UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended June 14, 2003
------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to_____________
Commission file number 1-14893
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THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4038356
--------------------- ----------
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
------------------------------- --------
(Address of principal executive offices) (Zip Code)
914-767-6000
------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report.)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Number of shares of Common Stock outstanding as of July 12, 2003:
267,880,300
The Pepsi Bottling Group, Inc.
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Index
Page No.
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 and 24-weeks ended June 14, 2003 and June 15, 2002 2
Condensed Consolidated Statements of Cash Flows -
24-weeks ended June 14, 2003 and June 15, 2002 3
Condensed Consolidated Balance Sheets -
June 14, 2003 and December 28, 2002 4
Notes to Condensed Consolidated Financial Statements 5-11
Independent Accountants' Review Report 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22-23
PART I - FINANCIAL INFORMATION
Item 1.
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Operations
in millions, except per share amounts, unaudited
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, June 15, June 14, June 15,
2003 2002 2003 2002
---- ---- ---- ----
Net revenues.................................................................... $2,532 $2,209 $4,406 $3,981
Cost of sales................................................................... 1,290 1,185 2,217 2,127
------ ------ ------ ------
Gross profit.................................................................... 1,242 1,024 2,189 1,854
Selling, delivery and administrative expenses................................... 971 753 1,798 1,448
------ ------ ------ ------
Operating income................................................................ 271 271 391 406
Interest expense, net........................................................... 57 46 110 91
Other non-operating expenses, net............................................... - - 3 -
Minority interest............................................................... 15 16 20 24
------ ------- ------ ------
Income before income taxes...................................................... 199 209 258 291
Income tax expense.............................................................. 68 70 88 98
------ ------ ------ ------
Income before cumulative effect of change in accounting principle............... 131 139 170 193
Cumulative effect of change in accounting principle, net of
tax and minority interest....................................................... - - 6 -
------ ------ ------ ------
Net income...................................................................... $ 131 $ 139 $ 164 $ 193
====== ====== ====== ======
Basic earnings per share before cumulative effect of change
in accounting principle......................................................... $ 0.48 $ 0.49 $ 0.61 $ 0.68
Cumulative effect of change in accounting principle............................. - - (0.02) -
------ ------ ------ ------
Basic earnings per share........................................................ $ 0.48 $ 0.49 $ 0.59 $ 0.68
====== ====== ====== ======
Weighted-average shares outstanding............................................. 273 283 276 282
Diluted earnings per share before cumulative effect of change
in accounting principle......................................................... $ 0.47 $ 0.47 $ 0.60 $ 0.66
Cumulative effect of change in accounting principle............................. - - (0.02) -
------ ------ ------ ------
Diluted earnings per share...................................................... $ 0.47 $ 0.47 $ 0.58 $ 0.66
====== ====== ====== ======
Weighted-average shares outstanding............................................. 279 296 283 294
See accompanying notes to Condensed Consolidated Financial Statements.
2
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
24-weeks Ended
--------------
June 14, June 15,
2003 2002
---- ----
Cash Flows - Operations
Net income.................................................................... $ 164 $ 193
Adjustments to reconcile net income to net cash provided by operations:
Depreciation................................................................ 244 189
Amortization................................................................ 4 3
Deferred income taxes....................................................... 34 36
Cumulative effect of change in accounting principle......................... 6 -
Other non-cash charges and credits, net..................................... 142 113
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net.................................................. (256) (235)
Inventories, net.......................................................... (68) (58)
Prepaid expenses and other current assets................................. (18) (1)
Accounts payable and other current liabilities............................ (21) 56
----- -----
Net change in operating working capital .................................... (363) (238)
----- -----
Other, net................................................................ (16) (18)
----- -----
Net Cash Provided by Operations................................................. 215 278
----- -----
Cash Flows - Investments
Capital expenditures.......................................................... (282) (299)
Acquisitions of bottlers...................................................... (83) (30)
Sale of property, plant and equipment......................................... 2 7
----- -----
Net Cash Used for Investments................................................... (363) (322)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less.................................. 84 (80)
Proceeds from issuance of long-term debt...................................... 248 37
Payments of long-term debt.................................................... (3) (1)
Dividends paid................................................................ (6) (6)
Proceeds from exercise of stock options....................................... 21 70
Purchases of treasury stock................................................... (228) (53)
----- -----
Net Cash Provided by (Used for) Financing....................................... 116 (33)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................... 3 2
----- -----
Net Decrease in Cash and Cash Equivalents....................................... (29) (75)
Cash and Cash Equivalents - Beginning of Period................................. 222 277
----- -----
Cash and Cash Equivalents - End of Period....................................... $ 193 $ 202
===== =====
Supplemental Cash Flow Information
Net third-party interest paid................................................... $ 120 $ 97
===== =====
Income taxes paid............................................................... $ 39 $ 25
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
3
The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
(Unaudited)
