-----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, KMAMBmVyyBPs+cPDZ1XyIqcTo2gf5fi/lKlPleTQyn0blMRa7VEsfG+rkwOY/Pmh /UgJFMIg9DMt0kZZQcY03Q== 0000950123-04-003177.txt : 20040311 0000950123-04-003177.hdr.sgml : 20040311 20040311125305 ACCESSION NUMBER: 0000950123-04-003177 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031227 FILED AS OF DATE: 20040311 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: 04662328 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 y94856e10vk.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 27, 2003 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 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. [ ] INDICATE BY CHECKMARK 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 1, 2004 WAS 259,681,616. 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 14, 2003 WAS $3,452,998,757.
DOCUMENTS OF WHICH PORTIONS PARTS OF FORM 10-K INTO WHICH PORTION ARE INCORPORATED BY REFERENCE OF DOCUMENTS ARE INCORPORATED - ----------------------------------- ------------------------------------- 2003 ANNUAL REPORT TO SHAREHOLDERS I, II PROXY STATEMENT FOR THE PEPSI BOTTLING GROUP, INC. MAY 26, 2004 ANNUAL III MEETING OF SHAREHOLDERS
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 20, 2004, PepsiCo's ownership represented 40.8% of the outstanding common stock and 100% of the outstanding Class B common stock, together representing 46.0% 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 20, 2004. 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 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"). Additionally, we have made available, free of charge, the following governance materials on our website at http://www.pbg.com under Corporate Governance: Corporate Governance Principles and Practices, Worldwide Code of Conduct, the Audit and Affiliated Transactions Committee Charter, the Compensation and Management Development Committee Charter and the Nominating and Corporate Governance Committee Charter. These governance materials are available in print, free of charge, to any shareholder upon request. PRINCIPAL PRODUCTS PBG is the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages. The beverages sold by us include PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, AQUAFINA, SIERRA MIST, LIPTON BRISK, DIET MOUNTAIN DEW, SOBE, DOLE, and PEPSI VANILLA, and, outside the U.S., PEPSI-COLA, KAS, AQUA MINERALE, MANZANITA SOL, and MIRINDA. In some of our territories, we have the right to manufacture, sell and distribute soft drink products of companies other than PepsiCo, including DR PEPPER, SQUIRT and through October 2003, ALL SPORT. We also have the right in some of our territories to manufacture, sell and distribute beverages under trademarks that we own, including ELECTROPURA and GARCI CRESPO. 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 all or a portion of 21 states in Mexico. In 2003, approximately 72% of our net revenues were generated in the United States, 11% of our net revenues were generated in Mexico and the remaining 17% was generated in Canada, Spain, Greece, Russia and Turkey. 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 beverage products from PepsiCo and other beverage companies. 1 In addition to concentrates, we purchase sweeteners, glass and plastic bottles, cans, closures, syrup containers, other packaging materials, carbon dioxide and some finished goods. 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, as defined below, provide that, with respect to the beverage 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, DIET PEPSI, MOUNTAIN DEW, AQUAFINA, SIERRA MIST, LIPTON BRISK, DIET MOUNTAIN DEW, SOBE, DOLE, and PEPSI VANILLA, and, outside the U.S., PEPSI-COLA, KAS, AQUA MINERALE, MANZANITA SOL, and MIRINDA. In some of our territories, we have the right to manufacture, sell and distribute beverage products of companies other than PepsiCo, including DR PEPPER, SQUIRT and through October 2003, ALL SPORT. We also have the right in some of our territories to manufacture, sell and distribute beverages under trademarks that we own, including ELECTROPURA and GARCI CRESPO. The majority of our volume is derived from brands licensed from PepsiCo or PepsiCo joint ventures. 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. 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 push vigorously the sale of cola beverages in our territories; and 2 (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 2003, PepsiCo approved our plans. If we carry out our annual plan in all material respects, we will be deemed to have satisfied our obligations to push vigorously the sale of the cola beverages, increase and fully meet the demand for the cola beverages in our territories and maintain the financial capacity required under the Master Bottling Agreement. Failure to present a plan or carry out approved plans in all material respects would constitute an event of default that, if not cured within 120 days of notice of the failure, would give PepsiCo the right to terminate the Master Bottling Agreement. If we present a plan that PepsiCo does not approve, such failure shall constitute a primary consideration for determining whether we have satisfied our obligations to maintain our financial capacity, push vigorously the sale of the cola beverages and increase and fully meet the demand for the cola beverages in our territories. If we fail to carry out our annual plan in all material respects in any segment of our territory, whether defined geographically or by type of market or outlet, and if such failure is not cured within six months of notice of the failure, PepsiCo may reduce the territory covered by the Master Bottling Agreement by eliminating the territory, market or outlet with respect to which such failure has occurred. PepsiCo has no obligation to participate with us in advertising and marketing spending, but it may contribute to such expenditures and undertake independent advertising and marketing activities, as well as cooperative advertising and sales promotion programs that would require our cooperation and support. Although PepsiCo has advised us that it intends to continue to provide cooperative advertising funds, it is not obligated to do so under the Master Bottling Agreement. The Master Bottling Agreement provides that PepsiCo may in its sole discretion reformulate any of the cola beverages or discontinue them, with some limitations, so long as all cola beverages are not discontinued. PepsiCo may also introduce new beverages under the PEPSI-COLA trademarks or any modification thereof. 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 3 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 20, 2004, to our knowledge, no shareholder of PBG, other than PepsiCo, held more than 10.6% of our Common Stock. We are prohibited from assigning, transferring or pledging the Master Bottling Agreement, or any interest therein, whether voluntarily, or by operation of law, including by merger or liquidation, without the prior consent of PepsiCo. The Master Bottling Agreement was entered into by us in the context of our separation from PepsiCo and, therefore, its provisions were not the result of arm's-length negotiations. Consequently, the agreement contains provisions that are less favorable to us than the exclusive bottling appointments for cola beverages currently in effect for independent bottlers in the United States. Terms of the Non-Cola Bottling Agreements. The beverage products covered by the non-cola bottling agreements are beverages licensed to us by PepsiCo, consisting of MOUNTAIN DEW, AQUAFINA, DIET MOUNTAIN DEW, MOUNTAIN DEW CODE RED, SLICE, SIERRA MIST, FRUITWORKS, and 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 AMP and DOLE in all of our territories and SOBE in certain specified territories. The distribution agreements contain provisions generally similar to those in the Master Bottling Agreement as to use of trademarks, trade names, approved containers and labels and causes for termination. We also have the right 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. 4 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 which will expire in 2004, however, the Master Syrup Agreement will automatically renew for additional five-year periods unless PepsiCo terminates it for cause. PepsiCo has the right to terminate the Master Syrup Agreement without cause 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 (which agreement terminated in October 2003), contain provisions generally similar to those in the Master Bottling Agreement as to use of trademarks, trade names, approved containers and labels, sales of imitations, and causes for termination. Some of these beverage agreements have limited terms and, in most instances, prohibit us from dealing in similar beverage products. Terms of the Country Specific Bottling Agreements. The country specific bottling agreements contain provisions generally 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. In addition, the bottling agreements for Mexico and Turkey contain provisions which restrict our ability to manufacture, sell and distribute beverages sold under non-PepsiCo trademarks. SEASONALITY Our peak season is the warm summer months beginning with Memorial Day and ending with Labor Day. Approximately 66% of our operating income is typically earned during the second and third quarters. Approximately 80% of cash flow from operations is typically generated in the third and fourth quarters. 5 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., Coca-Cola FEMSA S.A. de C.V. and Coca-Cola Bottling Co. Consolidated. Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo in our U.S. territories ranges from approximately 15.4% to approximately 38.8%. Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo for each country, outside the U.S., in which we do business is as follows: Canada 40.9%; Russia 24.7%; Turkey 21.5%; Spain 12.8% and Greece 11.3% (including market share for our IVI brand). In addition, market share for our territories and the territories of other bottlers in Mexico is 14.5% for carbonated soft drinks sold under trademarks owned by PepsiCo and carbonated water sold under the GARCI CRESPO trademark. 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 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, Hawaii, Maine, Massachusetts, Michigan, New York, Oregon, California, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Quebec. 6 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. Similar legislation has been enacted in Turkey. In 2003, Mexico adopted legislation regulating the disposal of solid waste products. In response to this new legislation, PBG Mexico entered into agreements with local and federal Mexican governmental authorities which require PBG Mexico, and other participating bottlers, to provide for collection and recycling of certain minimum amounts of plastic bottles. 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 are excise taxes on any sweetened beverage products produced without sugar, including our 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. 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 7 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 pump water from our own wells and we purchase water directly from municipal water companies pursuant to concessions obtained from the Mexican government on a plant-by-plant basis. The concessions are generally for 10-year terms and can generally be renewed by us prior to expiration with minimal cost and effort. Our concessions may be terminated if, among other things, (a) we use materially more water than permitted by the concession, (b) we use materially less water than required by the concession, or (c) we fail to complete agreed-upon construction or improvements. Our concessions generally satisfy our current water requirements and we believe that we are generally in compliance in all material respects with the terms of our existing concessions. EMPLOYEES As of December 27, 2003, we employed approximately 66,000 full-time workers, of whom approximately 33,300 were employed in the United States and approximately 23,200 were employed in Mexico. Approximately 10,900 of our full-time workers in the United States are union members and approximately 17,000 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 with the exception of a labor dispute in our Mississauga facility in Ontario, Canada, which was successfully resolved in August 2003. 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 55 of our Annual Report to Shareholders for the fiscal year ended December 27, 2003, which page is incorporated herein by reference and is included as Exhibit 13 hereto. ITEM 2. PROPERTIES As of December 27, 2003, we operated 98 soft drink production facilities worldwide, of which 91 were owned and 7 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 514 distribution facilities, 323 are owned and 191 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 40,900 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 1.8 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 8 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 proceedings arising in the ordinary course of our business, none of which, in the opinion of management, is likely to have a material adverse effect on our financial condition or results of operations. 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 is information pertaining to our executive officers who held office as of March 1, 2004 JOHN T. CAHILL, 46, 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. ALFRED H. DREWES, 48, 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, 45, 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. In addition, Mr. Foss is a director of United Dominion Realty Trust, Inc. SHAUN P. HOLLIDAY, 46, was appointed President of PBG Business Operations in January 2004. Previously, he had been President of PBG International since September 2003 with responsibilities 9 for PBG's operations in Europe and Mexico. Mr. Holliday was Chief Executive Officer of eMac from 2000 to September 2003. He was Chief Executive Officer of Living.com from 1999 to 2000. Living.com filed for Chapter 11 bankruptcy protection in August 2000. From 1997 to 1999, Mr. Holliday was Chief Executive Officer for Guinness Ireland Group and he was President of the Americas and Caribbean Region of Guinness from 1994 to 1997. From 1990 to 1994, Mr. Holliday held several senior positions at Frito-Lay, Inc. PAMELA C. MCGUIRE, 56, 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, 46, 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. ROGELIO REBOLLEDO, 59, was appointed President and Chief Executive Officer of PBG Mexico in January 2004. From 2000 to 2003, Mr. Rebolledo was President and Chief Executive Officer of Frito-Lay International ("FLI"), a subsidiary of PepsiCo, Inc., operating in Latin America, Asia Pacific, Australia, Europe, Middle East and Africa. From 1997 to 2000, Mr. Rebolledo was the President of the Latin America/Asia Pacific region for FLI. Mr. Rebolledo joined PepsiCo, Inc. in 1976 and held several senior positions including serving as President and Chief Executive Officer of the Latin America Region of PepsiCo Foods International ("PFI") and President of the Sabritas, Gamesa, Brazil and Spain PFI operations. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Stock Trading Symbol - PBG. Stock Exchange Listings - PBG's Common Stock is listed on the New York Stock Exchange. Our Class B common stock is not publicly traded. Shareholders - As of February 20, 2004, there were approximately 55,540 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 and low sales prices for a share of PBG Common Stock on the New York Stock Exchange, as reported by Bloomberg Service, for each fiscal quarter of 2003 and 2002 were as follows (in dollars):
2003 High Low ----- ---- --- First Quarter 27.620 17.000 Second Quarter 21.450 17.750 Third Quarter 24.650 19.540 Fourth Quarter 24.000 20.390
10
2002 High Low ---- ---- --- First Quarter 26.230 21.650 Second Quarter 34.800 24.820 Third Quarter 33.850 23.000 Fourth Quarter 29.500 23.000
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 2004 are expected to be March 12, June 11, September 10 and December 10. Cash Dividends Declared Per Share on Capital Stock:
Quarter 2003 2002 - ------- ---- ---- 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 1999 through 2003, on page 63 of our Annual Report to Shareholders for the fiscal year ended December 27, 2003 is incorporated into this report by reference and is included as part of Exhibit 13 hereto. 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 27, 2003 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 31 through 33 of our Annual Report to Shareholders for the fiscal year ended December 27, 2003 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 27, 2003, included as part of Exhibit 13 hereto, at the pages indicated: Consolidated Statements of Operations - Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (page 34). Consolidated Statements of Cash Flows - Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (page 35). Consolidated Balance Sheets - December 27, 2003 and December 28, 2002 (page 36). 11 Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (page 37). Notes to Consolidated Financial Statements (pages 38 through 60). Independent Auditors' Report (page 62). The financial statements of Bottling LLC, included in Bottling LLC's Annual Report on Form 10-K and filed with the SEC on March 11, 2004, are hereby incorporated by reference as required by the SEC as a result of Bottling LLC's guarantee of up to $1,000,000,000 aggregate principal amount of our 7% Senior Notes due in 2029. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES PBG's management carried out an evaluation (the "Evaluation"), as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K. Based upon the Evaluation, the Chief Executive Officer and the Chief Financial Officer concluded 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 our Exchange Act reports filed with the SEC. In addition, there were no changes in our internal control over financial reporting identified in connection with the Evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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 2004 Annual Meeting of Shareholders. The identification of our Audit Committee and our Audit Committee financial expert is contained in PBG's Proxy Statement for our 2004 Annual Meeting of Shareholders under the captions "CORPORATE GOVERNANCE - Committees of the Board of Directors - The Audit and Affiliated Transactions Committee." Information regarding the adoption of our Worldwide Code of Conduct, any material amendments thereto and any related waivers are contained in our Proxy Statement for our 2004 Annual Meeting of Shareholders under the captions "CORPORATE GOVERNANCE - Worldwide Code of Conduct." All of the foregoing information is incorporated herein by reference. The Worldwide Code of Conduct is posted on the PBG Website at http://www.pbg.com under Corporate Governance. 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 2004 Annual Meeting of Shareholders under the captions "OWNERSHIP OF PBG COMMON STOCK-- Section 16 Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. 12 ITEM 11. EXECUTIVE COMPENSATION Information on compensation of our directors and certain named executive officers is contained in our Proxy Statement for our 2004 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 relating to securities authorized for issuance under PBG's equity compensation plans is contained in PBG's Proxy Statement for our 2004 Annual Meeting of Shareholders under the captions "EXECUTIVE COMPENSATION -- Equity Compensation Plan Information" and is incorporated herein by reference. 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 captions "OWNERSHIP OF PBG COMMON STOCK -- 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 captions "OWNERSHIP OF PBG COMMON STOCK-Stock Ownership of Certain Beneficial Owners" in our Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to certain transactions between PBG, PepsiCo and their affiliates and certain other persons is set forth under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in our Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information relating to audit fees, audit-related fees, tax fees and all other fees billed in fiscal 2002 and 2003 by KPMG, LLP for services rendered to PBG is set forth under the caption "INDEPENDENT AUDITORS" in the Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. In addition, information relating to the pre-approval policies and procedures of the Audit and Affiliated Transactions Committee is set forth under the caption "INDEPENDENT AUDITORS - Pre-Approval Policies and Procedures" in the Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 27, 2003, are incorporated by reference into Part II, Item 8 of this Report: Consolidated Statements of Operations - Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (page 34). 13 Consolidated Statements of Cash Flows - Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (page 35). Consolidated Balance Sheets - December 27, 2003 and December 28, 2002 (page 36). Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (page 37). Notes to Consolidated Financial Statements (pages 38 through 60). Independent Auditors' Report (page 62). The financial statements of Bottling LLC, included in Bottling LLC's Annual Report on Form 10-K and filed with the SEC on March 11, 2004, are hereby incorporated by reference as required by the SEC as a result of Bottling LLC's guarantee of up to $1,000,000,000 aggregate principal amount of our 7% Senior Notes due in 2029. 2. Financial Statement Schedules. The following financial statement schedules of PBG and its subsidiaries are 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 27, 2003, December 28, 2002 and December 29,2001........ F-3
3. Exhibits See Index to Exhibits on pages E-1 - E-5. (b) Reports on Form 8-K On September 30, 2003, we furnished a Current Report on Form 8-K announcing our financial results for our third quarter ended September 6, 2003. 14 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, The Pepsi Bottling Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 9, 2004 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 9, 2004 - --------------------- Executive Officer John T. Cahill /s/Alfred H. Drewes Senior Vice President and Chief March 9, 2004 - --------------------- Financial Officer (Principal Alfred H. Drewes Financial Officer) /s/ Andrea L. Forster Vice President and Controller March 9, 2004 - --------------------- (Principal Accounting Officer) Andrea L. Forster /s/ Linda G. Alvarado Director March 9, 2004 - --------------------- Linda G. Alvarado /s/ Barry H. Beracha Director March 9, 2004 - --------------------- Barry H. Beracha /s/ Ira D. Hall Director March 9, 2004 - --------------------- Ira D. Hall /s/ Thomas H. Kean Director March 9, 2004 - --------------------- Thomas H. Kean /s/ Susan D. Kronick Director March 9, 2004 - --------------------- Susan D. Kronick /s/ Blythe J. McGarvie Director March 9, 2004 - ---------------------- Blythe J. McGarvie /s/ Margaret D. Moore Director March 9, 2004 - --------------------- Margaret D. Moore /s/ Clay G. Small Director March 9, 2004 - --------------------- Clay G. Small /s/ Craig E. Weatherup Director March 9, 2004 - ---------------------- Craig E. Weatherup
S-1 INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE ---- Independent Auditors' Report on Schedule and Consent............................................................ F-2 Schedule II - Valuation and Qualifying Accounts for the fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001....................................................................................... F-3
F-1 INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors The Pepsi Bottling Group, Inc.: The audits referred to in our report dated January 27, 2004, included the related financial statement schedule as of December 27, 2003, and for each of the fiscal years in the three-year period ended December 27, 2003, included 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 incorporation 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. of our report (incorporated by reference in the December 27, 2003, annual report on Form 10-K of The Pepsi Bottling Group, Inc.) dated January 27, 2004 with respect to the consolidated balance sheets of The Pepsi Bottling Group, Inc. as of December 27, 2003 and December 28, 2002, 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 27, 2003 and of our report on the related financial statement schedule dated March 10, 2004 (which report appears above). Our report on the consolidated financial statements refers to the adoption of FASB 142, "Goodwill and Other Intangible Assets," as of December 30, 2001 and Emerging Issues Task Force Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," as of December 29, 2002. /s/ KPMG LLP New York, New York March 10, 2004 F-2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THE PEPSI BOTTLING GROUP, INC. IN MILLIONS
Balance At Charged to Accounts Foreign Balance At Beginning Cost and Written Currency End Of Of Period Expenses Acquisitions Off Translation Period --------- -------- ------------ --- ----------- ------ DESCRIPTION FISCAL YEAR ENDED DECEMBER 27, 2003 Allowance for losses on trade accounts receivable .. $67 $12 $-- $(8) $1 $72 FISCAL YEAR ENDED DECEMBER 28, 2002 Allowance for losses on trade accounts receivable .. $42 $32 $14 $(22) $1 $67 FISCAL YEAR ENDED DECEMBER 29, 2001 Allowance for losses on trade accounts receivable .. $42 $9 $-- $(9) $-- $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, which is incorporated herein by reference to Exhibit 10.9 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 4.3 First Supplemental Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings, Inc., Bottling Group, LLC, PepsiCo, Inc. and The Chase Manhattan Bank, as trustee, supplementing the Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings, Inc., PepsiCo, Inc. and The Chase Manhattan Bank, as trustee, which is incorporated herein by reference to Exhibit 10.10 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 4.4 Indenture, dated as of March 8, 1999, by and among PBG, as obligor, Bottling Group, LLC, as guarantor, and The Chase Manhattan Bank, as trustee, relating to $1,000,000,000 7% Series B Senior Notes due 2029, which is incorporated herein by reference to Exhibit 10.14 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 4.5 U.S. $250,000,000 364-Day 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, which is incorporated herein by reference to Exhibit 4.7 to PBG's Annual Report on Form 10-K for the year ended December 28, 2002.
