-----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, F5XQKyHEeRDQ9qLo7Xdut3Drur4+KFbaqd2diX1luGdUlz1eSyE+f9YV9NRc0ZdS dENBOyCUtz04NwuSH8n/4Q== 0000950123-03-003463.txt : 20030328 0000950123-03-003463.hdr.sgml : 20030328 20030328142509 ACCESSION NUMBER: 0000950123-03-003463 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20021228 FILED AS OF DATE: 20030328 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: 03624433 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 y84636e10vk.txt THE PEPSI BOTTLING GROUP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 28, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ________ to ________ Commission file number 1-14893 THE PEPSI BOTTLING GROUP, INC. (Exact name of Registrant as Specified in its Charter) INCORPORATED IN DELAWARE 13-4038356 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE PEPSI WAY SOMERS, NEW YORK 10589 (Address of Principal Executive Offices) (Zip code) Registrant's telephone number, including area code: (914) 767-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: 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 ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12b-2). YES [X] NO [ ] THE NUMBER OF SHARES OF CAPITAL STOCK OF THE PEPSI BOTTLING GROUP, INC. OUTSTANDING AS OF MARCH 11, 2003 WAS 278,552,993. THE AGGREGATE MARKET VALUE OF THE PEPSI BOTTLING GROUP, INC. CAPITAL STOCK HELD BY NON-AFFILIATES OF THE PEPSI BOTTLING GROUP, INC. AS OF JUNE 15, 2002 WAS $5,803,740,542. DOCUMENTS OF WHICH PORTIONS PARTS OF FORM 10-K INTO WHICH PORTION ARE INCORPORATED BY REFERENCE OF DOCUMENTS ARE INCORPORATED - ----------------------------- ------------------------------------- 2002 ANNUAL REPORT TO SHAREHOLDERS I, II PROXY STATEMENT FOR THE PEPSI BOTTLING III GROUP,INC. MAY 28, 2003 ANNUAL MEETING OF SHAREHOLDERS 2 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, 2003, PepsiCo's ownership represented 38.0% of the outstanding common stock and 100% of the outstanding Class B common stock, together representing 43.1% of the voting power of all classes of PBG's voting stock. PepsiCo also owned approximately 6.8% of the equity interest of Bottling Group, LLC, PBG's principal operating subsidiary, as of February 21, 2003. 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." We maintain a website on the World Wide Web at http://www.pbg.com. We make available, free of charge, through the Investor Relations section of our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (the "SEC"). RECENT ACQUISITIONS 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 $75 million in cash and assumed debt. On November 5, 2002, we acquired approximately 99.8% of all of the outstanding capital stock of Pepsi-Gemex, S.A. de C.V. ("Gemex"), which is the largest bottler in Mexico and the largest bottler outside the United States of Pepsi-Cola soft drink products based on sales volume, through simultaneous tender offers in Mexico and the United States. Following the offers, we funded a trust for the acquisition of the balance of the outstanding capital stock and caused Gemex to carry out a reverse stock split that eliminated for cash the outstanding capital stock held by any remaining security holders other than us. Our total cost for the purchase of Gemex was a net cash payment of $871 million and assumed debt of approximately $305 million. PRINCIPAL PRODUCTS PBG is the world's largest manufacturer, seller and distributor of PEPSI-COLA beverages. The beverages sold by us include PEPSI-COLA, MOUNTAIN DEW, DIET PEPSI, AQUAFINA, LIPTON BRISK, MOUNTAIN DEW CODE RED, SIERRA MIST, SOBE, DOLE, MUG, DIET MOUNTAIN DEW, PEPSI TWIST, STARBUCKS FRAPPUCCINO and, outside the U.S., PEPSI-COLA, MIRINDA, 7 UP, KAS, ELECTROPURA, AQUA MINERALE, MANZANITA SOL, SQUIRT, GARCI CRESPO, FIESTA, PEPSI LIGHT, IVI, YEDIGUN, and FRUKO. We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of 41 states and the District of Columbia in the U.S., nine Canadian provinces, Spain, Greece, Russia, Turkey and, after our recent acquisition of Gemex, all or a portion of 21 states in Mexico. In some of our U.S. territories, we also have the right to manufacture, sell and distribute soft drink products 3 of other companies, including Dr PEPPER, All SPORT and, through December 2002, 7 UP. In 2002, approximately 82% of our net revenues were generated in the United States, and the remaining 18% was generated in Canada, Spain, Greece, Russia, Turkey and Mexico. We have an extensive direct store distribution system in the United States, Mexico and Canada. In Russia, Spain, Greece and Turkey, we use a combination of direct store distribution and distribution through wholesalers, depending on local marketplace considerations. RAW MATERIALS AND OTHER SUPPLIES We purchase 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 in the United States and Canada and, with respect to some of our raw materials, in certain of our international markets. 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 various factors, including price changes, strikes, weather conditions and governmental controls. PATENTS, TRADEMARKS, LICENSES AND FRANCHISES Our portfolio of beverage products includes some of the best recognized trademarks in the world and includes PEPSI-COLA, MOUNTAIN DEW, DIET PEPSI, AQUAFINA, LIPTON BRISK, MOUNTAIN DEW CODE RED, SIERRA MIST, SOBE, DOLE, MUG, DIET MOUNTAIN DEW, PEPSI TWIST, STARBUCKS FRAPPUCCINO and, outside the U.S., PEPSI-COLA, MIRINDA, 7 UP, KAS, ELECTROPURA, AQUA MINERALE, MANZANITA SOL, SQUIRT, GARCI CRESPO, FIESTA, PEPSI LIGHT, IVI, YEDIGUN, and FRUKO. The majority of our volume is derived from brands licensed from PEPSICO or PEPSICO joint ventures. In some of our U.S. territories, we also have the right to manufacture, sell and distribute soft drink products of other companies, including DR PEPPER , ALL SPORT and, through December 2002, 7 UP. We conduct our 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 in the U.S. 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. 4 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 2002, PepsiCo approved our annual plan. 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 5 beverages are not discontinued. PepsiCo may also introduce new beverages under the Pepsi-Cola trademarks or any modification thereof. When that occurs, we are 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 12.6% 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; (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, 2003, to our knowledge, no shareholder of PBG, other than PepsiCo, held more than 6.0% 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. 6 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, 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. Terms of Certain Distribution Agreements. We also have agreements with PepsiCo granting us exclusive rights to distribute AQUAFINA, AMP and DOLE in all of our territories and SoBe in certain specified territories. We have the right to manufacture Aquafina in certain locations depending on the availability of appropriate equipment. 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. We recently obtained the rights to sell and distribute GATORADE in Spain, Greece and Russia and in certain limited channels of distribution in the U.S. 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 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, 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, SCHWEPPES, CANADA DRY and HAWAIIAN PUNCH, the Pepsi/Lipton Tea Partnership for LIPTON BRISK and LIPTON'S ICED TEA, the North American Coffee Partnership for STARBUCKS FRAPPUCCINO, and The Monarch Beverage Company, Inc. for ALL SPORT, contain provisions generally similar to those in the Master Bottling Agreement as to use of trademarks, trade names, approved containers 7 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, term, 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. Certain of these bottling agreements contain 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. SEASONALITY Our peak season is the warm summer months beginning with Memorial Day and ending with Labor Day. Approximately 73% of our operating income is typically earned during the second and third quarters. Approximately 75% 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. Among our major competitors are bottlers that distribute products from The Coca-Cola Company including Coca-Cola Enterprises Inc., Coca-Cola Hellenic Bottling Company S.A. and Coca-Cola FEMSA S.A. de C.V. The market shares for our U.S. territories range from approximately 11.0% to approximately 53.0% and for our non-U.S. territories from approximately 13.0% to approximately 40.0%. Actions by our major competitors and others in the beverage industry, as well as the general economic environment could have an impact on our future market share. 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 in the United States as well as foreign government entities and agencies in Canada, Spain, Greece, Russia, Turkey and Mexico. 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 laws and regulations relating to the protection of the environment in the countries in which we do business. In the United States, we are subject to the laws and regulations of the Department of Transportation, and various federal, state and local occupational and environmental laws. These laws and regulations include the Occupational Safety and Health Act, the Clean Air Act, the 8 Clean Water Act, the Resource Conservation and Recovery 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 are adequate and that we are in substantial compliance with applicable laws and regulations of the countries in which we do business. 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, Prince Edward Island and Quebec. 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 Ontario 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 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. In Mexico, there is an excise tax on mineral water and, effective January 1, 2003, there is an excise tax applicable to any products produced without sugar, including diet soft drinks. Value-added taxes on soft drinks vary in our territories located in Canada, Spain, Greece, Russia, Turkey and Mexico, but are consistent with the value-added tax rate for other consumer products. In addition, there is a special consumption tax applicable to cola products in Turkey. 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. 9 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 and competition 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. Mexican Water Regulation In Mexico, we purchase water directly from municipal water companies and pump water from our own wells pursuant to concessions obtained from the Mexican government on a plant-by-plant basis. The concessions are generally for 5, 10 or 15 year terms. Our concessions may be terminated if, among other things, (a) we use more water than permitted, (b) we fail to pay required concession-related fees, or (c) we fail to complete agreed-upon construction or improvements. Our concessions satisfy our current water requirements and we believe that we are in compliance in all material respects with the terms of our existing concessions. EMPLOYEES As of December 28, 2002, we employed approximately 65,000 full-time workers, of whom approximately 29,500 were employed in the United States and approximately 25,900 were employed in Mexico. Approximately 8,700 of our full-time workers in the United States are union members and approximately 18,800 of our workers outside 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. FINANCIAL INFORMATION ON INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS For financial information on industry segments and operations in geographic areas, see Note 13 to PBG's Consolidated Financial Statements, found on page 52 of our Annual Report to Shareholders for the year ended December 28, 2002, which page is incorporated herein by reference and is included as Exhibit 13 hereto. 10 ITEM 2.PROPERTIES As of December 28, 2002, we operated 95 soft drink production facilities worldwide, of which 89 were owned and six were leased. In addition, one facility used for the manufacture of soft drink packaging materials was operated by a PBG joint venture in Turkey. Of our 532 distribution facilities, 360 are owned and 172 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 39,900 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 1.5 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 our best knowledge, threatened legal proceeding to which we are a party or 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 None. EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers are elected by our 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. Set forth below, as of March 25, 2003, is information pertaining to our executive officers who held office during our 2002 fiscal year: JOHN T. CAHILL, 45, is our Chairman of the Board and Chief Executive Officer. He had been our Chief Executive Officer since September 2001. 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. CRAIG E. WEATHERUP, 57, was our Chairman of the Board from March 1999 to January 2003. Mr. Weatherup retired as Chairman of the Board in 2003, but continues to serve on the Board as a 11 non-employee Director. Mr. Weatherup was also our Chief Executive Officer 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. ALFRED H. DREWES, 47, 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. ERIC J. FOSS, 44, is the President of PBG North America. Previously, Mr. Foss was our Executive Vice President and General Manager of 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. JAIME COSTA LAVIN, 50, is the Chief Executive Officer of PBG Mexico. He was appointed to this position in November 2002. Mr. Costa previously served as the President of Latin American operations of GRUMA, the world's largest corn flour and tortilla producer. In 1982, Mr. Costa joined the FEMSA Group in the soft drinks division. Following a number of increasingly responsible assignments, Mr. Costa was named Managing Director of Coca-Cola FEMSA for Mexico in 1985, a position he held for seven years. In 1993, he joined Grupo Lala, the largest dairy business in Mexico, as Managing Director. Mr. Costa was named Managing Director for Allied Domecq in Mexico in late 1994, where he remained until joining GRUMA. PAMELA C. MCGUIRE, 55, is our Senior Vice President, General Counsel and Secretary. She was appointed to this position in 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. YIANNIS PETRIDES, 45, is the President of PBG Europe. He was appointed to this position in June 2000, with responsibilities for our operations in Spain, Greece, Turkey 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Stock Trading Symbol - PBG. 12 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, 2003, there were approximately 55,000 registered and beneficial shareholders of Common Stock. PepsiCo is the holder of all of the outstanding shares of Class B common stock. 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 2002 and 2001 were as follows (in dollars):
2002 High Low Close ---- ---- --- ----- First Quarter 26.230 21.650 26.020 Second Quarter 34.800 24.820 32.420 Third Quarter 33.850 23.000 23.850 Fourth Quarter 29.500 23.000 25.450
2001(1) High Low Close ------- ---- --- ----- First Quarter 21.250 16.781 19.055 Second Quarter 22.535 17.950 20.725 Third Quarter 22.860 19.680 22.300 Fourth Quarter 24.725 21.625 23.800
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 2003 are expected to be March 14, June 13, September 12 and December 12. Cash Dividends Declared Per Share on Capital Stock:
Quarter 2002 2001(2) - ------- ---- ---- 1 $.01 $.01 2 $.01 $.01 3 $.01 $.01 4 $.01 $.01 Total $.04 $.04
ITEM 6.SELECTED FINANCIAL DATA "Selected Financial and Operating Data" for the years 1998 through 2002, on page 59 of our Annual Report to Shareholders for the fiscal year ended December 28, 2002 is incorporated into this report by reference and is included as part of Exhibit 13 hereto. (1) Reflects stock prices adjusted to give retroactive effect to the 2-for-1 split of PBG Common Stock effective November 27, 2001 (the "PBG Stock Split"). (2) Reflects dividends adjusted to give retroactive effect to the PBG Stock Split halving PBG's previous quarterly dividend of $.02 per share. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. "Management's Financial Review" on pages 18 through 33 of our Annual Report to Shareholders for the fiscal year ended December 28, 2002 is incorporated into this report by reference and is included as part of Exhibit 13 hereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK "Management's Financial Review -- Market Risks and Cautionary Statements" on pages 32 and 33 of our Annual Report to Shareholders for the fiscal year ended December 28, 2002 is incorporated herein by reference and is included as part of Exhibit 13 hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of PBG and our subsidiaries are incorporated herein by reference to our Annual Report to Shareholders for the fiscal year ended December 28, 2002, included as part of Exhibit 13 hereto, at the pages indicated: Consolidated Statements of Operations - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000 (page 34). Consolidated Statements of Cash Flows - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000 (page 35). Consolidated Balance Sheets - December 28, 2002 and December 29, 2001 (page 36). Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000 (page 37). Notes to Consolidated Financial Statements (pages 38-56). Report of Independent Auditors (page 58). The following consolidated financial statements and notes thereto of Bottling LLC for the year ended December 28, 2002 are incorporated herein by reference and are included as Exhibit 99.1 hereto: Consolidated Statements of Operations - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000. Consolidated Statements of Cash Flows - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000. Consolidated Balance Sheets - December 28, 2002 and December 29, 2001. Consolidated Statements of Changes in Owners' Equity - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000. Notes to Consolidated Financial Statements. Report of Independent Auditors. 14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PBG The name, age and background of each of our directors nominated for election are contained under the caption "Election of Directors" in our Proxy Statement for our 2003 Annual Meeting of Shareholders and such information is incorporated herein by reference. Pursuant to Item 401(b) of Regulation S-K, the requisite information pertaining to our executive officers is reported in Part I of this Report. Information on compliance with Section 16(a) of the Exchange Act is contained in our Proxy Statement for our 2003 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 our directors and certain named executive officers is contained in our Proxy Statement for our 2003 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 AND RELATED STOCKHOLDER MATTERS Information on the number of shares of PBG Common Stock beneficially owned by each director, each named executive officer and by all directors and all executive officers as a group is contained under the caption "Ownership of Common Stock by Directors and Executive Officers" and information on each beneficial owner of more that 5% of PBG Common Stock is contained under the caption "Stock Ownership of Certain Beneficial Owners" in our Proxy Statement for our 2003 Annual Meeting of Shareholders and is incorporated herein by reference. 15 Equity Compensation Plan Information The table below sets forth certain information as of December 28, 2002 for (i) all equity compensation plans previously approved by our shareholders and (ii) all equity compensation plans not previously approved by our shareholders.
Plan Category Number of Securities Weighted-average Number of Securities to be issued upon exercise price of remaining available exercise of outstanding options, for future issuance outstanding options, warrants and rights under equity warrants and rights compensation plans (excluding securities reflected in column (a)) ------------- -------------------- -------------------- --------------------- (a) (b) (c) ------------- -------------------- -------------------- --------------------- Equity compensation plans approved by 33,018,524 $15.84 22,522,911 (2) security holders (1) ---------- ------ ---------- Equity compensation 4,448,560 $13.26 1,210,774 plans not approved by security holders (3) ---------- ------ ---------- Total 37,467,084 $15.53 23,733,685 ---------- ------ ----------
(1) The securities reflected in this category are authorized for issuance under the following PBG plans: (i) 1999 Long-Term Incentive Plan; (ii) 2000 Long-Term Incentive Plan; (iii) 2002 Long-Term Incentive Plan and (iv) Directors' Stock Plan. (2) Excludes 383,382 shares of PBG Common Stock available for future issuance as of December 28, 2002 in connection with the PBG phantom stock account under the terms of our Executive Income Deferral Plan (the "Plan"). The Plan permits the deferral of certain compensation into the PBG phantom stock account and such deferrals may be paid out, at the discretion of our Compensation and Management Development Committee (the "Committee") of our Board of Directors, in cash or shares of our Common Stock. As of the date hereof, the Committee has not issued shares of our Common Stock to pay out deferrals from the Plan's PBG phantom stock account. The number of shares reflected above in this footnote was calculated by reference to the average of the high and low trading price of PBG Common Stock on the New York Stock Exchange (the "NYSE") on December 27, 2002 (the last trading day before the end of our fiscal year). (3) The securities reflected in this category are authorized for issuance under the PBG Stock Incentive Plan (the "SIP") which was approved by the Board of Directors on March 30, 1999. The SIP is the only one of our plans that has not been approved by our security holders. The SIP constitutes a "broadly-based" plan within the meaning of Paragraph 312.03 of the Shareholder Approval Policy of the NYSE Listed Company Manual and therefore no security holder approval was required as a prerequisite to our listing on the NYSE or for any other purpose. The summary of the material provisions of the SIP, set forth below, is provided pursuant to SEC requirements and is qualified in its entirety by reference to the SIP which is filed as Exhibit 10.11 to our Annual Report on Form 10-K for the year ended December 25, 1999. Purpose. We established the SIP to enable us to attract, retain and motivate employees and align their interests with those of our shareholders. Eligibility. Each of our employees as well as employees of our subsidiaries may be granted any of the awards under the SIP as determined by the Committee; provided however, that no individual employee may be granted awards in the aggregate under the SIP which, if exercised, would result in that employee receiving more than 10% of the maximum number of shares available for issuance under the SIP. Awards. The SIP provides for awards to be made in the form of stock options, restricted stock and 16 other share awards. (A) Stock Options. The Committee may grant options under the SIP to purchase PBG Common Stock that give the employee the right to purchase a share of PBG Common Stock at a fixed price for a specified period of time. The purchase price of a share of PBG Common Stock under each option shall not be less than the fair market value of a share of PBG Common Stock on the date the option is granted except for those stock options granted to eligible employees as of the date we became a separate publicly held company in March 1999. The options are exercisable in accordance with the terms established by the Committee. In general, the Committee intends that options will vest in annual increments of 25%, 25% and 50% and become fully exercisable within three years after their grant date. However, without regard to the vesting period assigned, the vesting and exercisability of options shall be accelerated in connection with certain transfers and events (disability, death and retirement), as explained below. The full purchase price of each share of PBG Common Stock purchased upon the exercise of any option shall be paid at the time of the exercise. Except as otherwise determined by the Committee, the purchase price shall be payable in cash or in PBG Common Stock (valued at fair market value as of the day of exercise), or in any combination thereof. (B) Restricted Stock and Other Share Awards. The Committee may grant restricted stock awards (a grant of PBG Common Stock with such shares subject to a risk of forfeiture or other restrictions as determined by the Committee) or share awards (a grant of PBG Common Stock). Any such awards shall be subject to such conditions, restrictions and contingencies as the Committee determines. However, without regard to the vesting period assigned, the vesting of restricted and other stock awards shall be accelerated in connection with certain transfers and events (death, disability, retirement), as explained below. Administration. The SIP is administered by the Committee. The Committee has the authority and discretion to select the individuals who shall receive awards, to determine the time or times of receipt, to determine the types of awards and the number of shares covered by the awards, to establish the terms, conditions, restrictions, and other provisions of such awards, and subject to certain limits, to cancel or suspend awards. The Committee has the authority and discretion to interpret the SIP, to establish, amend, and rescind any rules and regulations relating to the SIP, and to make all other determinations that may be necessary or advisable for the administration of the SIP. Any interpretation of the SIP by the Committee and any decision made by the Committee under the SIP is final and binding on all persons. The Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. In the event of a corporate transaction involving PBG (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the Committee may adjust awards to preserve the benefits or potential benefits of the awards. Action by the Committee may include: (i) adjustment of the number and kind of shares which may be delivered under the SIP; (ii) adjustment of the number and kind of shares subject to outstanding awards; (iii) adjustment of the exercise price of outstanding options; and (iv) any other adjustments that the Committee determines to be equitable. Except as otherwise provided by the Committee, awards under the SIP are not transferable except as designated by the participant by will or by the laws of descent and distribution. Limit on Shares. The maximum number of shares of stock that may be delivered to participants under the SIP shall not exceed an aggregate number of shares of Common Stock to be determined from time to time by the Committee, subject to certain adjustments described above. The current maximum number of shares that may be delivered under the SIP is 7.4 million, representing the number of shares that the 17 Committee has authorized for registration on the SIP's Form S-8 Registration Statement filed May 26, 1999. PBG management will not request that the Committee increase this maximum number of shares. Certain Transfers. In connection with certain PBG-approved transfers to certain allied organizations, as described in the SIP, the transferred participant's outstanding options will become fully exercisable and restricted stock awards will become fully vested. Employment by the allied organization will be treated as employment by PBG in determining the participant's right to exercise and in applying the SIP's misconduct provisions. Death, Disability, Termination of Employment, Misconduct. In the event of the participant's death, all restrictions upon Restricted Stock lapse and stock options then held by the participant become immediately exercisable as of the date of death and may be exercised by the participant's executor or legal representative in accordance with their terms. In the event that the participant becomes "Totally Disabled" within the meaning of the SIP, all restrictions upon Restricted Stock lapse and stock options then held by the participant continue to be exercisable in accordance with their terms. In the event of the participant's "Retirement" within the meaning of the SIP, Restricted Stock held by the participant which remains subject to restrictions as of such date, shall be cancelled and forfeited unless otherwise determined by the Committee; and all stock options then held by the participant become immediately exercisable and may be exercised in accordance with their terms. In the event of the participant's termination of employment for any reason other than the above, or for "Misconduct" within the meaning of the SIP, Restricted Stock held by the participant which remains subject to restrictions as of such date shall be cancelled and forfeited unless otherwise determined by the Committee; and all stock options then held by the participant which are exercisable on such date, shall continue to be exercisable until the earlier of 90 days from the date of such termination or in accordance with their terms. Unless otherwise determined by the Committee, all stock options which are not exercisable as of the date of termination automatically terminate and lapse. In the event the participant is determined to have engaged in Misconduct, within the meaning of the SIP, a participant forfeits all rights to unexercised stock options and all outstanding options automatically terminate and lapse. Amendment and Termination. The Committee may, at any time, amend or terminate the SIP, provided that no amendment or termination may, in the absence of consent to the change by the affected participant, adversely affect the rights of any participant or beneficiary under any award granted under the SIP prior to the date such amendment or termination is adopted by the Committee. Withholding of Taxes. We may withhold amounts to satisfy withholding tax requirements from amounts due to participants. Subject to guidelines established by the Committee, participants may have PBG Common Stock withheld from awards to satisfy tax withholding requirements. 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 our Proxy Statement for our 2003 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Within 90 days prior to the date of this report, PBG carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer of PBG, of the effectiveness and design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule 13a-14. Based upon that evaluation, the Chief 18 Executive Officer and the Chief Financial Officer concluded, subject to the limitations set forth below, that our disclosure controls and procedures are effective in timely alerting them to material information relating to PBG and its consolidated subsidiaries required to be included in PBG's periodic filings with the SEC. In addition, subject to the limitations set forth below, there were no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date of our most recent evaluation. LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. Our management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. PART IV ITEM 15. 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 28, 2002, are incorporated by reference into Part II, Item 8 of this report: Consolidated Statements of Operations - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000. Consolidated Statements of Cash Flows - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000. Consolidated Balance Sheets - December 28, 2002 and December 29, 2001. Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000. 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 28, 2002, December 29, 2001 and December 30, 2000 ........................................................................... F-3
19 3. Exhibits See Index to Exhibits on pages E-1 - E-4. (b) Reports on Form 8-K 1. On November 6, 2002, we filed a Current Report on Form 8-K announcing the successful completion of our tender offers in the United States and Mexico to acquire Pepsi-Gemex S.A. de C.V. and also announcing financial guidance for the year 2003 to incorporate the impact of the Pepsi - Gemex acquisition and an adjustment in pension expense. 2. On November 12, 2002, we filed a Current Report on Form 8-K announcing the retirement of Craig E. Weatherup as Chairman of the Company and the intention to elect John T. Cahill as successor. 20 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 27, 2003 The Pepsi Bottling Group, Inc. By: /s/ John T. Cahill ---------------------------------- John T. Cahill Chairman and 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/ John T. Cahill Chairman of the Board and Chief March 27, 2003 - ------------------ Executive Officer John T. Cahill /s/ Alfred H. Drewes Senior Vice President and Chief March 27, 2003 - ------------------- Financial Officer (Principal Alfred H. Drewes Financial Officer) /s/ Andrea L. Forster Vice President and Controller March 27, 2003 - --------------------- (Principal Accounting Officer) Andrea L. Forster /s/ Linda G. Alvarado Director March 27, 2003 - --------------------- Linda G. Alvarado /s/ Barry H. Beracha Director March 27, 2003 - -------------------- Barry H. Beracha Director - -------------------- Ira D. Hall /s/ Thomas H. Kean Director March 27, 2003 - ------------------ Thomas H. Kean /s/ Susan D. Kronick Director March 27, 2003 - -------------------- Susan D. Kronick /s/ Blythe J. McGarvie Director March 27, 2003 - ---------------------- Blythe J. McGarvie /s/ Margaret D. Moore Director March 27, 2003 - --------------------- Margaret D. Moore /s/ Clay G. Small Director March 27, 2003 - ----------------- Clay G. Small /s/ Craig E. Weatherup Director March 27, 2003 - ---------------------- Craig E. Weatherup
S-1 I, John T. Cahill, certify that: 1. I have reviewed this annual report on Form 10-K of The Pepsi Bottling Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 1 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 By: /s/ John T. Cahill ------------------------ John T. Cahill Chief Executive Officer 2 I, Alfred H. Drewes, certify that: 1. I have reviewed this annual report on Form 10-K of The Pepsi Bottling Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 1 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 By: /s/ Alfred H. Drewes -------------------- Alfred H. Drewes Chief Financial Officer 2 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 28, 2002, December 29, 2001 and December 30, 2000 .................................. F-3
F-1 INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors and Shareholders The Pepsi Bottling Group, Inc.: The audits referred to in our report dated January 28, 2003, included the related financial statement schedule as of December 28, 2002, and for each of the fiscal years in the three-year period ended December 28, 2002, incorporated in this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such 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, 333-69622, 333-60428, 333-73302, 333-100786) on Form S-8 of The Pepsi Bottling Group, Inc. Our report on the consolidated financial statements referred to the adoption of FASB No. 142, "Goodwill and Other Intangible Assets," as of December 30, 2001. /s/ KPMG LLP New York, New York March 28, 2003 F-2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THE PEPSI BOTTLING GROUP, INC. IN MILLIONS
Balance At Charged to Accounts Foreign Beginning Cost and Written Currency Balance At Of Period Expenses Acquisitions Off Translation End Of Period DESCRIPTION FISCAL YEAR ENDED DECEMBER 28, 2002 Allowance for losses on trade accounts receivable ............... $42 $32 $ 14 $(22) $ 1 $67 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 $ 3 $ -- $ (8) $(1) $42
F-3 INDEX TO EXHIBITS
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, which is incorporated herein by reference to Exhibit 3.4 to PBG's Annual Report on Form 10-K for the year ended December 29, 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, 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 reference to Exhibit 10.14 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291).
E-1
EXHIBIT 4.5 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. 4.6 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. 4.7 U.S. $250,000,000 364-Day Second Amended and Restated Credit Agreement, dated as of May 1, 2002 among PBG, Bottling Group, LLC, JPMorgan Chase Bank, Citibank, N.A., Bank of America, N. A., Deutsche Bank AG New York Branch and/or Cayman Islands Branch, Credit Suisse First Boston, The Northern Trust Company, Lehman Commercial Paper Inc., , Royal Bank of Canada, Banco Bilbao Vizcaya, The Bank of New York, Fleet National Bank, State Street Bank and Trust Company, JPMorgan Chase Bank, as Agent, Banc of America Securities LLC and J.P. Morgan Securities Inc. as Co-Lead Arrangers and Joint Book Managers and Bank of America, N.A. and Citibank, N.A., as Co-Syndication Agents. 4.8 Indenture, dated as of November 15, 2002, among Bottling Group, LLC, PepsiCo, Inc., as Guarantor, and JPMorgan Chase Bank, as Trustee, relating to $1 Billion 4 5/8% Senior Notes due November 15, 2012. 4.9 Registration Rights Agreement dated as of November 7, 2002 relating to the 4 5/8% Senior Notes due November 15, 2012. 4.10 Agreement to Tender, dated as of October 4, 2002, among PBG Grupo Embotellador Hispano-Mexicano S.L., Bottling Group, LLC and PepsiCo, Inc., which is incorporated herein by reference to Exhibit (d)(1) to Schedule to Tender Offer Statement as filed by PBG (SEC File Number 005-46036). 4.11 Agreement to Tender, dated as of October 4, 2002, among PBG Grupo Embotellador Hispano-Mexicano S.L., Bottling Group, LLC and Enrique C. Molina Sobrino, which is incorporated herein by reference to Exhibit (d)(2) to Schedule to Tender Offer Statement as filed by PBG (SEC File Number 005-46036).
E-2
Exhibit 4.12 Escrow Agreement, dated as of October 4, 2002, among PBG Grupo Embotellador Hispano-Mexicano S.L., Bottling Group, LLC, Enrique C. Molina Sobrino and The Bank of New York, which is incorporated herein by reference to Exhibit (d)(3) to Schedule to Tender Offer Statement as filed by PBG (SEC File Number 005-46036). 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). 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.
E-3
Exhibit 10.14 PBG Directors' Stock Plan which is incorporated by reference to Exhibit 10.14. to PBG's Annual Report on Form 10-K for the year ended December 29, 2001. 10.15 2002 PBG Long-Term Incentive Plan. 10.16 Form of International Master Bottling Agreement for Mexico. 12 Statement re Computation of Ratios. 13 PBG 2002 Annual Report to Shareholders. (Pages 18 through 59) 21 Subsidiaries of PBG. 23 Report and Consent of KPMG LLP. 24 Copy of Power of Attorney. 99.1 Bottling LLC consolidated financial statements and notes thereto for the year ended December 28, 2002.
E-4 EX-4.7 3 y84636exv4w7.txt SECOND AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 4.7 --------------------------------------- U.S. $250,000,000 364-DAY SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of May 1, 2002 among THE PEPSI BOTTLING GROUP, INC. BOTTLING GROUP, LLC THE LENDERS NAMED HEREIN JPMORGAN CHASE BANK, as Agent, BANC OF AMERICA SECURITIES LLC and J.P. MORGAN SECURITIES INC., as Co-Lead Arrangers and Joint Book Managers and BANK OF AMERICA, N.A. and CITIBANK, N.A., as Co-Syndication Agents --------------------------------------- SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 1, 2002 (the "Agreement") 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 JPMORGAN CHASE BANK, as Agent (in such capacity, the "Agent") for the Lenders. The Company, certain banks and the Agent are parties to a Credit Agreement dated as of May 3, 2000 (as amended and restated as of May 2, 2001, and as heretofore amended, modified and in effect on the date hereof, the "Existing Credit Agreement") providing for the making of loans by such banks to the Company in an aggregate principal amount at any one time outstanding not exceeding $250,000,000 (or as increased pursuant to the terms of the Existing Credit Agreement). The parties hereto wish to amend the Existing Credit Agreement to, among other things, extend the Termination Date by 364 days 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. 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 April 30, 2003 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. 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 29, 2001", 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. 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 the Existing Credit Agreement as amended and restated hereby, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Existing Credit Agreement as amended and restated hereby. (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. (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 Amended and Restated Credit Agreement -3- 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, Bank of America, N.A. and each of their 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: /s/ Nicholas J. D'Alessandro ---------------------------- Name: Nicholas J. D'Alessandro Title: Vice President and Treasurer BOTTLING GROUP, LLC, as Guarantor By: /s/ Nicholas J. D'Alessandro ---------------------------- Name: Nicholas J. D'Alessandro Title: Managing Director-Delegatee JPMORGAN CHASE BANK, as Agent By: /s/ B.B. Wuthrich ----------------- Name: B.B. Wuthrich Title: Vice President Amended and Restated Credit Agreement
COMMITMENT INITIAL LENDERS - ---------- --------------- $30,000,000 JPMORGAN CHASE BANK By: /s/B.B. Wuthrich ---------------- Name: B.B. Wuthrich Title: Vice President $30,000,000 CITIBANK, N.A. By: /s/ Sandy Salgado ------------------ Name: Sandy Salgado Title: $30,000,000 BANK OF AMERICA, N.A. By: /s/ David L. Catherall ---------------------- Name: David L. Catherall Title: Vice President $30,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By: /s/ William W. McGinty ---------------------- Name: William W. McGinty Title: Director By: /s/ Thomas A. Foley ------------------- Name: Thomas A. Foley Title: Vice President
Amended and Restated Credit Agreement
COMMITMENT INITIAL LENDERS - ---------- --------------- $25,000,000 CREDIT SUISSE FIRST BOSTON By: /s/ David W. Kratovil --------------------- Name: David W. Kratovil Title: Director By: /s/ James P. Moran ------------------ Name: James P. Moran Title: Director $20,000,000 THE NORTHERN TRUST COMPANY By: /s/ Eric Strickland -------------------- Name: Eric Strickland Title: Vice President $20,000,000 LEHMAN COMMERCIAL PAPER INC. By: /s/ Francis J. Chang -------------------- Name: Francis J. Chang Title: Vice President $15,000,000 ROYAL BANK OF CANADA By: /s/ Ritta Y. Lee ----------------- Name: Ritta Y. Lee Title: Senior Manager
AMENDED AND RESTATED CREDIT AGREEMENT
COMMITMENT INITIAL LENDERS - ---------- --------------- $12,500,000 BANCO BILBAO VIZCAYA By: /s/ John Martini ----------------- Name: John Martini Title: Vice President By: /s/ Erich Michel ----------------- Name: Erich Michel Title: Vice President $12,500,000 THE BANK OF NEW YORK By: /s/ Joanna S. Bellocq --------------------- Name: Joanna S. Bellocq Title: Vice President $12,500,000 FLEET NATIONAL BANK By: /s/ Renata Salgado ------------------ Name: Renata Salgado Title: Vice President $12,500,000 STATE STREET BANK AND TRUST COMPANY By: /s/ Juan G. Sierra ------------------ Name: Juan G. Sierra Title: Assistant Vice President - ---------------------------------- $250,000,000 - Total of the Commitments
Amended and Restated Credit Agreement EX-4.8 4 y84636exv4w8.txt INDENTURE EXHIBIT 4.8 EXECUTION COPY BOTTLING GROUP, LLC (as Obligor) and PEPSICO, INC. (as Guarantor) and JPMORGAN CHASE BANK (as Trustee) $1,000,000,000 4-5/8% Senior Notes due November 15, 2012 $1,000,000,000 4-5/8% Series B Senior Notes due November 15, 2012 Indenture Dated as of November 15, 2002 TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions................................................................................... 1 Section 1.02. Officers' Certificates and Opinions........................................................... 13 Section 1.03. Form of Documents Delivered to Trustee........................................................ 13 Section 1.04. Acts of Holders............................................................................... 14 Section 1.05. Notices, Etc., to Trustee, Obligor and Guarantor.............................................. 15 Section 1.06. Notice to Holders; Waiver..................................................................... 15 Section 1.07. Conflict with Trust Indenture Act............................................................. 16 Section 1.08. Effect of Headings and Table of Contents...................................................... 16 Section 1.09. Successors and Assigns........................................................................ 16 Section 1.10. Separability Clause........................................................................... 16 Section 1.11. Benefits of Indenture......................................................................... 16 Section 1.12. Governing Law................................................................................. 16 Section 1.13. Counterparts.................................................................................. 16 Section 1.14. Legal Holidays................................................................................ 16 ARTICLE II THE NOTES Section 2.01. Form and Dating............................................................................... 17 Section 2.03. Temporary Notes............................................................................... 20 Section 2.04. Registration, Transfer and Exchange........................................................... 20 Section 2.05. Mutilated, Destroyed, Lost and Stolen Notes................................................... 25 Section 2.06. Payment of Interest; Interest Rights Preserved................................................ 26 Section 2.07. Persons Deemed Owners......................................................................... 27 Section 2.08. Cancellation.................................................................................. 28 Section 2.09. Computation of Interest....................................................................... 28 Section 2.10. CUSIP Numbers................................................................................. 28 Section 2.11. Additional Interest under Registration Rights Agreement....................................... 28
i TABLE OF CONTENTS (continued)
PAGE ARTICLE III SATISFACTION AND DISCHARGE Section 3.01. Satisfaction and Discharge of Indenture....................................................... 28 Section 3.02. Defeasance and Discharge of Covenants upon Deposit of Moneys, U.S. Government Obligations..... 30 Section 3.03. Application of Trust Money.................................................................... 31 Section 3.04. Paying Agent to Repay Moneys Held............................................................. 31 Section 3.05. Return of Unclaimed Amounts................................................................... 31 ARTICLE IV REMEDIES Section 4.01. Events of Default............................................................................. 32 Section 4.02. Acceleration of Maturity; Rescission and Annulment............................................ 34 Section 4.03. Collection of Indebtedness and Suits for Enforcement.......................................... 35 Section 4.04. Trustee May File Proofs of Claim.............................................................. 36 Section 4.05. Trustee May Enforce Claims Without Possession of Notes........................................ 36 Section 4.06. Application of Money Collected................................................................ 37 Section 4.07. Limitation on Suits........................................................................... 37 Section 4.08. Unconditional Right of Holders to Receive Payment of Principal, Premium and Interest.......... 38 Section 4.09. Restoration of Rights and Remedies............................................................ 38 Section 4.10. Rights and Remedies Cumulative................................................................ 38 Section 4.11. Delay or Omission Not Waiver.................................................................. 38 Section 4.12. Control by Holders............................................................................ 38 Section 4.13. Waiver of Past Defaults....................................................................... 38 Section 4.14. Undertaking for Costs......................................................................... 39 Section 4.15. Waiver of Stay or Extension Laws.............................................................. 39 ARTICLE V THE TRUSTEE Section 5.01. Certain Duties and Responsibilities of Trustee................................................ 39 Section 5.02. Notice of Defaults............................................................................ 40 Section 5.03. Certain Rights of Trustee..................................................................... 41
ii TABLE OF CONTENTS (continued)
PAGE Section 5.04. Not Responsible for Recitals or Issuance of Notes............................................. 42 Section 5.05. May Hold Notes................................................................................ 42 Section 5.06. Money Held in Trust........................................................................... 42 Section 5.07. Compensation and Reimbursement................................................................ 42 Section 5.08. Disqualification; Conflicting Interests....................................................... 43 Section 5.09. Corporate Trustee Required; Eligibility....................................................... 43 Section 5.10. Resignation and Removal; Appointment of Successor............................................. 43 Section 5.11. Acceptance of Appointment by Successor........................................................ 44 Section 5.12. Merger, Conversion, Consolidation or Succession to Business................................... 45 Section 5.13. Preferential Collection of Claims Against Obligor............................................. 45 Section 5.14. Appointment of Authenticating Agent........................................................... 45 ARTICLE VI HOLDERS' LISTS AND REPORTS BY TRUSTEE AND OBLIGOR Section 6.01. Obligor to Furnish Trustee Names and Addresses of Holders..................................... 47 Section 6.02. Preservation of Information; Communications to Holders........................................ 47 Section 6.03. Reports by Trustee............................................................................ 48 Section 6.04. Reports by Obligor and Guarantor.............................................................. 49 ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER Section 7.01. Obligor May Consolidate, Etc., Only on Certain Terms.......................................... 49 Section 7.02. Guarantor May Consolidate, Etc., Only on Certain Terms........................................ 50 Section 7.03. Successor Entity Substituted.................................................................. 50 ARTICLE VIII SUPPLEMENTAL INDENTURES Section 8.01. Supplemental Indentures Without Consent of Holders............................................ 50 Section 8.02. Supplemental Indentures with Consent of Holders............................................... 51 Section 8.03. Execution of Supplemental Indentures.......................................................... 52 Section 8.04. Effect of Supplemental Indentures............................................................. 52 Section 8.05. Conformity with Trust Indenture Act........................................................... 52
iii TABLE OF CONTENTS (continued)
PAGE ARTICLE IX COVENANTS Section 9.01. Payment of Principal, Premium and Interest.................................................... 53 Section 9.02. Maintenance of Office or Agency............................................................... 53 Section 9.03. Money for Note Payments to be Held in Trust................................................... 53 Section 9.04. Certificate to Trustee........................................................................ 54 Section 9.05. Existence..................................................................................... 54 Section 9.06. Limitation on Liens........................................................................... 55 Section 9.07. Limitation on Sale-Leaseback Transactions..................................................... 57 ARTICLE X REDEMPTION OF NOTES Section 10.01. Election to Redeem; Notice to Trustee......................................................... 57 Section 10.02. Notice of Redemption.......................................................................... 57 Section 10.03. Deposit of Redemption Price................................................................... 58 Section 10.04. Notes Payable on Redemption Date.............................................................. 58 Section 10.05. Optional Redemption........................................................................... 58 Section 10.06. Mandatory Redemption.......................................................................... 59 ARTICLE XI GUARANTEE Section 11.01. Guarantee..................................................................................... 59 Section 11.02. Execution and Delivery of the Guarantee....................................................... 63 Section 11.03. Limitation of the Guarantor's Liability....................................................... 63 EXHIBIT A: Form of Initial Note............................................................................. A-1 EXHIBIT B: Form of Series B Note............................................................................ B-1 EXHIBIT C: Certificate to be Delivered upon Exchange or Registration of Transfer of Notes................... C-1 EXHIBIT D: Guarantee........................................................................................ D-1
iv THIS INDENTURE, among Bottling Group, LLC, a Delaware limited liability company (the "Obligor"), having its principal office at One Pepsi Way, Somers, NY 10589, PepsiCo, Inc., a North Carolina corporation, as guarantor (the "Guarantor"), having its principal office at 700 Anderson Hill Road, Purchase, NY 10577, and JPMorgan Chase Bank, a banking corporation incorporated and existing under the laws of the State of New York, as trustee (the "Trustee"), is made and entered into as of this 15th day of November, 2002. AGREEMENTS OF THE PARTIES To set forth or to provide for the establishment of the terms and conditions upon which the Notes (as hereinafter defined) are to be authenticated, issued, and delivered, and in consideration of the premises thereof, and the purchase of the Notes by the Holders (as hereinafter defined) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders from time to time of the Obligor's 4-5/8% Senior Notes due November 15, 2012 (the "Initial Notes") and the Guarantee (as hereinafter defined) (the Initial Notes and the Guarantee together, the "Initial Securities") and, if and when issued in exchange for Initial Securities, the Obligor's 4-5/8% Series B Senior Notes due November 15, 2012 (the "Series B Notes," and together with the Guarantee, the "Exchange Securities," the Initial Notes and the Series B Notes hereinafter referred to as the "Notes"), as follows: RECITALS OF THE OBLIGOR AND THE GUARANTOR WHEREAS, the Obligor has duly authorized the execution and delivery of this Indenture to provide for the issuance of the Notes, to be issued in fully registered form; WHEREAS, this Indenture provides for the issuance of a Guarantee of the Notes to be endorsed on the Notes as provided herein; WHEREAS, the Guarantor wishes to guarantee the Notes as provided herein; WHEREAS, the Guarantee shall become effective on the Guarantee Commencement Date (as hereinafter defined), except that under certain circumstances described below the Guarantee may not become effective or may only be a partial guarantee of the principal of and interest and premium, if any, on the Notes; WHEREAS, all things necessary to make this Indenture a valid agreement of the Obligor and the Guarantor, in accordance with its terms, have been done. Article I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions. For all purposes of this Indenture, and of any indenture supplemental hereto, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; 1 (2) all other terms used herein which are defined in the Trust Indenture Act (as hereinafter defined), either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with U.S. GAAP; and (4) all references in this instrument to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this instrument as originally executed. The words "herein," "hereof," and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section, or other subdivision. "Act," when used with respect to any Holder, has the meaning specified in Section 1.04. "Additional Interest" means all additional interest owing pursuant to Section 6 of the Registration Rights Agreement. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract, or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Attributable Debt" for a lease means the aggregate of present values (discounted at a rate per annum equal to the interest rate borne by the Notes and compounded semi-annually) of the obligations of the Obligor or any Restricted Subsidiary of the Obligor for net rental payments during the remaining term of such lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended). The term "net rental payments" under any lease of any period shall mean the sum of the rental and other payments required to be paid in such period by the lessee thereunder, not including, however, any amounts required to be paid by such lessee on account of maintenance and repairs, reconstruction, insurance, taxes, assessments, water rates or similar charges required to be paid by such lessee thereunder or any amounts required to be paid by such lessee thereunder contingent upon the amount of sales, maintenance and repairs, reconstruction, insurance, taxes, assessments, water rates or similar charges. Attributable Debt may be reduced by the present value of the rental obligations, calculated on the same basis, that any sublessee has for all or part of the leased property. "Authenticating Agent" means any Person authorized by the Trustee to authenticate Notes under Section 5.14. "Authentication Order" has the meaning specified in Section 2.02. "Bankruptcy Code" means title 11, U.S. Code, as amended, or any similar state or federal law for the relief of debtors. 2 "Benefitted Party" has the meaning specified in Section 11.01. "Board of Directors" means, with respect to the Guarantor, (a) the board of directors of the Guarantor or (b) any duly authorized committee of that board. "Board Resolution" means, with respect to the Guarantor, a copy of a resolution of the Board of Directors certified by the Secretary or an Assistant Secretary of the Guarantor to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York or Luxembourg are authorized or required by law, regulation or executive order to be closed. "Clearstream, Luxembourg" means Clearstream Banking, societe anonyme, or the successor to its securities clearance and settlement operations. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Comparable Treasury Price" means, with respect to the Redemption Date for the Notes, (a) the average of four Reference Treasury Dealer Quotations for the Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Company Request" or "Company Order" means, (a) with respect to the Obligor, a written request or order, respectively, signed in the name of the Obligor by any Officer thereof and delivered to the Trustee or (b) with respect to the Guarantor, a written request or order, respectively, signed in the name of the Guarantor by any Officer thereof and delivered to the Trustee. "Consolidated Net Tangible Assets" means, with respect to any Person, the total amount of assets of such Person and its Subsidiaries minus (a) all applicable depreciation, amortization, and other valuation reserves, (b) the amount of assets resulting from write-ups of capital assets of such Person and its Subsidiaries (except write-ups in connection with accounting for acquisitions in accordance with U.S. GAAP), (c) all current liabilities of such Person and its Subsidiaries (excluding any intercompany liabilities) and (d) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set 3 forth on the latest quarterly or annual consolidated balance sheet of such Person and its Subsidiaries prepared in accordance with U.S. GAAP. "Corporate Trust Office" means the office of the Trustee in the City of New York at which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 4 New York Plaza, New York, New York 10004, except that with respect to the presentation of Notes for payment or registration of transfer or exchange and with respect to the location of the Security Register, such term shall mean the office or the agency of the Trustee in said city at which at any particular time its corporate agency business shall be conducted, which office at the date hereof is located at 4 New York Plaza, New York, New York 10004. "Covenant Defeasance" has the meaning specified in Section 3.02. "Custodian" means the Person appointed by the Obligor to act as custodian for the Depositary, which Person shall be the Trustee unless and until a successor Person is appointed by the Obligor. "Debt" means, (a) with respect to the Obligor, any indebtedness of the Obligor for borrowed money, capitalized lease obligations and purchase money obligations, or any guarantee of such debt, in any such case which would appear on the consolidated balance sheet of the Obligor as a liability, and (b) with respect to the Guarantor, any indebtedness of the Guarantor for borrowed money. "Defaulted Interest" has the meaning specified in Section 2.06. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with this Indenture in the form of Exhibit A or B hereto, as applicable, except that such Note shall not bear the Global Note Legend (or the "Schedule of Exchanges of Interests in the Global Note" attached thereto), but may bear the Private Placement Legend, if required by this Indenture. "Depositary" means with respect to the Notes issuable or issued in whole or in part in global form, the Person designated as Depositary by the Obligor pursuant to Section 2.04, unless and until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Depositary" shall mean or include each Person who is then a Depositary hereunder. "Discharged" has the meaning specified in Section 3.02. "Distribution Compliance Period" means, with respect to any Initial Notes offered and sold outside the United States in reliance on Regulation S, the 40 consecutive days beginning on and including the later of (a) the day on which such Initial Notes are offered to Persons other than distributors (as defined in Regulation S) and (b) the Issue Date. "DTC" has the meaning specified in Section 2.04(2). 4 "Entity" means any corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust or unincorporated organization. "Euroclear" means Euroclear Bank S.A./N.V., as operator of the Euroclear System, or its successor in such capacity. "Event of Default" has the meaning specified in Section 4.01. "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Offer Registration Statement" has the meaning assigned to such term in the Registration Rights Agreement. "Exchange Securities" has the meaning specified in the Agreements of the Parties on the first page of this Indenture. "Exempted Debt" means the sum, without duplication, of the following items outstanding as of the date Exempted Debt is being determined: (a) Debt incurred after the date of this Indenture and secured by Liens created or assumed or permitted to exist on any Principal Property (as such term is defined with respect to the Obligor) or on any shares of stock of any Restricted Subsidiary of the Obligor, other than Debt secured by Liens described in clauses (i) through (vii) of Section 9.06(1) and (b) Attributable Debt of the Obligor and its Restricted Subsidiaries in respect of all sale and lease-back transactions with regard to any Principal Property (as such term is defined with respect to the Obligor) entered into pursuant to Section 9.07(1). "Funded Debt" means all Debt having a maturity of more than one year from the date of its creation or having a maturity of less than one year but by its terms being renewable or extendible, at the option of the obligor in respect thereof, beyond one year from its creation. "Global Note" means each note in global form issued in accordance with this Indenture and bearing the Global Note Legend. "Global Note Legend" means the legend set forth in Section 2.01, which is required to be placed on all Global Notes issued pursuant to this Indenture. "Guarantee" means the guarantee of the Obligor's obligations under this Indenture and the Notes by the Guarantor pursuant to Article XI. "Guarantee Commencement Date" means, if the Guarantee becomes effective pursuant to Article XI hereof, one Business Day prior to the 2004 Notes Payment Date. "Guarantor" means PepsiCo, Inc., a North Carolina corporation, unless and until a successor Entity or assign shall have assumed the obligations of the Guarantor under this Indenture and the Guarantee and thereafter "Guarantor" shall mean such successor Entity or assign. 5 "Holder" and "Holder of Notes" means a Person in whose name a Note is registered in the Security Register. "Indenture" or "this Indenture" means this Indenture, as amended or supplemented from time to time, including the Exhibits hereto. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Obligor. "Initial Notes" has the meaning specified in the Agreements of the Parties on the first page of this Indenture, including any replacement Notes issued therefor in accordance with this Indenture. "Initial Securities" has the meaning specified in the Agreements of the Parties on the first page of this Indenture. "Interest Payment Date," when used with respect to any Note, means the date specified in such Note on which an installment of interest on such Note is scheduled to be paid. "Issue Date" means November 15, 2002. "Legal Defeasance" has the meaning specified in Section 3.02. "Lien" has the meaning specified in Section 9.06. "Managing Directors" means, with respect to the Obligor, (a) the Managing Directors of the Obligor or (b) any duly authorized committee of the Managing Directors of the Obligor. "Managing Directors Resolution" means, with respect to the Obligor, a copy of a resolution of the Managing Directors certified by a Managing Director or a Managing Director-Delegatee of the Obligor to have been duly adopted by the Managing Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Maturity," when used with respect to any Note, means the date on which all or a portion of the principal amount outstanding under such Note becomes due and payable, whether on the Maturity Date, by declaration of acceleration, call for redemption, or otherwise. "Maturity Date" means November 15, 2012. "Non-U.S. Person" means a Person who is not a "U.S. person," as defined in Regulation S. "Note" has the meaning specified in the Agreements of the Parties on the first page of this Indenture. "Obligor" means Bottling Group, LLC, a Delaware limited liability company, unless and until a successor Entity or assign shall have assumed the obligations of the Obligor 6 under this Indenture and the Notes and thereafter "Obligor" shall mean such successor Entity or assign. "Officer" means, (a) with respect to the Obligor, a Managing Director, a Managing Director-Delegatee, the Principal Financial Officer or any other officer or officers of the Obligor designated pursuant to an applicable Managing Directors Resolution or (b) with respect to the Guarantor, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the Executive Vice President, any Vice President, the Treasurer, the Assistant Treasurer or any other officer or officers of the Guarantor designated pursuant to an applicable Board Resolution. "Officers' Certificate" means, with respect to any Person, a certificate signed on behalf of such Person by any two Officers of such Person that meets the applicable requirements of this Indenture. "Opinion of Counsel" means, with respect to the Obligor, the Guarantor or the Trustee, a written opinion of counsel to the Obligor, the Guarantor or the Trustee, as the case may be, which counsel may be an employee of the Obligor, the Guarantor or the Trustee, as the case may be. "Outstanding," when used with respect to the Notes means, as of the date of determination, all such Notes theretofore authenticated and delivered under this Indenture, except: (a) such Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) such Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited in trust with the Trustee or with any Paying Agent other than the Obligor, or, if the Obligor shall act as its own Paying Agent, has been set aside and segregated in trust by the Obligor; provided, in any case, that if such Notes are to be redeemed prior to their Maturity Date, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (c) such Notes in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, or which shall have been paid, in each case, pursuant to the terms of Section 2.05 (except with respect to any such Note as to which proof satisfactory to the Trustee is presented that such Note is held by a person in whose hands such Note is a legal, valid, and binding obligation of the Obligor); and (d) solely to the extent provided in Article III, Notes which are subject to Legal Defeasance or Covenant Defeasance as provided in Section 3.02. In determining whether the Holders of the requisite principal amount of such Notes Outstanding have given a direction concerning the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or concerning the exercise of any trust or power conferred upon the Trustee under this Indenture, or concerning a consent on behalf of 7 the Holders of the Notes to the waiver of any past default and its consequences, Notes owned by the Obligor, any other obligor upon the Notes, or any Affiliate of the Obligor or such other obligor shall be disregarded and deemed not to be Outstanding. In determining whether the Trustee shall be protected in relying upon any request, demand, authorization, direction, notice, consent, or waiver hereunder, only Notes which a Responsible Officer assigned to the corporate trust department of the Trustee knows to be owned by the Obligor or any other obligor upon the Notes or any Affiliate of the Obligor or such other obligor shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right to act as owner with respect to such Notes and that the pledgee is not the Obligor or any other obligor upon the Notes or any Affiliate of the Obligor or such other obligor. "Partial Guarantee Percentage" means a fraction, (a) the numerator of which is (i) the aggregate principal amount of the Notes Outstanding on the 2004 Notes Payment Date minus (ii) the principal of the 2004 Notes that the Guarantor has determined in good faith that the Guarantor is likely to have to pay on the 2004 Notes on the 2004 Notes Payment Date under the 2004 Notes Guarantee and that is specified in the Partial Payment Notice and (b) the denominator of which is the aggregate principal amount of the Notes Outstanding on the 2004 Notes Payment Date. "Partial Payment Notice" has the meaning specified in Section 11.01. "Paying Agent" means any Person appointed by the Obligor to distribute amounts payable by the Obligor on the Notes. As of the date of this Indenture, the Obligor has appointed JPMorgan Chase Bank as Paying Agent with respect to all Notes issuable hereunder. "PBG" means The Pepsi Bottling Group, Inc., a Delaware corporation. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, or government, or any agency or political subdivision thereof. "Place of Payment" means the place specified pursuant to Section 9.02. "Predecessor Notes" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.05 in lieu of a lost, destroyed, mutilated, or stolen Note shall be deemed to evidence the same debt as the lost, destroyed, mutilated, or stolen Note. "Principal Property" means, (a) with respect to the Obligor, any single manufacturing or processing plant, office building, or warehouse owned or leased by the Obligor or a Subsidiary of the Obligor, in each case, located in the 50 states of the United States, the District of Columbia or Puerto Rico, other than a plant, warehouse, office building, or portion thereof which, in the opinion of the Managing Directors evidenced by a Managing Directors Resolution, is not of material importance to the business conducted by the Obligor and its Subsidiaries as an entirety and (b) with respect to the Guarantor, any single manufacturing or processing plant, office building, or warehouse owned or leased by the Guarantor or a Restricted 8 Subsidiary of the Guarantor, in each case, located in the 50 states of the United States, the District of Columbia or Puerto Rico, other than a plant, warehouse, office building, or portion thereof which, in the opinion of the Guarantor's Board of Directors evidenced by a Board Resolution, is not of material importance to the business conducted by the Guarantor and its Restricted Subsidiaries as an entirety. "Private Exchange Securities" has the meaning assigned to such term in the Registration Rights Agreement. "Private Placement Legend" means the legend set forth in Section 2.04 to be placed on all Initial Notes initially issued pursuant to this Indenture. "QIB" means a "qualified institutional buyer" as defined in Rule 144A under the Securities Act. "Record Date" means any date as of which the Holder of a Note will be determined for any purpose described herein, such determination to be made as of the close of business on such date by reference to the Security Register, and in relation to a determination of a payment of an installment of interest on the Notes, shall have the meaning specified in the forms of Notes attached as Exhibits A and B hereto. "Redemption Date" means the date fixed for the redemption of the Notes in any notice of redemption issued pursuant to this Indenture. "Redemption Price" means the price specified in Section 10.05. "Reference Treasury Dealer" means Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Salomon Smith Barney Inc. and one other primary U.S. Government securities dealer in New York City (each, a "Primary Treasury Dealer") appointed by the Trustee in consultation with the Obligor; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Obligor shall substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and the Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding the Redemption Date. "Registered Exchange Offer" means an exchange offer that may be made by the Obligor and the Guarantor registered under the Securities Act pursuant to the Registration Rights Agreement to exchange the Initial Securities for Exchange Securities. "Registrar" means the Person who maintains the Security Register, which Person shall be the Trustee unless and until a successor Registrar is appointed by the Obligor. 9 "Registration Rights Agreement" means the Registration Rights Agreement, dated as of November 7, 2002, among the Obligor, the Guarantor and the several initial purchasers named therein. "Registration Statement" means an effective Exchange Offer Registration Statement or Shelf Registration Statement. "Regulation S" means Regulation S promulgated under the Securities Act or any successor regulation. "Regulation S Global Note" shall have the meaning specified in Section 2.01. "Resale Restriction Termination Date" means for any Restricted Note (or beneficial interest therein), two years (or such other period specified in Rule 144(k)) from the Issue Date. "Responsible Officer," when used with respect to the Trustee, means the chairman of the board of directors, the chairman of the executive committee of the board of directors, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any senior trust officer or trust officer, the controller and any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Definitive Note" means a Definitive Note bearing the Private Placement Legend. "Restricted Global Note" means a Global Note bearing the Private Placement Legend. "Restricted Note" means any Initial Note (or beneficial interest therein) until such time as: (a) such Initial Note (or beneficial interest therein) has been exchanged for a corresponding Series B Note pursuant to an Exchange Offer Registration Statement or transferred pursuant to a Shelf Registration Statement; (b) the Resale Restriction Termination Date therefor has passed; (c) such Note is a Regulation S Global Note and the Distribution Compliance Period therefor has terminated; or (d) the Private Placement Legend thereon has otherwise been removed pursuant to Section 2.04(3) or, in the case of a beneficial interest in a Global Note, such beneficial interest has been exchanged for an interest in a Global Note not bearing a Private Placement Legend. 10 "Restricted Subsidiary" means, (a) with respect to the Obligor or PBG, any current or future Subsidiary of the Obligor or PBG, as the case may be, (i) substantially all of the property of which is located, or substantially all of the business of which is carried on, within the 50 states of the United States of America, the District of Columbia or Puerto Rico and (ii) which owns or leases any Principal Property or (b) with respect to the Guarantor, at any time, any Subsidiary of the Guarantor which is at the time not an Unrestricted Subsidiary. "Rule 144" means Rule 144 promulgated under the Securities Act (or any successor rule). "Rule 144A" means Rule 144A promulgated under the Securities Act (or any successor rule). "Rule 144A Global Note" has the meaning specified in Section 2.01. "Scheduled Guarantee Commencement Date" means one Business Day prior to the 2004 Notes Payment Date. "Securities Act" means the U.S. Securities Act of 1933, as amended (or any successor Act), and the rules and regulations of the Commission promulgated thereunder (or respective successor thereto). "Security Register" has the meaning specified in Section 2.04. "Series B Notes" has the meaning set forth in the Agreements of the Parties on the first page of this Indenture, including any replacement Notes issued therefor in accordance with this Indenture. "Shelf Registration Statement" has the meaning assigned to such term in the Registration Rights Agreement. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 2.06. "Subsidiary" of any specified Person means any Person at least a majority of whose outstanding Voting Stock shall at the time be owned, directly or indirectly, by the specified Person or by one or more of its Subsidiaries, or both. "Treasury Rate" means, with respect to any Redemption Date for the Notes (i) the yield, under the heading which represents the average for the immediately preceding week, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Comparable Treasury Issue (if no maturity is within three months before or after the Maturity Date, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight line basis, rounding to the nearest month) or (ii) if 11 such statistical release (or any successor statistical release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Redemption Date. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended, as in force as of the date hereof; provided that, with respect to every supplemental indenture executed pursuant to this Indenture, "Trust Indenture Act" or "TIA" shall mean the Trust Indenture Act of 1939, as then in effect. "Trustee" means JPMorgan Chase Bank, unless and until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean and include each Person who is then a Trustee hereunder. "2004 Notes" means the Obligor's outstanding $1,000,000,000 5 -3/8% Senior Notes due 2004 guaranteed by the Guarantor. "2004 Notes Guarantee" means the Guarantor's unconditional and irrevocable guarantee of the 2004 Notes. "2004 Notes Payment Date" means February 17, 2004 or, if earlier, the date scheduled for payment of (a) the redemption price (in the event of a redemption in whole) or (b) the principal of and interest and premium, if any (in the event of acceleration), in each case, on the 2004 Notes. "2004 Notes Payment Deposit Date" means two Business Days prior to the 2004 Notes Payment Date. "2004 Notes Trustee" means JPMorgan Chase Bank in its capacity as the trustee under the indenture relating to the 2004 Notes, or its successor thereunder. "Unrestricted Subsidiary" means, with respect to the Guarantor, any Subsidiary of the Guarantor (not at the time designated a Restricted Subsidiary of the Guarantor) (a) the major part of whose business consists of finance, banking, credit, leasing, insurance, financial services, or other similar operations, or any combination thereof, (b) substantially all the assets of which consist of the capital stock of one or more Subsidiaries engaged in the operations referenced in the preceding clause (a), (c) substantially all of the property of which is located, or substantially all of the business of which is carried on, outside the 50 states of the United States of America, the District of Columbia and Puerto Rico or (d) designated as such by the Guarantor's Board of Directors. Any Subsidiary of the Guarantor designated as a Restricted Subsidiary may be designated as an Unrestricted Subsidiary. "U.S. GAAP" means accounting principles as are generally accepted in the United States of America at the date of any computation required or permitted under this Indenture. 12 "U.S. Government Obligations" means (a) securities that are direct obligations of the United States of America, the payment of which is unconditionally guaranteed by the full faith and credit of the United States of America and (b) securities that are obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed by the full faith and credit of the United States of America, and also includes depository receipts issued by a bank or trust company as custodian with respect to any of the securities described in the preceding clauses (a) and (b), and any payment of interest or principal payable under any of the securities described in the preceding clauses (a) and (b) that is held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt, or from any amount received by the custodian in respect of such securities, or from any specific payment of interest or principal payable under the securities evidenced by such depository receipt. "Vice President" means, with respect to any Person, any vice president of that Person, whether or not designated by a number or a word or words added before or after the title "vice president." "Voting Stock" means, as applied to any Person, capital stock (or other interests, including partnership or membership interests) of any class or classes (however designated), the outstanding shares (or other interests) of which have, by the terms thereof, ordinary voting power to elect a majority of the members of the board of directors (or other governing body) of such Person, other than stock (or other interests) having such power only by reason of the happening of a contingency. Section 1.02. Officers' Certificates and Opinions. Every Officers' Certificate, Opinion of Counsel and other certificate or opinion to be delivered to the Trustee under this Indenture with respect to any action to be taken by the Trustee shall include the following: (1) a statement that each individual signing such certificate or opinion has read all covenants and conditions of this Indenture relating to such proposed action, including the definitions of all applicable capitalized terms; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 1.03. Form of Documents Delivered to Trustee. (1) In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only 13 one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to the other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. (2) Any certificate or opinion of an officer of the Obligor may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, legal counsel, unless such officer knows that any such certificate, opinion, or representation is erroneous. Any opinion of counsel for the Obligor may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Obligor, unless such counsel knows that any such certificate, opinion, or representation is erroneous. (3) Where any Person is required to make, give, or execute two or more applications, requests, consents, certificates, statements, opinions, or other instruments under this Indenture, such instruments may, but need not, be consolidated and form a single instrument. Section 1.04. Acts of Holders. (1) Any request, demand, authorization, direction, notice, consent, waiver, or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and (if expressly required by the applicable terms of this Indenture) to the Obligor. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 5.01) conclusive in favor of the Trustee and the Obligor, if made in the manner provided in this Section. (2) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness to such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by an officer of a corporation or a member of a partnership, on behalf of such corporation or partnership, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (3) The ownership of Notes shall for all purposes be determined by reference to the Security Register, as such register shall exist as of the applicable Record Date. (4) If the Obligor shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other action, the Obligor may, at its option, by Managing Directors Resolution, fix in advance a Record Date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Obligor shall have no obligation to do so. If such Record Date is fixed, such 14 request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after such Record Date, but only the Holders of record at the close of business on such Record Date shall be deemed to be Holders for the purpose of determining whether Holders of the requisite proportion of Notes Outstanding have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the Notes Outstanding shall be computed as of such Record Date; provided that no such authorization, agreement or consent by the Holders on such Record Date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after such Record Date. (5) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Note shall bind each subsequent Holder of such Note, and each Holder of any Note issued upon the transfer thereof or in exchange therefor or in lieu thereof, with respect to anything done or suffered to be done by the Trustee or the Obligor in reliance upon such action, whether or not notation of such action is made upon such Note. Section 1.05. Notices, Etc., to Trustee, Obligor and Guarantor. Any request, order, authorization, direction, consent, waiver or other action to be taken by the Trustee, the Obligor, the Guarantor or the Holders hereunder (including any Authentication Order), and any notice to be given to the Trustee, the Obligor or the Guarantor with respect to any action taken or to be taken by the Trustee, the Obligor, the Guarantor or the Holders hereunder, shall be sufficient if made in writing and (1) if to be furnished or delivered to or filed with the Trustee by the Obligor, the Guarantor or any Holder, delivered to the Trustee at its Corporate Trust Office, Attention: Institutional Trust Services, or (2) if to be furnished or delivered to the Obligor by the Trustee or any Holder, and except as otherwise provided in Section 4.01(1)(iii), mailed to the Obligor, first-class postage prepaid, at the following address: c/o The Pepsi Bottling Group, Inc., One Pepsi Way, Somers, NY 10589, Attention: Treasurer, or at any other address hereafter furnished in writing by the Obligor to the Trustee, or (3) if to be furnished or delivered to the Guarantor by the Trustee or any Holder and except as otherwise provided in Section 4.01(2)(i), mailed to the Guarantor, first-class postage prepaid at its principal office (as specified in the first paragraph of this instrument), Attention: Treasurer, or at any other address hereafter furnished in writing by the Guarantor to the Trustee. Section 1.06. Notice to Holders; Waiver. Where this Indenture or any Note provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise expressly provided herein or in such Note) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his or her address as it appears in the Security Register as of the applicable Record Date, if any, not later than the latest date or earlier than the earliest date prescribed by this Indenture or such Note for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any particular Holder shall affect the sufficiency of such notice with 15 respect to other Holders. Where this Indenture or any Note provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or otherwise, it shall be impractical to mail notice of any event to any Holder when such notice is required to be given pursuant to any provision of this Indenture or the applicable Note, then any method of notification as shall be satisfactory to the Trustee and the Obligor shall be deemed to be sufficient for the giving of such notice. Section 1.07. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the TIA, if this Indenture is hereafter qualified under the TIA, such required provision shall control. Section 1.08. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents hereof are for convenience only and shall not affect the construction of any provision of this Indenture. Section 1.09. Successors and Assigns. All covenants and agreements in this Indenture by the Obligor and the Guarantor shall bind their respective successors and assigns, whether so expressed or not. Section 1.10. Separability Clause. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 1.11. Benefits of Indenture. Nothing in this Indenture or in any Notes, express or implied, shall give to any Person, other than the parties hereto, their successors hereunder, the Authenticating Agent, the Registrar, any Paying Agent, and the Holders of Notes (or such of them as may be affected thereby), any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 1.12. Governing Law. This Indenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to rules governing the conflict of laws. Section 1.13. Counterparts. This instrument may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all of which shall together constitute but one and the same instrument. Section 1.14. Legal Holidays. In any case where any Interest Payment Date or the Redemption Date or the Maturity Date shall not be a Business Day, then (notwithstanding any other provisions of this Indenture or of the Notes) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, the 16 Redemption Date or Maturity Date, provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Maturity Date, as the case may be. ARTICLE II THE NOTES Section 2.01. Form and Dating. (1) General. (i) The Initial Notes and the Trustee's certificate of authentication thereon shall be substantially in the form of Exhibit A hereto. The Series B Notes and the Trustee's certificate of authentication thereon shall be substantially in the form of Exhibit B hereto. The Notes may have notations, legends or endorsements placed thereon, as may be required to comply with law, stock exchange rule or DTC rule or usage, or as may, consistently herewith, be determined by the Officers executing such Notes, as evidenced by their execution of the Notes. Any portion of the text of any Note may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Note. Each Note shall be dated the date of its authentication. Except as otherwise provided in Section 11.01(2) and in the immediately following proviso, each Note shall have an executed Guarantee from the Guarantor substantially in the form of Exhibit D hereto endorsed thereon; provided, however, that any Note issued under this Indenture on and after the date which the Guarantor provides a notice to the Trustee pursuant to Section 11.01(3) that the Guarantee shall not become effective and the Guarantee Commencement Date shall not occur shall not have an executed Guarantee from the Guarantor endorsed thereon; and provided, further, that any such Note, when issued, authenticated and delivered in accordance with this Indenture, shall be treated as a single class of securities with other Outstanding Notes which have the Guarantee endorsed thereon. (ii) The Definitive Notes, if any, shall be printed, lithographed or engraved or produced by any combination of those methods on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange, all as determined by the Officers executing such Notes, as evidenced by their execution of such Notes. (iii) The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Obligor, the Guarantor and the Trustee, by their execution and delivery of this Indenture expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. Except as otherwise expressly permitted in this Indenture, all Notes shall be identical in all respects. Notwithstanding any differences among them, all Notes issued under this Indenture shall vote and consent together on all matters as one class. 17 (iv) No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for therein executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. (v) All Notes issued under this Indenture shall in all respects be equally and ratably entitled to the benefits hereof, without preference, priority, or distinction. (2) Global Notes. (i) Initial Notes offered and sold to QIBs in the United States of America in reliance on Rule 144A shall be issued initially in the form of one or more permanent Global Notes, substantially in the form of Exhibit A attached hereto (including the Global Note Legend and the Private Placement Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto, each, a "Rule 144A Global Note"). Initial Notes offered and sold outside the United States of America in reliance on Regulation S shall be issued initially in the form of one or more permanent Global Notes, substantially in the form set forth in Exhibit A (including the Global Note Legend and the Private Placement Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto, each, a "Regulation S Global Note"). (ii) Upon consummation of the Registered Exchange Offer, the Series B Notes may be issued in the form of one or more Global Notes with the Global Note Legend but not the Private Placement Legend. All or part of any Rule 144A Global Note or Regulation S Global Note exchanged in the Registered Exchange Offer will be exchanged for one or more Global Notes with the Global Note Legend but not the Private Placement Legend. Each Global Note shall represent such of the aggregate principal amount of the Outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of Outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of Outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of Outstanding Notes represented thereby shall be made by the Trustee in accordance with instructions given by the Holder thereof as required by Section 2.04. (iii) Each Global Note (a) shall be registered, in the name of the Depositary designated for such Global Note pursuant to Section 2.04, or in the name of a nominee of such Depositary, (b) shall be deposited with the Trustee, as Custodian for the Depositary, and (c) shall bear a legend substantially as follows ("Global Note Legend"): THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS NOTE IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A 18 PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (A NEW YORK CORPORATION) ("DTC") TO THE OBLIGOR OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. (iv) Each Depositary designated pursuant to Section 2.04 for a Global Note must, at the time of its designation and at all times while it serves as Depositary, be a clearing agency registered under the Exchange Act and any other applicable statute or regulation, provided that the Depositary is required to be so registered in order to act as depositary. (v) Any Global Note may be represented by more than one certificate. The aggregate principal amount of each Global Note may from time to time be increased or decreased by adjustments made on the records of the Registrar, as provided in this Indenture. Section 2.02. Execution and Authentication; Aggregate Principal Amount. (1) The Notes shall be executed on behalf of the Obligor by any two Officers of the Obligor. The signature of any of these officers on the Notes may be manual or facsimile. Typographical and other minor errors or defects in any such signature shall not affect the validity or enforceability of any Note that has been duly authenticated and delivered by the Trustee. (2) Notes bearing the manual or facsimile signatures of individuals who were at any time on or after the date hereof the proper officers of the Obligor shall bind the Obligor, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. (3) The Trustee shall, upon receipt of a written order of the Obligor signed by an Officer thereof (an "Authentication Order"), in accordance with procedures acceptable to the Trustee set forth in the Authentication Order, and subject to the provisions hereof, authenticate 19 and deliver (1) the Initial Notes in aggregate principal amount not to exceed $1,000,000,000, (2) Series B Notes for issue only in a Registered Exchange Offer, pursuant to the Registration Rights Agreement, in exchange for Initial Notes for a like principal amount and (3) Private Exchange Securities for issue pursuant to the Registration Rights Agreement, in exchange for Initial Notes for a like principal amount. (4) The aggregate principal amount of Notes Outstanding at any time may not exceed the sum of (i) $1,000,000,000, and (ii) the principal amount of lost, destroyed or stolen Notes for which replacement Notes are issued pursuant to Section 2.05. (5) The Notes shall be in fully registered form, without coupons, in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Section 2.03. Temporary Notes. Until certificates representing Notes are ready for delivery, the Obligor may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate and deliver temporary Notes. Temporary Notes shall be substantially in the form of certificated Notes but may have variations that the Obligor considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Obligor shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. Section 2.04. Registration, Transfer and Exchange. (1) Securities Register. The Trustee shall keep a register of the Notes (the "Security Register") which shall provide for the registration of such Notes, and for transfers of such Notes in accordance with information, if any, to be provided to the Trustee by the Obligor, subject to such reasonable regulations as the Trustee may prescribe. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. At all reasonable times the information contained in such register or registers shall be available for inspection at the Corporate Trust Office of the Trustee or at such other office or agency to be maintained by the Obligor pursuant to Section 9.02. Upon due presentation for registration of transfer of any Note at the Corporate Trust Office of the Trustee or at any other office or agency maintained by the Obligor pursuant to Section 9.02, the Obligor shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of authorized denominations, of a like aggregate principal amount and Maturity Date. (2) Transfer of Global Notes. Any other provision of this Section 2.04 notwithstanding, unless and until it is exchanged in whole or in part for Definitive Notes, a Global Note representing all or a portion of the Notes may not be transferred except as a whole by the Depositary to a nominee of such Depositary, or by a nominee of such Depositary to such Depositary or another nominee of such Depositary, or by such Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. 20 The Obligor initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Trustee is authorized to enter into a letter of representations with DTC in the form provided to the Trustee by the Obligor and to act in accordance with such letter. (i) Transfer and Exchange of Beneficial Interest in Rule 144A Global Note to Regulation S Global Note. If the holder of a beneficial interest in a Rule 144A Global Note that is a Restricted Note wishes to transfer such interest (or any portion thereof) to a Non-U.S. Person pursuant to Regulation S and such Non-U.S. Person wishes to hold its interest in the Notes through a beneficial interest in the Regulation S Global Note, then (1) upon receipt by the Registrar of (i) instructions from the Holder of the Rule 144A Global Note directing the Registrar to credit or cause to be credited a beneficial interest in the Regulation S Global Note equal to the principal amount of the beneficial interest in the Rule 144A Global Note to be transferred, specifying the participant accounts with the Depository to be credited and debited; and (ii) a certificate in the form of Exhibit C from the transferor; and (2) in accordance with the rules and procedures of the Depository, the Registrar shall (i) increase the Regulation S Global Note and credit or caused to be credited the specified participant account at the Depositary for such amount in accordance with the foregoing, and (ii) decrease the Rule 144A Global Note for such amount and debit or cause to be debited the specified participant account at the Depositary for such amount in accordance with the foregoing. (ii) Transfer and Exchange of Beneficial Interest in Regulation S Global Note to Rule 144A Global Note. If the holder of a beneficial interest in a Regulation S Global Note wishes to transfer such interest (or any portion thereof) to a QIB pursuant to Rule 144A, then (1) upon receipt by the Registrar of (i) instructions from the Holder of the Regulation S Global Note directing the Registrar to credit or cause to be credited a beneficial interest in the Rule 144A Global Note equal to the principal amount of the beneficial interest in the Regulation S Global Note to be transferred, specifying the participant accounts at the Depositary to be credited and debited, and (ii) a certificate in the form of Exhibit C duly executed by the transferor; and (2) in accordance with the rules and procedures of the Depository, the Registrar shall (i) increase the Rule 144A Global Note and credit or caused to be credited the specified participant account at the Depositary for such amount in accordance with the foregoing, and (ii) decrease the Regulation S Global Note amount and debit or cause to be debited the specified participant account at the Depositary for such amount in accordance with the foregoing. During the Distribution Compliance Period, all beneficial interests in the Regulation S Global Note shall be transferred only through Euroclear or Clearstream, Luxembourg, either directly if the transferor and transferee are participants in such systems, or indirectly through organizations that are participants. The Obligor covenants to give the Trustee notice of the date on which the Distribution Compliance Period terminates. (iii) Other Transfers. Any transfer of Restricted Notes not described above (other than a transfer of a beneficial interest in a Global Note that does not involve an exchange of such interest for a Definitive Note or a beneficial interest in another Global 21 Note, which must be effected in accordance with applicable law and the rules and procedures of the Depositary, but is not subject to any procedure required by this Indenture) shall be made only upon receipt by the Registrar of such opinions of counsel, certificates and/or other information reasonably required by and satisfactory to the Obligor in order to ensure compliance with the Securities Act or in accordance with this Section 2.04. (3) Legends. (i) Each Global Note shall bear the legend specified therefor in clause (iii) of Section 2.01(2) on the face thereof. (ii) Each Restricted Note, if any, (and all Notes issued in exchange therefor or substitution thereof) shall bear a legend on the face thereof in substantially the following form ("Private Placement Legend"): "THIS NOTE [, AND THE GUARANTEE ENDORSED HEREON,] HAS [HAVE] NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A ADOPTED UNDER THE SECURITIES ACT), OR (B) IT IS NOT A U.S. PERSON AND IS OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT; AND (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS NOTE RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE OBLIGOR OR ANY AFFILIATE THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A ADOPTED UNDER THE SECURITIES ACT, (C) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 ADOPTED UNDER THE SECURITIES ACT OR ANOTHER AVAILABLE EXEMPTION UNDER THE SECURITIES ACT (IF AVAILABLE), OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT; AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS NOTE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE OBLIGOR SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS MAY BE REQUIRED PURSUANT TO THE INDENTURE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A 22 TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT." By its acceptance of any Note bearing the Private Placement Legend, each Holder of such Note acknowledges the restrictions on transfer set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture and in the Private Placement Legend. (iii) Notwithstanding any other provision of this Indenture, upon any request for sale or other transfer of a Restricted Note (including any Restricted Global Notes) made subsequent to the Resale Restriction Termination Date, (A) any such Restricted Global Notes shall not be subject to any restriction on transfer set forth above and (B) in the case of any Restricted Definitive Note, the Trustee shall permit the Holder thereof to exchange such Restricted Definitive Note for Definitive Notes that do not bear the Private Placement Legend and such request shall be effective to rescind any restriction on the further transfer of such Note; and in each such case, such Notes (whether in definitive or global form) shall no longer constitute "Restricted Notes" for purposes of this Indenture. The Trustee and the Obligor shall be entitled (but not obligated) to require such additional certificates and information as it may reasonably deem necessary to demonstrate that any sale or other transfer of a Restricted Note is made in compliance with the applicable restrictions set forth above and with applicable securities laws. (iv) Notwithstanding any other provision of this Indenture, after a transfer of any Initial Notes during the period of the effectiveness of a Shelf Registration Statement with respect to the Initial Notes and pursuant thereto, all requirements for a Private Placement Legend on such Initial Notes will cease to apply, and Initial Notes in the form of one or more Global Notes without a Private Placement Legend will be available to the Holder of such Initial Notes. Upon the consummation of a Registered Exchange Offer with respect to the Initial Notes pursuant to which Holders of Initial Notes are offered Series B Notes in exchange for their Initial Notes, Initial Notes in the form of one or more Global Notes with the Private Placement Legend will be available to Holders of such Initial Notes that do not exchange their Initial Notes, and Series B Notes in the form of one or more Global Notes without the Private Placement Legend will be available to Holders that exchange such Initial Notes in such Registered Exchange Offer. (4) Definitive Notes. (i) Notwithstanding any other provisions of this Indenture or the Notes, a Global Note may be exchanged for Notes registered in the names of any Person designated by the Depositary in the event that (a) the Depositary has notified the Obligor that it is unwilling or unable to continue as Depositary for such Global Note or such Depositary has ceased to be a "clearing agency" registered under the Exchange Act, at a time when the Depositary is required to be so registered in order to act as depositary, and the Obligor has not appointed a successor Depositary within 60 days of receiving such notice or of becoming aware of such cessation, (b) an Event of Default has occurred and is continuing with respect to the applicable Notes, or (c) the Obligor, in its sole discretion, determines that the Notes issued in the form of Global Notes shall no longer 23 be represented by such Global Notes as evidenced by a Company Order delivered to the Trustee. Any Global Note exchanged pursuant to clause (a) or (c) above shall be so exchanged in whole and not in part and any Global Note exchanged pursuant to clause (b) above may be exchanged in whole or from time to time in part as directed by the Depositary. Any Note issued in exchange for a Global Note or any portion thereof shall be a Global Note, provided that any such Note so issued that is registered in the name of a Person other than the Depositary or a nominee thereof shall not be a Global Note. (ii) If at any time the Depositary for the Notes notifies the Obligor that it is unwilling or unable to continue as Depositary for the Notes or if the Depositary has ceased to be a "clearing agency" registered under the Exchange Act at a time when the Depositary is required to be so registered in order to act as depositary, the Obligor may within 60 days of receiving such notice or of becoming aware of such cessation appoint a successor Depositary with respect to the Notes. (iii) If, in accordance with this Section 2.04(4), Notes in global form will no longer be represented by Global Notes, the Obligor will execute, and the Trustee, upon receipt of an Authentication Order, will authenticate and make available for delivery, Definitive Notes in an aggregate principal amount equal to the principal amount of the Global Notes, in exchange for such Global Notes. (iv) If a Definitive Note is issued in exchange for any portion of a Global Note after the close of business at the office or agency where such exchange occurs on any Record Date for the payment of interest and before the opening of business at such office or agency on the next succeeding Interest Payment Date, interest shall not be payable on such Interest Payment Date in respect of such Definitive Notes, but shall be payable on such Interest Payment Date only to the Person to whom interest in respect of such portion of such Global Note is payable in accordance with the provisions of this Indenture. (v) Definitive Notes issued in exchange for a Global Note pursuant to this Section shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. To permit registrations of transfers and exchanges, the Obligor shall execute and the Trustee (or an Authenticating Agent appointed pursuant to this Indenture) shall authenticate and make available for delivery Definitive Notes at the Registrar's request, and upon direction of the Obligor. No service charge shall be made for any registration of transfer or exchange, but the Obligor may require payment of a sum sufficient to cover any transfer tax or other governmental charge payable in connection with any registration of transfer or exchange. (vi) When Definitive Notes are presented to the Trustee with a request to register the transfer of such Definitive Notes or to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Trustee shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided, however, that the Definitive Notes surrendered for 24 transfer or exchange (a) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Obligor and the Trustee, duly executed by the Holder thereof or his attorney, duly authorized in writing and (b) in the case of Restricted Definitive Notes only, shall be accompanied by the following additional information and documents, as applicable: (a) if such Restricted Definitive Note is being exchanged, without transfer, a certification from such Holder to that effect (in substantially the form of Exhibit C hereto); (b) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A or pursuant to an exemption from registration in accordance with Rule 144(k) under the Securities Act or Regulation S, a certification from the transferor to that effect (in substantially the form of Exhibit C hereto); (c) if such Restricted Definitive Note is being transferred to the Obligor or any of its Affiliates, a certification from the transferor to that effect (in substantially the form of Exhibit C hereto). (vii) At such time as all interests in Global Notes have either been exchanged for Definitive Notes or cancelled, such Global Notes shall be cancelled by the Trustee in accordance with the standing procedures and instructions existing between the Depositary and the Custodian. At any time prior to such cancellation, if any interest in a Global Note is exchanged for Definitive Notes or cancelled, the principal amount of Global Notes shall, in accordance with the standing procedures and instructions existing between the Depositary and the Custodian, be reduced and an endorsement shall be made on such Global Note, by the Trustee or the Custodian, at the direction of the Trustee, to reflect such reduction. (5) Notwithstanding anything in this Indenture to the contrary, (i) all Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Obligor, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange, (ii) all transfers and exchanges of the Notes may be made only in accordance with the procedures set forth in this Indenture (including the restrictions on transfer); and (iii) the transfer and exchange of a beneficial interest in a Global Note may only be effected through the Depositary in accordance with the procedures promulgated by the Depositary. (6) The Obligor shall not be required to (i) issue, register the transfer of, or exchange any Note during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes under Section 10.02 and ending at the close of business on the date of such mailing or (ii) register the transfer of or exchange any Note so called for redemption. Section 2.05. Mutilated, Destroyed, Lost and Stolen Notes. (1) If (i) any mutilated Note is surrendered to the Trustee, or the Obligor and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note and (ii) 25 there is delivered to the Obligor and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Obligor or the Trustee that such Note has been acquired by a bona fide purchaser, the Obligor may in its discretion execute and, upon request of the Obligor, the Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a new Note of like tenor, Maturity Date, and principal amount, bearing a number not contemporaneously outstanding. (2) In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Obligor in its discretion may, instead of issuing a new Note, pay such Note. (3) Upon the issuance of any new Note under this Section, the Obligor may require the payment by the Holder thereof of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. (4) Every new Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Note shall constitute an original contractual obligation of the Obligor, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. (5) The provisions of this Section 2.05 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. Section 2.06. Payment of Interest; Interest Rights Preserved. (1) Interest on any Note which is payable and is punctually paid or duly provided for on any Interest Payment Date shall, if so provided in such Note, be paid to the Person in whose name that Note (or one or more Predecessor Notes) is registered at the close of business on the applicable Record Date, notwithstanding any transfer or exchange of such Note subsequent to such Record Date and prior to such Interest Payment Date (unless such Interest Payment Date is also the Maturity Date, in which case such interest shall be payable to the Person to whom principal is payable). (2) Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered Holder on the applicable Record Date by virtue of his having been such Holder; and, except as hereinafter provided, such Defaulted Interest may be paid by the Obligor, at its election in each case, as provided in clause (i) or (ii) below: (i) The Obligor may elect to make payment of any Defaulted Interest to the Persons in whose names any such Notes (or their respective Predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Obligor shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on 26 each such Note and the date of the proposed payment, and at the same time the Obligor shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Obligor of such Special Record Date and, in the name and at the expense of the Obligor, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to the Holder of each such Note at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Notes (or their respective Predecessor Notes) are registered on such Special Record Date and shall no longer be payable pursuant to the following clause (ii). (ii) The Obligor may make payment of any Defaulted Interest in any other lawful manner if, after notice given by the Obligor to the Trustee of the proposed payment pursuant to this clause (ii), such manner of payment shall be deemed practicable by the Trustee. (3) If any installment of interest on any Note called for redemption pursuant to Article X is due and payable on or prior to the Redemption Date and is not paid or duly provided for on or prior to the Redemption Date in accordance with the foregoing provisions of this Section 2.06, such interest shall be payable as part of the Redemption Price of such Notes. (4) Interest on Notes may be paid by mailing a check to the address of the Person entitled thereto at such address as shall appear in the Security Register or by such other means as may be specified in the form of such Note. (5) Subject to the foregoing provisions of this Section 2.06 and the provisions of Section 2.04, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. Section 2.07. Persons Deemed Owners. (1) Prior to due presentment of a Note for registration of transfer, the Obligor, the Guarantor, the Trustee, and any agent of the Obligor, the Guarantor or the Trustee may treat the Person in whose name any Note is registered on the Security Register as the owner of such Note for the purpose of receiving payment of principal, premium, if any, and (subject to Section 2.06) interest, and for all other purposes whatsoever, whether or not such Note is overdue, and neither the Obligor, the Guarantor, the Trustee, nor any agent of the Obligor, the Guarantor or the Trustee shall be affected by notice to the contrary. 27 (2) None of the Obligor, the Guarantor, the Trustee, any Authenticating Agent, any Paying Agent, the Registrar or any Co-Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests and each of them may act or refrain from acting without liability on any information relating to such records provided by the Depositary. Section 2.08. Cancellation. All Notes surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and, if not already cancelled, shall be promptly cancelled by it. The Obligor may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Obligor may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly cancelled by the Trustee. Acquisition of such Notes by the Obligor shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation. No Note shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section, except as expressly permitted by this Indenture. The Trustee shall dispose of all cancelled Notes in accordance with its customary procedures and deliver a certificate of such disposition to the Obligor. Section 2.09. Computation of Interest. Interest on the Notes shall be calculated on the basis of a 360-day year of twelve 30-day months. Section 2.10. CUSIP Numbers. The Obligor in issuing the Notes may use "CUSIP" and "ISIN" numbers (if then generally in use), and, if so, the Trustee shall use the CUSIP or ISIN numbers, as the case may be, in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP or ISIN number, as the case may be, either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes. The Obligor will promptly notify the Trustee of any change in the CUSIP or ISIN number of any type. Section 2.11. Additional Interest under Registration Rights Agreement. Under certain circumstances, the Obligor may be obligated to pay Additional Interest to Holders, all as and to the extent set forth in the Registration Rights Agreement. The terms thereof, insofar as they relate to the payment of Additional Interest, are hereby incorporated herein by reference and such Additional Interest, if required to be paid, is deemed to be interest for all purposes of this Indenture. ARTICLE III SATISFACTION AND DISCHARGE Section 3.01. Satisfaction and Discharge of Indenture. This Indenture will be discharged with respect to the Notes and will cease to be of further effect as to all Notes (except as to any surviving rights of transfer or exchange of Notes expressly provided for herein), and 28 the Trustee, on demand of and at the expense of the Obligor, shall execute proper instruments acknowledging the satisfaction and discharge of this Indenture, when (1) either (i) all Notes theretofore authenticated and delivered (except (a) lost, stolen or destroyed Notes which have been replaced or paid, as provided in Section 2.05, and (b) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Obligor and thereafter repaid to the Obligor or discharged from such trust, as provided in Section 3.05) have been delivered to the Trustee cancelled or for cancellation; or (ii) all such Notes not theretofore delivered to the Trustee cancelled or for cancellation (a) have become due and payable, or (b) will, in accordance with their Maturity Date, become due and payable within one year, or (c) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Obligor, and, in any of the cases described in (a), (b) or (c), above, the Obligor has deposited or caused to be deposited with the Trustee, as trust funds in trust for the purpose, an amount of money in U.S. dollars sufficient, non-callable U.S. Government Obligations, the principal of and interest on which when due, will be sufficient, or a combination thereof, sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Trustee cancelled or for cancellation, for principal of and interest and premium, if any, on such Notes to the date of such deposit (in the case of Notes that have become due and payable), or to the Maturity Date or the Redemption Date, as the case may be; (2) the Obligor has paid or caused to be paid all other sums payable by it with respect to the Notes under this Indenture; (3) no Event of Default or event which with notice or lapse of time would become an Event of Default with respect to the Notes has occurred and is continuing with respect to such Notes on the date of such deposit; and (4) the Obligor has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent to satisfaction and discharge of this Indenture with respect to the Notes have been complied with, and, in the case of the Opinion of Counsel, stating: (i) such deposit and defeasance will not cause the holders of such Notes to recognize income, gain or loss for Federal income tax purposes and such holders will be 29 subject to Federal income tax on the same amount and in the same manner and at the same time as would have been the case if such option had not been exercised; (ii) either that no requirement to register under the Investment Company Act of 1940, as amended, will arise as a result of the Obligor's exercise of its option under this Section 3.01 or that any such registration requirement has been complied with; and (iii) such deposit and defeasance will not result in a material breach or violation of, or constitute a default under, any material agreement or instrument to which the Obligor is a party. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Obligor under Section 3.01(1) and the obligations of the Obligor to the Trustee under Section 5.07 shall survive, and the obligations of the Trustee under Sections 3.03 and 3.05 shall survive. Section 3.02. Defeasance and Discharge of Covenants upon Deposit of Moneys, U.S. Government Obligations. At the Obligor's option, either (a) the Obligor shall be deemed to have been Discharged (as defined below) from its obligations with respect to the Notes on the 123rd day after the applicable conditions set forth below have been satisfied ("Legal Defeasance") and/or (b) the Obligor and the Guarantor shall cease to be under any obligation to comply with any term, provision or condition set forth in Section 7.01, 7.02, 9.06 or 9.07 with respect to the Notes at any time after the applicable conditions set forth below have been satisfied ("Covenant Defeasance"): (1) The Obligor or the Guarantor shall have deposited or caused to be deposited irrevocably with the Trustee, as trust funds, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Notes, an amount of money, in cash in U.S. dollars sufficient, non-callable U.S. Government Obligations, the principal of and interest on which when due, will be sufficient, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge the entire indebtedness on the Notes with respect to principal, premium, if any, and accrued and unpaid interest to the date of such deposit (in the case of Notes that have become due and payable), or to the Maturity Date or Redemption Date, as the case may be; (2) No Event of Default, or event which with notice or lapse of time would become an Event of Default with respect to the Notes, shall have occurred and be continuing on the date of such deposit; (3) The Obligor shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent to the defeasance and discharge contemplated by this Section 3.02 have been complied with, and, in the case of the Opinion of Counsel stating that: (i) the deposit and defeasance contemplated by this Section will not cause the Holders of the Notes to recognize income, gain or loss for Federal income tax purposes as a result of the Obligor's exercise of its option under this Section 3.02 and such Holders will be subject to Federal income tax on the same amount and in the same manner and at 30 the same times as would have been the case if such option had not been exercised, which Opinion of Counsel (in the case of a Legal Defeasance) must be based upon a ruling of the Internal Revenue Service to the same effect or a change in applicable Federal income tax law or related treasury regulations after the date of this Indenture; and (ii) either no requirement to register under the Investment Company Act of 1940, as amended, will arise as a result of the Obligor's exercise of its option under this Section 3.02 or any such registration requirement has been complied with; and (4) with respect to a Legal Defeasance, 123 days shall have passed during which no Event of Default under clauses (iv) and (v) of Section 4.01(1) or under clauses (ii) and (iii) of Section 4.01(2) has occurred. If in connection with the exercise by the Obligor of any option under this Section 3.02, the Notes are to be redeemed, either notice of such redemption shall have been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee shall have been made. Notwithstanding the exercise by the Obligor of its option under Section 3.02(b) with respect to Section 7.01 or 7.02, the obligation of any successor Entity to assume the obligations to the Trustee under Section 5.07 shall not be discharged. "Discharged" means that the Obligor shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Notes and to have satisfied all the obligations under this Indenture relating to such Notes (and the Trustee, at the expense of the Obligor, shall execute proper instruments acknowledging the same), except (A) the rights of Holders of Notes to receive, from the trust fund described in clause (1) above, payment of the principal of, premium, if any, and the interest, if any, on such Notes when such payments are due; (B) the Obligor's obligations with respect to such Notes under Sections 2.04, 2.05, 3.02(1), 3.03, and 9.02 and its obligations under Section 5.07; and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder. Section 3.03. Application of Trust Money. All money deposited with the Trustee pursuant to Section 3.01 or Section 3.02 shall be held in trust and applied by it, in accordance with the provisions of this Indenture, to the payment, either directly or through any Paying Agent (including the Obligor acting as its own Paying Agent), as the Trustee may determine, to the Persons entitled thereto, of the principal, premium, if any, and interest, for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. Section 3.04. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture, all moneys then held by any Paying Agent of the Notes (other than the Trustee) shall, upon demand of the Obligor, be repaid to it or paid to the Trustee, and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. Section 3.05. Return of Unclaimed Amounts. Any amounts deposited with or paid to the Trustee or any Paying Agent for payment of the principal of, premium, if any, or interest on the Notes or then held by the Obligor, in trust for the payment of the principal of, 31 premium, if any, or interest on the Notes and not applied but remaining unclaimed by the Holders of such Notes for two years after the date upon which the principal of, premium, if any, or interest on such Notes, as the case may be, shall have become due and payable, shall be repaid to the Obligor by the Trustee on demand or (if then held by the Obligor) shall be discharged from such Trust; and the Holder of any of such Notes shall thereafter, as an unsecured general creditor, look only to the Obligor for any payment which such Holder may be entitled to collect (until such time as such unclaimed amounts shall escheat, if at all, to any applicable jurisdiction) and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Obligor as trustee thereof, shall thereupon cease. Notwithstanding the foregoing, the Trustee or Paying Agent, before being required to make any such repayment, may at the expense of the Obligor cause to be published once a week for two successive weeks (in each case on any day of the week) in a newspaper printed in the English language and customarily published at least once a day at least five days in each calendar week and of general circulation in the Borough of Manhattan, in the City and State of New York, a notice that said amounts have not been so applied and that after a date named therein any unclaimed balance of said amounts then remaining will be promptly returned to the Obligor. ARTICLE IV REMEDIES Section 4.01. Events of Default. "Event of Default," wherever used herein, means with respect to the Notes any of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) on and after the date hereof: (i) default in the payment of any principal of or premium, if any, on the Notes when due (whether at maturity, upon redemption or otherwise); (ii) default in the payment of any interest (including Additional Interest, if any) on any Note, when it becomes due and payable, and continuance of such default for a period of 30 days; (iii) default in the performance or breach of any covenant or warranty of the Obligor under this Indenture, and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Obligor by the Trustee or to the Obligor and the Trustee by the Holders of at least a majority in aggregate principal amount of the Outstanding Notes, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (iv) the entry of an order for relief against the Obligor, PBG or any Restricted Subsidiary of PBG under the Bankruptcy Code by a court having jurisdiction in the premises or a decree or order by a court having jurisdiction in the premises adjudging the 32 Obligor, PBG or any Restricted Subsidiary of PBG as bankrupt or insolvent under any other applicable Federal or state law, or the entry of a decree or order approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Obligor, PBG or any Restricted Subsidiary of PBG under the Bankruptcy Code or any other applicable Federal or state law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Obligor, PBG or any Restricted Subsidiary of PBG or of any substantial part of their respective properties, or ordering the winding up or liquidation of their respective affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days; (v) the consent by the Obligor, PBG or any Restricted Subsidiary of PBG to the institution of bankruptcy or insolvency proceedings against any of them, or the filing by the Obligor, PBG or any Restricted Subsidiary of PBG of a petition or answer or consent seeking reorganization or relief under the Bankruptcy Code or any other applicable Federal or state law, or the consent by the Obligor, PBG or any Restricted Subsidiary of PBG to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Obligor, PBG or any Restricted Subsidiary of PBG or of any substantial part of their respective properties, or the making by the Obligor, PBG or any Restricted Subsidiary of PBG of an assignment for the benefit of creditors, or the admission by the Obligor, PBG or any Restricted Subsidiary of PBG in writing of the Obligor's, PBG's or any Restricted Subsidiary of PBG's inability to pay debts generally as they become due, or the taking of corporate action by the Obligor, PBG or any Restricted Subsidiary of PBG in furtherance of any such action; (vi) the maturity of any Debt of the Obligor, PBG or any Restricted Subsidiary of PBG having a then outstanding principal amount in excess of $50 million shall have been accelerated by any holder or holders thereof or any trustee or agent acting on behalf of such holder or holders, in accordance with the provisions of any contract evidencing, providing for the creation of or concerning such Debt or failure to pay at the stated maturity (and the expiration of any grace period) any Debt of the Obligor, PBG or any Restricted Subsidiary of PBG having a then outstanding principal amount in excess of $50 million; and (2) on and after the Guarantee Commencement Date (in the event that the Guarantee Commencement Date shall occur): (i) default in the performance or breach of any covenant or warranty of the Guarantor under this Indenture, and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Guarantor by the Trustee or to the Guarantor and the Trustee by the Holders of at least a majority in aggregate principal amount of the Outstanding Notes, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (ii) the entry of an order for relief against the Guarantor under the Bankruptcy Code by a court having jurisdiction in the premises or a decree or order by a court having 33 jurisdiction in the premises adjudging the Guarantor as bankrupt or insolvent under any other applicable Federal or state law, or the entry of a decree or order approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Guarantor under the Bankruptcy Code or any other applicable Federal or state law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Guarantor or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days; (iii) the consent by the Guarantor to the institution of bankruptcy or insolvency proceedings against the Guarantor, or the filing by the Guarantor of a petition or answer or consent seeking reorganization or relief under the Bankruptcy Code or any other applicable Federal or state law, or the consent by the Guarantor to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Guarantor or of any substantial part of its property, or the making by the Guarantor of an assignment for the benefit of creditors, or the admission by the Guarantor in writing of the Guarantor's inability to pay debts generally as they become due, or the taking of corporate action by the Guarantor in furtherance of any such action; and (iv) the Guarantee ceases to be in full force and effect, or the Guarantor denies or disaffirms its obligations under the Guarantee, in each case, in accordance with Article XI. Section 4.02. Acceleration of Maturity; Rescission and Annulment. (1) If any Event of Default (other than an Event of Default specified in clause (iv) or (v) of Section 4.01(1)) occurs and is continuing, then either the Trustee or the Holders of a majority in aggregate principal amount of the Outstanding Notes may declare the principal of all Outstanding Notes, and the interest, if any, accrued thereon, to be immediately due and payable by notice in writing to the Obligor (and to the Trustee if given by Holders). If an Event of Default described in clause (iv) or (v) of Section 4.01(1) occurs, the principal amount and accrued interest, if any, on all the Notes as of the date of such Event of Default will become and be immediately due and payable without any declaration or other act on the part of the Trustee or the Holders of the Notes. (2) At any time after such a declaration of acceleration has been made with respect to the Notes and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article IV provided, the Holders of a majority in aggregate principal amount of the Outstanding Notes, by written notice to the Obligor and the Trustee, may rescind and annul such declaration or waive past defaults and its consequences if: (i) the Obligor or the Guarantor has paid or deposited with the Trustee a sum sufficient to pay: (a) all overdue installments of interest, if any, on such Notes, 34 (b) the principal of (and premium, if any, on) any such Notes which have become due otherwise than by such declaration of acceleration, and interest thereon at the rate borne by the Notes, to the extent that payment of such interest is lawful, (c) interest on overdue installments of interest at the rate borne by the Notes to the extent that payment of such interest is lawful, and (d) the reasonable compensation, expenses, disbursements and advances of the Trustee and its agents and counsel, and all other amounts due the Trustee under Section 5.07; and (ii) all Events of Default, other than the nonpayment of the principal of the Notes which have become due solely by such acceleration, have been cured or waived as provided in Section 4.13. (3) No such rescission shall affect any subsequent default or impair any right consequent thereon. Section 4.03. Collection of Indebtedness and Suits for Enforcement. (1) The Obligor covenants that if: (i) default is made in the payment of any installment of interest (including Additional Interest, if any) on any Note when such interest becomes due and payable, or (ii) default is made in the payment of (or premium, if any, on) the principal of any Note at the Maturity thereof, and (iii) any such default continues for any period of grace provided in relation to such default pursuant to Section 4.01, then, with respect to such Notes, the Obligor will, upon demand of the Trustee, pay to it, for the benefit of the Holder of any such Note, the whole amount then due and payable on any such Note for principal (and premium, if any) and interest with interest (to the extent that payment of such interest shall be legally enforceable) upon the overdue principal (and premium, if any) and upon overdue installments of interest at the rate of interest borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 5.07. (2) If the Obligor fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Obligor or any other obligor upon the Notes and collect the money adjudged or decreed to be payable in the manner provided by law out of the property of the Obligor or any other obligor upon such Notes, wherever situated. 35 (3) If an Event of Default with respect to the Notes occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Notes by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 4.04. Trustee May File Proofs of Claim. (1) In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition, or other judicial proceeding relative to the Obligor or any obligor upon the Notes or the property of the Obligor or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Obligor for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceedings or otherwise, (i) to file and prove a claim for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes, and to file such other papers or documents as may be necessary and advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements, and advances of the Trustee, its agents and counsel, and all other amounts due the Trustee under Section 5.07) and of the Holders allowed in such judicial proceedings, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee and its agent and counsel, and any other amounts due the Trustee under Section 5.07. (2) Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 4.05. Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee and its agents and counsel, be for the ratable benefit of the Holders of the Notes. 36 Section 4.06. Application of Money Collected. (1) Any money collected by the Trustee from the Obligor with respect to Notes pursuant to this Article IV shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, if any, upon presentation of the Notes and the notation thereon of the payment, if only partially paid, and upon surrender thereof, if fully paid: First: To the payment of all amounts due the Trustee under Section 5.07. Second: To the payment of the amounts then due and unpaid upon the Notes for principal, premium, if any, and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind. (2) Any money collected by the Trustee from the Guarantor with respect to the Guarantee pursuant to this Article IV shall only be applied to the payment of the amount then due and unpaid upon the Notes for principal, premium, if any, and interest, in respect of which or for the payment of which such money has been collected, ratably, without preference or priority of any kind, upon presentation of the Notes and the notation thereon of the payment, if only partially paid, and upon surrender thereof, if fully paid, at the date or dates fixed by the Trustee. Section 4.07. Limitation on Suits. No Holder of any Note may institute any action under this Indenture, unless and until: (1) such Holder has given the Trustee written notice of a continuing Event of Default; (2) the Holders of a majority in aggregate principal amount of the Outstanding Notes have requested the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders has or have offered the Trustee such reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request as the Trustee may require; (4) the Trustee has failed to institute any such proceeding for 60 days after its receipt of such notice, request and offer of indemnity; and (5) no inconsistent direction has been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Outstanding Notes; it being understood and intended that no one or more Holders of Notes shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Notes, or to obtain or to seek to obtain priority or preference over any other such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and proportionate benefit of all the Holders of all Notes. 37 Section 4.08. Unconditional Right of Holders to Receive Payment of Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal, premium, if any, and (subject to Section 2.06) interest on such Note on or after the Maturity Date (or, in the case of redemption, on or after the Redemption Date) and to institute suit for the enforcement of any such payment on or after such respective date, and such right shall not be impaired or affected without the consent of such Holder. Section 4.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, then and in every such case the Obligor, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 4.10. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right or remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 4.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article IV or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 4.12. Control by Holders. The Holders of a majority in aggregate principal amount of the Outstanding Notes shall have the right, to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee with respect to the Notes provided that: (1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, determines that the action so directed may not lawfully be taken or would conflict with this Indenture or if the Trustee in good faith shall, by a Responsible Officer, determine that the proceedings so directed would involve it in personal liability or be unjustly prejudicial to the Holders not taking part is in such direction, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 4.13. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes may, on behalf of the Holders of all Notes, 38 waive any past default hereunder with respect to the Notes, except a default not theretofore cured: (1) in the payment of principal, premium, if any, or interest on any Notes, or (2) in respect of a covenant or provision in this Indenture which, under Article VIII cannot be modified without the consent of the Holder of each Outstanding Note. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Section 4.