June 14, December 28,
2003 2002
------ ------
Assets
Current Assets
Cash and cash equivalents..................................................... $ 193 $ 222
Accounts receivable, less allowance of $74 at
June 14, 2003 and $67 at December 28, 2002.............................. 1,216 922
Inventories................................................................... 452 378
Prepaid expenses and other current assets..................................... 261 203
Investment in debt defeasance trust........................................... 174 12
------- -------
Total Current Assets.................................................. 2,296 1,737
Property, plant and equipment, net.............................................. 3,411 3,308
Other intangible assets, net.................................................... 3,647 3,495
Goodwill........................................................................ 1,241 1,192
Investment in debt defeasance trust............................................. - 170
Other assets.................................................................... 155 141
------- -------
Total Assets......................................................... $10,750 $10,043
======= =======
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities................................ $ 1,275 $ 1,179
Short-term borrowings......................................................... 145 51
Current maturities of long-term debt.......................................... 1,189 18
------- -------
Total Current Liabilities............................................. 2,609 1,248
Long-term debt.................................................................. 3,630 4,539
Other liabilities............................................................... 873 819
Deferred income taxes........................................................... 1,326 1,265
Minority interest............................................................... 379 348
------- -------
Total Liabilities..................................................... 8,817 8,219
Shareholders' Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares................................. 3 3
Additional paid-in capital................................................... 1,750 1,750
Retained earnings............................................................ 1,224 1,066
Accumulated other comprehensive loss......................................... (318) (468)
Deferred compensation........................................................ (5) -
Treasury stock: 39 shares and 30 shares at June 14, 2003 and December 28,
2002, respectively........................................................ (721) (527)
------- -------
Total Shareholders' Equity............................................ 1,933 1,824
------- -------
Total Liabilities and Shareholders' Equity........................... $10,750 $10,043
======= =======
See accompanying notes to Condensed Consolidated Financial Statements.
4
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions
- --------------------------------------------------------------------------------
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. References to PBG throughout these Condensed
Consolidated Financial Statements are made using the first-person notations of
"we," "our" and "us."
As of June 14, 2003, PepsiCo Inc.'s ("PepsiCo") ownership consisted of
39.1% of our outstanding common stock and 100% of our outstanding Class B common
stock, together representing 44.2% of the voting power of all classes of our
voting stock. PepsiCo also owns approximately 6.8% of the equity of Bottling
Group, LLC, our principal operating subsidiary.
The accompanying Condensed Consolidated Balance Sheet at June 14, 2003, the
Condensed Consolidated Statements of Operations for the 12 and 24- weeks ended
June 14, 2003 and June 15, 2002 and the Condensed Consolidated Statements of
Cash Flows for the 24-weeks ended June 14, 2003 and June 15, 2002 have not been
audited, but have been prepared in conformity with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. These
Condensed Consolidated Financial Statements should be read in conjunction with
the audited consolidated financial statements for the fiscal year ended December
28, 2002 as presented in our Annual Report on Form 10-K. In the opinion of
management, this interim information includes all material adjustments, which
are of a normal and recurring nature, necessary for a fair presentation.
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.
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. 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
Certain reclassifications were made in our Condensed Consolidated Financial
Statements to 2002 amounts to conform to the 2003 presentation.
Note 2 - Seasonality of Business
The results for the second quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not
significantly impacted by business seasonality.
5
Note 3 - Inventories
June 14, December 28,
2003 2002
----- -----
Raw materials and supplies............................................. $ 170 $ 162
Finished goods......................................................... 282 216
------ ------
$ 452 $ 378
====== ======
Note 4 - Property, plant and equipment, net
June 14, December 28,
2003 2002
----- ------
Land................................................................... $ 243 $ 228
Buildings and improvements............................................. 1,157 1,126
Manufacturing and distribution equipment............................... 2,910 2,768
Marketing equipment.................................................... 2,113 2,008
Other.................................................................. 163 154
------ ------
6,586 6,284
Accumulated depreciation............................................... (3,175) (2,976)
------ ------
$3,411 $3,308
====== ======
Note 5 - Other intangible assets, net and Goodwill
June 14, December 28,
2003 2002
----- -----
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights.................................................. $ 22 $ 20
Other identifiable intangibles.................................... 25 24
------ ------
47 44
------ ------
Accumulated amortization:
Franchise rights.................................................. (8) (6)
Other identifiable intangibles.................................... (12) (9)
------ ------
(20) (15)
------ ------
Intangibles subject to amortization, net............................... 27 29
------ ------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights.................................................. 3,578 3,424
Other identifiable intangibles.................................... 42 42
------ ------
Intangibles not subject to amortization................................ 3,620 3,466
------ ------
Total other intangible assets, net..................................... $3,647 $3,495
====== ======
Goodwill............................................................... $1,241 $1,192
====== ======
Total other intangible assets, net and goodwill increased by approximately
$201 million due to purchase price allocations relating to our recent
acquisitions of $106 million, coupled with the impact from foreign currency
translation of $99 million, offset by amortization of intangible assets of $4
million.
