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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1999
REGISTRATION NO. 333-70291
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE PEPSI BOTTLING GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 2086 13-4038356
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
ONE PEPSI WAY
SOMERS, NY 10589
(914) 767-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
PAMELA C. MCGUIRE
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
THE PEPSI BOTTLING GROUP, INC.
ONE PEPSI WAY
SOMERS, NY 10589
(914) 767-7982
------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
WINTHROP B. CONRAD, JR. LAWRENCE F. DICKIE MATTHEW J. MALLOW
DAVIS POLK & WARDWELL PEPSICO, INC. SKADDEN, ARPS, SLATE, MEAGHER
450 LEXINGTON AVENUE 700 ANDERSON HILL ROAD & FLOM LLP
NEW YORK, NEW YORK 10017 PURCHASE, NEW YORK 10577 919 THIRD AVENUE
(212) 450-4000 (914) 253-2950 NEW YORK, NEW YORK 10022-3897
(212) 735-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 26, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting offers to buy these securities
in any state where the offer or sale is not permitted.
<PAGE>
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PROSPECTUS [LOGO]
</TABLE>
SHARES
THE PEPSI BOTTLING GROUP, INC.
COMMON STOCK
--------------
This is The Pepsi Bottling Group, Inc.'s initial public offering of common
stock.
We expect the public offering price to be between $ and $ per share.
Currently, no public market exists for the common stock. After pricing of the
offering, we expect that the common stock will trade on The New York Stock
Exchange under the symbol "PBG."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
-----------------
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<CAPTION>
PER SHARE TOTAL
--------- ---------
<S> <C> <C>
Public Offering Price........................................ $ $
Underwriting Discount........................................ $ $
Proceeds, before expenses, to The Pepsi Bottling Group,
Inc........................................................ $ $
</TABLE>
The underwriters may also purchase up to an additional shares of
common stock at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Merrill Lynch & Co. is acting as book-running lead manager for the offering.
Merrill Lynch & Co. and Morgan Stanley & Co. Incorporated are acting as joint
lead managers. The shares of common stock will be ready for delivery in New
York, New York on or about , 1999.
------------------
JOINT LEAD MANAGERS
MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER
-----------
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
SANFORD C. BERNSTEIN & CO., INC.
SCHRODER & CO. INC.
------------
The date of this prospectus is , 1999.
<PAGE>
[PHOTOGRAPHS OF PBG'S OPERATIONS AND PRODUCTS TO BE INCLUDED HERE]
[MAP OF PBG TERRITORIES TO BE INCLUDED HERE]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary....................................................................................... 4
Risk Factors.................................................................................. 10
Rationale for the Separation of PBG from PepsiCo.............................................. 18
Use of Proceeds............................................................................... 19
Dividend Policy............................................................................... 19
Capitalization................................................................................ 20
Selected Combined Financial and Operating Data................................................ 21
Management's Discussion and Analysis of Results of Operations and Financial Condition......... 23
Business of PBG............................................................................... 34
Management.................................................................................... 48
Relationship with PepsiCo and Certain Transactions............................................ 56
Principal Stockholder......................................................................... 61
Description of Capital Stock.................................................................. 63
Shares Eligible for Future Sale............................................................... 67
Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock......... 68
Underwriting.................................................................................. 71
Legal Matters................................................................................. 75
Experts....................................................................................... 75
Additional Information........................................................................ 75
Index to Financial Statements................................................................. F-1
</TABLE>
------------------------
In this prospectus, "PBG," "we," "us" and "our" each refers to The Pepsi
Bottling Group, Inc. and, where appropriate, to our principal operating
subsidiary, Bottling Group, LLC, which we refer to as "Bottling LLC."
3
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
THE PEPSI BOTTLING GROUP, INC.
The Pepsi Bottling Group, Inc. is the world's largest manufacturer, seller
and distributor of carbonated and non-carbonated Pepsi-Cola beverages. Our sales
of Pepsi-Cola beverages account for 55% of the Pepsi-Cola beverages sold in the
United States and Canada and 32% worldwide. We have the exclusive right to
manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of 41
states, the District of Columbia, eight Canadian provinces, Spain, Greece and
Russia. Approximately 92% of our volume is sold in the United States and Canada.
The brands we sell are some of the best recognized trademarks in the world
and include PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, LIPTON BRISK, LIPTON'S ICED
TEA, 7UP outside the U.S., PEPSI MAX, PEPSI ONE, SLICE, MUG, AQUAFINA, STARBUCKS
FRAPPUCCINO and MIRINDA, which we bottle under licenses from PepsiCo or PepsiCo
joint ventures. In some of our territories, we also have the right to
manufacture, sell and distribute soft drink products of other companies,
including DR PEPPER and 7UP in the U.S. During the period from 1993 through
1998, the volume of Pepsi-Cola beverages sold in our U.S. territories grew at a
compound annual rate of approximately 5%, using a standard measure of cases
containing the equivalent of 24 eight-ounce bottles.
In the U.S. in 1998, the Pepsi-Cola beverages we sell had a 31% share of the
carbonated soft drink market as compared to the brands of The Coca-Cola Company,
which had a 45% share. However, excluding fountain sales, where the consumer
typically does not have a choice due to exclusive agreements, the market share
difference narrowed significantly, with Pepsi-Cola beverages having 26% and
Coca-Cola brands having 28%, according to our estimates. In convenience and gas
stores, where retail pricing, packaging and presentation are generally similar
among brands, and therefore consumers are free to choose based on brand
preference and taste, Pepsi-Cola beverages had the leading share, with 41%, as
compared to 36% for Coca-Cola brands.
We have an extensive distribution system through which we deliver our
products directly to stores without using wholesalers as middlemen. Our U.S. and
Canadian distribution system utilizes approximately 7,000 trucks and covers over
7,400 routes. Working seven days a week, our sales force sells and delivers over
100 million eight-ounce servings per day. Our products are produced in 72
manufacturing facilities worldwide.
Our management team has substantial experience in the soft drink bottling
business and a proven operating record with respect to manufacturing operations,
sales, distribution and financial management. For example, Craig Weatherup, our
Chairman and Chief Executive Officer, has over 24 years of experience in the
beverage industry and our 11 field operations managers have an average of nearly
15 years of experience in the beverage business.
RATIONALE FOR THE SEPARATION OF PBG FROM PEPSICO
We were organized in November 1998 to effect the separation of most of
PepsiCo's company-owned bottling business from its brand ownership. As an
independent entity, we believe we will benefit from a sharper definition of our
role and be able to execute our business strategy more effectively on a local
market level. The most significant advantages of the separation include:
- We will be free to focus more closely on sales and service in our
territories.
- We will be able to shift our performance emphasis to growth in operating
cash flow.
4
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- We will have incentives for management and employees based upon our
results.
- We will have a capital structure and financial policies that are more
appropriate for a bottling company, allowing us to make better capital
allocation and investment decisions.
After the offering, our business interests will continue to be aligned with
those of PepsiCo, which shares our objective of increasing availability and
consumption of Pepsi-Cola beverages. We plan to work closely with PepsiCo and
expect to benefit from this relationship in a number of ways including:
- We will have the benefit of PepsiCo's worldwide marketing expertise and
advertising programs.
- We expect that PepsiCo will continue to provide us with significant
marketing support and funding.
- Under a shared services agreement, we will have the benefit of PepsiCo's
scale and efficiencies in the procurement of raw materials, transaction
processing such as accounts payable and credit and collection and other
corporate services.
- We believe we benefit from lower interest rates resulting from our
relationship with PepsiCo, including PepsiCo's guarantee of $2.3 billion
of debt of our principal operating subsidiary, Bottling LLC.
- We expect that PepsiCo will help us identify and acquire other independent
PepsiCo bottlers principally in the United States and Canada.
THE LIQUID REFRESHMENT BEVERAGE INDUSTRY
Liquid refreshment beverage annual retail sales in 1997 were more than $72
billion in the United States and Canada, including carbonated soft drink
products, as well as non-carbonated beverages sold in bottles and cans, such as
waters, shelf-stable juices and juice drinks, sports drinks and tea and coffee
drinks.
We believe that the following are the significant trends in the industry:
- Liquid refreshment beverage sales have grown at a 6% average annual rate
in recent years and we expect that this growth will continue.
- Changes in lifestyle have resulted in increased demand for convenient
ready-to-drink beverages instead of drinks prepared at home.
- The bottling industry is consolidating to achieve the scale necessary to
remain competitive and to better serve large regional and national
accounts which are also consolidating.
- International opportunities will arise as per capita consumption levels of
carbonated soft drinks outside the United States grow.
STRATEGY TO ACHIEVE OUR GOALS
We have designed our strategy to enable us to achieve our goals of growing
our cash flow, earning a return on our investments in excess of our cost of
capital and increasing our market share. Our strengths include our broad
portfolio of global brands, our extensive distribution system, our scale in
operations and purchasing and our experienced management team. We intend to use
these strengths to capitalize on the key trends in the beverage industry
outlined above. In addition, our strategy focuses on improving our competitive
position in areas where we have lagged our largest competitor in recent years.
These areas are: the amount of investment in the cold drink business; the pace
of consolidation
5
<PAGE>
of the bottling system in the United States and Canada; and improvement in
market share outside the United States and Canada. The key elements of our
strategy include:
- We intend to invest significantly in placements of vending machines and
coolers to increase cold drink availability in the marketplace.
- We expect to play a key role in the consolidation of PepsiCo's U.S. and
Canadian bottling system.
- We are undertaking a number of initiatives to reduce costs by improving
productivity and becoming more efficient in our operations.
- We intend to grow our business with key retail customers by improving our
retail presence with them--on the shelf, on display and in the
cooler--while remaining price competitive.
- We intend to increase penetration of established brands such as MOUNTAIN
DEW and new brands such as PEPSI ONE and AQUAFINA.
- Internationally, low per capita consumption levels present opportunities
for volume growth. We intend to implement distribution and marketing
initiatives to take advantage of these opportunities.
- We intend to improve our results in Russia, where infrastructure
investments and the recent economic crisis have resulted in losses.
PEPSICO'S OWNERSHIP INTEREST IN PBG
Following the offering, PepsiCo will own % of our outstanding common stock
and 100% of our outstanding Class B common stock, together representing
approximately 40% of the voting power of all classes of our voting stock.
PepsiCo will also own % of the equity of Bottling LLC, our principal operating
subsidiary, giving PepsiCo economic ownership of % of our combined operations.
We anticipate that PepsiCo's economic ownership of our combined operations will
be % if the underwriters exercise their over-allotment option in full. We have
been advised by PepsiCo that it has no present intention of disposing of any of
the shares of our capital stock that it will own after the offering.
6
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THE OFFERING
Unless we specifically state otherwise, the information in this prospectus
does not take into account the possible issuance of up to additional shares
of common stock which the underwriters have the option to purchase solely to
cover over-allotments. If the underwriters exercise their over-allotment option
in full, shares of common stock will be outstanding after the offering.
<TABLE>
<S> <C>
Common stock offered......................... shares
Capital stock to be outstanding after the
offering:
Common stock............................... shares
Class B common stock....................... shares
---------------------------------------------
Total.................................... shares
Over-allotment option........................ shares of common stock
Use of proceeds.............................. We estimate that the net proceeds from the
offering will be approximately $ . We
intend to use substantially all of these net
proceeds to repay indebtedness.
Dividend policy.............................. We intend to declare and pay quarterly cash
dividends of $ per share, depending on
our financial results and action by our board
of directors. We expect the first dividend to
be payable in the quarter of 1999.
Voting rights:
Common stock............................... One vote per share
Class B common stock....................... 250 votes per share
Other common stock provisions................ Apart from the different voting rights, the
holders of common stock and Class B common
stock generally have identical rights. See
"Description of Capital Stock."
Risk factors................................. See "Risk Factors" and the other information
included in this prospectus for a discussion
of factors you should carefully consider
before deciding to invest in shares of the
common stock.
Proposed NYSE symbol......................... "PBG"
</TABLE>
Our principal executive offices are located at One Pepsi Way, Somers, New
York 10589 and our telephone number is (914) 767-6000.
7
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table presents summary financial and operating data of PBG.
You should read this along with "Management's Discussion and Analysis of Results
of Operations and Financial Condition," the Combined Financial Statements, the
unaudited Pro Forma Condensed Combined Financial Statements and the accompanying
notes.
The summary pro forma statement of operations data gives effect to the
following as if they had actually occurred on the first day of our 1998 fiscal
year:
- The offering;
- The 1998 acquisitions of Pepsi-Cola Allied Bottlers, Inc., Gray Beverage
Inc. and Pepsi International Bottlers, LLC;
- The expected 1999 acquisitions of certain U.S. and Russian territories
from Whitman Corporation;
- The change in interest expense on $3.3 billion of debt expected to be
outstanding after giving effect to the offering; and
- PepsiCo's % minority interest in Bottling LLC.
The summary pro forma combined balance sheet data gives effect to the
following as if such transactions actually occurred on December 26, 1998:
- The offering;
- The $3.3 billion of debt expected to be outstanding after the offering;
and
- The expected 1999 acquisitions of certain U.S. and Russian territories
from Whitman Corporation.
Pro forma earnings per share is based upon an assumed million shares
of capital stock outstanding after the offering.
The Statement of Operations Data set forth below includes unusual items and
events that affect comparability with other years:
- 1994 consisted of 53 weeks. The fifty-third week increased 1994 net sales
by $68 million, income before income taxes by $3 million, and net income
by $2 million.
- 1994 net income also reflects the cumulative effect of accounting changes
arising from Statement of Financial Accounting Standards 112, "Employers
Accounting for Postemployment Benefits," and changing to a preferable
method for calculating pension plan assets. The adoption of SFAS 112
reduced income before income taxes by $28 million and net income by $17
million, while the pension change increased income before income taxes by
$9 million and net income by $6 million.
- 1998 reflects unusual impairment and other charges, as well as an income
tax benefit arising from resolving a disputed claim with the Internal
Revenue Service. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and Note 3 to the Combined Financial
Statements for more information on the 1998 items.
8
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED
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PRO FORMA
DEC. 31 DEC. 30 DEC. 28 DEC. 27 DEC. 26 DEC. 26
1994 1995 1996 1997 1998 1998
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(IN MILLIONS, EXCEPT PER SHARE AND PER CASE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales..................................................... $ 5,950 $ 6,393 $ 6,603 $ 6,592 $7,041 $ 7,323
Cost of sales................................................. 3,432 3,771 3,844 3,832 4,181 4,341
--------- --------- --------- --------- --------- -----------
Gross profit.................................................. 2,518 2,622 2,759 2,760 2,860 2,982
Selling, delivery and administrative expenses................. 2,221 2,273 2,392 2,425 2,583 2,678
Unusual impairment and other charges.......................... -- -- -- -- 222 222
--------- --------- --------- --------- --------- -----------
Operating income.............................................. 297 349 367 335 55 82
Interest expense, net......................................... 231 239 225 222 221
Foreign currency loss (gain).................................. 3 -- 4 (2) 26
--------- --------- --------- --------- --------- -----------
Income (loss) before income taxes and cumulative effect of
accounting changes.......................................... 63 110 138 115 (192)
Income tax expense (benefit).................................. 46 71 89 56 (46)
--------- --------- --------- --------- --------- -----------
Income (loss) before cumulative effect of accounting
changes..................................................... 17 39 49 59 (146)
Cumulative effect of accounting changes....................... (11) -- -- -- --
Minority interest............................................. -- -- -- -- --
--------- --------- --------- --------- --------- -----------
Net income (loss)............................................. $ 6 $ 39 $ 49 $ 59 $ (146) $
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Pro forma earnings per share..................................
Pro forma weighted average shares outstanding.................
OTHER FINANCIAL DATA:
EBITDA........................................................ $ 681 $ 767 $ 792 $ 774 $721 $
Cash provided by operations................................... 484 431 451 548 625
Cash used for investments..................................... (310) (355) (376) (564) (1,046)
Cash provided by (used for) financing......................... (160) (66) (66) 63 370
Capital expenditures.......................................... (432) (358) (418) (472) (507)
OTHER OPERATING DATA:
Net sales per case............................................ $ 7.27 $ 6.92 $ 6.97 $ 6.74 $6.70 $
Costs of sales per case....................................... 4.20 4.08 4.06 3.92 3.98
BALANCE SHEET DATA (AT PERIOD END):
Total assets.................................................. $ 6,847 $ 7,082 $ 7,052 $ 7,188 $7,322 $
Long-term debt:
Allocation of PepsiCo long-term debt........................ 3,300 3,300 3,300 3,300 3,300
Due to third parties........................................ 135 131 127 96 61
--------- --------- --------- --------- --------- -----------
Total long-term debt...................................... 3,435 3,431 3,427 3,396 3,361
Advances from PepsiCo......................................... 1,265 1,251 1,162 1,403 1,605
Minority interest............................................. -- -- -- -- --
Accumulated comprehensive income (loss)....................... (112) (66) (102) (184) (238)
Stockholders' equity (deficit)................................ (112) (66) (102) (184) (238)
</TABLE>
9
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RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in PBG. As a stockholder of PBG, you may be exposed to risks inherent
in our business. The performance of your shares will reflect the performance of
our business relative to, among other things, competition, industry conditions
and general economic and market conditions. The value of your investment may
increase or decrease and could result in a loss. You should carefully consider
the following factors as well as other information contained in this prospectus
before deciding to invest in shares of our common stock.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE CARBONATED
SOFT DRINK MARKET AND NON-CARBONATED BEVERAGE MARKET.
The carbonated soft drink market and non-carbonated beverage market are both
highly competitive. We compete primarily on the basis of advertising to create
brand awareness, price and price promotions, retail space management, customer
service, consumer points of access, new products, packaging innovation and
distribution methods. Competition in our various markets could cause us to
reduce pricing, increase capital and other expenditures or lose market share,
which could have a material adverse effect on our business and financial
results. 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. Our most significant competitors in
these markets are Coca-Cola Enterprises Inc. and other Coca-Cola bottlers.
WE DEPEND UPON PEPSICO TO PROVIDE US WITH CONCENTRATE, FUNDING AND VARIOUS
SERVICES.
In early 1999, we entered into the master bottling agreement with PepsiCo
for cola products in the United States as well as agreements with PepsiCo
relating to non-cola products and fountain syrup in the United States and
similar agreements relating to Pepsi-Cola beverages in Canada, Spain, Greece and
Russia. Those agreements provide that we must purchase all of our concentrate
for such beverages at prices and on other terms which are set by PepsiCo in its
sole discretion. Any concentrate price increases could materially affect our
financial results. Prices under the Pepsi beverage agreements may increase
materially and we may not be able to pass on any increased costs to our
customers.
PepsiCo has also traditionally provided marketing support and funding to its
bottling operations. However, while PepsiCo has told us that they intend to
continue to provide this support, PepsiCo does not have to do this under the
Pepsi beverage agreements and any support provided to us by PepsiCo will be at
PepsiCo's discretion. Decreases in marketing support and funding levels could
materially affect our financial results.
In addition, PepsiCo is a 50% owner of the joint ventures that license
LIPTON BRISK, LIPTON'S ICED TEA and STARBUCKS FRAPPUCCINO to us. The joint
ventures also have the right to increase concentrate pricing. The joint ventures
are not obligated to continue to provide marketing support and funding to us
under their bottling agreements with us.
We also have to submit our annual marketing, advertising, management and
financial plans each year to PepsiCo for its review and approval. If we fail to
submit these plans, or if we fail to carry them out in all material respects,
PepsiCo can terminate the Pepsi beverage agreements. If the Pepsi beverage
agreements are terminated for this or for any other reason, it would have a
material adverse effect on our business and financial results.
Under a shared services agreement, after the offering we will continue to
obtain various services from PepsiCo. These services include obtaining raw
materials, transaction processing services including accounts payable and credit
and collection, various tax and treasury services and information technology
10
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maintenance and systems development. If the shared services agreement is
terminated, we will have to obtain such services on our own. We may not be able
to replace these services in a timely manner or on terms, including cost, that
are as favorable as those we received from PepsiCo. We also sublease our
headquarters from PepsiCo. The agreements with PepsiCo were negotiated in the
context of our separation from PepsiCo and are not the result of arms-length
negotiations between independent parties. For more information about these
arrangements, see "Relationship with PepsiCo and Certain Transactions."
PEPSICO WILL HAVE APPROXIMATELY 40% OF THE COMBINED VOTING POWER OF ALL OF OUR
CLASSES OF OUR VOTING STOCK AND WILL BE ABLE TO SIGNIFICANTLY AFFECT THE
OUTCOME OF STOCKHOLDER VOTING.
WE MAY HAVE POTENTIAL CONFLICTS OF INTEREST WITH PEPSICO BECAUSE OF OUR PAST AND
ONGOING RELATIONSHIPS WHICH COULD RESULT IN PEPSICO'S OBJECTIVES BEING FAVORED
OVER OUR OBJECTIVES.
These conflicts could arise over:
- the nature, quality and pricing of services or products provided to us by
PepsiCo or by us to PepsiCo;
- potential acquisitions of bottling territories and/or assets from PepsiCo
or other independent PepsiCo bottlers;
- the divestment of parts of our bottling operations;
- the payment of dividends by us; or
- balancing the objectives of increasing sales volume of Pepsi-Cola
beverages and maintaining or increasing our profitability.
We also have obligations to other brand owners which may compete with our
obligations to PepsiCo.
TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
PEPSICO DIRECTORS OR OFFICERS.
Two of our directors are also directors or officers of PepsiCo, a situation
which may create conflicts of interest. Our certificate of incorporation permits
PepsiCo to engage in the same or similar activities as we do. Our certificate
also provides that PepsiCo does not have to tell us about a corporate
opportunity, may pursue that opportunity or acquire it for itself, or may direct
that opportunity to another person without liability to us or our stockholders.
OUR FOREIGN OPERATIONS ARE SUBJECT TO SOCIAL, POLITICAL AND ECONOMIC RISKS AND
MAY BE ADVERSELY AFFECTED BY FOREIGN CURRENCY FLUCTUATIONS.
In the past two years, approximately 16% of our net sales came from Canada,
Spain, Greece and Russia. Social, economic and political conditions in these
international markets may adversely affect our results of operations, cash flows
and financial condition. The overall risks to our international businesses
include changes in foreign governmental policies, and other political or
economic developments. These developments may lead to new product pricing, tax
or other policies and monetary fluctuations which may adversely impact our
business. In addition, our results of operations and the value of our foreign
assets are affected by fluctuations in foreign currency exchange rates.
Our operations in Russia have resulted in significant losses. These losses
have largely been due to significant investments to fund start-up manufacturing
and distribution costs. Recent economic turmoil in Russia had a further adverse
effect on our results of operations, cash flows and financial condition during
our 1998 fourth fiscal quarter. Net sales in Russia are denominated in rubles,
which in
11
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August 1998 experienced significant devaluation against the U.S. dollar.
However, a substantial portion of the expenses of our Russian bottling
operations are denominated in U.S. dollars. In addition, the current Russian
economic crisis has caused a significant drop in demand, resulting in lower net
sales and increased operating losses.
For the foreseeable future, we expect that our Russian operations will incur
losses and require significant amounts of cash to fund operations. In the fourth
quarter of 1998, we recorded a charge of $212 million comprised of an asset
impairment charge of $194 million and costs to restructure our operations of $18
million. For more information about our Russian operations, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
Recent events in Russia also may expose our operations to increased risks as
a result of political instability, higher taxes, cancellation of contracts or
currency shortages and controls.
THE SEASONALITY OF OUR SALES COULD ADVERSELY AFFECT OUR BUSINESS.