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder or group of Holders holding in the aggregate more than 10% in principal amount of the Outstanding Notes to which the suit relates, or to any suit instituted by any Holder for the enforcement of the payment of principal, premium, if any, or interest on any Note on or after the respective payment dates expressed in such Note (or, in the case of redemption, on or after the Redemption Date). Section 4.15. Waiver of Stay or Extension Laws. Each of the Obligor and the Guarantor covenants (to the extent that each may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law (other than any bankruptcy law) wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and each of the Obligor and the Guarantor (to the extent that each may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE V THE TRUSTEE Section 5.01. Certain Duties and Responsibilities of Trustee. (1) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and 39 (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (2) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (3) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this Subsection shall not be construed to limit the effect of Section 5.01(1); (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes relating to the time, method, and place of conducting any proceeding for any remedy available to the Trustee with respect to such Notes, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to such Notes; and (iv) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (4) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. Section 5.02. Notice of Defaults. Within 90 days after the occurrence of any default hereunder with respect to Notes, the Trustee shall transmit by mail to all Holders of such Notes, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of or interest or premium, if any, on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors, and/or 40 Responsible Officers of the Trustee determine in good faith that the withholding of such notice is in the interests of the Holders of the Outstanding Notes and; provided, further, that, in the case of any default of the character specified in clause (iii) of Section 4.01(1) or in clause (i) of Section 4.01(2), no such notice to Holders shall be given until at least 60 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. Section 5.03. Certain Rights of Trustee. Except as otherwise provided in Section 5.01: (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Obligor described herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Managing Directors may be sufficiently evidenced by a Managing Directors Resolution; (3) any request or direction of the Guarantor described herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (4) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (5) the Trustee may consult with counsel and any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (6) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (7) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Obligor, personally or by agent or attorney; and (8) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be 41 responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. Section 5.04. Not Responsible for Recitals or Issuance of Notes. The recitals contained herein and in the Notes, except the certificates of authentication, shall be taken as the statements of the Obligor, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Obligor of Notes or the proceeds thereof. The Trustee shall not be charged with notice or knowledge of any Event of Default under clause (vi) of Section 4.01(1) or clause (iv) of Section 4.01(2) or of the identity of a Restricted Subsidiary of the Obligor or of the Guarantor or of any event giving rise to the obligation to pay Additional Interest unless either (i) a Responsible Officer of the Trustee assigned to and working in its Corporate Trust Office shall have actual knowledge thereof or (ii) notice thereof shall have been given to the Trustee in accordance with Section 1.05 from the Obligor, the Guarantor or any Holder. Section 5.05. May Hold Notes. The Trustee or any Paying Agent, Registrar, or other agent of the Obligor or the Guarantor, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to Sections 5.08 and 5.12, may otherwise deal with the Obligor or the Guarantor with the same rights it would have if it were not Trustee, Paying Agent, Registrar, or such other agent. Section 5.06. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Obligor. Section 5.07. Compensation and Reimbursement. The Obligor covenants and agrees: (1) to pay the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the reasonable expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. 42 Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in clause (iv) or (v) of Section 4.01(1) and clause (ii) or (iii) of Section 4.01(2), such expenses (including the reasonable charges and expenses of its counsel) and compensation for such services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency, reorganization, or other similar law. Section 5.08. Disqualification; Conflicting Interests. If the Trustee has or shall acquire any conflicting interest within the meaning of the Trust Indenture Act, it shall either eliminate such interest or resign as Trustee, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by such Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under: (i) the Indenture, dated as of February 8, 1999, among Pepsi Bottling Holdings, Inc., the Guarantor, as guarantor, and the Trustee, as supplemented by the Supplemental Indenture dated as of February 9, 1999, among Pepsi Bottling Holdings, Inc., the Guarantor and the Obligor relating to the 2004 Notes and the Obligor's Senior Notes due 2009 and (ii) the Indenture, dated as of March 8, 1999, among PBG, the Obligor, as guarantor, and the Trustee relating to the Senior Notes due 2029 of PBG and the Series B Senior Notes due 2029 of PBG. Section 5.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder that shall be a corporation organized and doing business under the laws of the United States of America or of any State or Territory thereof or of the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by Federal or State authority and having its principal office and place of business in the City of New York, if there be such a corporation having its principal office and place of business in said City. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article V. Section 5.10. Resignation and Removal; Appointment of Successor. (1) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article V shall become effective until the acceptance of appointment by the successor Trustee under Section 5.11. (2) The Trustee may resign at any time by giving 60 days' written notice thereof to the Obligor. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. 43 (3) The Trustee may be removed at any time by Act of the Holders of 66 2/3% in aggregate principal amount of the Outstanding Notes, delivered to the Trustee and to the Obligor. (4) If at any time: (i) the Trustee shall fail to comply with Section 5.08 after written request therefor by the Obligor or by any Holder who has been a bona fide Holder of a Note for at least six months; or (ii) the Trustee shall cease to be eligible under Section 5.09 and shall fail to resign after written request therefor by the Obligor or by any such Holder; or (iii) the Trustee shall become incapable of acting with respect to the Notes; or (iv) the Trustee shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case (a) the Obligor may remove the Trustee, or (b) subject to Section 4.14, any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (5) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Obligor shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapacity, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of 66 2/3% in aggregate principal amount of the Outstanding Notes delivered to the Obligor and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Obligor. If no successor Trustee shall have been so appointed by the Obligor or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been bona fide Holder of a Note for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Obligor shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Notes as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its principal Corporate Trust Office. Section 5.11. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Obligor and to the predecessor Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the predecessor Trustee shall become effective, and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the predecessor Trustee; but, on request of the Obligor or the successor Trustee, such predecessor Trustee shall, upon payment of its reasonable charges, if any, execute and deliver an 44 instrument transferring to such successor Trustee all the rights, powers and trusts of the predecessor Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such predecessor Trustee hereunder. Upon reasonable request of any such successor Trustee, the Obligor shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article V. Section 5.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be otherwise qualified and eligible under this Article V, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor Trustee by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes. Section 5.13. Preferential Collection of Claims Against Obligor. If and when the Trustee shall be or shall become a creditor, of the Obligor (or of any other Obligor upon the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Obligor (or against any such other obligor, as the case may be). Section 5.14. Appointment of Authenticating Agent. (1) At any time when any of the Notes remain Outstanding the Trustee, with the approval of the Obligor, may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Notes issued upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 2.05, and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Notes by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Obligor and shall at all times be a corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia, authorized under such laws to act as an Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and, if other than the Obligor itself, subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section 5.14, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in 45 accordance with the provisions of this Section 5.14, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 5.14. (2) Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. (3) An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and, if other than the Obligor, to the Obligor. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and, if other than the Obligor, to the Obligor. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee, with the approval of the Obligor, may appoint a successor Authenticating Agent which shall be acceptable to the Obligor and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders of Notes, as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. (4) The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 5.07. (5) If an appointment is made pursuant to this Section, the Notes may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Notes referred to in the within-mentioned Indenture. JPMorgan Chase Bank, as Trustee By_________________________ As Authenticating Agent By_________________________ Authorized Officer 46 Article VI HOLDERS' LISTS AND REPORTS BY TRUSTEE AND OBLIGOR Section 6.01. Obligor to Furnish Trustee Names and Addresses of Holders. The Obligor will furnish or cause to be furnished to the Trustee: (1) semi-annually, not more than 15 days after the Record Date for the payment of interest in respect of the Notes, in such form as the Trustee may reasonably require, a list of the names and addresses of the Holders of such Notes as of such date, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Obligor of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, provided that if the Trustee shall be the Registrar, such list shall not be required to be furnished. Section 6.02. Preservation of Information; Communications to Holders. (1) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of Notes contained in the most recent list furnished to the Trustee as provided in Section 6.01 and the names and addresses of Holders of Notes received by the Trustee in its capacity as Registrar. The Trustee may destroy any list furnished to it as provided in Section 6.01 upon receipt of a new list so furnished. (2) If three or more Holders of Notes (hereinafter referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Note for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of Notes with respect to their rights under this Indenture or under the Notes and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either: (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 6.02(1), or (ii) inform such applicants as to the approximate number of Holders of Notes, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 6.02(2), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder of a Note, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 6.02(1), a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material 47 to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing. (3) Every Holder of Notes, by receiving and holding the same, agrees with the Obligor and the Trustee that neither the Obligor nor the Trustee shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders of Notes in accordance with Section 6.02(2), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 6.02(2). Section 6.03. Reports by Trustee. (1) The term "reporting date" as used in this Section, means May 15. Within 60 days after the reporting date in each year, beginning in 2003, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, a brief report dated as of such reporting date with respect to (but if no such event has occurred within such period no report need be transmitted): (i) any change to its eligibility under Section 5.09 and its qualifications under Section 5.08; (ii) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of Notes, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the Notes Outstanding on the date of such report; (iii) any change to the amount, interest rate and maturity date of all other indebtedness owing by the Obligor (or by any other obligor on the Notes) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in Section 311(b)(2), (3), (4) or (6) of the TIA; (iv) any change to the property and funds, if any, physically in the possession of the Trustee as such on the date of such report; and (v) any action taken by the Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Notes, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 5.02. (2) The Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Section 48 6.03(1) (or if no such report has yet been transmitted, since the date of execution of this instrument) for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Notes, on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of the Notes Outstanding at such time, such report to be transmitted within 90 days after such time. (3) The Trustee shall also transmit by mail the foregoing reports as required by Section 313(c) of the TIA. Section 6.04. Reports by Obligor and Guarantor. (1) The Obligor and the Guarantor shall comply with the provisions of Section 314(a) and 314(c) of the TIA (provided that unless this Indenture is hereafter qualified under the TIA, the Obligor and the Guarantor shall not be required to file with the Commission any information, documents or other reports that are otherwise filed with the Trustee or transmitted to Holders pursuant to this Section 6.04(1)). (2) For so long as the Obligor or the Guarantor is not subject to Section 13 or Section 15(d) of the Exchange Act, upon the request of a Holder of the Notes, the Obligor and/or the Guarantor, as the case maybe, will promptly furnish or cause the Trustee to furnish to such Holder or to a prospective purchaser of a Note designated by such Holder, as the case may be, the information required to be delivered by it pursuant to Rule 144A(d)(4) under the Securities Act to permit compliance with Rule 144A in connection with resales of the Notes. Article VII CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER Section 7.01. Obligor May Consolidate, Etc., Only on Certain Terms. The Obligor may consolidate or merge with or into, or transfer or lease all or substantially all of its assets to, any Entity that is organized and validly existing under the laws of any state of the United States of America or the District of Columbia, and may permit any such Entity to consolidate with or merge into the Obligor or transfer or lease all or substantially all of its assets to the Obligor, provided that: (1) the Obligor will be the surviving Entity or, if not, that the successor Entity will expressly assume by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee the due and punctual payment of the principal of and premium, if any, and interest on the Notes and the performance of every covenant of the Indenture to be performed or observed by the Obligor; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, will have happened and be continuing; and 49 (3) the Obligor shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or lease and any such assumption involving the Obligor complies with the provisions of this Article VII. Section 7.02. Guarantor May Consolidate, Etc., Only on Certain Terms. The Guarantor may consolidate or merge with or into, or transfer or lease all or substantially all of its assets to, any Entity, provided that: (1) either the Guarantor will be the surviving Entity or, if not, that the successor Entity formed by such consolidation or into which the Guarantor is merged or the Entity which acquires by transfer or lease all or substantially all of the properties and assets of the Guarantor will be an Entity organized and existing under the laws of any state of the United States of America or the District of Columbia, and will expressly assume, by a supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all of the obligations of the Guarantor under this Indenture and the Guarantee; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, will have happened and be continuing; and (3) the Guarantor shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or lease and any such assumption involving the Guarantor complies with the provisions of this Article VII. In the event that the Guarantee shall not become effective and the Guarantee Commencement Date shall not occur in accordance with the provisions of Section 11.01(3), the provisions of this Section 7.02 shall not be applicable to the Guarantor. Section 7.03. Successor Entity Substituted. Upon any consolidation or merger, or any transfer or lease of all or substantially all of the properties and assets of the Obligor or the Guarantor in accordance with Section 7.01 or Section 7.02, as the case may be, the successor Entity will succeed to and be substituted for the Obligor or the Guarantor, as the case may be, as Obligor or Guarantor, as the case may be, on the Notes or on the Guarantee, as the case may be, with the same effect as if it had been named in this Indenture as the Obligor or as Guarantor, as the case may be, and the Obligor or the Guarantor, as the case may be, shall thereupon, except in the case of a lease, be released from all obligations hereunder and under the Notes and the Guarantee, as applicable. Article VIII SUPPLEMENTAL INDENTURES Section 8.01. Supplemental Indentures Without Consent of Holders. Without the consent of the Holders of any Notes, the Obligor, the Guarantor and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto (which shall conform to the provisions of the TIA as in force at the date of execution thereof), in form satisfactory to the Trustee, for any of the following purposes: 50 (1) to evidence the succession of another Entity to the Obligor or the Guarantor, or successive successions, and the assumption by any such successor of the covenants, agreements and obligations of the Obligor or the Guarantor pursuant to Article VII; or (2) to add to the covenants of the Obligor or the Guarantor such further covenants, restrictions or conditions for the protection of the Holders of the Notes as the Obligor, the Guarantor and the Trustee shall consider to be for the protection of the Holders of the Notes or to surrender any right or power herein conferred upon the Obligor or the Guarantor; or (3) to evidence the surrender of any right or power of the Obligor or the Guarantor; (4) to cure any defect or ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or in any supplemental indenture, or to make any other provisions with respect to matters or questions arising under this Indenture; or (5) to add to this Indenture such provisions as may be expressly permitted by the TIA as in effect at the date as of which this instrument is executed or any corresponding provision in any similar federal statute hereafter enacted; or (6) to evidence and provide for the acceptance of appointment by another corporation as a successor Trustee hereunder; (7) to add to the rights of the Holders of the Notes; (8) to add any additional Events of Default in respect of the Notes; or (9) to provide for the issuance of the Private Exchange Securities, which will have terms substantially identical to the Initial Notes except for the requirement of a Private Placement Legend and related transfer restrictions under the Securities Act and this Indenture and as to the applicability of additional interest payable as provided in Section 2.11, and which will be treated, together with any other Outstanding Notes, as a single class of securities. No supplemental indenture for the purposes identified in clause (2), (3), (4) (7) or (8) above may be entered into if to do so would adversely affect the interest of the Holders of Notes. Section 8.02. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes affected thereby, by Act of said Holders delivered to the Obligor, the Guarantor and the Trustee, the Obligor, the Guarantor and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Notes under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Note affected thereby: 51 (1) change the Maturity Date or the stated payment date of any payment of premium or interest payable on any Note, or reduce the principal amount thereof, or any amount of interest payable thereon, or change the method of computing the amount of interest payable thereon on any date, or change any Place of Payment where, or the coin or currency in which, any Note or any payment of principal, premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the same shall become due and payable, whether at Maturity or, in the case of redemption on or after the Redemption Date; or (2) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences, provided for in this Indenture; or (3) modify any of the provisions of this Section 8.02 or Section 4.13, except to increase any such percentage set forth in this Section 8.02 or Section 4.13 or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby. It shall not be necessary for any Act of Holders under this Section 8.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Section 8.03. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article VIII or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 5.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. Upon request of the Obligor and, in the case of Section 8.02, upon filing with the Trustee of evidence of an Act of Holders as aforementioned, the Trustee and the Guarantor shall join with the Obligor in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, powers, trusts, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Section 8.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article VIII, this Indenture shall be and be deemed to be modified and amended in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and the respective rights, limitation of rights, duties, powers, trusts and immunities under this Indenture of the Trustee, the Obligor, the Guarantor and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be determined, exercised and enforced thereunder to the extent provided therein. Section 8.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article VIII shall conform to the requirements of the TIA as then in effect. 52 ARTICLE IX COVENANTS Section 9.01. Payment of Principal, Premium and Interest. The Obligor will duly and punctually pay or cause to be paid the principal, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes, and will duly comply with all the other terms, agreements and conditions contained in this Indenture for the benefit of the Notes. The Obligor shall pay interest (including post-petition interest in any proceeding under any Federal or state bankruptcy, insolvency, reorganization, or other similar law) on overdue principal and premium, if any, from time to time on demand at the applicable rate of interest determined from time to time in the manner provided for in the Notes; it shall pay interest (including post-petition interest in any proceeding under any Federal or State bankruptcy, insolvency, reorganization, or other similar law) on overdue installments of interest and (without regard to any applicable grace periods) from time to time on demand at the same rates to the extent lawful. Section 9.02. Maintenance of Office or Agency. So long as any of the Notes remain outstanding, the Obligor will maintain an office or agency in the City of New York where Notes may be presented or surrendered for payment, where Notes may be surrendered for transfer or exchange, and where notices and demands to or upon the Obligor in respect of the Notes and this Indenture may be served. The Obligor will give prompt written notice to the Trustee of the location, and of any change in the location, of such office or agency. If at any time the Obligor shall fail to maintain such office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the principal Corporate Trust Office of the Trustee, and the Obligor hereby appoints the Trustee its agent to receive all such presentations, surrenders, notices and demands. The Obligor may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Obligor of its obligation to maintain an office or agency in the City of New York for such purposes. The Obligor shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Section 9.03. Money for Note Payments to be Held in Trust. If the Obligor shall at any time act as its own Paying Agent, it will, on or before each due date of the principal, premium, if any, or interest on any of the Notes, segregate and hold in trust for the benefit of the Holders of the Notes a sum sufficient to pay such principal, premium or interest so becoming due until such sums shall be paid to such Holders of the Notes or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. Whenever the Obligor shall have one or more Paying Agents, it will, on or prior to each due date of the principal, premium, if any, or interest, on any Notes, deposit with a Paying Agent a sum sufficient to pay such principal, premium, or interest so becoming due, such 53 sum to be held in trust for the benefit of the Holders of the Notes entitled to the same and (unless such Paying Agent is the Trustee) the Obligor will promptly notify the Trustee of its action or failure so to act. The Obligor will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of principal, premium, if any, or interest, on Notes in trust for the benefit of the Holders of the Notes entitled thereto until such sums shall be paid to such Holders of the Notes or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Obligor (or any other obligor upon the Notes) in the making of any such payment of principal, premium, if any, or interest, on the Notes; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Obligor may, at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Obligor or such Paying Agent or, if for any other purpose, all sums so held in trust by the Obligor in respect of all Notes, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Obligor or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Section 9.04. Certificate to Trustee. (1) The Obligor will deliver to the Trustee, within 120 days after the end of each fiscal year of the Obligor (beginning in 2003), an Officers' Certificate that complies with TIA Section 314(a)(4) stating that in thE course of the performance by the signers of their duties as officers of the Obligor, they would normally have knowledge of any default by the Obligor in the performance of any of its covenants or agreements contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. (2) The Guarantor will deliver to the Trustee, within 120 days after the end of each fiscal year of the Guarantor (beginning in 2003), an Officers' Certificate that complies with TIA Section 314(a)(4) stating that in THE course of the performance by the signers of their duties as officers of the Guarantor, they would normally have knowledge of any default by the Guarantor in the performance of any of its covenants or agreements contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. Section 9.05. Existence. Subject to Article VII, (1) the Obligor will do or cause to be done all things necessary to preserve and keep in full force and effect its limited liability 54 company existence and (2) the Guarantor will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. Section 9.06. Limitation on Liens. (1) Limitation on Liens with Respect to the Obligor: So long as any of the Notes shall be Outstanding, neither the Obligor nor any Restricted Subsidiary of the Obligor will incur, suffer to exist or guarantee any Debt, secured by a mortgage, pledge or lien (a "Lien") on any Principal Property (as such term is defined with respect to the Obligor) or on any shares of stock of (or other interests in) any Restricted Subsidiary of the Obligor unless the Obligor or such first mentioned Restricted Subsidiary secures or the Obligor causes such Restricted Subsidiary to secure the Notes (and any other Debt of the Obligor or such Restricted Subsidiary, at the option of the Obligor or such Restricted Subsidiary, as the case may be, not subordinate to the Notes), equally and ratably with (or prior to) such secured Debt, for so long as such secured Debt shall be so secured. This restriction will not, however, apply to Debt secured by: (i) Liens existing prior to the issuance of the Notes; (ii) Liens on property of or shares of stock of (or other interests in) any Entity existing at the time such Entity becomes a Restricted Subsidiary of the Obligor; (iii) Liens on property or shares of stock of (or other interests in) any Entity existing at the time of acquisition thereof (including acquisition through merger or consolidation); (iv) any Lien securing indebtedness incurred to finance all or any part of the purchase price of property or the cost of construction of such property (or additions, substantial repairs, alterations or substantial improvements thereto), provided that such Lien and the indebtedness secured thereby are incurred within 365 days after the later of acquisition of such property or the completion of construction (or addition, repair, alteration or improvement) thereon and the commencement of full operation thereof; (v) Liens in favor of the Obligor or any of its Restricted Subsidiaries; (vi) Liens in favor of, or required by contracts with, governmental entities; or (vii) any extension, renewal, or refunding referred to in any of the preceding clauses (i) through (vi), provided that in the case of a Lien permitted under clause (i), (ii), (iii), (iv) or (v), the Debt secured is not increased nor the Lien extended to any additional assets. Notwithstanding the foregoing, the Obligor or any of its Restricted Subsidiaries may incur, suffer to exist or guarantee any Debt secured by a Lien on any Principal Property (as such term is defined with respect to the Obligor) or on any shares of stock of (or other interests in) any Restricted Subsidiary of the Obligor if, after giving effect thereto, the aggregate amount of Exempted Debt does not exceed 15% of Consolidated Net Tangible Assets of the Obligor. 55 (2) Limitation on Liens with Respect to the Guarantor. On and after the Guarantee Commencement Date (in the event that the Guarantee Commencement Date shall occur) and so long as any of the Notes shall be Outstanding, neither the Guarantor nor any Restricted Subsidiary of the Guarantor will incur, suffer to exist or guarantee any Debt, secured by a Lien on any Principal Property (as such term is defined with respect to the Guarantor) or on any shares of stock of (or other interests in) any Restricted Subsidiary of the Guarantor unless the Guarantor or such first mentioned Restricted Subsidiary secures or the Guarantor causes such Restricted Subsidiary to secure the Guarantee (and any other Debt of the Guarantor or such Restricted Subsidiary, at the option of the Guarantor or such Restricted Subsidiary, as the case may be, not subordinate to the Guarantee), equally and ratably with (or prior to) such secured Debt, for so long as such secured Debt shall be so secured. This restriction will not, however, apply to Debt secured by: (i) Liens existing prior to the Guarantee Commencement Date; (ii) Liens on property of or shares of stock of (of other interests in) any Entity existing at the time such Entity becomes a Restricted Subsidiary of the Guarantor; (iii) Liens on property or shares of stock of (of other interests in) any Entity existing at the time of acquisition thereof (including acquisition through merger or consolidation) or to secure the payment of all or part of the purchase price thereof or construction or improvements on such property or to secure any Debt incurred prior to, at the time of, or within 365 days after the later of the acquisition, the completion of construction, or the commencement of full operation of such property, or within 365 days after the acquisition of such shares (or other interests) for the purpose of financing all or any part of the purchase price of such shares (or other interests); (iv) Liens in favor of the Guarantor or any of its Restricted Subsidiaries; (v) Liens in favor of, or required by contracts with, governmental entities; and (vi) any extension, renewal, or refunding referred to in any of the preceding clauses (i) through (v). Notwithstanding the foregoing, the Guarantor or any of its Restricted Subsidiaries may incur, suffer to exist or guarantee any Debt secured by a Lien on any Principal Property (as such term is defined with respect to the Guarantor) or on any shares of stock of (or other interests in) any Restricted Subsidiary of the Guarantor if, after giving effect thereto, the aggregate amount of such Debt does not exceed 15% of Consolidated Net Tangible Assets of the Guarantor. The transfer of a Principal Property by the Guarantor to an Unrestricted Subsidiary of the Guarantor or the change in designation by the Guarantor of a Subsidiary which owns a Principal Property from Restricted Subsidiary to Unrestricted Subsidiary shall not be restricted. 56 Section 9.07. Limitation on Sale-Leaseback Transactions. (1) The Obligor will not, and will not permit, any of its Restricted Subsidiaries to, sell or transfer, directly or indirectly, except to the Obligor or a Restricted Subsidiary of the Obligor, any Principal Property (as such term is defined with respect to the Obligor) as an entirety, or any substantial portion thereof, with the intention of taking back a lease of all or part of such property, except a lease for a period of three years or less at the end of which it is intended that the use of such property by the lessee will be discontinued; provided that, notwithstanding the foregoing, the Obligor or any of its Restricted Subsidiaries may sell a Principal Property (as such term is defined with respect to the Obligor) and lease it back for a longer period (i) if the Obligor or such Restricted Subsidiary would be entitled, pursuant to Section 9.06(1), to create a Lien on the property to be leased securing Debt in an amount equal to the Attributable Debt with respect to the sale and lease-back transaction without equally and ratably securing the Outstanding Notes or (ii) if (A) the Obligor promptly informs the Trustee of such transactions, (B) the net proceeds of such transactions are at least equal to the fair value (as determined by a Managing Directors Resolution) of such property and (C) the Obligor causes an amount equal to the net proceeds of the sale to be applied either (x) to the retirement (whether by redemption, cancellation after open-market purchases, or otherwise), within 365 days after receipt of such proceeds, of Funded Debt having an outstanding principal amount equal to such net proceeds or (y) to the purchase or acquisition (or in the case of property, the construction) of property or assets used in the business of the Obligor or any Restricted Subsidiary, within 365 days after receipt of such proceeds. (2) Notwithstanding Section 9.07(1), the Obligor or any Restricted Subsidiary of the Obligor may enter into sale and lease-back transactions in addition to those permitted by Section 9.07(1), and without any obligation to retire any outstanding Funded Debt or to purchase property or assets, provided that at the time of entering into such sale and lease-back transactions and after giving effect thereto, Exempted Debt does not exceed 15% of Consolidated Net Tangible Assets of the Obligor. ARTICLE X REDEMPTION OF NOTES Section 10.01. Election to Redeem; Notice to Trustee. If the Obligor elects to redeem Notes pursuant to the optional redemption provisions of Section 10.05, it shall furnish to the Trustee, at least 45 days but not more than 60 days before the Redemption Date, an Officers' Certificate setting forth (1) the Redemption Date, and (2) the CUSIP or ISIN numbers of the Notes to be redeemed. Section 10.02. Notice of Redemption. (1) Notice of redemption shall be given by first-class mail, postage prepaid, mailed not fewer than 30 nor more than 60 days prior to the Redemption Date, to each Holder of the Notes, at his or her address appearing in the Security Register. (2) All notices of redemption shall state: 57 (i) the Redemption Date; (ii) the manner of calculating the Redemption Price; (iii) that on the Redemption Date the Redemption Price will become due and payable upon each Note, and that interest, if any, thereon shall cease to accrue from and after said date; (iv) the place where the Notes are to be surrendered for payment of the Redemption Price, which shall be the office or agency maintained by the Obligor pursuant to Section 9.02; (v) the name and address of the Paying Agent; (vi) that the Notes must be surrendered to the Paying Agent to collect the Redemption Price; and (vii) the CUSIP and/or ISIN number, and that no representation is made as to the correctness or accuracy of the CUSIP and/or ISIN number, if any, listed in such notice or printed on the Notes. (3) Notice of redemption of the Notes shall be given by the Obligor or, at the Obligor's request, by the Trustee in the name and at the expense of the Obligor. Section 10.03. Deposit of Redemption Price. On or prior to 10 a.m. on any Redemption Date, the Obligor shall deposit with the Trustee or with a Paying Agent (or, if the Obligor is acting as its own Paying Agent, segregate and hold in trust as provided in Section 9.03) an amount of money sufficient to pay the Redemption Price of all the Notes. Section 10.04. Notes Payable on Redemption Date. (1) Notice of redemption having been given as aforesaid, the Notes shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Obligor shall default in the payment of the Redemption Price) the Notes shall cease to bear interest. Upon surrender of the Notes for redemption in accordance with the notice, the Notes shall be paid by the Obligor at the Redemption Price. Any installment of interest due and payable on or prior to the Redemption Date shall be payable to the Holders of the Notes registered as such on the relevant Record Date according to the terms and the provisions of Section 2.06. (2) If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate borne by the Note. Section 10.05. Optional Redemption. The Notes will be redeemable in whole but not in part at any time at the option of the Obligor, at the Redemption Price equal to the greater of: 58 (1) 100% of the principal amount of the Outstanding Notes, or (2) as determined by an Independent Investment Banker, the sum of the present values of the remaining scheduled payments of principal and interest on the Outstanding Notes from the Redemption Date to the Maturity Date discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Rate plus 15 basis points; plus, for (1) or (2) above, whichever is applicable, accrued and unpaid interest on the Notes to the Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Redemption Date and notice thereof shall promptly be given by the Obligor to the Trustee. Any redemption pursuant to this Section 10.05 shall be made pursuant to the provisions of Section 10.01 through 10.04. Section 10.06. Mandatory Redemption. The Obligor shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. ARTICLE XI GUARANTEE Section 11.01. Guarantee. (1) Provisions Relating to a Full Guarantee. (i) Subject to the provisions of this Article XI, in the event that: (a) the Obligor has deposited irrevocably with the 2004 Notes Trustee, prior to the 2004 Notes Payment Deposit Date, sufficient cash in immediately available funds to pay in full the principal of and interest and premium, if any, that will become due and payable on the 2004 Notes on the 2004 Notes Payment Date; or (b) (x) the Obligor has not deposited irrevocably with the 2004 Notes Trustee, prior to the 2004 Notes Payment Deposit Date, sufficient cash in immediately available funds to pay in full the principal of and interest and premium, if any, that will become due and payable on the 2004 Notes on the 2004 Notes Payment Date and (y) the Guarantor has not delivered to the Obligor and the Trustee an Officers' Certificate by 5:00 p.m., New York City time, on the 2004 Notes Payment Deposit Date, stating that the Guarantor has determined in good faith that the Guarantor is likely to have to pay some or all of the principal amount of the 2004 Notes (and the interest and premium, if any, with respect thereto) due and payable on the 2004 Notes Payment Date under the 2004 Notes Guarantee; then, beginning on the Guarantee Commencement Date, the Guarantor unconditionally and irrevocably guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, that: (a) the principal of, 59 premium, if any, and interest on the Notes will be duly and punctually paid in full when due, whether at stated maturity, by acceleration, redemption or otherwise, together with interest on overdue principal, and premium, if any, and (to the extent permitted by law) interest on any interest, if any, on the Notes and all other monetary obligations of the Obligor to the Holders hereunder or under the Notes will be promptly paid in full, all in accordance with the terms hereof; and (b) in case of any extension of time of payment or renewal of any of the Notes or any of such other monetary obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration, redemption or otherwise. (ii) In the event of the foregoing, on or promptly after the 2004 Notes Payment Deposit Date, the Guarantor shall notify the Trustee of the Guarantee Commencement Date and of the Guarantor's full Guarantee. (2) Provisions Relating to a Partial Guarantee. (i) Subject to the provisions of this Article XI, in the event that: (a) the Obligor has not deposited irrevocably with the 2004 Notes Trustee, prior to the 2004 Notes Payment Deposit Date, sufficient cash in immediately available funds to pay in full the principal of and interest and premium, if any, that will become due and payable on the 2004 Notes on the 2004 Notes Payment Date; and (b) the Guarantor has delivered to the Obligor and the Trustee an Officers' Certificate by 5:00 p.m., New York City time, on the 2004 Notes Payment Deposit Date, stating that the Guarantor has determined in good faith that the Guarantor is likely to have to pay some but not all of the principal amount of the 2004 Notes (and the interest and premium, if any, with respect thereto) due and payable on the 2004 Notes Payment Date under the 2004 Notes Guarantee (the "Partial Payment Notice"); then, beginning on the Guarantee Commencement Date, the Guarantor unconditionally and irrevocably guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, that (x) the Partial Guarantee Percentage of each of the principal of, premium, if any, and interest on the Notes will be duly and punctually paid in full when due, whether at stated maturity, by acceleration, redemption or otherwise, together with interest on the Partial Guarantee Percentage of such overdue principal, and premium, if any, and (to the extent permitted by law) interest, if any, on the Notes and the Partial Guarantee Percentage of all other monetary obligations of the Obligor to the Holders hereunder or under the Notes, all in accordance with the terms hereof; and (y) in case of any extension of time of payment or renewal of any of the Notes or any of such other monetary obligations, the amount set forth in clause (x) above will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration, redemption or otherwise. 60 (ii) In the event of the foregoing, on or promptly after the 2004 Notes Payment Deposit Date, the Guarantor shall notify the Trustee as to the Guarantee Commencement Date, of the Guarantor's partial Guarantee and of the Partial Guarantee Percentage. (iii) In the event that (a) the Obligor defaults in the payment of principal of and interest and premium, if any, on the Outstanding Notes upon the Maturity Date, the Redemption Date or by acceleration or otherwise, in each case, on and after the Guarantee Commencement Date (in the event that the Guarantee Commencement Date shall occur), and (b) the Guarantor makes the payment of the Partial Guarantee Percentage of each of the principal of and interest and premium, if any, on the Outstanding Notes under the Guarantor's partial Guarantee, a replacement Note in the principal amount equal to the principal of the Note that was not paid or redeemed will be issued in the name of the Holder of the Note upon cancellation of the original Note, and upon request of the Obligor, the Trustee shall authenticate and deliver such replacement Note. Any such replacement Note shall not have an executed Guarantee endorsed thereon and shall accrue interest from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid, from the Issue Date. The issuance of such replacement Note shall be deemed to be a replacement of the cancelled Note and not the incurrence of new or additional indebtedness under this Indenture. (3) Provisions Relating to the Absence of a Guarantee: (i) In the event that: (a) prior to the Scheduled Guarantee Commencement Date, there occurs an Event of Default or any default or other event which, with the giving of notice or passage of time, would constitute an Event of Default under this Indenture or the Notes; or (b) (x) the Obligor has not deposited irrevocably with the 2004 Notes Trustee, prior to the 2004 Notes Payment Deposit Date, sufficient cash in immediately available funds to pay in full the principal of and interest and premium, if any, that will become due and payable on the 2004 Notes on the 2004 Notes Payment Date and (y) the Guarantor has delivered to the Obligor and the Trustee an Officers' Certificate by 5:00 p.m., New York City time, on the 2004 Notes Payment Deposit Date, stating that the Guarantor has determined in good faith that the Guarantor is likely to have to pay all of the principal amount of the 2004 Notes (and the interest and premium, if any, with respect thereto) due and payable on the 2004 Notes Payment Date under the 2004 Notes Guarantee; then the Guarantee shall not become effective, the Guarantee Commencement Date shall not occur, and the Guarantor shall not have any obligations under the Guarantee or the Indenture. (ii) Promptly upon the occurrence of any event described in clause (a) or (b) of Section 11.03(1), the Guarantor shall notify the Trustee that the Guarantee shall not become effective and that the Guarantee Commencement Date shall not occur. 61 (4) In accordance with the terms of this Article XI and the Guarantee, failing payment when due of any amount so guaranteed, or failing performance of any other monetary obligation of the Obligor to the Holders, for whatever reason, the Guarantor will be obligated to pay, or to perform or to cause the performance of, such amount so guaranteed immediately. An Event of Default under this Indenture or the Notes shall constitute an event of default under the Guarantee, and shall entitle the Holders of the Notes to accelerate the obligations of the Guarantor under the Guarantee in the same manner and to the same extent as the obligations of the Obligor. (5) In accordance with the terms of this Article XI and the Guarantee, the Guarantor hereby agrees that its obligations under the Guarantee shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any thereof, the entry of any judgment against the Obligor, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of the Guarantor. The Guarantor hereby waives and relinquishes: (i) any right to require the Trustee, the Holders or the Obligor (each, a "Benefitted Party") to proceed against the Obligor or any other Person or to proceed against or exhaust any security held by a Benefitted Party at any time or to pursue any other remedy in any secured party's power before proceeding against the Guarantor; (ii) any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other Person or Persons or the failure of a Benefitted Party to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of any other Person or Persons; (iii) demand, protest and notice of any kind (except as expressly required by this Indenture), including but not limited to notice of any action or non-action on the part of the Guarantor, the Obligor, any Benefitted Party, any creditor of the Guarantor, the Obligor or on the part of any other Person whomsoever in connection with any obligations the performance of which are guaranteed under the Guarantee; (iv) any defense based upon an election of remedies by a Benefitted Party, including but not limited to an election to proceed against the Guarantor for reimbursement; (v) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; and (vi) any defense based on any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code. The Guarantor hereby covenants that the Guarantee will not be discharged except (a) in the event the Guarantee Commencement Date shall occur, (x) by payment in full of all principal, premium, if any, and interest on the Notes and all other monetary obligations to the Holders to the extent provided for under this Indenture by the Obligor or (y) by payment in full of all of or the Partial Guarantee Percentage of (as the case may be) the principal, premium, if any, and interest on the Notes and all other monetary obligations to the Holders to the extent provided for under this Indenture by the Guarantor, (b) before any Scheduled Guarantee Commencement Date, by the payment in full of all of the principal, premium, if any, and interest on the Notes and all other monetary obligations to the Holders to the extent provided for under this Indenture, (c) upon the occurrence of any event described in clause (i) of Section 11.01(3), (d) upon satisfaction and discharge of this Indenture in accordance with Section 3.01 or (e) upon the occurrence of Legal Defeasance in accordance with Section 3.02(a). This is a Guarantee of payment and not of collectibility. 62 (6) If any Holder or the Trustee is required by any court or otherwise to return to either the Obligor or the Guarantor, or any trustee or similar official acting in relation to either the Obligor or the Guarantor, any amount paid by the Obligor or the Guarantor to the Trustee or such Holder, the Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor agrees that it will not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed under the Guarantee until payment in full of all obligations guaranteed hereby. The Guarantor agrees that, as between it, on the one hand, and the Holders of the Notes and the Trustee, on the other hand, (i) the maturity of the obligations guaranteed under the Guarantee may be accelerated as provided in Article V for the purposes hereof, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (ii) in the event of any acceleration of such obligations as provided in Article V, such obligations so guaranteed under the Guarantee (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purpose of the Guarantee. Section 11.02. Execution and Delivery of the Guarantee. (1) To evidence the Guarantee set forth in Section 11.01, the Guarantor agrees that a notation of the Guarantee substantially in the form included in Exhibit D hereto shall be endorsed on each Note authenticated and delivered by the Trustee (except as otherwise provided in Sections 2.01(1) and 11.01(2)(iii)) and executed on behalf of the Guarantor by one of the Officers of the Guarantor by manual or facsimile signature. The Guarantor agrees that the Guarantee set forth in this Article XI will remain in full force and effect and apply to all the Notes, notwithstanding any failure to endorse on each Note a notation of the Guarantee (except as otherwise provided in Section 11.01(2)(iii)). (2) If an Officer of the Guarantor whose manual or facsimile signature is on a Guarantee no longer holds that office at the time the Trustee authenticates the Note on which the Guarantee is endorsed, the Guarantee shall be valid nevertheless. (3) The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guarantee endorsed on such Note on behalf of the Guarantor. Section 11.03. Limitation of the Guarantor's Liability. The Guarantor, and by its acceptance hereof, each Holder, hereby confirms that it is the intention of both parties that the Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or State law. To effectuate the foregoing intention, the Holders and the Guarantor hereby irrevocably agree that the obligations of the Guarantor under this Article XI shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of the Guarantor, result in the obligations of the Guarantor under the Guarantee not constituting a fraudulent transfer or conveyance under federal or state law. 63 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. Bottling Group, LLC By: /s/ Steven M. Rapp ---------------------------------------- Name: Steven M. Rapp Title: Managing Director-Delegatee PepsiCo, Inc. By: /s/ Lionel L. Nowell III ---------------------------------------- Name: Lionel L. Nowell III Title: Senior Vice President and Treasurer JPMorgan Chase Bank By: /s/ James P. Freeman ---------------------------------------- Name: James P. Freeman Title: Vice President EXHIBIT A FORM OF INITIAL NOTE [FORM OF FACE OF INITIAL NOTE] [Insert Global Note Legend, if applicable, pursuant to the provisions of the Indenture] [Insert Private Placement Legend, if applicable, pursuant to the provisions of the Indenture] CUSIP No.____________ [Include if the Note is a Regulation S Global Note:][ISIN No.____________] BOTTLING GROUP, LLC 4 5/8% Senior Note due November 15, 2012 No. R-_____ $________________ [If the Note is a Global Note, include the following:] as revised by the Schedule of Exchanges of Interests in the Global Note attached hereto BOTTLING GROUP, LLC, a Delaware limited liability company (herein called the "Obligor"), for value received, hereby promises to pay to [insert if a Global Note: Cede & Co. as nominee for The Depository Trust Company] [insert if a Definitive Note: _________] (the "Holder") or to its registered assigns, the principal sum of U.S.$___________ [Insert if a Global Note: or such other principal amount as shall be set forth on the Schedule of Exchanges of Interests in the Global Note attached hereto] on November 15, 2012 (the "Maturity Date"), and to pay interest on said principal sum semi-annually on May 15 and November 15 of each year (each, an "Interest Payment Date"), commencing May 15, 2003, at the rate of 4 5/8% per annum of the principal amount then outstanding from the original issuance date of the Notes, until payment of the principal sum has been made or duly provided for, and Additional Interest, if any, payable pursuant to Section 6 of the Registration Rights Agreement. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the Record Date for such Interest Payment Date, which shall be the 15th day (whether or not a Business Day) next preceding such Interest Payment Date, provided that interest payable on an Interest Payment Date that is a Redemption Date or the Maturity Date shall be payable to the Person to whom principal is payable. Any such interest that is payable but is not so punctually paid or duly provided for shall forthwith cease to be payable to the registered Holder on such Record Date and may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Notes not earlier than 10 days prior to such Special Record Date. A-1 Payment of the principal and interest on this Note will be made at the Place of Payment in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Reference is made to the further provisions of this Note and to certain definitions set forth on the reverse hereof, which shall have the same effect as though fully set forth at this place. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Obligor has caused this instrument to be duly executed by manual or facsimile signature. Dated: BOTTLING GROUP, LLC By: --------------------------------- Authorized Officer By: --------------------------------- Authorized Officer [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Notes referred to in the within-mentioned Indenture. JPMORGAN CHASE BANK, as Trustee By: --------------------------------- Authorized Officer A-2 [FORM OF REVERSE OF INITIAL NOTE] BOTTLING GROUP, LLC 4 5/8% Senior Note due November 15, 2012 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Bottling Group, LLC, a Delaware limited liability company (the "Obligor"), promises to pay interest on the principal amount of this Note at the rate of 4 5/8% per annum from November 15, 2002 until payment of the principal amount hereof has been made or duly provided for. The Obligor shall pay interest on each Interest Payment Date (or if such day is not a Business Day, on the next succeeding Business Day and no interest on the amount payable on such Interest Payment Date shall accrue for the intervening period). Interest on the Notes shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid, from the Issue Date; provided that if there is no existing default or Event of Default relating to the payment of interest, and if this Note is authenticated between a Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be May 15, 2003. The Obligor shall pay interest (including post-petition interest in any proceeding under any Federal or State bankruptcy, insolvency, reorganization, or other similar law) on overdue principal and premium, if any, from time to time on demand at the rate borne by this Note. The Obligor shall pay interest (including post-petition interest in any proceeding under any Federal or State bankruptcy, insolvency, reorganization, or other similar law) on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. 2. ADDITIONAL INTEREST. The Holder of this Note is entitled to the benefits of the Registration Rights Agreement relating to the Notes, dated as of November 7, 2002, among the Obligor, the Guarantor and the several initial purchasers named therein (the "Registration Rights Agreement"), including the right to receive, in the circumstances described therein, additional interest ("Additional Interest"). All accrued Additional Interest shall be paid by the Obligor and the Guarantor to the Holders entitled thereto in the same manner as interest payments on the Notes on the regular interest payment dates with respect to the Notes. 3. METHOD OF PAYMENT. The Obligor shall pay interest on the Notes (except Defaulted Interest) to the Persons who are registered Holders of Notes on the Record Date therefor, even if such Notes are cancelled after such Record Date and on or before such Interest Payment Date, except as provided in Section 2.06 of the Indenture, provided that interest payable on an Interest Payment Date that is a Redemption Date or the Maturity Date shall be payable to the Person to whom principal is payable. The Notes shall be payable as to principal, premium, if any, and interest at the office or agency of the Obligor maintained for such purpose as set forth in Section 9.02 of the Indenture, or, at the option of the Obligor, payment of interest A-3 may be made by check mailed to the Holders at their addresses set forth in the Security Register, and provided that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium, if any, and interest on Global Notes and a Holder of $10,000,000 or more in aggregate principal amount of Notes will be entitled to receive payments of interest, other than interest due at maturity or any date of redemption, by wire transfer of immediately available funds if appropriate wire transfer instructions have been received by the Trustee in writing not less than 15 calendar days prior to the applicable Interest Payment Date. Payment of principal of, premium, if any, and interest on the Notes shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 4. PAYING AGENT AND REGISTRAR. Initially, JPMorgan Chase Bank, the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Obligor may appoint and change any Paying Agent or Registrar without notice to any Holder. The Obligor or any of its Subsidiaries may act in any such capacity. 5. INDENTURE. The Obligor issued the Notes under an Indenture dated as of November 15, 2002 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture") among the Obligor, the Guarantor and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. 6. OPTIONAL REDEMPTION. The Notes will be redeemable, in whole but not in part, upon not less than 30 nor more than 60 days' notice, at any time at the option of the Obligor, at the Redemption Price equal to the greater of: (1) 100% of the principal amount of the Outstanding Notes or (2) as determined by an Independent Investment Banker, the sum of the present value of the remaining scheduled payments of principal and interest on the Notes from the Redemption Date to the Maturity Date discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Rate plus 15 basis points; plus, for (1) or (2) above, whichever is applicable, accrued and unpaid interest on the Notes to the Redemption Date. 7. MANDATORY REDEMPTION. The Obligor shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder whose Notes are to be redeemed at its registered address. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require A-4 a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Obligor may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Obligor need not exchange or register the transfer of any Note called for redemption. Also, the Obligor need not exchange or register the transfer of any Notes for a period of 15 days before the mailing of a notice of redemption. 10. PERSONS DEEMED OWNERS. Except as provided in the Indenture, the registered Holder of a Note on the Registrar's books may be treated as its owner for all purposes under the Indenture. 11. AMENDMENT, SUPPLEMENT AND WAIVER. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Obligor and the Guarantor and the rights of the Holders of the Notes under the Indenture at any time by the Obligor, the Guarantor and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Notes affected thereby. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all Notes, to waive certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 12. DEFAULTS AND REMEDIES. The Indenture provides that each of the following events constitutes an Event of Default with respect to this Note: (i) on and after the Issue Date: (A) failure to make any payment of principal when due (whether at maturity, upon redemption or otherwise) on the Notes; (B) failure to make any payment of interest when due on the Notes, which failure is not cured within 30 days; (C) failure of the Obligor to observe or perform any of its other covenants or warranties under the Indenture for the benefit of the holders of the Notes, which failure is not cured within 90 days after notice is given as specified in the Indenture; (D) certain events of bankruptcy, insolvency, or reorganization of the Obligor, PBG or any Restricted Subsidiary of PBG; (E) the maturity of any Debt of the Obligor, PBG or any Restricted Subsidiary of PBG having a then outstanding principal amount in excess of $50 million shall have been accelerated by any holder or holders thereof or any trustee or agent acting on behalf of such holder or holders, in accordance with the provisions of any contract evidencing, providing for the creation of or concerning such Debt or failure to pay at the stated maturity (and the expiration of any grace period) any Debt of the Obligor, PBG or any Restricted Subsidiary of PBG having a then outstanding principal amount in excess of $50 million; and (ii) on and after the Guarantee Commencement Date (in the event that the Guarantee Commencement Date shall occur): (A) failure of the Guarantor to observe or perform any of its covenants or warranties under the Indenture for the benefit of the holders of the Notes, which failure is not cured within 90 days after notice is given as specified in the Indenture; (B) certain events of bankruptcy, insolvency, or reorganization of the Guarantor; and (C) the Guarantee of the Notes ceases to be in full force or effect or the Guarantor denies or disaffirms its obligations under the Guarantee. A-5 If an Event of Default with respect to the Notes shall occur and be continuing, the principal amount hereof may be declared due and payable in the manner and with the effect provided in the Indenture. 13. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 14. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 15. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Obligor has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 16. GOVERNING LAW. This Note shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to rules governing the conflict of laws. [Include if this Note is a Regulation S Global Note] 17. ISIN NUMBERS. The Obligor has caused ISIN numbers to be printed on the Notes. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. A-6 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint ------------------------------------------------------- to transfer this Note on the books of the Obligor. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: Your Signature: ----------------------------- ----------------------------- (Sign exactly as your name appears on the face of this Note) Tax Identification No: ---------------------- SIGNATURE GUARANTEE: -------------------------------------------- Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-7 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE(1) The following exchanges of a part of this Global Note for a Global Note or a Definitive Note, or exchanges of a Definitive Note for an interest in this Global Note, have been made:
Principal Amount of Amount of Amount of this Signature of decrease in increase in Global Note authorized Principal Principal following such officer of Amount of this Amount of this decrease Trustee or Date of Exchange Global Note Global Note (or increase) Custodian - ---------------- -------------- -------------- -------------- ------------ - ---------------- -------------- -------------- -------------- ------------ - ---------------- -------------- -------------- -------------- ------------
- -------------------- (1) THIS SHOULD BE INCLUDED ONLY IF THE NOTE IS ISSUED IN GLOBAL FORM. A-8 EXHIBIT B FORM OF SERIES B NOTE [FORM OF FACE OF SERIES B NOTE] [Insert Global Note Legend, if applicable, pursuant to the provisions of the Indenture] BOTTLING GROUP, LLC 4 5/8% Series B Senior Note due November 15, 2012 No. R-_____ $________________ [If the Note is a Global Note, include the following:] as revised by the Schedule of Exchanges of Interests in the Global Note attached hereto BOTTLING GROUP, LLC, a Delaware limited liability company (herein called the "Obligor"), for value received, hereby promises to pay to [insert if a Global Note: Cede & Co. as nominee for The Depository Trust Company] [insert if a Definitive Note: _________] (the "Holder") or to its registered assigns, the principal sum of U.S.$___________ [Insert if a Global Note: or such other principal amount as shall be set forth on the Schedule of Exchanges of Interests in the Global Note attached hereto] on November 15, 2012 (the "Maturity Date"), and to pay interest on said principal sum semi-annually on May 15 and November 15 of each year (each, an "Interest Payment Date"), commencing May 15, 2003, at the rate of 4 5/8% per annum of the principal amount then outstanding from the original issuance date of the Notes, until payment of the principal sum has been made or duly provided for. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the Record Date for such Interest Payment Date, which shall be the 15th day (whether or not a Business Day) next preceding such Interest Payment Date, provided that interest payable on an Interest Payment Date that is a Redemption Date or the Maturity Date shall be payable to the Person to whom principal is payable. Any such interest that is payable but is not so punctually paid or duly provided for shall forthwith cease to be payable to the registered Holder on such Record Date and may be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Notes not earlier than 10 days prior to such Special Record Date. Payment of the principal and interest on this Note will be made at the Place of Payment in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Reference is made to the further provisions of this Note and to certain definitions set forth on the reverse hereof, which shall have the same effect as though fully set forth at this B-1 place. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Obligor has caused this instrument to be duly executed by manual or facsimile signature. Dated: BOTTLING GROUP, LLC By: --------------------------------- Authorized Officer By: --------------------------------- Authorized Officer [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Notes referred to in the within-mentioned Indenture. JPMORGAN CHASE BANK, as Trustee By: --------------------------------- Authorized Officer B-2 [FORM OF REVERSE OF SERIES B NOTE] BOTTLING GROUP, LLC 4-5/8% Series B Senior Note due November 15, 2012 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Bottling Group, LLC, a Delaware limited liability company (the "Obligor"), promises to pay interest on the principal amount of this Note at the rate of 4-5/8% per annum from November 15, 2002 until payment of the principal amount hereof has been made or duly provided for. The Obligor shall pay interest on each Interest Payment Date (or if such day is not a Business Day, on the next succeeding Business Day and no interest on the amount payable on such Interest Payment Date shall accrue for the intervening period). Interest on the Notes shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid, from the Issue Date; provided that if there is no existing default or Event of Default relating to the payment of interest, and if this Note is authenticated between a Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be May 15, 2003. The Obligor shall pay interest (including post-petition interest in any proceeding under any Federal or State bankruptcy, insolvency, reorganization, or other similar law) on overdue principal and premium, if any, from time to time on demand at the rate borne by this Note. The Obligor shall pay interest (including post-petition interest in any proceeding under any Federal or State bankruptcy, insolvency, reorganization, or other similar law) on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Obligor shall pay interest on the Notes (except Defaulted Interest) to the Persons who are registered Holders of Notes on the Record Date therefor, even if such Notes are cancelled after such Record Date and on or before such Interest Payment Date, except as provided in Section 2.06 of the Indenture, provided that interest payable on an Interest Payment Date that is a Redemption Date or the Maturity Date shall be payable to the Person to whom principal is payable. The Notes shall be payable as to principal, premium, if any, and interest at the office or agency of the Obligor maintained for such purpose as set forth in Section 9.02 of the Indenture, or, at the option of the Obligor, payment of interest may be made by check mailed to the Holders at their addresses set forth in the Security Register, and provided that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium, if any, and interest on Global Notes and a Holder of $10,000,000 or more in aggregate principal amount of Notes will be entitled to receive payments of interest, other than interest due at maturity or any date of redemption, by wire transfer of immediately available funds if appropriate wire transfer instructions have been received by the Trustee in writing not less than 15 calendar days prior to the applicable Interest Payment Date. Payment of principal of, premium, if any, and interest on the Notes shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. B-3 3. PAYING AGENT AND REGISTRAR. Initially, JPMorgan Chase Bank, the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Obligor may appoint and change any Paying Agent or Registrar without notice to any Holder. The Obligor or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Obligor issued the Notes under an Indenture dated as of November 15, 2002 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture") among the Obligor, the Guarantor and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. 5. OPTIONAL REDEMPTION. The Notes will be redeemable, in whole but not in part, upon not less than 30 nor more than 60 days' notice, at any time at the option of the Obligor, at the Redemption Price equal to the greater of: (1) 100% of the principal amount of the Outstanding Notes or (2) as determined by an Independent Investment Banker, the sum of the present value of the remaining scheduled payments of principal and interest on the Notes from the Redemption Date to the Maturity Date discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Rate plus 15 basis points; plus, for (1) or (2) above, whichever is applicable, accrued and unpaid interest on the Notes to the Redemption Date. 6. MANDATORY REDEMPTION. The Obligor shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 7. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder whose Notes are to be redeemed at its registered address. 8. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Obligor may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Obligor need not exchange or register the transfer of any Note called for redemption. Also, the Obligor need not exchange or register the transfer of any Notes for a period of 15 days before the mailing of a notice of redemption. 9. PERSONS DEEMED OWNERS. Except as provided in the Indenture, the registered Holder of a Note on the Registrar's books may be treated as its owner for all purposes under the Indenture. 10. AMENDMENT, SUPPLEMENT AND WAIVER. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the B-4 rights and obligations of the Obligor and the Guarantor and the rights of the Holders of the Notes under the Indenture at any time by the Obligor, the Guarantor and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Notes affected thereby. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all Notes, to waive certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 11. DEFAULTS AND REMEDIES. The Indenture provides that each of the following events constitutes an Event of Default with respect to this Note: (i) on and after the Issue Date (A) failure to make any payment of principal when due (whether at maturity, upon redemption or otherwise) on the Notes; (B) failure to make any payment of interest when due on the Notes, which failure is not cured within 30 days; (C) failure of the Obligor to observe or perform any of its other covenants or warranties under the Indenture for the benefit of the holders of the Notes, which failure is not cured within 90 days after notice is given as specified in the Indenture; (D) certain events of bankruptcy, insolvency, or reorganization of the Obligor, PBG or any Restricted Subsidiary of PBG; (E) the maturity of any Debt of the Obligor, PBG or any Restricted Subsidiary of PBG having a then outstanding principal amount in excess of $50 million shall have been accelerated by any holder or holders thereof or any trustee or agent acting on behalf of such holder or holders, in accordance with the provisions of any contract evidencing, providing for the creation of or concerning such Debt or failure to pay at the stated maturity (and the expiration of any grace period) any Debt of the Obligor, PBG or any Restricted Subsidiary of PBG having a then outstanding principal amount in excess of $50 million; and (ii) on and after the Guarantee Commencement Date (in the event that the Guarantee Commencement Date shall occur) (A) failure of the Guarantor to observe or perform any of its covenants or warranties under the Indenture for the benefit of the holders of the Notes, which failure is not cured within 90 days after notice is given as specified in the Indenture; (B) certain events of bankruptcy, insolvency, or reorganization of the Guarantor; and (C) the Guarantee of the Notes ceases to be in full force or effect or the Guarantor denies or disaffirms its obligations under the Guarantee. If an Event of Default with respect to the Notes shall occur and be continuing, the principal amount hereof may be declared due and payable in the manner and with the effect provided in the Indenture. 12. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 13. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). B-5 14. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Obligor has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 15. GOVERNING LAW. This Note shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to rules governing the conflict of laws. B-6 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint -------------------------------------------------------- to transfer this Note on the books of the Obligor. The agent may substitute another to act for him. Date: Your Signature: ---------------------------- ----------------------------- (Sign exactly as your name appears on the face of this Note) Tax Identification No: ---------------------- SIGNATURE GUARANTEE: -------------------------------------------- Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. B-7 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE(2) The following exchanges of a part of this Global Note for a Global Note or a Definitive Note, or exchanges of a Definitive Note for an interest in this Global Note, have been made:
Principal Amount of Amount of Amount of this Signature of decrease in increase in Global Note authorized Principal Principal following such officer of Amount of this Amount of this decrease Trustee or Date of Exchange Global Note Global Note (or increase) Custodian - ---------------- -------------- -------------- -------------- ------------ - ---------------- -------------- -------------- -------------- ------------ - ---------------- -------------- -------------- -------------- ------------
- -------------------- (2) THIS SHOULD BE INCLUDED ONLY IF THE NOTE IS ISSUED IN GLOBAL FORM. B-8 EXHIBIT C CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF NOTES Re: 4-5/8% Senior Notes due November 15, 2012 of Bottling Group, LLC Reference is hereby made to the Indenture, dated as of November 15, 2002 (as amended and supplemented from time to time, the "Indenture"), among Bottling Group, LLC, PepsiCo, Inc. and JPMorgan Chase Bank, as Trustee. Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. This Certificate relates to $_______________ principal amount of Notes [in the case of an interest in a Rule 144A Global Note or a Regulation S Global Note: which represents an interest in a [Rule 144A Global Note] [Regulation S Global Note] beneficially owned by] [in the case of a Definitive Note: which are held in the name of] the undersigned (the "Transferor"). The Transferor has requested the Trustee by written order to exchange or register the transfer of a Note or Notes. In connection with such request and in respect of each such Note, the Transferor does hereby certify to the Obligor and the Trustee as follows:* [ ] Such Note is owned by the Transferor and is being exchanged without transfer; or [ ] Such Note is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")), in a transaction meeting the requirements of Rule 144A under the Securities Act; or [ ] Such Note is being transferred in accordance with Rule 144(k) under the Securities Act; or [ ] Such Note is being transferred to a person located outside the United States and is not a "U.S. person" as defined in Regulation S under the Securities Act in a transaction meeting the requirements of Rule 903 or 904 under the Securities Act; or [ ] Such Note is being transferred to the Obligor or one of its Affiliates. - -------------------- * Check the applicable box. C-1 [INSERT NAME OF TRANSFEROR] By: ------------------------ Date: C-2 EXHIBIT D GUARANTEE PepsiCo, Inc., a North Carolina corporation (hereinafter referred to as the "Guarantor"), which term includes any successor or assign under the Indenture, dated as of November 15, 2002, among Bottling Group, LLC, a Delaware limited liability company or any successor thereto (the "Obligor"), the Guarantor and JPMorgan Chase Bank, as trustee, (the "Indenture"), hereby irrevocably and unconditionally guarantees to the Holders of the Notes and the Trustee that: (i) (A) in the event of a full guarantee as described in Section 11.01(1) of the Indenture, the principal of, premium, if any, and interest on the Notes will be duly and punctually paid in full when due, whether at stated maturity, by acceleration, redemption or otherwise, together with interest on overdue principal, and premium, if any, and (to the extent permitted by law) interest on any interest, if any, on the Notes and all other monetary obligations of the Obligor to the Holders under the Indenture or the Notes will be promptly paid in full, all in accordance with the terms hereof or (B) in the event of a partial guarantee as described in Section 11.01(2) of the Indenture, the Partial Guarantee Percentage of the principal of, premium, if any, and interest on the Notes will be duly and punctually paid in full when due, whether at stated maturity, by acceleration, redemption or otherwise, together with interest on the Partial Guarantee Percentage of such overdue principal, and premium, if any, and (to the extent permitted by law) interest, if any, on the Notes and the Partial Guarantee Percentage of all other monetary obligations of the Obligor to the Holders under the Indenture or the Notes, all in accordance with the terms hereof; and (ii) in case of any extension of time of payment or renewal of any of the Notes or any of such other monetary obligations, the amount set forth in clause (A) or (B) above, whichever is applicable, will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration, redemption or otherwise. The obligations of the Guarantor to the Holders and to the Trustee pursuant to this Guarantee and the Indenture are expressly set forth in Article XI of the Indenture and reference is hereby made to such Indenture for the precise terms of this Guarantee. No stockholder, officer, director or incorporator, as such, past, present or future of the Guarantor shall have any liability under this Guarantee by reason of his, her or its status as such stockholder, officer, director or incorporator. This is a continuing Guarantee and shall remain in full force and effect from and including the Guarantee Commencement Date (in the event that the Guarantee Commencement Date shall occur) and shall, in accordance with the terms of the Guarantee and the Indenture, be binding upon the Guarantor and its successors and assigns until (a) full and final payment and performance of all other monetary obligations of the Obligor to the Holders under the Indenture or the Notes or (b) full and final payment by the Guarantor of the same to the extent specified in clause (i)(A) or (i)(B) above, and shall inure to the benefit of the successors and assigns of the Trustee and the Holders, and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges herein conferred upon that party shall automatically D-1 extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Guarantee of payment and not of collectibility. This Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Note upon which this Guarantee is endorsed shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. IF THE GUARANTEE COMMENCEMENT DATE SHALL NOT OCCUR, THIS GUARANTEE SHALL NOT BECOME EFFECTIVE, AND THE GUARANTOR SHALL NOT HAVE ANY OBLIGATIONS UNDER THIS GUARANTEE OR THE INDENTURE. THE TERMS OF ARTICLE XI OF THE INDENTURE ARE INCORPORATED HEREIN BY REFERENCE. D-2 Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. Dated: PEPSICO, INC. By: ---------------------------------- Name: Title: D-3 EX-4.9 5 y84636exv4w9.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.9 $1,000,000,000 BOTTLING GROUP, LLC 4-5/8% SENIOR NOTES DUE NOVEMBER 15, 2012 REGISTRATION RIGHTS AGREEMENT November 7, 2002 Credit Suisse First Boston Corporation Deutsche Bank Securities Inc. Salomon Smith Barney Inc. Banc of America Securities LLC J.P. Morgan Securities Inc. Lehman Brothers Inc. c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, New York 10010-3629 Ladies and Gentlemen: Bottling Group, LLC, a Delaware limited liability company (the "Issuer"), proposes to issue and sell to Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Salomon Smith Barney Inc., Banc of America Securities LLC, J.P. Morgan Securities Inc. and Lehman Brothers Inc. (collectively, the "INITIAL PURCHASERS"), upon the terms set forth in a purchase agreement of even date herewith (the "PURCHASE AGREEMENT"), $1,000,000,000 aggregate principal amount of its 4-5/8% Senior Notes due November 15, 2012 (the "NOTES"), which will be issued pursuant to an Indenture (the "INDENTURE") to be entered into among the Issuer, the Guarantor and JPMorgan Chase Bank, as trustee (the "TRUSTEE"). Payment of principal of and interest and premium, if any, on the Notes will be unconditionally and irrevocably guaranteed on a senior unsecured basis (the "GUARANTEE") by PepsiCo, Inc., a North Carolina corporation (the "GUARANTOR" and, together with the Issuer, the "OFFERORS"), with the Guarantee becoming effective on the Guarantee Commencement Date (as defined in the Indenture), except that, under certain circumstances described in the Indenture, the Guarantee may not become effective or may become effective as to less than all of the principal of and interest and premium, if any, on the Notes, as described in the Indenture. The Notes and the Guarantee are together referred to as the "INITIAL SECURITIES." As an inducement to the Initial Purchasers to enter into the Purchase Agreement, each Offeror severally agrees with the Initial Purchasers, for the benefit of the Initial Purchasers and the holders of the Initial Securities (including, without limitation, the Initial Purchasers), the Exchange Securities (as defined below) and the Private Exchange Securities (as defined below) (collectively, the "HOLDERS"), as follows: 1. Registered Exchange Offer. The Offerors shall, at their own cost (subject to the provisions of Section 4), prepare and, not later than 135 days (or, if the 135th day is not a business day, the first business day thereafter, such day being a "FILING DEADLINE") after the date of original issuance of the Initial Securities (the "CLOSING DATE"), file with the Securities and Exchange Commission (the "COMMISSION") a registration statement (together with all amendments and supplements thereto, including post-effective amendments, in each case including the prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein, the "EXCHANGE OFFER REGISTRATION STATEMENT") on an appropriate form under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), with respect to a proposed offer (the "REGISTERED EXCHANGE OFFER") to the Holders of Transfer Restricted Securities (as defined in Section 6), who are not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer, to issue and deliver to such Holders, in exchange for the Initial Securities, a like aggregate principal amount of debt securities of the Offerors issued under the Indenture, and identical in all material respects to the Initial Securities (except for the transfer restrictions relating to the Initial Securities and the provisions relating to the matters described in Section 6) that would be registered under the Securities Act (the "EXCHANGE SECURITIES"). The Exchange Securities will be issued under the Indenture. Each Offeror shall use its best efforts to (i) cause such Exchange Offer Registration Statement to become effective under the Securities Act within 195 days (or, if the 195th day is not a business day, the first business day thereafter, such day being an "EFFECTIVENESS DEADLINE") after the Closing Date and (ii) keep the Exchange Offer Registration Statement effective for not less than 30 days (or longer, if required by applicable law) after the date notice of the Registered Exchange Offer is mailed to the Holders (such period being called the "EXCHANGE OFFER REGISTRATION PERIOD"). If the Offerors commence the Registered Exchange Offer, the Offerors (i) will be entitled to consummate the Registered Exchange Offer 30 days after such commencement (provided that the Offerors have accepted all the Initial Securities theretofore validly tendered in accordance with the terms of the Registered Exchange Offer) and (ii) will be required to consummate the Registered Exchange Offer no later than 40 days after the date on which the Exchange Offer Registration Statement is declared effective (such 40th day being the "CONSUMMATION DEADLINE"). Following the declaration of the effectiveness of the Exchange Offer Registration Statement, the Offerors shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder of Transfer Restricted Securities electing to exchange the Initial Securities for Exchange Securities (assuming that such Holder is not an affiliate of either Offeror within the meaning of the Securities Act, acquires the Exchange Securities in the ordinary course of such Holder's business and has no arrangements or 2 understandings with any person to participate in the distribution of the Exchange Securities and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. Each Offeror acknowledges that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, in the absence of an applicable exemption therefrom, (i) each Holder which is a broker-dealer electing to exchange Initial Securities, acquired for its own account as a result of market making activities or other trading activities, for the Exchange Securities (an "EXCHANGING DEALER"), is required to deliver a prospectus containing the information substantially as set forth in (a) Annex A hereto on the cover, (b) Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, and (c) Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer (except that the language of such information may be appropriately modified to comply with the "plain English" rules of the Commission) and (ii) an Initial Purchaser that elects to sell Securities (as defined below) acquired in exchange for Initial Securities constituting any portion of an unsold allotment, is required to deliver a prospectus containing the information required by Item 507 or 508 of Regulation S-K under the Securities Act, as applicable, in connection with such sale. Each Offeror shall use its best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein (insofar as the required information relates to it), in order to permit such prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Securities; provided, however, that (i) in the case where such prospectus and any amendment or supplement thereto must be delivered by an Exchanging Dealer or an Initial Purchaser, such period shall end on the earlier of 180 days from the consummation of the Registered Exchange Offer and the date on which all Exchanging Dealers and the Initial Purchasers have sold all Exchange Securities held by them (unless such period is extended pursuant to Section 3(j)) and (ii) the Issuer shall make such prospectus and any amendment or supplement thereto available to any broker-dealer for use in connection with any resale of any Exchange Securities for a period of not less than 180 days after the consummation of the Registered Exchange Offer. If, upon consummation of the Registered Exchange Offer, any Initial Purchaser holds Initial Securities acquired by it as part of its initial distribution, the Offerors, simultaneously with the delivery of the Exchange Securities pursuant to the Registered Exchange Offer, shall issue and deliver to such Initial Purchaser upon the written request of such Initial Purchaser, in exchange (the "PRIVATE EXCHANGE") for the Initial Securities held by such Initial Purchaser, a like principal amount of debt securities of the Offerors issued under the Indenture, and identical in all material respects to the Initial Securities (except for the existence of restrictions on transfer under the Securities Act and the securities laws of the several states of the United States and excluding provisions relating to the matters described in Section 6) (the "PRIVATE EXCHANGE 3 SECURITIES"). The Initial Securities, the Exchange Securities and the Private Exchange Securities are herein collectively called the "SECURITIES." In connection with the Registered Exchange Offer, the Offerors shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 30 days (or longer, if required by applicable law) after the date notice thereof is mailed to the Holders; (c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York, which may be the Trustee or an affiliate of the Trustee; (d) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York time, on the last business day on which the Registered Exchange Offer shall remain open; and (e) each otherwise comply with all applicable laws. As soon as practicable after the close of the Registered Exchange Offer or the Private Exchange, as the case may be, the Offerors shall: (x) accept for exchange all the Initial Securities validly tendered and not withdrawn pursuant to the Registered Exchange Offer and the Private Exchange; (y) deliver to the Trustee for cancellation all the Initial Securities so accepted for exchange; and (z) cause the Trustee to authenticate and deliver promptly to each Holder, the Exchange Securities or Private Exchange Securities, as the case may be, equal in principal amount to the Initial Securities of such Holder so accepted for exchange. The Indenture will provide that the Exchange Securities will not be subject to the transfer restrictions set forth in the Indenture and that all the Securities will vote and consent together on all matters as one class and that none of the Securities will have the right to vote or consent as a class separate from one another on any matter. Interest on each Exchange Security and Private Exchange Security issued pursuant to the Registered Exchange Offer and in the Private Exchange will accrue from the last interest payment date on which interest was paid on the Initial Security surrendered in exchange therefor or, if no interest has been paid on the Initial Securities, from the date of original issue of the Initial Securities. 4 Each Holder participating in the Registered Exchange Offer shall be required to represent to each Offeror that at the time of the consummation of the Registered Exchange Offer (i) any Exchange Securities received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understanding with any person to participate in the distribution of the Securities or the Exchange Securities within the meaning of the Securities Act, (iii) such Holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of either Offeror or if it is an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Securities and (v) if such Holder is a broker-dealer, that it will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. Notwithstanding any other provisions hereof, the Issuer will ensure that (i) any Exchange Offer Registration Statement complies in all material respects with the Securities Act, the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and the respective rules and regulations thereunder, (ii) any Exchange Offer Registration Statement does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except for statements or omissions made in (x) the Guarantor's Information (as defined in the immediately following paragraph) or (y) in reliance upon, and in conformity with information furnished to each Offeror by or on behalf of the Holders ("HOLDERS' INFORMATION") and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except for the Guarantor's Information and the Holders' Information. Notwithstanding any other provisions hereof, the Guarantor will ensure that (i) the Guarantor's Information included in any Exchange Offer Registration Statement complies in all material respects with the Securities Act, the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and the respective rules and regulations thereunder, (ii) the Guarantor's Information contained in any Exchange Offer Registration Statement does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) the Guarantor's Information contained in any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As used herein, the "GUARANTOR'S INFORMATION" shall mean any information contained in any Registration Statement (as defined below) that was set forth in the letter of even date herewith from the Guarantor to the Issuer and the Initial Purchasers and such other information as the Guarantor may furnish in writing specifically for inclusion or incorporation by reference in such Registration Statement. 5 2. Shelf Registration. If (i) because of any change in law or in applicable interpretations thereof by the staff of the Commission, the Offerors are not permitted to effect a Registered Exchange Offer, as contemplated by Section 1, (ii) the Exchange Offer Registration Statement is not declared effective by the 195th day after the Closing Date, (iii) any Initial Purchaser so requests with respect to the Initial Securities (or the Private Exchange Securities) not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer and held by it following consummation of the Registered Exchange Offer, (iv) any Holder (other than an Exchanging Dealer) is not eligible to participate in the Registered Exchange Offer or, in the case of any Holder (other than an Exchanging Dealer) that participates in the Registered Exchange Offer, such Holder does not receive freely tradeable Exchange Securities on the date of the exchange or (v) both Offerors elect, then the Offerors shall take the following actions: (a) The Offerors shall, at their cost (subject to Section 4), as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 2) file with the Commission and thereafter each Offeror shall use its best efforts to cause to be declared effective a registration statement (together with all amendments and supplements thereto, including post-effective amendments, in each case including the prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein, the "SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer Registration Statement, a "REGISTRATION STATEMENT") on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act (the "SHELF REGISTRATION"); provided, however, that no Holder (other than an Initial Purchaser) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder. (b) Each Offeror shall use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Holders of the relevant Securities, for a period of two years (or for such longer period if extended pursuant to Section 3(j)) from the date of its effectiveness or such shorter period that will terminate when all the Securities covered by the Shelf Registration Statement (i) have been sold pursuant thereto or (ii) are no longer restricted securities (as defined in Rule 144 under the Securities Act, or any successor rule thereof). An Offeror shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such Securities during that period, unless such action is required by applicable law. (c) Notwithstanding any other provisions of this Agreement to the contrary, the Issuer shall cause the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement or any amendment thereto or the date of any supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations of the Commission and (ii) not to contain any untrue 6 statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, other than with respect to the Guarantor's Information or the Holders' Information. (d) Notwithstanding any other provisions of this Agreement to the contrary, the Guarantor shall cause (i) the Guarantor's Information included in the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement or any amendment thereto or the date of any supplement, to comply in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations of the Commission and (ii) the Guarantor's Information contained in the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement or any amendment thereto or the date of any supplement, not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Registration Procedures. In connection with any Shelf Registration contemplated by Section 2 and, to the extent applicable, any Registered Exchange Offer contemplated by Section 1, the following provisions shall apply: (a) The Issuer shall use its reasonable best efforts to (i) furnish to each Initial Purchaser, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and, in the event that an Initial Purchaser (with respect to any portion of an unsold allotment from the original offering) is participating in the Registered Exchange Offer or the Shelf Registration Statement, the Issuer shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as such Initial Purchaser reasonably may propose (provided that, if such comments relate to the Guarantor's Information, the Guarantor shall also use its reasonable best efforts to reflect such comments in each such document); (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement (except that the language of such information may be appropriately modified to comply with the "plain English" rules of the Commission) and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; (iii) if requested by an Initial Purchaser, include the information required by Item 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement; (iv) include within the prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," reasonably acceptable to the Initial Purchasers, which shall contain a summary statement of the positions taken or policies made by the staff of the Commission with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined 7 in Rule 13d-3 under the Exchange Act) of Exchange Securities received by such broker-dealer in the Registered Exchange Offer (a "PARTICIPATING BROKER-DEALER"), whether such positions or policies have been publicly disseminated by the staff of the Commission or such positions or policies, in the reasonable judgment of the Initial Purchasers based upon advice of counsel (which may be in-house counsel), represent the prevailing views of the staff of the Commission; and (v) in the case of a Shelf Registration Statement, include the names of the Holders who propose to sell Securities pursuant to the Shelf Registration Statement as selling securityholders. (b) Each Offeror shall advise each of the Initial Purchasers, the Holders of the Securities and any Participating Broker-Dealer from which either Offeror has received prior written notice that it will be a Participating Broker-Dealer in the Registered Exchange Offer (which notice pursuant to clauses (ii) to (v) below shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made) and, if requested by such person, confirm such advice in writing: (i) when any Registration Statement or any amendment thereto has been filed with the Commission and when such Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to any Registration Statement or the prospectus included therein or for additional information; (iii) if known to such Offeror, of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by such Offeror or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires such Offeror to make changes in any Registration Statement or the prospectus included therein in order that such Registration Statement or the prospectus included therein do not contain an untrue statement of a material fact nor omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in light of the circumstances under which they were made) not misleading. Either Offeror may provide such advice or notice set forth in clauses (i) to (v) above on behalf of such Offeror or on behalf of both Offerors. (c) The Issuer shall make every reasonable effort to obtain the withdrawal at the earliest possible time, of any order suspending the effectiveness of any Registration Statement. The Guarantor shall make every reasonable effort to obtain the withdrawal at 8 the earliest possible time, of any order suspending the effectiveness of any Registration Statement, to the extent that such order relates to (i) any action or failure to act on the part of the Guarantor or (ii) the Guarantor's Information. (d) The Issuer shall furnish to each Holder of Securities included within the coverage of any Shelf Registration, without charge, at least one conformed copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Issuer shall deliver to each Exchanging Dealer and each Initial Purchaser, and to any other Holder who so requests, without charge, at least one conformed copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if any Initial Purchaser or any such Holder requests, all exhibits thereto (including those incorporated by reference). (f) The Issuer shall, during the Shelf Registration Period, deliver to each Holder of Securities included within the coverage of the Shelf Registration, without charge, as many copies of the prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such person may reasonably request. Each Offeror consents, subject to the provisions of this Agreement, to the use of such prospectus or any amendment or supplement thereto by each of the selling Holders of the Securities in connection with the offering and sale of the Securities covered by such prospectus, or any amendment or supplement thereto, included in the Shelf Registration Statement. (g) The Issuer shall deliver to each Initial Purchaser, any Exchanging Dealer, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such persons may reasonably request. Each Offeror consents, subject to the provisions of this Agreement, to the use of such prospectus or any amendment or supplement thereto by any Initial Purchaser, if necessary, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer in connection with the offering and sale of the Exchange Securities covered by such prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement. (h) Prior to any public offering of the Securities pursuant to any Registration Statement, each Offeror shall use its reasonable best efforts to register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of the Securities for offer and sale under the securities or "blue sky" laws of such United States jurisdictions as any Holder of the Securities reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by such Registration Statement; provided, however, that neither Offeror shall be 9 required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject; and, provided, further that neither Offeror shall be required to pay any expenses in connection therewith after the effective date of any applicable Registration Statement. (i) The Offerors shall cooperate with the Holders of the Securities to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request in writing a reasonable period of time prior to sales of the Securities pursuant to such Registration Statement. (j) Upon the occurrence of any event contemplated by paragraphs (ii) through (v) of Section 3(b) during the period for which the Offerors are required to maintain an effective Registration Statement, the Offerors shall promptly prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required document so that, as thereafter delivered to Holders of the Securities or purchasers of Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that, the Guarantor's obligations to prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required documents under this Section 3(j) will be limited to the Guarantor's Information. If the Offerors notify the Initial Purchasers, the Holders of the Securities and any known Participating Broker-Dealer in accordance with clauses (ii) to (v) of Section 3(b) to suspend the use of such prospectus until the requisite changes to the prospectus have been made, then the Initial Purchasers, the Holders of the Securities and any such Participating Broker-Dealers shall suspend use of such prospectus, and the period of effectiveness of the Shelf Registration Statement provided for in Section 2(b) above and the Exchange Offer Registration Statement provided for in Section 1 above shall each be extended by the number of days from and including the date of the giving of such notice to and including the date when the Initial Purchasers, the Holders of the Securities and any known Participating Broker-Dealer shall have received such amended or supplemented prospectus pursuant to this Section 3(j). (k) Not later than the effective date of the applicable Registration Statement, the Issuer will provide CUSIP and ISIN numbers for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, and provide the applicable trustee with printed certificates for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. (l) Each Offeror will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Registered Exchange Offer or the Shelf Registration and will make generally available to its members or security holders 10 (or otherwise provide in accordance with Section 11(a) of the Securities Act) an earnings statement satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of such Offeror's first fiscal quarter commencing after the effective date of the Registration Statement, which statement shall cover such 12-month period. (m) The Offerors shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner and containing such changes, if any, as shall be necessary for such qualification. In the event that such qualification would require the appointment of a new trustee under the Indenture, the Offerors shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (n) The Offerors may require each Holder of Securities to be sold pursuant to the Shelf Registration Statement to furnish to the Offerors such information regarding the Holder and the distribution of such Securities as the Offerors may from time to time reasonably require for inclusion in such Shelf Registration Statement, and the Offerors may exclude from such registration the Securities of any Holder that unreasonably fails to furnish such information within a reasonable time after receiving such request. (o) Each Offeror shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as Holders of a majority in aggregate principal amount of the Securities being sold or the managing underwriters, if any, shall reasonably request in order to facilitate the disposition of the Securities pursuant to any Shelf Registration. (p) In the case of any Shelf Registration, each Offeror shall (i) make reasonably available for inspection by one or more representatives of, and Special Counsel (as defined below) acting for, Holders of a majority in aggregate principal amount of the Securities being sold and, any underwriter participating in any disposition pursuant to such Shelf Registration Statement all relevant financial and other records, pertinent corporate documents and properties of such Offeror and (ii) cause such Offeror's managing directors, officers, directors, in-house counsel, employees, accountants and auditors to supply all relevant information reasonably requested by such representatives, Special Counsel or any such underwriter (each, an "INSPECTOR") in connection with such Shelf Registration Statement, in each case, as shall be reasonably necessary to enable such Inspector, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that the foregoing inspection and information gathering shall be coordinated on behalf of the Holders and on behalf of the other parties, by one counsel designated by and on behalf of such other parties as described in Section 4. (q) In the case of any Shelf Registration, each Offeror, if requested by Holders of a majority in aggregate principal amount of Securities being sold or the managing underwriters, if any, shall use its reasonable best efforts to cause (i) its counsel (which may be in-house counsel) to deliver an opinion relating to the Securities in customary 11 form; (ii) its officers to execute and deliver all customary documents and certificates and updates thereof requested by the managing underwriters of the applicable Securities and (iii) its independent public accountants and the independent public accountants with respect to any other entity for which financial information is provided in the Registration Statement (as a result of such entity's relationship with such Offeror) to provide a comfort letter in customary form, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (r) In the case of the Registered Exchange Offer, if requested by any Initial Purchaser or any known Participating Broker-Dealer, each Offeror shall use its reasonable best efforts to cause (i) its counsel to deliver to such Initial Purchaser or such Participating Broker-Dealer a signed opinion in customary form and (ii) its independent public accountants and the independent public accountants with respect to any other entity for which financial information is provided in the Registration Statement (as a result of such entity's relationship with such Offeror) to deliver to such Initial Purchaser or such Participating Broker-Dealer a comfort letter, in customary form. (s) If a Registered Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Initial Securities by Holders to the Offerors (or to such other Person as directed by the Offerors) in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be, the Offerors shall mark, or caused to be marked, on the Initial Securities so exchanged that such Initial Securities are being canceled in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be; in no event shall the Initial Securities be marked as paid or otherwise satisfied. (t) The Issuer will use its reasonable best efforts to (i) if the Initial Securities have been rated prior to the initial sale of such Initial Securities, confirm such ratings will apply to the Securities covered by a Registration Statement, or (ii) if the Initial Securities were not previously rated, cause the Securities covered by a Registration Statement to be rated with the appropriate rating agencies, if so requested by Holders of a majority in aggregate principal amount of Securities covered by such Registration Statement, or by the managing underwriters, if any. (u) In the event that any broker-dealer registered under the Exchange Act shall underwrite any Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Conduct Rules (the "RULES") of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder of such Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Offerors will assist such broker-dealer in complying with the requirements of such Rules, including, without limitation, by (i) if such Rules, including Rule 2720, shall so require, engaging a "qualified independent underwriter" (as defined in Rule 2720) to participate in the preparation of the Registration Statement relating to such Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by such Registration Statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Securities, (ii) indemnifying any such 12 qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 and (iii) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules; provided that, the Guarantor will only be obligated to provide such information which relates to the Guarantor or the Guarantor's Information. (v) Each Offeror shall use its reasonable best efforts to take all other steps necessary to effect the registration of the Securities covered by a Registration Statement contemplated hereby. 4. Registration Expenses. The Issuer shall bear all fees and expenses incurred in connection with the performance of the Offerors' obligations under Sections 1 through 3 (including the reasonable fees and expenses, if any, of Cleary, Gottlieb, Steen & Hamilton, counsel for the Holders, incurred in connection with the Registered Exchange Offer) and in the event of a Shelf Registration, the Issuer shall bear or reimburse the Holders of the Securities covered thereby for the reasonable fees and disbursements of one firm of counsel, which shall be counsel for the Initial Purchasers unless the Holders of a majority in principal amount of the Securities covered thereby otherwise so designate (the "SPECIAL COUNSEL") to act as counsel for the Holders of the Securities in connection therewith. The Guarantor shall bear all of its expenses incidental to the performance of its obligations under this Agreement, including the fees and expenses of its professional advisors. 5. Indemnification. (a) The Issuer agrees to indemnify and hold harmless each Holder of the Securities, any Participating Broker-Dealer and each person, if any, who controls such Holder or such Participating Broker-Dealer within the meaning of the Securities Act or the Exchange Act (each Holder, any Participating Broker-Dealer and such controlling persons are referred to collectively as the "INDEMNIFIED PARTIES") from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided, however, that (i) the Issuer shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus 13 relating to a Shelf Registration (x) with respect to the Guarantor's Information or (y) in reliance upon and in conformity with any Holders' Information and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus relating to a Shelf Registration Statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Holder or Participating Broker-Dealer (or any person controlling such Holder or Participating Broker-Dealer) from whom the person asserting any such losses, claims, damages or liabilities purchased the Securities concerned, to the extent that a prospectus relating to such Securities was required to be delivered by such Holder or Participating Broker-Dealer under the Securities Act in connection with such purchase and any such loss, claim, damage or liability of such Holder or Participating Broker-Dealer results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of the final prospectus if the Issuer or Guarantor have previously furnished copies thereof to such Holder or Participating Broker-Dealer; provided further, however, that this indemnity agreement will be in addition to any liability which the Issuer may otherwise have to such Indemnified Party. The Issuer shall also indemnify underwriters, their officers and directors and each person who controls such underwriters within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders of the Securities if requested by such Holders. (b) The Guarantor agrees to indemnify and hold harmless each Indemnified Party from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case, to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Guarantor's Information contained therein, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided, however, that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus relating to a Shelf Registration Statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Holder or Participating Broker-Dealer (or any person controlling such Holder or Participating Broker-Dealer) from whom the person asserting any such losses, claims, damages or liabilities purchased the Securities concerned, to the extent that a prospectus relating to such Securities was required to be delivered by such Holder or Participating Broker-Dealer under the Securities Act in connection with such purchase and any such loss, 14 claim, damage or liability of such Holder or Participating Broker-Dealer results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of the final prospectus if the Issuer or Guarantor have previously furnished copies thereof to such Holder or Participating Broker-Dealer; provided further, however, that this indemnity agreement will be in addition to any liability which the Guarantor may otherwise have to such Indemnified Party. The Guarantor shall also indemnify underwriters, their officers and directors and each person who controls such underwriters within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders of the Securities if requested by such Holders. (c) Each Holder of the Securities, severally and not jointly, will indemnify and hold harmless the Issuer and Guarantor, their directors and officers and each person, if any, who controls the Issuer and the Guarantor, as the case may be, within the meaning of the Securities Act or the Exchange Act from and against any losses, claims, damages or liabilities or any actions in respect thereof, to which the Issuer or Guarantor or any such controlling person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Issuer or the Guarantor by or on behalf of such Holder specifically for inclusion therein; and, subject to the limitation set forth immediately preceding this clause, shall reimburse, as incurred, the Issuer or Guarantor, as the case may be, for any legal or other expenses reasonably incurred by the Issuer or Guarantor, as the case may be, or any such controlling person in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability which such Holder may otherwise have to the Issuer or Guarantor, as the case may be, or any of their controlling persons. (d) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a), (b) or (c) above, notify the indemnifying party of the commencement thereof; provided that, the failure to notify the indemnifying party shall not relieve it from any liability that it may have under subsection (a), (b) or (c) above, except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided, further, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party otherwise than under subsection (a), (b) or (c) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any 15 other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and does not include a statement as to and an admission of fault, culpability or failure to act by or on behalf of any indemnified party. (e) If the indemnification provided for in this Section 5 is unavailable or insufficient to hold harmless an indemnified party under subsections (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Offerors on one hand and the Holders on the other from the exchange of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Offerors on the one hand and the Holders on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault as between the Offerors on the one hand and the Holders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer or Guarantor, as the case may be, on the one hand and the Holders on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding any other provision of this subsection (e), the Holders of the Securities shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such Holders from the sale of the Securities pursuant to a Registration Statement exceeds the amount of damages which such Holders have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this subsection (e), each person, if any, who controls 16 such indemnified party within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such indemnified party and each person, if any, who controls the Issuer or Guarantor, as the case may be, within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Issuer or Guarantor, as the case may be. (f) The agreements contained in this Section 5 shall survive the sale of the Securities pursuant to a Registration Statement and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any indemnified party. 6. Additional Interest Under Certain Circumstances. (a) Additional interest (the "ADDITIONAL INTEREST") with respect to the Initial Securities and the Private Exchange Securities shall be assessed as follows if any of the following events occur (each such event in clauses (1) through (3) below being herein called a "REGISTRATION DEFAULT"): (1) if by the Filing Deadline, the Exchange Offer Registration Statement has not been filed with the Commission with respect to the Registered Exchange Offer, (2) if by the Effectiveness Deadline, the Exchange Offer Registration Statement has not been declared effective or if by the Consummation Deadline, the Shelf Registration Statement has not been declared effective or the Registered Exchange Offer has not been consummated, (3) if by the Effectiveness Deadline, the Exchange Offer Registration Statement has been declared effective, or if by the Consummation Deadline, the Shelf Registration Statement has been declared effective but: (a) such registration statements cease to be effective, prior to expiration of the time periods described in Sections 1 and 2, if so required, or (b) such registration statements cease to be useable in connection with resales of Securities prior to expiration of the time periods described in Sections 1 and 2, if so required, Additional Interest shall accrue on the Initial Securities and the Private Exchange Securities over and above the interest set forth in the title of the Securities from and including the date on which any such Registration Default shall occur to but excluding the date on which all such Registration Defaults have been cured, at a rate of 0.25% per annum (the "ADDITIONAL INTEREST RATE") for the first 90-day period immediately following the occurrence of such Registration Default. The Additional Interest Rate shall increase by an additional 0.25% per annum with respect to each subsequent 90-day 17 period until all Registration Defaults have been cured, up to a maximum Additional Interest Rate of 0.5% per annum. (b) A Registration Default referred to in Section 6(a)(3) shall be deemed not to have occurred and be continuing in relation to a Shelf Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to such Shelf Registration Statement to incorporate annual audited financial information with respect to the Offerors where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events, with respect to the Offerors that would need to be described in such Shelf Registration Statement or the related prospectus and (ii) in the case of clause (y), the Offerors are proceeding promptly and in good faith to amend or supplement such Shelf Registration Statement and related prospectus to describe such events; provided, however, that in any case if such Registration Default occurs for a continuous period in excess of 30 days, Additional Interest shall be payable in accordance with the above paragraph from the day such Registration Default occurs (without regard to the foregoing clauses in this paragraph) until such Registration Default is cured. (c) Any amounts of Additional Interest due pursuant to Section 6(a) above will be payable in the same manner as specified in the Indenture for the payment of interest on the Securities on the regular interest payment dates with respect to the Securities. The amount of Additional Interest will be determined by multiplying the applicable Additional Interest rate by the principal amount of the Initial Securities or Private Exchange Securities, as the case may be, and further multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. (d) "TRANSFER RESTRICTED SECURITIES" means each Security until (i) the date on which such Security has been exchanged by a person other than a broker-dealer for a freely transferable Exchange Security in the Registered Exchange Offer, (ii) following the exchange by a broker-dealer in the Registered Exchange Offer of an Initial Security for an Exchange Security, the date on which such Exchange Security is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 7. Rules 144 and 144A. So long as Transfer Restricted Securities remain outstanding, each Offeror shall each use its best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time such Offeror is not required to file such reports, it will, upon the request of any Holder of Securities, make publicly available such information necessary to permit sales of their securities pursuant to Rules 144 and 18 144A. So long as Transfer Restricted Securities remain outstanding, each Offeror covenants that it will take such further action as any Holder of Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). So long as Transfer Restricted Securities remain outstanding, the Issuer will provide a copy of this Agreement to prospective purchasers of Initial Securities identified to the Issuer by the Initial Purchasers upon written request. So long as Transfer Restricted Securities remain outstanding, upon the written request of any Holder of Initial Securities, each Offeror shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require each Offeror to register any of its securities pursuant to the Exchange Act. 8. Underwritten Registrations. If any of the Transfer Restricted Securities covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("MANAGING Underwriters") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities to be included in such offering, subject to the consent of both Offerors (which shall not be unreasonably withheld or delayed), and such Holders shall be responsible for all underwriting commissions and discounts in connection therewith. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 9. Miscellaneous. (a) Remedies. Each Offeror acknowledges and agrees that any failure by such Offeror to comply with its obligations under Section 1 or 2 may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce such Offeror's obligations under Sections 1 or 2. Each Offeror further agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except by both Offerors and the written consent of the Holders of a majority in principal amount of the Securities affected by such amendment, modification, supplement, waiver or consents. Without the consent of the Holder of each Security, however, no modification may change the provisions relating to the payment of Additional Interest. 19 (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class mail, facsimile transmission, or air courier which guarantees overnight delivery: (1) if to a Holder of the Securities, at the most current address given by such Holder to the Offerors. (2) if to the Initial Purchasers: Credit Suisse First Boston Corporation Deutsche Bank Securities Inc. Salomon Smith Barney Inc. Banc of America Securities LLC J.P. Morgan Securities Inc. Lehman Brothers Inc. c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, NY 10010-3629 Fax No.: (212) 325-8278 Attention: Transactions Advisory Group with a copy to: Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, NY 10006 Fax No.: (212) 225-3999 Attention: Craig B. Brod, Esq. (3) if to the Offerors, at their address as follows: Bottling Group, LLC c/o The Pepsi Bottling Group, Inc. One Pepsi Way Somers, NY 10589 Fax No.: (914) 767-1820 Attention: Treasurer with a copy to: Proskauer Rose, LLP 1585 Broadway New York, NY 10036-8299 Fax No.: (212) 969 2900 Attention: Henry O. Smith III, Esq. PepsiCo, Inc. 20 700 Anderson Hill Road Purchase, NY 10577-1444 Fax No.: (914) 249-8536 Attention: Treasurer with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Fax No.: (212) 450-3800 Attention: Winthrop B. Conrad, Jr., Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery. (d) No Inconsistent Agreements. Neither Offeror has, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to their securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (e) Third Party Beneficiaries. The Holders shall be third party beneficiaries to the agreements made in this Agreement among the Offerors and the Initial Purchasers and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. (f) Successors and Assigns. This Agreement shall be binding upon each Offeror and its successors and assigns. (g) Termination of the Guarantor's Obligations. Notwithstanding any other provision of this Agreement, in the event that it is determined, prior to the consummation of the transactions contemplated in this Agreement, that the Guarantee shall never become effective and the Guarantee Commencement Date (as defined in the Indenture) shall not occur in accordance with the provisions of the Indenture, then at such time, the Guarantor's obligations hereunder (except the obligations contained in the second sentence of Section 4 and Sections 5(b), 5(d), 5(e) and 5(f), which shall remain in effect) shall cease. (h) Counterparts. This Agreement may be executed in any number of counterparts and by the 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. 21 (i) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (j) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Issuer and the Guarantor hereby submit to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. (k) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (l) Securities Held by the Offerors. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Offerors or their respective affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 22 If the foregoing is in accordance with your understanding of our agreement, please sign and return to each Offeror a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the several Initial Purchasers, the Issuer and the Guarantor in accordance with its terms. Very truly yours, Bottling Group, LLC By: /s/ Steven M. Rapp ------------------------- Name: Steven M. Rapp Title: Managing Director-Delegatee PepsiCo, Inc. By: /s/ Lionel L. Nowell III ------------------------- Name: Lionel L. Nowell III Title: Senior Vice President and Treasurer The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION DEUTSCHE BANK SECURITIES INC. SALOMON SMITH BARNEY INC. BANC OF AMERICA SECURITIES, LLC J.P. MORGAN SECURITIES INC. LEHMAN BROTHERS INC. By: CREDIT SUISSE FIRST BOSTON CORPORATION By: /s/ Peter Milhaupt ------------------------------------- Name: Peter Milhaupt Title: Managing Director ANNEX A Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Initial Securities where such Initial Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuer and the Guarantor have agreed that, for a period of 180 days after the Expiration Date (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." A-1 ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Initial Securities, where such Initial Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. See "Plan of Distribution." B-1 ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Initial Securities where such Initial Securities were acquired as a result of market-making activities or other trading activities. The Issuer and the Guarantor agreed that, for a period of 180 days after the Expiration Date, the Issuer will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until ______________, 200__, all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus. The Issuer will not receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Securities and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Issuer will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Issuer has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any brokers or dealers. The Issuer and the Guarantor will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act, or will contribute to payments which they may be required to make in that respect. C-1 ANNEX D [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: --------------------------------- Address: -------------------------------- If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. D-1 EX-10.15 6 y84636exv10w15.txt 2002 PBG LONG-TERM INCENTIVE PLAN EXHIBIT 10.15 PBG 2002 LONG TERM INCENTIVE PLAN 1. PURPOSE. The purposes of the PBG 2002 Long Term Incentive Plan (the "Plan") are: (a) to provide long term incentives to those persons with significant responsibility for the success and growth of The Pepsi Bottling Group, Inc. ("PBG") and its subsidiaries, divisions and affiliated businesses (collectively, the "Company"); (b) to assist the Company in attracting and retaining key employees on a competitive basis; and (c) to associate the interests of such employees with those of PBG shareholders. 2. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by the Compensation and Management Development Committee of the Board of Directors of PBG (except that, with respect to executive officers and other executives deemed covered by section 162(m) of the Internal Revenue Code (collectively, "Covered Executives"), the Plan shall be administered by such Committee's Compensation Subcommittee. The Compensation Subcommittee shall be appointed by the Board of Directors of PBG (the "Board") and shall consist of two or more members of the Board who qualify as outside directors for purposes of section 162(m) of the Internal Revenue Code. Any reference in the Plan to the "Committee" shall be understood to refer to the Compensation and Management Development Committee or the Compensation Subcommittee, whichever has administrative authority with respect to the matter. (b) The Committee shall have all powers vested in it by the terms of the Plan, such powers to include the authority (within the limitations described herein) to select the employees to be granted awards under the Plan; to determine the type, size and terms of awards to be granted to each employee selected, provided, however, that no awards granted under the Plan shall have a vesting period of less than one year; to determine the time when awards will be granted and any conditions which must be satisfied by employees before an award is granted; to establish performance objectives and conditions for earning awards; to determine whether such objectives and conditions have been met and whether awards will be paid at the end of the award period or at the time the award is exercised (whichever applies), or whether payment will be deferred; to determine whether payment of an award should be reduced or eliminated; and to determine whether such awards should qualify as deductible in their entirety for federal income tax purposes. (c) The Committee shall have full power and authority to administer and interpret the Plan and to adopt such rules, regulations, agreements, guidelines and instruments for the administration of the Plan and for the conduct of its business as the Committee deems necessary or advisable. The Committee's interpretations of the Plan, and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding on all parties concerned, including the Company, PBG shareholders and any person receiving an award under the Plan. (d) Except with respect to Covered Executives (or as prohibited by law or applicable stock exchange rules), the Committee may delegate to one or more persons any or all of its authority under Sections 2(b) and 2(c). 3. ELIGIBILITY. Each key employee of the Company may, in the Committee's discretion, be granted any of the awards available under the Plan. 4. AWARDS. (a) Types. Awards under the Plan include stock options, incentive stock options, stock appreciation rights, performance units, restricted stock and share awards. (i) Stock Options. Stock options are rights to purchase shares of PBG Common Stock ("Common Stock") at a fixed price for a specified period of time. The purchase price per share of Common Stock covered by a stock option awarded pursuant to this Plan, including any incentive stock options, shall be equal to or greater than the "Fair Market Value" of a share of PBG Common Stock on the date the stock option is awarded. "Fair Market Value" means an amount equal to the average of the high and low sales prices for Common Stock as reported on the composite tape for securities listed on The New York Stock Exchange, Inc. on the date in question (or, if no sales of Common Stock were made on such Exchange on this date, on the next preceding day on which sales were made on such Exchange), except that such average price shall be rounded up to the nearest one-fourth. The purchase price per share may be payable in cash or Common Stock or both (with any Common Stock valued at its Fair Market Value on the date of exercise). (ii) Stock Appreciation Rights. Stock appreciation rights ("SARs") are rights to receive the difference between: (A) an exercise price, which shall not be less than the Fair Market Value of a share of PBG Common Stock on the grant date, and (B) the Fair Market Value of a share of Common Stock on the date the SAR is exercised. Such difference may be paid in cash, Common Stock or both. (iii) Performance Units. Performance units are rights to receive up to 100% of the value of shares of Common Stock as of the date of grant, which value may be paid in cash or Common Stock, without payment of any amounts to PBG. The full and/or partial payment of performance unit awards granted under this Plan will be made only upon certification by the Committee of the attainment by PBG, over a performance period established by the Committee, of any one or more performance goals, which have been established by the Committee. The applicable performance goals shall be based on one or more of the following business criteria, as selected by the Committee in its sole discretion: cash flow, earnings, earnings per share, market value added, economic value added, EBITDA (earnings before interest, taxes, depreciation and amortization), return on assets, return on equity, return on investment capital, revenues, stock price, or total shareholder return. Each criterion may be determined in comparison to capital, shareholders' equity, shares outstanding, investments, assets or net assets. Performance goals may be stated in the alternative. No payment will be made if the minimum applicable performance goal is not met. (iv) Restricted Stock. Restricted stock awards are grants of Common Stock subject to a substantial risk of forfeiture or other restrictions. The full and/or partial vesting of any restricted stock award made to key employees under this Plan will occur in accordance with a vesting schedule established by the Committee and/or upon the attainment by PBG of any primary or secondary performance targets, which have been established by the Committee at the time the award is made. These targets shall be based on objective criteria, including (without limitation) one or more of the following: cash flow, earnings, earnings per share, market value added, economic value added, EBITDA (earnings before interest, taxes, depreciation and amortization), return on assets, return on equity, return on investment capital, revenues, stock price, or total shareholder return. Each criterion may be determined in comparison to capital, shareholders' equity, shares outstanding, investments, assets or net assets. Performance targets may be stated in the alternative. No payment will be made if the minimum applicable performance target is not met. (v) Share Awards. Share awards are grants of shares of Common Stock. The Committee may grant a share award to any eligible employee on such terms and conditions as the Committee may determine in its sole discretion. Share awards may be made as additional compensation for services rendered by the eligible employee or may be in lieu of cash or other compensation to which the eligible employee is entitled from the Company. (b) Supplemental Awards. Employees who are newly hired or promoted into eligible status during the vesting or performance period may be granted supplemental pro rata grants or supplemental incremental grants of stock options, performance units and/or restricted stock, as determined by the Committee in its sole discretion. (c) Negative Discretion. Notwithstanding the attainment by PBG of one or more performance target specified under this Plan, the Committee has the discretion, by participant, to reduce some or all of an award that would otherwise be paid. (d) Guidelines. The Committee may, from time to time, adopt written policies for its implementation of the Plan. Any such policies shall be consistent with the Plan and may include, but need not be limited to, the type, size and term of awards to be made, and the conditions for payment of such awards. (e) Maximum Awards. An eligible employee may be granted multiple awards under the Plan, but no one employee may be granted awards which would result in his or her receiving, in the aggregate, during the term of the Plan, more than 25% of the maximum number of shares available for award under the Plan. Solely for the purposes of determining whether this maximum is met, a performance unit or SAR shall be treated as entitling the holder thereof to one share of Common Stock. (f) Employment by the Company. To the extent the vesting, exercise, or term of any stock option, SAR or restricted stock award is conditioned on employment by the Company, an award recipient whose Company employment terminates through a Company-approved transfer to an allied organization: (i) shall vest in and be entitled to exercise any stock option, SAR or restricted stock award immediately prior to the transfer, (ii) shall have employment with the allied organization treated as employment by the Company in determining the term of such award and the period for exercise, and (iii) shall have the allied organization considered part of the Company for purposes of applying the misconduct provisions of Section 8. The Chief Personnel Officer shall specify the entities that are considered allied organizations as of any time. 5. SHARES OF STOCK SUBJECT TO THE PLAN. The shares that may be delivered or purchased under the Plan shall not exceed an aggregate of 18,000,000 shares of Common Stock, as adjusted, if appropriate, pursuant to Section 7 hereof. 6. DEFERRED PAYMENTS. The Committee may determine that all or a portion of a payment to a participant under the Plan, whether it is to be made in cash, shares of Common Stock or a combination thereof, shall be deferred. Deferrals shall be for such periods and upon such terms as the Committee may determine in its sole discretion. 7. DILUTION AND OTHER ADJUSTMENTS. In the event of (i) any change in the outstanding shares of Common Stock by reason of any split, stock dividend, recapitalization, merger, reorganization, consolidation, combination or exchange of shares, (ii) any separation of a corporation (including a spin-off or other distribution of assets of the Company to its shareholders), (iii) any partial or complete liquidation, or (iv) other similar corporate change, such equitable adjustments shall be made in the Plan and the awards thereunder as the Committee determines are necessary and appropriate, including, if necessary, an adjustment in the maximum number or kind of shares subject to the Plan or which may be or have been awarded to any participant (including the conversion of shares subject to awards from Common Stock to stock of another entity). Such adjustment shall be conclusive and binding for all purposes of the Plan. 8. MISCONDUCT. If the Committee or its delegate determines that a participant has, at any time prior to, or within twelve months after, the exercise of any option or SAR granted hereunder or the vesting of any other award made hereunder committed "Misconduct," then the Committee may, in its sole discretion: (i) cancel any outstanding option or other award granted hereunder and (ii) require the participant to pay to the Company any and all gains realized from any options or awards granted hereunder that were exercised (in the case of options or SARs), or vested (in the case of other awards), within the twelve month period immediately preceding the date of such cancellation (or if there is no cancellation, the date on which such claim for payment is made). A participant commits Misconduct if the Committee or its delegate determines that the participant: (a "Competed" (as defined below) with the Company; (b) engaged in any act which is considered by the Committee to be contrary to the Company's best interests, including, but not limited to, recruiting or hiring away employees of the Company; (c) violated the Company's Code of Conduct or engaged in any other activity which constitutes gross misconduct; (d) 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 employment with the Company; or (e) disclosed to an unauthorized person or misused confidential information or trade secrets of the Company. This paragraph shall also apply in the case of a former Company employee (including, without limitation, a retired or disabled employee) who commits Misconduct after his or her employment with the Company terminated. "Competed" shall mean (i) worked for, managed, operated, controlled or participated in the ownership, arrangement, operation or control of (or have been connected with or served on the board of directors of) any company or entity that engages in the production, marketing or sale of any product or service which is also produced, marketed or sold by the Company; or (ii) any action or omission which is injurious to the Company or which diverts customers or suppliers from the Company. 