For intangible assets subject to amortization, we calculate amortization
expense on a straight-line basis over the period we expect to receive economic
benefit. Total amortization expense was $4 million and $3 million for the
24-weeks ended June 14, 2003 and June 15, 2002, 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:
6
Weighted-Average Estimated Aggregate Amortization Expense to be Incurred
---------------- -------------------------------------------------------
Amortization
------------
Period
------
Balance of Fiscal Year Ending
---------- -----------------------------------------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Franchise rights.................... 5 years $2 $4 $4 $2 $1
Other identifiable intangibles....... 7 years $2 $4 $3 $2 $1
Note 6 - Acquisitions
During 2003 we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from two PepsiCo franchise bottlers.
The following acquisitions occurred for an aggregate purchase price of $77
million in cash and liabilities of $12 million:
o Pepsi-Cola Buffalo Bottling Corp. of Buffalo, New York in February 2003.
o Cassidy's Beverage Limited of New Brunswick, Canada in February 2003.
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.
As a result of these acquisitions, we have assigned $80 million of the
purchase price to intangible assets, of which $10 million was assigned to
goodwill and $70 million to franchise rights. The goodwill and franchise rights
are not subject to amortization. The allocations of the purchase price for these
acquisitions are still preliminary and will be determined based on the fair
value of assets acquired and liabilities assumed as of the dates of acquisition.
In addition, we made purchase price allocations of approximately $26
million during the first half of 2003, primarily relating to Pepsi-Gemex, S.A.
de. C.V. of Mexico. The allocations of the purchase price of the prior year
acquisitions are still preliminary, pending final valuations on certain assets.
The final allocations of the purchase price will be determined based on the fair
value of assets acquired and liabilities assumed as of the dates of
acquisitions.
During 2003, we paid approximately $3 million to PepsiCo for distribution
rights relating to the SoBe brand in certain PBG-owned territories in the United
States, which are being amortized over their estimated useful life of five
years. In addition, we paid $3 million for purchase obligations relating to
acquisitions made in the prior year.
Note 7 - Treasury Stock
In the first 24-weeks of 2003 and 2002, we repurchased approximately 10.9
million shares for $228 million and approximately 2.1 million shares for $53
million, respectively. During the second quarter, we completed our original
share repurchase program of 50 million shares of common stock. PBG's Board of
Directors announced a new share repurchase program at the Company's Annual
Meeting in May 2003, under which 25 million additional shares of common stock
may be repurchased. Approximately 1.3 million shares have been repurchased to
date under the new program.
7
Note 8 - Geographic Data
We operate in one industry, carbonated soft drinks and other ready-to-drink
beverages. We conduct business in all or a portion of the United States, Mexico,
Canada, Spain, Russia, Greece and Turkey.
Net Revenues 12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, June 15, June 14, June 15,
2003 2002 2003 2002
---- ---- ---- ----
U.S.......................................................... $1,797 $1,865 $3,293 $3,445
Mexico....................................................... 308 - 465 -
Other countries.............................................. 427 344 648 536
------ ------ ------ ------
$2,532 $2,209 $4,406 $3,981
====== ====== ====== ======
Long-Lived Assets June 14, December 28,
2003 2002
---- ----
U.S.......................................................... $5,683 $5,593
Mexico....................................................... 1,452 1,586
Other countries.............................................. 1,319 1,127
------ ------
$8,454 $8,306
====== ======
Note 9 - Stock-Based Compensation
During 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123," which provides alternative methods of accounting for
stock-based compensation. We measure stock-based compensation expense using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations. Accordingly, compensation expense for stock option grants to
our employees is measured as the excess of the quoted market price of common
stock at the grant date over the amount the employee must pay for the stock. Our
policy is to grant stock options at fair value on the date of grant. As allowed
by SFAS No. 148, 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. If 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:
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, June 15, June 14, June 15,
2003 2002 2003 2002
---- ---- ---- ----
Net income:
As reported..................................................... $ 131 $ 139 $ 164 $ 193
Add: Total stock-based employee compensation expense
included in reported net income, net of taxes and
minority interest..................................... 1 - 2 -
Less: Total stock-based employee compensation expense
determined under fair value based method for
all awards, net of taxes and minority interest........ (10) (9) (20) (22)
----- ----- ----- -----
Pro forma....................................................... $ 122 $ 130 $ 146 $ 171
===== ===== ===== =====
Earnings per share:
Basic - as reported.......................................... $0.48 $0.49 $0.59 $0.68
Basic - pro forma............................................ 0.44 0.46 0.53 0.61
Diluted - as reported........................................ $0.47 $0.47 $0.58 $0.66
Diluted - pro forma.......................................... 0.44 0.44 0.52 0.58
8
Pro forma compensation cost measured for stock options granted to employees
is amortized using a straight-line basis over the vesting period, which is
typically three years.
In the first quarter of 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 of approximately $6 million was recorded as a reduction to
shareholders' equity, and such amount will be adjusted quarterly and amortized
on a straight-line basis over the vesting periods. As of June 14, 2003, the
deferred compensation balance remaining to be amortized is approximately $5
million.