Our peak season is the warm summer months beginning with Memorial Day and
ending with Labor Day. Bad weather conditions during our peak selling season
could adversely affect operating income and cash flow and could therefore have a
disproportionate impact on our results for the full year. More than 90% of our
operating income is typically earned during the second and third quarters and we
typically report a net loss in the first and fourth quarters. Over 75% of cash
flow from operations is typically generated in the third and fourth quarters.
OUR SUBSTANTIAL INDEBTEDNESS COULD LIMIT OUR GROWTH AND OUR ABILITY TO RESPOND
TO CHANGING CONDITIONS.
We have incurred substantial indebtedness. Our level of indebtedness could
have important consequences to our stockholders such as:
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
pay interest;
- limiting our ability to obtain additional financing to fund our growth
strategy, working capital, capital expenditures, debt service requirements
or other purposes; and
- limiting our ability to react to changing market conditions, changes in
our industry and economic downturns.
After giving effect to the offering and the application of the net proceeds,
at December 26, 1998 we would have had $3.3 billion of indebtedness outstanding.
Our historical financial statements reflect an allocation of PepsiCo's interest
expense based upon the indebtedness expected to be outstanding after giving
effect to the application of proceeds from the offering. We may incur additional
indebtedness in the future to finance acquisitions, capital expenditures,
working capital and for other purposes.
OUR AGREEMENTS WITH PEPSICO RESTRICT OUR SOURCES OF SUPPLY FOR SOME RAW
MATERIALS.
We generally purchase our raw materials, other than concentrates, from
multiple suppliers. With respect to the soft drink products of PepsiCo, all
authorized containers, closures, cases, cartons and other packages and labels
may be purchased only from manufacturers approved by PepsiCo. This may restrict
our ability to obtain raw materials. Expenditures for packaging and concentrates
constitute approximately 43% and 47%, respectively, of our total raw material
costs.
None of the materials or supplies used by us is presently in short supply,
although the supply or cost of specific materials could be adversely affected by
price changes, strikes, weather conditions, governmental controls or other
factors. Any sustained interruption in the supply of these raw materials
12
<PAGE>
or any significant increase in their price could have a material adverse effect
on our business and financial results.
SUCCESS OF OUR ACQUISITION STRATEGY MAY BE LIMITED BY GEOGRAPHICAL RESTRICTIONS
ON ACQUISITIONS AND BY OUR ABILITY TO SUCCESSFULLY INTEGRATE ACQUIRED
BUSINESSES INTO OURS.
We intend to grow in part through the acquisition of bottling assets and
territories from PepsiCo's independent bottlers. This strategy will involve
reviewing and potentially reorganizing acquired business operations, corporate
infrastructure and systems and financial controls. The success of our
acquisition strategy may be limited because of unforeseen expenses,
difficulties, complications and delays encountered in connection with the
expansion of our operations through acquisitions. We may not be able to acquire
or manage profitably additional businesses or to integrate successfully any
acquired businesses into our business without substantial costs, delays or other
operational or financial difficulties. In addition, we may be required to incur
additional debt or issue equity to pay for future acquisitions.
We must obtain PepsiCo's approval to acquire any independent PepsiCo
bottler. Under the master bottling agreement, PepsiCo has agreed not to withhold
approval for any acquisition within a specific area--currently representing
approximately 14% of PepsiCo's U.S. bottling system in terms of volume-- if we
have successfully negotiated the acquisition and, in PepsiCo's reasonable
judgment, satisfactorily performed our obligations under the master bottling
agreement. We have agreed not to acquire or attempt to acquire any independent
PepsiCo bottler outside of that specific area without PepsiCo's prior written
approval.
AFTER THE OFFERING, PEPSICO WILL NO LONGER CONTINUE TO FUND OUR SUBSTANTIAL
CAPITAL REQUIREMENTS AND WE MAY BE UNABLE TO OBTAIN REPLACEMENT FUNDING ON
SIMILAR TERMS OR IN THE AMOUNTS WE EXPECT TO REQUIRE.
We will require substantial capital expenditures to implement our business
strategy. If we do not have sufficient funds or if we are unable to obtain
financing in the amounts desired or on acceptable terms, we may have to reduce
our planned capital expenditures which could have a material adverse effect on
our growth prospects and the market price of our common stock. In the past, our
capital needs, including those for working capital, have been satisfied by
PepsiCo as part of its overall capital plan. Following our separation from
PepsiCo, PepsiCo will no longer be required to provide financing for our
operations. It may not be possible to obtain financing with interest rates or on
terms that are as favorable as those historically enjoyed by PepsiCo.
WE HAVE NEVER OPERATED AS A STAND-ALONE COMPANY.
Before November 1998, we were fully integrated with PepsiCo and we depended
upon PepsiCo for various services and for the financing of our activities. In
anticipation of our establishment as a stand-alone entity, in late 1998, we made
significant organizational and strategic changes which are intended to promote
future growth. We cannot assure you that such changes will have the intended
effect or that we will be successful in implementing our strategy as a
stand-alone entity.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The historical financial information we have included in this prospectus may
not reflect what our results of operations, financial position and cash flows
would have been had we been a separate, stand-alone entity during the periods
presented or what our results of operations, financial position and cash flows
will be in the future. This is because PepsiCo did not account for us as, and we
were not operated as, a single stand-alone business for the periods presented.
13
<PAGE>
For more information about the carve-out of our financial statements from
the financial statements of PepsiCo, see "Management's Discussion and Analysis
of Results of Operations and Financial Condition."
OUR SUCCESS DEPENDS ON KEY MANAGEMENT.
Our success depends largely on the efforts and abilities of key management
employees. The loss of the services of those key personnel could have a material
adverse effect on our business and financial results. Key management employees
are not parties to employment agreements with us.
The implementation of our strategic plan will depend on our ongoing ability
to attract and retain additional qualified employees. Because of competition for
qualified personnel, we may not be successful in attracting and retaining the
personnel we require. See "Business of PBG--Employees of PBG" and "Management"
for more information about our key personnel.
WE MAY BE ADVERSELY AFFECTED IF OUR YEAR 2000 PROGRAM IS NOT SUCCESSFUL.
Our business could be adversely affected by information technology issues
related to the Year 2000. Many existing computer programs were designed and
developed without considering the upcoming change in the century, which could
lead to the failure of computer applications or create erroneous results by or
at the Year 2000. The Year 2000 issue is a broad business issue, whose impact
extends beyond traditional computer hardware and software to possible failure of
automated plant systems and instrumentation, as well as to third parties with
whom we do business.
We have implemented a Year 2000 program and we believe we have allocated
adequate resources for this purpose. Our most significant exposure arises from
our dependence on high volume transaction processing systems, particularly for
production scheduling, inventory cost accounting, purchasing, customer billing
and collection, and payroll. We anticipate that any corrective actions to these
applications will be completed by the end of the second quarter in 1999.
However, we cannot assure you that this will be the case. The ability of third
parties with whom we do business to address adequately their Year 2000 issues is
outside our control. Our failure or the failure of such third parties to address
adequately their respective Year 2000 issues may have a material adverse effect
on our business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000" for a detailed discussion of the status of our Year 2000
program.
WE MAY INCUR MATERIAL LOSSES AND COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS
THAT MAY BE BROUGHT AGAINST US OR ANY PRODUCT RECALLS WE HAVE TO MAKE.
We may be liable if the consumption of any of our products causes injury,
illness or death. We also may be required to recall some of our products if they
become contaminated or are damaged or mislabeled. We are not currently aware of
any material product liability claim against us or product recall that may be
required. However, a significant product liability judgment against us or a
widespread product recall could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY BE ADVERSELY AFFECTED BY GOVERNMENTAL REGULATIONS.
Our operations and properties are subject to regulation by various federal,
state and local government entities and agencies as well as foreign government
entities. We cannot assure you that we have been or will at all times be in
compliance with all regulatory requirements or that we will not incur material
costs or liabilities in connection with regulatory requirements.
14
<PAGE>
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 various federal, state and local environmental laws
and workplace regulations. These laws and regulations include, in the United
States, the Occupational Safety and Health Act, the Unfair Labor Standards Act,
the Clean Air Act, the Clean Water Act and laws relating to the maintenance of
fuel storage tanks. We believe that our current legal and environmental
compliance programs adequately address such concerns and that we are in
substantial compliance with applicable laws and regulations. However, compliance
with, or any violation of, current and 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.
WE ARE A HOLDING COMPANY AND WILL DEPEND ON DISTRIBUTIONS FROM OUR PRINCIPAL
OPERATING SUBSIDIARY, BOTTLING LLC, TO ENABLE US TO MEET OUR FINANCIAL
OBLIGATIONS.
We are primarily a holding company with limited direct operations and
limited assets other than our % interest in Bottling LLC. We will be dependent
on distributions from Bottling LLC to pay dividends to our stockholders and to
meet our obligations, including the payment of principal and interest on our
indebtedness.
The determination of the amount of distributions, if any, to be paid to us
by Bottling LLC will depend upon the terms of Bottling LLC's indebtedness, as
well as Bottling LLC's financial condition, results of operations, cash flow and
future business prospects. We will receive % of any distribution made by
Bottling LLC based on our % ownership interest and PepsiCo will receive the
remaining % of any such distribution.
At December 26, 1998, on a pro forma basis after giving effect to the
offering, Bottling LLC would have had $2.3 billion of indebtedness and aggregate
liabilities of $ . Any right of ours to participate in the assets of Bottling
LLC upon any liquidation or reorganization of Bottling LLC will be subject to
the prior claims of Bottling LLC's creditors, including trade creditors and
holders of indebtedness, except to the extent that we are a creditor of Bottling
LLC.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY AFTER THE OFFERING AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT.
Prior to this offering, there has been no public market for our common
stock. We intend to list the common stock on the New York Stock Exchange. We do
not know how the common stock will trade in the future. The initial public
offering price will be determined through negotiations between the underwriters
and us. You may not be able to resell your shares at or above the initial public
offering price due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts; and
- the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.
15
<PAGE>
PEPSICO'S APPROXIMATELY 40% VOTING POWER AND ITS RIGHTS UNDER THE PEPSI BEVERAGE
AGREEMENTS COULD DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY.
In addition to its voting rights, PepsiCo will have the right to terminate
the Pepsi beverage agreements upon the occurrence of certain events, including
any disposition of any voting securities of any bottler subsidiary without the
consent of PepsiCo, the assignment or transfer of the Pepsi beverage agreements
or the acquisition of 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 by a person or affiliated group,
without the consent of PepsiCo.
PROVISIONS IN OUR CORPORATE DOCUMENTS COULD DELAY OR PREVENT A CHANGE IN CONTROL
OF OUR COMPANY.
Our certificate of incorporation and bylaws contain several provisions which
may be deemed to have anti-takeover effects and may discourage, delay or prevent
a takeover attempt that a stockholder might consider in its best interest. These
provisions include the requirement that:
- the number of directors shall be no more than 15; and
- with respect to annual stockholders' meetings, stockholders must comply
with the timing and procedural requirements of the federal proxy rules in
order for a stockholder proposal to be included in our proxy statement.
Our board of directors has the authority to authorize the issuance of
preferred stock. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of our company, and may
adversely affect the voting and other rights of the holders of our capital
stock.
A SUBSTANTIAL NUMBER OF OUR SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC
MARKET AFTER THE OFFERING AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR
STOCK PRICE.
Sales of a substantial number of shares of common stock into the public
market after this offering, or the perception that such sales could occur, could
materially and adversely affect our stock price or could impair our ability to
obtain capital through an offering of equity securities. After the offering, we
will have outstanding shares of common stock. Of these shares, the
shares sold in this offering will be freely transferable without restriction or
further registration under the Securities Act, except for any shares purchased
by our "affiliates" as defined in Rule 144.
We have entered into a registration rights agreement with PepsiCo which
enables PepsiCo to require us to register shares of our common stock owned by
PepsiCo and to include those shares in registrations of common stock made by us
in the future.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Our actual results could differ materially from those anticipated
in these forward-looking statements. These forward-looking statements are
affected by risks, uncertainties and assumptions about PBG, including, among
other things:
- our anticipated growth strategies;
- competition in the beverage industry;
- our continuing relationship with PepsiCo;
- anticipated trends in the beverage industry;
- social, political and economic situations in foreign countries where we
have operations;
- our ability to continue to control costs; and
- the risks described above in "Risk Factors."
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
17
<PAGE>
RATIONALE FOR THE SEPARATION OF PBG FROM PEPSICO
We were organized in November 1998 to effect the separation of most of
PepsiCo's company-owned bottling business from its brand ownership. As an
independent entity, we believe we will benefit from a sharper definition of our
role and be able to execute our business strategy more effectively on a local
market level. The most significant advantages of the separation include:
- FOCUS ON SALES AND SERVICE IN OUR TERRITORIES. We will be free to focus
more closely on sales and service in our territories. Prior to separation,
we assisted PepsiCo in managing its relationships with independent PepsiCo
bottlers, including the coordination of regional and national marketing
initiatives. This responsibility has now been assumed by PepsiCo.
- SHIFT IN PERFORMANCE MEASURES. We will be able to shift our performance
emphasis to growth in operating cash flow. We believe this shift in
emphasis is appropriate given our higher levels of indebtedness and
significant non-cash depreciation and amortization charges resulting from
our capital investments and acquisitions. We intend to generate sufficient
cash flow to fund an aggressive investment program in vending machines,
coolers and other revenue generating assets.
- TARGETED INCENTIVES FOR MANAGEMENT AND EMPLOYEES. Our performance will now
be measurable and rewardable based upon the results we achieve. Our equity
securities will provide a basis for management and employee incentives
that are directly related to our performance.
- CAPITAL STRUCTURE AND FINANCIAL POLICIES APPROPRIATE FOR A BOTTLING
COMPANY. As a separate entity, we will have a capital structure and
financial policies that are more appropriate for a bottling company,
allowing us to make better capital allocation and investment decisions. In
addition, our equity securities will provide an additional form of
consideration for possible future acquisitions and financings.
After the offering, our business interests will continue to be aligned with
those of PepsiCo, which shares our objective of increasing availability and
consumption of Pepsi-Cola beverages. We plan to work closely with PepsiCo and
expect to benefit from this relationship in a number of ways including:
- MARKETING SUPPORT AND FUNDING. We will have the benefit of PepsiCo's
worldwide marketing expertise and advertising programs and we expect that
PepsiCo will continue to provide us with significant marketing support and
funding. This support covers a variety of initiatives, including consumer
marketing programs, trade incentives, capital equipment investment and
shared media expense.
- SHARED SERVICES. Under the terms of a shared services agreement, we will
have the benefit of PepsiCo's scale and efficiencies in certain areas such
as the procurement of raw materials, transaction processing such as
accounts payable and credit and collection, certain tax and treasury
services and information technology maintenance and systems development.
- CREDIT ENHANCEMENT. We believe we benefit from lower interest rates
resulting from PepsiCo's guarantee of $2.3 billion of debt of our
principal operating subsidiary, Bottling LLC. In addition, our association
with PepsiCo is viewed favorably by rating agencies.
- ACQUISITIONS. We expect that PepsiCo will help us identify and acquire
other independent PepsiCo bottlers principally in the United States and
Canada.
Bottling LLC is a limited liability company which was formed in January 1999
and % of its equity is owned by us. Bottling LLC owns substantially all of the
property, plant and equipment used in our operations. PepsiCo is the guarantor
of $2.3 billion aggregate principal amount of Bottling LLC's indebtedness. Use
of a limited liability company rather than a corporation is advantageous to us
and PepsiCo. It allows PepsiCo, which holds a minority interest in Bottling LLC,
to take into account its allocable share of Bottling LLC's income without
imposition of a second level of tax. The limited liability company structure
also provides an attractive acquisition platform since prospective sellers of
bottling operations may prefer to receive a minority limited liability company
interest for those operations, rather than a minority interest in a corporation.
18
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of our
common stock in the offering, after deducting estimated expenses of $ and
underwriting discounts and commissions, will be approximately $ , at an
assumed initial public offering price of $ per share, the midpoint of the
range set forth on the cover page of this prospectus. If the underwriters
exercise their over-allotment option in full, we estimate that the net proceeds
we will receive will be $ .
Substantially all of the net proceeds of this offering will be used to repay
indebtedness incurred by us to repay pre-existing intercompany obligations due
to PepsiCo and to purchase bottling businesses. The indebtedness to be repaid
bears interest at a rate of % and matures on .
DIVIDEND POLICY
Our board of directors expects to declare and pay quarterly cash dividends
of $ per share, commencing with a dividend payable in the quarter of
1999. The declaration of dividends by us and the amount of those dividends will,
however, be determined by our board of directors and will depend upon our
results of operations, financial condition, cash requirements, future prospects
and other factors deemed relevant by our board.
We are a newly formed corporation and as such have never declared or paid
any cash dividends on our capital stock.
19
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of December 26,
1998 as adjusted to reflect:
- $1.0 billion of debt that we expect to incur through a sale of notes prior
to the offering. We expect that this indebtedness will remain outstanding
after the offering. We will use the proceeds of this debt to repay
short-term financing incurred prior to the offering.
- $2.3 billion of debt that Bottling LLC incurred on February 9, 1999
through a sale of notes. PepsiCo has unconditionally guaranteed this
indebtedness which we expect to remain outstanding after the offering.
The table is further adjusted to reflect the offering and the application of the
estimated net proceeds as described under "Use of Proceeds". You should read the
table in conjunction with the Combined Financial Statements, the unaudited Pro
Forma Condensed Combined Financial Statements and the accompanying notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 26, 1998
-----------------------------------
<S> <C> <C> <C>
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
--------- ----------- -----------
<CAPTION>
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term borrowings.......................................................... $ 112 $ 2,550 $
--------- ----------- -----------
Long-term debt:
Allocation of PepsiCo long-term debt......................................... 3,300 --
Due to third parties......................................................... 61 --
PBG debt..................................................................... -- 1,000 1,000
Bottling LLC debt............................................................ -- 2,300 2,300
--------- ----------- -----------
Total long-term debt....................................................... 3,361 3,300 3,300
--------- ----------- -----------
Advances from PepsiCo.......................................................... 1,605 (772)
Minority interest.............................................................. -- --
Stockholders' equity:
Preferred stock, par value $.01 per share; 20 million shares authorized; no
shares issued or outstanding as adjusted and as further adjusted........... -- -- --
Common stock, par value $.01 per share; 300 million shares
authorized; million shares issued and
outstanding as adjusted; and million shares issued and outstanding as
further adjusted........................................................... -- --
Class B common stock, par value $.01 per share; 75,000 shares authorized;
shares issued and outstanding as adjusted; and shares issued and
outstanding as further adjusted............................................ -- --
Additional paid-in capital................................................... -- --
Accumulated other comprehensive loss......................................... (238) (238) (238)
--------- ----------- -----------
Total stockholders' equity (deficit)..................................... (238) (238)
--------- ----------- -----------
Total capitalization................................................. $ 4,840 $ 4,840 $
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
20
<PAGE>
SELECTED COMBINED FINANCIAL AND OPERATING DATA
The following table presents selected financial and operating data of PBG.
It should be read along with "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the Combined Financial Statements, the
unaudited Pro Forma Condensed Combined Financial Statements and the accompanying
notes included elsewhere in this prospectus. The financial information for the
fiscal years 1996, 1997 and 1998 has been derived from, and is qualified
completely by reference to, our Combined Financial Statements appearing
elsewhere in this prospectus.
The summary pro forma data set forth below is derived from the unaudited Pro
Forma Condensed Combined Financial Statements included elsewhere in this
prospectus. The unaudited Pro Forma Condensed Combined Financial Statements give
effect to the 1998 acquisitions of Pepsi-Cola Allied Bottlers, Inc., Gray
Beverage Inc. and Pepsi International Bottlers, LLC and the expected 1999
acquisition of certain U.S. and Russian territories from Whitman Corporation, as
well as the offering and related transactions. These transactions have been
recorded as if they had actually occurred on the first day of our 1998 fiscal
year with respect to pro forma statement of operations data and, except to the
extent that a transaction occurred earlier, on December 26, 1998 with respect to
pro forma balance sheet data. The pro forma data does not necessarily represent
what our financial position or results of operations would have been had such
transactions been completed on such dates nor does it give effect to any events
other than those discussed in the notes to the unaudited Pro Forma Condensed
Combined Financial Statements. The pro forma data also does not project our
financial position or results of operations as of any future date or for any
future period.
Pro forma earnings per share is based upon an assumed million shares of
capital stock outstanding after the offering.
The Statement of Operations Data set forth below includes unusual items and
events that affect comparability with other years:
- 1994 consisted of 53 weeks. The fifty-third week increased 1994 net sales
by $68 million, income before income taxes by $3 million and net income by
$2 million.
- 1994 net income also reflects the cumulative effect of accounting changes
arising from SFAS 112, "Employers Accounting for Postemployment Benefits,"
and changing to a preferable method for calculating pension plan assets.
The adoption of SFAS 112 reduced income before income taxes by $28 million
and net income by $17 million, while the pension change increased income
before income taxes by $9 million and net income by $6 million.
- 1998 reflects unusual impairment and other charges, as well as an income
tax benefit arising from resolving a disputed claim with the Internal
Revenue Service.
EBITDA is computed as operating income plus the sum of depreciation and
amortization expense and, for 1998, the non-cash portion of the unusual item
referred to above. We have included information concerning EBITDA as we believe
that it is useful to an investor in evaluating PBG because this measure is
widely used in the bottling industry to evaluate a company's operating
performance. EBITDA is not required under GAAP, and should not be considered an
alternative to net income or any other measure of performance required by GAAP,
and should be read along with the Combined Statements of Cash Flows contained in
the Combined Financial Statements. EBITDA should also not be used as a measure
of liquidity or cash flows under GAAP. In addition, PBG's EBITDA may not be
comparable to similar measures reported by other companies.
21
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DEC. 31 DEC. 30 DEC. 28 DEC. 27 DEC. 26
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AND PER CASE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales...................................................... $ 5,950 $ 6,393 $ 6,603 $ 6,592 $ 7,041
Cost of sales.................................................. 3,432 3,771 3,844 3,832 4,181
--------- --------- --------- --------- ---------
Gross profit................................................... 2,518 2,622 2,759 2,760 2,860
Selling, delivery and administrative expenses.................. 2,221 2,273 2,392 2,425 2,583
Unusual impairment and other charges........................... -- -- -- -- 222
--------- --------- --------- --------- ---------
Operating income............................................... 297 349 367 335 55
Interest expense, net.......................................... 231 239 225 222 221
Foreign currency loss (gain)................................... 3 -- 4 (2) 26
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative effect of
accounting changes........................................... 63 110 138 115 (192)
Income tax expense (benefit)................................... 46 71 89 56 (46)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of accounting changes... 17 39 49 59 (146)
Cumulative effect of accounting changes........................ (11) -- -- -- --
Minority interest.............................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net Income (loss).............................................. $ 6 $ 39 $ 49 $ 59 $ (146)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma earnings per share...................................
Pro forma weighted average shares outstanding..................