E-1 4.6 U.S. $250,000,000 5-Year Credit Agreement, dated as of April 30, 2003 among The Pepsi Bottling Group, Inc., Bottling Group, LLC, Citibank, N.A., Bank of America, N.A., Credit Suisse First Boston, Cayman Islands Branch, Deutsche Bank AG New York Branch, JPMorgan Chase Bank, The Northern Trust Company, Lehman Brothers Bank, FSB, Banco Bilbao Vizcaya Argentaria, HSBC Bank USA, Fleet National Bank, The Bank of New York, State Street Bank and Trust Company, Comerica Bank, Wells Fargo Bank, N.A., JPMorgan Chase Bank, as Agent, Citigroup Global Markets Inc. and Banc of America Securities LLC, as Joint Lead Arrangers and Book Managers and Citibank, N.A., Bank of America, N.A., Credit Suisse First Boston, and Deutsche Bank Securities Inc. as Syndication Agents, which is incorporated herein by reference to Exhibit 4.7 to Bottling Group, LLC's registration statement on Form S-4/A (Registration No. 333-102035). 4.7 U.S. $250,000,000 364-Day Credit Agreement, dated as of April 30, 2003 among The Pepsi Bottling Group, Inc., Bottling Group, LLC, Citibank, N.A., Bank of America, N.A., Credit Suisse First Boston, Cayman Islands Branch, Deutsche Bank AG New York Branch, JPMorgan Chase Bank, The Northern Trust Company, Lehman Brothers Bank, FSB, Banco Bilbao Vizcaya Argentaria, HSBC Bank USA, Fleet National Bank, The Bank of New York, State Street Bank and Trust Company, Comerica Bank, Wells Fargo Bank, N.A., JPMorgan Chase Bank, as Agent, Citigroup Global Markets Inc. and Banc of America Securities LLC, as Joint Lead Arrangers and Book Managers and Citibank, N.A., Bank of America, N.A., Credit Suisse First Boston, and Deutsche Bank Securities Inc. as Syndication Agents, which is incorporated herein by reference to Exhibit 4.8 to Bottling Group, LLC's registration statement on Form S-4/A (Registration No. 333-102035). 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, which is incorporated herein by reference to Exhibit 4.8 to PBG's Annual Report on Form 10-K for the year ended December 28, 2002. 4.9 Registration Rights Agreement, dated as of November 7, 2002 relating to the $1 Billion 4-5/8% Senior Notes due November 15, 2012, which is incorporated herein by reference to Exhibit 4.9 to PBG's Annual Report on Form 10-K for the year ended December 28, 2002. 4.10 Indenture, dated as of June 10, 2003 by and between Bottling Group, LLC, as Obligor, and JPMorgan Chase Bank, as Trustee, relating to $250,000,000 4-1/8 % Senior Notes due June 15, 2015, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLC's registration statement on Form S-4 (Registration No. 333-106285). 4.11 Registration Rights Agreement dated June 10, 2003 by and among Bottling Group, LLC, J.P. Morgan Securities Inc., Lehman Brothers Inc., Banc of America Securities LLC, Citigroup Global Markets Inc, Credit Suisse First Boston LLC, Deutsche Bank Securities Inc., Blaylock & Partners, L.P. and Fleet Securities, Inc, relating to $250,000,000 4-1/8 % Senior Notes due June 15, 2015, which is incorporated herein by reference to Exhibit 4.3 to Bottling Group, LLC's registration statement on Form S-4 (Registration No. 333-106285).
E-2 4.12 Indenture, dated as of October 1, 2003, by and between Bottling Group, LLC, as Obligor, and JPMorgan Chase Bank, as Trustee, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLC's Form 8-K dated October 3, 2003. 4.13 Form of Note for the $500,000,000 2.45% Senior Notes due October 16, 2006, which is incorporated herein by reference to Exhibit 4.2 to Bottling Group, LLC's Form 8-K dated October 3, 2003. 4.14 Form of Note for the $400,000,000 5.00% Senior Notes due November 15, 2013, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLC's Form 8-K dated November 13, 2003. 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.
E-3 10.12 Amended PBG Executive Income Deferral Program, which is incorporated herein by reference to Exhibit 10.12 to PBG's Annual Report on Form 10-K for the year ended December 30, 2000. 10.13 PBG Long Term Incentive Plan, which is incorporated herein by reference to Exhibit 10.13 to PBG's Annual Report on Form 10-K for the year ended December 30, 2000. 10.14 PBG Directors' Stock Plan, 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 Amendment No. 1 to the PBG Directors' Stock Plan, which is incorporated herein by reference to Exhibit 10 to PBG's Quarterly Report on Form 10-Q for the quarter ended June 14, 2003. 10.16 2002 PBG Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.15. to PBG's Annual Report on Form 10-K for the year ended December 28, 2002. 10.17 Form of Mexican Master Bottling Agreement, which is incorporated by reference to Exhibit 10.16. to PBG's Annual Report on Form 10-K for the year ended December 28, 2002. 12* Statement re Computation of Ratios. 13* PBG 2003 Annual Report to Shareholders. (Pages 18 through 63) 21* Subsidiaries of PBG. 23* Report and Consent of KPMG LLP. 24* Copy of Power of Attorney. 31.1* Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------- * Filed herewith E-4 EX-12 3 y94856exv12.txt STATEMENT RE COMPUTATION OF RATIOS EXHIBIT 12 RATIO OF EARNINGS TO FIXED CHARGES We have calculated PBG's ratio of earnings to fixed charges in the following table by dividing earnings by fixed charges. For this purpose, earnings are before taxes, minority interest and cumulative effect of change in accounting principle, plus fixed 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 rent which is the portion of the rent deemed representative of the interest factor. (dollars in millions)
FISCAL YEAR 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- NET INCOME BEFORE TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $710 $700 $482 $397 $209 Undistributed (income) loss from equity investments (1) -- -- -- -- Fixed charges excluding capitalize interest 270 221 217 222 227 ---- ---- ---- ---- ---- EARNINGS AS ADJUSTED $979 $921 $699 $619 $436 ==== ==== ==== ==== ==== FIXED CHARGES: Interest expense $247 $200 $204 $208 $209 Capital interest -- -- 1 1 1 Interest portion of rental expense 23 21 13 14 18 ---- ---- ---- ---- ---- TOTAL FIXED CHARGES $270 $221 $218 $223 $228 ==== ==== ==== ==== ==== RATIO OF EARNINGS TO FIXED CHARGES 3.63 4.17 3.20 2.78 1.91
EX-13 4 y94856exv13.txt PAGES FROM THE ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 MANAGEMENT'S FINANCIAL REVIEW TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA FINANCIAL PERFORMANCE SUMMARY Our 2003 financial results reflected a number of economic and marketplace challenges we faced in our largest markets. Our full-year results for the U.S. and Mexico did not meet our original expectations, but we saw significant improvement during the second half of the year. We continued our well-established trends of generating strong cash flows from operations, increasing pricing in the marketplace, and improving cost performance. Additionally, Europe had a strong year, with solid topline and profit results driven by volume growth, net price increases and benefits from foreign exchange. In 2003, we generated net income of $416 million or diluted earnings per share of $1.50, which includes a non-cash charge of $0.04 relating to a Canadian tax law change enacted in December 2003 and a $0.02 non-cash charge related to the adoption of Emerging Issues Task Force Issue No. 02-16. Our operating income grew 7% versus 2002 to $956 million, reflecting the impact of our Mexican acquisition of Pepsi-Gemex in November 2002. We were very pleased with our cash flow performance in 2003 as we continued our strong track record of growing our cash from operations. We generated $1.1 billion of cash from operations, net of approximately $162 million that we contributed into our pension plans, which are solidly funded. With our strong cash flows, we utilized $644 million for capital investments to grow our business and returned $483 million to our shareholders through our share repurchase program. Additionally, during 2003 we took advantage of favorable interest rates and issued $1.2 billion in debt with a combined effective interest rate of less than 4% primarily for the repayment of our $1 billion 5.38% senior notes due in February 2004, ensuring a stable debt level at a lower cost to the Company. From a revenue perspective in the U.S., we were able to increase our pricing in the marketplace by 2% during 2003 through consistent execution of our strategies during the year. However, we were faced with a number of challenges in the U.S., including changes in consumer preferences, declines in our cold drink business and weakness in retail traffic. These factors contributed to volume in the U.S. falling below our expectations, declining by 3% in the first half of 2003 but improving to flat in the second half (before the impact of our acquisitions), as we rebuilt momentum in our business. Despite these challenges, we believe our product portfolio is well positioned to capture the opportunity presented by changing consumer preferences. By and large, our brands are either number one or a strong number two across the beverage spectrum. Additionally, we have a strong position in the important cold drink channel, which is our most profitable business. We managed our U.S. operating costs very effectively during 2003. Even though our operating costs did increase slightly during the year due to higher pension, employee benefit and casualty costs, we were able to largely offset these increases with productivity gains due to improvements in our operational efficiencies and selling execution in the marketplace. Our Mexico business represents approximately 9% of our worldwide operating income. Although our first full-year results in this market did not meet our expectations due to a weak economy, competitive pressures and the steady devaluation of the Mexican peso, this acquisition was solidly accretive adding $0.06 per share to our diluted EPS. We are encouraged about the future opportunities in Mexico. Mexico represents an important growth market for us as its soft drink consumption per capita is second in the world only to the United States. We also sell a great portfolio of products, including the number one water brand in Mexico, ELECTROPURA. During 2003, we successfully fine-tuned our pricing architecture and packaging configuration in Mexico to ensure we are providing the right consumer value. We consolidated a number of our warehouses and distribution systems in Mexico to capitalize on productivity gains and to provide better service for our customers. We also implemented a standard organization structure to improve our capability and reduce redundancies. These operational changes have already resulted in significant cost savings. OUTLOOK In 2004, we expect solid worldwide operating income growth in the mid-single digits versus the prior year and to generate diluted EPS of $1.62 to $1.70 for the full-year. We expect our worldwide volume to grow in the low single digits and net revenue per case growth of about 1%. From a cash flow perspective, we expect to generate strong cash provided by operations of about $1.2 billion and we plan to spend between $675 million and $700 million in capital investments. 18 Our U.S. priorities in 2004 will be to improve our revenue growth by revitalizing cold drink performance, improving Trademark PEPSI trends and continuing to increase pricing. We will do this through new brand and package innovation to meet changing consumer tastes, increased media spending on brand PEPSI by PepsiCo and execution of brand PEPSI-led promotions throughout 2004. In the U.S. we expect volume to increase 1% to 2% for the full year. Net revenue per case is expected to increase approximately 2% in 2004, with three quarters of the growth coming from rate increases and the remainder of the growth coming from the mix of products we sell. We anticipate our U.S. operating income will grow in the mid-single digits. In Mexico, our focus will be to continue to drive consumer value, strengthen our execution and build brand equity. We expect our physical case volume in Mexico to grow in the low single digits versus 2003 and our net revenue per case to be down slightly in pesos. We expect our operating income in U.S. dollars to be flat to down in the high single digits in 2004, reflecting continued progress from an operating standpoint offset by an anticipated devaluation of the peso. As we move through 2004, we will continue to focus upon the key building blocks of our past success, great brands, the right people and our selling execution process. Our front line sales people have the tools needed to provide our customers with the right products at the right time. In combination, our approach to the marketplace will allow us to continue to be a world-class selling organization in every location where we do business. OVERVIEW The Pepsi Bottling Group, Inc. ("PBG" or the "Company") is the world's largest manufacturer, seller and distributor of 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, Mexico, Canada, Spain, Greece, Russia and Turkey. When used in these Consolidated Financial Statements, "PBG," "we," "our" and "us" each refers to the Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC, our principal operating subsidiary. We believe our financial success is largely dependent on the number of physical cases we sell and the net price we achieve on a per-case basis. Physical cases represent the number of units that are actually produced, distributed and sold. Each case of product, regardless of package configuration, represents one physical case. Our net price on a per case basis is impacted by how much we charge for the product, the mix of brands and packages we sell, and the channels in which the product is sold. For example, we realize a higher net revenue per case on 20-ounce chilled bottles sold in a convenience store than two-liter unchilled bottles sold in a grocery store. Our profitability is also dependent on how well we manage our raw material, manufacturing, distribution and other overhead costs. In order to achieve profitable growth, we need to extend the same discipline and focus we employ in revenue execution to cost productivity. The following discussion and analysis covers the key drivers behind our business performance in 2003 and is categorized into six major sections. The first three sections discuss critical accounting policies, related party transactions and items that affect the comparability of historical or future results. The next two sections provide an analysis of our results of operations and liquidity and financial condition. The last section contains a discussion of our market risks and cautionary statements. The discussion and analysis throughout Management's Financial Review should be read in conjunction with the Consolidated Financial Statements and the related accompanying notes. 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. 19 ALLOWANCE FOR DOUBTFUL ACCOUNTS - A portion of our accounts receivable will not be collected due to customer disputes and bankruptcies. Estimating an allowance for doubtful accounts requires significant management judgment and is dependent upon the overall economic environment and our customers' viability. We provide reserves for these situations based on the evaluation of the aging of our trade receivable portfolio and an in-depth 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. We have effective credit controls in place to manage these exposures and believe that our allowance for doubtful accounts adequately provides for these risks. Our allowance for doubtful accounts was $72 million, $67 million and $42 million as of December 27, 2003, December 28, 2002 and December 29, 2001, respectively. Our allowance for doubtful accounts represents management's best estimate of probable losses inherent in our portfolio. The following is an analysis of the allowance for doubtful accounts for the fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001:
ALLOWANCE FOR DOUBTFUL ACCOUNTS ------------------------------- 2003 2002 2001 ---- ---- ---- Beginning of the year ................... $ 67 $ 42 $ 42 Bad debt expense ........................ 12 32 9 Additions from acquisitions ............. - 14 - Accounts written off .................... (8) (22) (9) Foreign currency translation ............ 1 1 - ---- ---- ---- End of the year ......................... $ 72 $ 67 $ 42 ==== ==== ====
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 be tested for impairment. Effective the first day of fiscal year 2002, we no longer amortize goodwill and certain other indefinite-lived intangible assets, but evaluate them for impairment annually. Our identified intangible assets principally arise from the allocation of the purchase price of businesses acquired, and consist primarily of franchise rights, distribution rights and brands. We assign amounts to such identified intangibles based on their estimated fair values at the date of acquisition. The determination of the expected life will be dependent upon the use and underlying characteristics of the identified intangible asset. In determining whether our intangible assets have an indefinite useful life, we consider the following, as applicable: the nature and terms of underlying agreements; our intent and ability to use the specific asset contained in an agreement; the age and market position of the products within the territories we are entitled to sell; the historical and projected growth of those products; and costs, if any, to renew the agreement. We evaluate our identified intangible assets with indefinite useful lives for impairment annually on an individual basis or by asset groups on a country-by-country basis, depending on the nature of the intangible asset. We measure impairment as the amount by which the carrying value exceeds its estimated fair value. The fair value of our franchise rights and distribution rights is measured using a multi-period excess earnings method that is based upon estimated discounted future cash flows, including a terminal value, which assumes the franchise rights and distribution rights will continue in perpetuity. We deduct a contributory charge from our net after-tax cash flows for the economic return attributable to our working capital, other intangible assets and property plant and equipment, which represents the required cash flow to support these assets. The net discounted cash flows in excess of the fair returns on these assets represent the fair value of our franchise rights and distribution rights. The fair value of our brands is measured using a multi-period royalty saving method, which reflects the savings realized by owning the brand and, therefore, not having to pay a royalty fee to a third party. In valuing our brands, we have selected an estimated industry royalty rate relating to each brand and then applied it to the forecasted revenues associated with each brand. The net discounted after-tax cash flows from these royalty charges represent the fair value of our brands. Our discount rate utilized in each fair value calculation is based upon our weighted-average cost of capital plus an additional risk premium to reflect the risk and uncertainty inherent in separately acquiring the identified intangible asset between a willing buyer and a willing seller. The additional risk premium associated with our discount rate effectively eliminates the 20 benefit that we believe results from synergies, scale and our assembled workforce, all of which are components of goodwill. 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 performed in the fourth quarter of 2003, the estimated fair values of our identified intangible assets with indefinite lives exceeded their carrying amounts. 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 for each reporting unit. 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 2003, the estimated fair value of our reporting units exceeded their carrying value and as a result, we did not need to proceed to the second step of the impairment test. Considerable management judgment is necessary to estimate discounted future cash flows in conducting an impairment test for goodwill and other identified intangible assets, 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 and other identified intangible assets, 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 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. In evaluating our rate of return on assets for a given fiscal year, we consider the 10-15 year historical return of our pension investment portfolio, reflecting the weighted return of our plan asset allocation. 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. 21 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 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was passed into law. The reported postretirement benefit obligation in our Consolidated Balance Sheet does not reflect the effects of the Act. We do provide prescription drug benefits to Medicare-eligible retirees but have elected to defer recognition of the Act until the FASB provides guidance regarding its accounting treatment. This deferral election is permitted under FASB Staff Position FAS 106-1. We do not believe the adoption of the Act will have a material impact on our consolidated results. We used the following weighted-average assumptions to compute our pension and postretirement expense:
2003 2002 2001 ------- ------- ------- Discount rate .................................................... 6.75% 7.50% 7.75% Expected return on plan assets (net of administrative expenses)... 8.50% 9.50% 9.50% Rate of compensation increase .................................... 4.34% 4.33% 4.62%