Note 10 - New Accounting Standards
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 considerations given by a
vendor to a customer. The consensus requires that certain cash considerations
received by a customer from a vendor are presumed to be a reduction of the price
of the vendor's products, and therefore should be characterized as a reduction
of cost of sales when recognized in the customer's income statement, unless
certain criteria are met. EITF Issue No. 02-16 became effective beginning in our
fiscal year 2003. In the prior year 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. 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, in the first
quarter of 2003. 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 in the second quarter and first 24-weeks of 2003
and is not expected to have a material effect on such amounts for the balance of
fiscal 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 12 and 24-weeks ended June 15, 2002:
12-weeks Ended June 15, 2002
----------------------------
As EITF 02-16 Pro Forma
-- ---------- ---------
Reported Adjustment Results
-------- ---------- -------
Net revenues................................................ $2,209 $ (71) $2,138
Cost of sales............................................... 1,185 (119) 1,066
Selling, delivery and administrative expenses............... 753 49 802
------ ----- ------
Operating income............................................ $ 271 $ (1) $ 270
====== ===== ======
24-weeks Ended June 15, 2002
----------------------------
As EITF 02-16 Pro Forma
-- ---------- ---------
Reported Adjustment Results
-------- ---------- -------
Net revenues................................................ $3,981 $ (130) $3,851
Cost of sales............................................... 2,127 (214) 1,913
Selling, delivery and administrative expenses............... 1,448 86 1,534
------ ------ ------
Operating income............................................ $ 406 $ (2) $ 404
====== ====== ======
9
Assuming EITF Issue No. 02-16 had been adopted for all periods presented,
pro forma net income and earnings per share for the 12 and 24-weeks ended June
14, 2003 and June 15, 2002, would have been as follows:
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, June 15, June 14, June 15,
2003 2002 2003 2002
---- ---- ---- ----
Net income:
As reported.................................... $ 131 $ 139 $ 164 $ 193
Pro forma...................................... 131 138 170 192
Earnings per share:
Basic - as reported............................ $0.48 $0.49 $0.59 $0.68
Basic - pro forma.............................. 0.48 0.49 0.61 0.68
Diluted - as reported.......................... $0.47 $0.47 $0.58 $0.66
Diluted - pro forma............................ 0.47 0.47 0.60 0.65
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, and will not have a material impact on our Condensed Consolidated
Financial Statements.
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. We do not anticipate that
the adoption of SFAS No. 146 will have a material impact on our Condensed
Consolidated Financial Statements.
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. We
do not anticipate that the adoption of FIN 45 will have a material impact on our
Condensed Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," 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.
We do not anticipate that the adoption of FIN 46 will have a material impact on
our Condensed Consolidated Financial Statements.
10
Note 11 - Short-term Borrowings and Long-term Debt
We intend to refinance all or a portion of our $1 billion of 5 3/8% senior
notes upon their maturity in February 2004.
During the quarter, we issued $250 million of Series B Senior Notes with a
coupon rate of 4 1/8%, which has a yield of 4.4%, maturing on June 15, 2015.
These notes are general unsecured obligations and rank on an equal basis with
all of our other existing and future senior unsecured indebtedness and rank
senior to all of our existing and future subordinated indebtedness. These senior
notes have redemption features and covenants similar to our other senior notes.
PBG has a $500 million commercial paper program that is supported by two
$250 million credit facilities, which are guaranteed by Bottling Group, LLC.
During the quarter, PBG renegotiated the credit facilities. One of the credit
facilities expires in April 2004 and the other credit facility expires in April
2008.
Note 12 - Comprehensive Income
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, June 15, June 14, June 15,
2003 2002 2003 2002
---- ---- ---- ----
Net income.................................................... $131 $139 $164 $193
Currency translation adjustment............................... 166 25 142 27
Cash flow hedge adjustment (a) (b)............................ - 9 7 16
---- ---- ---- ----
Comprehensive income.......................................... $297 $173 $313 $236
==== ==== ==== ====
(a) Net of minority interest and taxes of $0 and $6 for the
12-weeks ended June 14, 2003 and June 15, 2002, respectively.
(b) Net of minority interest and taxes of $6 and $11 for the
24-weeks ended June 14, 2003 and June 15, 2002, respectively.
Note 13 - Contingencies
We are subject to various claims and contingencies related to lawsuits,
taxes and 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 expected
to have a material adverse effect on our results of operations, financial
condition or liquidity.
11
Independent Accountants' Review Report
--------------------------------------
The Board of Directors and Shareholders
The Pepsi Bottling Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
Pepsi Bottling Group, Inc. as of June 14, 2003, and the related condensed
consolidated statements of operations for the twelve and twenty-four weeks ended
June 14, 2003 and June 15, 2002 and the condensed consolidated statements of
cash flows for the twenty-four weeks ended June 14, 2003 and June 15, 2002.
These condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of The
Pepsi Bottling Group, Inc. as of December 28, 2002, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the fifty-two week period then ended not presented herein; and in our report
dated January 28, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 28, 2002,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
July 8, 2003
12
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
- --------
The Pepsi Bottling Group, Inc. (collectively referred to as "PBG," "we,"
"our" and "us") is the world's largest manufacturer, seller and distributor of
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. In the second quarter of 2003,
approximately 71% of our net revenues were generated in the United States, 12%
of our net revenues were generated in Mexico and the remaining 17% were
generated outside the United States and Mexico. For the first 24-weeks of 2003,
approximately 75% of our net revenues were generated in the United States, 10%
of our net revenues were generated in Mexico and the remaining 15% were
generated outside the United States and Mexico.
ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY
- ----------------------------------------------------
Gemex Acquisition
- -----------------
In November 2002, we acquired all of the outstanding capital stock of
Pepsi-Gemex, S.A. de. C.V. of Mexico ("Gemex"). Our total acquisition cost
consisted of a net cash payment of $871 million and assumed debt of
approximately $305 million. The Gemex acquisition was made to allow us to
increase our markets outside the United States. Gemex was the largest Pepsi-Cola
bottler in Mexico and the largest bottler outside the United States of
Pepsi-Cola soft drink products based on sales volume. Gemex produced, sold and
distributed a variety of soft drink products under the PEPSI-COLA, PEPSI LIGHT,
PEPSI MAX, MIRINDA, 7 UP, DIET 7 UP, KAS, MOUNTAIN DEW, POWER PUNCH and
MANZANITA SOL trademarks, under exclusive franchise and bottling arrangements
with PepsiCo and certain affiliates of PepsiCo. Gemex also had rights to
produce, sell and distribute in Mexico soft drink products of other companies
and it produced, sold and distributed purified and mineral water in Mexico under
the trademarks ELECTROPURA and GARCI CRESPO, respectively. As a result of the
acquisition of Gemex, we own the ELECTROPURA and GARCI CRESPO brands.
New Accounting Standards
- ------------------------
See Note 10 - New Accounting Standards, in our Notes to Condensed
Consolidated Financial Statements, for a detailed discussion of new accounting
standards that were adopted in 2003.
RESULTS OF OPERATIONS
- ----------------------
Volume
Worldwide
----------
Volume Drivers
--------------
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, 2003 vs. June 14, 2003 vs.
----------------- ----------------
June 15, 2002 June 15, 2002
------------ -------------
Acquisitions............................ 29 % 25 %
Base business........................... (1)% (2)%
---- ----
Total Worldwide Change.............. 28 % 23 %
Our reported worldwide physical case volume increased 28% and 23%,
respectively, in the second quarter and first 24-weeks of 2003, when compared
with similar periods of 2002. The increase in reported worldwide volume was
driven by our acquisitions, partially offset by volume declines in our base
business (base business reflects territories that we owned and operated for
comparable periods in both the current and prior year). Our acquisition of Gemex
contributed over
13
85% of the growth resulting from acquisitions for both the second quarter and
first 24-weeks of 2003.
In the U.S., our reported volume decreased by 1% and 3%, respectively, in
the second quarter and first 24- weeks of 2003, when compared with similar
periods of 2002. For the quarter and on a year-to-date basis, the decreases in
U.S. reported volume were driven primarily by the overlap of strong innovation
from the prior year and operating in a soft retail environment, partially offset
by incremental volume from acquisitions. Our cold drink business continues to be
soft, driven predominantly by our performance in the on-premise segment, which
includes fountain and full service vending. From a brand perspective, U.S.
volume continues to benefit from strong growth in Aquafina and the lemon-lime
category, led by Sierra Mist, offset by declines in trademark Pepsi.
Outside the U.S., reported volume increased by 125% for both the second
quarter and the first 24-weeks of 2003, when compared with similar periods of
2002. The increase in volume was driven by our Gemex acquisition coupled with
increases in our base business of 3% for both the quarter and on a year-to-date
basis. The increase in base business volume outside the U.S. was driven by
double-digit growth in Russia, resulting from a solid performance in trademark
Pepsi and Aqua Minerale, coupled with growth in Spain.
Net Revenues
Worldwide
---------
Net Revenues
------------
Drivers
-------
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, 2003 vs. June 14, 2003 vs.
----------------- ----------------
June 15, 2002 June 15, 2002
------------- -------------
Acquisitions............................ 16 % 14 %
---- ----
Base business:
EITF Issue No. 02-16 impact......... (3)% (3)%
Volume declines..................... (1)% (3)%
Currency translations............... 2 % 2 %
Rate / mix impact................... 1 % 1 %
---- ----
Base business change.................... (1)% (3)%
---- ----
Total Worldwide Change.................. 15 % 11 %
==== ====
Net revenues were $2.5 billion for the second quarter and $4.4 billion for
the first 24-weeks in 2003, a 15% and 11% increase over similar periods in 2002,
respectively. The increase in net revenues was driven primarily by our
acquisition of Gemex, which contributed over 85% of the growth resulting from
acquisitions for both the second quarter and first 24-weeks of 2003, partially
offset by declines in our base business. For both the second quarter and the
first 24-weeks of 2003, the decreases in our base business net revenues were
driven by the reclassification of certain bottler incentives from net revenues
to cost of sales resulting from 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, at the beginning of 2003, coupled
with volume declines. The declines in base business net revenues were partially
offset by favorable currency translations and the net rate/mix impact.