OTHER FINANCIAL DATA:
EBITDA......................................................... $ 681 $ 767 $ 792 $ 774 $ 721
Cash provided by operations.................................... 484 431 451 548 625
Cash used for investments...................................... (310) (355) (376) (564) (1,046)
Cash provided by (used for) financing.......................... (160) (66) (66) 63 370
Capital expenditures........................................... (432) (358) (418) (472) (507)
OTHER OPERATING DATA:
Net sales per case............................................. $ 7.27 $ 6.92 $ 6.97 $ 6.74 $ 6.70
Costs of sales per case........................................ 4.20 4.08 4.06 3.92 3.98
BALANCE SHEET DATA (AT PERIOD END):
Total assets................................................... $ 6,847 $ 7,082 $ 7,052 $ 7,188 $ 7,322
Long-term debt:
Allocation of PepsiCo long-term debt......................... 3,300 3,300 3,300 3,300 3,300
Due to third parties......................................... 135 131 127 96 61
--------- --------- --------- --------- ---------
Total long-term debt....................................... 3,435 3,431 3,427 3,396 3,361
Advances from PepsiCo.......................................... 1,265 1,251 1,162 1,403 1,605
Minority interest.............................................. -- -- -- -- --
Accumulated comprehensive income (loss)........................ (112) (66) (102) (184) (238)
Stockholders' equity (deficit)................................. (112) (66) (102) (184) (238)
<CAPTION>
PRO FORMA
DEC. 26
1998
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................................... $ 7,323
Cost of sales.................................................. 4,341
-----------
Gross profit................................................... 2,982
Selling, delivery and administrative expenses.................. 2,678
Unusual impairment and other charges........................... 222
-----------
Operating income............................................... 82
Interest expense, net..........................................
Foreign currency loss (gain)...................................
-----------
Income (loss) before income taxes and cumulative effect of
accounting changes...........................................
Income tax expense (benefit)...................................
-----------
Income (loss) before cumulative effect of accounting changes...
Cumulative effect of accounting changes........................
Minority interest.............................................. --
-----------
Net Income (loss).............................................. $
-----------
-----------
Pro forma earnings per share...................................
Pro forma weighted average shares outstanding..................
OTHER FINANCIAL DATA:
EBITDA......................................................... $
Cash provided by operations....................................
Cash used for investments......................................
Cash provided by (used for) financing..........................
Capital expenditures...........................................
OTHER OPERATING DATA:
Net sales per case............................................. $
Costs of sales per case........................................
BALANCE SHEET DATA (AT PERIOD END):
Total assets................................................... $
Long-term debt:
Allocation of PepsiCo long-term debt.........................
Due to third parties.........................................
-----------
Total long-term debt.......................................
Advances from PepsiCo..........................................
Minority interest..............................................
Accumulated comprehensive income (loss)........................
Stockholders' equity (deficit).................................
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
FINANCIAL STATEMENTS. Our Combined Financial Statements and the
accompanying notes, which are included elsewhere in this prospectus, reflect the
results of operations, financial condition and cash flows of the business
transferred to us from PepsiCo. Our Combined Financial Statements have been
carved-out from the financial statements of PepsiCo using the historical results
of operations and assets and liabilities of such business. Certain costs have
been reflected in the Combined Financial Statements which are not necessarily
indicative of the costs that we would have incurred had we operated as an
independent, stand-alone entity for all periods presented. Such costs include
allocated PepsiCo corporate overhead, an allocation of PepsiCo interest expense
and income taxes.
- Corporate overhead related to PepsiCo's corporate administrative functions
has been allocated to us based on a specific identification of PepsiCo's
administrative costs relating to the bottling operations and, to the
extent that such identification was not practicable, based upon the
percentage of our sales to PepsiCo's consolidated net sales. These
allocated costs of $42 million in 1996 and 1997 and $40 million in 1998,
have been included in selling, delivery and administrative expenses in the
Combined Statements of Operations. We believe that such allocation
methodology is reasonable. In addition, PBG expects to change from a non-
compensatory broad-based stock option program to an alternative program.
While no program has been finally determined or approved by the board of
directors, management anticipates that the new plan could cost up to an
additional $12 million per year.
- Interest expense included in the Combined Financial Statements reflects an
allocation of PepsiCo's interest costs based upon debt expected to be
outstanding after the offering and application of the proceeds from the
offering. As PBG was not a stand-alone entity, nor did it have its own
debt, we believe that PepsiCo's weighted average borrowing rate is the
best approximation of the interest actually paid on the debt allocated to
PBG. For information regarding interest rates we expect to pay on the
third party debt we anticipate to be outstanding at the offering date, see
the Pro Forma Condensed Combined Financial Statements.
- Income tax expense has been reflected in the Combined Financial Statements
as if we had actually filed a separate income tax return. In the Combined
Financial Statements, our effective tax rate differs from the 35% U.S.
federal statutory rate. This is primarily due to state and local income
taxes and the amortization of goodwill which is not deductible for U.S.
income tax purposes. In addition, in 1998 we settled a disputed claim with
the Internal Revenue Service regarding the deductibility of the
amortization of acquired franchise rights. Also in 1998, our effective tax
rate increased due to the Russia impairment and other charges for which we
have not recognized a tax benefit. In the future, our effective tax rate
will depend on our structure and tax strategies as a separate, independent
company.
Our fiscal year ends on the last Saturday in December and generally consists
of 52 weeks, though occasionally our fiscal years will consist of 53 weeks. This
last occurred in 1994 and will next occur in 2000. Fiscal years 1996, 1997 and
1998 consisted of 52 weeks. Each of the first three quarters of each fiscal year
consists of 12 weeks and the fourth quarter consists of 16 or 17 weeks.
Cost of sales is comprised of raw materials, which include concentrates,
sweeteners, carbon dioxide and other ingredients; packaging, which is primarily
cans and plastic bottles; and other direct costs, including labor and
manufacturing overhead. Expenditures for concentrate and packaging constitute
our largest individual raw material costs, representing approximately 43% and
47%, respectively, of our total raw material costs. We depend primarily on
PepsiCo for our concentrates and we purchase our other raw materials from
multiple suppliers.
23
<PAGE>
Selling, delivery and administrative expenses include labor and benefit
costs, depreciation of facilities and equipment and advertising and marketing
expenses. These expenses also include significant non-cash charges for
amortization of franchise rights, goodwill and other intangible assets.
BOTTLER INCENTIVES. PepsiCo and other brand owners, at their sole
discretion, provide us with various forms of marketing support. This marketing
support is intended to cover a variety of programs and initiatives, including
direct marketplace support, capital equipment funding and shared media and
advertising support. Direct marketplace support is primarily funding by PepsiCo
and other brand owners of sales discounts and similar programs and is recorded
as an adjustment to net sales. Capital equipment funding is designed to support
the purchase and placement of marketing equipment and is recorded within
Selling, delivery and administrative expenses. Shared media and advertising
support is recorded as a Reduction to advertising and marketing expense within
Selling, delivery and administrative expenses.
The total amount of bottler incentives received from PepsiCo and other brand
owners in the form of marketing support amounted to $421 million, $463 million,
and $536 million for 1996, 1997 and 1998, respectively. Of these amounts, $238
million, $235 million, and $247 million for 1996, 1997 and 1998 were recorded in
net sales, and the remainder was recorded in Selling, delivery and
administrative expenses. The amount of our bottler incentives received from
PepsiCo was more than 90% of our bottler incentives in each of the three years,
with the balance received from the other brand owners. We negotiate the level of
funding with PepsiCo and other brand owners as part of our annual planning
process.
In February 1999 PepsiCo announced an increase of approximately 5% in the
U.S. price of its concentrate. PepsiCo has agreed to offset the cost of this
price increase in substantial part with increases in the 1999 level of marketing
support and funding.
Because of economic conditions in Russia, PepsiCo has stated its intention
to provide approximately $35 million of funding for our Russian operations in
1999. This amount is based on our current operating plan for Russia and may
change if conditions change in Russia. PepsiCo may also provide comparable
levels of funding in subsequent years.
While we expect that PepsiCo and other brand owners will continue to provide
us with significant marketing support and funding, they have no obligation to
continue to provide funding at current levels.
EFFECT OF SEASONALITY. Our business is seasonal. You should read the risk
factor entitled "The seasonality of our sales could adversely affect our
business" contained in "Risk Factors" for an explanation of the effects and
risks of the seasonality of our business.
RECENT ACQUISITIONS. In 1998 and 1999, we made several acquisitions which
increased our ownership of the PepsiCo system in the U.S. from approximately 51%
to 53% and in Canada from approximately 64% to 78%. In 1998, we acquired the
remaining interest in our Russian joint venture. The unaudited Pro Forma
Combined Statement of Operations reflect these transactions as though they had
been made on the first day of fiscal 1998.
VARIABILITY OF RESULTS IN INTERNATIONAL MARKETS. Operating results in our
international markets vary considerably based on economic and industry
development. In Spain and Greece, which contribute approximately 7% of net sales
and 8% of volume and provide positive cash flow, there is low inflation,
economic stability and a carbonated soft drink industry that has been in
existence for some time.
In recent years, we have invested in Russia to build infrastructure and to
fund start-up manufacturing and distribution costs. Approximately 1% of our net
sales in fiscal 1997 and 2% in 1998 were attributable to our operations in
Russia. During such periods, operating losses, before the 1998 unusual charges,
amounted to $48 million and $80 million, respectively. Cash requirements for
investing
24
<PAGE>
activities and to fund operations were $71 million and $156 million in 1997 and
1998, respectively. This cash was used to build our existing infrastructure and
fund our purchase of a 25% interest in a Russian bottler in 1997, and our
purchase of the remaining interest in that bottler in 1998.
The economic turmoil in Russia which accompanied the August 1998 devaluation
of the ruble had an adverse impact on our operations. Consequently in our fourth
quarter we experienced a significant drop in demand, resulting in lower net
sales and increased operating losses. Additionally, since net sales in Russia
are denominated in rubles, while a substantial portion of our costs and expenses
are denominated in U.S. dollars, operating margins were further eroded. In
response to these conditions, we have reduced our cost structure primarily
through closing facilities, renegotiating manufacturing contracts and reducing
the number of employees. We have also evaluated the resulting impairment of our
long-lived assets, triggered by the reduction in utilization of assets caused by
the lower demand, the adverse change in the business climate and the expected
continuation of operating losses and cash deficits in that market. This has
resulted in a fourth quarter charge of $212 million comprised of an asset
impairment charge of $194 million and costs to restructure our operations of $18
million. The impairment charge reduced the net book value of the assets to their
estimated fair market value, based on values paid for similar assets in that
marketplace. In 1999, the reduction in depreciation and amortization expense as
a result of the asset impairment charge will be $18 million.
For the foreseeable future, we anticipate that our Russian operations will
incur losses and require significant amounts of cash to fund operations.
However, capital requirements will be minimal because our existing
infrastructure is adequate for current operations. We plan to review our Russian
operations on a regular basis and to consider changes in our distribution
systems and other operations as circumstances dictate.
IMPACT OF EARLY VESTING OF PEPSICO OPTIONS
Prior to the offering, substantially all non-vested PepsiCo stock options
held by PBG employees will vest on a date determined by PepsiCo. As a result,
PBG will incur a non-cash compensation charge equal to the difference between
the market price of PepsiCo capital stock and the exercise price of these
options at that vesting date. Based on the market price of PepsiCo capital stock
on February 23, 1999 the pre-tax and after-tax compensation charge would be $70
million.
USE OF EBITDA
As a separate entity, we will have a capital structure and financial
policies that are more appropriate for a bottling company, allowing us to make
better capital allocation and investment decisions. We will be able to shift our
performance emphasis to growth in EBITDA. We believe this shift in emphasis is
appropriate given our higher levels of indebtedness and significant non-cash
depreciation and amortization charges resulting from our capital investments and
acquisitions. Our discretionary use of funds depicted by EBITDA may be limited
by working capital, debt service, tax payment and capital expenditure
requirements, and by restrictions related to legal requirements, commitments and
uncertainties.
RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations,
financial condition and cash flows should be read along with the Combined
Financial Statements and the accompanying notes appearing elsewhere in this
prospectus.
25
<PAGE>
The table below sets forth, for the periods indicated, Combined Statements
of Operations data as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Net sales.......................................................................... 100.0% 100.0% 100.0%
Cost of sales...................................................................... 58.2 58.1 59.4
--------- --------- ---------
Gross profit....................................................................... 41.8 41.9 40.6
Selling, delivery and administrative expenses...................................... 36.2 36.8 36.7
Unusual impairment and other charges............................................... -- -- 3.1
--------- --------- ---------
Operating income................................................................... 5.6 5.1 0.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
<TABLE>
<CAPTION>
AMOUNTS IN MILLIONS 1997 1998 $ CHANGE % CHANGE
- ------------------------------------------------------------------------ --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
REPORTED
Net sales............................................................... $ 6,592 $ 7,041 $ 449 6.8%
Operating income........................................................ 335 55 (280) (83.6)
EBITDA.................................................................. 774 721 (53) (6.8)
ONGOING*
Net Sales............................................................... $ 6,592 $ 7,041 $ 449 6.8%
Operating income........................................................ 335 277 (58) (17.3)
EBITDA.................................................................. 774 721 (53) (6.8)
</TABLE>
* Operating income excludes $222 million of unusual impairment and other
charges. See Note 3 to the Combined Financial Statements.
Worldwide case volume, based upon physical cases sold regardless of the
volume contained in these cases, grew 7% with our combined U.S. and Canadian
markets increasing 6% and international increasing 18%. Excluding the impact of
acquisitions, volume increased 5% in our combined U.S. and Canadian markets and
6% in our international markets. In our combined U.S. and Canadian markets,
volume growth was led by cola products which were up 3%, and MOUNTAIN DEW which
increased by 8%. Expanded distribution increased AQUAFINA volume by 63%. The
U.S. introduction of PEPSI ONE in the fourth quarter of 1998 contributed one
percentage point of growth. International volume growth was led by Russia up 21%
excluding the impact of acquisitions, and Spain up 6%.
Worldwide net sales growth of 6.8% was fueled by strong volume gains and
acquisitions of bottlers in the U.S., Canada and Russia. Volume gains
contributed five percentage points of net sales growth. Unfavorable foreign
currency fluctuations in Canada, Spain and Greece reduced net sales growth by
one percentage point, while bottler acquisitions contributed three percentage
points to net sales growth. Pricing was essentially flat in 1998 as compared to
1997 as a greater percentage of higher priced "single-serve" packages sold was
offset by lower "take-home" package pricing in the combined U.S. and Canadian
markets and promotional pricing relating to the U.S. introduction of PEPSI ONE
in the fourth quarter of 1998.
Ongoing operating income declined $58 million or 17.3% compared to 1997.
Higher raw material costs in the U.S. and Canada, increases in selling and
delivery expenses associated with significant investments in cold drink
equipment consisting primarily of vending machines and coolers, and higher
losses in Russia more than offset strong worldwide volume growth.
26
<PAGE>
- Cost of sales as a percentage of net sales increased from 58.1% in 1997 to
59.4% in 1998. This increase was primarily a result of margin declines in
the take-home market and increases in concentrate costs. A greater
percentage of sales in the higher margin cold drink channel was
insufficient to offset those margin declines.
- Selling, delivery and administrative expenses increased $158 million or
6.5% in 1998. Selling and delivery expenses grew at a rate faster than
volume while our other administrative costs grew less than 1% in 1998. Our
costs associated with selling and delivery grew faster than volume largely
because we continued our program of heavy investment in vending machines
and coolers, consistent with our long-term strategy to increase our
presence in the cold drink segment of the industry in the combined U.S.
and Canadian markets. Spending on vending machines and coolers at customer
locations in the combined U.S. and Canadian markets was approximately 13%
higher in 1998 as compared to 1997, driving increases in the costs
associated with placing, depreciating and servicing these assets.
- We had higher operating losses in Russia in 1998 compared to 1997. The
devaluation of the ruble and the resulting economic downturn adversely
affected our 1998 business results. In addition, in February 1998 we
acquired the remaining 75% interest in a Russian bottling joint venture
that held the Pepsi franchise for part of that country. Our 1998 results
reflect the full consolidation of this operation.
In the fourth quarter of 1998, we recorded $222 million of charges relating
to the following:
- A charge of $212 million for asset impairment of $194 million and other
charges of $18 million related to our Russian operations.
- A charge of $10 million for employee related costs, mainly relocation and
severance, resulting from the separation of Pepsi-Cola bottling and
concentrate organizations to more effectively service retail customers in
light of the expected conversion of PBG to public ownership.
EBITDA declined $53 million or 6.8% in 1998 compared to 1997. This decline
in EBITDA was lower than the decline in ongoing operating income due primarily
to a significant increase in depreciation expense resulting from our investments
in cold drink equipment, a non-cash expense not included in EBITDA.
FOREIGN CURRENCY EXCHANGE GAINS/LOSSES
Foreign currency exchange losses increased $28 million from a gain of $2
million in 1997 to a loss of $26 million in 1998. The devaluation of the Russian
ruble in 1998 drove $21 million of this increase.
INTEREST EXPENSE, NET
Interest expense decreased $1 million in 1998 compared to 1997, reflecting
higher interest income in Spain offset by an increase in PepsiCo's average
borrowing rate from 6.2% to 6.4%.
INCOME TAX EXPENSE
Our effective tax rate in 1998 was a benefit of 24.0% compared to an expense
of 48.7% in 1997. In 1998, we settled a dispute with the Internal Revenue
Service regarding the deductibility of the amortization of acquired franchise
rights resulting in a $46 million tax benefit in the fourth quarter. Also in
1998, our effective tax rate was increased due to the Russia impairment and
other unusual charges for which we did not recognize a tax benefit. Excluding
these items, our effective tax rate in 1998 would have been an expense of 0.9%,
on income before income taxes of $20 million, driven by an increase in the mix
of international income taxed at lower rates.
27
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
<TABLE>
<CAPTION>
AMOUNTS IN MILLIONS 1996 1997 $ CHANGE % CHANGE
- ------------------------------------------------------------------------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales............................................................... $ 6,603 $ 6,592 $ (11) (0.2)%
Operating income........................................................ 367 335 (32) (8.7)
EBITDA.................................................................. 792 774 (18) (2.3)
</TABLE>
Worldwide case volume, based upon physical cases sold regardless of the
volume contained in the cases, grew 3% reflecting 4% growth in our combined U.S.
and Canadian markets offset by an 8% decline in our international markets. The
combined U.S. and Canadian growth was driven by 11% volume growth in MOUNTAIN
DEW, a 17% increase in LIPTON BRISK and a 9% increase in MUG. In addition,
expanded distribution drove AQUAFINA volume up 85%, while the growth of cola
products was flat. Our international volume, excluding our St. Petersburg,
Russia operations which we sold in 1997, was 4% lower than in the prior year,
led by Russia which was down 18% and Spain which was down 2%.
Worldwide net sales in 1997 declined by 0.2% compared to 1996. Volume gains
contributed four percentage points of net sales growth. Pricing declines
resulting from the competitive pricing environment in the United States and
Canada offset volume growth by approximately two percentage points. In addition,
the combined effect of unfavorable foreign currency fluctuations, primarily in
Spain, and the sale of our St. Petersburg, Russia operations also reduced net
sales growth by two percentage points.
Operating income in 1997 declined $32 million or 8.7% as compared to 1996.
Results were impacted by significant competitive pricing pressures in our U.S.
and Canadian markets and lower international volumes. These items more than
offset the positive U.S. and Canadian volume growth and lower raw material costs
in the majority of our markets.
- Cost of sales as a percentage of net sales improved from 58.2% in 1996 to
58.1% in 1997. Significant declines in aluminum, plastic bottles and
sweetener costs in 1997 were greater than the effect of the decline in
pricing on net sales.
- Selling, delivery and administrative expenses increased $33 million or
1.4% in 1997, somewhat slower than volume growth. Beginning in 1997, we
began a multi-year investment in vending machines and coolers to increase
our U.S. and Canadian presence in the cold drink channel. However,
financial support received from PepsiCo for this initiative more than
offset the incremental costs for placement and servicing of this
equipment.
EBITDA in 1997 declined $18 million or 2.3% as compared to 1996. This
decline was lower than the decline in operating income due to increases in
depreciation expense associated with our cold drink investment strategy.
FOREIGN CURRENCY EXCHANGE GAINS/LOSSES
Foreign currency exchange losses decreased $6 million from a loss of $4
million in 1996 to a gain of $2 million in 1997 driven primarily by favorable
exchange rate movements in Spain.
INTEREST EXPENSE, NET
In 1997, net interest expense decreased $3 million or 1.3% due primarily to
external debt reductions in our international markets.
28
<PAGE>
INCOME TAX EXPENSE
Our effective tax rate in 1997 was 48.7% compared to 64.5% in 1996. The
change was due primarily to no longer accruing for a disputed claim with the
Internal Revenue Service regarding deductibility of the amortization of acquired
franchise rights because we made substantial progress towards a satisfactory
resolution of the dispute. The other significant factor was a change in the tax
structure of some of our international operations, which enabled us to recognize
a tax benefit on operating losses.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY PRIOR TO AND UPON OUR SEPARATION FROM PEPSICO AND THE OFFERING
Our capital investments and acquisitions have been financed by cash flow
from operations and advances from PepsiCo. Under PepsiCo's centralized cash
management system, PepsiCo deposited sufficient cash in our bank accounts to
meet our daily obligations, and withdrew excess funds from those accounts. These
transactions are included in advances from PepsiCo in the Combined Balance
Sheets and Combined Statements of Cash Flows.
FINANCING TRANSACTIONS
On February 9, 1999, Bottling LLC issued $1 billion of 5 3/8% Senior Notes
due 2004 and $1.3 billion of 5 5/8% Senior Notes due 2009. These Bottling LLC
Notes are irrevocably and unconditionally guaranteed on a senior, unsecured
basis by PepsiCo. The net proceeds from the sale of the Bottling LLC Notes were
distributed by Bottling LLC to a subsidiary of PepsiCo.
On February 25, 1999, PepsiCo sold $750 million of its Series A Senior Notes
due 2000. PepsiCo's obligations under the Series A Notes were assumed by us and
became our unsecured senior obligation. In addition, we expect to issue prior to
this offering additional indebtedness in private placements.
We are currently in the process of negotiating a senior bank debt agreement
as well as a commercial paper program, each of which will be guaranteed by
Bottling LLC. We expect the bank debt agreement and the commercial paper program
will provide $500 million of revolving credit capacity and be available for
general corporate purposes, including working capital requirements. We expect
these arrangements to be finalized prior to this offering. The revolving credit
capacity is intended to replace our reliance on PepsiCo's centralized cash
management system.
Upon completion of the initial public offering and after giving effect to
the foregoing financing transactions, we expect that we will have outstanding $1
billion of long-term indebtedness, guaranteed by Bottling LLC, and Bottling LLC
will have outstanding $2.3 billion of long-term indebtedness guaranteed by
PepsiCo.
The debt levels reflected in our historical combined financial statements
are based upon the debt we anticipate to have outstanding upon consummation of
this offering and the application of the net proceeds. However, in the future,
our level of debt will change depending on our liquidity needs and capital
expenditure requirements, as well as our cash flow.
Based upon current and anticipated levels of operations, we believe that our
cash on hand and cash flow from operations, combined with borrowings available
under the proposed bank facility, will be sufficient to enable us to meet our
current and anticipated cash operating requirements, capital expenditures and
working capital needs for the foreseeable future. However, actual capital
requirements may change, particularly as a result of any acquisition which we
may make. Our ability to meet current and anticipated operating requirements
will depend upon our future performance, which, in turn, will be subject to
general economic and competitive conditions and to financial, business and other
factors, some of which may be beyond our control.
29
<PAGE>
CAPITAL EXPENDITURES
We have incurred and will require capital for ongoing infrastructure,
including investment in developing markets and acquisitions.
- 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 $418
million, $472 million and $507 million during 1996, 1997 and 1998,
respectively. We believe that capital infrastructure spending will
continue to be significant, driven by our increased investment in the cold
drink channel. We anticipate investing approximately $2 billion in
infrastructure over the next three years.
- We intend to pursue acquisitions of independent PepsiCo bottlers in the
U.S. and Canada, particularly in territories contiguous to our own, and
expect that PepsiCo will help us identify these bottlers. These
acquisitions will enable us to provide better service to our large retail
customers as well as to reduce costs through economies of scale. We also
plan to evaluate international acquisition opportunities as they become
available.