9. CHANGE IN CONTROL. Upon a "Change in Control" (as defined in subsection (d) below), the following shall occur: (a) Options and SARs. At the date of such Change in Control, all outstanding and unvested stock options and SARs granted under the LTIP shall immediately vest and become exercisable, and all stock options and SARs then outstanding under the LTIP shall remain outstanding in accordance with their terms. In the event that any stock option or SAR granted under the LTIP becomes unexercisable during its term on or after a Change in Control because: (i) the individual who holds such option or SAR is involuntarily terminated (other than for cause) within two years after the Change in Control; (ii) such option or SAR is terminated or adversely modified; or (iii) PBG Common Stock is no longer issued and outstanding, or no longer traded on a national securities exchange, then the holder of such option or SAR shall immediately be entitled to receive a lump sum cash payment equal to the gain on such option or SAR on the date such option or SAR becomes unexercisable. For purposes of the preceding sentence, the gain on a stock option or SAR shall be calculated as the difference between the Fair Market Value per share of PBG Common Stock as of the date such option or SAR becomes unexercisable less the exercise price per share of such option or SAR. (b) Performance Units, Restricted Stock or Share Awards. Each performance unit, restricted sock and share award granted under the LTIP that are outstanding on the date of the Change in Control shall immediately vest, and the holder of such performance unit, restricted stock or share award shall be entitled to a lump sum cash payment equal to the amount of such award payable at the end of the performance period as if 100% of the performance objectives have been achieved. (c) Time of Payment. Any amount required to be paid pursuant to this Section shall be paid within 20 days after the date such amount becomes payable. (d) Definition. A "Change in Control" means the occurrence of any of the following events: (i) any individual, corporation, partnership, group, association or other entity, other than PepsiCo, Inc. ("PepsiCo") or an entity approved by PepsiCo, is or becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Securities Exchange Act of 1934), directly or indirectly, of 50% or more of the combined voting power of PBG's outstanding securities ordinarily having the right to vote at elections of directors; (ii) during any consecutive two-year period, persons who constitute the Board at the beginning of the period cease to constitute at least 50% of the Board (unless the election of each new Board member was approved by a majority of directors who began the two-year period or was approved by PepsiCo); (iii) the approval by the shareholders of PBG of a plan or agreement providing for a merger or consolidation of PBG with another company, other than with PepsiCo or an entity approved by PepsiCo, and PBG is not the surviving company (unless the shareholders of PBG prior to the merger or consolidation continue to have 50% or more of the combined voting power of the surviving company's outstanding securities); or (iv) the sale, exchange or other disposition of all or substantially all of PBG's assets, other than to PepsiCo or an entity approved by PepsiCo. In addition, a "Change in Control" means the occurrence of any of the following events with respect to PepsiCo: (i) any individual, corporation, partnership, group, association or other entity is or becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Securities Exchange Act of 1934), directly or indirectly, of 20% or more of the combined voting power of PepsiCo's outstanding securities ordinarily having the right to vote at elections of directors; excluding, however, any acquisition by PepsiCo or any acquisition by an employee benefit plan or related trust sponsored or maintained by PepsiCo; (ii) during any consecutive two-year period, persons who constitute the Board of Directors of PepsiCo (the "PepsiCo Board") at the beginning of the period cease to constitute at least 50% of the PepsiCo Board (unless the election of each new PepsiCo Board member was approved by a majority of directors who began the two-year period); (iii) the approval by the shareholders of PepsiCo of a plan or agreement providing for a merger or consolidation of PepsiCo with another company, and PepsiCo is not the surviving company (unless the shareholders of PepsiCo prior to the merger or consolidation continue to have 50% or more of the combined voting power of the surviving company's outstanding securities); or (iv) the sale, exchange or other disposition of all or substantially all of PepsiCo's assets. 10. MISCELLANEOUS PROVISIONS. (a) Rights as Shareholder. A participant in the Plan shall have no rights as a holder of Common Stock with respect to awards hereunder, unless and until certificates for shares of Common Stock are issued to such participant. (b) Assignment or Transfer. Unless the Committee shall specifically determine otherwise, no award granted under the Plan or any rights or interests therein shall be assignable or transferable by a participant, except by will or the laws of descent and distribution. (c) Agreements. All awards granted under the Plan shall be evidenced by agreements in such form and containing such terms and conditions (not inconsistent with the Plan), as the Committee shall approve. (d) Requirements for Transfer. No share of Common Stock shall be issued or transferred under the Plan until all legal requirements applicable to the issuance or transfer of such shares have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any issuance of shares of Common Stock made to any participant upon such participant's written undertaking to comply with such restrictions on his subsequent disposition of such shares as the Committee or PBG shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. (e) Withholding Taxes. PBG shall have the right to deduct from all awards hereunder paid in cash any federal, state, local or foreign taxes required by law to be withheld with respect to such awards, and with respect to awards paid or satisfied in stock, to require the payment (through withholding from the participant's salary or otherwise) of any such taxes. The obligations of PBG to make delivery of awards in cash or Common Stock shall be subject to currency or other restrictions imposed by any government. (f) No Implied Rights to Awards. Except as set forth herein, no employee or other person shall have any claim or right to be granted an award under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company. (g) Costs and Expenses. The cost and expenses of administering the Plan shall be borne by PBG and not charged to any award nor to any employee receiving an award. (h) Funding of Plan. 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. 11. EFFECTIVE DATE, AMENDMENTS AND TERMINATION. (a) Effective Date. The Plan shall become effective on its approval by PBG's shareholders. (b) Amendments. The Committee may at any time terminate or from time to time amend the Plan in whole or in part, but no such action shall adversely affect any rights or obligations with respect to any awards theretofore granted under the Plan. In addition, unless the shareholders of PBG shall have first approved, no amendment of the Plan shall be effective which would: (i) modify the requirements as to eligibility for participation in the Plan; (ii) increase the maximum number of shares of Common Stock which may be delivered under the Plan or to any one individual, except to the extent such amendment is made pursuant to Section 7 hereof, (iii) change the performance criteria for performance units, or (iv) decrease the minimum option or SAR exercise price. The Committee may, at any time, amend outstanding agreements evidencing awards under the Plan in a manner not inconsistent with the terms of the Plan; provided, however, that if such amendment is adverse to the participant, the amendment shall not be effective unless and until the participant consents, in writing, to such amendment. (c) Termination. No awards shall be granted under the Plan after December 31, 2007. Determination of the award actually earned and payout or settlement of the award may occur later. EX-10.16 7 y84636exv10w16.txt FORM OF INTL. MASTER BOTTLING AGREEMENT FOR MEXICO Exhibit 10.16 INTERNATIONAL MASTER BOTTLING AGREEMENT BETWEEN PEPSICO, INC. AND PEPSI-GEMEX, S.A. DE C.V. INTERNATIONAL MASTER BOTTLING AGREEMENT THIS AGREEMENT, (this "Agreement") effective as of ___________, 2002, is made and entered into by and between PEPSICO, INC., a corporation organized and existing under the laws of the State of North Carolina having its principal place of business in Purchase, New York (the "Company"), and Pepsi-Gemex S.A. de C.V., a corporation organized and existing under the laws of Mexico having its principal place of business in Mexico City, Mexico (the "Bottler"). W I T N E S S E T H : WHEREAS A. The Company manufactures and sells the concentrates (the "Concentrates") for the Beverages (as hereinafter defined). The Company authorizes others to manufacture the syrups prepared from the Concentrates for the Beverages (the "Syrups") and to manufacture from the Syrups and sell the soft drinks identified on Schedule A (the Syrups and the soft drinks identified on Schedule A, as modified from time to time under paragraphs 21 and 22, are together referred to herein as the "Beverages"). The formulas for the Concentrates, Syrups and Beverages constitute trade secrets owned by the Company; B. The Company is the owner of certain proprietary intellectual property, including, without limitation, trademarks, trade dress, logos, designs and 2 slogans, used in connection with the brands listed in Schedule A (together with such other trademarks as may be authorized by the Company from time to time for current use by the Bottler under this Agreement, the "Trademarks"), which, among other things, identify and distinguish the Concentrates and the Beverages; C. The Bottler had been authorized by Company to bottle Beverages in Mexico pursuant to certain agreements with the Company (collectively, together with all amendments thereto, the "Existing Bottling Appointments"), either directly or indirectly through one or more persons controlling, controlled by or under common control with the Bottler (the "Bottler Affiliates"); D. The reputation of the Beverages as being of consistently superior quality has been a major factor in stimulating and sustaining demand for the Beverages, and special technical skill and constant diligence on the part of the Bottler and the Company are required in order for the Beverages to maintain the excellence that consumers expect; and E. Conditions affecting the production, sale and distribution of Beverages have changed since the Company and the Bottler, or its predecessors-in-interest, entered into the Existing Bottling Appointments, and as a consequence, the Company and the Bottler desire to amend the Existing Bottling Appointments, the terms of the Existing Bottling Appointments, as so amended, being replaced and restated in the form of this Agreement; NOW THEREFORE, for and in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and 3 sufficiency of which are hereby acknowledged, the Company and the Bottler agree as follows: ARTICLE I The Authorization 1. The Company authorizes the Bottler, and the Bottler undertakes, to manufacture and package the Beverages and to distribute and sell the Beverages only in Authorized Containers, as hereinafter defined, under the Trademarks in and throughout the territory described in Schedule B (together with any territories added under paragraph 31, and subject to the possible elimination of subterritories under paragraph 29, the "Territory"). 2. The Company will, from time to time, in its discretion, approve containers of certain types, sizes, shapes and other distinguishing characteristics (collectively, subject to any additions, deletions and modifications by the Company, the "Authorized Containers"). A list of Authorized Containers for each Beverage will be provided by the Company to the Bottler, which list may be amended by the Company from time to time by additions, deletions or modifications. The Bottler is authorized to use only Authorized Containers in the manufacture, distribution and sale of the Beverages. The Company reserves the right to withdraw from time to time its approval of any of the Authorized Containers upon six (6) months notice to the Bottler, and, in such event, the repurchase provisions of subparagraph 28(e) shall apply to containers so disapproved that are owned by the Bottler. The Company will exercise its right to approve, and to withdraw its approval of, 4 specific Authorized Containers in good faith so as to permit the Bottler to continue to fully meet the demand in the Territory as a whole for Beverages. ARTICLE II Exclusive Authorization 3. The Company appoints the Bottler as its sole and exclusive purchaser of the Concentrates for the purpose of manufacture, packaging and distribution of the Beverages under the Trademarks in Authorized Containers for sale in the Territory; 4. The Company agrees not to authorize any other party whatsoever to use the Trademarks on Beverages in Authorized Containers for purposes of resale in the Territory. 5. The Bottler shall purchase its entire requirements of Concentrates exclusively from the Company and shall not use any other syrup, beverage base, concentrate or other ingredient in the Beverages than as specified by the Company. ARTICLE III Obligations of Bottler Relating to Trademarks and Other Matters 6. The Bottler acknowledges that the Company is the sole and exclusive owner of the Trademarks, and the Bottler agrees not to question or dispute the 5 validity of the Trademarks or their exclusive ownership by the Company. By this Agreement, the Company extends to the Bottler only: (i) a nonexclusive license to use the trademark "Pepsi-Cola" as part of the corporate name of the Bottler; and (ii) an exclusive license to use the Trademarks solely in connection with the manufacture, packaging, distribution, and sale of the Beverages in Authorized Containers in the Territory subject to the rights reserved to the Company under this Agreement. Nothing herein, nor any act or failure to act by the Bottler or the Company, shall give the Bottler any proprietary or ownership interest of any kind in the Trademarks or in the goodwill associated therewith. 7. The Bottler agrees during the term of this Agreement and in accordance with any requirements imposed upon the Bottler under applicable laws that neither it nor any Bottler Affiliate will: (a) Produce, manufacture, package, sell, deal in or otherwise use or handle, directly or indirectly, any "Cola Product" (herein defined to mean any soft drink beverage which is generally marketed as a cola product or which is generally perceived as being a cola product) other than a soft drink manufactured, packaged, distributed or sold by the Bottler under authority of the Company; (b) Manufacture, package, sell, deal in or otherwise use or handle, directly or indirectly, any concentrate, beverage base, syrup, beverage or any other product which is similar to, likely to be confused with, or passed off for, any of the Concentrates or Beverages; 6 (c) Manufacture, package, sell, deal in or otherwise use or handle, directly or indirectly, any product under any trade dress or in any container that is an imitation of a trade dress or container in which the Company claims a proprietary interest or which is likely to be confused or cause confusion or be confusingly similar to or be passed off as such trade dress or container; (d) Manufacture, package, sell, deal in or otherwise use or handle, directly or indirectly, any product under any trademark or other designation that is an imitation, counterfeit, copy or infringement of, or confusingly similar to, any of the Trademarks; or (e) Acquire or hold, directly or indirectly, any ownership interest in, or, directly or indirectly, enter into any contract or arrangement with respect to, the management or control of, any person within or without the Territory that engages in any of the activities prohibited by subparagraphs (a), (b), (c) or (d) of this paragraph 7. ARTICLE IV Obligations of Bottler Relating to Manufacture and Packaging of the Beverages 8. (a) The Bottler represents and warrants that the Bottler possesses, or will possess, in the Territory, prior to the manufacture, packaging and distribution of the Beverages, and will maintain during the term of this Agreement, such plant or plants, machinery and equipment, 7 trained staff, and distribution and vending facilities as are capable of manufacturing, packaging and distributing the Beverages in Authorized Containers in accordance with this Agreement, in compliance with all applicable governmental and administrative requirements, and in sufficient quantities to fully meet the demand for the Beverages in Authorized Containers in the Territory. (b) The Company and the Bottler acknowledge that each is or may become a party to one or more agreements authorizing a bottler or other Company-authorized entity to produce Beverages for sale by another bottler. Such agreements include, but are not limited to (i) agreements permitting bottlers, subject to certain conditions, to commence or continue to manufacture the Beverages for other bottlers, and (ii) agreements pursuant to which bottlers may have the Beverages manufactured for them by other Company-authorized entities. It is hereby agreed that the Company shall not unreasonably withhold (i) any consents required by such agreements, or (ii) approval of Bottler's participation in such agreements. All such existing agreements shall remain in full force and effect in accordance with their terms. 9. The Bottler recognizes that increases in the demand for the Beverages, as well as changes in the list of Authorized Containers, may, from time to time, require adaptation of its existing manufacturing, packaging or delivery equipment or the purchase of additional manufacturing, packaging and delivery equipment. The Bottler agrees to make such modifications and adaptations as necessary and to purchase and install such equipment, in time to permit the introduction and manufacture, packaging and delivery of 8 sufficient quantities of the Beverages in the Authorized Containers, to fully meet the demand for the Beverages in Authorized Containers in the Territory. 10. The Bottler warrants that the handling and storage of the Concentrates; and the manufacture, handling, storage, and packaging of the Beverages shall be accomplished in accordance with the Company's quality control and sanitation standards, as reasonably established by the Company and communicated to the Bottler from time to time, and shall, in any event, conform with all food, labeling, health, packaging and other relevant laws and regulations applicable in the Territory. 11. The Bottler, in accordance with such instructions as may be given from time to time by the Company, shall submit to the Company, at the Bottler's expense, samples of the Beverages and the raw materials used in the manufacture of the Beverages. The Bottler shall permit representatives of the Company to have access to the premises of the Bottler during ordinary business hours to inspect the plant, equipment, and methods used by the Bottler in order to ascertain whether the Bottler is complying with the instructions and standards prescribed for the manufacturing, handling, storage and packaging of the Beverages. 12. (a) For the packaging, distribution and sale of the Beverages, the Bottler shall use only such Authorized Containers, closures, cases, cartons and other packages and labels as shall be authorized from time to time by the Company for the Bottler and shall purchase such items only from manufacturers approved by the Company, which approval 9 shall not be unreasonably withheld. Such approval by the Company does not relieve the Bottler of the Bottler's independent responsibility to assure that the Authorized Containers, closures, cases, cartons and other packages and labels purchased by the Bottler are suitable for the purpose intended, and in accordance with the good reputation and image of excellence of the Trademarks and Beverages. (b) The Bottler shall maintain at all times a stock of Authorized Containers, closures, labels, cases, cartons, and other essential related materials bearing the Trademarks, sufficient to fully meet the demand for Beverages in Authorized Containers in the Territory, and the Bottler shall not use or permit the use of Authorized Containers, or such closures, labels, cases, cartons and other materials, if they bear the Trademarks or contain any Beverages, for any purpose other than the packaging and distribution of the Beverages. The Bottler further agrees not to refill or otherwise reuse nonreturnable containers. 13. If the Company determines the existence of quality or technical difficulties with any Beverage, or any package used for such product, the Company shall have the right, immediately and at its sole option, to withdraw such product or any such package from the market. The Company shall notify the Bottler in writing of such withdrawal, and the Bottler shall, upon receipt of notice, immediately cease distribution of such product or such package therefor. If so directed by the Company, the Bottler shall recall and reacquire the product or package involved from any purchaser thereof. If any recall of any product or any of the packages used therefor is caused by 10 (i) quality or technical defects in the Concentrate, or other materials prepared by the Company from which the product involved was prepared by the Bottler, or (ii) quality or technical defects in the Company's designs and design specifications of packages which it has imposed on the Bottler or the Bottler's third party suppliers if such designs and specifications were negligently established by the Company (and specifically excluding designs and specifications of other parties and the failure of other parties to manufacture packages in strict conformity with the designs and specifications of the Company), the Company shall reimburse the Bottler for the Bottler's total expenses incident to such recall. Conversely, if any recall is caused by the Bottler's failure to comply with instructions, quality control procedures or specifications for the preparation, packaging and distribution of the product involved, the Bottler shall bear its total expenses of such recall and reimburse the Company for the Company's total expenses incident to such recall. ARTICLE V Conditions of Purchase and Sale 14. The Company reserves the right to establish and to revise at any time, in its sole discretion, the price of any of the Concentrates, the terms of payment, and the other terms and conditions of supply, any such revision to be effective immediately upon notice to the Bottler. If Bottler rejects a change in price or the other terms and conditions contained in any such notice, then the Bottler shall so notify the Company within thirty (30) days of receipt of the Company's notice, and this Agreement will terminate ninety (90) days after the date of such notification by the Bottler, without further liability of 11 the Company or the Bottler. The change in price or other terms and conditions so rejected by the Bottler shall not apply to purchases of such Concentrate by the Bottler during such ninety (90) day period preceding termination. Failure by the Bottler to notify the Company of its rejection of the changes in price or such other terms and conditions shall be deemed acceptance thereof by the Bottler. 15. The Bottler shall purchase from the Company only such quantities of the Concentrates as shall be necessary and sufficient to carry out the Bottler's obligations under this Agreement. The Bottler shall use the Concentrates exclusively for its manufacture of the Beverages. The Bottler shall not sell or otherwise transfer any Concentrate or permit the same to get into the hands of third parties. 16. (a) The Bottler agrees not to distribute or sell any Beverage outside the Territory except pursuant to another Exclusive Bottling Appointment granted by the Company. The Bottler shall not sell any Beverage to any person (other than another Bottler pursuant to subparagraph 8(b)) for ultimate sale outside the Territory. If any Beverage distributed by the Bottler is found outside of the Territory, Bottler shall be deemed to have transshipped such Beverage and shall be deemed to be a "Transshipping Bottler" for purposes hereof. For purposes of this Agreement, "Offended Bottler" shall mean a Bottler in any territory into which any Beverage is transshipped. (b) In addition to all other remedies the Company may have against any Transshipping Bottler for violation of this paragraph 16, the 12 Company may impose upon any Transshipping Bottler a charge for each case of Beverage transshipped by such Bottler. The per-case amount of such charge shall be determined by the Company in its sole discretion. The Company and the Bottler agree that the amount of such charge shall be deemed to reflect the damages to the Company, the Offended Bottler and the bottling system. In addition, the Company may directly charge the Transshipping Bottler the full amount of all investigative and other costs incurred by the Company in connection with the transshipment and such Transshipping Bottler shall be obligated to pay such amount. The Company shall forward to the Offended Bottler, upon receipt from the Transshipping Bottler, the full amount of the per case charge so received (but not including investigative and other costs charged to the Transshipping Bottler by the Company). If the Company or its agent recalls any Beverage which has been transshipped, the Transshipping Bottler shall, in addition to any other obligation it may have hereunder, reimburse the Company for its costs of purchasing, transporting, and/or destroying such Beverage. ARTICLE VI Obligations of the Bottler Relating to the Marketing of the Beverages Financial Capacity and Planning 17. The continuing responsibility to increase and fully meet the demand for the Beverages in Authorized Containers within the Territory rests upon the 13 Bottler. The Bottler agrees to use all approved means as may be reasonably necessary to meet this responsibility. 18. (a) The Bottler will push vigorously the sale of the Beverages in Authorized Containers throughout the entire Territory. Without in any way limiting the Bottler's obligation under this Paragraph 18, the Bottler must fully meet and increase the demand for the Beverages throughout the Territory and secure full distribution up to the maximum sales potential therein through all distribution channels or outlets available to soft drinks, using any and all equipment reasonably necessary to secure such distribution; must service all accounts with frequency adequate to keep them at all times fully supplied with the Beverages and must use its own salesmen and trucks, (or salesmen and trucks of independent distributors, of whom the Company approves), in quantity adequate for all seasons. (b) The parties agree that to fully meet and increase demand for the Beverages in Authorized Containers advertising and other forms of marketing activities are required. Therefore, the Bottler will spend such funds in advertising and marketing the Beverages as may be reasonably required to increase, as well as maintain, demand for the Beverages in Authorized Containers in the Territory. The Bottler shall fully cooperate in and vigorously push all cooperative advertising and sales promotion programs and campaigns that may be reasonably established by the Company for the Territory. The Bottler will use and publish only such advertising, promotional materials or other items bearing the Trademarks relating to the 14 Beverages as the Company has approved and authorized. The expenditures required by this Article VI shall be made by the Bottler. The Company may, in its sole discretion, contribute to such expenditures. The Company may also undertake, at its expense, independently of the Bottler's marketing programs, any advertising or promotional activity that the Company deems appropriate to conduct in the Territory, but this shall in no way affect the responsibility of the Bottler for increasing the demand for the Beverages in Authorized Containers in the Territory. 19. The Bottler and all Bottler Affiliates shall maintain the consolidated financial capacity reasonably necessary to assure that the Bottler and all Bottler Affiliates directly or indirectly controlled by the Bottler will be financially able to perform their respective duties and obligations under this Agreement and under all other agreements between the Company and Bottler Affiliates regarding the manufacture, packaging, distribution and sale of the Beverages in "authorized containers" (as defined in such agreements). 20. (a) The Company and the Bottler have agreed upon a business plan for the first three years occurring during the term of this Agreement. Since periodic planning is essential for the proper implementation of this Agreement, the Bottler and the Company shall meet each year at such date as the parties may set (but no later than ninety (90) days prior to the commencement of any calendar year during the term of this Agreement beginning with the commencement of the calendar 15 year closest to the anniversary date of this Agreement), to discuss the Bottler's plans for the ensuing three (3) year period. At such meeting, the Bottler shall present a plan that sets out in reasonable detail satisfactory to the Company: (i) the marketing plans, management plans and advertising plans of the Bottler with respect to the Beverages for the ensuing year, including a financial plan showing that the Bottler and all Bottler Affiliates have the consolidated financial capacity to perform their respective duties and obligations under this Agreement and any other agreement with the Company regarding the manufacture, packaging, distribution and sale of the Beverages in "authorized containers" (as defined in such agreements) and specifically setting forth the projected cash flows, income and balance sheet (including any capitalization plans) of the Bottler and the Bottler Affiliates for such ensuing year and (ii) the projected sales, marketing and advertising plans and related capital expenditures for the two years immediately following such year. Senior management of the Company and the Bottler shall discuss this plan and this plan, upon approval by the Company (represented by such senior management), which shall not be unreasonably withheld, shall define the Bottler's obligation herein to maintain such consolidated financial capacity and to increase and fully meet the demand for the Beverages in Authorized Containers in the Territory for the period of time covered by the plan. (b) The Bottler shall report to the Company periodically, but not less than quarterly, as to its implementation of the approved plan; it is understood, however, that the Bottler shall report sales on a regular basis as requested by the Company and in such format and detail, 16 and containing such information as may be reasonably requested by the Company. The failure by the Bottler to carry out the plan, or if the plan is not presented or is not approved, will constitute a primary consideration for determining whether the Bottler has fulfilled its obligation to maintain the consolidated financial capacity required under paragraph 19 and to push vigorously the sale of Beverages in Authorized Containers throughout the Territory and to increase and fully meet the demand for the Beverages in Authorized Containers in the Territory. If the Bottler carries out the plan in all material respects, it shall be deemed to have satisfied the obligations of the Bottler under paragraphs 17, 18, 19 and 20 for the period of time covered by the plan. (c) Neither the Bottler nor any Bottler Affiliate shall make any significant change in the capitalization, debt level or methods of financing the operations of the Bottler and Bottler Affiliates set forth in any projected balance sheet of the Bottler and Bottler Affiliates approved under Paragraph 20(a) hereof without the consent of the Company. ARTICLE VII Reformulation, New Products and Related Matters 21. The Company has the sole and exclusive right and discretion to reformulate any of the Beverages. In addition, the Company has the sole and exclusive right and discretion to discontinue any of the Beverages under this Agreement, provided (i) such Beverage is discontinued in Mexico in Authorized Containers and in such other containers as may have been 17 authorized for use by other Bottlers under their respective bottle contracts, and (ii) the Company does not discontinue all Beverages under this Agreement. In the event that the Company discontinues any Beverage, Schedule A to this Agreement shall be deemed amended by deleting the discontinued Beverage from the list of Beverages set forth on Schedule A. 22. In the event that the Company introduces any new beverage in the Territory under the trademarks "Pepsi-Cola" or "Pepsi" or any modification thereof (herein defined to mean the addition of a prefix, suffix or other modifier used in conjunction with the trademarks "Pepsi-Cola" or "Pepsi"), the Bottler shall be obligated to manufacture, package, distribute and sell such new beverage in Authorized Containers in the Territory pursuant to the terms and conditions of this Agreement, and Schedule A to this Agreement shall be deemed amended by adding such new beverage to the list of beverages set forth on Schedule A. 23. The Company has the unrestricted right to use the Trademarks on the Beverages and on all other products and merchandise other than the Beverages in Authorized Containers in the Territory. ARTICLE VIII Term and Termination of the Agreement 24. The term of this Agreement shall commence on the effective date hereof and, unless earlier terminated in accordance with its provisions, will continue perpetually. 18 25. The obligation to supply Concentrates to the Bottler and the Bottler's obligation to purchase Concentrates from the Company and to manufacture, package, distribute and sell the Beverages under this Agreement shall be suspended during any period when any of the following conditions exist: (a) There shall occur a change in the law or regulation (including, without limitation, any government permission or authorization regarding customs, health or manufacturing) in such a manner as to render unlawful or commercially impracticable: (i) the importation of Concentrate or any of its essential ingredients, which cannot be produced in quantities sufficient to satisfy the demand therefor by existing Company facilities; or (ii) the manufacture and distribution of the Concentrates or Beverages; or (b) There shall occur any inability or commercial impracticability of either of the parties to perform resulting from an act of god, or "force majeure," public enemies, boycott, quarantine, riot, strike, or insurrection, or due to a declared or undeclared war, belligerency or embargo, sanctions, blacklisting, or other hazard or danger incident to the same, or resulting from any other cause whatsoever beyond its control. If any of the conditions described in this paragraph 25 persists so that either party's obligation to perform is suspended for a period of six (6) months or 19 more, the other party may terminate this Agreement forthwith, upon notice to the party whose obligation to perform is suspended. 26. (a) The Company may terminate this Agreement in the event of the occurrence of any of the following events of default: (i) If the Bottler or any Bottler Affiliate becomes insolvent; if a petition in bankruptcy is filed against or on behalf of the Bottler or Bottler Affiliate which is not stayed or dismissed within sixty (60) days; if the Bottler or Bottler Affiliate is put in liquidation or placed under sequester; if a receiver is appointed to manage the business of the Bottler or Bottler Affiliate; or if the Bottler or Bottler Affiliate enters into any judicial or voluntary arrangement or composition with its creditors, or concludes any similar arrangements with them or makes an assignment for the benefit of creditors; (ii) If the Bottler or Bottler Affiliate adopts a plan of dissolution or liquidation other than a plan of dissolution or liquidation that results in the transfer or other disposition of assets from the Bottler or Bottler Affiliate to one or more wholly-owned subsidiary of such Bottler or Bottler Affiliate; (iii) If any person or any Affiliated Group (as hereinafter defined), other than any person or any Affiliated Group acting with the consent of the Company, acquires, or obtains any contract, option, conversion privilege or other right to acquire, directly or indirectly, Beneficial 20 Ownership (as hereinafter defined) of more than fifteen percent (15%) of any class or series of voting securities of the Bottler or Bottler Affiliate and if such person or Affiliated Group does not divest itself of Beneficial Ownership of such voting securities or otherwise terminate any such contract, option, conversion privilege or other right to a level equal to or below fifteen percent (15%) within thirty (30) days after the Company notifies the Bottler that the failure of such person or Affiliated Group to thus divest or terminate may result in termination of this Agreement; (iv) If any Disposition (as hereinafter defined) is made without the consent of the Company by Bottler or by any Bottler Affiliate of any voting securities of Bottler or any Bottler Affiliate; (v) If any agreement regarding the manufacture, packaging, distribution or sale of the Beverages in "authorized containers" (as defined in such agreement) between the Company and Bottler or any Bottler Affiliate is terminated, unless the Company agrees in writing that this subparagraph 26(a)(v) will not be applied by the Company to such termination; (vi) If the Bottler, any Bottler Affiliate or any person in which the Bottler or any Bottler Affiliate has Beneficial Ownership of any equity or voting securities, or in which the Bottler or any Bottler Affiliate has a right or control of management, or which controls or is under common control with the Bottler, should engage directly or indirectly in the manufacture, distribution or marketing of any product specified in subparagraphs (a), (b), (c) or (d) of paragraph 7 above, 21 or should obtain a right or license to do the same, and if the Company has given the Bottler notice that such condition exists and that the Company will terminate this Agreement within six (6) months if such condition is not eliminated, and if such condition has not been eliminated within the six (6) month period. (vii) If all or substantially all of the Bottler's or any Bottler Affiliate's bottling assets are sold, transferred or otherwise disposed of (including any transfer by operation of law) other than sales, transfers or other dispositions of assets by the Bottler or one or more Bottler Subsidiaries or Bottler Affiliates to one or more wholly-owned subsidiaries of such Bottler, Bottler Subsidiary or Bottler Affiliate. (viii)If the Bottler or any Bottler Affiliate shall engage in any business other than (x) the business of manufacturing, selling or distributing non-alcoholic beverages or (y) any business which is directly related and incidental to such beverage business. (b) The Bottler covenants and agrees with the Company: (i) to notify the Company promptly in the event of or upon obtaining knowledge of any third party action which may or will result in any change in ownership described in Section 26(a)(iii) above; (ii) to make available from time to time and at the request of the Company complete records of current ownership of the 22 Bottler and all Bottler Affiliates and full information concerning any entities or parties by whom it is controlled directly or indirectly or which it controls; and (iii) to the extent the Bottler has any legal control over changes in the ownership of the Bottler or any entity having direct or indirect ownership or control of the Bottler as described in Section 26(a)(iii) above, not to initiate or implement, consent to or acquiesce in any such change without the prior written consent of the Company. (c) For the purposes of this Agreement: (i) "Affiliated Group" shall mean two or more persons acting as a partnership, limited partnership, syndicate or other group, or who agrees to act together, for the purpose of acquiring, holding, voting or making any Disposition of any voting securities of the Bottler or any Bottler Affiliate; provided further that the Affiliated Group formed thereby shall be deemed to have acquired Beneficial Ownership of all voting securities of the Bottler or any Bottler Affiliate beneficially owned by any such persons. (ii) "Beneficial Ownership" shall mean (i) voting power which includes the power to vote, or to direct the voting of, any securities, or (ii) investment power which includes the power to dispose, or to direct the Disposition of, any securities; provided further Beneficial Ownership shall include any such 23 voting power or investment power which any person has or shares, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise; provided, however, that the following persons shall not be deemed to have acquired Beneficial Ownership under the circumstances described: (a) a person engaged in business as an underwriter of securities who acquires securities through his participation in good faith in a firm commitment underwriting registered under the Securities Act of 1933 shall not be deemed to be the Beneficial Owner of such securities until such time as such underwriter completes his participation in the underwriting and shall not thereupon or thereafter be deemed to be the Beneficial Owner of the securities acquired by other members of any underwriting syndicate or selected dealers in connection with such underwriting solely by reason of customary underwriting or selected dealer arrangements; (b) a member of a national securities exchange shall not be deemed to be a Beneficial Owner of securities held directly or indirectly by it on behalf of another person solely because such member is the record holder of such securities and, pursuant to the rules of such exchange, may direct the vote of such securities, without instruction, on other than contested matters or matters that may affect substantially the rights or privileges of the holders of the securities to be voted, but is otherwise precluded by the rules of such exchange from voting without instruction; and (c) the holder of a proxy solicited by the Board of Directors of the Bottler for the voting of securities of such Bottler at any 24 annual or special meeting and any adjournment or adjournments thereof of the stockholders of such Bottler shall not be deemed to be a Beneficial Owner of the securities that are the subject of the proxy solely for such reason. (iii) "Bottler Subsidiary" shall mean any person that is controlled directly or indirectly by the Bottler and either participates in the manufacture, packaging, distribution or sale of the Beverages in Authorized Containers or has a direct or indirect equity interest in another Bottler Subsidiary that does so participate; (iv) "Disposition" shall mean any sale, merger, issuance of securities, or other transaction in which, or as a result of which, any person other than Bottler or a wholly owned subsidiary of Bottler, acquires, or obtains any contract, option, conversion privilege or other right to acquire Beneficial Ownership of any securities. (d) Upon the occurrence of any of the events of default specified in subparagraphs 26(a) and (b), the Company may terminate this Agreement by giving the Bottler notice to that effect, effective immediately. 27. (a) In addition to the events of a default described in paragraph 26, the Company may also terminate this Agreement, subject to the 25 limitations of subparagraph 27(b), in the event of the occurrence of any of the following events of default: (i) If the Bottler or a Bottler Affiliate fails to make timely payment for Concentrate or of any other debt owing to the Company; (ii) If the condition of the plant or equipment used by the Bottler in manufacturing, packaging or distributing the Beverages fails to meet the sanitary standards reasonably established by the Company; (iii) If the Beverages manufactured by the Bottler fail to meet the quality control standards reasonably established by the Company; (iv) If the Beverages are not manufactured in strict conformity with such standards and instructions as the Company may reasonably establish; (v) If the Bottler fails to present or carry out a plan approved under paragraph 20 in all material respects; or (vi) If the Bottler materially breaches any of the Bottler's other obligations under this Agreement. The standards and instructions of the Company comprise privately published information concerning the manufacture, handling and 26 storage of the Beverages under good manufacturing practices, as well as technical instructions, bulletins and other communications issued or amended from time to time by the Company. (b) Upon the occurrence of any of the foregoing events of default, the Company shall, as a condition to termination of this Agreement under this paragraph 27, give the Bottler notice thereof. The Bottler shall then have a period of sixty (60) days within which to cure the default, including, at the instruction of the Company and at the Bottler's expense, by the prompt withdrawal from the market and destruction of any Beverage that fails to meet the quality control standards of the Company or any Beverage that is not manufactured in accordance with the instructions of the Company. If such default has not been cured within such period, then the Company may, by giving the Bottler further notice to such effect, suspend sales to the Bottler of Concentrates and require the Bottler to cease production of the Beverages and the packaging and distribution of Beverages in Authorized Containers. During such second period of sixty (60) days, the Company also may supply, or cause or permit others to supply, the Beverages in Authorized Containers under the Trademarks in the Territory. If such default has not been cured during such second period of sixty (60) days, then the Company may terminate this Agreement, by giving the Bottler notice to such effect, effective immediately. 28. Upon the termination of this Agreement: 27 (a) The Bottler shall forthwith take such action as necessary to eliminate the trademark "Pepsi-Cola" from its corporate name; (b) Any other agreement between the Company and the Bottler or any Bottler Affiliate regarding the manufacture, packaging, distribution, sale or promotion of soft drinks in "authorized containers" (as defined in such agreement) may, at the election of the Company, be automatically terminated and thereby become of no further force or effect. (c) Thereafter, neither the Bottler nor any Bottler Affiliate will continue to manufacture, package, distribute or sell any of the Beverages in Authorized Containers or to make any use of the Trademarks or Authorized Containers, or any closures, cases, labels or advertising material bearing the Trademarks; (d) The Bottler and the Bottler Affiliate shall forthwith remove and efface all reference to the Company, the Beverages and the Trademarks from the business premises and equipment of the Bottler and the Bottler Affiliate and from all business papers and advertising used or maintained by the Bottler and the Bottler Affiliate; and they shall not thereafter hold forth in any manner whatsoever that they have any connection with the Company or the Beverages; and, (e) The Bottler shall forthwith deliver all Concentrate, Beverage, usable returnable or any nonreturnable containers, cases, closures, labels, and advertising material bearing the Trademarks, still in the Bottler's or a Bottler Affiliate's possession or under the Bottler's or a Bottler 28 Affiliate's control, to the Company or the Company's nominee, as instructed, and, upon receipt, the Company shall pay to the Bottler or the Bottler Affiliate a sum equal to the reasonable market value of such supplies or materials. The Company will accept and pay for only such articles as are, in the opinion of the Company, in first-class and usable condition, and all other such articles shall be destroyed at the Bottler's or the Bottler Affiliate's expense. Containers, closures and advertising material and all other items bearing the name of the Bottler or a Bottler Affiliate, in addition to the Trademarks, that have not been purchased by the Company shall be destroyed without cost to the Company, or otherwise disposed of in accordance with instructions given by the Company, unless the Bottler or Bottler Affiliate can remove or obliterate the Trademarks therefrom to the satisfaction of the Company. The provisions for repurchase contained in subparagraph 28(e) shall apply with regard to any Authorized Container, approval of which has been withdrawn by the Company under paragraph 2; upon termination by either party under paragraph 25; and upon termination by the Bottler under subparagraph 14. In all other cases, the Company shall have the right, but not the obligation, to purchase the aforementioned items from the Bottler or Bottler Affiliate. 29. (a) Subject to the limitations set forth in subparagraph 29(b), in the event that the Bottler at any time fails to carry out a plan approved under paragraph 20 in all material respects in any segment of the Territory, whether defined geographically or by type of market or outlet, which segment shall be defined by the Company (hereinafter 29 "Subterritory"), the Company may reduce the Territory covered by this Agreement, and thereby restrict the Bottler's authorization hereunder to the remainder of the Territory, by eliminating the Subterritory from the Territory covered by this Agreement. (b) In the event of such failure, the Company may eliminate Subterritories from the Territory covered by this Agreement by giving the Bottler notice to that effect, which notice shall define the Subterritory or Subterritories to which the notice applies. The Bottler shall then have a period of six (6) months within which to cure such failure. If the Bottler has not cured such failure in such six (6) month period, the Company may eliminate such Subterritory or Subterritories from the Territory by giving the Bottler further notice to that effect, effective immediately. (c) Upon elimination of any Subterritory from the Territory: (i) Schedule B to this Agreement shall be deemed amended by eliminating such Subterritory from the Territory described on Schedule B; (ii) The Company may manufacture, package, distribute and sell the Beverages in Authorized Containers under the Trademarks in such Subterritory, or authorize others to do so; (iii) Any other agreement between the Bottler, a Bottler Affiliate and the Company regarding the manufacture, packaging, distribution or sale of soft drinks in "authorized containers" 30 (as defined in such agreement) in such Subterritory may, at the election of the Company, be automatically terminated and thereby become of no further force or effect in such Subterritory; (iv) The Bottler shall not thereafter continue to manufacture, package, distribute or sell any of the Beverages in Authorized Containers in such Subterritory, or to make any use of the Trademarks, Authorized Containers, closures, cases, labels or advertising material bearing the Trademarks in connection with the sale or distribution of the Beverages in such Subterritory; and (v) The Bottler shall not thereafter hold forth in such Subterritory in any manner whatsoever that it has any connection with the Beverages. ARTICLE IX Transferability/Worldwide and Regional Accounts/Additional Territories 30. The Bottler hereby acknowledges the personal nature of the Bottler's obligations under this Agreement with respect to the performance standards applicable to the Bottler, the dependence of the Trademarks on proper quality control, the level of marketing effort required of the Bottler to increase demand for the Beverages in Authorized Containers, and the confidentiality required for protection of the Company's trade secrets and confidential information. In recognition of the personal nature of these and 31 other obligations of the Bottler under this Agreement, the Bottler may not assign, transfer or pledge this Agreement or any interest therein, in whole or in part, whether voluntarily, involuntarily, or by operation of law (including, but not limited to, by merger or liquidation), or delegate any material element of the Bottler's performance thereof, or sublicense its rights hereunder, in whole or in part, to any third party or parties, without the prior consent of the Company. Any attempt to take such action without such consent shall be void and shall be deemed to be a material breach of this Agreement. 31. (a) The Bottler understands that from time to time the Company negotiates worldwide or regional agreements to sell the Syrups to certain hotel chains, restaurant chains, movie theaters and similar on premise accounts which operate in multiple countries. The Company will submit to the Bottler for its review the terms of these worldwide or regional agreements to sell the Syrups (the "Chain Agreements"). The Bottler agrees to use its best efforts to support the Company in the Chain Agreements by supplying the Syrups to these accounts based on the terms of the Chain Agreements negotiated by the Company. In the event that the Bottler declines to participate in any Chain Agreement, the Bottler agrees that the Company shall have the right to find alternative ways to supply the Syrups to these accounts through other authorized bottlers or distributors of the Beverages, without any obligation to compensate the Bottler with respect to these sales; provided, however, that the Company's right to supply the Beverages to these accounts will not affect in any way the Bottler's exclusive rights to sell and distribute the Beverages to all 32 other accounts within the Territory. With respect to the Chain Agreements, the Bottler also agrees to use its best efforts to support the Company by supplying Beverages in packages other than the Syrups to these accounts. (b) In the event that the Bottler acquires the right to manufacture and sell any of the Beverages in any container that has been designated as an Authorized Container in any territory outside of the Territory but within Mexico, such additional territory shall automatically be deemed to be included within the Territory covered by this Agreement for all purposes. Any separate agreement that may exist concerning such additional territory shall be ipso facto amended to conform to the terms of this Agreement. In addition, if the Bottler acquires control, directly or indirectly, of any person which is a party, or which controls directly or indirectly a party, to an agreement whereby such party has the right to manufacture and sell any of the Beverages in any territory in Mexico in any container that has been designated as an Authorized Container, the Bottler shall cause such party to amend such agreement, effective as of the date of acquisition of control of such party, to conform to the terms of this Agreement with respect to all such territory within Mexico. ARTICLE X Litigation 32. (a) The Company reserves the right to institute any civil, administrative or criminal proceeding or action, and generally to take or seek any 33 available legal remedy it deems desirable, for the protection of its good reputation and industrial property rights (including, but not limited to, the Trademarks), as well as for the protection of the Concentrates, the Beverages and the formulas therefor, and to defend any action affecting these matters. At the request of the Company, the Bottler will render reasonable assistance in any such action. The Bottler may not claim any right against the Company as a result of such action or for any failure to take such action. The Bottler shall promptly notify the Company of any litigation or proceeding instituted or threatened affecting these matters. The Bottler shall not institute any legal or administrative proceeding against any third party which may affect the interests of the Company in connection with this Agreement without the Company's prior consent. (b) The Company has the sole and exclusive right and responsibility to prosecute and defend all suits relating to the Trademarks. The Company may prosecute or defend any suit relating to the Trademarks in the name of the Bottler whenever an issue in such suit involves the Territory and therefore it is appropriate to act in the Bottler's name, or may proceed alone in the name of the Company, provided that the Company shall take no action in the Bottler's name which the Company knows or should know will materially prejudice or impair the rights or interests of the Bottler under this Agreement. (c) The Bottler recognizes the importance and benefit to itself and all other bottlers of the Beverages of protecting the interest of the Company in the Beverages, Authorized Containers and the goodwill associated with the trademarks. Therefore, the Bottler agrees to 34 consult with the Company on all products liability claims or lawsuits brought against the Bottler in connection with the Beverages or Authorized Containers and to take such action with respect to the defense of any such claim or lawsuit as the Company may reasonably request in order to protect the interest of the company in the Beverages, Authorized Containers and goodwill associated with the Trademarks. Further, the Bottler shall supervise, control and direct the defense of all such products liability claims and lawsuits brought against them whether individually or jointly, provided, however, that the Bottler and the Company expressly reserve all rights of contribution and indemnity as prescribed by law. ARTICLE XI Automatic Amendment 33. In the event that bottlers, which purchased for their own account eighty percent (80%) or more of all of the Concentrate for Beverages purchased for the account of all bottlers who are parties to agreements with the Company containing substantially the same terms as this Agreement, agree with the Company to any different provisions to be included in this Agreement, then the Bottler hereby agrees to include an amendment containing such different provisions in this Agreement. The gallons of Concentrate purchased by such bottlers shall be determined based on the most recently-ended calendar year prior to the date such amendment was first offered to bottlers. ARTICLE XII 35 General 34. For purposes of this Agreement, the following terms shall have the meanings set forth below: (a) "person" means an individual, a corporation, a limited liability company, a partnership, a limited partnership, an association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. (b) "control" (including terms "controlling", "controlled by" and "under common control with") means: (i) Beneficial Ownership of a majority of any class or series of voting securities of a person; or (ii) the power or authority, directly or indirectly, to elect or designate a majority of the members of the board of directors, or other governing body of a person. 35. The Company hereby reserves for its exclusive benefit all rights of the Company not expressly granted to the Bottler under the terms of this Agreement. 36. (a) Without relieving the Bottler of any of its responsibilities under this Agreement, the Company, from time to time during the term of this Agreement, at its option and either free of charge or on such terms and conditions as the Company may propose, may offer technology to the Bottler which the Company possesses, develops or acquires 36 (and is free to furnish to third parties without obligation) relating to the design, installation, operation and maintenance of the plant and equipment appropriate for the maintenance of product quality, sanitation and safety as well as for the efficient manufacture and packaging of the Beverages; or relating to personnel training, accounting methods, electronic data processing and marketing and distribution techniques. (b) The Bottler covenants and agrees that, so long as this agreement is in effect the Bottler shall install and maintain management information systems that are capable of interfacing and sharing required data with the management information systems of the Company in accordance with standards established by the Company. 37. The Bottler agrees: (a) it will not disclose to any third party any nonpublic information whatsoever concerning the composition of the Concentrates or the Beverages, without the prior consent of the Company, and it will use any such information solely to perform its obligations hereunder; (b) It will at all times treat and maintain as confidential, all nonpublic information that it may receive at any time from the Company, including, but not limited to: (i) Information or instructions of a technical or other nature, relating to the mixing, sale, marketing and distribution of the product. 37 (ii) Information about projects or plans worked out in the course of this Agreement; and (iii) Information constituting manufacturing or commercial trade secrets. The Bottler, further agrees to disclose such information, as necessary to perform its obligations hereunder, only to employees of its enterprise: (i) who have a reasonable need to know such information; (ii) who have agreed to keep such information secret; and (iii) whom the Bottler has no reason to believe is untrustworthy; and (c) Upon the termination of this Agreement, Bottler will promptly surrender to the Company all original documents and all photocopies or other reproductions in its possession (including, but not limited to, any extracts or digests thereof) containing or relating to any nonpublic information described in this paragraph 37. Following such termination, and the surrender of such materials, the Bottler and its employees shall continue to hold any nonpublic information in confidence and refrain from any further use or disclosure thereof whatsoever, provided that such obligation shall expire as to any nonpublic information that does not constitute trade secrets ten (10) years following such termination. 38. The Bottler agrees that it will not enter into any contract or other arrangement to manage or participate in the management of any other Pepsi-Cola bottler without the prior consent of the Company. 38 39. The Bottler is an independent manufacturer and not the agent of the Company. The Bottler agrees that it will not represent that it is an agent of the Company nor hold itself out as such. 40. The Bottler covenants and agrees that, so long as this Agreement is in effect the Bottler shall deliver to Company: (i) Quarterly Statements. As soon as such statements are made available to the public, or if such statements are not regularly made available to the public, within thirty days after such fiscal quarter, an unaudited income and expense statement and balance sheet for the Bottler certified as correct by the chief financial officer of the Bottler; and (ii) Annual Audit Statement. As soon as such statements are made available to the public, or if such statements are not regularly made available to the public, within 120 days after the end of each fiscal year, statements of income and retained earnings of the Bottler for the just-ended fiscal year, and a balance sheet of the Bottler as of the end of such year, accompanied by an opinion from the independent public accountants of the Bottler; and (iii) Other information. With reasonable promptness such other financial information as the Company may reasonably request in such format as the Company may reasonably request. 39 41. The Bottler shall maintain its books, accounts and records in accordance with generally accepted accounting principles and shall permit any person designated in writing by the Company to visit and inspect any of its properties, corporate books and financial records (including, but not limited to, auditor's workpapers), and make copies thereof and take extracts therefrom, and to discuss the accounts and finances of the Bottler with the principal officers thereof, all at such times as the Company may reasonably request. The Company's rights of inspection under this paragraph 41 shall be exercised reasonably, and only for purposes of determining Bottler's compliance with its obligations under paragraph 19, so as not to interfere with the normal operation of the Bottler's business. The Company will treat and maintain as confidential for a period of one year all nonpublic financial information received from the Bottler. 42. The parties agree: (a) All Existing Bottling Appointments or related franchise agreement with respect to the Territory are hereby superseded and restated in their entirety, and all rights, duties and obligations of the Company and the Bottler regarding the Trademarks and the manufacture, packaging, distribution and sale of the Beverages in Authorized Containers shall be determined under this Agreement, without regard to the terms of any prior agreement and without regard to any prior course of conduct between the parties; (b) As to all matters addressed herein, this Agreement sets forth the entire agreement between the Company and the Bottler, and all prior understandings, commitments or agreements relating to such matters 40 between the parties or their predecessors -in-interest are of no force or effect; and (c) Any waiver or modification of this Agreement or any of its provisions, and any notices given or consents made under this Agreement shall not be binding upon the Bottler or the Company unless made in writing, signed by an officer of the Company or by a duly qualified and authorized representative of the Bottler, and personally delivered or sent by telegram, telex or certified mail to an officer of the Company (if from the Bottler) or a duly qualified and authorized representative of the Bottler (if from the Company) at the principal address of such party. 43. Failure of the Company to exercise promptly any option or right herein granted or to require strict performance of any such option or right shall not be deemed to be a waiver of such option or right, or of the right to demand subsequent performance of any and all obligations herein imposed upon the Bottler. 44. The Company may delegate any of its rights, performance or obligations under this Agreement to any subsidiaries or affiliates of the Company upon notice to the Bottler, but no such delegation shall relieve the Company of its obligations hereunder. 45. If any provision of this Agreement, or the application thereof to any party or circumstance shall ever be prohibited by or held invalid under applicable law, such provision shall be ineffective to the extent of such prohibition without invalidating the remainder of such provision or any other provision 41 hereof, or the application of such provision to other parties or circumstances. 46. This Agreement shall be governed, construed and interpreted under the laws of the State of New York. 42 IN WITNESS WHEREOF, the parties have duly executed this Agreement in triplicate effective as of the day and year first above written. PEPSICO, INC. Pepsi-Gemex S.A. de C.V. By: By: ---------------------------------- ------------------------------------- Title: Title: ------------------------------- ---------------------------------- Date: Date: -------------------------------- ----------------------------------- 43 Schedule A 44 SCHEDULE B 45 EX-12 8 y84636exv12.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 table by dividing earnings by fixed charges. For this purpose, earnings are before taxes and minority interest, plus charges (excluding capitalized interest) 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 which is the portion of the rent deemed representative of the interest factor. PBG RATIO OF EARNINGS TO FIXED CHARGES ($ in millions) FISCAL YEAR 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- NET INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST $ 700 $ 482 $ 397 $ 209 $ (192) Undistributed (income) loss from equity investments - - - - 5 Fixed charges excluding capitalized interest 221 217 222 227 245 ------- ------- ------- ------- ------- EARNINGS AS ADJUSTED $ 921 $ 699 $ 619 $ 436 $ 58 ======= ======= ======= ======= ======= FIXED CHARGES: Interest expense $ 200 $ 204 $ 208 $ 209 $ 230 Capital interest - 1 1 1 1 Interest portion of rental expense 21 13 14 18 15 ------- ------- ------- ------- ------- TOTAL FIXED CHARGES $ 221 $ 218 $ 223 $ 228 $ 246 ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 4.17 3.20 2.78 1.91 (A)
(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. EX-13 9 y84636exv13.txt SELECTED PAGES FROM ANNUAL REPORT TO SHAREHOLDERS The Pepsi Bottling Group, Inc. Exhibit 13 MANAGEMENT'S FINANCIAL REVIEW TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA OVERVIEW The Pepsi Bottling Group, Inc. (collectively referred to as "PBG", "we", "our" and "us") is the world's largest manufacturer, seller and distributor of carbonated and non-carbonated Pepsi-Cola beverages. We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of the United States, Canada, Spain, Greece, Russia, Turkey and, as a result of our recent acquisition, Mexico. In 2002, approximately 82% of our net revenues were generated in the United States with the remaining 18% generated outside the United States. In 2003, we expect approximately 72% of our net revenues to come from the U.S., 12% of our net revenues to come from our newly acquired operations in Mexico, and the remaining 16% to come from operations outside the U.S. and Mexico. The brands we sell are some of the best recognized trademarks in the world and include PEPSI-COLA, DIET PEPSI, MOUTAIN DEW, MOUTAIN DEW CODE RED, LIPTON BRISK, MUG, AQUAFINA, DIET MOUNTAIN DEW, PEPSI TWIST, STARBUCKS FRAPPUCCINO, SIERRA MIST, DOLE and SOBE, and outside the U.S., PEPSI-COLA, MIRANDA, 7 UP, KAS, ELECTROPUA, AQUA MINERALE, MANZANITA SOL, SQUIRT, GARCI CRESPO, FIESTA, PEPSI LIGHT, IVI, YEDIGUN, and FRUKO. In some of our U.S. territories, we also have the right to manufacture, sell and distribute soft drink products of companies other than PepsiCo. Inc., including DR PEPPER and All SPORT, and through December 2002, 7 UP. The following discussion and analysis covers the key drivers behind our business performance in 2002 and is categorized into seven major sections. The first four sections discuss application of critical accounting policies, related party transactions, items that affect the comparability of historical or future results and non-GAAP measures. 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. APPLICATION OF CRITICAL ACCOUNTING POLICIES The preparation of our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts in our Consolidated Financial Statements and the related accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. We use our best judgment, based on the advice of external experts and our knowledge of existing facts and circumstances and actions that we may undertake in the future, in determining the estimates that affect our Consolidated Financial Statements. For each of the critical accounting estimates discussed below we have reviewed our policies, assumptions and related disclosures with our Audit and Affiliated Transactions Committee. ALLOWANCE FOR DOUBTFUL ACCOUNTS - A portion of our accounts receivable will not be collected due to customer issues and bankruptcies. We provide reserves for these situations based on the evaluation of the aging of our trade receivable portfolio and a customer-by-customer analysis of our high-risk customers. Our reserves contemplate our historical loss rate on receivables, specific customer situations and the economic environments in which we operate. As of December 28, 2002, our allowance for doubtful accounts was $67 million and $42 million as of December 29, 2001 and December 30, 2000, which represents management's best estimate of probable losses inherent in our portfolio. While the overall quality of our receivable portfolio has remained relatively stable, we continue to pay particular attention to those customers that represent a higher potential risk. In 2002, as a result of the deterioration of the financial condition of certain customers, we have recorded additional reserves based upon estimates of uncollectibility. The following is an analysis of the allowance for doubtful accounts for the fiscal years ended December 28, 2002, December 29, 2001, and December 30, 2000: The Pepsi Bottling Group, Inc.