14
In the U.S., net revenues decreased 4% for both the second quarter and the
first 24-weeks of 2003, when compared with the similar periods of 2002. The
decreases in net revenues in the U.S. in the quarter and on a year-to-date
basis, are due primarily to the impact of adopting EITF Issue No. 02-16 and
volume declines, partially offset by the net rate/mix impact and incremental
revenue from acquisitions. For both the second quarter and on a year-to-date
basis, our net rate/mix impact reflects an approximate 2% price increase in the
marketplace, partially offset by a negative mix impact of 1%, driven by soft
cold drink performance.
Net revenues outside the U.S. grew approximately 114% in the second quarter
and 108% for the first 24-weeks of 2003 when compared with the similar periods
of 2002. For both the second quarter and the first 24-weeks of 2003, the
increases were driven by our Gemex acquisition, favorable foreign currency
translation, and the net rate/mix impact and volume performance, partially
offset by a decline due to the impact of adopting EITF Issue No. 02-16.
For the full year, worldwide net revenues are expected to increase in the
low double digits versus the prior year, with the majority of the increase
resulting from our Gemex acquisition. Worldwide net revenue per case is expected
to be down in the mid to high single-digits during the second half and for the
full year of 2003, as compared with the prior year periods. The decline in our
worldwide net revenue per case will be driven by country mix as a result of our
Gemex acquisition and the adoption of EITF Issue No. 02-16. We expect U.S.
pricing in the marketplace to continue to be solid, up about two percent for the
second half and the full year of 2003 versus the prior year comparable periods.
Net revenue per case results in the U.S. are forecasted to be down one to two
percent during the second half and for the full year of 2003 versus the prior
year comparable periods, reflecting the adoption of EITF Issue No. 02-16.
Cost of Sales
Worldwide
---------
Cost of Sales
-------------
Drivers
-------
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, 2003 vs. June 14, 2003 vs.
----------------- -----------------
June 15, 2002 June 15, 2002
------------- -------------
Acquisitions............................ 15 % 13 %
----- -----
Base business:
EITF Issue No. 02-16 impact......... (10)% (10)%
Cost per case impact................ 4 % 3 %
Volume declines..................... (1)% (3)%
Currency translations............... 1 % 1 %
----- -----
Base business change.................... (6)% (9)%
----- -----
Total Worldwide Change.................. 9 % 4 %
===== =====
Cost of sales was $1.3 billion in the second quarter and $2.2 billion for
the first 24-weeks of 2003, a 9% and 4% increase over similar periods in 2002,
respectively. The increase in cost of sales was driven primarily by our
acquisition of Gemex, which contributed over 80% of the growth resulting from
acquisitions in both the second quarter and the first 24-weeks of 2003,
partially offset by declines in our base business costs. Our base business cost
of sales declines were driven by 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, coupled
with volume declines. The declines in base business cost of sales were partially
offset by cost per case increases and foreign currency translation.
In the U.S., cost of sales decreased 7% in the second quarter and 9% for
the first 24-weeks of 2003, when compared with the similar periods of 2002. The
decreases in our U.S. cost of sales were driven by the impact of adopting EITF
Issue No. 02-16 and volume declines, partially offset
15
by cost per case increases and incremental costs from acquisitions. In the U.S.,
cost per case increased 3% for both the second quarter and on a year-to-date
basis, resulting from higher concentrate and resin costs.
Cost of sales outside the U.S. grew approximately 83% in the second quarter
and 77% for the first 24-weeks of 2003, when compared with the similar periods
of 2002. The increases in cost of sales outside the U.S., for the quarter and on
a year-to-date basis, were driven by our Gemex acquisition, impact of foreign
currency translation, and increases in both cost per case and volume, partially
offset by a reduction resulting from the impact of adopting EITF Issue No.
02-16.
For the balance of the year, we expect our cost of sales increases to be
similar to those experienced during the first half of the year. The expected
growth in our cost of sales will be driven primarily by our Gemex acquisition
and cost per case increases in the U.S., partially offset by 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.
Selling, Delivery and Administrative Expenses
Worldwide
---------
SD&A Drivers
------------
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, 2003 vs. June 14, 2003 vs.
----------------- -----------------
June 15, 2002 June 15, 2002
------------ -------------
Acquisitions............................ 20 % 17 %
----- -----
Base business:
EITF Issue No. 02-16 impact......... 7 % 6 %
Currency translations............... 2 % 2 %
Cost performance.................... 0 % (1)%
----- -----
Base business change.................... 9 % 7 %
----- -----
Total Worldwide Change.................. 29 % 24 %
===== =====
Selling, delivery and administrative expenses were $971 million in the
second quarter and $1.8 billion for the first 24-weeks of 2003, a 29% and 24%
increase over similar periods in 2002, respectively. The increase in selling,
delivery and administrative expenses was driven primarily by our acquisition of
Gemex and increases in our base business. Gemex contributed over 85% of the
growth resulting from acquisitions for both the second quarter and first
24-weeks of 2003. Increases in our base business selling, delivery and
administrative expenses in both the second quarter and first 24-weeks of 2003,
were driven by 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. Our base business cost performance was flat and declined 1%,
respectively, in the second quarter and on a year-to-date basis, driven largely
by reductions in labor and other costs, partially offset by increases in
pension, benefit and casualty costs.