CUMULATIVE TRANSLATION ADJUSTMENT
The cumulative translation adjustment account increased unfavorably by $35
million in 1998 as compared to 1997 due to erosion in the value of the Canadian
dollar against the U.S. dollar, partially offset by a strengthening of the
Spanish peseta. In 1997, the cumulative translation adjustment increased
unfavorably by $83 million as compared to 1996 due primarily to declines in the
value of the Spanish peseta and Canadian dollar against the U.S. dollar.
Translation gains and losses arising from the re-measurement into U.S.
dollars of the net monetary assets of our Russian operations are reflected as
foreign exchange gains and losses in the Combined Statements of Operations since
Russia is considered a highly inflationary economy for accounting purposes.
CASH FLOWS
FISCAL 1998 COMPARED TO FISCAL 1997
Net cash provided by operations in 1998 improved to $625 million from $548
million in 1997 due primarily to the favorable effect of a three year insurance
prepayment to a PepsiCo affiliate in 1997 and our continued focus on working
capital management.
Net cash used for investments was $1,046 million in 1998 compared to $564
million in 1997. In 1998, $546 million was utilized for the acquisition of
bottlers in the U.S., Canada and Russia compared to $3 million in 1997. In
addition, we continued to invest heavily in cold drink equipment in the U.S. and
Canada.
The net cash used for investments in 1998 was financed through normal
operating activities, advances from PepsiCo and proceeds from short-term
borrowings. The total net cash provided by financing activities in 1998 was $370
million.
FISCAL 1997 COMPARED TO FISCAL 1996
Net cash provided by operations in 1997 increased to $548 million from $451
million in 1996. This improvement was driven by a focus on working capital
management, partially offset by prepayment of insurance to an affiliate of
PepsiCo.
Net cash used for investments was $564 million in 1997, as compared to $376
million in 1996. In 1997, we began an initiative to significantly increase the
amount of cold drink equipment in the
30
<PAGE>
combined U.S. and Canadian markets. Also contributing to this increase were
additional investments made in the Russian joint venture and increased payments
for non-current and other assets.
In 1997, we received $161 million in advances from PepsiCo. This financing
was primarily used to repay short and long-term borrowings and make capital
investments. Our remaining capital needs were funded by normal operating
activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks including commodity prices, interest
rates on our debt and foreign exchange rates.
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.
INTEREST RATE RISK
Historically, we have had no material interest rate risk associated with
debt used to finance our operations due to limited third party borrowings.
Subsequent to the offering, we intend to manage our interest rate exposure using
both financial derivative instruments and a mix of fixed and floating interest
rate debt.
FOREIGN CURRENCY EXCHANGE RATE RISK
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically also affect
economic growth, inflation, interest rates, government actions and other
factors. These changes can cause us to adjust our financing and operating
strategies. The discussion below of changes in currency exchange rates does not
incorporate these other economic factors. For example, the sensitivity analysis
presented in the foreign exchange discussion below does not take into account
the possibility that rates can move in opposite directions and that gains from
one category may or may not be offset by losses from another category.
Operations outside the U.S. constitute approximately 16% of our net sales.
As currency exchange rates change, translation of the statements of operations
of our international businesses into U.S. dollars affects year-over-year
comparability. We have not hedged translation risks because cash flows from
international operations have generally been reinvested locally, nor
historically have we entered into hedges to minimize the volatility of reported
earnings. We estimate that a 10% change in foreign exchange rates would affect
reported operating income by less than $25 million.
Foreign exchange gains and losses reflect transaction and translation gains
and losses arising from the re-measurement into U.S. dollars of the net monetary
assets of businesses in highly inflationary countries. Russia is considered a
highly inflationary economy for accounting purposes and all foreign exchange
gains and losses are included in the Combined Statements of Operations.
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing, or legacy, currencies
and one common currency, the Euro. The Euro trades on currency exchanges and may
be used in business transactions. Conversion to the Euro eliminated currency
exchange rate risk between member countries. Beginning in January 2002, new
Euro-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation.
31
<PAGE>
Spain is one of the member countries that instituted the Euro and we have
established plans to address the issues raised by the Euro currency conversion.
These issues include, among others, the need to adapt computer and financial
systems, business processes and equipment such as vending machines, to
accommodate Euro-denominated transactions and the impact of one common currency
on cross-border pricing. Since financial systems and processes currently
accommodate multiple currencies, we do not expect the system and equipment
conversion costs to be material. Due to numerous uncertainties, we cannot
reasonably estimate the long-term effects one common currency may have on
pricing, costs and the resulting impact, if any, on financial condition or
results of operations.
YEAR 2000
Many computerized systems and microprocessors that are embedded in a variety
of products used by us have the potential for operational problems if they lack
the ability to handle the transition to the Year 2000. We have established teams
to identify and correct Year 2000 issues. We have engaged IBM to help set
testing strategy and complete some of the offsite remediation. Information
technology systems with non-compliant code are expected to be modified or
replaced with systems that are Year 2000 compliant. Similar actions are being
taken with respect to systems embedded in manufacturing and other facilities.
The teams are also charged with investigating the Year 2000 readiness of
suppliers, customers and other third parties and with developing contingency
plans where necessary.
Key information technology systems have been inventoried and assessed for
compliance, and detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are well underway with
approximately 81% of the systems already compliant. This percentage is expected
to increase to 95% and 99% by the end of the first and second quarters of 1999,
respectively. Inventories and assessments of systems embedded in manufacturing
and other facilities are in progress and expected to be complete by year-end;
remediation began in the fourth quarter of 1998 with a mid-year 1999 target
completion date. Independent consultants are monitoring progress against
remediation programs and performing tests at certain key locations. In addition,
the progress of the programs is also monitored by senior management and the
boards of directors of PepsiCo and PBG.
Our most significant exposure arises from our dependence on high volume
transaction processing systems, particularly for production scheduling,
inventory cost accounting, purchasing, customer billing and collection, and
payroll. We anticipate that any corrective actions to these applications will be
completed by the end of the second quarter in 1999.
We have contacted the key suppliers that are critical to our production
processes. There are approximately 150 key suppliers, all of whom responded to
our initial request for information about their remediation plans. We are now in
the process of visiting the 60 suppliers we have identified as presenting the
greatest risk. These suppliers have been selected either because of our
dependence on them or because of concerns regarding their remediation plans. To
date we have not identified any key suppliers who will not be Year 2000
compliant. We will, however, develop contingency plans for the non-compliance of
key suppliers during 1999. We have also contacted significant customers and
PepsiCo joint venture partners who manufacture certain LIPTON and STARBUCKS
products that we sell and have begun to survey their Year 2000 remediation
programs. Risk assessments and contingency plans, where necessary, will be
finalized in the second quarter of 1999.
Costs directly related to Year 2000 issues are estimated to be $56 million,
of which $26 million was spent in 1998 and $7 million in 1997. We have
redeployed approximately 160 employees to support this work as well as engaged
over 100 independent contractors. Approximately one-half of the total estimated
spending represents costs to modify existing systems, which includes the
inventory, assessment, remediation, testing and rollout phases. The remaining
dollars represent spending for the development, testing and rollout of new
systems to replace older, non-compliant applications. This estimate assumes that
we will not incur any costs on behalf of our suppliers, customers or other third
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<PAGE>
parties. These costs will not necessarily increase our normal level of spending
on information technology due to the deferral of other projects to enable us to
focus on Year 2000 remediation.
Contingency plans for Year 2000 related interruptions are being developed
and will include, but not be limited to, the development of emergency backup and
recovery procedures, remediation of existing systems parallel with installation
of new systems, replacement of electronic applications with manual processes,
identification of alternate suppliers and an increase in raw material and
finished goods inventory levels. All plans are expected to be completed by the
end of the second quarter in 1999.
In light of the foregoing, we do not currently anticipate that we will
experience a significant disruption to our business as a result of the Year 2000
issue. Our most likely potential risk is a temporary inability of suppliers to
provide supplies of raw materials or of customers to pay on a timely basis. We
typically experience below average sales volume in January due to the
seasonality of our products. In addition, we are not dependent on any single
supplier location or PBG location for a critical commodity or product.
Consequently we believe that in a worst case scenario any supply disruption can
be minimized by drawing down inventories or increasing production at unaffected
plants with some increase in distribution costs. We are testing electronic
billing and payment systems during 1999 as part of our overall Year 2000
strategy and will work with customers that experience disruptions that might
impact payment to us.
Our Year 2000 efforts are ongoing and our overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. While we anticipate no major interruption to our business
activities, there is still uncertainty about the broader scope of the Year 2000
issue as it may affect us and third parties, including our suppliers and
customers. For example, lack of readiness by electrical and water utilities and
other providers of general infrastructure such as rail transportation, could, in
some geographic areas, pose significant impediments to our ability to carry on
normal operations in the areas affected. Accordingly, while we believe our
actions in this regard should have the effect of lessening Year 2000 risks, we
are unable to eliminate such risks or to estimate the ultimate effect of Year
2000 risks on our operating results.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. We
are currently assessing the effects of adopting SFAS 133, and are not yet able
to make a determination of the impact on our financial position or results of
operations. SFAS 133 will be effective for our first quarter of year 2000.
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<PAGE>
BUSINESS OF PBG
PBG is the world's largest manufacturer, seller and distributor of
Pepsi-Cola beverages, accounting for 55% of the Pepsi-Cola beverages sold in the
United States and Canada and 32% worldwide. Pepsi-Cola beverages sold by us
include PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, LIPTON BRISK, LIPTON'S ICED TEA,
7UP outside the U.S., PEPSI MAX, PEPSI ONE, SLICE, MUG, AQUAFINA, STARBUCKS
FRAPPUCCINO and MIRINDA. In some of our territories, we also have the right to
manufacture, sell and distribute soft drink products of other companies,
including DR PEPPER and 7UP in the U.S. Approximately 92% of our volume is sold
in the United States and Canada and the remaining 8% is sold in Spain, Greece
and Russia.
THE LIQUID REFRESHMENT BEVERAGE INDUSTRY
OVERVIEW
We believe we are well positioned to capitalize on industry trends in the
liquid refreshment beverage industry. Liquid refreshment beverage annual retail
sales in 1997 were more than $72 billion in the United States and Canada, and
included the carbonated soft drink market, as well as markets for non-carbonated
beverages sold in bottles and cans, such as waters, shelf-stable juices and
juice drinks, sports drinks and tea and coffee drinks. PBG participates in a
number of different markets in the liquid refreshment beverage industry.
The following chart sets forth the category mix by volume for the U.S.:
1997 CATEGORY MIX BY VOLUME--U.S. LIQUID REFRESHMENT BEVERAGE INDUSTRY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SPORTS DRINKS 3%
<S> <C>
Ready-to-drink Tea and Coffee 3%
Bottled Water 16%
Shelf-stable Juices and Juice
Drinks 8%
Carbonated Soft Drinks 70%
</TABLE>
Source: Beverage World
The owners of beverage brands either manufacture and sell products
themselves or appoint bottlers to sell, distribute and, in some cases,
manufacture these products pursuant to licenses. Brand owners, such as PepsiCo,
generally own both the beverage trademarks and the secret formulas for the
concentrates, which they also manufacture and sell to their licensed bottlers.
Brand owners also develop new products and packaging for use by their bottlers.
Brand owners develop national marketing, promotion and advertising programs to
support their brands and brand image, and lead and coordinate selling efforts
with respect to national fountain, supermarket and mass merchandising accounts.
They also provide local marketing support to their bottlers.
34
<PAGE>
Bottlers, such as PBG, are generally responsible for manufacturing, selling
and distributing their products under the brand names they license from brand
owners in their exclusive territories. For carbonated soft drink products, the
bottler combines soft drink concentrate with sweeteners and carbonated water and
packages this mixture in bottles or cans. Bottlers may also have licenses to
manufacture syrup for sale to fountain accounts. Under these licenses, bottlers
combine soft drink concentrate with sweeteners to manufacture syrup for delivery
to fountain customers. For non-carbonated beverages, the bottler either
manufactures and packages such products or purchases such products in finished
form and sells them through its distribution system.
The primary distribution channels for the retail sale of products in the
beverage industry are supermarkets, mass merchandisers, vending machines,
convenience and gas stores, fountain, such as restaurants or cafeterias, and
other, which includes small groceries, drug stores and educational institutions.
Channel mix refers to the relative size of the various distribution channels
through which beverage products are sold. The largest channel in the United
States and Canada is supermarkets but the fastest growing channels have been
mass merchandisers, fountain and convenience and gas stores.
The following chart sets forth the carbonated soft drink channel mix by
volume in the U.S.:
1998 U.S. CARBONATED SOFT DRINK CHANNEL MIX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VENDING 11%
<S> <C>
Mass Merchandisers 9%
Supermarkets and Other Retail 44%
Fountain 25%
Convenience and Gas Stores 11%
</TABLE>
Source: Beverage Marketing Corporation
Depending upon the size of the bottler and the particular market, a bottler
delivers products through these channels using either a direct delivery system
or a warehouse system. In a direct delivery system, a bottler delivers its
product to a store, stocks the store's shelves and orders additional product
when needed by the store. In a warehouse system, the bottler delivers beverages
to a warehouse, and then the retailer or a third party delivers the product to a
store. In its exclusive territories, each bottler is responsible for selling
products and providing timely service to its existing customers and identifying
and obtaining new customers. Bottlers are also responsible for local advertising
and marketing, as well as the execution in their territories of national and
regional selling programs instituted by brand owners. The bottling business is
capital intensive. Manufacturing operations require specialized high-speed
equipment, and distribution requires extensive placement of cold drink, vending
and fountain equipment as well as investment in trucks and warehouse facilities.
There are three soft drink bottling networks in the United States and
Canada.
35
<PAGE>
(1) the PepsiCo system, which includes PBG, Whitman Corporation and
other independent PepsiCo bottlers,
(2) the Coca-Cola system, which includes Coca-Cola Enterprises and
Coca-Cola Bottling Co. Consolidated, as well as other independent
Coca-Cola bottlers, and
(3) the smaller independent bottlers of brands not associated with
either PepsiCo or Coca-Cola.
TRENDS IN THE LIQUID REFRESHMENT BEVERAGE INDUSTRY
We believe that the following are the significant trends in the industry:
- GROWTH IN BEVERAGE SALES
Liquid refreshment beverage sales have grown in recent years and this
growth is expected to continue. From 1992 to 1997, average annual case
sales of liquid refreshment beverages in the U.S. increased 6%, using a
standard measure of cases containing the equivalent of 24 eight-ounce
bottles. Carbonated soft drink sales increased 4% and non-carbonated soft
drink sales increased 20% per annum over the same period. The volume
contained in each physical case of product may differ because our
products come in different package sizes.
- CHANGES IN CONSUMER LIFESTYLE
The emergence of an "on-the-go" lifestyle in developed countries has
resulted in increased dining out and demand for ready-to-drink beverages
instead of drinks prepared at home. In addition, consumers are demanding
packages that are easy to carry, close and reuse and that are available
at convenient locations. As a result, convenience, packaging and product
innovation have become important factors in consumers' purchasing
decisions. To capitalize on this trend, bottlers and brand owners are:
- making products easier to purchase and more readily available for
consumption by expanding points of access, especially for cold
single-serve products;
- creating innovative packaging; and
- developing new products.
The market for cold drinks sold for immediate consumption is one of
the fastest growing segments in the liquid refreshment beverage industry
in the United States and Canada. Since a key to making a sale is having
products close at hand, pursuing sales opportunities requires the
placement of equipment that keeps products cold, including vending
machines, glass door coolers and fountain dispensers, in a location where
the consumer is likely to purchase a drink. As a result, bottlers,
especially PBG and Coca-Cola Enterprises, are investing significant
capital to increase the number of cold drink vending machines and coolers
in the marketplace. Locations include restaurants, convenience and gas
stores, schools and businesses and supermarkets and video stores. From
1995 through 1997, the number of vending machines in the U.S. marketplace
increased more than 35%.
Innovations in packaging have also addressed consumers' desire for
convenience. Over the last 30 years, a variety of new sizes, shapes and
configurations of packaging has been introduced. For instance, use of the
20-ounce plastic bottle has become increasingly popular because of its
larger size and resealable cap, which allows for better portability in a
single-serve package.
In the past five years, the number of new product introductions in
the liquid refreshment beverage industry has increased to satisfy
consumers' desire for a wider choice of flavors and products. New
products have included bottled teas, waters, juices, new age drinks and
sports
36
<PAGE>
drinks, as well as new carbonated soft drinks. From 1992 to 1997, the
volume of non-carbonated beverages in the U.S. has grown more than 80%,
from approximately 700 million cases to 1.3 billion cases, using a
standard measure of cases containing the equivalent of 24 eight-ounce
bottles.
- CONSOLIDATION OF BOTTLERS
The bottling industry has experienced significant consolidation in
recent years. The reasons for this consolidation are the need to generate
economies of scale and cost savings and the need to better sell to and
service large regional and national accounts, such as supermarkets,
restaurants and mass merchandisers, which have themselves been
consolidating. Consolidation has also been driven by the estate planning
needs of family-owned independent bottlers and competitive pressures to
invest in manufacturing, distribution and information systems. We believe
that these factors will result in continued consolidation of the bottling
industry.
- INCREASE IN INTERNATIONAL OPPORTUNITIES
Per capita carbonated soft drink beverage consumption varies
considerably around the world. In 1998, U.S. per capita consumption was
878 eight-ounce servings. International per capita consumption is
dramatically lower than in the United States and Canada. However, in many
international markets consumption is growing rapidly. The following chart
sets forth 1997 per capita consumption of carbonated soft drinks in
selected countries:
CARBONATED SOFT DRINK CONSUMPTION PER CAPITA IN 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COUNTRIES IN WHICH WE OPERATE
<S> <C>
U.S. 859
Mexico 495
Canada 460
UK 336
Greece 281
Spain 227
Poland 141
Russia 65
China 17
8 OZ. SERVINGS PER YEAR
</TABLE>
Generally, in international markets the variety of soft drink
products is not as broad and the distribution channels are less developed
than in the United States and Canada. In many markets outside the United
States and Canada, soft drinks are established products but many
opportunities for volume growth remain through basic improvements in
distribution infrastructure, packaging innovation, the introduction of
cold drink equipment and, in developed countries, modern large store
merchandising and promotional techniques.
Given the relatively low per capita consumption levels of carbonated
soft drinks outside the United States and Canada, bottlers in
international markets are increasingly focused on opportunities to grow
through expansion of their distribution channels and product and
packaging innovation. We believe that the greatest potential for volume
growth lies in several
37
<PAGE>
less-developed markets, including Eastern Europe, Russia, China and
India. In these markets, bottlers are attempting to take advantage of
increases in consumers' disposable income, shifts in consumers' tastes to
soft drinks and, in certain countries, the development of the local
economy and its retail trade and infrastructure. Significant investments
are being made in these markets by PepsiCo and others to develop basic
infrastructure and build brand awareness.
STRATEGY TO ACHIEVE OUR GOALS
Our strategy is intended to capitalize on the key trends in the beverage
industry as well as our strengths, which include our broad portfolio of global
brands supported by PepsiCo's marketing programs, an extensive range of
products, an effective distribution system, scale in operations and purchasing
and an experienced management team. In addition, our strategy focuses on
improving our competitive position in areas where we have lagged our largest
competitor in recent years. These areas are: the amount of investment in the
cold drink business; the pace of consolidation of the U.S. and Canadian bottling
system; and the improvement in market share outside the United States and
Canada.
We have designed our strategy to enable us to achieve our goals of growing
EBITDA, earning a return on our investments in excess of our cost of capital and
increasing our market share. The key elements of our strategy include:
- INCREASE COLD DRINK AVAILABILITY
We intend to continue to invest significantly in placements of
vending machines and coolers to increase cold drink availability in the
marketplace. The market for cold drinks sold from vending machines and
coolers for immediate consumption is one of the fastest growing and most
profitable segments within the liquid refreshment beverage industry in
the United States and Canada because of the emergence of an on-the-go
lifestyle and the consumer's desire for convenience. This market is
particularly attractive for us because the gross margins for product sold
through cold drink equipment are significantly higher than those from
sales of products for consumption at home. In the U.S., beverages sold
cold constituted approximately 31% of our volume and 43% of our net sales
in fiscal 1998. Since the key to making the sale is having our products
close at hand, pursuing this sales opportunity requires the placement of
equipment that keeps our product cold, including vending machines, glass
door coolers and fountain dispensers, in a location where consumers live,
work or play. Because consumers frequently desire to take the product
with them, we have installed vending machines that can dispense the
larger single-serve 20-ounce plastic bottles, which can be resealed and
easily carried. In 1997, we began to increase significantly our placement
of cold drink equipment, doubling the spending for new pieces of
equipment placed in the market as compared to the prior year. In 1998, we
added almost 300 employees in positions designed to service the equipment
in the market. In 1997 and 1998, we placed approximately 175,000 new
pieces of equipment into the market. We expect to continue this rapid
pace of investment over the next several years.
- PURSUE ACQUISITIONS IN THE UNITED STATES AND CANADA
We expect to play a key role in the consolidation of PepsiCo's United
States and Canadian bottling system. We intend to pursue acquisitions of
independent PepsiCo bottlers in the United States and Canada,
particularly in territories contiguous to our own, and expect that
PepsiCo will help us identify and acquire these bottlers. For example, in
1999, we acquired a small bottler in Watertown, New York and we have a
preliminary understanding to acquire another small bottler in Fairfield,
Connecticut. In the United States and Canada, we own 55% of the PepsiCo
bottling system in terms of 1998 case sales using a standard measure of
cases containing the equivalent of 24 eight-ounce bottles. More than 100
bottlers own the
38
<PAGE>
remaining 45%. Under the Pepsi beverage agreements, we may acquire
independent PepsiCo bottlers in a significant portion of the remaining
45% of the United States and Canada, subject to PepsiCo's approval. These
acquisitions will enable us to provide better service to our large retail
customers as well as to reduce costs through economies of scale.
- INCREASE PRODUCTIVITY
We are undertaking a number of initiatives to reduce costs by
improving productivity and becoming more efficient in our operations.
Over the last two years, in the United States and Canada, we have been
engaged in a manufacturing and warehousing productivity program designed
to maximize the capacity and efficiency of our production and warehousing
labor and assets. As a result of this program, our manufacturing line
efficiency increased 13%, resulting in lower annual operating costs and
in capital investment savings. We expect to complete the first phase of
this program by the end of 1999, and have already begun planning for a
second phase, which we believe will generate additional labor and asset
productivity gains by further improving our product supply chain
management, from buying raw materials to stocking retailers' shelves.
- EXPAND BUSINESS WITH OUR KEY RETAIL CUSTOMERS
In addition to adding points of access for cold drinks, we intend to
grow our business with key retail customers. Our principal method will be
to improve our retail presence through increased promotional frequency
and in-store product inventory--on the shelf, on display and in the
cooler--while remaining price competitive. In 1998, we reorganized our
field sales teams to provide dedicated focus on large retail customers,
small retail customers and on-premise or cold drink accounts. We believe
this step will enable us to provide significantly better customer service
and will stimulate growth.
We believe our "category management" selling technique and "Power of
One" approach to marketing provide us with a competitive advantage in
retail chains. Our category management selling approach involves
recommending to our retailers merchandising strategies and retail space
allocation policies for a portfolio of beverage categories, as opposed to
a specific brand. These policies maximize the strength and profitability
of the entire beverage category for the retailer, not just a particular
brand. Given the strength of the products we distribute in channels where
the consumer is free to choose any brand, we believe the category
management approach aligns our objectives with those of the retailer and
constitutes a competitive advantage.