During 2003, our defined benefit pension and postretirement expenses totaled $77 million. In 2004, our defined benefit pension and postretirement expenses will increase by $12 million to $89 million due primarily to the following factors: - A decrease in our weighted-average discount rate for our pension and postretirement expense from 6.75% to 6.25%, reflecting declines in the yields of long-term corporate bonds. This assumption change will increase our 2004 defined benefit pension and postretirement expense by approximately $15 million. - Amortization of prior asset losses resulting from differences between our expected and actual return on plan assets, changes in demographics and medical trend rates, and other plan changes will increase our 2004 defined benefit pension and postretirement expense by approximately $11 million. - Contributions of $162 million to our pension plan during 2003 will reduce our 2004 defined benefit pension expense by approximately $14 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., we moved to a self-insurance program in 2002. In 2003, we were self-insured for workers' compensation, automobile, product and general liability risks for occurrences up to $5 million. We purchased casualty insurance from a third-party for losses per occurrence exceeding $5 million. The casualty insurance costs for our self-insurance program represent the estimated ultimate net cost of all reported and unreported losses incurred during a fiscal year. We do not discount loss expense reserves. Our liability for casualty costs of $127 million and $69 million as of December 27, 2003 and December 28, 2002, respectively, 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 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 pre-tax income, statutory tax rates and tax planning strategies 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 tax benefit and costs we expect to realize. 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 22 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 our 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. We expect that these audits will be completed in 2004. 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 to our reserves, a cash outlay for settlement and a possible increase to our annual tax provision. RELATED PARTY TRANSACTIONS PepsiCo is considered a related party due to the nature of our franchisee relationship and its ownership interest in our company. Over 80% of our volume is derived from the sale of Pepsi-Cola beverages. At December 27, 2003, PepsiCo owned approximately 40.6% of our outstanding common stock and 100% of our outstanding class B common stock, together representing approximately 45.8% 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. Our business is conducted primarily under beverage agreements with PepsiCo, including a master bottling agreement, non-cola bottling agreement and a master syrup agreement. Additionally, under a shared services agreement, we obtain various services from PepsiCo, which include procurement of raw materials and certain information technology and administrative services. We review our annual marketing, advertising, management and financial plans each year with PepsiCo for its approval. If we fail to submit these plans, or if we fail to carry them out in all material respects, PepsiCo can terminate our beverage agreements. Because we depend on PepsiCo to provide us with concentrate, bottler incentives and various services, changes in our relationship with PepsiCo could have a material adverse effect on our business and financial results. As part of our franchise relationship, we purchase concentrate from PepsiCo, pay royalties and produce or distribute other products through various arrangements with PepsiCo or PepsiCo joint ventures. Total net amounts paid or payable to PepsiCo or PepsiCo joint ventures for these arrangements was $2,521 million, $2,153 million and $1,927 million in 2003, 2002 and 2001, respectively. In order to promote PepsiCo beverages, PepsiCo, at its discretion, provides us with various forms of bottler incentives. These incentives are mutually agreed-upon between PepsiCo and us and cover a variety of initiatives, including direct marketplace support, capital equipment funding and advertising support. Based on the objectives of the programs and initiatives, we record bottler incentives as an adjustment to net revenues, cost of sales or selling, delivery and administrative expenses. Beginning in 2003, due to the adoption of Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," we have changed our accounting methodology for the way we record bottler incentives. See Note 2 in Notes to our Consolidated Financial Statements for a discussion on the change in classification of these bottler incentives. Bottler incentives received from PepsiCo, including media costs shared by PepsiCo, were $646 million, $560 million and $554 million for 2003, 2002 and 2001, respectively. Changes in our bottler incentives and funding levels could materially affect our business and financial results. 23 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, $200 million and $185 million, in 2003, 2002 and 2001, respectively. We provide and receive various services from PepsiCo and PepsiCo affiliates pursuant to a shared services agreement and other arrangements. In the absence of these agreements, we would have to obtain such services on our own. We might not be able to obtain these services on terms, including cost, that are as favorable as those we receive from PepsiCo. Total net expenses incurred with PepsiCo and PepsiCo affiliates were approximately $62 million, $57 million and, $133 million during 2003, 2002 and 2001, 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 $51 million, $44 million and $27 million in 2003, 2002 and 2001, respectively. Our agreement with Frito-Lay expires in 2004; however, we expect to renew the agreement and continue our relationship with Frito-Lay. For further audited information about our relationship with PepsiCo and its affiliates see Note 14 in Notes to Consolidated Financial Statements. 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 $318 million. See Note 16 in Notes to our Consolidated Financial Statements for additional information relating to Gemex and other bottling operations we have acquired in 2003 and 2002. SFAS No. 142 During 2001, the 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 other intangible assets, but evaluate them for impairment annually. See Note 2 in Notes to our Consolidated Financial Statements and the preceding section entitled Critical Accounting Policies for additional information. EITF Issue No. 02-16 In January 2003, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," addressing the recognition and income statement classification of various cash consideration given by a vendor to a customer. 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 to overcome this presumption. EITF Issue No. 02-16 became effective beginning in our fiscal year 2003. Prior to 2003 we classified worldwide bottler incentives received from PepsiCo and other brand owners as adjustments to net revenues and selling, delivery and administrative expenses, depending on the objective of the program. In accordance with EITF Issue No. 02-16, we have classified certain bottler incentives as a reduction of cost of sales beginning in 2003. See Note 2 in Notes to Consolidated Financial Statements, for additional information and pro forma adjustments for bottler incentives that would have been made to our reported results for the 52-weeks ended December 28, 2002 and December 29, 2001 assuming that EITF Issue No. 02-16 had been in place for all periods presented. 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 2003, PepsiCo announced an increase of approximately 2% in the price of U.S. concentrate. PepsiCo has recently announced a further increase of approximately 0.7%, effective February 2004. 24 RESULTS OF OPERATIONS - 2003 VOLUME 2003 WORLDWIDE VOLUME BY GEOGRAPHY 2003 WORLDWIDE VOLUME BY BRAND U.S. 61% Trademark Pepsi 46% Mexico 18% Other Carbonated Flavors 31% Other 21% Non-Carbonated Products 23% [PIE CHART] [PIE CHART] The brands we sell are some of the best recognized trademarks in the world and include PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, AQUAFINA, SIERRA MIST, LIPTON BRISK, DIET MOUNTAIN DEW, SOBE, DOLE, and PEPSI VANILLA, and outside the U.S., PEPSI-COLA, KAS, AQUA MINERALE, MANZANITA SOL, and MIRINDA. In some of our territories, we also have the right to manufacture, sell and distribute soft drink products of companies other than PepsiCo, Inc., including DR PEPPER and SQUIRT and trademarks we own including ELECTROPURA and GARCI CRESPO. The charts above show the percentage of our worldwide volume by geography and by the brands we sell, which are grouped by trademark PEPSI (e.g., PEPSI-COLA, DIET PEPSI, PEPSI VANILLA), other carbonated flavors (e.g. MOUNTAIN DEW, SIERRA MIST, KAS) and non-carbonated products (e.g., AQUAFINA, LIPTON BRISK, ELECTROPURA).
52-WEEKS ENDED DECEMBER 27, 2003 VS. DECEMBER 28, 2002 --------------------- Acquisitions ...................... 20% Base business ..................... 0% -- Total Worldwide Volume Change.. 20% ==
Our full-year reported worldwide physical case volume increased 20% in 2003 versus 2002. The increase in reported worldwide volume was due entirely to our acquisitions. Our acquisition of Gemex contributed over 90% of the growth resulting from acquisitions. In the U.S., our base business volume decreased 2% versus 2002 due to changes in consumer preferences, declines in our cold drink business and weakness in retail traffic. (The term "base business" reflects territories that we owned and operated for comparable periods in both the current year and the prior year.) However, during the second half of 2003, we saw improvement in our cold drink business as we began to implement changes to ensure that we have the right consumer value and the right space allocation for our products in the cold vaults. From a brand perspective, as consumers sought more variety, we saw declines in brand PEPSI, partially offset by strong growth in AQUAFINA and lemon-lime volume, led by SIERRA MIST, coupled with product introductions such as PEPSI VANILLA and MOUNTAIN DEW LIVEWIRE. Outside the U.S., our base business volume increased by 4%. The increase in base business volume outside the U.S. was driven by warm summer weather in Europe, coupled with a strong performance in Russia, resulting from growth in AQUA MINERALE and the launch of PEPSI X. NET REVENUES
52-WEEKS ENDED DECEMBER 27, 2003 VS. DECEMBER 28, 2002 --------------------- Acquisitions ........................... 11% --- Base business: EITF Issue No. 02-16 impact ........ (3)% Currency translation ............... 2% Rate / mix impact (pricing) ........ 1% Volume impact ...................... 0% --- Base business change ................... 0% --- Total Worldwide Net Revenues Change .... 11% ===
25 Net revenues were $10.3 billion in 2003, an 11% increase over the prior year. Approximately 72% of our net revenues was generated in the United States, 11% of our net revenues was generated in Mexico and the remaining 17% was generated outside the United States and Mexico. The increase in net revenues in 2003 was driven primarily by our acquisition of Gemex, which contributed more than 85% of the growth resulting from acquisitions. Our base business net revenues were flat in 2003 versus 2002. In 2003, base business net revenues were favorably impacted by foreign currency translation and price increases, offset by the reclassification of certain bottler incentives from net revenues to cost of sales resulting from the adoption of EITF Issue No. 02-16. In the U.S., net revenues decreased 2% in 2003 versus 2002. The decrease in U.S. net revenues was due to a decline in volume and the impact of adopting EITF Issue No. 02-16. This was partially offset by a 2% increase in marketplace pricing and incremental revenue from acquisitions. Net revenues outside the U.S. grew approximately 74% in 2003 versus 2002. The increase in net revenues outside the U.S. was driven by our Gemex acquisition and an increase in our base business revenues of 13%. The increase in base business net revenues outside the U.S. was the result of favorable foreign currency translation in Canada and Europe, volume growth, and a 3% increase in pricing, partially offset by a decline due to the impact of adopting EITF Issue No. 02-16. In 2004, we expect our worldwide net revenue per case to grow about 1% as compared with 2003. COST OF SALES
52-WEEKS ENDED DECEMBER 27, 2003 VS. DECEMBER 28, 2002 --------------------- Acquisitions .......................... 10% --- Base business: EITF Issue No. 02-16 impact ....... (10)% Cost per case impact .............. 2% Currency translation .............. 2% Volume impact ..................... 0% --- Base business change .................. (6)% --- Total Worldwide Cost of Sales Change .. 4% ===
Cost of sales was $5.2 billion in 2003, a 4% increase over 2002. The increase in cost of sales was due primarily to our acquisition of Gemex, which contributed over 80% of the growth resulting from acquisitions, partially offset by a decline in our base business costs. The decline in base business cost of sales was due primarily to the reclassification of certain bottler incentives from net revenues and selling, delivery and administrative expenses to cost of sales resulting from the adoption of EITF Issue No. 02-16, partially offset by increases in cost per case and the negative impact of foreign currency translation. In the U.S., cost of sales decreased 7% in 2003 versus 2002. The decrease in U.S. cost of sales was driven by volume declines and the impact of adopting EITF Issue No. 02-16, partially offset by cost per case increases and incremental costs from acquisitions. In the U.S., cost per case increased by 3% resulting from higher concentrate and resin costs, coupled with the mix of products we sell. Our base business cost of sales outside the U.S. decreased approximately 1% in 2003 versus 2002. The decrease in base business cost of sales outside the U.S. was driven from the impact of adopting EITF Issue No. 02-16, partially offset by the negative impact of foreign currency translation in Canada and Europe, and increases in both cost per case and volume. In 2004, we expect our worldwide cost of sales per case will increase in the low single digits as compared with 2003. SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES
52-WEEKS ENDED DECEMBER 27, 2003 VS. DECEMBER 28, 2002 --------------------- Acquisitions ....................................... 14% --- Base business: EITF Issue No. 02-16 impact .................... 6% Currency translation ........................... 2% Cost performance ............................... 1% --- Base business change ............................... 9% --- Total Worldwide Selling, Delivery and Administrative Expenses Change .................................... 23% ===
26 Selling, delivery and administrative expenses were $4.1 billion in 2003, a 23% increase over 2002. The increase in selling, delivery and administrative expenses was driven primarily by our acquisition of Gemex and increases in our base business costs. Gemex contributed more than 90% of the growth resulting from acquisitions. The 9% increase in our base business selling, delivery and administrative expenses was due to the reclassification of certain bottler incentives from selling, delivery and administrative expenses to cost of sales resulting from the adoption of EITF Issue No. 02-16, coupled with the impact of foreign currency translation in Canada and Europe and an increase in our base business cost performance. Our base business cost performance increased 1% as a result of higher pension, employee benefit and casualty costs, partially offset by a reduction in our bad debt expense and productivity gains due to improvements in our operational efficiencies and selling execution to the marketplace. In 2004, we expect our worldwide selling, delivery and administrative expenses in dollars will increase in the low single digits as compared with 2003. OPERATING INCOME
52-WEEKS ENDED DECEMBER 27, 2003 VS. DECEMBER 28, 2002 --------------------- Acquisitions ................................ 8% --- Base business: Gross margin rate/mix impact ............ 1% Volume .................................. 0% SD&A impact ............................. (3)% Currency translation .................... 1% --- Base business change ........................ (1)% --- Total Worldwide Operating Income Change ..... 7% ===
Operating income was $956 million in 2003, a 7% increase over 2002. The increase in operating income was due primarily to our acquisition of Gemex, partially offset by a 1% decrease in our base business. The decrease in our base business operating income resulted from increased selling, delivery and administrative expenses, partially offset by the improvement in the net impact of gross margin rate and mix in the U.S. and Europe, coupled with the favorable impact of foreign currency translation in Canada and Europe. In 2004, we expect our worldwide operating income to grow in the mid-single digits versus 2003. INTEREST EXPENSE, NET Interest expense, net increased by $48 million to $239 million, when compared with 2002, largely due to the additional interest associated with the $1 billion 4.63% senior notes used to finance our acquisition of Gemex in November 2002 and the additional $1.2 billion of debt issued during 2003. This was partially offset by the lower effective interest rate achieved on our fixed rate long-term debt from the use of interest rate swaps. MINORITY INTEREST Minority interest represents PepsiCo's approximate 6.8% ownership in our principal operating subsidiary, Bottling Group, LLC. INCOME TAX EXPENSE BEFORE RATE CHANGE Our full-year effective tax rate for 2003 was 34.4% before our income tax rate change expense. This rate corresponds to an effective tax rate of 34.0% in 2002. The increase in the effective tax rate is primarily due to the unfavorable mix in pre-tax income in jurisdictions with higher effective tax rates. INCOME TAX RATE CHANGE EXPENSE (BENEFIT) In December 2003, legislation was enacted changing certain Canadian provincial income tax rates. These rate changes increased deferred tax liabilities by $11 million and resulted in a non-cash charge in 2003. EARNINGS PER SHARE
Shares in millions 2003 2002 2001 -------- -------- -------- Basic earnings per share on reported net income ...... $ 1.54 $ 1.52 $ 1.07 Basic weighted-average shares outstanding ............ 270 282 286 Diluted earnings per share on reported net income .... $ 1.50 $ 1.46 $ 1.03 Diluted weighted-average shares outstanding .......... 277 293 296
27 Dilution Diluted earnings per share reflect the potential dilution that could occur if equity awards from our stock compensation plans were exercised and converted into common stock that would then participate in net income. Our employee equity award issuances have resulted in $0.04, $0.06 and $0.04 per share of dilution in 2003, 2002 and 2001, respectively. Diluted Weighted-Average Shares Outstanding The decrease in shares outstanding reflects the effect of our share repurchase program, which began in October 1999, partially offset by share issuances from the exercise of stock options. The amount of shares authorized by the Board of Directors to be repurchased totals 75 million shares, of which we have repurchased approximately 23 million shares in 2003 and 63 million shares since the inception of our share repurchase program. RESULTS OF OPERATIONS - 2002 VOLUME 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. NET REVENUES Reported net revenues were $9.2 billion in 2002, 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 translation contributed more than 1% to our net revenue per case growth in 2002 outside the United States. COST OF SALES Cost of sales was $5.0 billion in 2002, 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. 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. OPERATING INCOME Operating income was $898 million in 2002, 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. This growth was a reflection of higher 28 pricing, volume growth from our acquisitions and base business, partially offset by increased selling, delivery and administrative expenses resulting from growth in our business. 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 issuance of $1 billion in debt, the proceeds of which were used 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 used 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 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. LIQUIDITY AND FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES As a result of the strong cash flows that we generate from our operations, we have been able to fund most of our capital investments, share repurchases and acquisitions, with the exception 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 for the foreseeable future. We have a $500 million commercial paper program that is supported by two $250 million credit facilities. During the second quarter of 2003, we renegotiated the credit facilities. One of the credit facilities expires in April 2004, which we intend to renew, and the other credit facility expires in April 2008. There are certain financial covenants associated with these credit facilities. Both credit facilities are guaranteed by Bottling Group, LLC. We have used these credit facilities to support our commercial paper program in 2003 and 2002, however, there were no borrowings outstanding under these credit facilities at December 27, 2003, or December 28, 2002. We have available short-term bank credit lines of approximately $302 million and $167 million at December 27, 2003 and December 28, 2002, respectively. These lines were used to support the general operating needs of our businesses outside the United States. The weighted-average interest rate for used lines of credit outstanding at December 27, 2003, and December 28, 2002, was 4.17% and 8.85%, respectively. During the second quarter of 2003, Bottling Group, LLC issued $250 million of senior notes with a coupon rate of 4.13%, maturing on June 15, 2015. We used the net proceeds of this offering primarily for general corporate purposes. During the third quarter of 2003, Bottling Group, LLC filed a shelf registration statement with the Securities and Exchange Commission (the "SEC") that was declared effective by the SEC on September 5, 2003. Under this registration statement, we have the capability to issue, in one or more offerings, up to $1 billion in senior notes. Pursuant to the shelf registration statement, on October 7, 2003, we completed an offering of $500 million 2.45% senior notes due on October 16, 2006. In addition, on November 17, 2003, we completed an offering of $400 million 5.0% senior notes due on November 15, 2013. In February 2004, we have used the net proceeds from these offerings for the repayment of a portion of our $1 billion principal amount of 5.38% senior notes. Pending such use, the net proceeds were invested in several short-term instruments with original maturities of three months or less and were classified as cash and cash equivalents in our Consolidated Balance Sheet. Each of the senior notes mentioned above has redemption features and covenants that 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. We believe we are in compliance with all debt covenants in our indenture agreements and credit facilities. 29 Contractual Obligations The following table summarizes our contractual obligations as of December 27, 2003:
PAYMENTS DUE BY PERIOD -------------------------------------------------------- LESS THAN 1 MORE THAN CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ----------------------- ------ ----------- --------- --------- --------- Long-term debt obligations (1) $5,672 $1,169 $ 522 $ 28 $3,953 Capital lease obligations (2) 11 6 2 -- 3 Operating leases (2) 171 34 46 32 59 Purchase obligations: Raw material obligations (3) 216 -- 162 54 -- Capital expenditure obligations (4) 74 74 -- -- -- Other obligations (5) 261 138 50 28 45 Other long-term liabilities (6) 25 4 9 6 6 ------ ------ ------ ------ ------ TOTAL $6,430 $1,425 $ 791 $ 148 $4,066 ====== ====== ====== ====== ======
(1) See Note 7 in Notes to our Consolidated Financial Statements for additional information relating to our long-term debt obligations. (2) See Note 8 in Notes to our Consolidated Financial Statements for additional information relating to our lease obligations. (3) Represents obligations to purchase raw materials pursuant to contracts entered into by PepsiCo on our behalf. (4) Represents commitments to suppliers under capital expenditure related contracts or purchase orders. (5) Represents noncancellable agreements that specify fixed or minimum quantities and agreements that include termination penalty clauses. (6) Primarily relates to contractual obligations associated with non-compete contracts that resulted from business acquisitions. The table excludes other long-term liabilities included in our Consolidated Financial Statements, such as pension, postretirement and other non-contractual obligations. The timing of payments under these obligations cannot be reasonably estimated. See Note 10 in Notes to our Consolidated Financial Statements for a discussion of our future pension and postretirement contributions. Off-Balance Sheet Arrangements There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. 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 $644 million, $623 million and $593 million during 2003, 2002 and 2001, respectively. In 2004, we expect our capital expenditures to be approximately 6% to 7% of net revenues. Acquisitions During 2003 we acquired the operations and exclusive right to manufacture, sell and distribute beverages from three franchise bottlers. The following acquisitions occurred for an aggregate purchase price of $91 million in cash and the assumption of liabilities of $13 million: - Pepsi-Cola Buffalo Bottling Corp. of Buffalo, New York in February. - Cassidy's Beverage Limited of New Brunswick, Canada in February. - Olean Bottling Works, Inc. of Olean, New York in August. During 2003, we also paid $5 million for the purchase of certain distribution rights relating to SOBE and DR. PEPPER. In addition, we paid $4 million for purchase obligations relating to acquisitions made in the prior year. During 2002, we acquired the operations and exclusive right to manufacture, sell and distribute beverages of several different PepsiCo franchise bottlers. The following acquisitions occurred for an aggregate purchase price of $936 million in cash and $388 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. 30 - 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 intend to continue to pursue other acquisitions of independent PepsiCo bottlers in the U.S., Mexico and Canada, particularly in territories contiguous to our own, where they create shareholder value. We also intend to continue to evaluate other international acquisition opportunities as they become available. CASH FLOWS Fiscal 2003 Compared with Fiscal 2002 Our net cash provided by operations of $1,084 million was driven by the strong cash flow generated from the sale of our products. Net operating cash flow grew by $70 million over the prior year due primarily to the incremental cash generated by our Mexican business. This increase was partially offset by higher worldwide tax payments, U.S. casualty insurance payments and the settlement of our New Jersey wage and hour litigation. Net cash used for investments decreased by $1.0 billion to $734 million, reflecting lower acquisition spending during 2003 and the lapping of a $181 million investment in our debt defeasance trust in the prior year, partially offset by increases in capital expenditures. Net cash provided by financing decreased by $20 million to $653 million, driven by higher share repurchases and lower stock option exercises, offset by an increase in our proceeds from long-term debt. 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 continued 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 4.63% 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. 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 rates 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. 31 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 certain commodities used in our operations. With respect to commodity price risk, we currently have various contracts outstanding for commodity purchases in 2004, which establish our purchase prices within defined ranges. We had $19 million in unrealized deferred gains and $16 million in unrealized losses based on the commodity rates in effect on December 27, 2003 and December 28, 2002, 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 $17 million and $32 million at December 27, 2003 and December 28, 2002, 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 $1.8 billion of our fixed-rate debt to floating-rate debt through the use of interest rate swaps. The fair value of our interest rate swaps resulted in an increase to our swap and debt instruments of $3 million and $23 million at December 27, 2003 and December 28, 2002, respectively. We estimate that a 10% decrease in interest rates with all other variables held constant would have resulted in a net increase in the fair value of our financial instruments, both our fixed-rate debt and our interest rate swaps, of $160 million and $147 million at December 27, 2003 and December 28, 2002, respectively. Foreign Currency Exchange Rate Risk In 2003, approximately 28% of our net revenues came 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 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 have not hedged 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 27, 2003 and December 28, 2002, near-term changes 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 both transaction gains and losses in our foreign operations, as well as translation gains and losses arising from the re-measurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries. Turkey and Russia were considered highly inflationary economies for accounting purposes in 2002. Beginning in 2003, Russia is no longer considered highly inflationary, and as a result, changed its functional currency from the U.S. dollar to the Russian ruble. There was no material impact on our consolidated financial statements as a result of Russia's change in functional currency in 2003. In 2003, approximately 11% of our net revenues was derived from Mexico. In 2003, the Mexican peso devalued by approximately 8%. Future significant movements in the Mexican peso could have a material impact on our financial results. 32 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. Employees participating 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 the fair value from these commitments by $2 million in 2003 and 2002. CAUTIONARY STATEMENTS Except for the historical information and discussions contained herein, statements contained in this annual report on Form 10-K and in the annual report to the shareholders 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: - - changes in our relationship with PepsiCo that could have a material adverse effect on our business and financial results; - - restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs; - - decreased demand for our product resulting from changes in consumers' preferences; - - an inability to achieve volume growth through product and packaging initiatives; - - lower-than-expected net pricing resulting from marketplace competition and competitive pressures that may cause channel and product mix to shift from more profitable cold drink channels and packages; - - material changes from expectations in the cost of raw materials and ingredients; - - an inability to achieve cost savings; - - 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; - - changes in product category consumption; - - unfavorable weather conditions in our markets; - - unforeseen economic and political changes; - - possible recalls of our products; - - an inability to meet projections for performance in newly acquired territories; - - changes in laws and regulations, including restrictions on the sale of carbonated soft drinks in schools, changes in food and drug laws, transportation regulations, employee safety rules, labor laws, accounting standards, taxation requirements (including unfavorable outcomes from audits performed by various tax authorities) and environmental laws; - - changes in our debt ratings; and - - material changes in our expected interest and currency exchange rates and unfavorable market performance of our pension plan assets. 33 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS in millions, except per share data FISCAL YEARS ENDED DECEMBER 27, 2003, DECEMBER 28, 2002 AND DECEMBER 29, 2001
2003 2002 2001 ------- ------- ------- NET REVENUES ............................................................................... $10,265 $ 9,216 $ 8,443 Cost of sales .............................................................................. 5,215 5,001 4,580 ------- ------- ------- GROSS PROFIT ............................................................................... 5,050 4,215 3,863 Selling, delivery and administrative expenses .............................................. 4,094 3,317 3,187 ------- ------- ------- OPERATING INCOME ........................................................................... 956 898 676 Interest expense, net ...................................................................... 239 191 194 Other non-operating expenses, net .......................................................... 7 7 -- Minority interest .......................................................................... 50 51 41 ------- ------- ------- INCOME BEFORE INCOME TAXES ................................................................. 660 649 441 Income tax expense before rate change ...................................................... 227 221 161 Income tax rate change expense (benefit) ................................................... 11 -- (25) ------- ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE .......................... 422 428 305 Cumulative effect of change in accounting principle, net of tax and minority interest ...... 6 -- -- ------- ------- ------- NET INCOME ................................................................................. $ 416 $ 428 $ 305 ======= ======= ======= BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........ $ 1.56 $ 1.52 $ 1.07 Cumulative effect of change in accounting principle ........................................ 0.02 -- -- ------- ------- ------- BASIC EARNINGS PER SHARE ................................................................... $ 1.54 $ 1.52 $ 1.07 ======= ======= ======= Weighted-average shares outstanding ........................................................ 270 282 286 DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ...... $ 1.52 $ 1.46 $ 1.03 Cumulative effect of change in accounting principle ........................................ 0.02 -- -- ------- ------- ------- DILUTED EARNINGS PER SHARE ................................................................. $ 1.50 $ 1.46 $ 1.03 ======= ======= ======= Weighted-average shares outstanding ........................................................ 277 293 296
See accompanying notes to Consolidated Financial Statements. 34 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS in millions FISCAL YEARS ENDED DECEMBER 27, 2003, DECEMBER 28, 2002 AND DECEMBER 29, 2001
2003 2002 2001 ------- ------- ------- CASH FLOWS -- OPERATIONS Net income ................................................................................. $ 416 $ 428 $ 305 Adjustments to reconcile net income to net cash provided by operations: Depreciation ........................................................................... 556 443 379 Amortization ........................................................................... 12 8 135 Deferred income taxes .................................................................. 125 131 23 Cumulative effect of change in accounting principle .................................... 6 -- -- Other non-cash charges and credits, net ................................................ 303 228 182 Changes in operating working capital, excluding effects of acquisitions: Accounts receivable, net ............................................................ (20) (19) (28) Inventories, net .................................................................... 4 13 (50) Prepaid expenses and other current assets ........................................... 7 (7) (10) Accounts payable and other current liabilities ...................................... (118) (10) 69 ------- ------- ------- Net change in operating working capital .......................................... (127) (23) (19) ------- ------- ------- Pension contributions .................................................................. (162) (151) (86) Other, net ............................................................................. (45) (50) (37) ------- ------- ------- NET CASH PROVIDED BY OPERATIONS ............................................................ 1,084 1,014 882 ------- ------- ------- CASH FLOWS -- INVESTMENTS Capital expenditures ....................................................................... (644) (623) (593) Acquisitions of bottlers ................................................................... (100) (936) (120) Sales of property, plant and equipment ..................................................... 10 6 6 Investment in debt defeasance trust ........................................................ -- (181) -- ------- ------- ------- NET CASH USED FOR INVESTMENTS .............................................................. (734) (1,734) (707) ------- ------- ------- CASH FLOWS -- FINANCING Short-term borrowings, net -- three months or less ......................................... 8 (78) 50 Net proceeds from issuances of long-term debt .............................................. 1,141 1,031 -- Payments of long-term debt ................................................................. (30) (120) -- Minority interest distribution ............................................................. (7) (11) (16) Dividends paid ............................................................................. (11) (11) (12) Proceeds from exercise of stock options .................................................... 35 93 18 Purchases of treasury stock ................................................................ (483) (231) (249) ------- ------- ------- NET CASH PROVIDED BY (USED FOR) FINANCING .................................................. 653 673 (209) ------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ............................... 10 (8) (7) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... 1,013 (55) (41) CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR ............................................. 222 277 318 ------- ------- ------- CASH AND CASH EQUIVALENTS -- END OF YEAR ................................................... $ 1,235 $ 222 $ 277 ======= ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION NON-CASH INVESTING AND FINANCING ACTIVITIES: Liabilities incurred and/or assumed in conjunction with acquisitions of bottlers .... $ 146 $ 813 $ 25
See accompanying notes to Consolidated Financial Statements. 35 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED BALANCE SHEETS in millions, except per share data DECEMBER 27, 2003 AND DECEMBER 28, 2002
2003 2002 ------- ------- ASSETS CURRENT ASSETS Cash and cash equivalents......................................................... $ 1,235 $ 222 Accounts receivable, less allowance of $72 in 2003 and $67 in 2002................ 994 922 Inventories....................................................................... 374 378 Prepaid expenses and other current assets......................................... 268 203 Investment in debt defeasance trust............................................... 168 12 ------- ------- TOTAL CURRENT ASSETS.......................................................... 3,039 1,737 Property, plant and equipment, net................................................ 3,423 3,308 Other intangible assets, net...................................................... 3,562 3,495 Goodwill.......................................................................... 1,386 1,192 Investment in debt defeasance trust............................................... -- 170 Other assets...................................................................... 134 141 ------- ------- TOTAL ASSETS.................................................................. $11,544 $10,043 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities.................................... $ 1,231 $1,179 Short-term borrowings............................................................. 67 51 Current maturities of long-term debt.............................................. 1,180 18 ------- ------- TOTAL CURRENT LIABILITIES..................................................... 2,478 1,248 Long-term debt.................................................................... 4,493 4,539 Other liabilities................................................................. 875 819 Deferred income taxes............................................................. 1,421 1,265 Minority interest................................................................. 396 348 ------- ------- TOTAL LIABILITIES............................................................. 9,663 8,219 ------- ------- SHAREHOLDERS' EQUITY Common stock, par value $0.01 per share: authorized 900 shares, issued 310 shares....................................... 3 3 Additional paid-in capital........................................................ 1,743 1,750 Retained earnings................................................................. 1,471 1,066 Accumulated other comprehensive loss.............................................. (380) (468) Deferred compensation............................................................. (4) -- Treasury stock: 49 shares and 30 shares in 2003 and 2002, respectively, at cost... (952) (527) ------- ------- TOTAL SHAREHOLDERS' EQUITY.................................................... 1,881 1,824 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................ $11,544 $10,043 ======= =======
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 27, 2003, DECEMBER 28, 2002 AND DECEMBER 29, 2001
ACCUMULATED COMPRE- ADDITIONAL OTHER HENSIVE COMMON PAID-IN DEFERRED RETAINED COMPREHENSIVE TREASURY INCOME/ STOCK CAPITAL COMPENSATION EARNINGS LOSS STOCK TOTAL (LOSS) ------ ---------- ------------ -------- ------------- -------- ------ ------- 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 (net of tax and minority interest of $8)....... -- -- -- -- (12) -- (12) (12) Minimum pension liability adjustment (net of tax and minority interest of $41)................................ -- -- -- -- (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 (net of tax and minority interest of $4)....... -- -- -- -- 7 -- 7 7 Minimum pension liability adjustment (net of tax and minority interest of $93)................................ -- -- -- -- (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 Comprehensive income: Net income............................. -- -- -- 416 -- -- 416 $ 416 Currency translation adjustment........ -- -- -- -- 90 -- 90 90 Cash flow hedge adjustment(net of tax and minority interest of $13)...... -- -- -- -- 18 -- 18 18 Minimum pension liability adjustment (net of tax and minority interest of $14)................................ -- -- -- -- (20) -- (20) (20) ------- Total comprehensive income................. $ 504 ======= Stock option exercises: 3 shares........... -- (23) -- -- -- 58 35 Tax benefit - stock option exercises....... -- 8 -- -- -- -- 8 Purchase of treasury stock: 23 shares...... -- -- -- -- -- (483) (483) Stock compensation......................... -- 8 (4) -- -- -- 4 Cash dividends declared on common stock (per share - $0.04)...................... -- -- -- (11) -- -- (11) ------ -------- ------- -------- ------- ------- ------ BALANCE AT DECEMBER 27, 2003................. $ 3 $ 1,743 $ (4) $ 1,471 $ (380) $ (952) $1,881 ====== ======== ======= ======== ======= ======= ======