For the balance of the year, we expect the growth of our selling, delivery
and administrative expenses to be similar to that experienced during the first
half of the year. Expected increases in selling, delivery and administrative
expenses will be driven predominantly by our Gemex acquisition and 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, partially offset by improved cost performance in the United
States.
16
Operating Income
Worldwide
---------
Operating Income
----------------
Drivers
-------
12-weeks Ended 24-weeks Ended
-------------- --------------
June 14, 2003 vs. June 14, 2003 vs.
----------------- -----------------
June 15, 2002 June 15, 2002
------------- -------------
Acquisitions............................ 10 % 7 %
----- -----
Base business:
Volume impact....................... (5)% (12)%
Rate/mix impact..................... 11 % 13 %
Cost of sales per case impact....... (17)% (15)%
SD&A impact......................... 0 % 2 %
Currency translations............... 1 % 1 %
----- -----
Base business change.................... (10)% (11)%
----- -----
Total Worldwide Change.................. 0 % (4)%
===== =====
Operating income was $271 million in the second quarter and $391 million
for the first 24-weeks of 2003, a 0% change and 4% decrease over similar periods
in 2002, respectively. The primary drivers of change in operating income for the
quarter and on a year-to-date basis were decreases in our base business offset
by an increase from our acquisition of Gemex. The decreases in our base business
operating income for the quarter and on a year-to-date basis were driven by
lower volume in the U.S. and higher product costs, partially offset by rate
increases in the marketplace, reduced selling, delivery and administrative
expenses as a result of our focus on cost controls and the favorable impact of
foreign currency translation. Gemex contributed the majority of the growth
resulting from acquisitions for both the second quarter and first 24-weeks of
2003.
For the third quarter, we anticipate operating profit to grow in the high
single digits and for the full year we expect operating profit to grow about
10%, as compared with the prior-year periods. Expected increases in operating
income for the third quarter and for the full year of 2003 will be driven by
improving trends in the U.S. and contributions from our Gemex acquisition.
Interest Expense, net
Interest expense, net increased by $11 million and $19 million,
respectively, in the second quarter and the first 24-weeks of 2003, when
compared with similar periods of 2002, largely due to the additional interest
associated with the $1 billion 4 5/8% senior notes used to finance our
acquisition of Gemex in November 2002, partially offset by the favorable impact
of the interest rate swaps on $1.3 billion of our fixed rate long-term debt.
Income Tax Expense
PBG's estimated full year effective tax rate for 2003 is 34.3%, before the
cumulative effect of change in accounting principle, and has been applied to our
second quarter 2003 results. Our effective tax rate in the second quarter of
2002 was 33.8%. The slight increase in the effective tax rate is primarily due
to an increase in anticipated pre-tax income in jurisdictions with higher tax
rates.
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operations decreased by $63 million to $215 million
for the first 24-weeks of 2003, when compared with the similar period in 2002,
reflecting a decline in net income
17
coupled with the increased use of cash from working capital, principally from
the timing of payments.
Net cash used for investments increased by $41 million to $363 million for
the first 24-weeks of 2003, when compared with the similar period in 2002,
reflecting higher acquisition spending, partially offset by declines in capital
expenditures.
Net cash provided by financing increased by $149 million for the first
24-weeks of 2003 when compared with the similar period in 2002, driven by the
issuance of $250 million in long-term debt and other short-term borrowings,
partially offset by higher share repurchases and lower stock option exercises.
For the full year in 2003, we expect to achieve net cash provided by
operations of $1.1 billion. In addition, we expect capital expenditures to be
approximately $700 million for the full year in 2003.
Short-term Borrowings and Long-term Debt
We intend to refinance all or a portion of our $1 billion of 5 3/8% senior
notes upon their maturity in February 2004. We are currently in compliance with
all debt covenants in our indenture agreements.
During the second quarter we issued $250 million of Series B Senior Notes
with a coupon rate of 4 1/8%, which has a yield of 4.4%, maturing on June 15,
2015. These notes are general unsecured obligations and rank on an equal basis
with all of our other existing and future senior unsecured indebtedness and rank
senior to all of our existing and future subordinated indebtedness. These senior
notes have redemption features and covenants similar to our other senior notes.
PBG has a $500 million commercial paper program that is supported by two
$250 million credit facilities. During the quarter, PBG renegotiated the credit
facilities. One of the credit facilities expires in April 2004 and the other
credit facility expires in April 2008. Both credit facilities are guaranteed by
Bottling Group, LLC.
Cautionary Statements
- ----------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. Among the events and uncertainties that could
adversely affect future periods are lower-than-expected net pricing resulting
from marketplace competition, material changes from expectations in the cost of
raw materials and ingredients, an inability to achieve the expected timing for
returns on cold drink equipment and related infrastructure expenditures,
material changes in expected levels of bottler incentive payments from PepsiCo,
material changes in our expected interest and currency exchange rates, an
inability to achieve cost savings, an inability to achieve volume growth through
product and packaging initiatives, competitive pressures that may cause channel
and product mix to shift from more profitable cold drink channels and packages,
weather conditions in PBG's markets, political conditions in PBG's markets
outside the United States and Canada, possible recalls of PBG's products, an
inability to meet projections for performance in newly acquired territories,
unfavorable market performance of our pension plan assets, unfavorable outcomes
from our U.S. Internal Revenue Service audits, and changes in our debt ratings.