In the last two years, we have expanded our joint selling and
promotional efforts with PepsiCo's snack division, Frito-Lay, a concept
we call "Power of One." This includes take-home promotional and display
programs in supermarkets as well as single serve promotions in
convenience and gas stores, such as combo pricing for a snack and
beverage. The synergies of soft drinks and salty snacks and Frito-Lay's
strength in the salty snack category make this combination a competitive
advantage.
- CAPITALIZE ON DISTRIBUTION AND BRAND STRENGTHS
We intend to take advantage of opportunities to increase our
penetration in our exclusive territories and capitalize on the strength
of PepsiCo's brand portfolio, which are some of the world's best
recognized trademarks. For instance, MOUNTAIN DEW has been the fastest
growing major soft drink brand in the U.S. over the last ten years and is
now the fourth largest carbonated soft drink brand, after Coca-Cola,
PEPSI-COLA and Diet Coke, sold in the U.S., using a standard measure of
cases containing the equivalent of 24 eight-ounce bottles. It is larger
than Sprite and more than twice the size of 7UP. Nevertheless, there
remain many markets and distribution channels where MOUNTAIN DEW is
under-represented. In addition,
39
<PAGE>
we intend to build upon the initial success of PEPSI ONE, our new one
calorie cola which was introduced across the United States in October
1998. Although AQUAFINA only reached national distribution in 1998, it is
already the number two bottled water in convenience and gas stores and
number six in supermarkets. AQUAFINA presents significant opportunities
for sales expansion because the bottled water segment is highly
fragmented and growing rapidly. Our non-carbonated beverage portfolio, in
addition to AQUAFINA, includes the number one ready-to-drink packaged
tea, LIPTON, and the only national ready-to-drink coffee beverage,
STARBUCKS FRAPPUCCINO. Taken together, our broad product portfolio
provides an advantage in selling to many customers.
In the U.S. in 1998, the Pepsi-Cola beverages we sell had a 31% share
of the carbonated soft drink market as compared to the brands of
Coca-Cola, which had a 45% share. However, excluding fountain sales,
where the consumer typically does not have a choice due to exclusive
agreements, the market share difference narrowed significantly, with
Pepsi-Cola beverages having 26% and Coca-Cola brands having 28%,
according to our estimates. In convenience and gas stores, where retail
pricing, packaging and presentation are generally similar among brands,
and therefore consumers are free to choose based on brand preference and
taste, Pepsi-Cola beverages had the leading share, with 41%, as compared
to 36% for Coca-Cola brands.
- GROW OUR INTERNATIONAL BUSINESS
Internationally, low per capita consumption levels present
opportunities for volume growth. We will implement distribution and
marketing initiatives tailored to each of our international markets in
order to take advantage of these opportunities. We intend to improve our
operating and financial performance in Spain and Greece. Spain and Greece
currently have per capita consumption of carbonated soft drinks of about
230 and 280 eight ounce servings per year, respectively, less than
one-third the U.S. per capita consumption. With low inflation, economic
stability and a well-established carbonated soft drink industry, Spain
and Greece offer many opportunities with respect to channel development
and product and package innovation. Since a significant and growing
portion of the volume is sold through traditional supermarkets and
over-sized supermarkets, known as hypermarkets, there is opportunity to
grow sales with modern merchandising and promotional programs focused on
specific target audiences.
We intend to improve our results in Russia, where infrastructure
investments and the recent economic crisis have resulted in losses. In
Russia, which is the world's seventh most populous nation, per capita
consumption of carbonated soft drinks is only about 65 eight ounce
servings per year, less than 10% of the U.S. per capita consumption. For
per capita consumption growth to occur in Russia, our products need to be
affordable for a large part of the population. Accordingly, we have taken
steps to streamline our Russian operations and control costs in order to
lower prices. Although the current economic and social situation in
Russia presents significant challenges, we believe we have the expertise
to take advantage of the longer-term opportunities Russia presents. We
also plan to evaluate international acquisition opportunities as they
become available.
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<PAGE>
PBG'S LIQUID REFRESHMENT BEVERAGE PRODUCTS AND PACKAGING
Our portfolio of beverage products includes some of the best recognized
trademarks in the world. While the majority of our volume is derived from brands
licensed from PepsiCo and PepsiCo joint ventures, we also sell and distribute
brands licensed from others. Our principal beverage brands are set forth below:
<TABLE>
<CAPTION>
UNITED STATES AND CANADA
- -------------------------------------------------------------------------------------------------------------
BRANDS LICENSED
BRANDS LICENSED FROM PEPSICO BRANDS LICENSED
FROM PEPSICO JOINT VENTURES FROM OTHERS
- ----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
PEPSI-COLA LIPTON BRISK 7UP(2)
DIET PEPSI LIPTON'S ICED TEA DIET 7UP(2)
MOUNTAIN DEW STARBUCKS FRAPPUCCINO(2) DR PEPPER
DIET MOUNTAIN DEW HAWAIIAN PUNCH(2)
CAFFEINE FREE PEPSI SCHWEPPES
CAFFEINE FREE DIET PEPSI OCEAN SPRAY
7UP(1)
7UP LIGHT(1)
PEPSI ONE(2)
PEPSI MAX (3)
WILD CHERRY PEPSI(2)
SLICE(2)
MUG
AQUAFINA
ALL SPORT
<CAPTION>
SPAIN GREECE RUSSIA
- ----------------------------------- ----------------------------------- -----------------------------------
BRANDS LICENSED FROM PEPSICO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PEPSI-COLA PEPSI-COLA PEPSI-COLA
PEPSI-COLA LIGHT PEPSI-COLA LIGHT 7UP
PEPSI MAX PEPSI MAX 7UP LIGHT
7UP 7UP MIRINDA (flavors)
7UP LIGHT 7UP LIGHT KAS (flavors and mixers)
KAS (juices, flavors and mixers) IVI (waters and flavors)
RADICAL FRUIT
</TABLE>
- ------------------------
(1) The 7UP brand is owned by PepsiCo in Canada and by Cadbury Schweppes in the
U.S.
(2) U.S. only
(3) Canada only
Pepsi-Cola beverages have an approximately 31% share of the United States
carbonated soft drink market. International market share measurements are less
precise and change rapidly, particularly in developing markets. However,
Pepsi-Cola beverages sold by us occupy a significant market position in their
category in each of our international markets giving us critical mass in these
markets. PEPSI-COLA consistently wins taste tests versus its primary competitor
and has the leading market share in convenience and gas stores. Our three
largest brands in terms of volume are PEPSI-COLA, DIET PEPSI and MOUNTAIN DEW,
which together account for 75% of our volume in the U.S. as shown in the chart
below:
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<PAGE>
1998 PBG U.S. BRAND MIX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DIET PEPSI PEPSI OTHER MOUNTAIN DEW
<S> <C> <C> <C>
16% 42% 25% 17%
</TABLE>
Our beverages are available in different package types, including two liter,
one liter and 20-ounce bottles, and multi-packs of 6, 12, and 24 cans. Syrup is
also sold in larger packages for fountain use. In our international markets,
more than 75% of our case volume is sold in cans or in non-returnable plastic
bottles, using a standard measure of cases containing the equivalent of 24
eight-ounce bottles. Cans are the dominant package in the U.S., however, use of
the resealable 20-ounce bottle has grown rapidly in the convenience and gas
store channel where it is now 26% of physical cases sold in bottles and cans.
PBG'S EXCLUSIVE OPERATING TERRITORIES
We have the exclusive right to manufacture, sell and distribute Pepsi-Cola
beverages in all or a portion of 41 states, the District of Columbia, eight
Canadian provinces, Spain, Greece and Russia.
[MAP TO BE INSERTED SHOWING PBG'S TERRITORIES IN THE U.S. AND CANADA]
In the U.S., where we bottle about 53% of total Pepsi-Cola beverages sold,
our strongest regions include the northern New England states, the Mid-Atlantic
states, Michigan and certain Southwestern states, as well as parts of northern
and central California. We sold approximately 80% of the volume of all
Pepsi-Cola beverages sold in Canada. Our strongest regions in Canada are Quebec
and the Maritime Provinces, where we have a market share of approximately 40%.
We focus on growing in local markets because there can be substantial
differences with respect to share position, trade structure, channel mix and
package mix not only between our international and combined U.S. and Canadian
markets but also within the U.S. and Canadian market itself. For example, our
share of the combined supermarket, drug store and mass merchandise channels of
carbonated soft drink beverages ranges from a low of 12% in Houston to 48% in
Pittsburgh. In most markets, our share ranges from 25% to 35%.
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<PAGE>
SALES, MARKETING AND DISTRIBUTION OF PBG'S LIQUID REFRESHMENT BEVERAGE PRODUCTS
Our sales and marketing approach varies by region and channel to respond to
the unique local competitive environment. For us, the fastest growing channels
are mass merchandisers, convenience and gas stores and vending. Developing a
sales and marketing plan that manages channel mix and package mix is critical to
our success. The following chart shows the relative importance of our U.S. and
Canadian distribution channels by volume of physical cases:
PBG U.S. AND CANADA 1998 PHYSICAL CASE VOLUME CHANNEL MIX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SUPERMARKETS AND OTHER RETAIL 64%
<S> <C>
Fountain 6%
Convenience and Gas Stores 12%
Vending 10%
Mass Merchandisers 8%
</TABLE>
In the United States and Canada, the channels with larger stores can
accommodate a number of beverage suppliers and, therefore, marketing efforts
tend to focus on increasing the amount of shelf space and the number of displays
in any given outlet. In locations where our products are purchased for immediate
consumption, marketing efforts are aimed not only at securing the account but
also on providing equipment that facilitates the sale of cold product, such as
vending machines, glass door coolers and fountain equipment.
An important aspect of our sales and marketing strategy involves working
closely with PepsiCo to ensure that the mix of new products and packages it is
developing meets the needs of customers in our particular markets. Product
introductions such as PEPSI ONE, a one calorie cola launched in the fourth
quarter of 1998, and AQUAFINA, PepsiCo's water brand, which achieved national
distribution in 1998, further strengthen our portfolio of products. Package mix
is an important consideration in the development of our marketing plans.
Although some packages are more expensive to produce, in certain channels those
packages may have a higher and more stable selling price. For example, packaged
product that is sold cold for immediate consumption generally has better margins
than product sold to take home.
On a local level, we market our products with a number of specific programs
and promotions, including sweepstakes, product tie-ins, associations with
entertainment or athletic events, and joint marketing programs with local
retailers. In addition, we have programs with local schools, universities and
businesses through which we support certain programs or pay sponsorship fees in
exchange for vending and fountain rights. We also implement local advertising
campaigns on a cooperative basis with PepsiCo and work with PepsiCo on local
media plans and signage promotions.
In the United States and Canada, we distribute directly to a majority of
customers in our licensed territories through a distribution system without
using warehouse middlemen. Our approximately 10,000 member sales force is key to
our selling efforts because its members interact continually with our customers
to promote and sell our products. The members of our sales force deliver
products on
43
<PAGE>
company-owned trucks directly to our retail customers. They then arrange the
product on the shelves, build any displays previously agreed upon with the
retailer and take the next delivery order. To ensure they have selling
incentive, a large part of our route salesmen's compensation is made up of
commissions based on revenues. Although route salesmen are responsible for
selling to their customers, in certain markets and channels we use a pre-sell
system, where we call accounts in advance to determine how much product to
deliver and whether we will provide any additional displays. We are in the
process of expanding this system because it is efficient and cost effective for
many accounts. In our efforts to obtain new accounts we use 700 retail sales
representatives who are responsible for calling on prospective new accounts,
developing relationships, selling accounts and interacting with such accounts on
an ongoing basis.
In the United States and Canada, this direct delivery system is used for all
packaged goods and some fountain accounts. We deliver fountain syrup to local
customers in large containers rather than in packaged form. We have the
exclusive right to sell and deliver fountain syrup to local customers in our
territories. We have 400 managers who are responsible for calling on prospective
fountain accounts, developing relationships, selling accounts and interacting
with accounts on an ongoing basis. We also serve as PepsiCo's exclusive delivery
agent in our territories for PepsiCo national fountain account customers that
request direct delivery. We are also the exclusive equipment service agent for
all of PepsiCo's national account customers in our territories.
We believe our distribution system is highly effective. For example, we
introduced PEPSI ONE in October 1998 and within four weeks achieved more than
80% distribution in the convenience and gas store, mass merchandise and
supermarket channels in our exclusive territories in the United States.
In international markets, we use both our direct distribution system and
third party distributors or wholesalers. In the early stages of market
development, it is more common to use third party distributors. As the market
grows and reaches critical mass, there is generally a move toward direct
distribution systems.
In the less developed international markets, small format retail outlets
play a larger role. However, with the emergence of larger, more sophisticated
retailers in Spain and Greece, the marketing focus is increasingly similar to
that of the United States and Canada.
RAW MATERIALS AND PROCESSES USED IN THE MANUFACTURING OF PBG'S PRODUCTS
Expenditures for concentrate and packaging constitute our largest individual
raw material costs, representing approximately 43% and 47%, respectively, of our
total raw material costs.
We buy various soft drink concentrates from PepsiCo and other soft drink
companies whose products we bottle, and mix them in our plants with other
ingredients, including carbon dioxide and sweeteners. Artificial sweeteners are
included in the concentrates we purchase for diet soft drinks. The product is
then bottled in a variety of containers ranging from 12-ounce cans to two liter
plastic bottles to various glass packages, depending on market requirements.
In addition to concentrates, we purchase sweeteners, glass and plastic
bottles, cans, closures, syrup containers, other packaging materials and carbon
dioxide. We generally purchase our raw materials, other than concentrates, from
multiple suppliers. The Pepsi beverage agreements provide that, with respect to
the soft drink products of PepsiCo, all authorized containers, closures, cases,
cartons and other packages and labels may be purchased only from manufacturers
approved by PepsiCo.
We manufacture soft drink products using state-of-the-art processes that
produce high quality finished products. The first step of the manufacturing
process is to combine concentrate with sweeteners and other ingredients. Cans or
bottles are then conveyed to a filling area, where syrups from the mixing tanks
are combined with purified water. The liquid is then carbonated and filled at
speeds frequently in excess of 1,200 cans per minute. Sealed cans and bottles
are imprinted with date codes that permit us to monitor and replace inventory to
provide fresh products.
44
<PAGE>
INFORMATION TECHNOLOGY USED IN PBG'S OPERATIONS
Information technology systems are critical to our ability to manage our
business. Every day in the U.S. more than 7,000 trucks, on average, are
dispatched to make deliveries to our customers. Our information technology
systems enable us to coordinate this activity, from production scheduling and
raw material ordering to truck routing and loading and customer delivery and
invoicing.
We depend upon standardized systems that can be maintained centrally but are
available for decision making by our front line employees. We believe this is
the most effective strategy to optimize our significant investment in
information technology. We also believe that several recent initiatives have
significantly contributed to our ability to service customers, reduce costs and
improve efficiency.
- HANDHELD SALES COMPUTERS. Handheld computers are used by all of our route
salesmen in the United States and Canada and have been upgraded to
provide customer sales trends, pricing and promotional information.
- CUSTOMER SERVICE CENTER. Customer support activities in the U.S. such as
telephone selling, billing and collection have been centralized in one
location to best utilize investments in technology, people and process.
- CUSTOMER EQUIPMENT TRACKING SYSTEM. With the significant investment in
cold drink equipment, our customer equipment tracking system enables us
to track equipment and coordinate service needs in the U.S., minimizing
lost sales and equipment down-time.
COMPETITION
The carbonated soft drink market and the non-carbonated beverage market are
highly competitive. Our competitors in these markets include bottlers and
distributors of nationally advertised and marketed products, bottlers and
distributors of regionally advertised and marketed products, as well as bottlers
of private label soft drinks sold in chain stores. We estimate that in 1997 the
carbonated soft drink products of PepsiCo represented 31% of total carbonated
soft drink sales in the United States. We estimate that in each U.S. territory
in which we operate, between 65% and 85% of soft drink sales from supermarkets,
drug stores and mass merchandisers are accounted for by us and our major
competitor--Coca-Cola Enterprises or the local Coca-Cola bottler. We compete
primarily on the basis of advertising to create brand awareness, price and price
promotions, retail space management, customer service, consumer points of
access, new products, packaging innovations and distribution methods. We believe
that brand recognition is a primary factor affecting our competitive position.
EMPLOYEES OF PBG
As of December 1998, we employed approximately 36,900 full-time workers, of
whom approximately 33,000 were employed in the United States and Canada and
approximately 11,500 of whom were union members. We consider relations with our
employees to be good and have not experienced significant interruptions of
operations due to labor disagreements.
We have 159 contracts with our union employees worldwide, which expire at
various times over the next five years. There are contracts covering
approximately 2,350 employees that are up for renewal in 1999.
PBG'S PROPERTIES
We operate 72 soft drink production facilities, eight of which are solely
production facilities and 64 of which are combination production/distribution
facilities. We also operate 319 distribution facilities. We believe that our
bottling, canning and syrup filling lines and our distribution facilities are
sufficient to meet present needs.
We also own or lease and operate more than 16,500 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 or lease approximately 1.0 million soft drink dispensing and vending
machines.
45
<PAGE>
In addition, we sublease our headquarters in Somers, New York from PepsiCo.
We believe that our properties are in good operating condition and are
adequate to serve our current operational needs.
LEGAL PROCEEDINGS RELATING TO PBG
From time to time we are a party to various litigation matters incidental to
the conduct of our business. There is no pending or threatened legal proceeding
to which we are a party that, in the opinion of management, is likely to have a
material adverse effect on our future financial results.
GOVERNMENTAL REGULATION APPLICABLE TO PBG
Our operations and properties are subject to regulation by various federal,
state and local governmental entities and agencies as well as foreign government
entities. As a producer of food products, we are subject to production,
packaging, quality, labeling and distribution standards in each of the countries
where we have operations, including, in the United States, those of the federal
Food, Drug and Cosmetic Act. The operations of our production and distribution
facilities are subject to various federal, state and local environmental laws
and workplace regulations. These laws and regulations include, in the United
States, the Occupational Safety and Health Act, the Unfair Labor Standards Act,
the Clean Air Act, the Clean Water Act and laws relating to the maintenance of
fuel storage tanks. We believe that our current legal and environmental
compliance programs adequately address such concerns and that we are in
substantial compliance with applicable laws and regulations. We do not
anticipate making any material expenditures in connection with environmental
remediation and compliance. However, compliance with, or any violation of,
current and 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-returnable 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 is charged
for the container. These include Connecticut, Delaware, Maine, Massachusetts,
Michigan, New York, Oregon, California, British Columbia, Alberta, Saskatchewan,
Manitoba, New Brunswick, Nova Scotia and Quebec.
Maine, Massachusetts and Michigan have statutes that require us to pay all
or a portion of unclaimed container deposits to the state and California imposes
a levy on beverage containers to fund a waste recovery system.
In addition to the Canadian deposit legislation described above, Ontario,
Canada currently has a regulation requiring that 30% of all soft drinks sold in
Ontario be bottled in refillable containers. This regulation is currently being
reviewed by the Ministry of the Environment.
The European Commission has issued a packaging and packing waste directive
which is in the process of being incorporated into the national legislation of
the member states. This will result in targets being set for the recovery and
recycling of household, commercial and industrial packaging waste and impose
substantial responsibilities upon bottlers and retailers for implementation.
We are not aware of similar material legislation being proposed or enacted
in any other areas served by us. We are unable to predict, however, whether such
legislation will be enacted or what impact its enactment would have on our
business, financial condition or results of operations.
SOFT DRINK EXCISE TAX LEGISLATION
Specific soft drink excise taxes have been in place in certain states for
several years. The states in which we operate that currently impose such a tax
are West Virginia, Arkansas, North Carolina, South Carolina, Tennessee and, with
respect to fountain syrup only, Washington. Although soft drink excise tax
legislation is currently in place in North Carolina and South Carolina, new
legislation has been
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<PAGE>
enacted that phases out such taxes by the end of the year 2000 in North Carolina
and 2002 in South Carolina.
Value-added taxes on soft drinks vary in our territories located in Canada,
Spain, Greece and Russia, but are consistent with the value-added tax rate for
other consumer products.
We are not aware of any material soft drink taxes that have been enacted in
any other market served by us. We are unable to predict, however, whether such
legislation will be enacted or what impact its enactment would have on our
business, financial condition or results of operations.
TRADE REGULATION RELATING TO THE LIQUID REFRESHMENT BEVERAGE INDUSTRY
As a manufacturer, seller and distributor of bottled and canned soft drink
products of PepsiCo and other soft drink manufacturers in exclusive territories
in the United States and internationally, we are subject to antitrust laws.
Under the Soft Drink Interbrand Competition Act, soft drink bottlers operating
in the United States, such as us, may have an exclusive right to manufacture,
distribute and sell a soft drink product in a geographic territory if the soft
drink product is in substantial and effective competition with other products of
the same class in the same market or markets. We believe that there is such
substantial and effective competition in each of the exclusive geographic
territories in which we operate.
Our operations in Spain and Greece are subject to the antitrust laws of the
European Union, Spain and Greece. As a result of antitrust laws in the European
Union, the beverage agreements applicable in Spain, unlike the Pepsi beverage
agreements relating to our U.S. operations, do not prohibit the transshipment of
Pepsi-Cola beverages into our exclusive territories in response to unsolicited
orders. Our operations in Russia are subject to the trade practices laws of
Russia.
CALIFORNIA CARCINOGEN AND REPRODUCTIVE TOXIN LEGISLATION
A California law requires that any person who exposes another to a
carcinogen or a reproductive toxin must provide a warning to that effect.
Because the law does not define quantitative thresholds below which a warning is
not required, virtually all manufacturers of food products are confronted with
the possibility of having to provide warnings due to the presence of trace
amounts of defined substances. Regulations implementing the law exempt
manufacturers from providing the required warning if it can be demonstrated that
the defined substances occur naturally in the product or are present in
municipal water used to manufacture the product. We have assessed the impact of
the law and its implementing regulations on our beverage products and have
concluded that none of our products currently require a warning under the law.
We cannot predict whether or to what extent food industry efforts to minimize
the law's impact on food products will succeed. We also cannot predict what
impact, either in terms of direct costs or diminished sales, imposition of the
law may have.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF PBG
The following table sets forth certain information regarding our executive
officers, senior management and directors, as of February 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Craig E. Weatherup................................... 53 Chairman of the Board, Chief Executive Officer and
Director
Craig D. Jung........................................ 45 Chief Operating Officer
John T. Cahill....................................... 41 Executive Vice President, Chief Financial Officer and
Director
Pamela C. McGuire.................................... 51 Senior Vice President, General Counsel and Secretary
Margaret D. Moore.................................... 51 Senior Vice President and Treasurer
Peter A. Bridgman.................................... 46 Senior Vice President and Controller
SENIOR MANAGEMENT:
Donald W. Blair...................................... 40 Senior Vice President, Finance
Kevin L. Cox......................................... 35 Senior Vice President and Chief Personnel Officer
Eric J. Foss......................................... 40 Senior Vice President, Sales and Field Marketing
Gary K. Wandschneider................................ 46 Senior Vice President, Operations
</TABLE>
DIRECTORS OF PBG
Our certificate of incorporation provides that the number of directors may
be altered from time to time by a resolution adopted by our board of directors.
However, the number of directors may not be less than two nor more than fifteen.
The following individuals have agreed to serve as directors of PBG. They
will hold office until the first annual meeting of our stockholders after the
offering, which is expected to be held in 2000.