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" or the "Company") is the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages, consisting of bottling operations located in the United States, Mexico, Canada, Spain, Greece, Russia and Turkey. When used in these Consolidated Financial Statements, "PBG," "we," "our" and "us" each refers to the Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC, our principal operating subsidiary. 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. At December 27, 2003, PepsiCo owned approximately 40.6% of our outstanding common stock and 100% of our outstanding Class B common stock, together representing approximately 45.8% 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 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 is 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. 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. At December 27, 2003, there was no preferred stock outstanding. Certain reclassifications were made in our Consolidated Financial Statements to 2002 and 2001 amounts to conform to the 2003 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 U.S. and Canadian operations report using a fiscal year that consists of 52 weeks, ending on the last Saturday in December. Every five or six years a 53rd week is added. Fiscal years 2003, 2002 and 2001 consisted of 52 weeks. Our remaining countries report using a calendar-year basis. Accordingly, we recognize our quarterly business results as outlined below:
Quarter U.S. & Canada Mexico & Europe ------- ------------- --------------- First Quarter 12 weeks January and February Second Quarter 12 weeks March, April and May Third Quarter 12 weeks June, July and August Fourth Quarter 16 weeks September, October, November and December
REVENUE RECOGNITION - We recognize revenue when our products are delivered to customers. Sales terms allow for a right of return if product freshness dating has expired or breakage has occurred. 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. 38 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 $453 million, $441 million and $389 million in 2003, 2002 and 2001, 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 are mutually agreed-upon between us and PepsiCo and other brand owners and 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, cost of sales or selling, delivery and administrative expenses. Beginning in 2003, due to the adoption of Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," we have changed our accounting methodology for the way we record bottler incentives. Prior to 2003, we classified worldwide bottler incentives received from PepsiCo and other brand owners as adjustments to net revenues and selling, delivery and administrative expenses depending on the objective of the program. In accordance with EITF Issue No. 02-16, we have classified certain bottler incentives as a reduction of cost of sales, beginning in 2003 as follows: - - Direct marketplace support represents PepsiCo's and other brand owners' agreed-upon funding to assist us in offering sales and promotional discounts to retailers and is generally recorded as an adjustment to cost of sales beginning in 2003. If the direct marketplace support is a reimbursement for a specific, incremental and identifiable program, the funding is recorded as an adjustment to net revenues. Prior to 2003, all direct marketplace support was 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 cost of sales beginning in 2003. Prior to 2003, capital equipment funding was recorded as a reduction to selling, delivery and administrative expenses. - - Advertising support represents agreed-upon funding to assist us for the cost of media time and promotional materials and is generally recorded as an adjustment to cost of sales. Advertising support that represents reimbursement for a specific, incremental and identifiable media cost, is recorded as a reduction to advertising and marketing expenses within selling, delivery and administrative expenses. Prior to 2003, all funding for media costs was recorded as an adjustment to selling, delivery and administrative expenses. Total bottler incentives recognized as adjustments to net revenues, cost of sales and selling, delivery and administrative expenses in our Consolidated Statements of Operations were as follows:
52-WEEKS ENDED 2003 2002 2001 ---- ---- ---- Net revenues.................................... $ 55 $293 $293 Cost of sales................................... 527 -- -- Selling, delivery and administrative expenses... 108 311 305 ---- ---- ---- Total bottler incentives..................... $690 $604 $598 ==== ==== ====
See "New Accounting Standards" for the pro-forma disclosure to our reported results for the 52-weeks ended December 28, 2002 and December 29, 2001, assuming that EITF Issue No. 02-16 had been in place for all periods presented. SHIPPING AND HANDLING COSTS - We record the majority of our shipping and handling costs within selling, delivery and administrative expenses. Such costs totaled $1,397 million, $1,172 million and $1,092 million in 2003, 2002 and 2001, respectively. 39 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 both transaction gains and losses in our foreign operations, as well as translation gains and losses arising from the remeasurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries. Turkey and Russia were considered highly inflationary economies for accounting purposes in 2002 and 2001. Beginning in 2003, Russia is no longer considered highly inflationary, and as a result, changed its functional currency from the U.S. dollar to the Russian ruble. There was no material impact on our consolidated financial statements as a result of Russia's change in functional currency in 2003. PENSION AND POSTRETIREMENT BENEFIT PLANS - We sponsor pension and other postretirement benefit 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"). 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. We amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits. For additional unaudited information, see "Critical Accounting Policies" in Management's Financial Review. INCOME TAXES - Our effective tax rate is based on pre-tax income, statutory tax rates and tax planning strategies 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 tax benefit and costs we expect to realize. Valuation allowances are established where expected future taxable income does not support the recognition of the related deferred tax asset. For additional unaudited information, see "Critical Accounting Policies" in Management's Financial Review. 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 an in-depth 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. For additional unaudited information, see "Critical Accounting Policies" in Management's Financial Review. INVENTORIES - We value our inventories at the lower of cost or net realizable value. The cost of our inventory in the majority of locations is computed on the first-in, first-out method. In Turkey, we compute the cost of our inventories at the lower of cost computed using the weighted-average cost method. 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. 40 GOODWILL AND OTHER INTANGIBLE ASSETS, NET - 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 intangible assets, but evaluate them for impairment annually. See "New Accounting Standards" for the pro-forma disclosure to our reported results for the 52-weeks ended December 29, 2001, assuming that SFAS No. 142 had been in place for all periods presented. We evaluate our identified intangible assets with indefinite useful lives for impairment annually on an individual basis or by asset groups on a country-by-country basis, depending on the nature of the intangible asset. We measure impairment as the amount by which the carrying value exceeds its estimated fair value. Based upon our annual impairment analysis performed in the fourth quarter of 2003, the estimated fair values of our identified intangible assets with indefinite lives exceeded their carrying amounts. 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. Based upon our annual impairment analysis in the fourth quarter of 2003, the estimated fair value of our reporting units exceeded their carrying value and as a result, we did not need to proceed to the second step of the impairment test. Other identified intangible assets that are subject to amortization are amortized 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. The determination of the expected life will be dependent upon the use and underlying characteristics of the intangible asset. In our evaluation of the intangible assets, we consider the nature and terms of the underlying agreements, the customer's attrition rate, competitive environment, and brand history, as applicable. 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. For additional unaudited information, see "Critical Accounting Policies" in Management's Financial Review. INVESTMENT IN DEBT DEFEASANCE TRUST - In 2002 we 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 9.75% 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. At December 27, 2003, total amortized cost for these held-to-maturity securities is $168 million and is recorded in the current portion of investment in debt defeasance trust in our Consolidated Balance Sheets. At December 28, 2002, total amortized costs for these held-to-maturity securities was $182 million, of which $12 million was recorded as current and the remaining $170 million was recorded as long-term in investment in debt defeasance trust in our Consolidated Balance Sheets. CASUALTY INSURANCE COSTS - We became self-insured for casualty costs in the United States starting in 2002. Our liability for casualty costs was $127 million as of December 27, 2003 of which $38 million was reported in accounts payable and other current liabilities and $89 million was recorded in other liabilities in our Consolidated Balance Sheets. 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. We do not discount our loss expense reserves. For additional unaudited information, see "Critical Accounting Policies" in Management's Financial Review. 41 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 27, 2003, 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 63 million shares and have reissued approximately 14 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. 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 recognized in earnings 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 was 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 a derivative instrument for which hedge accounting is not required because it is entered into to offset changes in the fair value of an underlying transaction recognized in earnings ("natural hedge"). These instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value recognized in earnings. STOCK-BASED EMPLOYEE COMPENSATION - We measure stock-based compensation expense 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 based upon the fair value of the PBG stock on the date of grant. As allowed by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123," 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 42 we had measured compensation cost for the stock-based awards 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:
52-WEEKS ENDED 2003 2002 2001 ----- ----- ----- Net income: As reported..................................................................... $ 416 $ 428 $ 305 Add: Total stock-based employee compensation expense included in reported net income, net of taxes and minority interest......................................................... 2 -- -- Less: Total stock-based employee compensation expense under fair value-based method for all awards, net of taxes and minority interest..... (42) (40) (36) ----- ----- ----- Pro forma....................................................................... $ 376 $ 388 $ 269 ===== ===== ===== Earnings per share: Basic - as reported............................................................ $1.54 $1.52 $1.07 Basic - pro forma.............................................................. $1.39 $1.38 $0.94 Diluted - as reported.......................................................... $1.50 $1.46 $1.03 Diluted - pro forma............................................................ $1.35 $1.32 $0.91
Pro forma compensation cost measured for equity awards granted to employees is amortized using a straight-line basis over the vesting period, which is typically three years. During 2003, we issued restricted stock awards to certain key members of senior management, which vest over periods ranging from three to five years from the date of grant. These restricted stock awards are earned only if the Company achieves certain performance targets over a three-year period. These restricted share awards are considered variable awards pursuant to APB Opinion No. 25, which requires the related compensation expense to be re-measured each period until the performance targets are met and the amount of the awards becomes fixed. When the restricted stock award was granted, deferred compensation was recorded as a reduction to shareholders' equity, and such amount has been adjusted quarterly and amortized on a straight-line basis over the vesting periods. As of December 27, 2003, the deferred compensation balance remaining to be amortized is approximately $4 million. The Company recognized approximately $1 million of expense in 2003 relating to these equity awards. 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 SFAS No. 142 During 2001, the 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 be 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. The following table provides pro forma disclosure of the elimination of goodwill and certain franchise rights amortization in 2001, as if SFAS No. 142 had been adopted at the beginning of 2001:
2003 2002 2001 ----- ----- ----- Reported net income.................................................................... $ 416 $ 428 $ 305 Add back: Goodwill amortization, net of taxes and minority interest................. -- -- 27 Add back: Franchise rights amortization, net of taxes and minority interest......... -- -- 64 ----- ----- ----- Adjusted net income.................................................................... $ 416 $ 428 $ 396 ===== ===== ===== Reported earnings per common share - Basic............................................. $1.54 $1.52 $1.07 Add back: Goodwill amortization, net of taxes and minority interest................. -- -- 0.09 Add back: Franchise rights amortization, net of taxes and minority interest ........ -- -- 0.23 ----- ----- ----- Adjusted earnings per common share - Basic............................................. $1.54 $1.52 $1.39 ===== ===== ===== Reported earnings per common share - Diluted........................................... $1.50 $1.46 $1.03 Add back: Goodwill amortization, net of taxes and minority interest................. -- -- 0.09 Add back: Franchise rights amortization, net of taxes and minority interest......... -- -- 0.22 ----- ----- ----- Adjusted earnings per common share - Diluted........................................... $1.50 $1.46 $1.34 ===== ===== =====
43 EITF Issue No. 02-16 As discussed above in Note 2, the EITF reached a consensus on Issue No. 02-16, addressing the recognition and income statement classification of various cash consideration given by a vendor to a customer. In accordance with EITF Issue No. 02-16, we have classified certain bottler incentives as a reduction of cost of sales beginning in 2003. In the first quarter of 2003, we have recorded a transition adjustment of $6 million, net of taxes and minority interest of $1 million, for the cumulative effect on prior years. This adjustment reflects the amount of bottler incentives that can be attributed to our 2003 beginning inventory balances. This accounting change did not have a material effect on our income before cumulative effect of change in accounting principle for the 52-weeks ended December 27, 2003. Assuming that EITF Issue No. 02-16 had been in place for all periods presented, the following pro forma adjustments would have been made to our reported results for the 52-weeks ended December 28, 2002 and December 29, 2001:
52-WEEKS ENDED DECEMBER 28, 2002 ----------------------------------- AS EITF 02-16 PRO FORMA REPORTED ADJUSTMENT RESULTS -------- ---------- --------- Net revenues............................................. $ 9,216 $ (290) $ 8,926 Cost of sales............................................ 5,001 (491) 4,510 Selling, delivery and administrative expenses............ 3,317 201 3,518 -------- ---------- --------- Operating income......................................... $ 898 $ - $ 898 ======== ========== =========
52-WEEKS ENDED DECEMBER 29, 2001 ----------------------------------- AS EITF 02-16 PRO FORMA REPORTED ADJUSTMENT RESULTS -------- ---------- --------- Net revenues............................................. $ 8,443 $ (278) $ 8,165 Cost of sales............................................ 4,580 (468) 4,112 Selling, delivery and administrative expenses............ 3,187 190 3,377 -------- ---------- --------- Operating income......................................... $ 676 $ - $ 676 ======== ========== =========
Assuming EITF Issue No. 02-16 had been adopted for all periods presented, pro forma net income and earnings per share for the 52-weeks ended December 27, 2003, December 28, 2002 and December 29, 2001, would have been as follows:
52-WEEKS ENDED -------------- DECEMBER DECEMBER DECEMBER 27, 2003 28, 2002 29, 2001 -------- -------- -------- Net income: As reported..................................... $ 416 $ 428 $ 305 Pro forma....................................... 422 428 305 Earnings per share: Basic - as reported............................. $ 1.54 $ 1.52 $ 1.07 Basic - pro forma............................... 1.56 1.52 1.07 Diluted - as reported........................... $ 1.50 $ 1.46 $ 1.03 Diluted - pro forma............................. 1.52 1.46 1.03
SFAS No. 149 During 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our Consolidated Financial Statements. FIN 46 In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities an Interpretation of ARB No. 51," which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the equity investors lack an essential characteristic of a controlling financial interest. The adoption of FIN 46 did not have a material impact on our Consolidated Financial Statements. SFAS No. 146 During 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our Consolidated Financial Statements. 44 FIN 45 In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34," which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees that are entered into or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our Consolidated Financial Statements. Equity Award Accounting The FASB is planning to issue an exposure draft proposing to expense the fair value of equity awards beginning in 2005. We are currently evaluating the impact of this proposed standard on our financial statements. NOTE 3 -- INVENTORIES
2003 2002 ------- ------- Raw materials and supplies.................... $ 140 $ 162 Finished goods................................ 234 216 ------- ------- $ 374 $ 378 ======= =======
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT, NET
2003 2002 ------- ------- Land.......................................... $ 241 $ 228 Buildings and improvements.................... 1,185 1,126 Manufacturing and distribution equipment...... 3,028 2,768 Marketing equipment........................... 2,131 2,008 Other......................................... 176 154 ------- ------- 6,761 6,284 Accumulated depreciation...................... (3,338) (2,976) ------- ------- $ 3,423 $ 3,308 ======= =======
We calculate depreciation on a straight-line basis over the estimated lives of the assets as follows: Buildings and improvements................................. 20-33 years Manufacturing and distribution equipment................... 2-15 years Marketing equipment........................................ 3-7 years
NOTE 5 - OTHER INTANGIBLE ASSETS, NET AND GOODWILL
2003 2002 ------- ------- Intangibles subject to amortization: Gross carrying amount: Customer relationships and lists ......................... $ 42 $ -- Franchise rights.......................................... 23 20 Other identified intangibles.............................. 27 24 ------- ------- 92 44 ------- ------- Accumulated amortization: Customer relationships and lists ......................... (3) -- Franchise rights.......................................... (10) (6) Other identified intangible............................... (12) (9) ------- ------- (25) (15) ------- ------- Intangibles subject to amortization, net 67 29 ------- ------- Intangibles not subject to amortization: Carrying amount: Franchise rights.......................................... 2,908 3,424 Distribution rights....................................... 286 -- Trademarks................................................ 207 -- Other identified intangibles.............................. 94 42 ------- ------- Intangibles not subject to amortization......................... 3,495 3,466 ------- ------- Total other intangible assets, net.............................. $ 3,562 $ 3,495 ======= ======= Goodwill........................................................ $ 1,386 $ 1,192 ======= =======