ALLOWANCE FOR DOUBTFUL ---------------------- ACCOUNTS -------- 2002 2001 2000 ---- ---- ---- Beginning of the year ................... $ 42 $ 42 $ 48 Bad debt expense ........................ 32 9 3 Additions from acquisitions ............. 14 -- -- Accounts written off .................... (22) (9) (8) Foreign currency translation ............ 1 -- (1) ---- ---- ---- End of the year ......................... $ 67 $ 42 $ 42 ==== ==== ====
18 Estimating an allowance for doubtful accounts requires significant management judgment and is dependent upon the overall economic environment and in particular, our customers' viability. We have effective credit controls in place to manage these exposures and believe that our allowance for doubtful accounts adequately provides for these risks. RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE LIVES - During 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 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 no longer amortize goodwill and certain franchise rights, but evaluate them for impairment annually. Our identifiable intangible assets principally arise from the allocation of the purchase price of businesses acquired, and consist primarily of franchise rights. Our franchise rights are typically perpetual in duration, subject to compliance with the underlying franchise agreement. The value and life of our franchise rights are directly associated with the underlying portfolio of brands that we are entitled to make, sell and distribute under applicable franchise agreements. In considering whether franchise rights have an indefinite useful life, we consider the nature and terms of the underlying franchise agreements; our intent and ability to use the franchise rights; and the age and market position of the products within the franchise as well as the historical and projected growth of those products. We assign amounts to such identifiable intangibles based on their estimated fair values at the date of acquisition. In accordance with Emerging Issues Task Force ("EITF") Issue No. 02-07, "Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets," we evaluate our franchise rights with indefinite useful lives for impairment annually as asset groups on a country-by-country basis ("asset groups"). We measure the fair value of these asset groups utilizing discounted estimated future cash flows, including a terminal value, which assumes the franchise rights will continue in perpetuity. Our long-term terminal growth assumptions reflect our current long-term view of the marketplace. Our discount rate is based upon our weighted-average cost of capital plus an additional risk premium to reflect the risk and uncertainty inherent in separately acquiring a franchise agreement between a willing buyer and a willing seller. Each year we re-evaluate our assumptions in our discounted cash flow model to address changes in our business and marketplace conditions. Based upon our annual impairment analysis, the estimated fair values of our franchise rights with indefinite lives exceeded their carrying amounts in 2002. In accordance with SFAS No. 142, we evaluate goodwill on a country-by-country basis ("reporting unit") for impairment. We evaluate each reporting unit for impairment based upon a two-step approach. First, we compare the fair value of our reporting unit with its carrying value. Second, if the carrying value of our reporting unit exceeds its fair value, we compare the implied fair value of the reporting unit's goodwill to its carrying amount to measure the amount of impairment loss. In measuring the implied fair value of goodwill, we would allocate the fair value of the reporting unit to each of its assets and liabilities (including any unrecognized intangible assets). Any excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. We measure the fair value of a reporting unit as the discounted estimated future cash flows, including a terminal value, which assumes the business continues in perpetuity, less its respective minority interest and net debt (net of cash and cash equivalents). Our long-term terminal growth assumptions reflect our current long-term view of the marketplace. Our discount rate is based upon our weighted average cost of capital. Each year we re-evaluate our assumptions in our discounted cash flow model to address changes in our business and marketplace conditions. The Pepsi Bottling Group, Inc. Based upon our annual impairment analysis in the fourth quarter of 2002, the estimated fair value of our reporting units exceeded their carrying value and as a result, we did not proceed to the second step of the impairment test. Considerable management judgment is necessary to estimate discounted future cash flows, which may be impacted by future actions taken by us and our competitors and the volatility in the markets in which we conduct business. A change in assumptions in our cash flows could have a significant impact on the fair value of our reporting units, which could then result in a material impairment charge to our results of operations. PENSION AND POSTRETIREMENT BENEFIT PLANS - We sponsor pension and other postretirement benefit plans in various forms, covering employees who meet specified eligibility requirements. We account for our defined benefit pension plans and our postretirement benefit plans using actuarial models required by SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The amounts necessary to fund future payouts under these plans are subject to numerous assumptions and variables including anticipated discount rate, expected rate of return on plan assets and future compensation levels. We evaluate these assumptions with our actuarial advisors on an annual basis and we believe that they 19 The Pepsi Bottling Group, Inc. are appropriate and within acceptable industry ranges, although an increase or decrease in the assumptions or economic events outside our control could have a material impact on reported net income. The assets, liabilities and assumptions used to measure expense for any fiscal year are determined as of September 30 of the preceding year ("measurement date"). The discount rate assumption used in our pension and postretirement benefit plans' accounting is based on current interest rates for high-quality, long-term corporate debt as determined on each measurement date. The expected return on plan assets is based on our long-term historical experience, our plan asset allocation and our expectations for long-term interest rates and market performance. In evaluating our rate of return on assets for a given fiscal year, we consider a 15 to 20 year time horizon for our pension investment portfolio. In addition, we look at the return on asset assumptions used by other companies in our industry as well as other large companies. Over the past three fiscal years the composition of our plan assets was approximately 70%-75% equity investments and 25%-30% fixed income securities, which primarily consist of U.S. government and corporate bonds. Differences between actual and expected returns are generally recognized in the net periodic pension calculation over five years. To the extent the amount of all unrecognized gains and losses exceeds 10% of the larger of the benefit obligation or plan assets, such amount is amortized over the average remaining service life of active participants. The rate of future compensation increases is based upon our historical experience and management's best estimate regarding future expectations. We amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits. For our postretirement plans that provide medical and life insurance benefits, we review external data and our historical health care cost trends with our actuarial advisors to determine the health care cost trend rates. During 2002, our defined benefit pension and postretirement expenses were $41 million. We utilized the following weighted-average assumptions to compute our pension and postretirement expense in 2002: Discount rate ......................................................... 7.5% Expected return on plan assets (net of administrative expenses) ....... 9.5% Rate of compensation increase ......................................... 4.3%
In 2003 our defined benefit pension and postretirement expenses will increase by $36 million due primarily to the following: - A decrease in our net weighted-average expected return on plan assets from 9.5% to 8.5% due to declines in the level of returns on our plan assets over the last several years. Additionally, amortization of asset losses resulting from differences between our expected and actual return on plan assets will contribute to the increase in our pension expense during 2003. These changes will increase our 2003 defined benefit pension and postretirement expense by approximately $15 million. - A decrease in our weighted-average discount rate for our pension and postretirement expense from 7.5% to 6.8%, reflecting declines in the yields of long-term corporate bonds. This assumption change will increase our defined benefit pension and postretirement expense by approximately $15 million. - Expiration of amortization credits, changes in demographics and medical trend rates, and other plan changes will increase our defined benefit pension and postretirement expense by approximately $16 million; and - Contributions of $151 million to our pension plan during 2002 will reduce our 2003 defined benefit pension expense by approximately $10 million. Our plans have been funded to be in compliance with the funding provisions of the Employee Retirement Income Security Act of 1974 and have been made in accordance with applicable tax regulations that provide for current tax deductions for our contributions and for taxation to the employee of plan benefits when the benefits are received. CASUALTY INSURANCE COSTS - Due to the nature of our business, we require insurance coverage for certain casualty risks. Given the rapidly increasing costs associated with obtaining third-party insurance coverage for our casualty risks in the U.S., in 2002 we moved to a self-insurance program for these risks. We are self-insured for workers' compensation, automobile, product and general liability risks for occurrences up to $5 million. We purchase casualty insurance from a third-party for losses per occurrence exceeding $5 million. The casualty insurance costs for our self-insurance program represent the ultimate net cost of all reported and estimated unreported losses incurred during the fiscal year. We do not discount loss expense reserves. Our liability for casualty costs is estimated using individual case-based valuations and statistical analyses and is based upon historical experience, actuarial assumptions and professional judgment. These estimates are subject to the effects of trends in loss severity and frequency and are based on the best data 20 The Pepsi Bottling Group, Inc. available to us. However, these estimates are also subject to a significant degree of inherent variability. We evaluate these estimates with our actuarial advisors on an annual basis and we believe that they are appropriate and within acceptable industry ranges, although an increase or decrease in the estimates or economic events outside our control could have a material impact on reported net income. Accordingly, the ultimate settlement of these costs may vary significantly from the estimates included in our financial statements. INCOME TAXES - Our effective tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect our best estimate of the ultimate outcome of our tax audits. Significant management judgment is required in determining our effective tax rate and in evaluating our tax position. We establish reserves when, despite our belief that our tax return positions are supportable, we believe these positions may be challenged. We adjust these reserves as warranted by changing facts and circumstances. A change in our tax reserves could have a significant impact on our results of operations. Under our tax separation agreement with PepsiCo, Inc. ("PepsiCo"), PepsiCo maintains full control and absolute discretion for any combined or consolidated tax filings for tax periods ended on or before our initial public offering that occurred in March 1999. However, PepsiCo may not settle any issue without PBG's written consent, which consent cannot be unreasonably withheld. PepsiCo has contractually agreed to act in good faith with respect to all tax audit matters affecting us. In accordance with the tax separation agreement, we will bear our allocable share of any risk or upside resulting from the settlement of tax matters affecting us for these periods. A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years for which we have audits that are open varies depending on the tax jurisdiction. The U.S. Internal Revenue Service is currently examining our and PepsiCo's joint tax returns for 1994 through 1997 and our tax returns for 1999 and 2000. While it is often difficult to predict the final outcome or the timing of the resolution, we believe that our reserves reflect the probable outcome of known tax contingencies. Favorable resolutions would be recognized as a reduction of our tax expense in the year of resolution. Unfavorable resolutions would be recognized as a reduction of our reserves and a cash outlay for settlement. RELATED PARTY TRANSACTIONS PepsiCo is considered a related party due to the nature of our franchisee relationship and its ownership interest in our company. Approximately 90% of PBG's 2002 volume was derived from the sale of Pepsi-Cola beverages. At December 28, 2002, PepsiCo owned approximately 37.8% of our outstanding common stock and 100% of our outstanding class B common stock, together representing approximately 42.9% of the voting power of all classes of our voting stock. In addition, PepsiCo owns 6.8% 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. 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; master bottling agreements 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 country, including Canada, Spain, Russia, Greece, Turkey and Mexico, 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 support, including information technology maintenance, procurement of raw materials, shared space, employee benefits, credit and collection, international tax and accounting services. The amounts paid or received under this contract are equal to the actual costs incurred by the company providing the service. 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 ended on or before the initial public offering. PepsiCo has contractually agreed to act in good faith with respect to all 21 The Pepsi Bottling Group, Inc. tax audit matters affecting us. In addition, PepsiCo has agreed to use its best efforts to settle all joint interests in any common audit issue on a basis consistent with prior practice. BOTTLER INCENTIVES AND OTHER ARRANGEMENTS - We share a business objective with PepsiCo of increasing the availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo, at its discretion, provides us with various forms of bottler incentives to promote its beverages. These incentives cover a variety of initiatives, including direct marketplace support, capital equipment funding and advertising support. Based on the objective of the programs and initiatives, we record bottler incentives as an adjustment to net revenues or as a reduction of selling, delivery and administrative expenses. Direct marketplace support represents PepsiCo's funding to assist us in offering sales and promotional discounts to retailers and is recorded as an adjustment to net revenues. Capital equipment funding is designed to help offset the costs of purchasing and installing marketing equipment, such as vending machines and glass door coolers at customer locations and is recorded as a reduction of selling, delivery and administrative expenses. Advertising support represents the cost of media time, promotional materials, and other advertising and marketing costs that are funded by PepsiCo and is recorded as a reduction to advertising and marketing expenses within selling, delivery and administrative expenses. In addition, PepsiCo may share certain media costs with us due to our joint objective of promoting PepsiCo brands. There are no conditions or other requirements that could result in a repayment of the bottler incentives received. Bottler incentives received from PepsiCo, including media costs shared by PepsiCo, were $560 million, $554 million and $524 million for 2002, 2001 and 2000, respectively. Of these amounts, we recorded $257 million, $262 million and $244 million for 2002, 2001 and 2000, respectively, in net revenues, and the remainder as a reduction of selling, delivery and administrative expenses. PURCHASES OF CONCENTRATE AND FINISHED PRODUCT - We purchase concentrate from PepsiCo, which is the critical flavor ingredient used in the production of carbonated soft drinks and other ready-to-drink beverages. PepsiCo determines the price of concentrate annually at its discretion. We also pay a royalty fee to PepsiCo for the Aquafina trademark. Amounts paid or payable to PepsiCo and its affiliates for concentrate and royalty fees were $1,699 million, $1,584 million and $1,507 million in 2002, 2001 and 2000, respectively. We also produce or distribute other products and purchase finished goods and concentrate through various arrangements with PepsiCo or PepsiCo joint ventures. During 2002, 2001 and 2000, total amounts paid or payable to PepsiCo for these transactions were $464 million, $375 million and $155 million, respectively. We provide manufacturing services to PepsiCo and PepsiCo affiliates in connection with the production of certain finished beverage products. During 2002, 2001 and 2000, total amounts paid or payable by PepsiCo for these transactions were $10 million, $32 million and $36 million, respectively. FOUNTAIN SERVICE FEE - 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 our Consolidated Statements of Operations in selling, delivery and administrative expenses. Net amounts paid or payable by PepsiCo to us for these services were approximately $200 million, $185 million and $189 million, in 2002, 2001 and 2000, respectively. OTHER TRANSACTIONS - Prior to 2002, Hillbrook Insurance Company, Inc., a subsidiary of PepsiCo, provided insurance and risk management services to us pursuant to a contractual agreement. Total premiums paid to Hillbrook Insurance Company, Inc. during 2001 and 2000 were $58 million and $62 million, respectively. We provide PepsiCo and PepsiCo affiliates or PepsiCo provides us various services pursuant to a shared services agreement and other arrangements, including information technology maintenance, procurement of raw materials, shared space, employee benefits, credit and collection, international tax and accounting services. Total net expenses incurred were approximately $57 million, $133 million and $117 million during 2002, 2001 and 2000, respectively. We purchase snack food products from Frito-Lay, Inc., a subsidiary of PepsiCo, for sale and distribution in all of Russia except Moscow. Amounts paid or payable to PepsiCo and its affiliates for snack food products were $44 million, $27 million and $24 million in 2002, 2001 and 2000, respectively. 22 The Pepsi Bottling Group, Inc. The Consolidated Statements of Operations include the following income (expense) amounts as a result of transactions with PepsiCo and its affiliates:
2002 2001 2000 ------- ------- ------- Net revenues: Bottler incentives ................................... $ 257 $ 262 $ 244 ======= ======= ======= Cost of sales: Purchases of concentrate and finished products, and Aquafina royalty fees ........................ $(2,163) $(1,959) $(1,662) Manufacturing and distribution service reimbursements 10 32 36 ------- ------- ------- $(2,153) $(1,927) $(1,626) ======= ======= ======= Selling, delivery and administrative expenses: Bottler incentives ................................... $ 303 $ 292 $ 280 Fountain service fee ................................. 200 185 189 Frito-Lay purchases .................................. (44) (27) (24) Insurance costs ...................................... -- (58) (62) Shared services ...................................... (57) (133) (117) ------- ------- ------- $ 402 $ 259 $ 266 ======= ======= =======
We are not required to pay any minimum fees to PepsiCo, nor are we obligated to PepsiCo under any minimum purchase requirements. As part of our acquisition in Turkey, PBG paid PepsiCo $8 million for its share of Fruko Mesrubat Sanayii A.S. and related entities. In addition, we sold certain brands to PepsiCo from the net assets acquired for $16 million. As part of our acquisition of Pepsi-Gemex, S.A. de C.V. ("Gemex") of Mexico, PepsiCo received $297 million for the tender of its shares for its 34.4% ownership in the outstanding capital stock of Gemex. In addition, PepsiCo made a payment to us for $17 million, to facilitate the purchase and ensure a smooth ownership transition of Gemex. We paid PepsiCo $10 million and $9 million during 2002 and 2001, respectively, for distribution rights relating to the SoBe brand in certain PBG-owned territories in the U.S. and Canada. In connection with PBG's acquisition of Pepsi-Cola Bottling of Northern California in 2001, PBG paid $10 million to PepsiCo for its equity interest in Northern California. With respect to PepsiCo's 6.8% ownership in Bottling Group, LLC, our principal operating subsidiary, Bottling Group, LLC will distribute pro rata to PepsiCo and us sufficient cash such that aggregate cash distributed to us will enable us to pay our income taxes and interest on our $1 billion 7% senior notes due 2029. PepsiCo's pro rata cash distribution during 2002 from Bottling Group, LLC was $11 million. The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8% senior notes issued on February 9, 1999, by our subsidiary Bottling Group, LLC are guaranteed by PepsiCo. In addition, the $1.0 billion of 4 5/8% senior notes issued on November 15, 2002, also by Bottling Group, LLC, will be guaranteed by PepsiCo in accordance with the terms set forth in the related indenture. Amounts payable to PepsiCo and its affiliates were $26 million and $17 million at December 28, 2002 and December 29, 2001, respectively. Such amounts are recorded within accounts payable and other current liabilities in our Consolidated Balance Sheets. Board of Directors Two of our board members are employees of PepsiCo. Neither of these board members serves on our Audit and Affiliated Transactions Committee. In addition, one of our managing directors of Bottling Group, LLC, our principal operating subsidiary, is an employee of PepsiCo. ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY Gemex Acquisition In November 2002, we acquired all of the outstanding capital stock of Gemex. Our total acquisition cost consisted of a net cash payment of $871 million and assumed debt of approximately $305 million. The Gemex acquisition was made to allow us to increase our markets outside the United States. Gemex is the largest Pepsi-Cola bottler in Mexico and the largest bottler outside the United States of Pepsi-Cola soft drink products based on sales volume. Gemex produces, sells and distributes a variety of soft drink products under the PEPSI-COLA, PEPSI LIGHT, PEPSI MAX, PEPSI LIMON, MIRINDA, 7 UP, DIET 7 UP, KAS, MOUNTAIN DEW, POWER PUNCH and MANZANITA SOL trademarks, under exclusive franchise and bottling arrangements with PepsiCo and certain affiliates of PepsiCo. Gemex also 23 The Pepsi Bottling Group, Inc. has rights to produce, sell and distribute in Mexico soft drink products of other companies and it produces, sells and distributes purified and mineral water in Mexico under the trademarks ElECTROPURA and GARCI CRESPO, respectively. As a result of the acquisition of Gemex, we own the Electropura and Garci Crespo brands. New Accounting Standards During 2001, the FASB issued SFAS No. 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 No. 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 no longer amortize goodwill and certain franchise rights, but evaluate them for impairment annually. Based on our annual impairment review, we have determined that our intangible assets are not impaired. If we had adopted SFAS No. 142 at the beginning of 2000 our amortization expense would have been reduced by approximately $129 million in each of 2001 and 2000. In addition, net income would have increased by approximately $91 million (or $0.31 per diluted share) to $396 million (or $1.34 per diluted share) in 2001 and $90 million (or $0.30 per diluted share) to $319 million (or $1.07 per diluted share) in 2000. During 2002, the EITF addressed various issues related to the income statement classification of certain payments received by a customer from a vendor. In November 2002, the EITF reached a consensus on Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," addressing the recognition and income statement classification of various consideration given by a vendor to a customer. Among its requirements, the consensus requires that certain cash consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor's products, and therefore should be characterized as a reduction of cost of sales when recognized in the customer's income statement, unless certain criteria are met. EITF Issue No. 02-16 will be effective beginning in our fiscal year 2003. We currently classify bottler incentives received from PepsiCo and other brand owners as adjustments to net revenues and selling, delivery and administrative expenses. In accordance with EITF Issue No. 02-16, we will classify certain bottler incentives as a reduction of cost of sales beginning in 2003. We are currently assessing the transitional guidance released by the EITF to determine the net impact to our Consolidated Financial Statements. 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 Management's Financial Review and 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 to common stock. All PBG share and per share data were restated to reflect the split. 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 2002 and 2001 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 ------- ------------- Volume ...................................... N/A (2) Net Revenues ................................ $ 113 (1) Diluted Earnings per Share .................. $0.02 (4)
24 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 2002, PepsiCo announced an increase of approximately 3% in the price of U.S. concentrate. PepsiCo has recently announced a further increase of approximately 2%, effective February 2003. Amounts paid or payable to PepsiCo and its affiliates for concentrate were $1,590 million, $1,502 million and $1,450 million in 2002, 2001 and 2000, respectively, which excludes any payments to PepsiCo for royalty fees associated with the Aquafina trademark. NON-GAAP MEASURES We utilize certain non-GAAP measures to evaluate our performance. We consider these measures important indicators of our success. These measures should not be considered an alternative to measurements required by U.S. GAAP such as net income and net cash provided by operations or should not be considered measures of our liquidity. In addition, our non-GAAP measures may not be comparable to similar measures reported by other companies and could be misleading unless all companies and analysts calculate them in the same manner. Our key non-GAAP measures are: 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. Our constant territory results exclude the operating results of the following acquisitions made during 2002: - Fruko Mesrubat Sanayii A.S. and related companies of Turkey in March 2002. - Pepsi-Cola Bottling Company of Macon, Inc. of Georgia in March 2002. - Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle, Maine in June 2002. - Seaman's Beverages Limited of the Canadian province of Prince Edward Island in July 2002. - Pepsi-Gemex, S.A. de. C.V of Mexico in November 2002. - Kitchener Beverages Limited of Ontario, Canada in December 2002. We adjusted our prior year results to include the operating results of the following prior year acquisitions as if they had occurred on the first day of the prior fiscal year: - Pepsi-Cola Bottling of Northern California in May 2001. - Pepsi-Cola Elmira Bottling Co. Inc. of New York in August 2001. Our prior year pro forma adjustments did not have a material impact on our constant territory results. The table below reconciles our U.S. GAAP reported results to our constant territory results for 2002 vs. 2001 on a worldwide basis:
WORLDWIDE 2002 VS. 2001 ------------- AS IMPACT IMPACT FROM CONSTANT REPORTED FROM 2002 2001 PRO FORMA TERRITORY CHANGE ACQUISITIONS ADJUSTMENTS CHANGE ------ ------------ ----------- ------ Net revenues .............. 9% -4% 0% 5% Net revenue per case ...... 1% 2% 0% 3% Cost of sales ............. 9% -5% 0% 4% Cost of sales per case .... 1% 2% 0% 3%
25 The table below reconciles our U.S. GAAP reported results to our constant territory results for 2002 vs. 2001 for our U.S. operations:
U.S. 2002 VS. 2001 ------------- AS IMPACT IMPACT FROM CONSTANT REPORTED FROM 2002 2001 PRO FORMA TERRITORY CHANGE ACQUISITIONS ADJUSTMENTS CHANGE ------ ------------ ----------- ------ Net revenues .............. 5% 0% 0% 5% Net revenue per case ...... 3% 0% 0% 3% Cost of sales ............. 5% 0% -1% 4% Cost of sales per case .... 3% 0% 0% 3%
The table below reconciles our U.S. GAAP reported results to our constant territory results for 2002 vs. 2001 for our operations outside the United States:
OUTSIDE THE U.S. 2002 VS. 2001 ------------- AS IMPACT IMPACT FROM CONSTANT REPORTED FROM 2002 2001 PRO FORMA TERRITORY CHANGE ACQUISITIONS ADJUSTMENTS CHANGE ------ ------------ ----------- ------ Net revenues ............... 32% -26% 0% 6% Net revenue per case ....... -1% 4% 0% 3% Cost of sales .............. 31% -25% 0% 6% Cost of sales per case ..... -1% 4% 0% 3%
EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization or EBITDA, which is computed as operating income plus the sum of depreciation and amortization, is a key indicator that we and others in our industry use to evaluate operating performance. We believe that current shareholders and potential investors in our company use multiples of EBITDA, in making investment decisions about our company. We use multiples of EBITDA in combination with discounted cash flow analysis as the primary method of determining the value of bottling operations. The table below reconciles Operating Income to EBITDA for 2002 and 2001:
2002 2001 % CHANGE ------ ------ -------- Operating Income ....... $ 898 $ 676 33% Add back: Depreciation ......... 443 379 Amortization ......... 8 135 ------ ------ EBITDA ................. $1,349 $1,190 13% ====== ======
FINANCIAL OVERVIEW RESULTS OF OPERATIONS - 2002 VOLUME
2002 VS. 2001 ------------- AS CONSTANT REPORTED TERRITORY CHANGE CHANGE ------ ------ Volume ........................................ 8% 2%
Our worldwide reported physical case volume increased 8% in 2002, reflecting a 6% increase in volume resulting from our acquisitions and a 2% increase in base volume. In the U.S., reported volume increased by 2%, reflecting a 1% increase from acquisitions and a 1% increase in base volume. The weakness in the economy and less travel caused softness in our U.S. results in the second half of the year. However, take-home volume, particularly in food stores, as well as volume in our convenience and gas segment continues to grow. Additionally, U.S. volume growth continued to benefit from innovation, as well as the strong growth of Aquafina, offset by declines in trademark Pepsi. Outside the U.S., our volumes increased 32% reflecting a 29% increase from our acquisitions in Turkey and Mexico. Volume outside the U.S. from our base business increased 3% due to double-digit growth in Russia driven by the strong performance of trademark Pepsi and Aqua Minerale, our water product, which was partially offset by volume declines in Spain. 26 In 2003, we expect our worldwide constant territory volume to grow between 2% and 3%. In the U.S., we expect our constant territory volume growth projections to be flat to 1% for the full year, which includes a 50 to 100 basis point negative impact from our Sierra Mist transition. Beginning in 2003, we will no longer distribute 7 UP in the U.S. as we have decided to manufacture, sell, and distribute Sierra Mist exclusively in all of our U.S. markets. This conversion will affect about one third of our markets and will facilitate a unified and more effective selling and marketing proposition as we support a single growing lemon-lime brand. NET REVENUES
2002 VS. 2001 ------------- AS CONSTANT REPORTED TERRITORY CHANGE CHANGE ------ ------ Net revenues ............ 9% 5% Net revenue per case .... 1% 3%
Reported net revenues were $9.2 billion, a 9% increase over the prior year, reflecting an 8% increase in volume and a 1% increase in net revenue per case. In the U.S., reported net revenues increased 5% reflecting a 3% increase in net revenue per case and a 2% increase in volumes. Net revenue per case growth in the U.S. benefited from rate increases combined with lapping of account level investment spending in the fourth quarter of 2001. Reported net revenues outside the U.S. grew approximately 32%, reflecting a 32% increase in volume offset by a 1% decrease in net revenue per case. Net revenue per case outside the U.S. grew 3% after excluding the impact of acquisitions. The favorable impact of currency translations contributed over 1% to our net revenue per case growth in 2002 outside the United States. Our reported worldwide net revenues are expected to increase approximately 16% in 2003. The majority of the increase in net revenues will be driven by the full year impact of results from the six acquisitions made during 2002 combined with volume increases from our base business. COST OF SALES
2002 VS. 2001 ------------- CONSTANT REPORTED TERRITORY CHANGE CHANGE ------ ------ Cost of sales ............. 9% 4% Cost of sales per case .... 1% 3%
Cost of sales was $5.0 billion, a 9% increase over the prior year, reflecting an 8% increase in volume and a 1% increase in cost of sales per case. In the U.S., cost of sales increased by 5% reflecting a 3% increase in cost of sales per case and a 2% increase in volume. The increase in U.S. cost of sales per case was driven by higher concentrate costs and mix shifts into higher cost packages. Cost of sales outside the U.S. grew by 31% reflecting a 32% increase in volume offset by a 1% decrease in cost of sales per case. In 2003, we expect our reported cost of sales per case to decrease in the mid single digits, due largely to the lower cost structure from our newly acquired international operations, partially offset by an increase in concentrate prices of 2% in the United States. SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES Selling, delivery and administrative expenses grew $130 million, or 4% in 2002. Had we adopted SFAS No. 142 on the first day of 2001, amortization expense would have been lowered by $129 million in 2001. The impact of the adoption of SFAS No. 142 was largely offset by increased selling, delivery and administrative expenses resulting from our acquisitions in Mexico and Turkey. Excluding acquisitions and the effects of adopting SFAS No. 142, selling, delivery and administrative expenses were up 4% for the year driven by growth in our business and our continued investment in marketing equipment partially offset by favorable productivity gains. Selling, delivery and administrative expenses were also favorably impacted as we lapped higher labor costs associated with labor contract negotiations in the prior year partially offset by increased accounts receivable reserves resulting from the deterioration of the financial condition of certain customers. 27 INTEREST EXPENSE, NET Net interest expense decreased by $3 million, or 2%, in 2002 primarily reflecting the lower interest rate environment partially offset by increased interest expense from our new issuance of $1 billion in debt, the proceeds of which were utilized to finance our acquisition of Gemex. OTHER NON-OPERATING EXPENSE, NET Net other non-operating expense in 2002 increased $7 million due primarily to the amortization of premiums associated with derivative instruments that were utilized to mitigate currency risk in our acquisition of Gemex. MINORITY INTEREST Minority interest represents PepsiCo's approximate 7% ownership in our principal operating subsidiary, Bottling Group, LLC. INCOME TAX EXPENSE BEFORE RATE CHANGE Our full-year effective tax rate for 2002 was 34.0%, a 2.5 percentage point decrease from the prior year before our income tax rate change benefit. The decrease in the effective tax rate is primarily a result of the implementation of SFAS No. 142 in 2002 as goodwill amortization is not deductible under the U.S. tax code. Our full-year effective tax rate for 2003 is expected to be 34.3%. EARNINGS PER SHARE
Shares in millions 2002 2001 2000 -------- -------- -------- Basic earnings per share on reported net income ......... $ 1.52 $ 1.07 $ 0.78 Weighted-average shares outstanding ..................... 282 286 294 Diluted earnings per share on reported net income ....... $ 1.46 $ 1.03 $ 0.77 Weighted-average shares outstanding ..................... 293 296 299
Dilution Diluted earnings per share reflect the potential dilution that could occur if stock options from our stock compensation plans were exercised and converted into common stock that would then participate in net income. Our stock price improvement and employee option issuances during the last three years has resulted in $0.06, $0.04 and $0.01 per share of dilution in 2002, 2001 and 2000, respectively. Weighted-Average Shares Outstanding 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 40 million shares since the inception of our share repurchase program. OPERATING INCOME/EBITDA Operating income was $898 million, representing a 33% increase over 2001. This growth reflects the positive impact from higher pricing, volume growth from our acquisitions and base business, and the adoption of SFAS No. 142 during 2002 partially offset by increased selling, delivery and administrative expenses. EBITDA (see page 26 for our definition of and use of EBITDA) was $1,349 million in 2002, representing a 13% increase over 2001. This growth was a reflection of higher pricing, volume growth from our acquisitions and base business, partially offset by increased selling, delivery and administrative expenses resulting from growth in our business. In 2003, we expect our reported operating income to grow approximately 15% driven largely by our 2002 acquisitions. RESULTS OF OPERATIONS - 2001 VOLUME
2001 VS. 2000 ------------- AS CONSTANT REPORTED TERRITORY CHANGE CHANGE ------ ------ Volume .......... 2% 3%
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 28 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. NET REVENUES
2001 VS. 2000 ------------- AS CONSTANT REPORTED TERRITORY CHANGE CHANGE ------ ------ Net revenues ....................... 6% 6% Net revenue per case ............... 3% 3%
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 food stores, 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. COST OF SALES
2001 VS. 2000 ------------- AS CONSTANT REPORTED TERRITORY CHANGE CHANGE ------ ------ Cost of sales ...................... 4% 5% Cost of sales per case ............. 1% 1%
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. 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. 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. MINORITY INTEREST Minority interest represents PepsiCo's approximate 7% ownership in our principal operating subsidiary, Bottling Group, LLC. 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 than anticipated pre-tax income in 2001, partially offset by the decreased favorable impact of our foreign results. 29 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. EBITDA On a reported basis, EBITDA (see page 26 for our definition of and use of 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. This growth 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. LIQUIDITY AND FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES We have financed our capital investments and acquisitions primarily through cash flows from operations except for the acquisition of Gemex, which was financed through the issuance of $1 billion of senior notes. We believe that our future cash flows from operations and borrowing capacity will be sufficient to fund capital expenditures, acquisitions, dividends and working capital requirements. We intend to refinance all or a portion of our $1 billion of 5 3/8% senior notes on their maturity in February 2004. We are currently in compliance with all debt covenants in our indenture agreements discussed below. Financing Transactions Relating to our Acquisition of Gemex During 2002 we issued $645 million in commercial paper, which was utilized as bridge financing in connection with our acquisition of Gemex. In November 2002, the commercial paper was repaid after our issuance of $1 billion of 4 5/8% senior notes due in November 2012. We utilized the net proceeds of the $1 billion of 4 5/8% senior notes, together with available cash on hand, for our acquisition of Gemex and the covenant defeasance and repayment of a portion of Gemex's debt. The $1 billion of 4 5/8% senior notes will be guaranteed by PepsiCo in accordance with the terms set forth in the related indenture. Other Financing Transactions We converted our entire $1.0 billion of 5 3/8% senior notes and $0.3 billion of 5 5/8% senior notes to floating rate debt through the use of interest rate swaps with the objective of reducing our overall borrowing costs. We have a $500 million commercial paper program that is supported by two $250 million credit facilities. One of the credit facilities expires in May 2003 and the other credit facility expires in April 2004. There were no borrowings outstanding under these credit facilities at December 28, 2002, or December 29, 2001. We have available short-term bank credit lines of approximately $167 million and $177 million at December 28, 2002 and December 29, 2001, respectively. These lines were 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 28, 2002, and December 29, 2001, was 8.9% and 4.3%, respectively. Long-Term Debt and Lease Obligations Our future minimum commitments for our long-term debt and non-cancellable capital and operating leases at December 28, 2002 are as follows:
PAYMENTS DUE BY PERIOD ---------------------- TOTAL 2003 2004 2005 2006 2007 THEREAFTER ------ ---- ------ ---- ---- ---- ---------- Long-term debt and capital leases.. $4,534 $18 $1,165 $ 5 $ 3 $37 $3,306 Operating leases .................. 177 34 25 19 15 14 70 ------ --- ------ --- --- --- ------ TOTAL LONG-TERM DEBT AND LEASE OBLIGATIONS ........................ $4,711 $52 $1,190 $24 $18 $51 $3,376 ====== === ====== === === === ======
In addition, at December 28, 2002, we had outstanding letters of credit and surety bonds valued at $98 million primarily to provide collateral for estimated self-insurance claims and other insurance requirements. 30 Capital Expenditures 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 $623 million, $593 million and $515 million during 2002, 2001 and 2000, respectively. Acquisitions During 2002 we acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola beverages of several different PepsiCo franchise bottlers. The following acquisitions occurred for an aggregate purchase price of $936 million in cash and $375 million of assumed debt: - Fruko Mesrubat Sanayii A.S. and related companies of Turkey in March. - Pepsi-Cola Bottling Company of Macon, Inc. of Georgia in March. - Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle, Maine in June. - Seaman's Beverages Limited of the Canadian province of Prince Edward Island in July. - Pepsi-Gemex, S.A. de. C.V of Mexico in November. - Kitchener Beverages Limited of Ontario, Canada in December. The Mexican and Turkish acquisitions were made to allow us to increase our markets outside the United States. Our U.S. and Canadian acquisitions were made to enable us to provide better service to our large retail customers. We expect these acquisitions to reduce costs through economies of scale. We completed the acquisition of a Pepsi-Cola bottler based in Buffalo, New York, in the first quarter of 2003. We intend to continue to pursue other acquisitions of independent PepsiCo bottlers in the U.S. and Canada, particularly in territories contiguous to our own, where they create shareholder value. We also intend to continue to evaluate international acquisition opportunities as they become available. CASH FLOWS Fiscal 2002 Compared with Fiscal 2001 Net cash provided by operations increased $132 million to $1,014 million reflecting strong operating income growth coupled with lower income tax payments and higher non-cash casualty and benefits expenses offset by an increase in our pension contributions. Net cash used for investments increased by $1,027 million to $1,734 million primarily due to the six acquisitions we made during the year, coupled with the investment in our debt defeasance trust and an increase in capital expenditures as we continue to invest in small bottle production lines and cold drink equipment. Net cash provided by financing increased by $882 million to $673 million driven by proceeds received from our issuance of $1.0 billion of 4 5/8% senior notes to finance our acquisition of Gemex and an increase in stock option exercises, offset by a reduction of short and long-term borrowings primarily outside the United States. Fiscal 2001 Compared with Fiscal 2000 Net cash provided by operating activities increased $103 million to $882 million in 2001, driven by strong operating income growth and the timing of casualty insurance payments, partially offset by higher pension contribution payments in 2001. Net cash used for investments increased by $175 million from $532 million in 2000 to $707 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. Net cash used for financing increased by $94 million to $209 million in 2001. This increase primarily reflects our share repurchase program offset by higher short-term borrowings outside the U.S. and proceeds from stock option exercises. 31 MARKET RISKS AND CAUTIONARY STATEMENTS QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, our financial position is routinely 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. 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 2003 and 2004, which establish our purchase prices within defined ranges. We had $16 million and $19 million in unrealized losses based on the commodity rates in effect on December 28, 2002, and December 29, 2001, respectively. 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 $32 million and $15 million at December 28, 2002, and December 29, 2001, 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. As a result of the market risk, we effectively converted $1.3 billion of our fixed rate debt to floating rate debt through the use of interest rate swaps. The change in fair value of the interest rate swaps resulted in an increase to our hedge and debt instruments of $16 million and $7 million in 2002 and 2001, respectively. We estimate that a 10% decrease in interest rates with all other variables held constant would have resulted in an increase in the fair value of our financial instruments, both our fixed rate debt and our interest rate swaps, of $162 million and $144 million at December 28, 2002, and December 29, 2001, respectively Foreign Currency Exchange Rate Risk In 2002, approximately 18% of our net revenues came from outside the United States. This amount is not indicative of our 2003 results due to our recent acquisition of Gemex. Accordingly, in 2003 we expect approximately 28% of our net revenues to come from outside the United States. 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 32 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 and liabilities 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 generally do not hedge against currency risks because cash flows from our international operations are usually reinvested locally. In addition, we historically have not entered into hedges to minimize the volatility of reported earnings. Based on our overall evaluation of market risk exposures for our foreign currency financial instruments at December 28, 2002, and December 29, 2001, a near term change in foreign currency exchange rates would not materially affect our consolidated financial position, results of operations or cash flows in those periods. 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 and Turkey have been considered highly inflationary economies for accounting purposes. Beginning in 2003, Russia will no longer be considered highly inflationary, and will change its functional currency from the U.S. dollar to the Russian ruble. We do not expect any material impact on our consolidated financial statements as a result of Russia's change in functional currency. Unfunded Deferred Compensation Liability Our unfunded deferred compensation liability is subject to changes in our stock price as well as price changes in certain other equity and fixed income investments. Participating employees in our deferred compensation program can elect to defer all or a portion of their compensation to be paid out on a future date or dates. As part of the deferral process, employees select from phantom investment options that determine the earnings on the deferred compensation liability and the amount that they will ultimately receive. Employee investment elections include PBG stock and a variety of other equity and fixed income investment options. Since the plan is unfunded, employees' deferred compensation amounts are not directly invested in these investment vehicles. Instead, we track the performance of each employee's investment selections and adjust his or her deferred compensation account accordingly. The adjustments to the employees' accounts increases or decreases the deferred compensation liability reflected on our Consolidated Balance Sheets with an offsetting increase or decrease to our selling, delivery and administrative expenses. We use prepaid forward contracts to hedge the portion of our deferred compensation liability that is based on our stock price. Therefore, changes in compensation expense as a result of changes in our stock price are substantially offset by the changes in the fair value of these contracts. We estimate that a 10% unfavorable change in the year end stock price would have reduced our gains from these commitments by $2 million in 2002 and $1 million in 2001. 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 our 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 bottler incentive payments from PepsiCo, material changes in our expected interest and currency exchange rates, an inability to achieve cost savings, an inability to achieve volume growth through product and packaging initiatives, competitive pressures that may cause channel and product mix to shift from more profitable cold drink channels and packages, weather conditions in PBG's markets, political conditions in PBG's markets outside the United States and Canada, possible recalls of PBG's products, an inability to meet projections for performance in newly acquired territories, unfavorable market performance on our pension plan assets, unfavorable outcomes from our U.S. Internal Revenue Service audits, and changes in our debt ratings. 33 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS in millions, except per share data FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
2002 2001 2000 ------ ------- ------ NET REVENUES ................................ $9,216 $ 8,443 $7,982 Cost of sales ............................... 5,001 4,580 4,405 ------ ------- ------ GROSS PROFIT ................................ 4,215 3,863 3,577 Selling, delivery and administrative expenses 3,317 3,187 2,987 ------ ------- ------ OPERATING INCOME ............................ 898 676 590 Interest expense, net ....................... 191 194 192 Other non-operating expenses, net ........... 7 -- 1 Minority interest ........................... 51 41 33 ------ ------- ------ INCOME BEFORE INCOME TAXES .................. 649 441 364 Income tax expense before rate change ....... 221 161 135 Income tax rate change benefit .............. -- (25) -- ------ ------- ------ NET INCOME .................................. $ 428 $ 305 $ 229 ====== ======= ====== BASIC EARNINGS PER SHARE .................... $ 1.52 $ 1.07 $ 0.78 Weighted-Average Shares Outstanding ......... 282 286 294 DILUTED EARNINGS PER SHARE .................. $ 1.46 $ 1.03 $ 0.77 Weighted-Average Shares Outstanding ......... 293 296 299
See accompanying notes to Consolidated Financial Statements. 34 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS dollars in millions FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
2002 2001 2000 ------- ----- ----- CASH FLOWS -- OPERATIONS Net income ............................................................................ $ 428 $ 305 $ 229 Adjustments to reconcile net income to net cash provided by operations: Depreciation ...................................................................... 443 379 340 Amortization ...................................................................... 8 135 131 Deferred income taxes ............................................................. 131 23 -- Other non-cash charges and credits, net ........................................... 228 182 176 Changes in operating working capital, excluding effects of acquisitions: Accounts receivable ............................................................ (19) (28) 13 Inventories .................................................................... 13 (50) 11 Prepaid expenses and other current assets ...................................... 33 2 (97) Accounts payable and other current liabilities ................................. (50) 57 28 ------- ----- ----- Net change in operating working capital ..................................... (23) (19) (45) ------- ----- ----- Pension contributions ............................................................. (151) (86) (26) Other, net ........................................................................ (50) (37) (26) ------- ----- ----- NET CASH PROVIDED BY OPERATIONS ....................................................... 1,014 882 779 ------- ----- ----- CASH FLOWS -- INVESTMENTS Capital expenditures .................................................................. (623) (593) (515) Acquisitions of bottlers .............................................................. (936) (120) (26) Sales of property, plant and equipment ................................................ 6 6 9 Investment in debt defeasance trust ................................................... (181) -- -- ------- ----- ----- NET CASH USED FOR INVESTMENTS ......................................................... (1,734) (707) (532) ------- ----- ----- CASH FLOWS -- FINANCING Short-term borrowings, net -- three months or less .................................... (78) 50 12 Proceeds from issuances of long-term debt ............................................. 1,031 -- -- Payments of long-term debt ............................................................ (120) -- (9) Minority interest distribution ........................................................ (11) (16) (3) Dividends paid ........................................................................ (11) (12) (12) Proceeds from exercise of stock options ............................................... 93 18 -- Purchases of treasury stock ........................................................... (231) (249) (103) ------- ----- ----- NET CASH PROVIDED BY (USED FOR) FINANCING ............................................. 673 (209) (115) ------- ----- ----- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .......................... (8) (7) (4) ------- ----- ----- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................................. (55) (41) 128 CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR ........................................ 277 318 190 ------- ----- ----- CASH AND CASH EQUIVALENTS -- END OF YEAR .............................................. $ 222 $ 277 $ 318 ======= ===== ===== SUPPLEMENTAL CASH FLOW INFORMATION NON-CASH INVESTING AND FINANCING ACTIVITIES: Liabilities incurred and/or assumed in conjunction with acquisitions of bottlers $ 813 $ 25 $ 9
See accompanying notes to Consolidated Financial Statements. 35 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED BALANCE SHEETS in millions, except per share data DECEMBER 28, 2002 AND DECEMBER 29, 2001
2002 2001 -------- ------- ASSETS CURRENT ASSETS Cash and cash equivalents ..................................................... $ 222 $ 277 Accounts receivable, less allowance of $67 in 2002 and $42 in 2001 ............ 922 823 Inventories ................................................................... 378 331 Prepaid expenses and other current assets ..................................... 215 117 -------- ------- TOTAL CURRENT ASSETS ...................................................... 1,737 1,548 Property, plant and equipment, net ............................................ 3,308 2,543 Intangible assets, net ........................................................ 4,687 3,684 Investment in debt defeasance trust ........................................... 170 -- Other assets .................................................................. 125 82 -------- ------- TOTAL ASSETS .............................................................. $ 10,027 $ 7,857 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities ................................ $ 1,179 $ 1,004 Short-term borrowings ......................................................... 69 77 -------- ------- TOTAL CURRENT LIABILITIES ................................................. 1,248 1,081 Long-term debt ................................................................ 4,523 3,285 Other liabilities ............................................................. 819 550 Deferred income taxes ......................................................... 1,265 1,021 Minority interest ............................................................. 348 319 -------- ------- TOTAL LIABILITIES ......................................................... 8,203 6,256 SHAREHOLDERS' EQUITY Common stock, par value $0.01 per share authorized 900 shares, issued 310 shares ................................... 3 3 Additional paid-in capital .................................................... 1,750 1,739 Retained earnings ............................................................. 1,066 649 Accumulated other comprehensive loss .......................................... (468) (370) Treasury stock: 30 shares and 29 shares in 2002 and 2001, respectively, at cost (527) (420) -------- ------- TOTAL SHAREHOLDERS' EQUITY ................................................ 1,824 1,601 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 10,027 $ 7,857 ======== =======
See accompanying notes to Consolidated Financial Statements. 36 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY in millions, except per share data FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE STOCK CAPITAL EARNINGS LOSS STOCK TOTAL INCOME/(LOSS) ----- ---------- -------- ------------- -------- -------- ------------- 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: 10 shares ..... -- -- -- -- (103) (103) Cash dividends declared on common stock (per share - $0.04) ............................. -- -- (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) Cash flow hedge 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 (per share - $0.04) ............................. -- -- (11) -- -- (11) ---- ------- ------- ----- ----- ------- BALANCE AT DECEMBER 29, 2001 ....................... 3 1,739 649 (370) (420) 1,601 Comprehensive income: Net income .................................. -- -- 428 -- -- 428 $ 428 Currency translation adjustment ............. -- -- -- 18 -- 18 18 Cash flow hedge adjustment ................. -- -- -- 7 -- 7 7 Minimum pension liability adjustment ....... -- -- -- (123) -- (123) (123) ----- Total comprehensive income ...................... $ 330 ===== Stock option exercises: 8 shares ................ -- (31) -- -- 124 93 Tax benefit - stock option exercises ............ -- 42 -- -- -- 42 Purchase of treasury stock: 9 shares ............ -- -- -- -- (231) (231) Cash dividends declared on common stock (per share - $0.04) ............................. -- -- (11) -- -- (11) ---- ------- ------- ----- ----- ------- BALANCE AT DECEMBER 28, 2002 ....................... $ 3 $ 1,750 $ 1,066 $(468) $(527) $ 1,824 ==== ======= ======= ===== ===== =======
See accompanying notes to Consolidated Financial Statements. 37 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 all or part of the United States, Canada, Spain, Greece, Russia, Turkey and Mexico. 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 2002 volume was derived from the sale of Pepsi-Cola beverages. References to PBG throughout these Consolidated Financial Statements are made using the first-person notations of "PBG," "we," "our" and "us." 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 were restated to reflect the split. PepsiCo, Inc. ("PepsiCo") owns 106,011,358 shares of our common stock, consisting of 105,911,358 shares of common stock and 100,000 shares of Class B common stock. All shares of Class B common stock that have been authorized have been issued to PepsiCo. PepsiCo's ownership at December 28, 2002, represents 37.8% 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 our voting stock. As of December 28, 2002, PepsiCo also owns 6.8% of the equity of Bottling Group, LLC, our principal operating subsidiary. The common stock and Class B common stock both have a par value of $0.01 per share and 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. In addition, our Board of Directors has the authority to issue up to 20,000,000 shares of preferred stock, and to determine the price and terms, including, but not limited to, preferences and voting rights of those shares without stockholder approval. Certain reclassifications were made in our Consolidated Financial Statements to 2001 and 2000 amounts to conform to the 2002 presentation. 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 ("U.S. 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. 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 2002 and 2001 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. 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. SALES INCENTIVES - We offer certain sales incentives to our customers, which are accounted for as a reduction in our net revenues when incurred. A number of these arrangements are based upon annual and quarterly targets that generally do not exceed one year. Based upon forecasted volume and other performance criteria, net revenues in our Consolidated Statements of Operations are reduced by the expected amounts to be paid out to our customers. 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 fiscal year incurred. Advertising and marketing costs were $441 million, $389 million and $350 million in 2002, 2001 and 2000, respectively, before bottler incentives received from PepsiCo and other brand owners. BOTTLER INCENTIVES - PepsiCo and other brand owners, at their sole discretion, provide us with various forms of bottler incentives. These incentives cover a variety of initiatives, including direct marketplace support, capital equipment funding and advertising 38 support. Based on the objective of the programs and initiatives, we record bottler incentives as an adjustment to net revenues or as a reduction of selling, delivery and administrative expenses. Direct marketplace support represents PepsiCo's and other brand owners' funding to assist us in offering sales and promotional discounts to retailers and is recorded as an adjustment to net revenues. Capital equipment funding is designed to help offset the costs of purchasing and installing marketing equipment, such as vending machines and glass door coolers at customer locations and is recorded as a reduction of selling, delivery and administrative expenses. Advertising support represents the cost of media time, promotional materials, and other advertising and marketing costs that are funded by PepsiCo and other brand owners and is recorded as a reduction to advertising and marketing expenses within selling, delivery and administrative expenses. In addition, PepsiCo and other brand owners may share certain media costs with us due to our joint objective of promoting their brands. There are no conditions or other requirements that could result in a repayment of the bottler incentives received. Total bottler incentives received, including media costs shared by PepsiCo and other brand owners were $604 million, $598 million and $566 million in 2002, 2001 and 2000, respectively. Of these amounts, we recorded $293 million in both 2002 and 2001 and $277 million in 2000, in net revenues, and the remainder as a reduction of selling, delivery and administrative expenses. SHIPPING AND HANDLING COSTS - We record the majority of our shipping and handling costs within selling, delivery and administrative expenses. Such costs totaled $1,116 million, $1,058 million and $977 million in 2002, 2001 and 2000, 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 remeasurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries and transaction gains and losses. Turkey and Russia were considered highly inflationary economies for accounting purposes in 2002. Beginning in 2003, Russia will no longer be considered highly inflationary, and will change its functional currency from the U.S. dollar to the Russian ruble. We do not expect any material impact on our consolidated financial statements as a result of Russia's change in functional currency in 2003. Turkey is expected to remain highly inflationary for fiscal year 2003. PENSION AND POSTRETIREMENT BENEFIT PLANS - We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. We account for our defined benefit pension plans and our postretirement benefit plans using actuarial models required by Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The assets, liabilities and assumptions used to measure expense for any fiscal year are determined as of September 30 of the preceding year ("measurement date"). The discount rate assumption used in our pension and postretirement benefit plans' accounting is based on current interest rates for high-quality, long-term corporate debt as determined on each measurement date. The expected return on plan assets is based on our long-term historical experience, our plan asset allocation and our expectations for long-term interest rates and market performance. In evaluating our rate of return on assets for a given fiscal year, we consider a 15 to 20 year time horizon for our pension investment portfolio. In addition, we look at the return on asset assumptions used by other companies in our industry as well as other large companies. Over the past three fiscal years the composition of our plan assets was approximately 70%-75% equity investments and 25%-30% fixed income securities, which primarily consist of U.S. government and corporate bonds. Differences between actual and expected returns are generally recognized in the net periodic pension calculation over five years. To the extent the amount of all unrecognized gains and losses exceeds 10% of the larger of the benefit obligation or plan assets, such amount is amortized over the average remaining service life of active participants. The rate of future compensation increases is based upon our historical experience and management's best estimate regarding future expectations. We amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits. For our postretirement plans that provide medical and life insurance benefits, we review external data and our historical health care cost trends with our actuarial advisors to determine the health care cost trend rates. INCOME TAXES - Our effective tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. 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. 39 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 the evaluation of the aging of our trade receivable portfolio and a customer-by-customer analysis of our high-risk customers. Our reserves contemplate our historical loss rate on receivables, specific customer situations, and the economic environments 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 for the majority of our locations. For our recent acquisitions in Mexico and Turkey, we value inventories at the lower of cost computed on the weighted-average cost 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 - During 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 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 no longer amortize goodwill and certain franchise rights, but evaluate them for impairment annually. Our identifiable intangible assets principally arise from the allocation of the purchase price of businesses acquired, and consist primarily of franchise rights. Our franchise rights are typically perpetual in duration, subject to compliance with the underlying franchise agreement. The value and life of our franchise rights are directly associated with the underlying portfolio of brands that we are entitled to make, sell and distribute under applicable franchise agreements. In considering whether franchise rights have an indefinite useful life, we consider the nature and terms of the underlying franchise agreements; our intent and ability to use the franchise rights; and the age and market position of the products within the franchise as well as the historical and projected growth of those products. We assign amounts to such identifiable intangibles based on their estimated fair values at the date of acquisition. In accordance with Emerging Issues Task Force ("EITF") Issue No. 02-07, "Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets," we evaluate our franchise rights with indefinite useful lives for impairment annually as asset groups on a country-by-country basis ("asset groups"). We measure the fair value of these asset groups utilizing discounted estimated future cash flows, including a terminal value, which assumes the franchise rights will continue in perpetuity. Our long-term terminal growth assumptions reflect our current long-term view of the marketplace. Our discount rate is based upon our weighted-average cost of capital plus an additional risk premium to reflect the risk and uncertainty inherent in separately acquiring a franchise agreement between a willing buyer and a willing seller. Each year we re-evaluate our assumptions in our discounted cash flow model to address changes in our business and marketplace conditions. Based upon our annual impairment analysis, the estimated fair values of our franchise rights with indefinite lives exceeded their carrying amounts in 2002. In accordance with SFAS No. 142, we evaluate goodwill on a country-by-country basis ("reporting unit") for impairment. We evaluate each reporting unit for impairment based upon a two-step approach. First, we compare the fair value of our reporting unit with its carrying value. Second, if the carrying value of our reporting unit exceeds its fair value, we compare the implied fair value of the reporting unit's goodwill to its carrying amount to measure the amount of impairment loss. In measuring the implied fair value of goodwill, we would allocate the fair value of the reporting unit to each of its assets and liabilities (including any unrecognized intangible assets). Any excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. We measure the fair value of a reporting unit as the discounted estimated future cash flows, including a terminal values, which assumes the business continues in perpetuity, less its respective minority interest and net debt (net of cash and cash equivalents). Our long-term terminal growth assumptions reflect our current long-term view of the marketplace. Our discount rate is based upon our weighted-average cost of capital. Each year we re-evaluate our assumptions in our discounted cash flow model to address changes in our business and marketplace conditions. Based upon our annual impairment analysis in the fourth quarter of 2002, the estimated fair value of our reporting units exceeded their carrying value and as result, we did not proceed to the second step of the impairment test. 40 Other identifiable intangible assets that are subject to amortization are amortized straight-line over the period in which we expect to receive economic benefit and are reviewed for impairment when facts and circumstances indicate that the carrying value of the asset may not be recoverable. Determining the expected life of these intangible assets is based on an evaluation of a number of factors, including the competitive environment, market share and brand history. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value. Fair value is generally estimated based on either appraised value or other valuation techniques. INVESTMENT IN DEBT DEFEASANCE TRUST - We have purchased $181 million in U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest on the $160 million of 9 3/4% senior notes maturing in March 2004, in order to defease their respective covenants. These marketable securities have maturities that coincide with the scheduled interest payments of the senior notes and ultimate payment of principal. We have categorized these marketable securities as held-to-maturity as we have the positive intent and ability to hold these securities to maturity. Held-to-maturity securities are carried at amortized cost. The total amortized cost for these held-to-maturity securities at December 28, 2002, was $182 million. The current portion of these held-to-maturity securities is recorded in prepaid expenses and other current assets in the amount of $12 million, and the remaining long-term portion of $170 million is recorded in investment in debt defeasance trust in our Consolidated Balance Sheets. CASUALTY INSURANCE COSTS - We are self-insured for casualty costs in the United States. Casualty insurance costs for our self-insurance program represent the ultimate net cost of all reported and estimated unreported losses incurred during the fiscal year. Our liability for casualty costs of $69 million as of December 28, 2002, is estimated using individual case-based valuations and statistical analyses and is based upon historical experience, actuarial assumptions and professional judgment. We do not discount loss expense reserves. 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 in February 1999. At December 28, 2002, PBG owns 93.2% of Bottling Group, LLC and PepsiCo owns the remaining 6.8%. Accordingly, the Consolidated Financial Statements reflect PepsiCo's share of the 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 the inception of our share repurchase program in October 1999, we have repurchased approximately 40 million shares and have reissued approximately 10 million for stock option exercises. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - We use derivative instruments to hedge against the risk associated with the price of commodities purchased and used in our business, interest rates on outstanding debt and in 2002, certain currency exposures relating to our acquisition of Pepsi-Gemex, S.A. de C.V. ("Gemex"), a company we acquired in November 2002. 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 generally 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 derivative instruments that hedge interest rate risk, the fair value adjustments are recorded to interest expense, net, in the Consolidated Statements of Operations. For a cash flow hedge, the effective portion of 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 applicable gain or loss is recognized in earnings immediately and is recorded consistent with the expense classification of the underlying hedged item. The ineffective portion of fair value changes on qualifying cash flow hedges is recognized in earnings immediately and is recorded 41 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 enter into derivative instruments that do not qualify for hedge accounting. These instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value recognized in earnings. We also may enter into certain derivative instruments 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 using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, compensation expense for stock option grants to our 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. As allowed by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." If we had measured compensation cost for the stock options granted to our employees under the fair value based method prescribed by SFAS No. 123, net income would have been changed to the pro forma amounts set forth below:
2002 2001 2000 ------- ------- ------- Net Income Reported ........................................................... $ 428 $ 305 $ 229 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes (40) (36) (25) ------- ------- ------- Pro forma .......................................................... $ 388 $ 269 $ 204 ======= ======= ======= Earnings per Share Basic - as reported ................................................ $ 1.52 $ 1.07 $ 0.78 Diluted - as reported .............................................. $ 1.46 $ 1.03 $ 0.77 Basic - pro forma .................................................. $ 1.38 $ 0.94 $ 0.70 Diluted - pro forma ................................................ $ 1.32 $ 0.91 $ 0.69
Pro forma compensation cost measured for stock options granted to employees is amortized straight-line over the vesting period, which is typically three years. 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. NEW ACCOUNTING STANDARDS - During 2001, the FASB issued SFAS No. 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 No. 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 no longer amortize goodwill and certain franchise rights, but evaluate them for impairment annually. We have completed our annual impairment review and have determined that our goodwill and indefinite-lived intangible assets are not impaired. The following table provides pro forma disclosure of the elimination of goodwill and certain franchise rights amortization in 2001 and 2000, as if SFAS No. 142 had been adopted in 2000: 42
2002 2001 2000 ------- ------- ------- Reported net income .................................. $ 428 $ 305 $ 229 Add back: Goodwill amortization, net of tax ....... -- 27 27 Add back: Franchise rights amortization, net of tax -- 64 63 ------- ------- ------- Adjusted net income .................................. $ 428 $ 396 $ 319 ======= ======= ======= Reported earnings per common share - Basic ........... $ 1.52 $ 1.07 $ 0.78 Add back: Goodwill amortization, net of tax ....... -- 0.09 0.09 Add back: Franchise rights amortization, net of tax -- 0.23 0.22 ------- ------- ------- Adjusted earnings per common share - Basic ........... $ 1.52 $ 1.39 $ 1.09 ======= ======= ======= Reported earnings per common share - Diluted ......... $ 1.46 $ 1.03 $ 0.77 Add back: Goodwill amortization, net of tax ....... -- 0.09 0.09 Add back: Franchise rights amortization, net of tax -- 0.22 0.21 ------- ------- ------- Adjusted earnings per common share - Diluted ......... $ 1.46 $ 1.34 $ 1.07 ======= ======= =======
During 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 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 No. 143 is effective for fiscal year 2003. We do not anticipate that the adoption of SFAS No. 143 will have a material impact on our Consolidated Financial Statements. During 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 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. We adopted SFAS No. 144 at the beginning of fiscal year 2002. The adoption of SFAS No. 144 did not have a material impact on our Consolidated Financial Statements. During 2001, the EITF issued EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products," which addresses the recognition of income statement and classification of various sales incentives. We adopted EITF Issue No. 01-09 at the beginning of fiscal 2002 and it did not have a material impact on our Consolidated Financial Statements. During 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with the Exit or Disposal Activities." SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not anticipate that the adoption of SFAS No. 146 will have a material impact on our Consolidated Financial Statements. During 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this statement requires SFAS No. 123 disclosure requirements in both annual and interim financial statements. We will continue to measure stock-based compensation expense in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and its related interpretations, and therefore we do not anticipate that the adoption of SFAS No. 148 will have a material impact on our Consolidated Financial Statements. During 2002, the EITF addressed various issues related to the income statement classification of certain payments received by a customer from a vendor. In November 2002, the EITF reached a consensus on Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," addressing the recognition and income statement classification of various consideration given by a vendor to a customer. Among its requirements, the consensus requires that certain cash consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor's products, and therefore should be characterized as a reduction of cost of sales when recognized in the customer's income statement, unless certain criteria are met. EITF Issue No. 02-16 will be effective beginning in our fiscal year 2003. We currently classify bottler incentives received from PepsiCo and other brand owners as adjustments to net revenues and selling, delivery and administrative expenses. In accordance with EITF Issue No. 02-16, we will classify certain bottler incentives as a reduction of cost of sales beginning in 2003. We are currently assessing the transitional guidance released by the EITF to determine the net impact to our Consolidated Financial Statements. 43 NOTE 3 -- INVENTORIES
2002 2001 ----- ----- Raw materials and supplies................................... $ 162 $ 117 Finished goods............................................... 216 214 ----- ----- $ 378 $ 331 ===== =====
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT, NET
2002 2001 ------- ------- Land ................................... $ 228 $ 145 Buildings and improvements ............. 1,126 925 Manufacturing and distribution equipment 2,768 2,308 Marketing equipment .................... 2,008 1,846 Other .................................. 154 121 ------- ------- 6,284 5,345 Accumulated depreciation ............... (2,976) (2,802) ------- ------- $ 3,308 $ 2,543 ======= =======
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............................ 2-10 years Marketing equipment............................... 3-7 years
NOTE 5 -- INTANGIBLE ASSETS, NET
2002 2001 ------- ------- Intangibles subject to amortization: Gross carrying amount: Franchise rights ................................................... $ 20 $ 12 Other identifiable intangibles ..................................... 24 39 ------- ------- 44 51 ------- ------- Accumulated amortization: Franchise rights ................................................... (6) (2) Other identifiable intangibles ..................................... (9) (25) ------- ------- (15) (27) ------- ------- Intangibles subject to amortization (less accumulated amortization) 29 24 ------- ------- Intangibles not subject to amortization: Carrying amount: Franchise rights ................................................... 3,424 2,577 Goodwill ........................................................... 1,192 1,046 Other identifiable intangibles ..................................... 42 37 ------- ------- Intangibles not subject to amortization ............................ 4,658 3,660 ------- ------- Total Intangible Assets (less accumulated amortization) ............... $ 4,687 $ 3,684 ======= =======
For intangible assets subject to amortization, we calculate amortization on a straight-line basis over the period we expect to receive economic benefit. Total amortization expense was $8 million, $135 million and $131 million in 2002, 2001 and 2000, respectively. The weighted-average amortization period for each class of intangible assets and their estimated aggregate amortization expense expected to be recognized over the next five years are as follows:
Weighted-Average Amortization Period Estimated Aggregate Amortization Expense to be Incurred ------------------- ------------------------------------------------------- 2003 2004 2005 2006 2007 ---- ---- ---- ---- ---- Franchise rights ................ 5 years $4 $4 $4 $2 $-- Other identifiable intangibles .. 7 years $4 $4 $3 $2 $1
Through our various current and prior year acquisitions we accumulated $146 million of goodwill during 2002. 44 NOTE 6 -- ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
2002 2001 ------ ------ Accounts payable ................ $ 394 $ 362 Trade incentives ................ 210 205 Accrued compensation and benefits 181 141 Accrued interest ................ 81 71 Other accrued taxes ............. 57 38 Other current liabilities ....... 256 187 ------ ------ $1,179 $1,004 ====== ======
NOTE 7 -- SHORT-TERM BORROWINGS AND LONG-TERM DEBT
2002 2001 ------ ------ Short-term borrowings Current maturities of long-term debt ......................... $ 18 $ 3 Other short-term borrowings .................................. 51 74 ------ ------ $ 69 $ 77 ====== ====== 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 4 5/8% senior notes due 2012 ................................. 1,000 -- 9 3/4% senior notes due 2004 ................................. 160 -- Other (average rate 3.7%) .................................... 74 11 ------ ------ 4,534 3,311 Add: SFAS No. 133 adjustment * ............................... 23 7 Fair value adjustment relating to purchase accounting 14 -- Less: Unamortized discount, net .............................. 30 30 Current maturities of long-term debt .................... 18 3 ------ ------ $4,523 $3,285 ====== ======
* In accordance with the requirements of SFAS No. 133, the portion of our fixed-rate debt obligations that is hedged is reflected in our Consolidated Balance Sheets as an amount equal to the sum of the debt's carrying value plus a SFAS No. 133 fair value adjustment representing changes recorded in the fair value of the hedged debt obligations attributable to movements in market interest rates. Maturities of long-term debt as of December 28, 2002, are 2003: $18 million, 2004: $1,165 million, 2005: $5 million, 2006: $3 million, 2007: $37 million and thereafter, $3,306 million. The $1.3 billion of 5 5/8% senior notes (with an effective interest rate of 5.6%) and the $1.0 billion of 5 3/8% senior notes (with an effective interest rate of 4.5%) were issued on February 9, 1999, by our subsidiary Bottling Group, LLC and are guaranteed by PepsiCo. PBG issued the $1.0 billion of 7% senior notes (with an effective interest rate of 7.0%) on March 8, 1999 and they are guaranteed by Bottling Group, LLC. The $1.0 billion of 4 5/8% senior notes (with an effective interest rate of 4.6%) was issued on November 15, 2002, by our subsidiary Bottling Group, LLC and will be guaranteed by PepsiCo, in accordance with the terms set forth in the related indenture. Each of the senior notes mentioned above has redemption features, covenants and will, among other things, limit our ability and the ability of our restricted subsidiaries to create or assume liens, enter into sale and lease-back transactions, engage in mergers or consolidations and transfer or lease all or substantially all of our assets. The $160 million of 9 3/4% senior notes were issued by Gemex. These senior notes have an effective interest rate of 3.7% after a fair value adjustment of $14 million resulting from our acquisition of Gemex. In December 2002, we purchased $181 million of U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest on the $160 million of 9 3/4% senior notes maturing in March 2004, in order to defease its respective covenants. We estimate that the U.S. government securities will be sufficient to satisfy all future principal and interest requirements of the senior notes. See Note 2. We have a $500 million commercial paper program that is supported by two $250 million credit facilities. One of the credit facilities expires in May 2003 and the other credit facility expires in April 2004. There were no borrowings outstanding under these credit facilities at December 28, 2002, or December 29, 2001. We have available short-term bank credit lines of approximately $167 million and $177 million at December 28, 2002, and December 29, 2001, respectively. These lines were 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 28, 2002, and December 29, 2001, was 8.9% and 4.3%, respectively. Amounts paid to third parties for interest were $196 million, $191 million and $202 million in 2002, 2001 and 2000, respectively. Total interest expense incurred during 2002, 2001 and 2000 was $200 million, $204 million and $208 million, respectively. 45 NOTE 8 -- COMMITMENTS We have noncancellable commitments under both capital and long-term operating leases, which consist principally of buildings, office equipment and machinery. 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:
LEASES ------ CAPITAL OPERATING ------- --------- 2003 ...... $ 1 $ 34 2004 ...... 1 25 2005 ...... -- 19 2006 ...... -- 15 2007 ...... -- 14 Later years 3 70 ------- --------- $ 5 $177 ======= =========
In addition, at December 28, 2002, we have outstanding letters of credit and surety bonds valued at $98 million primarily to provide collateral for estimated self-insurance claims and other insurance requirements. At December 28, 2002, the present value of minimum payments under capital leases was $3 million, after deducting $2 million for imputed interest. Our rental expense was $62 million, $40 million and $42 million for 2002, 2001 and 2000, respectively. NOTE 9 -- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT These Consolidated Financial Statements reflect the implementation of SFAS No. 133, as amended by SFAS No. 138, on the first day of fiscal year 2001. In June 1998, the FASB issued SFAS No. 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 No. 138, amending the accounting and reporting standards of SFAS No. 133. Prior to the adoption of SFAS No. 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 Statements of Operations. As of December 28, 2002, 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. CASH FLOW HEDGES - 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 future and option contracts 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 one 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. The amount of deferred losses from our commodity hedging that we recognized into cost of sales in our Consolidated Statements of Operations was $22 million in 2002 and $4 million for 2001. As a result of our commodity hedges, $16 million and $19 million of deferred losses (before taxes and minority interest) remained in accumulated other comprehensive loss in our Consolidated Balance Sheets based on the commodity rates in effect on December 28, 2002, and December 29, 2001, respectively. The adjustment to accumulated other comprehensive loss is reflected after income taxes and minority interest of $7 million and $8 million in 2002 and 2001, respectively, in our Consolidated Statements of Changes in Shareholders' Equity. Assuming no change in the commodity prices as measured on December 28, 2002, $13 million of the deferred loss will be recognized in our cost of sales 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 2002 or 2001. On November 15, 2002, Bottling Group, LLC issued a $1 billion 10 year bond with an interest rate of 4 5/8%. In anticipation of the bond issuance, Bottling Group, LLC entered into several treasury rate future contracts to hedge against adverse interest rate changes. We recognized $8 million as a deferred gain (before taxes and minority interest) reported in accumulated other comprehensive loss resulting from these treasury rate 46 contracts. The adjustment to accumulated other comprehensive income is reflected after minority interest and income taxes of $3 million. These deferred gains are released to match the underlying interest expense on the debt. Deferred gains of $0.7 million will be recognized in interest expense over the next 12 months. FAIR VALUE HEDGES - We finance a portion of our operations through fixed-rate debt instruments. We converted our entire $1.0 billion 5 3/8% senior notes and $300 million of our $1.3 billion 5 5/8% senior notes to floating rate debt through the use of interest rate swaps with the objective of reducing our overall borrowing costs. These interest rate swaps meet the criteria for fair value hedge accounting and are 100% effective in eliminating the market rate risk inherent in our long-term debt. Accordingly, any gain or loss associated with these swaps are fully offset by the opposite market impact on the related debt. The change in fair value of the interest rate swaps was a gain of $16 million in 2002 and 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 of the related long-term debt. UNFUNDED DEFERRED COMPENSATION LIABILITY - Our unfunded deferred compensation liability is subject to changes in our stock price as well as price changes in other equity and fixed income investments. Participating employees in our deferred compensation program can elect to defer all or a portion of their compensation to be paid out on a future date or dates. As part of the deferral process, employees select from phantom investment options that determine the earnings on the deferred compensation liability and the amount that they will ultimately receive. Employee investment elections include PBG stock and a variety of other equity and fixed income investment options. Since the plan is unfunded, employees' deferred compensation amounts are not directly invested in these investment vehicles. Instead, we track the performance of each employee's investment selections and adjust his or her deferred compensation account accordingly. The adjustments to the employees' accounts increases or decreases the deferred compensation liability reflected on our Consolidated Balance Sheets with an offsetting increase or decrease to our selling, delivery and administrative expenses. We use prepaid forward contracts to hedge the portion of our deferred compensation liability that is based on our stock price. At December 28, 2002, we had a prepaid forward contract for 638,000 shares at an exercise price of $28.50, which was accounted for as a natural hedge. This contract requires cash settlement and has a fair value at December 28, 2002, of $16 million recorded in prepaid expenses and other current assets in our Consolidated Balance Sheets. The fair value of this contract changes based on the change in our stock price compared with the contract exercise price. We recognized $1 million in gains in 2002 and $2 million in gains in 2001, resulting from the change in fair value of these prepaid forward contracts. The earnings impact from these instruments are classified as selling, delivery and administrative expenses. OTHER DERIVATIVES - During 2002, we entered into option contracts to mitigate certain foreign currency risks in anticipation of our acquisition of Gemex. Although these instruments did not qualify for hedge accounting, they were deemed derivatives since they contained a net settlement clause. These options expired unexercised and the cost of these options of $7 million has been recorded in other non-operating expenses, net in our Consolidated Statements of Operations. OTHER FINANCIAL ASSETS AND LIABILITIES - 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 maturities and since interest rates approximate current market rates for short-term debt. Long-term debt at December 28, 2002, had a carrying value and fair value of $4.5 billion and $4.9 billion, respectively, and at December 29, 2001, had a carrying value and fair value of $3.3 billion and $3.4 billion, respectively. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities. NOTE 10 -- 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 plans for our operations outside the U.S. was not significant. 47 Our U.S. employees are also eligible to participate in our 401(k) savings plans, which are voluntary defined contribution plans. We make matching contributions to the 401(k) savings plans on behalf of participants eligible to receive such contributions. If a participant has one or more but less than 10 years of eligible service, our match will equal $0.50 for each dollar the participant elects to defer up to 4% of the participant's pay. If the participant has 10 or more years of eligible service, our match will equal $1.00 for each dollar the participant elects to defer up to 4% of the participant's pay.