CRAIG E. WEATHERUP, 53, is the Chairman of our board and our Chief Executive
Officer, and has served as a director of PepsiCo since 1996. Prior to becoming
our Chairman and Chief Executive Officer, he served as Chairman and Chief
Executive Officer of the Pepsi-Cola Company since July 1996. He was appointed
President of the Pepsi-Cola Company in 1988, President and Chief Executive
Officer of Pepsi-Cola North America in 1991, and served as PepsiCo's President
in 1996. Mr. Weatherup is also a director of Federated Department Stores, Inc.
and Starbucks Corporation.
JOHN T. CAHILL, 41, is our Executive Vice President and Chief Financial
Officer. He held the same position at the Pepsi-Cola Company from March 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. Mr. Cahill
joined PepsiCo in 1989, became Senior Vice President, Finance and Chief
Financial Officer for KFC Corporation, a former subsidiary of PepsiCo, in 1993,
and in 1996 he became Senior Vice President and Chief Financial Officer of
Pepsi-Cola North America.
We intend to elect two additional directors who are officers of PepsiCo and
directors who are independent of PepsiCo and us prior to the consummation of
the offering.
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BOARD COMPENSATION AND BENEFITS
Employee directors will not receive additional compensation for serving on
our board of directors. Non-employee directors will be compensated entirely in
options to purchase our common stock. Options will be granted at fair market
value at the grant date and be exercisable for ten years. Directors may annually
convert their stock options into our common stock at a ratio of three options
for each share of common stock. If a director converts all of his or her stock
option grant, he or she would receive $75,000 of our common stock. Directors may
also defer payment of their stock grant. The deferral will be in our common
stock equivalents. Non-employee directors will also receive a one-time $25,000
grant of our common stock at the initial public offering price, which shares may
not be sold until a director retires or resigns from our board of directors.
Directors will not receive retirement, health or life insurance benefits.
COMMITTEES OF THE BOARD
Our board has established an audit committee, an executive development and
compensation committee, a nominating committee and an affiliated transactions
committee. The members will all be non-employee directors.
AUDIT COMMITTEE RESPONSIBILITIES. Our audit committee will:
- recommend to the board the selection, retention or termination of our
independent auditors;
- approve the level of non-audit services provided by the independent
auditors;
- review the scope and results of the work of our internal auditors;
- review the scope and approve the estimated cost of the annual audit;
- review the annual financial statements and the results of the audit with
management and the independent auditors;
- review with management and the independent auditors the adequacy of our
internal accounting controls;
- review with management and the independent auditors the significant
recommendations made by the auditors with respect to changes in accounting
procedures and internal accounting controls; and
- report to the board on its review and make such recommendations as it
deems appropriate.
EXECUTIVE DEVELOPMENT AND COMPENSATION COMMITTEE RESPONSIBILITIES. Our
executive development and compensation committee will:
- administer our Long-Term Incentive Plan, Executive Incentive Compensation
Plan and related programs;
- approve, or refer to the board of directors for approval, changes in such
plans and the compensation programs to which they relate; and
- review and approve the compensation and development of our senior
executives.
NOMINATING COMMITTEE RESPONSIBILITIES. The nominating committee will:
- identify candidates for future board membership;
- develop criteria for selection of candidates for election as directors;
- propose to the board a slate of directors for election by the stockholders
at each annual meeting; and
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- propose to the board candidates to fill board vacancies as they occur.
AFFILIATED TRANSACTIONS COMMITTEE RESPONSIBILITIES. The affiliated
transactions committee will review and approve any transaction between us and
PepsiCo, or any entity in which PepsiCo has a 20% or greater ownership interest,
where the transaction is other than in the ordinary course of business and has a
value of more than $10 million. No member of this committee will be an employee
of PBG or PepsiCo.
EXECUTIVE OFFICERS OF PBG
In addition to Messrs. Weatherup and Cahill, the following persons are
executive officers of PBG:
CRAIG D. JUNG, 45, is our Chief Operating Officer. After joining PepsiCo
more than 12 years ago, Mr. Jung worked in a variety of domestic and
international operating assignments at Frito-Lay. He was named a Vice President
of Sales at Frito-Lay in 1992, and became President of Hostess Frito-Lay in
Canada in 1994. He joined Pepsi-Cola International as the Business Unit General
Manager for South America in 1996, and was named President of the Pepsi-Cola
Bottling Co. in 1997.
PAMELA C. MCGUIRE, 51, is our Senior Vice President, General Counsel and
Secretary. Ms. McGuire has had more than twenty years' experience in the
beverage business, serving as Vice President and Division Counsel of Pepsi-Cola
since 1989, and, in March 1998, she was named Vice President and Associate
General Counsel of the Pepsi-Cola Company.
MARGARET D. MOORE, 51, is our Senior Vice President and Treasurer. In
addition to serving in PepsiCo's Treasury, Planning and Human Resources
Departments from 1973 to 1986, Ms. Moore has been PepsiCo's Vice President,
Investor Relations, since 1987. Ms. Moore is also a director of Michael Foods,
Inc.
PETER A. BRIDGMAN, 46, is our Senior Vice President and Controller. Mr.
Bridgman had been Vice President and Controller of the Pepsi-Cola Company since
1992, and had previously been Controller and Finance Director at Pepsi-Cola
International.
SENIOR MANAGEMENT OF PBG
DONALD W. BLAIR, 40, is our Senior Vice President of Finance. Mr. Blair was
Pepsi-Cola International's Vice President of Finance from 1993 until 1996, when
he joined Pizza Hut, Inc., a former subsidiary of PepsiCo, as Vice President,
Planning. In 1997, he became Chief Financial Officer of the Pepsi-Cola Bottling
Company.
KEVIN L. COX, 35, is our Senior Vice President and Chief Personnel Officer.
Mr. Cox has served as Director, Organizational Capability and Sales Development
in the Pepsi-Cola Company from 1994 to 1995, and as Vice President,
Organizational Capability from 1996 to 1997. Prior to assuming his present
position, he was Senior Vice President, Human Resources, Pepsi-Cola Bottling Co.
ERIC J. FOSS, 40, is our Senior Vice President of Sales and Field Marketing.
From 1994 to 1996 Mr. Foss was General Manager of Pepsi-Cola North America's
Great West Business Unit. Prior to assuming his present position, he was General
Manager for the Central Europe Region for Pepsi-Cola International. Mr. Foss
joined Pepsi-Cola in 1982, and has held a variety of other field and
headquarters-based sales, marketing and general management positions.
GARY K. WANDSCHNEIDER, 46, is our Senior Vice President, Operations, a
position he held with the Pepsi-Cola Company since 1997. He also served as Vice
President, Manufacturing and Logistics from 1995 to 1997, and, in 1994, as a
General Manager of two of Pepsi-Cola's business units.
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<PAGE>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS OF PBG
All of our capital stock is currently owned by PepsiCo and therefore none of
our executive officers or directors own any of our capital stock. Certain
officers, including the executive officers named in the Summary Compensation
Table below, will be granted options to purchase shares of our common stock. No
director or executive officer will own in excess of 1% of our common stock.
EXECUTIVE COMPENSATION
Prior to the offering, all compensation paid to our executive officers was
paid by PepsiCo, Inc., and was attributable, at least in part, to services
provided to PepsiCo's bottling business.
The following table sets forth information concerning the compensation paid
to our Chief Executive Officer and our four other most highly compensated
executive officers during our fiscal year ended December 26, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1998 LONG-TERM COMPENSATION
1998 ANNUAL COMPENSATION
----------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
AWARDS PAYOUTS
----------- -------------------
<CAPTION>
PEPSICO
SECURITIES LONG-TERM
OTHER ANNUAL UNDERLYING INCENTIVE ALL OTHER
SALARY BONUS COMPENSATION OPTIONS PLAN PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) (#)(1) ($) ($)(2)
- ------------------------------------------- --------- --------- ------------- ----------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Craig E. Weatherup
Chairman and Chief Executive Officer..... 792,307 844,000 131,164(3) 156,486 0 11,698(4)
Craig D. Jung
Chief Operating Officer.................. 307,731 144,220 7,065 53,625 0 0
John T. Cahill
Executive Vice President and Chief
Financial Officer........................ 357,577 237,500 7,065 51,490 0 0
Margaret D. Moore
Senior Vice President and Treasurer...... 264,708 136,450 6,224 31,428 0 0
Pamela C. McGuire
Senior Vice President, General Counsel
and Secretary............................ 217,408 93,680 4,949 17,066 0 0
</TABLE>
- ------------------------
(1) All such options will vest and become exercisable at the date of the
offering.
(2) We pay a portion of the annual cost of life insurance policies on the lives
of certain of our key employees. These amounts are included here. If a
covered employee dies while employed by us, we are reimbursed for our
payments from the proceeds of the policy.
(3) This amount includes $107,135 from the use of corporate transportation in
1998.
(4) Of this amount, $2,086 is for life insurance, as discussed in note (2)
above, and $9,612 is preferential earnings on income deferred by Mr.
Weatherup since 1986. In order to earn a preferential return, Mr. Weatherup
elected a risk feature under which, if he terminated his employment, he
would forfeit all his deferred income.
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<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning grants of stock
options made to the named executive officers during our fiscal year ended
December 26, 1998. All grants relate to PepsiCo capital stock.
PEPSICO OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
------------------------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR(2) ($/SHARE) DATE 5%($)(3) 10%($)(3)
- ------------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
Craig E. Weatherup................... 156,486 0.507 $ 36.50 1/31/08 3,592,082 9,103,041
Craig D. Jung........................ 53,625 0.174 $ 36.50 1/31/08 1,230,943 3,179,452
John T. Cahill....................... 51,490 0.167 $ 36.50 1/31/08 1,181,935 2,995,256
Margaret D. Moore.................... 31,428 0.102 $ 36.50 1/31/08 721,419 1,828,217
Pamela C. McGuire.................... 17,066 0.055 $ 36.50 1/31/08 391,744 992,757
</TABLE>
- ------------------------
(1) These options become exercisable on February 1, 2001. However, if the
offering is completed, each of these options will vest and become
exercisable on the date of the offering.
(2) Includes approximately 14,700,000 options granted to employees under
PepsiCo's Share Power Stock Option Plan.
(3) The 5% and 10% rates of appreciation were set by the Securities and Exchange
Commission and are not intended to forecast future appreciation, if any, of
PepsiCo's capital stock. If PepsiCo's capital stock does not increase in
value, then the option grants described in the table will be valueless.
In addition to the option grants to executive officers named in the table
above, each of these officers may receive an additional option grant or cash
payment based upon achievement of PepsiCo performance objectives. The payments
and option grants, if any, would be made on or about February 1, 2001. The
obligations to make these grants will be assumed by us at the date of the
offering, and we intend to set new performance targets based on our performance.
PEPSICO OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning option exercises with
respect to PepsiCo capital stock by our executive officers named in the table
above during our fiscal year ended December 26, 1998.
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AGGREGATED PEPSICO OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT FY-END MONEY OPTIONS AT FY-END (1)
ACQUIRED ON VALUE ------------------------- ----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------ ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Craig E. Weatherup..... 565,057 $18,521,040 1,236,238 1,945,326 $ 31,842,379 $ 35,860,759
Craig D. Jung.......... 0 0 114,958 162,311 2,666,813 1,403,184
John T. Cahill......... 0 0 209,523 153,858 5,242,681 1,416,124
Margaret D. Moore...... 26,751 770,488 131,119 87,730 3,085,501 864,181
Pamela C. McGuire...... 26,917 770,657 125,799 58,364 3,219,509 610,244
</TABLE>
- ------------------------
(1) The closing price of PepsiCo capital stock on December 24, 1998, the last
trading day prior to PepsiCo's fiscal year end, was $40.4375 per share.
PENSION PLANS
Many of our salaried employees have been participants in PepsiCo's Salaried
Employees Retirement Plan. At or prior to the consummation of the offering, we
intend to adopt a PBG Salaried Employees Retirement Plan and a PBG Pension
Equalization Plan on terms substantially similar to the comparable PepsiCo
plans.
Under the PBG plan, when an executive retires at the normal retirement age
of 65, the approximate annual benefits payable after January 1, 1999 for the
following pay classifications and years of service are:
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------
REMUNERATION 30 35 40
- ------------- ------------ ------------ ------------
<S> <C> <C> <C>
$ 250,000 $ 120,740 $ 132,530 $ 145,030
$ 500,000 $ 245,740 $ 270,030 $ 295,030
$ 750,000 $ 370,740 $ 407,530 $ 445,030
$ 1,000,000 $ 495,740 $ 545,030 $ 595,030
$ 1,250,000 $ 620,740 $ 682,530 $ 745,030
$ 1,500,000 $ 745,740 $ 820,030 $ 895,030
$ 1,750,000 $ 870,740 $ 957,530 $ 1,045,030
$ 2,000,000 $ 995,740 $ 1,095,030 $ 1,195,030
$ 2,250,000 $ 1,120,740 $ 1,232,530 $ 1,345,030
$ 2,500,000 $ 1,245,740 $ 1,370,030 $ 1,495,030
</TABLE>
The pay covered by the pension plans noted above is based on the salary and
bonus shown in the Summary Compensation Table above for each of the named
executive officers. The years of credited service as of January 1, 1999 for the
named executive officers are as follows: 24 years for Mr. Weatherup; 13 years
for Mr. Jung; 9 years for Mr. Cahill; 25 years for Ms. Moore; and 21 years for
Ms. McGuire.
NEW STOCK-BASED AND INCENTIVE PLANS OF PBG
PBG LONG-TERM INCENTIVE PLAN
GENERALLY. The PBG Long-Term Incentive Plan has been approved by our board
of directors and by PepsiCo as our sole stockholder. The PBG Long-Term Incentive
Plan provides for the grant of various types of long-term incentive awards to
key employees. These awards may include non-qualified options to purchase shares
of our common stock, performance units, incentive stock options, stock
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appreciation rights and restricted stock grants. The term of the PBG Long-Term
Incentive Plan is two years.
ADMINISTRATION. The PBG Long-Term Incentive Plan vests broad powers in the
executive development and compensation committee of our board of directors to
administer and interpret the PBG Long-Term Incentive Plan. The committee's
powers include authority to select persons to be granted awards, to determine
terms and conditions of awards, including the type, size and term of awards, to
determine the time when awards will be granted and any conditions for receiving
awards, to establish objectives and conditions for earning awards, and to
determine whether such conditions have been met. The committee also has
authority to determine whether payment of an award will be made at the end of an
award period, or at the time of exercise, or deferred, and to determine whether
payment of an award should be reduced or eliminated. The PBG Long-Term Incentive
Plan grants powers to the executive development and compensation committee to
amend and terminate the PBG Long-Term Incentive Plan.
ELIGIBILITY. Key employees of PBG and its divisions, subsidiaries and
affiliates have or will be granted awards under the PBG Long-Term Incentive
Plan. The executive development and compensation committee may also grant awards
to employees of a joint venture or other business in which we have a substantial
investment, and may make awards to non-executive employees who are in a position
to contribute to our success.
STOCK OPTION GRANTS AS OF THE OFFERING
As of the offering, the executive development and compensation committee of
our board of directors intends to make the following stock option grants to our
executive officers named in the tables above:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE
- --------------------------------------- ----------------- ------------------- ------------------- ---------------------
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
OPTION TERM
------------------------------
<S> <C> <C>
NAME 5%(3) 10%(3)
- --------------------------------------- ------ -------
</TABLE>
- ------------------------
(1) These options will be granted as of the offering date and consist of
non-qualified stock options. These options become exercisable on and
expire on .
(2) Based upon an assumed initial public offering price of $ per share, the
midpoint of the range set forth on the cover page of this prospectus.
(3) The 5% and 10% rates of appreciation were set by the Securities and Exchange
Commission and are not intended to forecast future appreciation, if any, of
our common stock. If our common stock does not increase in value, then the
option grants described in the table will be valueless.
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<PAGE>
PBG EXECUTIVE INCENTIVE COMPENSATION PLAN
GENERALLY. PBG's Executive Incentive Compensation Plan has been approved by
our board of directors and by PepsiCo as our sole stockholder. The PBG Executive
Incentive Plan provides for our executives to be granted annual cash incentive
awards. The term of the plan is expected to be ten years.
ADMINISTRATION. The PBG Executive Incentive Plan vests broad powers in the
executive development and compensation committee to administer and interpret the
PBG Executive Incentive Plan. The committee's powers include authority to select
the persons to be granted awards, to determine the time when awards will be
granted, and to determine and certify whether objectives and conditions for
earning awards have been met. The committee also has authority to determine
whether payment of an award will be made at the end of an award period or
deferred, and to determine whether an award or payment of an award should be
reduced or eliminated. The PBG Executive Incentive Plan grants broad powers to
the executive development and compensation committee to amend and terminate the
Plan.
OTHER STOCK OWNERSHIP PROGRAMS
OWNERSHIP GUIDELINES. We have adopted stock ownership guidelines for all of
our senior executives. The guidelines provide that, within five years of the
offering:
- our Chief Executive Officer will own shares of our common stock with a
value of at least five times his annual salary;
- our Chief Operating and Chief Financial Officers will own shares with a
value of at least three times their respective annual salaries; and
- our other officers will own shares with a value at least equal to their
respective annual salaries.
Messrs. Weatherup and Cahill and Ms. Moore each have PepsiCo deferred income
which will be transferred to PBG as of the offering. They have elected to
transfer approximately $4,000,000, $1,000,000 and $250,000, respectively, from
their deferral investments into a PBG phantom stock investment as of the
offering. This transfer will satisfy all or substantially all of their
respective PBG stock ownership requirements.
FOUNDER'S GRANT. The executive development and compensation committee
intends to make a one-time grant to each of our full-time employees below the
middle-management level of options to purchase 100 shares of our common stock.
These options will have an exercise price equal to the initial public offering
price; will vest in three years; and will be exercisable for ten years after the
date of grant.
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RELATIONSHIP WITH PEPSICO AND CERTAIN TRANSACTIONS
In 1998 and prior years, there have been significant transactions between us
and PepsiCo involving purchases of concentrate from PepsiCo, the provision of
marketing and other support by PepsiCo, as well as the provision to us of
administrative and other services by PepsiCo. See Note 17 to the notes to
Combined Financial Statements. For purposes of governing certain on-going
relationships between us and PepsiCo, we will enter into, or continue in effect,
various agreements and relationships, including those described below. The
agreements described below were negotiated in the context of our separation from
PepsiCo and therefore are not the result of arm's-length negotiations between
independent parties. There can be no assurance, therefore, that these
agreements, or the transactions which they provide for will be on terms as
favorable to us as could have been obtained from unaffiliated third parties.
Some of the agreements summarized below are included as exhibits to the
registration statement of which this prospectus is a part, and the following
summaries are qualified completely by reference to such exhibits which are
incorporated in this prospectus by reference.
RELATIONSHIP WITH PEPSICO AFTER THE OFFERING
STOCK OWNERSHIP AND PARTICIPATION IN MANAGEMENT. Following the offering,
PepsiCo will have approximately 40% of the combined voting power of all classes
of our voting stock. We have been advised that PepsiCo has no present intention
of disposing of any of the shares of our capital stock that it will own after
the offering. As a major stockholder of PBG, PepsiCo will be able to
significantly influence the outcome of all matters requiring stockholder action.
Of the persons elected to our board, two are executive officers of
PepsiCo, two are executive officers of PBG and the remainder are independent.
CORPORATE OPPORTUNITIES. Our certificate of incorporation provides that
PepsiCo has no duty to refrain from engaging in the same or similar activities
as we do. Our certificate also provides that PepsiCo need not communicate to us,
may pursue or acquire for itself, or may direct to another person, a corporate
opportunity, without liability to us or our stockholders.
DESCRIPTION OF BOTTLING AGREEMENTS. We have recently entered into a number
of bottling agreements with PepsiCo. These bottling agreements consist of:
(1) the master bottling agreement for cola beverages bearing the
"PEPSI-COLA" and "PEPSI" trademark, including DIET PEPSI and PEPSI ONE in
the United States;
(2) bottling and distribution agreements for non-cola products in the United
States;
(3) a master fountain syrup agreement for fountain syrup in the United
States; and
(4) agreements similar to the master bottling agreement and the non-cola
bottling agreements for each specific country, including Canada, Spain,
Greece and Russia, as well as a fountain syrup agreement similar to the
master syrup agreement for Canada.
The master bottling agreement, the master syrup agreement, the non-cola
bottling agreements and the country specific bottling agreements are referred to
in this prospectus as the Pepsi beverage agreements.
Set forth below is a description of the Pepsi beverage agreements and other
bottling agreements to which we are a party.
TERMS OF THE MASTER BOTTLING AGREEMENT. The master bottling agreement under
which we manufacture, package, sell and distribute the cola beverages bearing
the PEPSI-COLA and PEPSI trademarks was entered into in March 1999. The master
bottling agreement gives us the exclusive right
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<PAGE>
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. The prices at which we purchase concentrate under
the master bottling agreement and the level of advertising and marketing support
provided by PepsiCo may vary materially from the levels provided historically.
PepsiCo may determine from time to time what types of containers to authorize
for use by us. PepsiCo has no rights under the master bottling agreement with
respect to the prices at which we sell our products.
Under the master bottling agreement we are obligated to:
(1) maintain such plant and equipment, staff, and distribution and vending
facilities that are capable of manufacturing, packaging and distributing
the cola beverages in sufficient quantities to fully meet the demand for
these beverages in our territories;
(2) undertake adequate quality control measures prescribed by PepsiCo;
(3) push vigorously the sale of the cola beverages in our territories;
(4) increase and fully meet the demand for the cola beverages in our
territories;
(5) use all approved means and spend such funds on advertising and other
forms of marketing beverages as may be reasonably required to meet the
objective; and
(6) maintain such financial capacity as may be reasonably necessary to
assure performance under the master bottling agreement by us.
The master bottling agreement requires us to meet annually with PepsiCo to
discuss plans for the ensuing year and the following two years. At such
meetings, we are obligated to present plans that set out in reasonable detail
our marketing plan, including the introduction of any new beverage product or
any change in the geographic area in which existing beverage products are
distributed, 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.
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 and to increase and fully meet the demand for the cola beverages in
our territories and to 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 and to push vigorously the sale
of the cola beverages and to 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
57
<PAGE>
as cooperative advertising and sales promotion programs that would require our
cooperation and support. Although PepsiCo has advised us that it intends to
continue to provide cooperative advertising funds, it is not obligated to do so
under the master bottling agreement.
The master bottling agreement provides that PepsiCo may in its sole
discretion reformulate any of the cola beverages or discontinue them, with some
limitations, so long as all cola beverages are not discontinued. PepsiCo may
also introduce new beverages under the PEPSI-COLA trademarks or any modification
thereof. If that occurs, we will be obligated to manufacture, package,
distribute and sell such new beverages with the same obligations as then exist
with respect to other cola beverages. We are prohibited from producing or
handling cola products, other than those of PepsiCo, or products or packages
that imitate, infringe or cause confusion with the products, containers or
trademarks of PepsiCo. The master bottling agreement also imposes requirements
with respect to the use of PepsiCo's trademarks, authorized containers,
packaging and labeling.
If we acquire control, directly or indirectly, of any bottler of cola
beverages, we must cause the acquired bottler to amend its bottling appointments
for the cola beverages to conform to the terms of the master bottling agreement.
Under the master bottling agreement, PepsiCo has agreed not to withhold
approval for any acquisition of rights to manufacture and sell Pepsi trademarked
cola beverages within a specific area-- currently representing approximately 14%
of PepsiCo's U.S. bottling system in terms of volume--if we have successfully
negotiated the acquisition and, in PepsiCo's reasonable judgment, satisfactorily
performed our obligations under the master bottling agreement. We have agreed
not to acquire or attempt to acquire any rights to manufacture and sell PEPSI
trademarked cola beverages outside of that specific area without PepsiCo's prior
written approval.