Total other intangible assets, net and goodwill increased by approximately $261 million due to the following:
OTHER INTANGIBLE GOODWILL ASSETS, NET TOTAL ---------- ----------- -------- Balance at December 28, 2002................................... $ 1,192 $ 3,495 $ 4,687 Purchase price allocations relating to recent acquisitions..... 163 66 229 Impact of foreign currency translation......................... 31 8 39 Increase in pension asset...................................... -- 5 5 Amortization of intangible assets.............................. -- (12) (12) ---------- ----------- -------- Balance at December 27, 2003................................... $ 1,386 $ 3,562 $ 4,948 ========== =========== ========
See Note 16 - Acquisitions for further information relating to the changes of goodwill and other intangible assets, net. 45 For intangible assets subject to amortization, we calculate amortization expense over the period we expect to receive economic benefit. Total amortization expense was $12 million, $8 million and $135 million in 2003, 2002 and 2001, respectively. The weighted-average amortization period for each category of intangible assets and its estimated aggregate amortization expense expected to be recognized over the next five years are as follows:
ESTIMATED AGGREGATE AMORTIZATION EXPENSE TO BE INCURRED WEIGHTED- ------------------------------------------------------- AVERAGE FISCAL YEAR ENDING AMORTIZATION ------------------ PERIOD 2004 2005 2006 2007 2008 ------------ ---- ---- ---- ---- ---- Customer relationships and lists..... 17 years $ 2 $ 2 $ 2 $ 2 $ 2 Franchise rights..................... 5 years $ 5 $ 5 $ 2 $ 1 $ -- Other identified intangibles......... 6 years $ 5 $ 4 $ 3 $ 2 $ 1
NOTE 6 -- ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
2003 2002 -------- -------- Accounts payable........................................................ $ 392 $ 394 Trade incentives........................................................ 220 210 Accrued compensation and benefits....................................... 162 181 Other accrued taxes..................................................... 114 57 Accrued interest........................................................ 86 81 Other current liabilities............................................... 257 256 -------- -------- $ 1,231 $ 1,179 ======== ========
NOTE 7 -- SHORT-TERM BORROWINGS AND LONG-TERM DEBT
2003 2002 -------- -------- Short-term borrowings Current maturities of long-term debt................................ $ 1,180 $ 18 Other short-term borrowings ........................................ 67 51 -------- -------- $ 1,247 $ 69 ======== ======== Long-term debt 5.63% (5.06% effective rate**) senior notes due 2009............... $ 1,300 $ 1,300 5.38% (3.54% effective rate**) senior notes due 2004............... 1,000 1,000 7.00% (7.12% effective rate) senior notes due 2029................. 1,000 1,000 4.63% (4.59% effective rate) senior notes due 2012................. 1,000 1,000 2.45% (1.87% effective rate**) senior notes due 2006............... 500 -- 5.00% (5.12% effective rate) senior notes due 2013................. 400 -- 4.13% (4.48% effective rate) senior notes due 2015................. 250 -- 9.75% (3.77% effective rate***) senior notes due 2004.............. 160 160 Other (average rate 3.08%).......................................... 71 74 -------- -------- 5,681 4,534 Add: SFAS No. 133 adjustment *...................................... 3 23 Fair value adjustment relating to purchase accounting.......... 3 14 Less: Unamortized discount, net...................................... 14 14 Current maturities of long-term debt........................... 1,180 18 -------- -------- $ 4,493 $ 4,539 ======== ========
* 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. ** Effective interest rates include the impact of the gain/loss realized on swap instruments and represent the rates that were achieved in 2003. *** Effective interest rate includes the impact resulting from the fair value adjustment relating to our acquisition of Gemex. 46 Maturities of long-term debt as of December 27, 2003, are 2004: $1,175 million, 2005: $16 million, 2006: $506 million, 2007: $28 million, 2008: $0 million and thereafter, $3,956 million. The maturities of long-term debt do not include the non-cash impact of the SFAS No. 133 adjustment, and the interest effect of the fair value adjustment relating to purchase accounting and unamortized discount. The $1.3 billion of 5.63% senior notes and the $1.0 billion of 5.38% senior notes are guaranteed by PepsiCo. The $1.0 billion of 7.0% senior notes are guaranteed by Bottling Group, LLC. The $1.0 billion of 4.63% senior notes will be guaranteed by PepsiCo starting in February 2004, in accordance with the terms set forth in the related indenture. During the second quarter of 2003, Bottling Group, LLC issued $250 million of senior notes with a coupon rate of 4.13%, maturing on June 15, 2015. We used the net proceeds of this offering for general corporate purposes. During the third quarter of 2003, Bottling Group, LLC filed a shelf registration statement with the Securities and Exchange Commission (the "SEC") that was declared effective by the SEC on September 5, 2003. Under this registration statement, we have the capability to issue, in one or more offerings, up to $1 billion in senior notes. Pursuant to the shelf registration statement on October 7, 2003, we completed an offering of $500 million 2.45% senior notes due on October 16, 2006. In addition, on November 17, 2003, we completed an offering of $400 million of 5.0% senior notes due on November 15, 2013. In February 2004, we intend to utilize the net proceeds from these offerings for the repayment of a portion of our $1 billion principal amount of 5.38% senior notes. Pending such use, the net proceeds have been invested in several short-term instruments with original maturities of three months or less and are classified as cash and cash equivalents in our Consolidated Balance Sheet. Each of the senior notes mentioned above has redemption features and 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 9.75% senior notes were issued by Pepsi-Gemex, S.A. de C.V. of Mexico ("Gemex"). In December 2002, we purchased $181 million of U.S. government securities and placed those securities into an irrevocable trust. The trust has been established for the sole purpose of funding payments of principal and interest on the $160 million of 9.75% 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 for further information relating to these instruments. We have a $500 million commercial paper program that is supported by two $250 million credit facilities. During the second quarter of 2003, we renegotiated the credit facilities. One of the credit facilities expires in April 2004, which we intend to renew, and the other credit facility expires in April 2008. There are certain financial covenants associated with these credit facilities. Both credit facilities are guaranteed by Bottling Group, LLC. We have used these credit facilities to support our commercial paper program in 2003 and 2002, however, there were no borrowings outstanding under these credit facilities at December 27, 2003, or December 28, 2002. We have available short-term bank credit lines of approximately $302 million and $167 million at December 27, 2003 and December 28, 2002, respectively. These lines were used to support the general operating needs of our businesses outside the United States. The weighted-average interest rate for used lines of credit outstanding at December 27, 2003, and December 28, 2002, was 4.17% and 8.85%, respectively. 47 Amounts paid to third parties for interest, net of cash received from our interest rate swaps, was $243 million, $198 million and $193 million in 2003, 2002 and 2001, respectively. Total interest expense incurred during 2003, 2002 and 2001 was $247 million, $200 million and, $204 million, respectively. At December 27, 2003, we have outstanding letters of credit and surety bonds valued at $135 million from financial institutions primarily to provide collateral for estimated self-insurance claims and other insurance requirements. NOTE 8 -- LEASES 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 2023. 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 ------- --------- 2004......................... $ 6 $ 34 2005......................... 1 26 2006......................... 1 20 2007......................... -- 17 2008......................... -- 15 Later years.................. 3 59 ------- --------- $ 11 $ 171 ======= =========
At December 27, 2003, the present value of minimum payments under capital leases was $9 million, after deducting $2 million for imputed interest. Our rental expense was $69 million, $62 million and $40 million for 2003, 2002 and 2001, respectively. NOTE 9 -- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT 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 hedges and qualify for cash flow hedge accounting treatment. The net amount of deferred losses from our commodity hedging that we recognized into cost of sales in our Consolidated Statements of Operations was $2 million in 2003 and $22 million in 2002. As a result of our commodity hedges, $19 million of deferred gains and $16 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 27, 2003, and December 28, 2002, respectively. The adjustment to accumulated other comprehensive loss is reflected after income taxes and minority interest expense of $8 million in 2003 and income taxes and minority interest benefit of $7 million in 2002 in our Consolidated Statements of Changes in Shareholders' Equity. Assuming no change in the commodity prices as measured on December 27, 2003, $19 million of the deferred gain 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 2003 or 2002. FAIR VALUE HEDGES - We finance a portion of our operations through fixed-rate debt instruments. We effectively converted $1.8 billion of our 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 is fully offset by the opposite market impact on the related debt. The change in fair value of the interest rate swaps was a decrease of 48 $20 million in 2003 and an increase of $16 million in 2002. The current portion of the fair value change of our swap and debt has been recorded in prepaid expenses and other current assets and current maturities of long-term debt in our Consolidated Balance Sheets. The long-term portion of the fair value change of our swaps and debt has been recorded in other assets and long-term debt in our Consolidated Balance Sheets. 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 27, 2003, we had a prepaid forward contract for 638,000 shares at an exercise price of $23.33, which was accounted for as a natural hedge. This contract requires cash settlement and has a fair value at December 27, 2003, of $15 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 losses in 2003 and $1 million in gains in 2002, resulting from the change in fair value of these prepaid forward contracts. The earnings impact from these instruments is 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 in 2002. 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 their short maturities and since interest rates approximate current market rates for short-term debt. Long-term debt at December 27, 2003, had a carrying value and fair value of $5.7 billion and $6.0 billion, respectively, and at December 28, 2002, had a carrying value and fair value of $4.5 billion and $4.9 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 and is not included in the tables presented below. 49 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 --------------------------- 2003 2002 2001 ------- ------- ------- Components of pension expense: Service cost................................................................ $ 37 $ 28 $ 25 Interest cost............................................................... 63 56 50 Expected return on plan assets.............................................. (67) (66) (57) Amortization of prior service amendments.................................... 6 6 4 Amortization of net loss.................................................... 13 -- -- Special termination benefits................................................ -- 1 -- ------- ------- ------- Net pension expense for the defined benefit plans........................... $ 52 $ 25 $ 22 ------- ------- ------- Defined contribution plans expense.......................................... $ 19 $ 18 $ 17 ------- ------- ------- Total pension expense recognized in the Consolidated Statements of Operations.................................................... $ 71 $ 43 $ 39 ======= ======= =======
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 --------------------------- 2003 2002 2001 ------- ------- ------- Components of postretirement benefits expense: Service cost................................................................ $ 3 $ 3 $ 3 Interest cost............................................................... 19 17 16 Amortization of net loss.................................................... 5 2 1 Amortization of prior service amendments.................................... (2) (6) (6) ------- ------- ------- Net postretirement benefits expense recognized in the Consolidated Statements of Operations....................................... $ 25 $ 16 $ 14 ======= ======= =======
CHANGES IN THE PROJECTED BENEFIT OBLIGATIONS
PENSION POSTRETIREMENT ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Obligation at beginning of year............................................. $ 953 $ 760 $ 286 $ 228 Service cost................................................................ 37 28 3 3 Interest cost............................................................... 63 56 19 17 Plan amendments............................................................. 11 22 -- -- Actuarial loss.............................................................. 112 127 22 55 Benefit payments............................................................ (47) (41) (18) (17) Special termination benefits................................................ -- 1 -- -- ------- ------- ------- ------- Obligation at end of year................................................... $ 1,129 $ 953 $ 312 $ 286 ======= ======= ======= =======
CHANGES IN THE FAIR VALUE OF ASSETS
PENSION POSTRETIREMENT ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Fair value at beginning of year............................................. $ 538 $ 578 $ -- $ -- Actual return on plan assets................................................ 121 (61) -- -- Asset transfers............................................................. -- 11 -- -- Employer contributions...................................................... 197 51 18 17 Benefit payments............................................................ (47) (41) (18) (17) ------- ------- ------- ------- Fair value at end of year................................................... $ 809 $ 538 $ -- $ -- ======= ======= ======= =======
50 ADDITIONAL PLAN INFORMATION
PENSION POSTRETIREMENT ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Projected benefit obligation.................................................... $ 1,129 $ 953 $ 312 $ 286 Accumulated benefit obligation.................................................. 1,006 843 312 286 Fair value of plan assets (1) .................................................. 899 663 -- --
(1) Includes fourth quarter employer contributions. The accumulated and projected obligations for all plans exceed the fair value of assets. FUNDED STATUS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Funded status at end of year.................................................... $ (320) $ (415) $ (312) $ (286) Unrecognized prior service cost................................................. 46 41 (7) (9) Unrecognized loss............................................................... 453 407 127 110 Fourth quarter employer contribution............................................ 90 125 6 6 ------- ------- ------- ------- Net amounts recognized.......................................................... $ 269 $ 158 $ (186) $ (179) ======= ======= ======= =======
NET AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
PENSION POSTRETIREMENT ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Other liabilities............................................................... $ (124) $ (196) $ (186) $ (179) Intangible assets............................................................... 47 42 -- -- Accumulated other comprehensive loss............................................ 346 312 -- -- ------- ------- ------- ------- Net amounts recognized.......................................................... $ 269 $ 158 $ (186) $ (179) ======= ======= ======= ======= Increase in minimum liability included in accumulated other comprehensive loss.. $ 34 $ 216 $ -- $ -- ======= ======= ======= =======
At December 27, 2003, and December 28, 2002, the accumulated benefit obligation of all 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 $47 million in 2003, 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 $34 million and $216 million in 2003 and 2002, respectively, before taxes and minority interest. The adjustments to accumulated other comprehensive loss are reflected after minority interest of $2 million and $15 million, and deferred income taxes of $12 million and $78 million in 2003 and 2002, respectively, in our Consolidated Statements of Changes in Shareholders' Equity. ASSUMPTIONS The assets, liabilities and assumptions used to measure pension and postretirement 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. In evaluating our rate of return on assets for a given fiscal year, we consider the 10-15 year historical return of our pension investment portfolio, reflecting the weighted return of our plan asset allocation. 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. The weighted-average assumptions used to measure net expense for years ended:
PENSION POSTRETIREMENT ------------------ ------------------ 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- Discount rate......................................... 6.75% 7.50% 7.75% 6.75% 7.50% 7.75% Expected return on plan assets (1) ................... 8.50% 9.50% 9.50% N/A N/A N/A Rate of compensation increase......................... 4.34% 4.33% 4.62% 4.34% 4.33% 4.62%
(1) Expected return on plan assets is presented after administration expenses. 51 The weighted-average assumptions used to measure the benefit liability as of the end of the period were as follows:
PENSION POSTRETIREMENT --------------------- -------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Discount rate......................................... 6.25% 6.75% 6.25% 6.75% Rate of compensation increase......................... 4.20% 4.34% 4.20% 4.34%
FUNDING AND PLAN ASSETS
ALLOCATION PERCENTAGE ------------------------------- TARGET ACTUAL ACTUAL Asset Category 2004 2003 2002 -------------- ------ ------ ------ Equity securities..................................... 70%-75% 74% 71% Debt securities....................................... 25%-30% 26% 29%
The table above shows the target allocation and actual allocation. Our target allocations of our plan assets reflect the long-term nature of our pension liabilities. None of the assets are invested directly in equity or debt instruments issued by PBG, PepsiCo or any bottling affiliates of PepsiCo, although it is possible that insignificant indirect investments exist through our broad market indices. Our equity investments are diversified across all areas of the equity market (i.e., large, mid and small capitalization stocks as well as international equities). Our fixed income investments are also diversified and consist of both corporate and U.S. government bonds. We currently do not invest directly into any derivative investments. PBG's assets are held in a pension trust account at our trustee's bank. PBG's pension investment policy and strategy are mandated by PBG's Pension Investment Committee (PIC) and is overseen by the PBG Board of Directors' Compensation Committee. The plan assets are invested using a combination of enhanced and passive indexing strategies. The performance of the plan assets is benchmarked against market indices and reviewed by the PIC. Changes in investment strategies, asset allocations and specific investments are approved by the PIC prior to execution. HEALTH CARE COST TREND RATES We have assumed an average increase of 11.0% in 2004 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 2003 service and interest cost components.......... $ 1 $ (1) Effect on the fiscal year 2003 accumulated postretirement benefit obligation... $ 10 $ (9)
During 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was passed into law. The reported postretirement benefit obligation in our Consolidated Balance Sheet does not reflect the effects of the Act. We do provide prescription drug benefits to Medicare-eligible retirees but have elected to defer recognition of the Act until the FASB provides guidance regarding its accounting treatment. This deferral election is permitted under FASB Staff Position FAS 106-1. We do not believe the adoption of the Act will have a material impact on our consolidated results. PENSION AND POSTRETIREMENT CASH FLOW Our contributions are made in accordance with applicable tax regulations that provide us with 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 tax deductible or when benefits would be taxable to the employee before receipt. Of the total pension liabilities at December 27, 2003, $59 million relates to plans not funded due to these unfavorable tax consequences.