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The overall risks to our international businesses include changes in
foreign governmental policies, and other political or economic developments.
These developments may lead to new product pricing, tax or other policies and
monetary fluctuations, which may adversely impact our business. In addition, our
results of operations and the value of the foreign assets are affected by
fluctuations in foreign currency exchange rates.
Foreign currency gains and losses reflect transaction gains and losses 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. Beginning in 2003, Russia is no longer considered highly
inflationary, and changed its functional currency from the U.S. dollar to the
Russian ruble. The impact to our consolidated financial statements as a result
of Russia's change in functional currency in 2003 was not material.
We acquired Gemex in November 2002. Approximately 12% and 10% of our net
revenues were derived from Mexico in the second quarter and first 24-weeks of
2003, respectively. During the second quarter and the first 24-weeks of 2003,
the Mexican peso appreciated by approximately 6% and less than 1%, respectively.
Future movements in the Mexican peso could have a material impact on our
financial results.
Item 4.
Controls and Procedures
-----------------------
Within 90 days prior to the filing date of this report, PBG carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial Officer of PBG, of
the effectiveness and design and operation of our disclosure controls and
procedures pursuant to the Exchange Act Rule 13a-14. Based upon that evaluation,
the Chief 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 PBG's periodic filings with the SEC. In addition, there were
no significant changes in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the date of our most
recent evaluation.
19
PART II - OTHER INFORMATION
Item 4.
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
(a) Annual Meeting of Shareholders of PBG was held on May 28, 2003.
(b) The names of all directors are set forth in (c) below. The proxies for the
meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. There were no solicitations in opposition to the
nominees as listed in the proxy and all such nominees were elected.
(c) A brief description of each matter voted on and the approximate number of
votes cast are as follows:
Number of Votes (millions)
--------------------------
Withheld/ Broker
Description of Proposals For Against Abstain Non-votes
- ------------------------ --- ------- ------- ---------
1) Election of Directors:
Linda G. Alvarado 256 N/A 23 N/A
Barry H. Beracha 257 N/A 22 N/A
John T. Cahill 262 N/A 17 N/A
Ira D. Hall 264 N/A 15 N/A
Thomas H. Kean 258 N/A 21 N/A
Susan D. Kronick 257 N/A 22 N/A
Blythe J. McGarvie 256 N/A 23 N/A
Margaret D. Moore 215 N/A 64 N/A
Clay G. Small 216 N/A 63 N/A
Craig E. Weatherup 263 N/A 16 N/A
2) Approval of the appointment of
KPMG LLP as independent auditors 275 3 1 N/A
20
Item 5.
Other Information
- ------------------
The following financial information of Bottling Group, LLC ("Bottling
LLC"), filed by Bottling LLC with the SEC on July 28, 2003, is 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:
>> Condensed Consolidated Statements of Operations - 12 and 24-weeks
ended June 14, 2003 and June 15, 2002
>> Condensed Consolidated Statements of Cash Flows - 24-weeks ended June
14, 2003 and June 15, 2002
>> Condensed Consolidated Balance Sheets - June 14, 2003 and December 28,
2002
>> Notes to Condensed Consolidated Financial Statements
>> Independent Accountants' Review Report
21
Item 6.
Exhibits and Reports on Form 8-K
- --------------------------------
Item 6 (a) Exhibits
- -------------------
Exhibit No.
- -----------
10 * Amendment No. 1 to the PBG Director's Stock Plan
11 * Computation of Basic and Diluted Earnings Per Share
15 * Accountants' Acknowledgement
4.1 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)
4.2 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. 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)
4.3 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)
4.4 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)
22
99.1 * Certification by the Chief Executive Officer of Periodic Financial
Report pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
99.2 * Certification by the Chief Financial Officer of Periodic Financial
Report pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
- -----------------
* Filed herewith.
ITEM 6(b) REPORTS ON FORM 8-K
- -----------------------------
On April 22, 2003, the Company furnished a current Form 8-K Report announcing
its financial results for its first quarter ended March 22, 2003.
23
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Registrant)
Date: July 25, 2003 /s/ Andrea L. Forster
------------- ---------------------
Andrea L. Forster
Vice President and Controller
Date: July 25, 2003 /s/ Alfred H. Drewes
------------- ---------------------
Alfred H. Drewes
Senior Vice President and
Chief Financial Officer
Form 10-Q Certification
I, John T. Cahill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pepsi Bottling
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: July 25, 2003 /s/ John T. Cahill
------------- ------------------
John T. Cahill
Chief Executive Officer
Form 10-Q Certification
I, Alfred H. Drewes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pepsi Bottling
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: July 25, 2003 /s/ Alfred H. Drewes
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Alfred H. Drewes
Senior Vice President and
Chief Financial Officer