The master bottling agreement is perpetual, but may be terminated by PepsiCo
in the event of our default. Events of default include:
(1) our insolvency, bankruptcy, dissolution, receivership or the like;
(2) any disposition of any voting securities of one of our bottling
subsidiaries or substantially all of our bottling assets without the
consent of PepsiCo;
(3) our entry into any business other than the business of manufacturing,
selling or distributing non-alcoholic beverages or any business which is
directly related and incidental to such beverage business; and
(4) any material breach under the contract that remains uncured for 120 days
after notice by PepsiCo.
An event of default will also occur if any person or affiliated group
acquires any contract, option, conversion privilege, or other right to acquire,
directly or indirectly, beneficial ownership of more than 15% of any class or
series of our voting securities without the consent of PepsiCo. If the master
bottling agreement is terminated, PepsiCo also has the right to terminate its
other bottling agreements with us.
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
arms-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.
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TERMS OF THE NON-COLA BOTTLING AGREEMENTS. The beverage products covered by
the non-cola bottling agreements are beverages licensed to us by PepsiCo,
consisting of MOUNTAIN DEW, DIET MOUNTAIN DEW, SLICE, MUG root beer and cream
soda and ALL SPORT. The non-cola bottling agreements contain provisions that are
similar to those contained in the master bottling agreement with respect to
pricing, territorial restrictions, authorized containers, planning, quality
control, transfer restrictions, term, and related matters. Our non-cola bottling
agreements will terminate if PepsiCo terminates our master bottling agreement.
The exclusivity provisions contained in the non-cola bottling agreements would
prevent us from manufacturing, selling or distributing beverage products which
imitate, infringe upon, or cause confusion with, the beverage products covered
by the non-cola bottling agreements. PepsiCo may also elect to discontinue the
manufacture, sale or distribution of a non-cola beverage and terminate the
applicable non-cola bottling agreement upon six months notice to us.
We also have an agreement with PepsiCo granting us the exclusive right to
distribute AQUAFINA in our territories. We have the right to manufacture
AQUAFINA in certain locations depending on the availability of appropriate
equipment. The distribution agreement contains 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. However, the
distribution agreement does not prevent us from distributing other bottled
waters. The distribution agreement is for a limited term. Upon expiration of
this term, PepsiCo may issue a perpetual license depending on whether we meet
volume, distribution and marketing objectives described in the distribution
license.
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, we are granted a right of first refusal to act as the
manufacturer for fountain syrup to be delivered to national accounts that elect
delivery through independent distributors. Under the master syrup agreement, we
will have the exclusive right to service fountain equipment for all of the
national account customers within our territories. The master syrup agreement
provides that the determination of whether an account is local or national is in
the sole discretion of PepsiCo.
The master syrup agreement contains provisions that are similar to those
contained in the master bottling agreement with respect to pricing, territorial
restrictions with respect to local customers and national customers electing
direct-to-store delivery only, planning, quality control, transfer restrictions
and related matters. The master syrup agreement has an initial term of five
years and is automatically renewable for additional five year periods unless
PepsiCo terminates it for cause. PepsiCo has the right to terminate the master
syrup agreement without cause at the conclusion of the initial five year period
or at any time during a renewal term upon twenty four months notice. In the
event PepsiCo terminates the master syrup agreement without cause, PepsiCo is
required to pay us the fair market value of our rights under such agreement.
Our master syrup agreement will terminate if PepsiCo terminates our master
bottling agreement.
TERMS OF OTHER U.S. BOTTLING AGREEMENTS. The bottling agreements between us
and other licensors of beverage products, including Cadbury Schweppes plc--for
DR PEPPER, 7UP, SCHWEPPES and CANADA DRY, the Pepsi/Lipton Tea Partnership--for
LIPTON BRISK and LIPTON'S ICED TEA and the North American Coffee
Partnership--for STARBUCKS FRAPPUCCINO, 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.
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<PAGE>
TERMS OF THE COUNTRY SPECIFIC BOTTLING AGREEMENTS. The country specific
bottling agreements contain provisions similar to those contained in the master
bottling agreement and the non-cola bottling agreements and, in Canada, the
master syrup agreement with respect to authorized containers, planning, quality
control, transfer restrictions, causes for termination and related matters.
These bottling agreements differ from the master bottling agreement because,
except for Canada, they include both fountain syrup and non-fountain beverages.
These bottling agreements also differ from the master bottling agreement with
respect to term and contain certain provisions that have been modified to
reflect the laws and regulations of the applicable country. For example, the
bottling agreements in Spain do not contain a restriction on the sale and
shipment of Pepsi-Cola beverages into our territory by others in response to
unsolicited orders.
DESCRIPTION OF OTHER AGREEMENTS WITH PEPSICO
We have entered into, or will enter into, other agreements with PepsiCo,
governing the relationships between us and PepsiCo after the offering, and
providing for the allocation of tax and other liabilities and obligations
relating to periods prior to and after the offering. Copies of the forms of such
agreements are filed as exhibits to the registration statement of which this
prospectus is a part. We currently estimate that the fees that we will pay
PepsiCo during fiscal 1999 under the agreements described below will be
approximately $100 million in the aggregate. In addition, we anticipate that we
will pay approximately $7 million in 1999 to PepsiCo for the sublease of our
headquarters in Somers, New York.
TERMS OF THE SHARED SERVICES AGREEMENT. We have entered into a shared
services agreement with PepsiCo providing for various services to be provided by
PepsiCo to us after the offering, and the fees and payment terms for each
service. The shared services agreement provides that we will have the benefit of
PepsiCo's scale and efficiencies in areas such as the procurement of raw
materials, processing of accounts payable and credit and collection, certain tax
and treasury services and information technology maintenance and systems
development. In addition, we will continue to provide certain employee benefits
services to PepsiCo.
TERMS OF THE TAX SEPARATION AGREEMENT. We have entered into a tax
separation agreement with PepsiCo, on our own behalf and on behalf of our
respective consolidated tax groups, that reflects each party's rights and
obligations with respect to payments and refunds of taxes attributable to
periods beginning prior to and including the offering date and taxes resulting
from transactions effected in connection with the offering. The tax separation
agreement also expresses each party's intention with respect to certain of our
tax attributes after the offering. The tax separation agreement provides for
payments between the two companies for certain tax adjustments made after the
offering that cover pre-offering tax liabilities. Other provisions cover the
handling of audits, settlements, stock options, elections, accounting methods
and return filing in cases where both companies have an interest in the results
of these activities.
TERMS OF THE EMPLOYEE PROGRAMS AGREEMENT. We have entered into an employee
programs agreement with PepsiCo, which allocates assets, liabilities and
responsibilities between the two parties with respect to employee compensation
and benefit plans and programs and other related matters.
TERMS OF THE SEPARATION AGREEMENT. We have entered into a separation
agreement with PepsiCo which provides for books, records and personnel which we
and PepsiCo will make available to each other from and after the offering. The
separation agreement also provides for the assumption by us of liabilities
relating to our bottling businesses and indemnification of PepsiCo with respect
to such liabilities, other than the $2.3 billion of debt of Bottling LLC that
has been unconditionally guaranteed by PepsiCo.
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Under the terms of the separation agreement, we have agreed to use our best
efforts to release, terminate or replace, prior to the offering, all letters of
credit, guarantees, other than the guarantee of the $2.3 billion of debt issued
by Bottling LLC, and contingent liabilities relating to our bottling businesses
for which PepsiCo is liable. After the offering, PepsiCo may remain liable for
some of the letters of credit, guarantees and contingent liabilities which were
not terminated or replaced and from which PepsiCo was not released prior to the
offering. Under the separation agreement, after the offering we will pay a fee
to PepsiCo with respect to any such letters of credit, guarantees, other than
the guarantee of Bottling LLC's $2.3 billion of debt and contingent liabilities,
until such time as they are released, terminated or replaced by a qualified
letter of credit. We will be required to indemnify PepsiCo with respect to such
letters of credit, guarantees, other than the guarantee of Bottling LLC's $2.3
billion of debt and contingent liabilities.
TERMS OF THE REGISTRATION RIGHTS AGREEMENT. We have entered into a
registration rights agreement with PepsiCo which allows PepsiCo to require us to
register shares of our common stock owned by PepsiCo and to include such shares
in any registration of common stock made by us in the future. We have agreed to
cooperate fully in connection with any such registration and with any offering
made under the registration rights agreement and to pay all costs and expenses,
other than underwriting discounts and commissions, related to shares sold by
PepsiCo in connection with any such registration.
PEPSICO'S AGREEMENT TO COMBINE BOTTLING BUSINESSES WITH WHITMAN. On January
25, 1999, PepsiCo signed an agreement with Whitman Corporation providing for the
combination of certain of PepsiCo's bottling businesses and assets in the
Midwestern United States and Central Europe with those of Whitman in a newly
created Whitman entity. The agreement provides that Whitman will assume
liabilities associated with the U.S. operations of PepsiCo being transferred to
it and will acquire certain of PepsiCo's operations in Central Europe for cash.
PepsiCo will receive $300 million in net proceeds plus 35% of the common stock
in the newly created Whitman entity. Whitman has agreed to undertake a stock
repurchase program that is anticipated to raise PepsiCo's stake in the new
Whitman to 40%. The transaction is subject to approval by regulators and by a
majority vote of Whitman shareholders.
The new Whitman will operate under bottling agreements with PepsiCo,
containing terms which are similar to the Pepsi beverage agreements, including
that:
(1) Whitman will not acquire or attempt to acquire the right to manufacture
or sell Pepsi-Cola trademark beverages outside of a specified area
without PepsiCo's prior written consent; and
(2) an acquisition in the specified territory would be subject to PepsiCo's
approval.
Because of the territorial restrictions on acquisitions in our master
bottling agreement and the Whitman bottling agreements, PBG and Whitman will
generally not be competing for acquisitions of Pepsi-Cola bottling territories
in the United States unless PepsiCo consents. The new Whitman could also acquire
international bottling territories which are of interest to us, with PepsiCo's
consent.
PepsiCo has agreed not to increase its ownership of the new Whitman's equity
securities beyond 49%, except with the approval of the the new Whitman board of
directors or under the terms of an offer made to all new Whitman shareholders.
Whitman will also transfer to us prior to the offering bottling operations
in Virginia, West Virginia and St. Petersburg, Russia. This transfer is not
subject to approval by Whitman shareholders.
PRINCIPAL STOCKHOLDER
Prior to this offering, PepsiCo owned 100% of our capital stock. Following
the offering, PepsiCo will own % of our outstanding common stock and 100% of
our outstanding Class B common stock.
The following table sets forth, as of March , 1999, the beneficial
ownership of PepsiCo's Capital Stock by each of our executive officers named in
the Summary Compensation Table, each of our
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directors and all of our directors and executive officers as a group. The number
and percentage of shares identified as beneficially owned are based on
shares of PepsiCo capital stock outstanding as of March , 1999.
Beneficial ownership is determined in accordance with the rules and regulations
of the Securities and Exchange Commission. Shares of PepsiCo capital stock
subject to options that are currently exercisable or exercisable within 60 days
of March , 1999 are deemed to be outstanding and beneficially owned by the
person holding such options for the purpose of computing the number of shares
beneficially owned and the percentage ownership of such person, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person. Except as indicated in the text below this table, and
subject to applicable community property laws, such persons have sole voting and
investment power with respect to all shares of the PepsiCo capital stock shown
as beneficially owned by them.
Certain directors or executive officers share voting and investment power
over shares of PepsiCo capital stock with their spouses or children.
The shares shown in the table include shares of PepsiCo capital stock
which certain directors and executive officers have a right to acquire within 60
days.
The shares shown in the table do not include shares held by children
or spouses of directors or executive officers, or by trusts for the benefit of
directors or executive officers, as to which beneficial ownership is disclaimed.
The shares shown also include the following number of PepsiCo capital stock
equivalents, which are held in PepsiCo's deferred income program:
; and all directors and executive officers
as a group, shares.
Directors and executive officers as a group own less than 1% of outstanding
capital stock.
OWNERSHIP OF PEPSICO CAPITAL STOCK BY PBG EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PEPSICO CAPITAL
NAME AND ADDRESS OF STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT
- -------------------------------------------------------- -------------------- -----------
<S> <C> <C>
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
The following summarizes important provisions of our capital stock and
describes all material provisions of our certificate of incorporation and
bylaws. This summary is qualified by our certificate of incorporation and
bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part and by the provisions of applicable
law.
DESCRIPTION OF COMMON STOCK AND CLASS B COMMON STOCK
Our certificate of incorporation provides for two classes of capital stock,
common stock, par value $.01, and Class B common stock, par value $.01, which
are substantially identical, except with respect to voting rights. We refer to
our common stock together with our Class B common stock as our capital stock.
Our capital stock has no preemptive rights with respect to new stock we issue
and no redemption or sinking fund provisions. All the shares of our capital
stock to be issued upon completion of this offering will be fully paid and
non-assessable.
VOTING AND CONVERSION RIGHTS. Holders of common stock and Class B common
stock generally have identical voting rights and vote together as a single
class, except that holders of common stock are entitled to one vote per share
and holders of Class B common stock are entitled to 250 votes per share. In
addition, holders of common stock may not vote on an alteration or change in the
powers or rights of the Class B common stock that does not adversely affect the
rights of the common stock. Any amendment to our certificate of incorporation
which would alter or change the powers, preferences or rights of the common
stock or the Class B common stock must be approved by a majority of the votes
cast by holders of shares affected by the proposed amendment, in addition to
approval by a majority of the votes cast by holders of capital stock.
Other than as set forth above, all matters to be voted on by stockholders
must be approved by a majority of the votes cast by holders of the outstanding
shares of common stock and Class B common stock. This would change if voting
rights were granted in the future to holders of outstanding preferred stock.
Holders of capital stock may not cumulate their votes for the election of
directors.
Each share of Class B common stock held by PepsiCo is, at PepsiCo's option,
convertible into one share of common stock. Any Class B common stock transferred
by PepsiCo to any person other than a PepsiCo affiliate or subsidiary will
automatically convert into shares of common stock upon such transfer.
DIVIDENDS AND DISTRIBUTIONS. Holders of common stock and holders of Class B
common stock shall share equally on a per share basis in any dividends or
distributions declared by our board of directors, unless in the future, holders
of preferred stock have preferential dividend or distribution rights. In the
case of dividends or distributions payable in capital stock, only shares of
common stock shall be paid or distributed with respect to common stock and only
shares of Class B common stock shall be paid or distributed with respect to
Class B common stock. The number of shares of common stock and Class B common
stock distributed on each share shall be equal in number. The shares of common
stock and Class B common stock may not be reclassified, subdivided or combined
unless such reclassification, subdivision or combination occurs simultaneously
and in the same proportion for each class.
In the event of any dissolution, liquidation or winding up of our affairs,
after payment of amounts due to holders of preferred stock, our remaining assets
and funds shall be distributed pro rata to the holders of capital stock, and the
holders of common stock and Class B common stock shall be entitled to the same
amount per share.
MERGER. If we reorganize or consolidate or merge with another corporation,
and shares of common stock or Class B common stock are converted into shares of
stock and/or securities or property of another entity, the holders of common
stock and Class B common stock will be entitled to
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receive the same per share consideration, unless unequal consideration is
approved by a majority of the votes cast by holders of each class of capital
stock.
PREFERRED STOCK
Our board of directors has the authority, as limited by the Delaware General
Corporation Law to authorize the issuance of preferred stock. The preferred
stock may be divided into two or more series, with such preferences, limitations
and relative rights as the Board may determine. However, no holder of preferred
stock shall be entitled to receive, if we involuntarily liquidate, an amount in
excess of $100 per share of preferred stock. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of PBG,
and may adversely affect the voting and other rights of the holders of our
common stock and Class B common stock. We have no current plan to issue any
preferred stock.
DESCRIPTION OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
CHANGE IN CONTROL. Under the terms of our certificate of incorporation, we
have "opted-out" of Delaware's anti-takeover law. In general, Section 203 of the
Delaware corporate law prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless, with certain exceptions, the "business combination" or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the interested stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. It does not include "interested stockholders" prior
to the time our common stock is listed on the NYSE. The existence of this
provision would have an anti-takeover effect with respect to transactions not
approved in advance by our Board of Directors, including discouraging takeover
attempts that might result in a premium over the market price for the shares of
our common stock.
SPECIAL MEETINGS. The bylaws provide that special meetings of stockholders
may be called at any time by our Chairman of the board or the board, and must be
called by our Secretary upon the written request of stockholders holding of
record at least 25% of the voting power of our capital stock issued and
outstanding and entitled to vote at such meeting. Following the offering,
PepsiCo will own capital stock representing approximately 40% of the voting
power of the capital stock. As a result, PepsiCo will be able to call a special
meeting of stockholders to consider various corporate actions.
STOCKHOLDER PROPOSALS. Our bylaws provide that for business proposed by a
stockholder, other than director nominations, to be a proper subject for action
at an annual meeting of stockholders, the stockholder must timely request that
the proposal be included in our proxy statement for the meeting and such request
must satisfy all of the provisions of Rule 14a-8 under the Securities Exchange
Act of 1934, as amended. This provision may limit the ability of stockholders to
bring business before an annual stockholders' meeting.
CORPORATE OPPORTUNITIES. Our certificate of incorporation provides that
PepsiCo shall have no duty to refrain from engaging in the same or similar
activities as we do and, except as set out below, neither PepsiCo nor any of its
officers, directors, or employees shall be liable to us or our stockholders by
reason of any such activities. In the event that PepsiCo acquires knowledge of a
potential transaction or matter which may be a corporate opportunity for both
PepsiCo and us, PepsiCo shall have no duty to communicate or offer such
corporate opportunity to us. PepsiCo shall not be liable to us or our
stockholders for breach of any fiduciary duty to us by reason of the fact that
PepsiCo pursues or acquires such corporate opportunity for itself, directs such
corporate opportunity to another person, or
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does not communicate information regarding such corporate opportunity to us.
PepsiCo currently owns interests in other domestic and international bottling
companies and may offer opportunities to them which may be of interest to us.
Where corporate opportunities are offered to persons who are directors or
officers of both us and PepsiCo, our certificate of incorporation provides that
such director or officer shall have fully satisfied his or her fiduciary duty to
us and to our stockholders and will have no liability to us or our stockholders
if such person acts in a manner consistent with the following policy:
(1) a corporate opportunity offered to any person who is an officer of
PBG and also a director of PepsiCo shall belong to us;
(2) a corporate opportunity offered to any person who is one of our
directors but is not one of our officers, and who is also a director or
officer of PepsiCo, shall belong to us if such opportunity is expressly
offered to such person in writing solely in his or her capacity as one of
our directors, and otherwise shall belong to PepsiCo; and
(3) a corporate opportunity offered to any person who is an officer of
both us and PepsiCo shall belong to us.
LIABILITY AND INDEMNIFICATION OF DIRECTORS. Our certificate of
incorporation provides that, to the full extent from time to time permitted by
law, no director shall be personally liable for monetary damages for breach of
any duty as a director. Neither the amendment or repeal of this provision, nor
the adoption of any provision of our certificate of incorporation which is
inconsistent with this provision, shall eliminate or reduce the protection
afforded by this provision with respect to any matter which occurred, or any
suit or claim which, but for this provision would have accrued or arisen, prior
to such amendment, repeal or adoption.
While our certificate of incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, they do not
eliminate such duty. As a result, our certificate of incorporation will have no
effect on the availability of equitable remedies such as an injunction or
recission based on a director's breach of his or her duty of care.
Our certificate of incorporation also provides that we shall, to the fullest
extent from time to time permitted by law, indemnify our directors and officers
against all liabilities and expenses in any suit or proceeding, arising out of
their status as an officer or director or their activities in these capacities.
We shall also indemnify any person who, at our request, is or was serving as a
director, officer, partner, trustee, employee or agent of another corporation,
joint venture, trust or other enterprise, or as a trustee or administrator under
any employee benefit plan.
The right to be indemnified shall include the right of an officer or a
director to be paid expenses in advance of the final disposition of any
proceeding, if we receive an undertaking to repay such amount unless it shall be
determined that he or she is entitled to be indemnified. A person entitled to
indemnification shall also be paid reasonable costs, expenses and attorneys'
fees in connection with the enforcement of his or her indemnification rights.
Our board of directors may take such action as it deems necessary to carry
out these indemnification provisions, including adopting procedures for
determining and enforcing indemnification rights and purchasing insurance
policies. Our board of directors may also adopt bylaws, resolutions or contracts
implementing indemnification arrangements as may be permitted by law. Neither
the amendment or repeal of these indemnification provisions, nor the adoption of
any provision of our certificate of incorporation inconsistent with these
indemnification provisions, shall eliminate or reduce any rights to
indemnification relating to their status or any activities prior to such
amendment, repeal or adoption.
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LISTING OF PBG COMMON STOCK
We intend to list the common stock on the New York Stock Exchange under the
symbol "PBG."
TRANSFER AGENT AND REGISTRAR FOR PBG COMMON STOCK
The Transfer Agent and Registrar for the common stock is The Bank of New
York.
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have shares of common stock outstanding. If
the underwriters exercise their over-allotment option in full, we will have a
total of shares outstanding. All of the common stock sold in this offering
will be freely transferable without restriction or further registration under
the Securites Act, except for shares acquired by our directors and senior
officers. PepsiCo's and our directors and senior officers who are purchasing
common stock in this offering have agreed not to sell or dispose of any common
stock for a period of 180 days after the date of this prospectus, without
Merrill Lynch, Pierce, Fenner & Smith Incorporated's prior written consent. We
can give no assurance concerning how long these parties will continue to hold
their common stock after this offering.
After this offering PepsiCo will own shares of our common stock. Any
common stock held by one of our affiliates will be subject to the resale
limitations required by Rule 144 under the Securities Act. Rule 144 defines an
affiliate as a person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with
the issuer.
After this offering, PepsiCo will be our affiliate. Therefore, as long as
PepsiCo remains an affiliate, PepsiCo may sell our common stock only:
- under an effective registration statement under the Securities Act;
- under Rule 144; or
- under another exemption from registration.
PepsiCo is not under any contractual obligation to retain our common stock,
except during the 180-day period noted above.
In general, a stockholder subject to Rule 144 who has owned common stock of
an issuer for at least one year may, within any three-month period, sell up to
the greater of:
- 1% of the total number of shares of common stock then outstanding and
- the average weekly trading volume of the common stock during the four
weeks preceding the stockholder's required notice of sale.
Rule 144 requires stockholders to aggregrate their sales with other
affiliated stockholders for purposes of complying with this volume limitation. A
stockholder who has owned common stock for at least two years, and who has not
been an affiliate of the issuer for at least 90 days, may sell common stock free
from the volume limitation and notice requirements of Rule 144.
PepsiCo is entitled to require us to register our shares of common stock
held by it for sale under the Securities Act after the expiration of the 180-day
period noted above. See "Relationship with PepsiCo and Certain Transactions."
We cannot estimate the number of shares of common stock that may be sold by
third parties in the future because such sales will depend on market prices, the
circumstances of sellers and other factors.
In connection with this offering, we are offering options to purchase
approximately shares of our outstanding common stock. Immediately after
this offering, we intend to file a registration statement on Form S-8 covering
all options granted under the PBG Long-Term Incentive Plan. Shares of our common
stock registered under this registration statement will be available for sale in
the open market, unless such shares are subject to vesting restriction with us
or the lock-up agreements described below. Any sales of these shares will be
subject to the volume limitations of Rule 144 described above. In addition,
sales of these shares will not be subject to the 180-day period noted above, and
will therefore be transferable unless restricted by their individual terms.