EMPLOYER CONTRIBUTIONS PENSION POSTRETIREMENT ---------------------- ------- -------------- 2002................................... $ 151 $ 19 2003................................... $ 162 $ 18 2004 (expected)........................ $ 100 $ 20
Our 2004 expected contributions are intended to meet or exceed the IRS minimum requirements and provide us with current tax deductions. 52 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 2003, 2002 and 2001 had exercise prices ranging from $18.25 per share to $25.50 per share, $23.25 per share to $29.25 per share, and $18.88 per share to $22.50 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 2003:
WEIGHTED- AVERAGE EXERCISE Options in millions OPTIONS PRICE - ------------------- ------- ----- Outstanding at beginning of year................................................................ 37.4 $ 15.53 Granted..................................................................................... 8.1 23.27 Exercised................................................................................... (3.1) 11.27 Forfeited................................................................................... (1.1) 22.44 ---- Outstanding at end of year...................................................................... 41.3 $ 17.19 ==== ======== Exercisable at end of year...................................................................... 26.9 $ 13.93 ==== ======== Weighted-average fair value of options granted during the year.................................. $ 9.29 ========
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 ========
Stock options outstanding and exercisable at December 27, 2003:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE ------------------- -------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- Options in millions REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE RANGE OF EXERCISE PRICE OPTIONS LIFE IN YEARS PRICE OPTIONS PRICE - -------------------------- ------------------------------------------------------------ $9.38-$11.49.............. 7.2 6.00 $ 9.39 7.2 $ 9.39 $11.50-$15.88............. 12.0 5.06 $ 11.63 12.0 $ 11.61 $15.89-$22.50............. 9.1 7.12 $ 20.44 5.7 $ 20.50 $22.51-$29.25............. 13.0 8.54 $ 24.36 2.0 $ 25.35 ---- ---- --------- ---- --------- 41.3 6.77 $ 17.19 26.9 $ 13.93 ==== ==== ========= ==== =========
53 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:
2003 2002 2001 ---- ---- ---- Risk-free interest rate.................................. 2.9% 4.5% 4.6% Expected life............................................ 6 years 6 years 6 years Expected volatility...................................... 37% 37% 35% Expected dividend yield.................................. 0.17% 0.16% 0.20%
NOTE 12 -- INCOME TAXES The details of our income tax provision are set forth below:
2003 2002 2001 ---- ---- ---- Current: Federal....................................................... $ 93 $ 61 $ 93 Foreign....................................................... 12 12 5 State......................................................... 8 17 15 ------- ------ ------- 113 90 113 ------- ------ ------- Deferred: Federal....................................................... 74 115 43 Foreign....................................................... 26 2 (1) State......................................................... 14 14 6 ------- ------ ------- 114 131 48 ------- ------ ------- 227 221 161 Cumulative effect of change in accounting principle........... (1) -- -- Rate change expense/(benefit)................................. 11 -- (25) ------- ------ ------- $ 237 $ 221 $ 136 ======= ====== =======
Our income tax provision includes a nonrecurring increase in income tax expense of $11 million and a nonrecurring reduction in income tax expense of $25 million due to enacted tax rate changes in Canada during the 2003 and 2001 respective tax years. Our U.S. and foreign income before income taxes is set forth below:
2003 2002 2001 ---- ---- ---- U.S............................................................................ $ 533 $ 573 $ 375 Foreign........................................................................ 127 76 66 ------ ------ ------ Income before income taxes and cumulative effect of change in accounting principle...................................................................... $ 660 $ 649 $ 441 Cumulative effect of change in accounting principle............................ (7) -- -- ------ ------ ------ $ 653 $ 649 $ 441 ====== ====== ======
Our reconciliation of income taxes calculated at the U.S. federal statutory rate to our provision for income taxes is set forth below:
2003 2002 2001 ---- ---- ---- Income taxes computed at the U.S. federal statutory rate........................................ 35.0% 35.0% 35.0% State income tax, net of federal tax benefit.................................................... 1.9 2.8 3.1 Impact of results outside of U.S. and Mexico.................................................... (9.4) (7.8) (10.7) Impact of Mexico operations..................................................................... (14.7) -- -- Change in valuation allowances.................................................................. 18.3 1.7 1.7 Goodwill and other nondeductible expenses....................................................... 1.9 1.0 3.9 Other, net...................................................................................... 1.4 1.3 3.5 ----- ---- ---- 34.4 34.0 36.5 Rate change expense/(benefit)................................................................... 1.7 -- (5.7) ----- ---- ---- Total effective income tax rate before cumulative effect of change in accounting principle ... 36.1% 34.0% 30.8% Cumulative effect of change in accounting principle............................................. 0.2 -- -- ----- ---- ---- Total effective income tax rate ................................................................ 36.3% 34.0% 30.8% ===== ==== ====
The details of our 2003 and 2002 deferred tax liabilities (assets) are set forth below:
2003 2002 ---- ---- Intangible assets and property, plant and equipment........................................ $1,596 $1,424 Other...................................................................................... 52 94 ------ ------ Gross deferred tax liabilities............................................................. 1,648 1,518 ------ ------ Net operating loss carryforwards........................................................... (267) (142) Employee benefit obligations............................................................... (181) (191) Bad debts.................................................................................. (21) (22) Various liabilities and other.............................................................. (100) (106) ------ ------ Gross deferred tax assets.................................................................. (569) (461) Deferred tax asset valuation allowance..................................................... 271 147 ------ ------ Net deferred tax assets.................................................................... (298) (314) ------ ------ Net deferred tax liability................................................................. $1,350 $1,204 ====== ====== CONSOLIDATED BALANCE SHEETS CLASSIFICATION Prepaid expenses and other current assets.................................................. $ (71) $ (61) Deferred income taxes...................................................................... 1,421 1,265 ------ ------ $1,350 $1,204 ====== ======
54 We have net operating loss carryforwards totaling $807 million at December 27, 2003, which are available to reduce future taxes in the U.S., Spain, Greece, Russia, Turkey and Mexico. Of these carryforwards, $6 million expire in 2004 and $801 million expire at various times between 2005 and 2023. 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 27, 2003, we have tax credit carryforwards in the U.S. of $7 million with an indefinite carryforward period and in Mexico of $12 million, which expire at various times between 2008 and 2013. Our valuation allowances, which reduce deferred tax assets to an amount that will more likely than not be realized, have increased by $124 million in 2003 and increased by $25 million in 2002. Approximately $22 million of our valuation allowance relating to our deferred tax assets at December 27, 2003 would be applied to reduce goodwill if reversed in future periods. 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 from taxing authorities were $68 million and $42 million at December 27, 2003, and December 28, 2002, respectively. Such amounts are recorded within prepaid expenses and other current assets in our Consolidated Balance Sheets. Income taxes receivable from related parties were $6 million and $3 million at December 27, 2003, and December 28, 2002, respectively. Such amounts are recorded within accounts payable and other current liabilities in our Consolidated Balance Sheets. Amounts paid to taxing authorities and related parties for income taxes were $115 million, $49 million and $101 million in 2003, 2002 and 2001, 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 ended 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 the U.S., Mexico, Canada, Spain, Russia, Greece, and Turkey.
NET REVENUES ---------------------------------------------- 2003 2002 2001 ---- ---- ---- U.S................................................................... $ 7,406 $7,572 $7,197 Mexico................................................................ 1,105 164 -- Other countries....................................................... 1,754 1,480 1,246 ------- ------ ------ $10,265 $9,216 $8,443 ======= ====== ======
LONG-LIVED ASSETS ------------------ 2003 2002 ---- ---- U.S................................................................... $5,723 $5,593 Mexico................................................................ 1,432 1,586 Other countries....................................................... 1,350 1,127 ------ ------ $8,505 $8,306 ====== ======
NOTE 14 -- RELATED PARTY TRANSACTIONS PepsiCo is considered a related party due to the nature of our franchisee relationship and its ownership interest in our company. 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" trademarks 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 in which we operate, including Canada, Spain, Russia, Greece, Turkey and Mexico, as well as a fountain syrup agreement for Canada, similar to the master syrup agreement; 55 (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 benefit administration, credit and collection, and 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. During 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. Additionally, we review our annual marketing, advertising, management and financial plans each year with PepsiCo for its approval. If we fail to submit these plans, or if we fail to carry them out in all material respects, PepsiCo can terminate our beverage agreements. If our beverage agreements with PepsiCo are terminated for this or for any other reason, it would have a material adverse effect on our business and financial results. 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 are mutually agreed-upon between us and PepsiCo and cover a variety of initiatives, including direct marketplace support, capital equipment funding and advertising support. Based on the objectives of the programs and initiatives, we record bottler incentives as an adjustment to net revenues, cost of sales or selling, delivery and administrative expenses. Beginning in 2003, due to the adoption of Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," we have changed our accounting methodology for the way we record bottler incentives. See Note 2 - Summary of Significant Accounting Policies for a discussion on the change in classification of these bottler incentives. Bottler incentives received from PepsiCo, including media costs shared by PepsiCo, were $646 million, $560 million and $554 million for 2003, 2002 and 2001, respectively. Changes in our bottler incentives and funding levels could materially affect our business and financial results. 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 $1,971 million, $1,699 million and $1,584 million in 2003, 2002 and 2001, respectively. We also produce or distribute other products and purchase finished goods and concentrate through various arrangements with PepsiCo or PepsiCo joint ventures. During 2003, 2002 and 2001, total amounts paid or payable to PepsiCo or PepsiCo joint ventures for these transactions were $556 million, $464 million and $375 million, respectively. We provide manufacturing services to PepsiCo and PepsiCo affiliates in connection with the production of certain finished beverage products. During 2003, 2002 and 2001, total amounts paid or payable by PepsiCo for these transactions were $6 million, $10 million and $32 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, $200 million and $185 million, in 2003, 2002 and 2001, 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 were $58 million. 56 We provide and receive various services from PepsiCo and PepsiCo affiliates pursuant to a shared services agreement and other arrangements, including information technology maintenance, procurement of raw materials, shared space, employee benefit administration, credit and collection, and international tax and accounting services. Total net expenses incurred were approximately $62 million, $57 million and $133 million during 2003, 2002 and 2001, 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 $51 million, $44 million and $27 million in 2003, 2002 and 2001, respectively. Under tax sharing arrangements we have with PepsiCo, we received $7 million, $3 million and $4 million in tax related benefits from PepsiCo in 2003, 2002 and 2001, respectively. The Consolidated Statements of Operations include the following income (expense) amounts as a result of transactions with PepsiCo and its affiliates:
2003 2002 2001 ---- ---- ---- Net revenues: Bottler incentives.................................................... $ 21 $ 257 $ 262 ======== ======== ======== Cost of sales: Purchases of concentrate and finished products, and Aquafina royalty fees......................................... $ (2,527) $ (2,163) $ (1,959) Bottler incentives.................................................... 527 -- -- Manufacturing and distribution service reimbursements................ 6 10 32 -------- -------- -------- $ (1,994) $ (2,153) $ (1,927) ======== ======== ======== Selling, delivery and administrative expenses: Bottler incentives.................................................... $ 98 $ 303 $ 292 Fountain service fee.................................................. 200 200 185 Frito-Lay purchases................................................... (51) (44) (27) Insurance fees........................................................ -- -- (58) Shared services....................................................... (62) (57) (133) -------- -------- -------- $ 185 $ 402 $ 259 ======== ======== ======== Income tax expense $ 7 $ 3 $ 4 ======== ======== ========
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 2002. In addition, we sold certain brands to PepsiCo from the net assets acquired for $16 million in 2002. As part of our acquisition of Gemex (see Note 16), PepsiCo received $297 million in 2002 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 in 2002, to facilitate the purchase and ensure a smooth ownership transition of Gemex. We paid PepsiCo $3 million, $10 million and $9 million during 2003, 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. Bottling Group, LLC will distribute pro rata to PepsiCo and PBG, based upon membership interest, sufficient cash such that aggregate cash distributed to us will enable us to pay our income taxes and interest on our $1 billion 7.0% senior notes due 2029. PepsiCo's pro rata cash distribution during 2003, 2002 and 2001 from Bottling Group, LLC was $7 million, $11 million and $16 million, respectively. The $1.3 billion of 5.63% senior notes and the $1.0 billion of 5.38% senior notes issued on February 9, 1999, by our subsidiary Bottling Group, LLC are guaranteed by PepsiCo. In addition, the $1.0 billion of 4.63% senior notes issued on November 15, 2002, also by Bottling Group, LLC, were guaranteed by PepsiCo starting in February 2004 in accordance with the terms set forth in the related indenture. Amounts payable to PepsiCo and its affiliates were $20 million and $26 million at December 27, 2003, and December 28, 2002, respectively. Such amounts are recorded within accounts 57 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 the managing directors of Bottling Group, LLC, our principal operating subsidiary, is an employee of PepsiCo. Effective March 2004, neither of the PepsiCo board members will serve on any of our board of director committees. NOTE 15 -- 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. 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 2003 we acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from three franchise bottlers. The following acquisitions occurred for an aggregate purchase price of $91 million in cash and assumption of liabilities of $13 million: - - Pepsi-Cola Buffalo Bottling Corp. of Buffalo, New York in February. - - Cassidy's Beverage Limited of New Brunswick, Canada in February. - - Olean Bottling Works, Inc. of Olean, New York in August. As a result of these acquisitions, we have assigned $7 million to goodwill, $76 million to franchise rights and $5 million to non-compete arrangements. The goodwill and franchise rights are not subject to amortization. The non-compete agreements are being amortized over five years. The allocations of the purchase price for these acquisitions are still preliminary and will be determined based on the estimated fair value of assets acquired and liabilities assumed as of the dates of acquisitions. The operating results of each of our acquisitions are included in the accompanying consolidated financial statements from its respective date of purchase. These 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. During 2003, we also paid $5 million for the purchase of certain franchise rights relating to SOBE and DR. PEPPER and paid $4 million for purchase obligations relating to acquisitions made in the prior year. 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 $388 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. For our 2002 acquisitions, we made additional purchase price allocations to goodwill and other intangible assets, net of approximately $136 million in 2003. The final allocations of the purchase prices were determined based on the fair value of assets acquired and liabilities assumed as of the date of acquisition. During 2003, the allocations of the purchase prices for these acquisitions were finalized. As a result of our final purchase price allocations to our 2002 acquisitions, the total amounts that we have assigned to goodwill and other intangibles, net in our Consolidated Balance Sheets were $302 million and $835 million, respectively. 58 The largest of our 2002 acquisitions was Gemex, where we acquired all of its outstanding capital stock. Our total cost for the purchase of Gemex was a net cash payment of $871 million and assumed debt of approximately $318 million. The following table summarizes the final allocation of fair values of the assets acquired and liabilities assumed in connection with our acquisition of Gemex, net of cash acquired:
GEMEX GEMEX PRELIMINARY PURCHASE FINAL USEFUL LIFE ALLOCATION ACCOUNTING ALLOCATION (YEARS) 2002 ADJUSTMENTS 2003 ------------ ----------- ----------- ----------- ASSETS Current assets........................................ $ 101 $ 4 $ 105 Fixed assets.......................................... 5-33 505 2 507 Intangible assets subject to amortization: Customer relationships and lists ................. 17-20 -- 46 46 Goodwill.............................................. 126 161 287 Indefinite lived intangible assets: Franchise rights.................................. Indefinite 808 (621) 187 Trademarks........................................ Indefinite -- 225 225 Distribution rights............................... Indefinite -- 311 311 Other identified intangibles...................... Indefinite -- 10 10 Other assets.......................................... 15 (9) 6 ----------- ----------- ----------- TOTAL ASSETS............................. $ 1,555 $ 129 $ 1,684 ----------- ----------- ----------- LIABILITIES Accounts payable and other current liabilities........ 141 24 165 Short-term borrowings................................. 5 -- 5 Long-term debt........................................ 300 13 313 Deferred income taxes................................. 137 92 229 Other liabilities..................................... 101 -- 101 ----------- ----------- ----------- TOTAL LIABILITIES........................ $ 684 $ 129 $ 813 ----------- ----------- ----------- NET ASSETS ACQUIRED..................................... $ 871 $ -- $ 871 =========== =========== ===========
As noted in the table above, we have adjusted the preliminary allocation of goodwill relating to Gemex by $161 million in 2003. These adjustments resulted primarily from revised estimates of the fair value of our intangible assets of $29 million and the recognition of deferred tax liabilities of $92 million. In addition, we have adjusted the preliminary allocation of goodwill of Gemex for pre-acquisition contingencies of $17 million and severance and other facility closing costs of $23 million. These adjustments were made in accordance with our previously established acquisition plans. 59 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 2002 and 2001.