PENSION -------------------------- Components of pension expense: 2002 2001 2000 ---- ---- ---- Service cost ............................................ $ 28 $ 25 $ 24 Interest cost ........................................... 56 50 49 Expected return on plan assets .......................... (66) (57) (53) Amortization of prior service amendments ................ 6 4 5 Special termination benefits ............................ 1 -- -- ---- ---- ---- Net pension expense for the defined benefit plans ....... $ 25 $ 22 $ 25 ---- ---- ---- Cost of defined contribution plans ...................... $ 18 $ 17 $ 15 ---- ---- ---- Total pension expense recognized in the Consolidated Statements of Operations ................................ $ 43 $ 39 $ 40 ==== ==== ====
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.
POSTRETIREMENT -------------------------- 2002 2001 2000 ---- ---- ---- Components of postretirement benefits expense: Service cost ........................................... $ 3 $ 3 $ 3 Interest cost .......................................... 17 16 14 Amortization of net loss ............................... 2 1 1 Amortization of prior service amendments ............... (6) (6) (6) ---- ---- ---- Net postretirement benefits expense recognized in the Consolidated Statements of Operations .................. $ 16 $ 14 $ 12 ==== ==== ====
CHANGES IN THE BENEFIT OBLIGATION
PENSION POSTRETIREMENT ----------------- ----------------- 2002 2001 2002 2001 ----- ----- ----- ----- Obligation at beginning of year $ 760 $ 664 $ 228 $ 212 Service cost ............................... 28 25 3 3 Interest cost .............................. 56 50 17 16 Plan amendments ............................ 22 10 -- -- Actuarial loss ............................. 127 48 55 14 Benefit payments ........................... (41) (37) (17) (17) Special termination benefits ............... 1 -- -- -- ----- ----- ----- ----- Obligation at end of year .................. $ 953 $ 760 $ 286 $ 228 ===== ===== ===== =====
48 CHANGES IN THE FAIR VALUE OF ASSETS
PENSION POSTRETIREMENT ----------------- ----------------- 2002 2001 2002 2001 ----- ----- ----- ----- Fair value at beginning of year $ 578 $ 665 $ -- $ -- Actual return on plan assets ............... (61) (120) -- -- Asset transfers ............................ 11 -- -- -- Employer contributions ..................... 51 70 17 17 Benefit payments ........................... (41) (37) (17) (17) ----- ----- ----- ----- Fair value at end of year .................. $ 538 $ 578 $ -- $ -- ===== ===== ===== =====
SELECTED INFORMATION FOR THE PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS
PENSION POSTRETIREMENT -------------- -------------- 2002 2001 2002 2001 ---- ---- ---- ---- Projected benefit obligation ....................... $953 $760 $286 $228 Accumulated benefit obligation ..................... 843 690 286 228 Fair value of plan assets * ........................ 663 604 -- --
*Includes fourth quarter employer contributions. FUNDED STATUS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT ----------------- ----------------- 2002 2001 2002 2001 ----- ----- ----- ----- Funded status at end of year ................................. $(415) $(182) $(286) $(228) Unrecognized prior service cost .............................. 41 36 (9) (16) Unrecognized loss ............................................ 407 153 110 57 Unrecognized transition asset ................................ -- (1) -- -- Fourth quarter employer contribution ......................... 125 26 6 5 ----- ----- ----- ----- Net amounts recognized ....................................... $ 158 $ 32 $(179) $(182) ===== ===== ===== =====
NET AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT ----------------- ----------------- 2002 2001 2002 2001 ----- ----- ----- ----- Other liabilities ........................................... $(196) $(101) $(179) $(182) Intangible assets ........................................... 42 37 -- -- Accumulated other comprehensive loss......................... 312 96 -- -- ----- ----- ----- ----- Net amounts recognized ...................................... $ 158 $ 32 $(179) $(182) ===== ===== ===== =====
At December 28, 2002, and 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 the unfunded liability as a minimum balance sheet liability. As a result of this additional liability, our intangible asset increased by $5 million to $42 million in 2002, which equals the amount of unrecognized prior service cost in our plans. The remainder of the liability that exceeded the unrecognized prior service cost was recognized as an increase to accumulated other comprehensive loss of $216 million and $96 million in 2002 and 2001, respectively, before taxes and minority interest. The adjustment to accumulated other comprehensive loss is reflected after minority interest of $15 million and $7 million, and deferred income taxes of $78 million and $34 million in 2002 and 2001, respectively in our Consolidated Statements of Changes in Shareholders' Equity. ASSUMPTIONS The weighted-average assumptions used to compute the above information are set forth below:
PENSION ------------------------ 2002 2001 2000 ---- ---- ---- Discount rate for benefit obligation ............................................ 6.8% 7.5% 7.8% Expected return on plan assets (1) .............................................. 9.5% 9.5% 9.5% Rate of compensation increase ................................................... 4.3% 4.3% 4.6%
(1) Expected return on plan assets is presented after administration expenses.
POSTRETIREMENT --------------------------- 2002 2001 2000 ---- ---- ---- Discount rate for benefit obligation........................................... 6.8% 7.5% 7.8%
We evaluate these assumptions with our actuarial advisors on an annual basis and we believe they are within accepted industry ranges, although an increase or decrease in the assumptions or economic events outside our control could have a direct impact on reported net earnings. FUNDING AND PLAN ASSETS The pension plan assets are principally invested in stocks and bonds. None of the assets are invested directly into PBG, PepsiCo or any bottling affiliates of PepsiCo, although it is possible that insignificant indirect investments exist through our broad market indices. Our contributions are made in accordance with applicable tax regulations that provide for current tax deductions for our contributions and for taxation to the employee of plan benefits when the benefits are received. We do not fund our pension plan and postretirement plans when our contributions would not be deductible and when benefits would be taxable to the employee before receipt. Of the total pension liabilities at year end 2002, $52 million relates to plans not funded due to these unfavorable tax consequences. HEALTH CARE COST TREND RATES We have assumed an average increase of 12.0% in 2003 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 5.0% in 2013 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: 49
1% 1% INCREASE DECREASE -------- -------- Effect on total fiscal year 2002 service and interest cost components ................... $-- $-- Effect on the fiscal year 2002 accumulated postretirement benefit obligation ............ $10 $(8)
NOTE 11 -- 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 2002, 2001 and 2000 had exercise prices ranging from $23.25 per share to $29.25 per share, $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 generally become exercisable 25% after one year, an additional 25% after two years, and the remainder after three years. 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. The following table summarizes option activity during 2002:
WEIGHTED- AVERAGE EXERCISE Options in millions OPTIONS PRICE ------- -------- Outstanding at beginning of year ............................. 39.7 $13.20 Granted ................................................... 6.4 25.32 Exercised ................................................. (8.1) 11.63 Forfeited ................................................. (0.6) 16.89 ------ ------ Outstanding at end of year ................................... 37.4 $15.53 ====== ====== Exercisable at end of year ................................... 19.9 $12.59 ====== ====== Weighted-average fair value of options granted during the year $10.89 ======
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 ======
50 Stock options outstanding and exercisable at December 28, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- --------------------------- WEIGHTED- AVERAGE Options in millions REMAINING WEIGHTED- WEIGHTED- CONTRACTUAL AVERAGE AVERAGE RANGE OF EXERCISE PRICE OPTIONS LIFE IN YEARS EXERCISE PRICE OPTIONS EXERCISE PRICE - ----------------------- ------- ------------- -------------- ------- -------------- $9.38-$11.49 8.9 6.99 $ 9.39 7.0 $10.38 $11.50-$15.88 13.2 6.06 $11.63 9.6 $11.61 $15.89-$22.50 9.1 8.00 $20.49 3.2 $20.04 $22.51-$29.25 6.2 9.00 $25.34 0.1 $25.16 ---- ---- ------ ---- ------ 37.4 7.24 $15.53 19.9 $12.59 ==== ==== ====== ==== ======
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:
2002 2001 2000 ---- ---- ---- Risk-free interest rate..................................... 4.5% 4.6% 6.7% Expected life............................................... 6 years 6 years 7 years Expected volatility......................................... 37% 35% 35% Expected dividend yield..................................... 0.16% 0.20% 0.43%
NOTE 12 -- INCOME TAXES The details of our income tax provision are set forth below:
2002 2001 2000 ----- ----- ----- Current: Federal ......................................... $ 61 $ 93 $ 107 Foreign ......................................... 12 5 1 State ........................................... 17 15 27 ----- ----- ----- 90 113 135 ----- ----- ----- Deferred: Federal ......................................... 115 43 7 Foreign ......................................... 2 (1) -- State ........................................... 14 6 (7) ----- ----- ----- 131 48 -- ----- ----- ----- 221 161 135 Rate change benefit -- (25) -- ----- ----- ----- $ 221 $ 136 $ 135 ===== ===== =====
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 2001. Our U.S. and foreign income before income taxes is set forth below:
2002 2001 2000 ---- ---- ---- U.S. .................................................... $573 $375 $318 Foreign.................................................. 76 66 46 ---- ---- ---- $649 $441 $364 ==== ==== ====
Our reconciliation of income taxes calculated at the U.S. federal statutory rate to our provision for income taxes is set forth below:
2002 2001 2000 ---- ---- ---- Income taxes computed at the U.S. federal statutory rate.... 35.0% 35.0% 35.0% State income tax, net of federal tax benefit ............... 2.8 3.1 3.2 Impact of foreign results .................................. (6.1) (9.0) (7.5) Goodwill and other nondeductible expenses .................. 1.0 3.9 5.1 Other, net ................................................. 1.3 3.5 1.2 ---- ---- ---- 34.0 36.5 37.0 Rate change benefit ........................................ -- (5.7) -- ---- ---- ---- Total effective income tax rate ............................ 34.0% 30.8% 37.0% ==== ==== ====
51 The details of our 2002 and 2001 deferred tax liabilities (assets) are set forth below:
2002 2001 ------- ------- Intangible assets and property, plant and equipment......... $ 1,424 $ 1,094 Other ...................................................... 94 109 ------- ------- Gross deferred tax liabilities ............................. 1,518 1,203 ------- ------- Net operating loss carryforwards ........................... (142) (121) Employee benefit obligations ............................... (191) (141) Bad debts .................................................. (22) (13) Various liabilities and other .............................. (106) (72) ------- ------- Gross deferred tax assets .................................. (461) (347) Deferred tax asset valuation allowance ..................... 147 122 ------- ------- Net deferred tax assets .................................... (314) (225) ------- ------- Net deferred tax liability ................................. $ 1,204 $ 978 ======= ======= CONSOLIDATED BALANCE SHEETS CLASSIFICATION Prepaid expenses and other current assets................... $ (61) $ (43) Deferred income taxes....................................... 1,265 1,021 ------- ------- $ 1,204 $ 978 ======= =======
We have net operating loss carryforwards totaling $443 million at December 28, 2002, which are available to reduce future taxes in the U.S., Spain, Greece, Russia, Turkey and Mexico. Of these carryforwards, $14 million expire in 2003 and $429 million expire at various times between 2004 and 2022. We have established a full valuation allowance for the net operating loss carryforwards attributable to our operations in Spain, Greece, Russia, Turkey and Mexico based upon our projection that it is more likely than not that the benefit of these losses will not be realized. In addition, at December 28, 2002, we have tax credit carryforwards in the U.S. of $7 million with an indefinite carryforward period and in Mexico of $13 million, which expire at various times between 2006 and 2012. Our valuation allowances, which reduce deferred tax assets to an amount that will more likely than not be realized, have increased by $25 million in 2002 and decreased by $26 million in 2001. The increase in 2002 was mainly due to our business acquisitions in Turkey and Mexico. 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 $42 million and $15 million at December 28, 2002, and December 29, 2001, respectively. Such amounts are recorded within prepaid expenses and other current assets in our Consolidated Balance Sheets. Amounts paid to taxing authorities and related parties for income taxes were $49 million, $101 million and $147 million in 2002, 2001 and 2000, respectively. Under our tax separation agreement with PepsiCo, PepsiCo maintains full control and absolute discretion for any combined or consolidated tax filings for tax periods ending on or before our initial public offering that occurred in March 1999. PepsiCo has contractually agreed to act in good faith with respect to all tax audit matters affecting us. In accordance with the tax separation agreement, we will share on a pro rata basis any risk or upside resulting from the settlement of tax matters affecting us for these periods. NOTE 13 -- 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 Canada, Spain, Russia, Greece, Turkey and Mexico.
NET REVENUES ---------------------------------- 2002 2001 2000 ------ ------ ------ U.S. ....................... $7,572 $7,197 $6,830 Mexico ..................... 164 -- -- Other countries ............ 1,480 1,246 1,152 ------ ------ ------ $9,216 $8,443 $7,982 ====== ====== ======
LONG-LIVED ASSETS ---------------------------------- 2002 2001 2000 ------ ------ ------ U.S. ....................... $5,577 $5,395 $5,192 Mexico...................... 1,586 -- -- Other countries............. 1,127 914 960 ------ ------ ------ $8,290 $6,309 $6,152 ====== ====== ======
NOTE 14 -- RELATIONSHIP WITH PEPSICO PepsiCo is considered a related party due to the nature of our franchisee relationship and its ownership interest in our company. Approximately 90% of PBG's 2002 volume was derived from the sale of Pepsi-Cola beverages. At December 28, 2002, PepsiCo owned approximately 37.8% of our outstanding common stock and 100% of our outstanding class B common stock, together representing approximately 42.9% of the voting power of all classes of our voting stock. In addition, PepsiCo owns 6.8% 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. 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; master bottling agreements 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 country, including Canada, Spain, Russia, Greece, Turkey and Mexico, as well as a fountain syrup agreement similar to the master syrup agreement for Canada; 52 (3) A shared services agreement whereby PepsiCo provides us or we provide PepsiCo with certain support, including information technology maintenance, procurement of raw materials, shared space, employee benefits, credit and collection, international tax and accounting services. The amounts paid or received under this contract are equal to the actual costs incurred by the company providing the service. 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 ended 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 its best efforts to settle all joint interests in any common audit issue on a basis consistent with prior practice. BOTTLER INCENTIVES AND OTHER ARRANGEMENTS - We share a business objective with PepsiCo of increasing the availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo, at its discretion, provides us with various forms of bottler incentives to promote its beverages. These incentives cover a variety of initiatives, including direct marketplace support, capital equipment funding and advertising support. Based on the objective of the programs and initiatives, we record bottler incentives as an adjustment to net revenues or as a reduction of selling, delivery and administrative expenses. Direct marketplace support represents PepsiCo's funding to assist us in offering sales and promotional discounts to retailers and is recorded as an adjustment to net revenues. Capital equipment funding is designed to help offset the costs of purchasing and installing marketing equipment, such as vending machines and glass door coolers at customer locations and is recorded as a reduction of selling, delivery and administrative expenses. Advertising support represents the cost of media time, promotional materials, and other advertising and marketing costs that are funded by PepsiCo and is recorded as a reduction to advertising and marketing expenses within selling, delivery and administrative expenses. In addition, PepsiCo may share certain media costs with us due to our joint objective of promoting PepsiCo brands. There are no conditions or other requirements that could result in a repayment of the bottler incentives received. Bottler incentives received from PepsiCo, including media costs shared by PepsiCo, were $560 million, $554 million and $524 million for 2002, 2001 and 2000, respectively. Of these amounts, we recorded $257 million, $262 million and $244 million for 2002, 2001 and 2000, respectively, in net revenues, and the remainder as a reduction of selling, delivery and administrative expenses. PURCHASES OF CONCENTRATE AND FINISHED PRODUCT - We purchase concentrate from PepsiCo, which is the critical flavor ingredient used in the production of carbonated soft drinks and other ready-to-drink beverages. PepsiCo determines the price of concentrate annually at its discretion. We also pay a royalty fee to PepsiCo for the Aquafina trademark. Amounts paid or payable to PepsiCo and its affiliates for concentrate and royalty fees were $1,699 million, $1,584 million and $1,507 million in 2002, 2001 and 2000, respectively. We also produce or distribute other products and purchase finished goods and concentrate through various arrangements with PepsiCo or PepsiCo joint ventures. During 2002, 2001 and 2000, total amounts paid or payable to PepsiCo or PepsiCo joint ventures for these transactions were $464 million, $375 million and $155 million, respectively. We provide manufacturing services to PepsiCo and PepsiCo affiliates in connection with the production of certain finished beverage products. During 2002, 2001 and 2000, total amounts paid or payable by PepsiCo for these transactions were $10 million, $32 million and $36 million, respectively. FOUNTAIN SERVICE FEE - 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 our Consolidated Statements of Operations in selling, delivery and administrative expenses. Net amounts paid or payable by PepsiCo to us for these services were approximately $200 million, $185 million and $189 million, in 2002, 2001 and 2000, respectively. OTHER TRANSACTIONS - Prior to 2002, Hillbrook Insurance Company, Inc., a subsidiary of PepsiCo, provided insurance and risk management services to us pursuant to a contractual agreement. Total premiums paid to Hillbrook Insurance Company, Inc. during 2001 and 2000 were $58 million and $62 million, respectively. 53 We provide PepsiCo and PepsiCo affiliates or PepsiCo provides us various services pursuant to a shared services agreement and other arrangements, including information technology maintenance, procurement of raw materials, shared space, employee benefits, credit and collection, international tax and accounting services. Total net expenses incurred were approximately $57 million, $133 million and $117 million during 2002, 2001 and 2000, respectively. We purchase snack food products from Frito-Lay, Inc., a subsidiary of PepsiCo, for sale and distribution in all of Russia except Moscow. Amounts paid or payable to PepsiCo and its affiliates for snack food products were $44 million, $27 million and $24 million in 2002, 2001 and 2000, respectively. The Consolidated Statements of Operations include the following income (expense) amounts as a result of transactions with PepsiCo and its affiliates:
2002 2001 2000 ------- ------- ------- Net revenues: Bottler incentives ................................... $ 257 $ 262 $ 244 ======= ======= ======= Cost of sales: Purchases of concentrate and finished products, and Aquafina royalty fees ........................ $(2,163) $(1,959) $(1,662) Manufacturing and distribution service reimbursements 10 32 36 ------- ------- ------- $(2,153) $(1,927) $(1,626) ======= ======= ======= Selling, delivery and administrative expenses: Bottler incentives ................................... $ 303 $ 292 $ 280 Fountain service fee ................................. 200 185 189 Frito-Lay purchases .................................. (44) (27) (24) Insurance costs ...................................... -- (58) (62) Shared services ...................................... (57) (133) (117) ------- ------- ------- $ 402 $ 259 $ 266 ======= ======= =======
We are not required to pay any minimum fees to PepsiCo, nor are we obligated to PepsiCo under any minimum purchase requirements. As part of our acquisition in Turkey (see Note 16), PBG paid PepsiCo $8 million for its share of Fruko Mesrubat Sanayii A.S. and related entities. In addition, we sold certain brands to PepsiCo from the net assets acquired for $16 million. As part of our acquisition of Gemex in Mexico (see Note 16), PepsiCo received $297 million for the tender of its shares for its 34.4% ownership in the outstanding capital stock of Gemex. In addition, PepsiCo made a payment to us for $17 million, to facilitate the purchase and ensure a smooth ownership transition of Gemex. We paid PepsiCo $10 million and $9 million during 2002 and 2001, respectively, for distribution rights relating to the SoBe brand in certain PBG-owned territories in the U.S. and Canada. In connection with PBG's acquisition of Pepsi-Cola Bottling of Northern California in 2001, PBG paid $10 million to PepsiCo for its equity interest in Northern California. With respect to PepsiCo's 6.8% ownership in Bottling Group, LLC, our principal operating subsidiary, Bottling Group, LLC will distribute pro rata to PepsiCo and us sufficient cash such that aggregate cash distributed to us will enable us to pay our income taxes and interest on our $1 billion 7% senior notes due 2029. PepsiCo's pro rata cash distribution during 2002 from Bottling Group, LLC was $11 million. The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8% senior notes issued on February 9, 1999, by our subsidiary Bottling Group, LLC are guaranteed by PepsiCo. In addition, the $1.0 billion of 4 5/8% senior notes issued on November 15, 2002, also by Bottling Group, LLC, will be guaranteed by PepsiCo in accordance with the terms set forth in the related indenture. Amounts payable to PepsiCo and its affiliates were $26 million and $17 million at December 28, 2002, and December 29, 2001, respectively. Such amounts are recorded within accounts payable and other current liabilities in our Consolidated Balance Sheets. 54 NOTE 15 -- CONTINGENCIES We are involved in a lawsuit with current and former employees concerning wage and hour issues in New Jersey. We believe that the ultimate resolution to this matter will not have a material adverse effect on our results of operations, financial condition or liquidity. Subsequent to year end we have resolved this matter, see Note 19. 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 16 -- ACQUISITIONS During 2002, we acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from several PepsiCo franchise bottlers. The following acquisitions occurred for an aggregate amount of $936 million in cash and $375 million of assumed debt: - Fruko Mesrubat Sanayii A.S. and related entities of Turkey in March. - Pepsi-Cola Bottling Company of Macon, Inc. of Georgia in March. - Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle, Maine in June. - Seaman's Beverages Limited of the Canadian province of Prince Edward Island in July. - Pepsi-Gemex, S.A. de. C.V of Mexico in November. - Kitchener Beverages Limited of Ontario, Canada in December. The largest of our six acquisitions was Gemex, where we acquired all of their outstanding capital stock. Our total cost for the purchase of Gemex was a net cash payment of $871 million and assumed debt of approximately $305 million. Gemex produces, sells and distributes a variety of soft drink products under the Pepsi-Cola, Pepsi Light, Pepsi Max, Pepsi Limon, Mirinda, 7 UP, Diet 7 UP, KAS, Mountain Dew, Power Punch and Manzanita Sol trademarks under exclusive franchise and bottling arrangements with PepsiCo and certain affiliates of PepsiCo. Gemex owns, produces, sells and distributes purified and mineral water in Mexico under the trademarks Electropura and Garci Crespo and has rights to produce, sell and distribute soft drink products of other companies in Mexico. Our U.S. and Canadian acquisitions were made to enable us to provide better service to our large retail customers. We expect these acquisitions to reduce costs through economies of scale. The Mexican and Turkish acquisitions were made to allow us to increase our markets outside the United States. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with our acquisitions, net of cash acquired:
ASSETS USEFUL LIFE (YEARS) GEMEX OTHER TOTAL ----------- ----- ----- ----- Current assets ......................................... $ 101 $ 33 $ 134 Fixed assets ........................................... 5-33 505 85 590 Intangible assets: Non-compete agreements subject to amortization......... 3-5 -- 4 4 Franchise rights subject to amortization .............. 5 -- 8 8 Franchise rights not subject to amortization .......... 808 35 843 Goodwill (non-tax deductible) ......................... 126 20 146 Other assets ........................................... 15 2 17 ------ ------ ------ TOTAL ASSETS .................................. $1,555 $ 187 $1,742 ------ ------ ------ LIABILITIES Accounts payable and other current liabilities ......... 141 43 184 Short-term borrowings .................................. 5 50 55 Long-term debt ......................................... 300 20 320 Other liabilities ...................................... 238 16 254 ------ ------ ------ TOTAL LIABILITIES ...................... $ 684 $ 129 $ 813 ------ ------ ------ NET ASSETS ACQUIRED ...................................... $ 871 $ 58 $ 929 ====== ====== ======
In addition to the net assets acquired above, we also incurred non-capitalizable costs associated with the acquisition of Gemex. As discussed in Note 9, we entered into option contracts to mitigate certain foreign currency risks in anticipation of our acquisition. These options expired unexercised and the cash flow of $7 million associated with these options is included in acquisitions of bottlers in the Consolidated Statements of Cash Flows. The allocation of the purchase price for Gemex is preliminary, pending final valuations on certain assets. The final allocations of the purchase price will be determined based on the fair value of assets acquired and liabilities assumed as of the date of acquisition. 55 Non-compete agreements and franchise rights that are subject to amortization acquired during 2002 have a weighted-average amortization period of three to five years, respectively. The following unaudited pro forma operating information summarizes our consolidated results of operations as if the Gemex acquisition had occurred on the first day of fiscal year 2001.
2002 2001 ------- ------- Net revenues .................................................................. $10,297 $ 9,617 Income before income taxes..................................................... $ 678 $ 468 Net income .................................................................... $ 448 $ 324 Earnings per share Basic ....................................................................... $ 1.59 $ 1.14 Diluted ..................................................................... $ 1.53 $ 1.09
The operating results of each of our acquisitions are included in the accompanying consolidated financial statements from its respective date of purchase. 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. 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 in 2001. NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS The balances related to each component of accumulated other comprehensive loss were as follows:
2002 2001 2000 ------ ------ ------ Currency translation adjustment ................................. $(285) $(303) $(254) Cash flow hedge adjustment (a) .................................. (5) (12) -- Minimum pension liability adjustment (b)......................... (178) (55) -- ------ ------ ----- Accumulated other comprehensive loss ............................ $(468) $(370) $(254) ====== ====== =====
(a) Net of minority interest and taxes of $4 million in 2002, $8 million in 2001 and $0 in 2000. (b) Net of minority interest and taxes of $134 million in 2002, $41 million in 2001 and $0 in 2000. NOTE 18 -- COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (shares in thousands)
2002 2001 2000 -------- -------- -------- Number of shares on which basic earnings per share are based: Weighted-average outstanding during period .................... 281,674 286,024 294,294 Add - Incremental shares under stock compensation plans ....... 11,116 9,655 4,376 -------- -------- -------- Number of shares on which diluted earnings per share are based .. 292,790 295,679 298,670 Basic and diluted net income applicable to common shareholders .. $ 428 $ 305 $ 229 Basic earnings per share ........................................ $ 1.52 $ 1.07 $ 0.78 Diluted earnings per share ...................................... $ 1.46 $ 1.03 $ 0.77
Diluted earnings per share reflect the potential dilution that could occur if the stock options from our stock compensation plans 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 1. 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 40 million shares and have reissued approximately 10 million shares for stock option exercises since the inception of our share repurchase program. NOTE 19 -- SUBSEQUENT EVENTS (UNAUDITED) During the first quarter of 2003, we acquired a Pepsi-Cola bottler based in Buffalo, New York, for a purchase price of approximately $75 million. In the first quarter of 2003, we settled a lawsuit with the New Jersey State Department of Labor and with current and former employees concerning overtime wage issues. The amount of this settlement was approximately $28 million, which was fully provided for in our litigation reserves as of December 28, 2002 in our Consolidated Balance Sheets. 56 NOTE 20 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH 2002 QUARTER QUARTER QUARTER QUARTER FULL YEAR ------- ------- ------- ------- --------- Net revenues ........ $1,772 $2,209 $2,455 $2,780 $9,216 Gross profit ........ 830 1,024 1,118 1,243 4,215 Operating income..... 135 271 338 154 898 Net income .......... 54 139 178 57 428
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
(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. 57 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 28, 2002 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
Independent Auditors' Report 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 28, 2002 and December 29, 2001, 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 28, 2002. 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 28, 2002 and December 29, 2001, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the Company adopted FASB 142, "Goodwill and Other Intangible Assets," as of December 30, 2001. /s/ KPMG LLP New York, New York January 28, 2003 58 SELECTED FINANCIAL AND OPERATING DATA
in millions, except per share data FISCAL YEARS ENDED 2002 2001 2000(1) 1999 1998 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net revenues ....................................... $ 9,216 $ 8,443 $ 7,982 $ 7,505 $ 7,041 Cost of sales ...................................... 5,001 4,580 4,405 4,296 4,181 -------- -------- -------- -------- -------- Gross profit ....................................... 4,215 3,863 3,577 3,209 2,860 Selling, delivery and administrative expenses ...... 3,317 3,187 2,987 2,813 2,583 Unusual impairment and other charges and credits (2) -- -- -- (16) 222 -------- -------- -------- -------- -------- Operating income ................................... 898 676 590 412 55 Interest expense, net .............................. 191 194 192 202 221 Other non-operating expenses, net .................. 7 -- 1 1 26 Minority interest .................................. 51 41 33 21 -- -------- -------- -------- -------- -------- Income (loss) before income taxes .................. 649 441 364 188 (192) Income tax expense (benefit) (3)(4) ................ 221 136 135 70 (46) -------- -------- -------- -------- -------- Net income (loss) .................................. $ 428 $ 305 $ 229 $ 118 $ (146) ======== ======== ======== ======== ======== PER SHARE DATA: (5) Basic earnings (loss) per share .................... $ 1.52 $ 1.07 $ 0.78 $ 0.46 $ (1.33) Diluted earnings (loss) per share .................. $ 1.46 $ 1.03 $ 0.77 $ 0.46 $ (1.33) Cash dividend per share ............................ $ 0.04 $ 0.04 $ 0.04 $ 0.03 $ -- Weighted-average basic shares outstanding .......... 282 286 294 257 110 Weighted-average diluted shares outstanding ........ 293 296 299 257 110 OTHER FINANCIAL DATA: Cash provided by operations ........................ $ 1,014 $ 882 $ 779 $ 699 $ 601 Capital expenditures ............................... $ (623) $ (593) $ (515) $ (560) $ (507) BALANCE SHEET DATA (AT PERIOD END): Total assets ....................................... $ 10,027 $ 7,857 $ 7,736 $ 7,624 $ 7,322 Long-term debt: Allocation of PepsiCo long-term debt ............ $ -- $ -- $ -- $ -- $ 3,300 Due to third parties ............................ 4,523 3,285 3,271 3,268 61 -------- -------- -------- -------- -------- Total long-term debt .......................... $ 4,523 $ 3,285 $ 3,271 $ 3,268 $ 3,361 Minority interest .................................. $ 348 $ 319 $ 306 $ 278 $ -- Advances from PepsiCo .............................. $ -- $ -- $ -- $ -- $ 1,605 Accumulated other comprehensive loss ............... $ (468) $ (370) $ (254) $ (223) $ (238) Shareholders' equity (deficit) ..................... $ 1,824 $ 1,601 $ 1,646 $ 1,563 $ (238)
(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) Fiscal year 2001 includes Canada tax law change benefits of $25 million. (5) Reflects the 2001 two-for-one stock split. 59 EX-21 10 y84636exv21.txt SUBSIDIARIES Exhibit 21 Subsidiaries of The Pepsi Bottling Group, Inc. As of December 28, 2002 NAME OF SUBSIDIARY JURISDICTION AJN Holdings, Inc. Delaware Alistar Beverages Corporation Washington Allied Acquisition Company of Delaware, Inc. Delaware Atlantic Holding Company California Atlantic Soft Drink Company, South Carolina Inc. Avalon Lake, LLC Delaware Beverage Products Corporation Oklahoma Bottling Group Holdings, Inc. Delaware Bottling Group, LLC Delaware C & I Leasing, Inc. Maryland Centran, Inc. Pennsylvania CSD Sawgrass, Inc. Florida D.C. Beverages, Inc. Delaware Desormeau Vending Corp. New York 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 New Bern Transport Corporation Delaware PBG Canada Finance, LLC Delaware PBG Canada Finance II, LLC Delaware PBG Canada Holdings, Inc. Delaware PBG Canada Holdings II, Inc. Delaware PBG Commerce, LLC Delaware PBG Michigan, LLC Delaware PBG Spirituosen Holdings, LLC Delaware PBG Texas, L.P. Delaware Pepsi-Cola Allied Bottlers, Inc. Delaware Pepsi-Cola Commodities, LLC Delaware Page 1 of 5 Pepsi-Cola General Bottlers of Princeton, Inc. West Virginia Pepsi-Cola General Bottlers of Virginia, Inc. Virginia Pepsi-Cola Laurel Bottling Company Pennsylvania Primrose, LLC Delaware Rice Bottling Enterprises, Inc. Tennessee Rockledge Holdings, LLC Delaware TGCC, Inc. Delaware Valley Pond, LLC Delaware White Co., Inc. Delaware Woodlands Insurance Company Vermont PBG Canada Global Holdings ULC Canada The Pepsi Bottling Group (Canada), Co. Canada PBG Investment Partnership Canada PBG Investment (Luxembourg) Sarl Luxembourg Onbiso Inversiones, S.L. Spain Kitchener Beverages Limited Canada Seaman's Beverages Limited Canada Pepsi Bottling Group GmbH Germany Pepsi-Cola Bottling Beteiligungsges Germany GmbH Aspetuck Ireland Limited Ireland Tanglewood Finance, Sarl Luxembourg PepsiCo IVI S.A. Greece Dornfell Ireland PBG Northern Atlantic Limited Ireland Pepsi-Cola Bottling Finance B.V. The Netherlands Pepsi Bottling Group Global Finance Sarl Luxembourg Pepsi-Cola Bottling Global B.V. The Netherlands Pepsi Bottling Group (St. Petersburg) LLC (GB Russia) Russia PepsiCo Holdings OOO (Russia) Russia Pepsi-Cola Soft Drink Factory Russia of Sochi Page 2 of 5 Pepsi International Bottlers (Ekaterinburg) LLC Russia Pepsi International Bottlers (Samara) LLC Russia Abechuko Inversiones, S.L. Spain Alikate Inversiones, S.L. Spain Apodaka Inversiones, S.L. Spain Catalana de Bebidas Carbonicas, S.A. Spain Canguro Rojo Inversiones, S.L. Spain Centro-Mediterreanea de Bebidas Carbonicas PepsiCo S.C.m.p.a. Spain Centro-Levantina de Bebidas Carbonicas PepsiCo S.L. Spain Celestecasa Inversiones, S.L. Spain Compania de Bebidas PepsiCo, S.A. Spain KAS, S.L. Spain Mountain Dew Inversiones, S.L. Spain Enfolg Inversiones, S.L. Spain Gatika Inversiones, S.L. Spain Greip Inversiones, S.L. Spain PBG Holding de Espana ETVE, S.A. Spain Jatabe Inversiones, S.L. Spain Jugodesalud Inversiones, S.L. Spain Lorenzito Inversiones, S.L. Spain Manurga Inversiones, S.L. Spain Migliori Inversiones, S.L. Spain Nadamas Inversiones, S.L. Spain PBG Financiera y Promocion de Empresas, S.L. Spain PBG Grupo Embotellador Hispano- Mexicano, S.L. Spain PBG Commercial SECOR, S.L. Spain PepsiCo Ventas Andalucia, S.A. Spain Page 3 of 5 Stepplan Inversiones, S.L. Spain Beimiguel Inversiones, S.L. Spain Aquafina Inversiones, S.L. Spain Wesellsoda Inversiones, S.L. Spain Rasines Inversiones, S.L. Spain Rebujito Inversiones, S.L. Spain Ronkas Inversiones, S.L. Spain Pet-Iberia, S.L. Spain Retana Inversiones SPE, S.L. Spain Spirituosen, S.A. Spain Constar Ambalaj Sanyi Ve Ticaret A.S. Turkey Fruko Mesrubat Pazarlama, A.S. Turkey Fruko Mesrubat Sanayii, A.S. Turkey Mekta Ticaret, A.S. Turkey PepsiCo Middle East Investments The Netherlands Pepsi-Cola Servis Dagitim, A.S. Turkey Pepsi Gemex S.R.L. Mexico Gemex Holdings LLC Mexico Embotelledores Internacionales de Mexico S.R.L Mexico Duingrass Holdings, B.V. The Netherlands Embotelladores Del Valle de Anahuac, S.R.L. Mexico Embotelladores Mexicanos de Pepsi Cola S.R.L. Mexico Embotelladora de Refrescos Mexicanos S.R.L. Mexico Envasadora Del Centro, S.R.L. Mexico Embotelladora Moderna, S.R.L Mexico Embotelladora La Isleta, S.R.L. Mexico Embotelladores Del Bajio, S.R.L. Mexico Fivemex, S.R.L. Mexico Nueva Santa Cecilia, S.R.L. Mexico Servicios Administativos Suma, S.R.L. Mexico Bienes Raices Metropolitanos, S.R.L. Mexico Page 4 of 5 Fomentadora Urbana Metropolitana, S.R.L. Mexico Equipos Para Embotelladoras Y Cervecerias, S.R.L. Mexico Industria de Refrescos, S.R.L. Mexico Bedidas Purificadas Del Sureste S.R.L. Mexico Procesos Plasticos S.R.L. Mexico Inmobiliaria La Bufa, S.R.L. Mexico Central de La Industria Escorpion S.R.L. Mexico Fomentadora Urbana del Surestes, S.R.L. Mexico Embotelladora Metropolitana, S.R.L. Mexico Embotelladora Potosi, S.R.L. Mexico Electropura, S.R.L. Mexico Inmobiliaria Operativa S.R.L. Mexico Embotelladora Garci-Crespo, S.R.L. Mexico Distribuidora Garci-Crespo, S.R.L. Mexico Inmobiliaria La Cantera, S.R.L. Mexico Granja Buen Agua, S.R.L. Mexico Bebidas Purificadas Del Noreste, S.R.L. Mexico Tenedora Del Noreste, S.R.L. Mexico Grupo Embotellador Noreste, S.R.L. Mexico Industria de Refrescos Del Noreste, S.R.L. Mexico Page 5 of 5 EX-23 11 y84636exv23.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.: The audits referred to in our report dated January 28, 2003, included the related financial statement schedule as of December 28, 2002, and for each of the fiscal years in the three-year period ended December 28, 2002, incorporated in this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present 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, 333-69622, 333-60428, 333-73302, 333-100786) on Form S-8 of The Pepsi Bottling Group, Inc. Our report on the consolidated financial statements referred to the adoption of FASB No. 142, "Goodwill and Other Intangible Assets," as of December 30, 2001. /s/ KPMG LLP New York, New York March 28, 2003 EX-24 12 y84636exv24.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, 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 28, 2002, 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 the attorneys-in-fact named herein shall have the power to act hereunder with or without the other. The undersigned acknowledges that the foregoing attorneys-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 of January 29, 2003. THE PEPSI BOTTLING GROUP, INC. By: /s/ Pamela C. McGuire --------------------- Pamela C. McGuire Senior Vice President, General Counsel and Secretary SIGNATURE TITLE DATE /s/ John T. Cahill Chairman of the Board and January 29, 2003 - ------------------ Chief Executive Officer John T. Cahill /s/Alfred H. Drewes Senior Vice President and February 5, 2003 - ------------------- Chief Financial Officer Alfred H. Drewes (Principal Financial Officer) /s/ Andrea L. Forster Vice President and Controller January 31, 2003 - --------------------- (Principal Accounting Officer) Andrea L. Forster /s/ Linda G. Alvarado Director February 4, 2003 - --------------------- Linda G. Alvarado /s/ Barry H. Beracha Director February 4, 2003 - -------------------- Barry H. Beracha /s/ Ira D. Hall Director March 27, 2003 - --------------- Ira D. Hall /s/ Thomas H. Kean Director January 29, 2003 - ------------------ Thomas H. Kean /s/ Susan D. Kronick Director January 30, 2003 - -------------------- Susan D. Kronick /s/ Blythe J. McGarvie Director January 31, 2003 - ---------------------- Blythe J. McGarvie /s/ Margaret D. Moore Director February 4, 2003 - --------------------- Margaret D. Moore /s/ Clay G. Small Director January 29, 2003 - ----------------- Clay G. Small /s/ Craig E. Weatherup Director February 5, 2003 - ---------------------- Craig E. Weatherup EX-99.1 13 y84636exv99w1.txt CONSOLIDATED FINANCIAL STATEMENTS AND NOTES EXHIBIT 99.1 BOTTLING GROUP, LLC CONSOLIDATED STATEMENTS OF OPERATIONS in millions FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000 2002 2001 2000 ---- ---- ---- NET REVENUES............................... $9,216 $8,443 $7,982 Cost of sales.............................. 5,001 4,580 4,405 ----- ----- ----- GROSS PROFIT............................... 4,215 3,863 3,577 Selling, delivery and administrative expenses................................. 3,318 3,185 2,986 ----- ----- ----- OPERATING INCOME........................... 897 678 591 Interest expense........................... 131 132 136 Interest income............................ 33 54 47 Other non-operating expenses, net.......... 7 -- 1 Minority interest.......................... 9 14 8 ----- ----- ----- INCOME BEFORE INCOME TAXES................. 783 586 493 Income tax expense before rate change...... 49 24 22 Income tax rate change benefit............. -- (25) -- ----- ----- ----- NET INCOME................................. $734 $587 $ 471 ==== ==== ===== See accompanying notes to Consolidated Financial Statements. 19 BOTTLING GROUP, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS in millions FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
2002 2001 2000 ------- ------- ------- CASH FLOWS -- OPERATIONS Net income ................................................................ $ 734 $ 587 $ 471 Adjustments to reconcile net income to net cash provided by operations: Depreciation ........................................................... 443 379 340 Amortization ........................................................... 8 135 131 Other non-cash charges and credits, net ................................ 140 146 145 Changes in operating working capital, excluding effects of acquisitions: Accounts receivable ................................................. (19) (28) 8 Inventories ......................................................... 13 (50) 11 Prepaid expenses and other current assets ........................... 27 (29) (102) Accounts payable and other current liabilities ...................... (36) 56 22 ------- ------- ------- Net change in operating working capital ........................... (15) (51) (61) ------- ------- ------- Pension contributions .................................................. (151) (86) (26) Other, net ............................................................. (52) (37) (26) ------- ------- ------- NET CASH PROVIDED BY OPERATIONS ........................................... 1,107 1,073 974 ------- ------- ------- CASH FLOWS -- INVESTMENTS Capital expenditures ...................................................... (623) (593) (515) Acquisitions of bottlers .................................................. (921) (52) (26) Sales of property, plant and equipment .................................... 6 6 9 Notes receivable from PBG.................................................. (117) (310) (268) Investment in debt defeasance trust ....................................... (181) -- -- ------- ------- ------- NET CASH USED FOR INVESTMENTS ............................................. (1,836) (949) (800) ------- ------- ------- CASH FLOWS -- FINANCING Short-term borrowings, net -- three months or less ........................ (78) 50 12 Proceeds from issuances of long-term debt ................................. 1,031 -- -- Payments of long-term debt ................................................ (120) -- (9) Distributions to owners ................................................... (156) (223) (45) ------- ------- ------- NET CASH PROVIDED BY (USED FOR) FINANCING ................................. 677 (173) (42) ------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .............. (8) (7) (4) ------- ------- ------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...................... (60) (56) 128 CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR ............................ 262 318 190 ------- ------- ------- CASH AND CASH EQUIVALENTS -- END OF YEAR .................................. $ 202 $ 262 $ 318 ======= ======= =======
See accompanying notes to Consolidated Financial Statements. 20 BOTTLING GROUP, LLC CONSOLIDATED BALANCE SHEETS in millions DECEMBER 28, 2002 AND DECEMBER 29, 2001
2002 2001 ------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents ................................................................. $ 202 $ 262 Accounts receivable, less allowance of $67 in 2002 and $42 in 2001 ........................ 922 823 Inventories ............................................................................... 378 331 Prepaid expenses and other current assets ................................................. 161 115 -------- -------- TOTAL CURRENT ASSETS ................................................................... 1,663 1,531 Property, plant and equipment, net ........................................................ 3,308 2,543 Intangible assets, net .................................................................... 4,687 3,684 Notes receivable from PBG.................................................................. 954 837 Investment in debt defeasance trust ....................................................... 170 -- Other assets .............................................................................. 125 82 -------- -------- TOTAL ASSETS ........................................................................... $ 10,907 $ 8,677 ======== ======== LIABILITIES AND OWNERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities ............................................ $ 1,138 $ 977 Short-term borrowings ..................................................................... 67 77 -------- -------- TOTAL CURRENT LIABILITIES .............................................................. 1,205 1,054 Long-term debt ............................................................................ 3,535 2,299 Other liabilities ......................................................................... 621 406 Deferred income taxes ..................................................................... 360 168 Minority interest ......................................................................... -- 154 -------- -------- TOTAL LIABILITIES ...................................................................... 5,721 4,081 OWNERS' EQUITY Owners' net investment .................................................................... 5,782 5,012 Accumulated other comprehensive loss ...................................................... (596) (416) -------- -------- TOTAL OWNERS' EQUITY ................................................................... 5,186 4,596 -------- -------- TOTAL LIABILITIES AND OWNERS' EQUITY ................................................ $ 10,907 $ 8,677 ======== ========
See accompanying notes to Consolidated Financial Statements. 21 BOTTLING GROUP, LLC CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY in millions FISCAL YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
ACCUMULATED OWNERS' OTHER NET COMPREHENSIVE COMPREHENSIVE INVESTMENT LOSS TOTAL INCOME/(LOSS) ---------- ---- ----- ------------- BALANCE AT DECEMBER 25, 1999 ............. $ 4,150 $ (222) $ 3,928 Comprehensive income: Net income ......................... 471 -- 471 $ 471 Currency translation adjustment..... -- (31) (31) (31) ------- Total comprehensive income ............ $ 440 ======= Cash distributions to owners .......... (45) -- (45) Non-cash distribution to owner ........ (2) -- (2) ------ ----- ------ BALANCE AT DECEMBER 30, 2000 ............. 4,574 (253) 4,321 Comprehensive income: Net income ......................... 587 -- 587 $ 587 Currency translation adjustment .... -- (48) (48) (48) Minimum pension liability adjustment -- (96) (96) (96) Cash flow hedge adjustment ......... -- (19) (19) (19) ------- Total comprehensive income ............ $ 424 ======= Cash distributions to owners .......... (223) -- (223) Non-cash contribution from owner ...... 74 -- 74 ------ ----- ------ BALANCE AT DECEMBER 29, 2001 ............. 5,012 (416) 4,596 Comprehensive income: Net income ......................... 734 -- 734 $ 734 Currency translation adjustment .... -- 25 25 25 Minimum pension liability adjustment -- (216) (216) (216) Cash flow hedge adjustment ......... -- 11 11 11 ------- Total comprehensive income ............ $ 554 ======= Non-cash contribution from owner ...... 192 -- 192 Cash distributions to owners .......... (156) -- (156) ------ ----- ------ BALANCE AT DECEMBER 28, 2002.............. $5,782 $(596) $5,186 ====== ===== ======
See accompanying notes to Consolidated Financial Statements. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Tabular dollars in millions NOTE 1 -- BASIS OF PRESENTATION Bottling Group, LLC (collectively referred to as "Bottling LLC," "we," "our" and "us") is the principal operating subsidiary of The Pepsi Bottling Group, Inc. ("PBG") and consists of substantially all of the operations and assets of PBG. Bottling LLC, which is consolidated by PBG, consists of bottling operations located in the United States, Canada, Spain, Greece, Russia, Turkey and, as a result of our recent acquisition, Mexico. In conjunction with PBG's initial public offering and other subsequent transactions, PBG and PepsiCo contributed bottling businesses and assets used in the bottling businesses to Bottling LLC. As a result of the contribution of these assets, PBG owns 93.2% of Bottling LLC and PepsiCo owns the remaining 6.8% as of December 28, 2002. Certain reclassifications were made in our Consolidated Financial Statements to 2001 and 2000 amounts to conform to the 2002 presentation. 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 ("U.S. 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. 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 2002 and 2001 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. SALES INCENTIVES - We offer certain sales incentives to our customers, which are accounted for as a reduction in our net revenues when incurred. A number of these arrangements are based upon annual and quarterly targets that generally do not exceed one year. Based upon forecasted volume and other performance criteria, net revenues in our Consolidated Statements of Operations are reduced by the expected amounts to be paid out to our customers. 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 fiscal year incurred. Advertising and marketing costs were $441 million, $389 million and $350 million in 2002, 2001 and 2000, respectively, before bottler incentives received from PepsiCo and other brand owners. BOTTLER INCENTIVES - PepsiCo and other brand owners, at their sole discretion, provide us with various forms of bottler incentives. These incentives cover a variety of initiatives, including direct marketplace support, capital equipment funding and advertising support. Based on the objective of the programs and initiatives, we record bottler incentives as an adjustment to net revenues or as a reduction of selling, delivery and administrative expenses. Direct marketplace support represents PepsiCo's and other brand owners' funding to assist us in offering sales and promotional discounts to retailers and is recorded as an adjustment to net revenues. Capital equipment funding is designed to help offset the costs of purchasing and installing marketing equipment, such as vending machines and glass door coolers at customer locations and is recorded as a reduction of selling, delivery and administrative expenses. Advertising support represents the cost of media time, promotional materials, and other advertising and marketing costs that are funded by PepsiCo and other brand owners and is recorded as a reduction to advertising and marketing expenses within selling, delivery and administrative expenses. In addition, PepsiCo and other brand owners may share certain media costs with us due to our joint objective of promoting their brands. There are no conditions or other requirements that could result in a repayment of the bottler incentives received. Total bottler incentives received, including media costs shared by PepsiCo and other brand owners were $604 million, $598 million and $566 million in 2002, 2001 and 2000, respectively. Of these amounts, we recorded $293 million in both 23 2002 and 2001 and $277 million in 2000, in net revenues, and the remainder as a reduction of selling, delivery and administrative expenses. SHIPPING AND HANDLING COSTS - We record the majority of our shipping and handling costs within selling, delivery and administrative expenses. Such costs totaled $1,116 million, $1,058 million and $977 million in 2002, 2001 and 2000, 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 remeasurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries and transaction gains and losses. Turkey and Russia were considered highly inflationary economies for accounting purposes in 2002. Beginning in 2003, Russia will no longer be considered highly inflationary, and will change its functional currency from the U.S. dollar to the Russian ruble. We do not expect any material impact on our consolidated financial statements as a result of Russia's change in functional currency in 2003. Turkey is expected to remain highly inflationary for fiscal year 2003. PENSION AND POSTRETIREMENT BENEFIT PLANS - We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. We account for our defined benefit pension plans and our postretirement benefit plans using actuarial models required by Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The assets, liabilities and assumptions used to measure expense for any fiscal year are determined as of September 30 of the preceding year ("measurement date"). The discount rate assumption used in our pension and postretirement benefit plans' accounting is based on current interest rates for high-quality, long-term corporate debt as determined on each measurement date. The expected return on plan assets is based on our long-term historical experience, our plan asset allocation and our expectations for long-term interest rates and market performance. In evaluating our rate of return on assets for a given fiscal year, we consider a 15 to 20 year time horizon for our pension investment portfolio. In addition, we look at the return on asset assumptions used by other companies in our industry as well as other large companies. Over the past three fiscal years the composition of our plan assets was approximately 70%-75% equity investments and 25%-30% fixed income securities, which primarily consist of U.S. government and corporate bonds. Differences between actual and expected returns are generally recognized in the net periodic pension calculation over five years. To the extent the amount of all unrecognized gains and losses exceeds 10% of the larger of the benefit obligation or plan assets, such amount is amortized over the average remaining service life of active participants. The rate of future compensation increases is based upon our historical experience and management's best estimate regarding future expectations. We amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits. For our postretirement plans that provide medical and life insurance benefits, we review external data and our historical health care cost trends with our actuarial advisors to determine the health care cost trend rates. INCOME TAXES - We are a limited liability company, taxable as a partnership for U.S. tax purposes and, as such, generally will pay no U.S. federal or state income taxes. Our federal and state distributable share of income, deductions and credits will be allocated to our owners based on their percentage of ownership. However, certain domestic and foreign affiliates pay taxes in their respective jurisdictions and record related deferred income tax assets and liabilities. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. In accordance with SFAS No. 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws. With the exception of certain of our subsidiaries for which we have recorded deferred taxes in our Consolidated Financial Statements, deferred taxes associated with our U.S. operations are recorded directly by our owners. CASH EQUIVALENTS - Cash equivalents represent funds we have temporarily invested with original maturities not exceeding three months. 24 ALLOWANCE FOR DOUBTFUL ACCOUNTS - We determine our allowance for doubtful accounts based on the evaluation of the aging of our trade receivable portfolio and a customer-by-customer analysis of our high-risk customers. Our reserves contemplate our historical loss rate on receivables, specific customer situations, and the economic environments 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 for the majority of our locations. For our recent acquisitions in Mexico and Turkey, we value inventories at the lower of cost computed on the weighted-average cost 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 - During 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 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 no longer amortize goodwill and certain franchise rights, but evaluate them for impairment annually. Our identifiable intangible assets principally arise from the allocation of the purchase price of businesses acquired, and consist primarily of franchise rights. Our franchise rights are typically perpetual in duration, subject to compliance with the underlying franchise agreement. The value and life of our franchise rights are directly associated with the underlying portfolio of brands that we are entitled to make, sell and distribute under applicable franchise agreements. In considering whether franchise rights have an indefinite useful life, we consider the nature and terms of the underlying franchise agreements; our intent and ability to use the franchise rights; and the age and market position of the products within the franchise as well as the historical and projected growth of those products. We assign amounts to such identifiable intangibles based on their estimated fair values at the date of acquisition. In accordance with Emerging Issues Task Force ("EITF") Issue No. 02-07, "Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets," we evaluate our franchise rights with indefinite useful lives for impairment annually as asset groups on a country-by-country basis ("asset groups"). We measure the fair value of these asset groups utilizing discounted estimated future cash flows, including a terminal value, which assumes the franchise rights will continue in perpetuity. Our long-term terminal growth assumptions reflect our current long-term view of the marketplace. Our discount rate is based upon our weighted-average cost of capital plus an additional risk premium to reflect the risk and uncertainty inherent in separately acquiring a franchise agreement between a willing buyer and a willing seller. Each year we re-evaluate our assumptions in our discounted cash flow model to address changes in our business and marketplace conditions. Based upon our annual impairment analysis, the estimated fair values of our franchise rights with indefinite lives exceeded their carrying amounts in 2002. In accordance with SFAS No. 142, we evaluate goodwill on a country-by-country basis ("reporting unit") for impairment. We evaluate each reporting unit for impairment based upon a two-step approach. First, we compare the fair value of our reporting unit with its carrying value. Second, if the carrying value of our reporting unit exceeds its fair value, we compare the implied fair value of the reporting unit's goodwill to its carrying amount to measure the amount of impairment loss. In measuring the implied fair value of goodwill, we would allocate the fair value of the reporting unit to each of its assets and liabilities (including any unrecognized intangible assets). Any excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. We measure the fair value of a reporting unit as the discounted estimated future cash flows, including a terminal value, which assumes the business continues in perpetuity, less its respective minority interest and net debt (net of cash and cash equivalents). Our long-term terminal growth assumptions reflect our current long-term view of the marketplace. Our discount rate is based upon our weighted-average cost of capital. Each year we re-evaluate our assumptions in our discounted cash flow model to address changes in our business and marketplace conditions. Based upon our annual impairment analysis in the fourth quarter of 2002, the estimated fair value of our reporting units exceeded their carrying value and as result, we did not proceed to the second step of the impairment test. Other identifiable intangible assets that are subject to amortization are amortized straight-line over the period in which we expect to receive economic benefit and are reviewed for impairment when facts and circumstances indicate that the carrying value of the asset may not be recoverable. Determining the expected life of these intangible assets is based on an evaluation of a number of factors, including the competitive environment, market share and brand history. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value 25 exceeds its estimated fair value. Fair value is generally estimated based on either appraised value or other valuation techniques. INVESTMENT IN DEBT DEFEASANCE TRUST - We have purchased $181 million in U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest on the $160 million of 9 3/4% senior notes maturing in March 2004, in order to defease their respective covenants. These marketable securities have maturities that coincide with the scheduled interest payments of the senior notes and ultimate payment of principal. We have categorized these marketable securities as held-to-maturity as we have the positive intent and ability to hold these securities to maturity. Held-to-maturity securities are carried at amortized cost. The total amortized cost for these held-to-maturity securities at December 28, 2002, was $182 million. The current portion of these held-to-maturity securities is recorded in prepaid expenses and other current assets in the amount of $12 million, and the remaining long-term portion of $170 million is recorded in investment in debt defeasance trust in our Consolidated Balance Sheets. MINORITY INTEREST - Prior to 2002, PBG had a direct minority ownership in one of our subsidiaries. PBG's share of combined income or loss and assets and liabilities in the subsidiary is accounted for as minority interest. During 2002, PBG made a capital contribution to us of its ownership in our subsidiary. As a result, PBG's minority interest was reduced to zero. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - We use derivative instruments to hedge against the risk associated with the price of commodities purchased and used in our business, interest rates on outstanding debt and in 2002, certain currency exposures relating to our acquisition of Pepsi-Gemex, S.A. de C.V. ("Gemex"), a company we acquired in November 2002. 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 generally 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 derivative instruments that hedge interest rate risk, the fair value adjustments are recorded to interest expense in the Consolidated Statements of Operations. For a cash flow hedge, the effective portion of 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 applicable gain or loss is recognized in earnings immediately and is recorded consistent with the expense classification of the underlying hedged item. The ineffective portion of fair value changes on qualifying cash flow 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 enter into derivative instruments that do not qualify for hedge accounting. These instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value recognized in earnings. We also may enter into certain derivative instruments 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 PBG stock-based compensation expense using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, compensation expense for PBG stock option grants to our employees is measured as the excess of the quoted market price of PBG's common stock at the grant date over the amount the employee must pay for the stock. Our policy is to grant PBG stock options at fair value on 26 the date of grant. As allowed by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." If we had measured compensation cost for the stock options granted to our employees under the fair value based method prescribed by SFAS No. 123, net income would have been changed to the pro forma amounts set forth below: 2002 2001 2000 ---- ---- ---- Net Income Reported........................................ $ 734 $ 587 $ 471 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes........... (70) (64) (46) ---- ---- ---- Pro forma....................................... $664 $523 $425 ==== ==== ==== Pro forma compensation cost measured for stock options granted to employees is amortized straight-line over the vesting period, which is typically three years. 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. NEW ACCOUNTING STANDARDS - During 2001, the FASB issued SFAS No. 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 No. 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 no longer amortize goodwill and certain franchise rights, but evaluate them for impairment annually. We have completed our annual impairment review and have determined that our goodwill and indefinite-lived intangible assets are not impaired. The following table provides pro forma disclosure of the elimination of goodwill and certain franchise rights amortization in 2001 and 2000, as if SFAS No. 142 had been adopted in 2000: 2002 2001 2000 ---- ---- ---- Reported net income........................... 734 $ 587 $ 471 Add back: Goodwill amortization............. -- 35 37 Add back: Franchise rights amortization..... -- 88 86 ---- ----- ----- Adjusted net income........................... $734 $ 710 $ 594 ==== ===== ===== During 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 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 No. 143 is effective for fiscal year 2003. We do not anticipate that the adoption of SFAS No. 143 will have a material impact on our Consolidated Financial Statements. During 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 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. We adopted SFAS No. 144 at the beginning of fiscal year 2002. The adoption of SFAS No. 144 did not have a material impact on our Consolidated Financial Statements. During 2001, the EITF issued EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products," which addresses the recognition of income statement and classification of various sales incentives. We adopted EITF Issue No. 01-09 at the beginning of fiscal 2002 and it did not have a material impact on our Consolidated Financial Statements. During 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with the Exit or Disposal Activities." SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not anticipate that the adoption of SFAS No. 146 will have a material impact on our Consolidated Financial Statements. 27 During 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this statement requires SFAS No. 123 disclosure requirements in both annual and interim financial statements. We will continue to measure stock-based compensation expense in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and its related interpretations, and therefore we do not anticipate that the adoption of SFAS No. 148 will have a material impact on our Consolidated Financial Statements. During 2002, the EITF addressed various issues related to the income statement classification of certain payments received by a customer from a vendor. In November 2002, the EITF reached a consensus on Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," addressing the recognition and income statement classification of various consideration given by a vendor to a customer. Among its requirements, the consensus requires that certain cash consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor's products, and therefore should be characterized as a reduction of cost of sales when recognized in the customer's income statement, unless certain criteria are met. EITF Issue No. 02-16 will be effective beginning in our fiscal year 2003. We currently classify bottler incentives received from PepsiCo and other brand owners as adjustments to net revenues and selling, delivery and administrative expenses. In accordance with EITF Issue No. 02-16, we will classify certain bottler incentives as a reduction of cost of sales beginning in 2003. We are currently assessing the transitional guidance released by the EITF to determine the net impact to our Consolidated Financial Statements. NOTE 3 -- INVENTORIES
2002 2001 -------- -------- Raw materials and supplies ................. $ 162 $ 117 Finished goods ............................. 216 214 -------- -------- $ 378 $ 331 ======== ======== NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT, NET 2002 2001 -------- -------- Land ....................................... $ 228 $ 145 Buildings and improvements ................. 1,126 925 Manufacturing and distribution equipment ... 2,768 2,308 Marketing equipment ........................ 2,008 1,846 Other ...................................... 154 121 -------- -------- 6,284 5,345 Accumulated depreciation ................... (2,976) (2,802) -------- -------- $ 3,308 $ 2,543 ======== ========
28 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 ............ 2-10 years Marketing equipment ............... 3-7 years NOTE 5 -- INTANGIBLE ASSETS, NET
2002 2001 ---------- ---------- Intangibles subject to amortization: Gross carrying amount: Franchise rights ....................... $ 20 $ 12 Other identifiable intangibles ......... 24 39 ---------- ---------- 44 51 ---------- ---------- Accumulated amortization: Franchise rights ....................... (6) (2) Other identifiable intangibles ......... (9) (25) ---------- ---------- (15) (27) ---------- ---------- Intangibles subject to amortization (less accumulated amortization)............... 29 24 ---------- ---------- Intangibles not subject to amortization: Carrying amount: Franchise rights ....................... 3,424 2,577 Goodwill ............................... 1,192 1,046 Other identifiable intangibles ......... 42 37 ---------- ---------- Intangibles not subject to amortization .. 4,658 3,660 ---------- ---------- Total Intangible Assets (less accumulated amortization) .......................... $ 4,687 $ 3,684 ========== ==========
For intangible assets subject to amortization, we calculate amortization on a straight-line basis over the period we expect to receive economic benefit. Total amortization expense was $8 million, $135 million and $131 million in 2002, 2001 and 2000, respectively. The weighted-average amortization period for each class of intangible assets and their estimated aggregate amortization expense expected to be recognized over the next five years are as follows:
Weighted-Average Amortization Period Estimated Aggregate Amortization Expense to be Incurred ------------------- ------------------------------------------------------- 2003 2004 2005 2006 2007 ---- ---- ---- ---- ---- Franchise rights ................... 5 years $4 $4 $4 $2 $- Other identifiable intangibles...... 7 years $4 $4 $3 $2 $1
Through our various current and prior year acquisitions we accumulated $146 million of goodwill during 2002. NOTE 6 -- ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES 2002 2001 ---------- ---------- Accounts payable ................... $ 394 $ 362 Trade incentives ................... 210 205 Accrued compensation and benefits... 181 141 Other accrued taxes ................ 57 30 Other current liabilities .......... 296 239 ---------- ---------- $ 1,138 $ 977 ========== ========== 29 NOTE 7 -- SHORT-TERM BORROWINGS AND LONG-TERM DEBT
2002 2001 ---------- ---------- Short-term borrowings Current maturities of long-term debt ......................... $ 16 $ 3 Other short-term borrowings .................................. 51 74 ---------- ---------- $ 67 $ 77 ========== ========== 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 4 5/8% senior notes due 2012 ................................. 1,000 -- 9 3/4% senior notes due 2004 ................................. 160 -- Other (average rate 3.5%) .................................... 68 11 ---------- ---------- 3,528 2,311 Add: SFAS No. 133 adjustment * .............................. 23 7 Fair value adjustment relating to purchase accounting .. 14 -- Less: Unamortized discount, net .............................. 14 16 Current maturities of long-term debt ................... 16 3 ---------- ---------- $ 3,535 $ 2,299 ========== ==========
* In accordance with the requirements of SFAS No. 133, the portion of our fixed-rate debt obligations that is hedged is reflected in our Consolidated Balance Sheets as an amount equal to the sum of the debt's carrying value plus a SFAS No. 133 fair value adjustment representing changes recorded in the fair value of the hedged debt obligations attributable to movements in market interest rates. Maturities of long-term debt as of December 28, 2002, are 2003: $16 million, 2004: $1,164 million, 2005: $3 million, 2006: $2 million, 2007: $37 million and thereafter, $2,306 million. The $1.3 billion of 5 5/8% senior notes (with an effective interest rate of 5.6%) and the $1.0 billion of 5 3/8% senior notes (with an effective interest rate of 4.5%) were issued on February 9, 1999, by Bottling LLC and they are guaranteed by PepsiCo. The $1.0 billion of 4 5/8% senior notes (with an effective interest rate of 4.6%) was issued on November 15, 2002, by Bottling LLC and will be guaranteed by PepsiCo, in accordance with the terms set forth in the related indenture. Each of the senior notes mentioned above has redemption features, covenants and will, among other things, limit our ability and the ability of our restricted subsidiaries to create or assume liens, enter into sale and lease-back transactions, engage in mergers or consolidations and transfer or lease all or substantially all of our assets. The $160 million of 9 3/4% senior notes were issued by Gemex. These senior notes have an effective interest rate of 3.7% after a fair value adjustment of $14 million resulting from our acquisition of Gemex. In December 2002, we purchased $181 million of U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest on the $160 million of 9 3/4% senior notes maturing in March 2004, in order to defease its respective covenants. We estimate that the U.S. government securities will be sufficient to satisfy all future principal and interest requirements of the senior notes. See Note 2. We have available short-term bank credit lines of approximately $167 million and $177 million at December 28, 2002, and December 29, 2001, respectively. These lines were 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 28, 2002, and December 29, 2001, was 8.9% and 4.3%, respectively. Amounts paid to third parties for interest were $126 million, $121 million and $131 million in 2002, 2001 and 2000, respectively. NOTE 8 -- COMMITMENTS We have noncancellable commitments under both capital and long-term operating leases, which consist principally of buildings, office equipment and machinery. 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. 30 Our future minimum commitments under noncancellable leases are set forth below:
LEASES -------------------------------------- CAPITAL OPERATING ---------- ---------- 2003 ............... $ 1 $ 34 2004 ............... 1 25 2005 ............... -- 19 2006 ............... -- 15 2007 ............... -- 14 Later years ........ 3 70 ---------- ---------- $ 5 $ 177 ========== ==========
In addition, at December 28, 2002 we have outstanding letters of credit and surety bonds valued at $29 million primarily to provide collateral for estimated self insurance claims and other insurance requirements. At December 28, 2002, the present value of minimum payments under capital leases was $3 million, after deducting $2 million for imputed interest. Our rental expense was $62 million, $40 million and $42 million for 2002, 2001 and 2000, respectively. NOTE 9 -- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT These Consolidated Financial Statements reflect the implementation of SFAS No. 133, as amended by SFAS No. 138, on the first day of fiscal year 2001. In June 1998, the FASB issued SFAS No. 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 No. 138, amending the accounting and reporting standards of SFAS No. 133. Prior to the adoption of SFAS No. 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 accumulated other comprehensive loss of $4 million. Furthermore, the adoption had no impact on our Consolidated Statements of Operations. As of December 28, 2002, 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. CASH FLOW HEDGES - 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 future and option contracts 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 one 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. The amount of deferred losses from our commodity hedging that we recognized into cost of sales in our Consolidated Statements of Operations was $22 million in 2002 and $4 million for 2001. As a result of our commodity hedges, $16 million and $19 million of deferred losses remained in accumulated other comprehensive loss in our Consolidated Balance Sheets based on the commodity rates in effect on December 28, 2002, and December 29, 2001, respectively. Assuming no change in the commodity prices as measured on December 28, 2002, $13 million of the deferred loss will be recognized in our cost of sales 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 2002 or 2001. On November 15, 2002, we issued a $1 billion 10 year bond with an interest rate of 4 5/8 %. In anticipation of the bond issuance, we entered into several treasury rate future contracts to hedge against adverse interest rate changes. We recognized $8 million as a deferred gain reported in accumulated other comprehensive loss resulting 31 from these treasury rate contracts. These deferred gains are released to match the underlying interest expense on the debt. Deferred gains of $0.7 million will be recognized in interest expense over the next 12 months. FAIR VALUE HEDGES - We finance a portion of our operations through fixed-rate debt instruments. We converted our entire $1.0 billion 5 3/8% senior notes and $300 million of our $1.3 billion 5 5/8% senior notes to floating rate debt through the use of interest rate swaps with the objective of reducing our overall borrowing costs. These interest rate swaps meet the criteria for fair value hedge accounting and are 100% effective in eliminating the market rate risk inherent in our long-term debt. Accordingly, any gain or loss associated with these swaps are fully offset by the opposite market impact on the related debt. The change in fair value of the interest rate swaps was a gain of $16 million in 2002 and a gain of $7 million in 2001. The fair value change was recorded in interest expense 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 in our Consolidated Statements of Operations and in long-term debt in our Consolidated Balance Sheets representing the change in fair value of the related long-term debt. UNFUNDED DEFERRED COMPENSATION LIABILITY - Participating employees in our deferred compensation program can elect to defer all or a portion of their compensation to be paid out on a future date or dates. As part of the deferral process, employees select from phantom investment options that determine the earnings on the deferred compensation liability and the amount that they will ultimately receive. Employee investment elections include PBG stock and a variety of other equity and fixed income investment options. Our unfunded deferred compensation liability is subject to change in these investment elections. Since the plan is unfunded, employees' deferred compensation amounts are not directly invested in these investment vehicles. Instead, we track the performance of each employee's investment selections and adjust his or her deferred compensation account accordingly. The adjustments to the employees' accounts increases or decreases the deferred compensation liability reflected on our Consolidated Balance Sheets with an offsetting increase or decrease to our selling, delivery and administrative expenses. We use prepaid forward contracts to hedge the portion of our deferred compensation liability that is based on PBG's stock price. At December 28, 2002, we had a prepaid forward contract for 638,000 shares at an exercise price of $28.50, which was accounted for as a natural hedge. This contract requires cash settlement and has a fair value at December 28, 2002, of $16 million recorded in prepaid expenses and other current assets in our Consolidated Balance Sheets. The fair value of this contract changes based on the change in PBG's stock price compared with the contract exercise price. We recognized $1 million in gains in 2002 and $2 million in gains in 2001, resulting from the change in fair value of these prepaid forward contracts. The earnings impact from these instruments are classified as selling, delivery and administrative expenses. OTHER DERIVATIVES - During 2002, we entered into option contracts to mitigate certain foreign currency risks in anticipation of our acquisition of Gemex. Although these instruments did not qualify for hedge accounting, they were deemed derivatives since they contained a net settlement clause. These options expired unexercised and the cost of these options of $7 million has been recorded in other non-operating expenses, net in our Consolidated Statements of Operations. OTHER FINANCIAL ASSETS AND LIABILITIES - 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 maturities and since interest rates approximate current market rates for short-term debt. Long-term debt at December 28, 2002, had a carrying value and fair value of $3.5 billion and $3.7 billion, respectively, and at December 29, 2001, had a carrying value and fair value of $2.3 billion. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities. NOTE 10 -- 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 32 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 plans for our operations outside the U.S. was not significant. Our U.S. employees are also eligible to participate in our 401(k) savings plans, which are voluntary defined contribution plans. We make matching contributions to the 401(k) savings plans on behalf of participants eligible to receive such contributions. If a participant has one or more but less than 10 years of eligible service, our match will equal $0.50 for each dollar the participant elects to defer up to 4% of the participant's pay. If the participant has 10 or more years of eligible service, our match will equal $1.00 for each dollar the participant elects to defer up to 4% of the participant's pay.
PENSION -------------------------------------- Components of pension expense: 2002 2001 2000 ---- ---- ---- Service cost ................................................ $ 28 $ 25 $ 24 Interest cost ............................................... 56 50 49 Expected return on plan assets .............................. (66) (57) (53) Amortization of prior service amendments .................... 6 4 5 Special termination benefits ................................ 1 -- -- ---- ---- ---- Net pension expense for the defined benefit plans ........... $ 25 $ 22 $ 25 ---- ---- ---- Cost of defined contribution plans .......................... $ 18 $ 17 $ 15 ---- ---- ---- Total net pension expense recognized in the Consolidated Statements of Operations .................................... $ 43 $ 39 $ 40 ==== ==== ====
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.
POSTRETIREMENT -------------------------------------- Components of postretirement benefits expense: ............. 2002 2001 2000 ---- ---- ---- Service cost ............................................... $ 3 $ 3 $ 3 Interest cost .............................................. 17 16 14 Amortization of net loss ................................... 2 1 1 Amortization of prior service amendments ................... (6) (6) (6) ---- ---- ---- Net postretirement benefits expense recognized in the Consolidated Statements of Operations ...................... $ 16 $ 14 $ 12 ==== ==== ====
33 CHANGES IN THE BENEFIT OBLIGATION
PENSION POSTRETIREMENT ------------------------------- ------------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Obligation at beginning of year $ 760 $ 664 $ 228 $ 212 Service cost ......................... 28 25 3 3 Interest cost ........................ 56 50 17 16 Plan amendments ...................... 22 10 -- -- Actuarial loss ....................... 127 48 55 14 Benefit payments ..................... (41) (37) (17) (17) Special termination benefits ......... 1 -- -- -- -------- -------- -------- -------- Obligation at end of year ............ $ 953 $ 760 $ 286 $ 228 ======== ======== ======== ========
CHANGES IN THE FAIR VALUE OF ASSETS
PENSION POSTRETIREMENT ------------------------------ ------------------------------ 2002 2001 2002 2001 ------- ------- ------- ------- Fair value at beginning of year $ 578 $ 665 $ -- $ -- Actual return on plan assets ......... (61) (120) -- -- Asset transfers ...................... 11 -- -- -- Employer contributions ............... 51 70 17 17 Benefit payments ..................... (41) (37) (17) (17) ------- ------- ------- ------- Fair value at end of year ............ $ 538 $ 578 $ -- $ -- ======= ======= ======= =======
SELECTED INFORMATION FOR THE PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS
PENSION POSTRETIREMENT ------------------------ ------------------------ 2002 2001 2002 2001 ------ ------ ------ ------ Projected benefit obligation .................. $ 953 $ 760 $ 286 $ 228 Accumulated benefit obligation ................ 843 690 286 228 Fair value of plan assets * ................... 663 604 -- --
*Includes fourth quarter employer contributions. FUNDED STATUS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT ----------------------------- ----------------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Funded status at end of year ........ $ (415) $ (182) $ (286) $ (228) Unrecognized prior service cost ..... 41 36 (9) (16) Unrecognized loss ................... 407 153 110 57 Unrecognized transition asset ....... -- (1) -- -- Fourth quarter employer contributions 125 26 6 5 ------- ------- ------- ------- Net amounts recognized .............. $ 158 $ 32 $ (179) $ (182) ======= ======= ======= =======
NET AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT ------------------------------- ------------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Other liabilities .................. $ (196) $ (101) $ (179) $ (182) Intangible assets .................. 42 37 -- -- Accumulated other comprehensive loss 312 96 -- -- ------- ------- ------- ------- Net amounts recognized ............. $ 158 $ 32 $ (179) $ (182) ======= ======= ======= =======
34 At December 28, 2002, and 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 the unfunded liability as a minimum balance sheet liability. As a result of this additional liability, our intangible asset increased by $5 million to $42 million in 2002, which equals the amount of unrecognized prior service cost in our plans. The remainder of the liability that exceeded the unrecognized prior service cost was recognized as an increase to accumulated other comprehensive loss of $216 million and $96 million in 2002 and 2001, respectively. ASSUMPTIONS The weighted-average assumptions used to compute the above information are set forth below:
PENSION ------------------------------------------------- 2002 2001 2000 --- --- --- Discount rate for benefit obligation 6.8% 7.5% 7.8% Expected return on plan assets (1) .............. 9.5% 9.5% 9.5% Rate of compensation increase ................... 4.3% 4.3% 4.6%
(1) Expected return on plan assets is presented after administration expenses.
POSTRETIREMENT ------------------------------------------------- 2002 2001 2000 --- --- --- Discount rate for benefit obligation..................... 6.8% 7.5% 7.8%
We evaluate these assumptions with our actuarial advisors on an annual basis and we believe they are within accepted industry ranges, although an increase or decrease in the assumptions or economic events outside our control could have a direct impact on reported net earnings. FUNDING AND PLAN ASSETS The pension plan assets are principally invested in stocks and bonds. None of the assets are invested directly into PBG, PepsiCo or any bottling affiliates of PepsiCo, although it is possible that insignificant indirect investments exist through our broad market indices. Our contributions are made in accordance with applicable tax regulations that provide for current tax deductions for our contributions and for taxation to the employee of plan benefits when the benefits are received. We do not fund our pension plan and postretirement plans when our contributions would not be deductible and when benefits would be taxable to the employee before receipt. Of the total pension liabilities at year end 2002, $52 million relates to plans not funded due to these unfavorable tax consequences. HEALTH CARE COST TREND RATES We have assumed an average increase of 12.0% in 2003 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 5.0% in 2013 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 2002 service and interest cost components ............... $ -- $ -- Effect on the fiscal year 2002 accumulated postretirement benefit obligation......... $ 10 $ (8)
35 NOTE 11 -- EMPLOYEE STOCK OPTION PLANS Under PBG's long-term incentive plan, PBG stock options are issued to our middle and senior management employees and vary according to salary and level. Except as noted below, options granted in 2002, 2001 and 2000 had exercise prices ranging from $23.25 per share to $29.25 per share, $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 generally become exercisable 25% after one year, an additional 25% after two years, and the remainder after three years. 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. The following table summarizes option activity during 2002:
WEIGHTED-AVERAGE EXERCISE Options in millions OPTIONS PRICE -------- -------- Outstanding at beginning of year ............................. 39.7 $ 13.20 Granted ................................................... 6.4 25.32 Exercised ................................................. (8.1) 11.63 Forfeited ................................................. (0.6) 16.89 -------- -------- Outstanding at end of year ................................... 37.4 $ 15.53 ======== ======== Exercisable at end of year ................................... 19.9 $ 12.59 ======== ======== Weighted-average fair value of options granted during the year $ 10.89 ========
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 ========
36 Stock options outstanding and exercisable at December 28, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ------------------------- WEIGHTED-AVERAGE REMAINING Options in millions WEIGHTED-AVERAGE CONTRACTUAL WEIGHTED-AVERAGE EXERCISE RANGE OF EXERCISE PRICE OPTIONS LIFE IN YEARS EXERCISE PRICE OPTIONS PRICE - ----------------------- ------- ------- ------- ------- ------- $9.38-$11.49 ............ 8.9 6.99 $ 9.39 7.0 $ 10.38 $11.50-$15.88 ........... 13.2 6.06 $ 11.63 9.6 $ 11.61 $15.89-$22.50 ........... 9.1 8.00 $ 20.49 3.2 $ 20.04 $22.51-$29.25 ........... 6.2 9.00 $ 25.34 0.1 $ 25.16 ------- ------- ------- ------- ------- 37.4 7.24 $ 15.53 19.9 $ 12.59 ======= ======= ======= ======= =======
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:
2002 2001 2000 ------- ------- ------- Risk-free interest rate..... 4.5% 4.6% 6.7% Expected life .............. 6 years 6 years 7 years Expected volatility ........ 37% 35% 35% Expected dividend yield..... 0.16% 0.20% 0.43%
NOTE 12 -- INCOME TAXES We are a limited liability company, taxable as a partnership for U.S. tax purposes and, as such, generally pay no U.S. federal or state income taxes. Our federal and state distributable share of income, deductions and credits are allocated to our owners based on their percentage of ownership. However, certain domestic and foreign affiliates pay income taxes in their respective jurisdictions. We had income tax expense of $49 million in 2002, an income tax benefit of $1 million in 2001 and income tax expense of $22 million in 2000. These amounts were comprised of current income tax expense of $12 million, $8 million and $27 million, and deferred income tax expense of $37 million in 2002 and deferred income tax benefit of $9 million and $5 million in 2001 and 2000, respectively. Our 2001 deferred income tax benefit includes a nonrecurring benefit of $25 million due to enacted tax rate changes in Canada during the year. Our reconciliation of income taxes calculated at the U.S. federal statutory rate to our provision for income taxes is set forth below:
2002 2001 2000 -------- -------- -------- Income taxes computed at the U.S. federal statutory rate ............................. 35.0% 35.0% 35.0% Transfer of income to owners ................. (26.4) (28.5) (27.5) State income tax, net of federal tax benefit . 0.6 0.4 0.9 Impact of foreign results .................... (4.8) (8.5) (8.6) Goodwill and other nondeductible expenses .... 0.8 2.7 3.7 Other, net ................................... 1.2 3.0 0.9 -------- -------- -------- 6.4 4.1 4.4 Rate change benefit .......................... -- (4.3) -- -------- -------- -------- Total effective income tax rate .............. 6.4% (0.2)% 4.4% ======== ======== ========
37 The details of our 2002 and 2001 deferred tax liabilities (assets) are set forth below:
2002 2001 -------- -------- Intangible assets and property, plant and equipment $ 370 $ 175 Other ............................................. 30 36 -------- -------- Gross deferred tax liabilities .................... 400 211 -------- -------- Net operating loss carryforwards .................. (142) (121) Various liabilities and other ..................... (63) (49) -------- -------- Gross deferred tax assets ......................... (205) (170) Deferred tax asset valuation allowance ............ 147 122 -------- -------- Net deferred tax assets ........................... (58) (48) -------- -------- Net deferred tax liability ........................ $ 342 $ 163 ======== ======== Included in: Prepaid expenses and other current assets ......... $ (18) $ (5) Deferred income taxes ............................. 360 168 -------- -------- $ 342 $ 163 ======== ========
We have net operating loss carryforwards totaling $443 million at December 28, 2002, which are available to reduce future taxes in the U.S., Spain, Greece, Russia, Turkey and Mexico. Of these carryforwards, $14 million expire in 2003 and $429 million expire at various times between 2004 and 2022. We have established a full valuation allowance for the net operating loss carryforwards attributable to Spain, Greece, Russia, Turkey and Mexico based upon our projection that it is more likely than not that these losses will not be realized. In addition, at December 28, 2002, we have a tax credit carryforwards in the U.S. of $7 million with an indefinite carryforward period and in Mexico of $13 million, which expire at various times between 2006 and 2012. Our valuation allowances, which reduce deferred tax assets to an amount that will more likely than not be realized, have increased by $25 million and decreased by $26 million in 2002 and 2001, respectively. The increase in 2002 was mainly due to the purchase of bottling companies in Turkey and Mexico. 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 payable were $8 million at December 28, 2002 and income taxes receivable were $10 million at December 29, 2001. Such amounts are recorded within accounts payable and other current liabilities and prepaid expenses and other current assets in our Consolidated Balance Sheets, respectively. Amounts paid to taxing authorities for income taxes were $0, $11 million and $34 million in 2002, 2001 and 2000 respectively. 38 NOTE 13 -- 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 Canada, Spain, Russia, Greece, Turkey and Mexico.
NET REVENUES ----------------------------------- 2002 2001 2000 ------ ------ ------ U.S ............................. $7,572 $7,197 $6,830 Mexico .......................... 164 -- -- Other countries ................. 1,480 1,246 1,152 ------ ------ ------ $9,216 $8,443 $7,982 ====== ====== ======
LONG-LIVED ASSETS ----------------------------------- 2002 2001 2000 ------ ------ ------ U.S ............................. $6,531 $6,232 $5,719 Mexico .......................... 1,586 -- -- Other countries ................. 1,127 914 960 ------ ------ ------ $9,244 $7,146 $6,679 ====== ====== ======
NOTE 14 -- RELATED PARTY TRANSACTIONS PepsiCo, Inc. ("PepsiCo") is considered a related party due to the nature of our franchisee relationship and its ownership interest in our company. Approximately 90% of our 2002 volume was derived from the sale of Pepsi-Cola beverages. In addition, at December 28, 2002, PepsiCo owned 6.8% of our equity. We have entered into a number of agreements with PepsiCo since PBG's initial public offering. Although we are not a direct party to these contracts, as the principal operating subsidiary of PBG, we derive direct benefit from them. Accordingly, set forth below are the most significant agreements that govern our relationship 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; master bottling agreements 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 country, including Canada, Spain, Russia, Greece, Turkey and Mexico, 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 support, including information technology maintenance, procurement of raw materials, shared space, employee benefits, credit and collection, international tax and accounting services. The amounts paid or received under this contract are equal to the actual costs incurred by the company providing the service. 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 ended 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 its best efforts to settle all joint interests in any common audit issue on a basis consistent with prior practice. BOTTLER INCENTIVES AND OTHER ARRANGEMENTS - We share a business objective with PepsiCo of increasing the availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo, at its discretion, provides us with various forms of bottler incentives to promote its beverages. These incentives cover a variety of initiatives, including direct marketplace support, capital equipment funding and advertising support. Based on the objective of the programs and initiatives, we record bottler incentives as an adjustment to net revenues or as a reduction of selling, delivery and administrative expenses. Direct marketplace support represents PepsiCo's funding to assist us in 39 offering sales and promotional discounts to retailers and is recorded as an adjustment to net revenues. Capital equipment funding is designed to help offset the costs of purchasing and installing marketing equipment, such as vending machines and glass door coolers at customer locations and is recorded as a reduction of selling, delivery and administrative expenses. Advertising support represents the cost of media time, promotional materials, and other advertising and marketing costs that are funded by PepsiCo and is recorded as a reduction to advertising and marketing expenses within selling, delivery and administrative expenses. In addition, PepsiCo may share certain media costs with us due to our joint objective of promoting PepsiCo brands. There are no conditions or other requirements that could result in a repayment of the bottler incentives received. Bottler incentives received from PepsiCo, including media costs shared by PepsiCo, were $560 million, $554 million and $524 million for 2002, 2001 and 2000, respectively. Of these amounts, we recorded $257 million, $262 million and $244 million for 2002, 2001 and 2000, respectively, in net revenues, and the remainder as a reduction of selling, delivery and administrative expenses. PURCHASES OF CONCENTRATE AND FINISHED PRODUCT - We purchase concentrate from PepsiCo, which is the critical flavor ingredient used in the production of carbonated soft drinks and other ready-to-drink beverages. PepsiCo determines the price of concentrate annually at its discretion. We also pay a royalty fee to PepsiCo for the Aquafina trademark. Amounts paid or payable to PepsiCo and its affiliates for concentrate and royalty fees were $1,699 million, $1,584 million and $1,507 million in 2002, 2001 and 2000, respectively. We also produce or distribute other products and purchase finished goods and concentrate through various arrangements with PepsiCo or PepsiCo joint ventures. During 2002, 2001 and 2000, total amounts paid or payable to PepsiCo or PepsiCo joint ventures for these transactions were $464 million, $375 million and $155 million, respectively. We provide manufacturing services to PepsiCo and PepsiCo affiliates in connection with the production of certain finished beverage products. During 2002, 2001 and 2000, total amounts paid or payable by PepsiCo for these transactions were $10 million, $32 million and $36 million, respectively. FOUNTAIN SERVICE FEE - 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 our Consolidated Statements of Operations in selling, delivery and administrative expenses. Net amounts paid or payable by PepsiCo to us for these services were approximately $200 million, $185 million and $189 million, in 2002, 2001 and 2000, respectively. OTHER TRANSACTIONS - Prior to 2002, Hillbrook Insurance Company, Inc., a subsidiary of PepsiCo, provided insurance and risk management services to us pursuant to a contractual agreement. Total premiums paid to Hillbrook Insurance Company, Inc. during 2001 and 2000 were $58 million and $62 million, respectively. We provide PepsiCo and PepsiCo affiliates or PepsiCo provides us various services pursuant to a shared services agreement and other arrangements, including information technology maintenance, procurement of raw materials, shared space, employee benefits, credit and collection, international tax and accounting services. Total net expenses incurred were approximately $57 million, $133 million and $117 million during 2002, 2001 and 2000, respectively. We purchase snack food products from Frito-Lay, Inc., a subsidiary of PepsiCo, for sale and distribution in all of Russia except Moscow. Amounts paid or payable to PepsiCo and its affiliates for snack food products were $44 million, $27 million and $24 million in 2002, 2001 and 2000, respectively. 40 The Consolidated Statements of Operations include the following income (expense) amounts as a result of transactions with PepsiCo and its affiliates:
2002 2001 2000 ------- ------- ------- Net revenues: Bottler incentives ................................... $ 257 $ 262 $ 244 ======= ======= ======= Cost of sales: Purchases of concentrate and finished products, and Aquafina royalty fees ........................ $(2,163) $(1,959) $(1,662) Manufacturing and distribution service reimbursements 10 32 36 ------- ------- ------- $(2,153) $(1,927) $(1,626) ======= ======= ======= Selling, delivery and administrative expenses: Bottler incentives ................................... $ 303 $ 292 $ 280 Fountain service fee ................................. 200 185 189 Frito-Lay purchases .................................. (44) (27) (24) Insurance costs ...................................... -- (58) (62) Shared services ...................................... (57) (133) (117) ------- ------- ------- $ 402 $ 259 $ 266 ======= ======= =======
We are not required to pay any minimum fees to PepsiCo, nor are we obligated to PepsiCo under any minimum purchase requirements. As part of our acquisition in Turkey (see Note 16), we paid PepsiCo $8 million for its share of Fruko Mesrubat Sanayii A.S. and related entities. In addition, we sold certain brands to PepsiCo from the net assets acquired for $16 million. As part of our acquisition of Gemex in Mexico (see Note 16), PepsiCo received $297 million for the tender of its shares for its 34.4% ownership in the outstanding capital stock of Gemex. In addition, PepsiCo made a payment to us for $17 million, to facilitate the purchase and ensure a smooth ownership transition of Gemex. We paid PepsiCo $10 million and $9 million during 2002 and 2001, respectively, for distribution rights relating to the SoBe brand in certain PBG-owned territories in the U.S. and Canada. The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8% senior notes issued on February 9, 1999, by us are guaranteed by PepsiCo. In addition, the $1.0 billion of 4 5/8% senior notes issued on November 15, 2002, also by us, will be guaranteed by PepsiCo in accordance with the terms set forth in the related indenture. Amounts payable to PepsiCo and its affiliates were $26 million and $17 million at December 28, 2002, and December 29, 2001, respectively. Such amounts are recorded within accounts payable and other current liabilities in our Consolidated Balance Sheets. PBG is considered a related party, as we are the principal operating subsidiary of PBG and we make up substantially of all of the operations and assets of PBG. At December 28, 2002, PBG owned approximately 93.2% of our equity. Beginning in 2002, PBG provides insurance and risk management services to us pursuant to a contractual agreement. Total premiums paid to PBG during 2002 was $86 million. We have loaned PBG $117 million and $310 million during 2002 and 2001, respectively, net of repayments. During 2002 these loans were made through a series of 1-year notes, with interest rates ranging from 1.9% to 2.5%. Total intercompany loans owed to us from PBG at December 28, 2002 and December 29, 2001, was $954 million and $837 million, respectively. The proceeds were used by PBG to pay for interest, taxes, dividends, share repurchases 41 and acquisitions. Accrued interest receivable from PBG on these notes totaled $22 million and $44 million at December 28, 2002 and December 29, 2001, respectively, and is included in prepaid expenses and other current assets in our Consolidated Balance Sheets. Total interest income recognized in our Consolidated Statements of Operations relating to outstanding loans with PBG was $24 million, $44 million and $36 million, in 2002, 2001 and 2000, respectively. On March 8, 1999, PBG issued $1 billion of 7% senior notes due 2029, which are guaranteed by us. PBG has a $500 million commercial paper program that is supported by two $250 million credit facilities, which is guaranteed by us. One of the credit facilities expires in May 2003 and the other credit facility expires in April 2004. There were no borrowings outstanding under these credit facilities at December 28, 2002, or December 29, 2001. We also guarantee that to the extent there is available cash, we will distribute pro rata to PBG and PepsiCo sufficient cash such that aggregate cash distributed to PBG will enable PBG to pay its taxes and make interest payments on the $1 billion 7% senior notes due 2029. During 2002 and 2001, we made cash distributions to our owners totaling $156 million and $223 million, respectively. Any amounts in excess of taxes and interest payments were used by PBG to repay loans to us. NOTE 15 -- CONTINGENCIES We are involved in a lawsuit with current and former employees concerning wage and hour issues in New Jersey. We believe that the ultimate resolution to this matter will not have a material adverse effect on our results of operations, financial condition or liquidity. Subsequent to year end we have resolved this matter, see Note 18. 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 16 -- ACQUISITIONS During 2002, we acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from several PepsiCo franchise bottlers. The following acquisitions occurred for an aggregate amount of $921 million in cash and $369 million of assumed debt: - Fruko Mesrubat Sanayii A.S. and related entities of Turkey in March. - Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle, Maine in June. - Seaman's Beverages Limited of the Canadian province of Prince Edward Island in July. - Pepsi-Gemex, S.A. de. C.V of Mexico in November. - Kitchener Beverages Limited of Ontario, Canada in December. Also in 2002, PBG acquired the Pepsi-Cola bottling operations along with the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from Pepsi-Cola Bottling Company of Macon, Inc. in Georgia ("Macon"). In connection with the acquisition, PBG contributed the business and certain net assets of Macon totaling $24 million to Bottling LLC. The largest of our acquisitions was Gemex, where we acquired all of their outstanding capital stock. Our total cost for the purchase of Gemex was a net cash payment of $871 million and assumed debt of approximately $305 million. Gemex produces, sells and distributes a variety of soft drink products under the Pepsi-Cola, Pepsi Light, Pepsi Max, Pepsi Limon, Mirinda, 7 UP, Diet 7 UP, KAS, Mountain Dew, Power Punch and Manzanita Sol trademarks under exclusive franchise and bottling arrangements with PepsiCo and certain affiliates of PepsiCo. Gemex owns, produces, sells and distributes purified and mineral water in Mexico under the trademarks Electropura and Garci Crespo and has rights to produce, sell and distribute soft drink products of other companies in Mexico. Our U.S. and Canadian acquisitions were made to enable us to provide better service to our large retail customers. We expect these acquisitions to reduce costs through economies of scale. The Mexican and Turkish acquisitions were made to allow us to increase our markets outside the United States. 42 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with our acquisitions and the asset contribution of Macon from PBG, net of cash acquired:
USEFUL LIFE ASSETS (YEARS) GEMEX OTHER TOTAL ------- -------- -------- -------- Current assets ..................................... $ 101 $ 33 $ 134 Fixed assets ....................................... 5-33 505 85 590 Intangible assets: Non-compete agreements subject to amortization .... 3-5 -- 4 4 Franchise rights subject to amortization .......... 5 -- 8 8 Franchise rights not subject to amortization ...... 808 35 843 Goodwill (non-tax deductible) ..................... 126 20 146 Other assets ....................................... 15 2 17 -------- -------- -------- TOTAL ASSETS .............................. $ 1,555 $ 187 $ 1,742 -------- -------- -------- LIABILITIES Accounts payable and other current liabilities ..... 141 42 183 Short-term borrowings .............................. 5 50 55 Long-term debt ..................................... 300 14 314 Other liabilities .................................. 238 14 252 -------- -------- -------- TOTAL LIABILITIES ......................... $ 684 $ 120 $ 804 -------- -------- -------- NET ASSETS ACQUIRED .................................. $ 871 $ 67 $ 938 ======== ======== ========
In addition to the net assets acquired above, we also incurred non-capitalizable costs associated with the acquisition of Gemex. As discussed in Note 9, we entered into option contracts to mitigate certain foreign currency risks in anticipation of our acquisition. These options expired unexercised and the cash flow of $7 million associated with these options included in acquisitions of bottlers in the Consolidated Statements of Cash Flows. The allocation of the purchase price for Gemex is preliminary, pending final valuations on certain assets. The final allocations of the purchase price will be determined based on the fair value of assets acquired and liabilities assumed as of the date of acquisition. Non-compete agreements and franchise rights that are subject to amortization acquired during 2002 have a weighted-average amortization period of three and five years, respectively. The following unaudited pro forma operating information summarizes our consolidated results of operations as if the Gemex acquisition had occurred on the first day of fiscal year 2001.
2002 2001 ------- ------- Net revenues ................. $10,297 $ 9,617 Income before income taxes ... $ 813 $ 615 Net income ................... $ 755 $ 608
The operating results of each of our acquisitions are included in the accompanying consolidated financial statements from its respective date of purchase. During 2001, PBG acquired the Pepsi-Cola bottling operations along with the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from Pepsi-Cola Bottling of Northern California. In connection with the acquisition, PBG contributed certain net assets acquired totaling $74 million to Bottling LLC. Also during 2001, we acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from Pepsi-Cola Elmira Bottling Co. Inc. for $46 million in cash and assumed debt. These acquisitions were made to enable us to provide better service to our large retail customers as well as reduce costs through economies of scale. 43 NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS The balances related to each component of accumulated other comprehensive loss were as follows:
2002 2001 2000 ------- ------- ------- Currency translation adjustment ........ $ (276) $ (301) $ (253) Cash flow hedge adjustment ............. (8) (19) -- Minimum pension liability adjustment ... (312) (96) -- ------- ------- ------- Accumulated other comprehensive loss ... $ (596) $ (416) $ (253) ======= ======= =======
NOTE 18 -- SUBSEQUENT EVENTS (UNAUDITED) During the first quarter of 2003, we acquired a Pepsi-Cola bottler based in Buffalo, New York, for a purchase price of approximately $75 million. In the first quarter of 2003, we settled a lawsuit with the New Jersey State Department of Labor and with current and former employees concerning overtime wage issues. The amount of this settlement was approximately $28 million, which was fully provided for in our litigation reserves as of December 28, 2002 in our Consolidated Balance Sheets. NOTE 19 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH 2002 QUARTER QUARTER QUARTER QUARTER FULL YEAR ------- ------- ------- ------- --------- Net revenues ...................... $1,772 $2,209 $2,455 $2,780 $9,216 Gross profit ...................... 830 1,024 1,118 1,243 4,215 Operating income .................. 135 272 338 152 897 Net income ........................ 107 240 287 100 734
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 ................ 90 218 285 85 678 Net income (1) .................. 67 201 260 59 587
(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. 44 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS To Our Owners: 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 28, 2002 provide reasonable assurance that our assets are safeguarded. Alfred H. Drewes Andrea L. Forster Principal Financial Officer Principal Accounting Officer 45 Independent Auditors' Report The Owners of Bottling Group, LLC: We have audited the accompanying consolidated balance sheets of Bottling Group, LLC as of December 28, 2002 and December 29, 2001, and the related consolidated statements of operations, cash flows and changes in owners' equity for each of the fiscal years in the three-year period ended December 28, 2002. These consolidated financial statements are the responsibility of management of Bottling Group, LLC. 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 Bottling Group, LLC as of December 28, 2002 and December 29, 2001, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the Company adopted FASB 142, "Goodwill and Other Intangible Assets," as of December 30, 2001. /s/ KPMG LLP New York, New York January 28, 2003 SELECTED FINANCIAL AND OPERATING DATA in millions
FISCAL YEARS ENDED 2002 2001 2000(1) 1999 1998 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net revenues ....................................... $ 9,216 $ 8,443 $ 7,982 $ 7,505 $ 7,041 Cost of sales ...................................... 5,001 4,580 4,405 4,296 4,181 -------- -------- -------- -------- -------- Gross profit ....................................... 4,215 3,863 3,577 3,209 2,860 Selling, delivery and administrative expenses ...... 3,318 3,185 2,986 2,813 2,583 Unusual impairment and other charges and credits (2) -- -- -- (16) 222 -------- -------- -------- -------- -------- Operating income ................................... 897 678 591 412 55 Interest expense, net .............................. 98 78 89 129 157 Other non-operating expenses, net .................. 7 -- 1 1 26 Minority interest .................................. 9 14 8 5 4 -------- -------- -------- -------- -------- Income (loss) before income taxes .................. 783 586 493 277 (132) Income tax (benefit) expense (3) ................... 49 (1) 22 4 (1) -------- -------- -------- -------- -------- Net income (loss) .................................. $ 734 $ 587 $ 471 $ 273 $ (131) ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT PERIOD END): Total assets ....................................... $ 10,907 $ 8,677 $ 8,228 $ 7,799 $ 7,227 Long-term debt: Allocation of PepsiCo long-term debt ............ -- -- -- -- 2,300 Due to third parties ............................ 3,535 2,299 2,286 2,284 61 -------- -------- -------- -------- -------- Total long-term debt .......................... $ 3,535 $ 2,299 $ 2,286 $ 2,284 $ 2,361 Minority interest .................................. $ -- $ 154 $ 147 $ 141 $ 112 Accumulated other comprehensive loss ............... $ (596) $ (416) $ (253) $ (222) $ (238) Owners' equity ..................................... $ 5,186 $ 4,596 $ 4,321 $ 3,928 $ 3,283
(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 $12 million. (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) Fiscal Year 2001 includes Canada tax law change benefits of $25 million. 47 -----END PRIVACY-ENHANCED MESSAGE-----