2002 2001 ---- ---- Net revenues........................................... $10,297 $9,617 Income before income taxes............................. $ 676 $ 466 Net income............................................. $ 446 $ 322 Earnings per share Basic................................................ $ 1.58 $ 1.13 Diluted.............................................. $ 1.52 $ 1.09
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS The balances related to each component of accumulated other comprehensive loss were as follows:
2003 2002 2001 ---- ---- ---- Currency translation adjustment................................... $ (195) $ (285) $ (303) Cash flow hedge adjustment (a).................................... 13 (5) (12) Minimum pension liability adjustment (b).......................... (198) (178) (55) ------ ------ ------ Accumulated other comprehensive loss.............................. $ (380) $ (468) $ (370) ====== ====== ======
(a) Net of minority interest and taxes of $(9) million in 2003, $4 million in 2002 and $8 million in 2001. (b) Net of minority interest and taxes of $148 million in 2003, $134 million in 2002 and $41 million in 2001. NOTE 18 -- COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(shares in thousands) 2003 2002 2001 -------- -------- -------- Number of shares on which basic earnings per share are based: Weighted-average outstanding during period......................... 269,933 281,674 286,024 Add - Incremental shares under stock compensation plans............................................... 6,986 11,116 9,655 -------- -------- -------- Number of shares on which diluted earnings per share are based...................................... 276,919 292,790 295,679 Basic and diluted net income applicable to common shareholders............................................... $ 416 $ 428 $ 305 Basic earnings per share............................................. $ 1.54 $ 1.52 $ 1.07 Diluted earnings per share........................................... $ 1.50 $ 1.46 $ 1.03
Diluted earnings per share reflect the potential dilution that could occur if the stock options or other equity awards from our stock compensation plans were exercised and converted into common stock that would then participate in net income. Shares outstanding reflect the effect of our share repurchase program, which began in October 1999. The amount of shares authorized by the Board of Directors to be repurchased totals 75 million shares, of which we have repurchased approximately 63 million shares and have reissued approximately 14 million shares for stock option exercises since the inception of our share repurchase program. NOTE 19 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH 2003 QUARTER QUARTER QUARTER QUARTER FULL-YEAR ------- ------- ------- ------- --------- Net revenues............................. $ 1,874 $ 2,532 $ 2,810 $ 3,049 $ 10,265 Gross profit............................. 947 1,242 1,372 1,489 5,050 Operating income......................... 120 271 358 207 956 Net income............................... 33 131 183 69 416
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
60 MANAGEMENT RESPONSIBILITY AND CORPORATE GOVERNANCE To Our Shareholders: The culture of The Pepsi Bottling Group was founded on the principles of clarity and transparency, beginning with the simplicity of our mission statement, "We Sell Soda." We take pride in communicating our objectives and our results in a clear and straightforward manner. Our corporate controls and governance policies are designed to ensure the accuracy and integrity of our data. We also emphasize the role everyone in our organization has in understanding our principles and upholding them. We maintain a system of internal controls over financial reporting designed to provide reasonable assurance regarding financial statement reliability, operating efficiency and effectiveness, as well as compliance with applicable laws and regulations. Our internal controls over financial reporting consist of company policies and procedures that are designed to achieve these objectives. To ensure the quality of our disclosures, we also maintain a system of disclosure controls. We enlist the involvement of our Disclosure Committee in the review process of our periodic SEC filings and other investor communications. The Disclosure Committee is composed of senior executives from a number of functions who are knowledgeable about our business and our financial reporting. Our internal audit function monitors the design and effectiveness of our internal control and disclosure control procedures. A majority of the members of our Board of Directors are independent. Our Audit Committee of the Board of Directors is composed solely of independent, financially literate directors, with one member of the Audit Committee qualified and designated to serve as a financial expert. The Audit Committee assists the Board in its oversight of 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 unlimited and open access to the Audit Committee. The consolidated financial statements in this report have been audited and reported on by our independent auditors, KPMG LLP, who are engaged and evaluated by, and report directly to our Audit Committee. KPMG LLP is given free access to all financial records and related data, including the minutes of the meetings of the Board of Directors and its committees. Their report for 2003 can be found on page 62. While our management team is responsible for the integrity of the information in this report, all PBG employees at every level are required to adhere to high standards of personal and professional integrity. PBG carefully selects and trains qualified employees, who are provided written policies and procedures including PBG's Code of Conduct. The Code of Conduct was adopted by our Board of Directors and explains the principles that define our Company. We have provided our Code of Conduct, which has been translated into several languages, to every one of our employees, directors and officers and we hold them personally accountable for compliance with its principles. PBG's Business Ethics Line provides a confidential way for PBG employees to raise issues or concerns to our Board of Directors without retribution. The Business Ethics Line is monitored by an independent third party, and is available to employees at all locations worldwide. In addition, we have established a process for shareholders to communicate directly with PBG's non-management directors regarding their concerns, including the integrity of our financial reporting process. We are responsible for the integrity and objectivity of the financial data and information contained in this report, which we have prepared in accordance with accounting principles generally accepted in the United States of America. We believe our controls as of December 27, 2003 provide reasonable assurance that our consolidated financial statements are reliable and our assets are safeguarded and we remain committed to providing accurate and clear information about PBG to our shareholders. John T. Cahill Alfred H. Drewes Andrea L. Forster Chairman of the Board Senior Vice President and Vice President and and Chief Executive Officer Chief Financial Officer Controller 61 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. and subsidiaries as of December 27, 2003 and December 28, 2002, 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 27, 2003. 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. and subsidiaries as of December 27, 2003 and December 28, 2002, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 27, 2003, 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 and Emerging Issues Task Force Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," as of December 29, 2002. /s/ KPMG LLP New York, New York January 27, 2004 62 SELECTED FINANCIAL AND OPERATING DATA
in millions, except per share data 2003 2002 2001 2000(1) 1999 -------- -------- -------- -------- -------- FISCAL YEARS ENDED STATEMENT OF OPERATIONS DATA: Net revenues ................................................ $10,265 $ 9,216 $ 8,443 $ 7,982 $ 7,505 Cost of sales ............................................... 5,215 5,001 4,580 4,405 4,296 -------- -------- -------- -------- -------- Gross profit ................................................ 5,050 4,215 3,863 3,577 3,209 Selling, delivery and administrative expenses ............... 4,094 3,317 3,187 2,987 2,813 Unusual impairment and other charges and credits (2) ........ -- -- -- -- (16) -------- -------- -------- -------- -------- Operating income ............................................ 956 898 676 590 412 Interest expense, net ....................................... 239 191 194 192 202 Other non-operating expenses, net ........................... 7 7 -- 1 1 Minority interest ........................................... 50 51 41 33 21 -------- -------- -------- -------- -------- Income before income taxes .................................. 660 649 441 364 188 Income tax expense (3)(4) ................................... 238 221 136 135 70 -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle ................................................. 422 428 305 229 118 Cumulative effect of change in accounting principle, net of tax and minority interest ................................ 6 -- -- -- -- -------- -------- -------- -------- -------- Net income .................................................. $ 416 $ 428 $ 305 $ 229 $ 118 ======== ======== ======== ======== ======== PER SHARE DATA: (5) Basic earnings per share .................................... $ 1.54 $ 1.52 $ 1.07 $ 0.78 $ 0.46 Diluted earnings per share .................................. $ 1.50 $ 1.46 $ 1.03 $ 0.77 $ 0.46 Cash dividend per share ..................................... $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.03 Weighted-average basic shares outstanding ................... 270 282 286 294 257 Weighted-average diluted shares outstanding ................. 277 293 296 299 257 OTHER FINANCIAL DATA: Cash provided by operations ................................. $ 1,084 $ 1,014 $ 882 $ 779 $ 699 Capital expenditures ........................................ $ (644) $ (623) $ (593) $ (515) $ (560) BALANCE SHEET DATA (AT PERIOD END): Total assets ................................................ $ 11,544 $ 10,043 $ 7,857 $ 7,736 $ 7,624 Long-term debt .............................................. $ 4,493 $ 4,539 $ 3,285 $ 3,271 $ 3,268 Minority interest ........................................... $ 396 $ 348 $ 319 $ 306 $ 278 Accumulated other comprehensive loss ........................ $ (380) $ (468) $ (370) $ (254) $ (223) Total shareholders' equity .................................. $ 1,881 $ 1,824 $ 1,601 $ 1,646 $ 1,563
(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 comprise 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. (3) Fiscal year 2001 includes Canada tax law change benefits of $25 million. (4) Fiscal year 2003 includes Canada tax law change expense of $11 million. (5) Reflects the 2001 two-for-one stock split. 63 EX-21 5 y94856exv21.txt SUBSIDIARIES . . . Exhibit 21 Subsidiaries of The Pepsi Bottling Group, Inc As of December 27, 2003
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, Inc. South Carolina 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 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 Pepsi Bottling Group GmbH Germany Pepsi-Cola Bottling Beteiligungsges GmbH Germany 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 GB Russia LLC (St. Petersburg) Russia PepsiCo Holdings OOO (Russia) Russia Pepsi-Cola Soft Drink Factory of Sochi Russia Pepsi International Bottlers (Ekaterinburg) LLC Russia Pepsi International Bottlers (Samara) LLC Russia Abechuko Inversiones, S.L. Spain Alikate Inversiones, S.L. Spain Bottling Group Espana, 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 Commercial SECOR, S.L. Spain PepsiCo Ventas Andalucia, S.A. Spain 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 Sanayii, A.S. Turkey Mekta Ticaret, A.S. Turkey PepsiCo Middle East Investments The Netherlands Pepsi-Cola Servis Dagitim, A.S. Turkey The Pepsi Bottling Group Mexico S.R.L. Mexico Gemex Holdings LLC Delaware Embotelledores Internacionales de Mexico S.R.L Mexico Duingras 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 Finvemex, 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 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 Marketing para Embotelladoras, 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
EX-23 6 y94856exv23.txt REPORT AND CONSENT OF KPMG LLP EXHIBIT 23 INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors The Pepsi Bottling Group, Inc.: The audits referred to in our report dated January 27, 2004, included the related financial statement schedule as of December 27, 2003, and for each of the fiscal years in the three-year period ended December 27, 2003, included 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 incorporation 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. of our report (incorporated by reference in the December 27, 2003, annual report on Form 10-K of The Pepsi Bottling Group, Inc.) dated January 27, 2004 with respect to the consolidated balance sheets of The Pepsi Bottling Group, Inc. as of December 27, 2003 and December 28, 2002, 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 27, 2003 and of our report on the related financial statement schedule dated March 10, 2004 (which report appears above). Our report on the consolidated financial statements refers to the adoption of FASB 142, "Goodwill and Other Intangible Assets," as of December 30, 2001 and Emerging Issues Task Force Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor," as of December 29, 2002. /s/ KPMG LLP New York, New York March 10, 2004 EX-24 7 y94856exv24.txt COPY OF THE POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY Know all by these presents, that the undersigned hereby constitutes and appoints each of Pamela C. McGuire and Steven M. Rapp, signing singly, the undersigned's true and lawful attorney-in-fact to execute and file on behalf of the undersigned in the undersigned's capacity as a Director and /or Executive Officer of The Pepsi Bottling Group, Inc. ("PBG") all necessary and/or required applications, reports, registrations, information, documents and instruments filed or required to be filed by PBG with the Securities and Exchange Commission ("SEC"), any stock exchanges or any governmental official or agency, including without limitation: 1) execute and file any amendment or supplement to PBG's Annual Report on Form 10-K for the year ended December 27, 2003, 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 17, 2004. 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 Chief January 14, 2004 - --------------------------- Executive Officer John T. Cahill /s/ Alfred H. Drewes Senior Vice President and Chief January 14, 2004 - --------------------------- Financial Officer Alfred H. Drewes (Principal Financial Officer) /s/ Andrea L. Forster Vice President and Controller - --------------------------- (Principal Accounting Officer) March 2, 2004 Andrea L. Forster /s/ Linda G. Alvarado Director December 17, 2003 - --------------------------- Linda G. Alvarado /s/ Barry H. Beracha Director January 6, 2004 - --------------------------- Barry H. Beracha /s/ Ira D. Hall Director December 19, 2003 - --------------------------- Ira D. Hall /s/ Thomas H. Kean Director December 12, 2003 - --------------------------- Thomas H. Kean
/s/ Susan D. Kronick Director December 15, 2003 - --------------------------- Susan D. Kronick /s/ Blythe J. McGarvie Director December 19, 2003 - --------------------------- Blythe J. McGarvie /s/ Margaret D. Moore Director December 18, 2003 - --------------------------- Margaret D. Moore /s/ Clay G. Small Director December 17, 2003 - --------------------------- Clay G. Small /s/ Craig E. Weatherup Director December 31, 2003 - --------------------------- Craig E. Weatherup
EX-31.1 8 y94856exv31w1.txt CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2004 /s/ John T. Cahill ------------------ ----------------------- John T. Cahill Chief Executive Officer EX-31.2 9 y94856exv31w2.txt CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and c) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2004 /s/ Alfred H. Drewes -------------------- -------------------------- Alfred H. Drewes Senior Vice President and Chief Financial Officer EX-32.1 10 y94856exv32w1.txt CERTIFICATION OF CEO EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of The Pepsi Bottling Group, Inc. (the "Company") certifies to his knowledge that: (1) The Annual Report on Form 10-K of the Company for the year ended December 27, 2003 (the "Form 10-K") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Act"); and (2) The information contained in the Form 10-K fairly presents, in all material respects, the financial conditions and results of operations of the Company as of the dates and for the periods referred to in the Form 10-K. /s/ John T. Cahill ------------------------ John T. Cahill Chief Executive Officer March 10, 2004 The foregoing certification (the "Certification") is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). A signed original of the Certification has been provided to the Company and will be retained by the Company in accordance with Rule 12b-11(d) of the Act and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 11 y94856exv32w2.txt CERTIFICATION OF CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of The Pepsi Bottling Group, Inc. (the "Company") certifies to his knowledge that: (1) The Annual Report on Form 10-K of the Company for the year ended December 27, 2003 (the "Form 10-K") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Act"); and (2) The information contained in the Form 10-K fairly presents, in all material respects, the financial conditions and results of operations of the Company as of the dates and for the periods referred to in the Form 10-K. /s/ Alfred H. Drewes -------------------------- Alfred H. Drewes Senior Vice President and Chief Financial Officer March 10, 2004 The foregoing certification (the "Certification") is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). A signed original of the Certification has been provided to the Company and will be retained by the Company in accordance with Rule 12b-11(d) of the Act and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----