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Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that future sales of shares of our
common stock or the availability of shares for sale would have on the prevailing
market price of our common stock. Nevertheless, future sales by us or by PepsiCo
of substantial amounts of our common stock, or the perception that such sales
may occur, could adversely affect the prevailing market price of our common
stock.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of our common stock by
a beneficial owner that is a non-U.S. holder. A non-U.S. holder is a person or
entity that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership, or a foreign estate or
trust.
This discussion is based on the Internal Revenue Code of 1986, as amended,
and administrative interpretations as of the date of this prospectus, all of
which are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to non-U.S. holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of any state, local or foreign jurisdiction. Prospective holders are advised to
consult their tax advisors with respect to the particular tax consequences to
them of owning and disposing of our common stock, including the consequences
under the laws of any state, local or foreign jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends, if any, paid to a non-U.S.
holder of our common stock generally will be subject to withholding tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
For purposes of determining whether tax is to be withheld at a 30% rate or at a
reduced rate as specified by an income tax treaty, we ordinarily will presume
that dividends paid on or before December 31, 1999 to an address in a foreign
country are paid to a resident of such country, absent knowledge that such
presumption is not warranted.
Under the United States Treasury Regulations applicable to dividends paid
after December 31, 1999, to obtain a reduced rate of withholding under a treaty,
a non-U.S. holder generally will be required to provide an Internal Revenue
Service Form W-8 BEN certifying such non-U.S. holder's entitlement to benefits
under a treaty. These regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty,
dividends paid to a non-U.S. holder that is an entity should be treated as paid
to the entity or those holding an interest in that entity.
There will be no withholding tax on dividends paid to a non-U.S. holder that
are effectively connected with the non-U.S. holder's conduct of a trade or
business within the United States if a Form 4224, or, after December 31, 1999, a
Form W-8 ECI, stating that the dividends are so connected is filed with us.
Instead, the effectively connected dividends will be subject to regular U.S.
income tax in the same manner as if the non-U.S. holder were a U.S. resident. A
non-U.S. corporation receiving effectively connected dividends may also be
subject to an additional "branch profits tax" which is imposed, under certain
circumstances, at a rate of 30%, or such lower rate as may be specified by an
applicable treaty, of the non-U.S. corporation's effectively connected earnings
and profits, subject to certain adjustments.
Generally, we must report to the U.S. Internal Revenue Service the amount of
dividends paid, the name and address of the recipient, and the amount, if any,
of tax withheld. A similar report is sent to the holder. Under the terms of tax
treaties or other agreements, the U.S. Internal Revenue Service may make its
reports available to tax authorities in the recipient's country of residence.
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Dividends paid to a non-U.S. holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the non-U.S.
holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and certain other information to us.
Under current United States federal income tax law, backup withholding
generally will not apply to dividends paid on or before December 31, 1999 to a
non-U.S. holder at an address outside the United States, unless the payer has
knowledge that the payee is a U.S. person. Under the regulations described
above, however, a non-U.S. holder will be subject to backup withholding unless
applicable certification requirements are met.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of our common stock
unless:
(1) the gain is effectively connected with a trade or business of such
holder in the United States,
(2) in the case of certain non-U.S. holders who are non-resident alien
individuals and hold our common stock as a capital asset, such individuals
are present in the United States for 183 or more days in the taxable year of
the disposition,
(3) the non-U.S. holder is subject to tax pursuant to the provisions of
the Internal Revenue Code regarding the taxation of U.S. expatriates, or
(4) we are or have been a "U.S. real property holding corporation"
within the meaning of Section 897(c)(2) of the Internal Revenue Code at any
time within the shorter of the five-year period preceding such disposition
or such holder's holding period.
We are not, and do not anticipate becoming, a U.S. real property holding
corporation.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK
Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of our common stock effected by or through a U.S. office of a broker
unless the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds where the
transaction is effected outside the United States through a non-U.S. office of a
non-U.S. broker. However, U.S. information reporting requirements will apply to
a payment of disposition proceeds where the transaction is effected outside the
United States by or through an office outside the United States of a broker that
fails to maintain documentary evidence that the holder is a non-U.S. holder and
that certain conditions are met or that the holder otherwise is entitled to an
exemption, and the broker is:
(1) a U.S. person;
(2) a foreign person which derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United
States;
(3) a "controlled foreign corporation" for U.S. federal income tax
purposes; or
(4) effective after December 31, 1999, a foreign partnership (A) at
least 50% of the capital or profits interest in which is owned by U.S.
persons, or (B) that is engaged in a U.S. trade or business.
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Effective after December 31, 1999, backup withholding will apply to a
payment of those disposition proceeds if the broker has actual knowledge that
the holder is a U.S. person.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
FEDERAL ESTATE TAX
An individual non-U.S. holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in our common stock will be required
to include the value of that interest in his gross estate for U.S. federal
estate tax purposes, and may be subject to U.S. federal estate tax unless an
applicable estate tax treaty provides otherwise.
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UNDERWRITING
GENERAL
We intend to offer our common stock in the United States and Canada through
a number of U.S. underwriters as well as elsewhere through international
managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley
& Co. Incorporated are acting as U.S. representatives of each of the U.S.
underwriters named below. Subject to the terms and conditions set forth in a
U.S. purchase agreement between us and the U.S. underwriters, and concurrently
with the sale of shares of our common stock to the international
managers, we have agreed to sell to the U.S. underwriters, and each of the U.S.
underwriters severally and not jointly has agreed to purchase from us, the
number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- -------------------------------------------------------------------------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................................
Morgan Stanley & Co. Incorporated...........................................................
Bear, Stearns & Co. Inc.....................................................................
Credit Suisse First Boston Corporation......................................................
Goldman, Sachs & Co.........................................................................
Lehman Brothers Inc.........................................................................
NationsBanc Montgomery Securities LLC.......................................................
Salomon Smith Barney Inc....................................................................
Sanford C. Bernstein & Co., Inc.............................................................
Schroder & Co. Inc..........................................................................
-----------
Total.............................................................................
-----------
-----------
</TABLE>
We have also entered into an international purchase agreement with certain
underwriters outside the United States and Canada who we call international
managers and, together with the U.S. underwriters, the underwriters, for whom
Merrill Lynch International and Morgan Stanley & Co. International Limited are
acting as lead managers. Subject to the terms and conditions set forth in the
international purchase agreement, and concurrently with the sale of
shares of our common stock to the U.S. underwriters under the terms
of the U.S. purchase agreement, we have agreed to sell to the international
managers, and the international managers severally have agreed to purchase from
us, an aggregate of shares of our common stock. The initial public
offering price per share and the total underwriting discount per share of common
stock are identical under the U.S. purchase agreement and the international
purchase agreement.
In the U.S. purchase agreement and the international purchase agreement, the
several U.S. underwriters and the several international managers, respectively,
have agreed, subject to the terms and conditions set forth in those agreements,
to purchase all of the shares of common stock being sold under the terms of each
such agreement if any of the shares of common stock being sold under the terms
of that agreement are purchased. Under certain circumstances, under the U.S.
purchase agreement and the international purchase agreement, the commitments of
non-defaulting underwriters may be increased. The closings with respect to the
sale of shares of common stock to be purchased by the U.S. underwriters and the
international managers are conditioned upon one another.
We and PepsiCo have agreed to indemnify the U.S. underwriters and the
international managers against some liabilities, including some liabilities
under the Securities Act, or to contribute to payments the U.S. underwriters and
international managers may be required to make in respect of those liabilities.
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The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ and are payable by us and PepsiCo. The underwriters have
agreed to reimburse PepsiCo for certain expenses payable by it.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares of our common stock to the public at the initial
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share of common stock. The U.S. underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share of common stock to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the U.S. underwriters and the
international managers and the proceeds before expenses to us. This information
is presented assuming either no exercise or full exercise by the U.S.
underwriters and the international managers of their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- --------- ---------
<S> <C> <C> <C>
Public offering price........................................... $ $ $
Underwriting discount........................................... $ $ $
Proceeds, before expenses, to PBG............................... $ $ $
</TABLE>
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of our common stock to each
other for purposes of resale at the initial public offering price, less an
amount not greater than the selling concession. Under the terms of the
intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell
shares of our common stock will not offer to sell or sell shares of our common
stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the international managers and any dealer to whom they sell shares of our
common stock will not offer to sell or sell shares of our common stock to U.S.
persons or to Canadian persons or to persons they believe intend to resell to
U.S. or Canadian persons, except in the case of transactions under the terms of
the intersyndicate agreement.
OVER-ALLOTMENT OPTION
We have granted an option to the U.S. underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of
additional shares of our common stock at the initial public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
U.S. underwriters may exercise this option solely to cover over-allotments, if
any, made on the sale of our common stock offered hereby. To the extent that the
U.S. underwriters exercise this option, each U.S. underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of our
common stock proportionate to such U.S. underwriter's initial amount reflected
in the foregoing table.
72
<PAGE>
We also have granted an option to the international managers, exercisable
for 30 days after the date of this prospectus, to purchase up to an aggregate of
additional shares of our common stock to cover over-allotments, if
any, on terms similar to those granted to the U.S. underwriters.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares offered hereby to be sold to
some of our directors and officers. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
those persons purchase the reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of the offering will
be offered by the underwriters to the general public on the same terms as the
other shares offered by this prospectus.
NO SALES OF SIMILIAR SECURITIES
We and our executive officers and directors and PepsiCo have agreed, with
certain exceptions, not to directly or indirectly
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, lend or otherwise dispose of or transfer any
shares of our common stock or securities convertible into or exchangeable
or exercisable for or repayable with our common stock, whether now owned
or later acquired by the person executing the agreement or with respect to
which the person executing the agreement later acquires the power of
disposition, or file a registration statement under the Securities Act
relating to any shares of our common stock or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of 180
days after the date of this prospectus. See "Shares Eligible for Future
Sale."
NEW YORK STOCK EXCHANGE LISTING
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us and the U.S. representatives and the lead managers. The factors to be
considered in determining the initial public offering price, in addition to
prevailing market conditions, the valuation multiples of publicly traded
companies that the U.S. representatives and the lead managers believe to be
comparable to us, certain of our financial information, the history of, and the
prospects for, PBG and the industry in which we compete, and an assessment of
our management, its past and present operations, the prospects for, and timing
of, future revenues of our company, the present state of our development, and
the above factors in relation to market values and various valuation measures of
other companies engaged in activities similar to ours. There can be no assurance
that an active trading market will develop for our common stock or that our
common stock will trade in the public market subsequent to the offerings at or
above the initial public offering price.
We expect our common stock to be approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "PBG." In order to
meet the requirements for listing of our common stock on that exchange, the U.S.
underwriters and the international managers have undertaken to sell lots of 100
or more shares to a minimum of 2,000 beneficial owners.
The underwriters do not expect sales of our common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered under this prospectus.
73
<PAGE>
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common stock is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase our common stock. As an exception to these
rules, Merrill Lynch is permitted to engage in certain transactions that
stabilize the price of our common stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of our
common stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common stock
than are set forth on the cover page of this prospectus, Merrill Lynch may
reduce that short position by purchasing our common stock in the open market.
Merrill Lynch may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
PENALTY BIDS
Merrill Lynch may also impose a penalty bid on certain underwriters and
selling group members. This means that if Merrill Lynch purchases shares of our
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of our common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
Some of the underwriters or their affiliates have provided investment
banking, financial advisory and banking services to our company, PepsiCo and our
respective affiliates, for which they have received customary compensation. The
underwriters may continue to render these services in the future.
74
<PAGE>
LEGAL MATTERS
Legal matters with respect to the validity of the issuance of the shares of
our common stock offered hereby will be passed upon for us by Pamela C. McGuire,
Senior Vice President, General Counsel and Secretary of PBG, and Davis Polk &
Wardwell, New York, New York. Legal matters relating to our common stock offered
hereby will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher
& Flom LLP, New York, New York. Each of Davis Polk & Wardwell and Skadden, Arps,
Slate, Meagher & Flom LLP has from time to time represented, and may continue to
represent, PepsiCo and its affiliates in certain legal matters, and is one of
several firms that have provided advice on taxation matters in connection with
the formation of PBG.
EXPERTS
Our combined financial statements and schedules as of December 26, 1998 and
December 27, 1997, and for each of the three years in the period ended December
26, 1998 included in this prospectus have been audited by KPMG LLP, independent
auditors, as stated in their reports appearing in this prospectus and elsewhere
in the registration statement, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered under this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and the attached exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract or other document that is filed as
an exhibit to the registration statement are not necessarily complete and each
such statement is qualified in all respects by reference to the full text of
such contract or document. For further information about us and our common
stock, refer to the registration statement and the attached exhibits and
schedules, which may be inspected and copied at the principal office of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any
part of those documents may be obtained at prescribed rates from the
Commission's Public Reference Section at such addresses. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Also, the Commission maintains a world Wide Web
Site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Upon approval of our common stock for
listing on the New York Stock Exchange, such reports, proxy and information
statements and other information can be inspected also at the offices of the New
York Stock Exchange at 20 Broad Street, New York, New York 10005.
Upon completion of this offering, we will be required to comply with the
informational requirements of the Securities and Exchange Act of 1934 and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Those reports, proxy statements and other information will
be available for inspection and copying at the regional offices, public
reference facilities and Web site of the Commission referred to above.
75
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
COMBINED FINANCIAL STATEMENTS
Report of Independent Auditors.................................................................... F-2
Combined Statements of Operations--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998................... F-3
Combined Statements of Cash Flows--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998................... F-4
Combined Balance Sheets--
December 27, 1997 and December 26, 1998......................................................... F-5
Combined Statements of Accumulated Other Comprehensive Loss--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998................... F-6
Notes to Combined Financial Statements............................................................ F-7
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--UNAUDITED...................................... P-1
Pro Forma Condensed Combined Statement of Operations--
Fiscal year ended December 26, 1998............................................................. P-2
Pro Forma Condensed Combined Balance Sheet--
December 26, 1998............................................................................... P-3
Notes to unaudited Pro Forma Condensed Combined Financial Statements.............................. P-4
</TABLE>
F-1
<PAGE>
When PBG's capitalization is finalized as set forth in Note 1, we will be in
a position to render the following report.
/s/ KPMG LLP
THE PEPSI BOTTLING GROUP, INC.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
The Pepsi Bottling Group, Inc.
We have audited the accompanying combined balance sheets of The Pepsi
Bottling Group, Inc. as of December 27, 1997 and December 26, 1998 and the
related combined statements of operations, cash flows and accumulated other
comprehensive loss for each of the fiscal years in the three-year period ended
December 26, 1998. These combined financial statements are the responsibility of
management of The Pepsi Bottling Group, Inc. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Pepsi Bottling
Group, Inc. as of December 27, 1997 and December 26, 1998, and the results of
its operations and its cash flows for each of the fiscal years in the three-year
period ended December 26, 1998, in conformity with generally accepted accounting
principles.
New York, New York
March , 1999
F-2
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
COMBINED STATEMENTS OF OPERATIONS
IN MILLIONS, EXCEPT PER SHARE DATA
FISCAL YEARS ENDED DECEMBER 28, 1996,
DECEMBER 27, 1997 AND DECEMBER 26, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
NET SALES............................................................................ $ 6,603 $ 6,592 $ 7,041
Cost of sales........................................................................ 3,844 3,832 4,181
--------- --------- ---------
GROSS PROFIT......................................................................... 2,759 2,760 2,860
Selling, delivery and administrative expenses........................................ 2,392 2,425 2,583
Unusual impairment and other charges................................................. -- -- 222
--------- --------- ---------
OPERATING INCOME..................................................................... 367 335 55
Interest expense, net................................................................ 225 222 221
Foreign currency loss (gain)......................................................... 4 (2) 26
--------- --------- ---------
Income (loss) before income taxes.................................................... 138 115 (192)
Income tax expense (benefit)......................................................... 89 56 (46)
--------- --------- ---------
NET INCOME (LOSS).................................................................... $ 49 $ 59 $ (146)
--------- --------- ---------
--------- --------- ---------
UNAUDITED PRO FORMA BASIC AND DILUTED NET INCOME (LOSS) PER SHARE.................... $
UNAUDITED PRO FORMA WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING............
</TABLE>
See accompanying notes to Combined Financial Statements.
F-3
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
IN MILLIONS
FISCAL YEARS ENDED DECEMBER 28, 1996,
DECEMBER 27, 1997 AND DECEMBER 26, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS--OPERATIONS
Net income (loss)................................................................. $ 49 $ 59 $ (146)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation.................................................................... 296 316 351
Amortization.................................................................... 129 123 121
Non-cash impairment charge...................................................... -- -- 194
Non-cash portion of tax settlement.............................................. -- -- (46)
Deferred income taxes........................................................... 8 17 47
Other non-cash charges and credits, net......................................... 1 12 88
Changes in operating working capital, excluding effects of acquisitions and
dispositions:
Trade accounts receivable................................................... (87) 26 46
Inventories................................................................. 21 -- (25)
Prepaid expenses, deferred income taxes and other current assets............ 35 (54) 8
Accounts payable and other current liabilities.............................. (5) 56 39
Trade accounts payable to PepsiCo........................................... (9) 7 --
Income taxes payable........................................................ 13 (14) (52)
--------- --------- ---------
Net change in operating working capital....................................... (32) 21 16
--------- --------- ---------
NET CASH PROVIDED BY OPERATIONS................................................... 451 548 625
--------- --------- ---------
CASH FLOWS--INVESTMENTS
Capital expenditures.............................................................. (418) (472) (507)
Acquisitions of bottlers and investments in affiliates............................ (26) (49) (546)
Sales of bottling operations and property, plant and equipment.................... 55 23 31
Other, net........................................................................ 13 (66) (24)
--------- --------- ---------
NET CASH USED FOR INVESTMENTS..................................................... (376) (564) (1,046)
--------- --------- ---------
CASH FLOWS--FINANCING
Short-term borrowings--three months or less....................................... 54 (90) 52
Proceeds from third party debt.................................................... 4 3 50
Payments of third party debt...................................................... (7) (11) (72)
Increase (decrease) in advances from PepsiCo...................................... (117) 161 340
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING......................................... (66) 63 370
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS...................... -- (1) 1
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 9 46 (50)
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR...................................... 31 40 86
--------- --------- ---------
CASH AND CASH EQUIVALENTS--END OF YEAR............................................ $ 40 $ 86 $ 36
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING ACTIVITIES:
PepsiCo capital stock issued in conjunction with acquisitions of bottlers..... $ -- $ 14 $ --
Liabilities incurred and/or assumed in conjunction with acquisitions of
bottlers.................................................................... $ 2 $ 3 $ 161
</TABLE>
See accompanying notes to Combined Financial Statements.
F-4
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
COMBINED BALANCE SHEETS
IN MILLIONS
DECEMBER 27, 1997 AND DECEMBER 26, 1998
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................................................... $ 86 $ 36
Trade accounts receivable, less allowance of $45 and $46, in 1997 and 1998, respectively....... 808 808
Inventories.................................................................................... 257 296
Prepaid expenses, deferred income taxes and other current assets............................... 185 178
--------- ---------
TOTAL CURRENT ASSETS......................................................................... 1,336 1,318
Property, plant and equipment, net............................................................. 1,918 2,055
Intangible assets, net......................................................................... 3,679 3,806
Other assets................................................................................... 255 143
--------- ---------
TOTAL ASSETS............................................................................... $ 7,188 $ 7,322
--------- ---------
--------- ---------
LIABILITIES AND ACCUMULATED OTHER COMPREHENSIVE LOSS
CURRENT LIABILITIES
Accounts payable and other current liabilities................................................. $ 811 $ 881
Trade accounts payable to PepsiCo.............................................................. 23 23
Income taxes payable........................................................................... 273 9
Short-term borrowings.......................................................................... 40 112
--------- ---------
TOTAL CURRENT LIABILITIES.................................................................... 1,147 1,025
Allocation of PepsiCo long-term debt........................................................... 3,300 3,300
Long-term debt due to third parties............................................................ 96 61
Other liabilities.............................................................................. 350 367
Deferred income taxes.......................................................................... 1,076 1,202
Advances from PepsiCo.......................................................................... 1,403 1,605
--------- ---------
TOTAL LIABILITIES............................................................................ 7,372 7,560
Accumulated other comprehensive loss........................................................... (184) (238)
--------- ---------
TOTAL LIABILITIES AND ACCUMULATED OTHER COMPREHENSIVE LOSS................................... $ 7,188 $ 7,322
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-5
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
COMBINED STATEMENTS OF
ACCUMULATED OTHER COMPREHENSIVE LOSS
IN MILLIONS
FISCAL YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997
AND DECEMBER 26, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME/(LOSS) LOSS
--------------- ---------------
<S> <C> <C>
BALANCE AT DECEMBER 30, 1995...................................................... $ (64)
Comprehensive income:
Net income.................................................................... $ 49
Currency translation adjustment............................................... (37) (37)
----- -----
Total comprehensive income...................................................... $ 12
-----
-----
BALANCE AT DECEMBER 28, 1996...................................................... (101)
Comprehensive loss:
Net income.................................................................... $ 59
Currency translation adjustment............................................... (83) (83)
----- -----
Total comprehensive loss........................................................ $ (24)
-----
-----
BALANCE AT DECEMBER 27, 1997...................................................... (184)
Comprehensive loss:
Net loss...................................................................... $ (146)
Currency translation adjustment............................................... (35) (35)
Minimum pension liability adjustment.......................................... (19) (19)
----- -----
Total comprehensive loss........................................................ $ (200)
-----
-----
BALANCE AT DECEMBER 26, 1998...................................................... $ (238)
-----
-----
</TABLE>
See accompanying notes to Combined Financial Statements.
F-6
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
NOTE 1--BASIS OF PRESENTATION
The Pepsi Bottling Group, Inc. was incorporated in January 1999 and consists
of bottling operations located in the United States, Canada, Spain, Greece and
Russia. Prior to its formation, PBG was an operating unit of PepsiCo, Inc. These
bottling operations manufacture, sell and distribute Pepsi-Cola beverages
including PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW and other brands of carbonated
soft drinks and other ready-to-drink beverages. Approximately 88% of PBG's 1998
net sales were derived from the sale of Pepsi-Cola beverages.
Following the offering, PepsiCo will own % of our outstanding common stock
and 100% of our outstanding Class B common stock, together representing
approximately 40% of the voting power of all classes of our voting stock.
PepsiCo will also own % of the equity of Bottling LLC, our principal operating
subsidiary, giving PepsiCo economic ownership of % of our combined operations.
PBG's certificate of incorporation provides for two classes of capital
stock, common stock and Class B common stock, which are substantially identical,
except for voting rights. There are 300 million and 75,000 shares of common
stock and Class B common stock, respectively, authorized for issuance. Holders
of common stock are entitled to one vote per share and holders of Class B common
stock are entitled to 250 votes per share. Each share of Class B common stock
held by PepsiCo is, at PepsiCo's option, convertible into one share of common
stock. Holders of common stock and holders of Class B common stock shall share
equally on a per share basis in any dividend distributions declared by PBG's
board of directors. Additionally, there are 20 million shares of preferred stock
authorized for issuance, although PBG has no current plan to issue any preferred
stock.
PBG and PepsiCo will enter into agreements providing for the separation of
the companies and governing various relationships between PBG and PepsiCo,
including a separation agreement, tax separation agreement, employee programs
agreement, registration rights agreement and shared services agreement. In
connection with the offering, PBG expects to enter into a master bottling
agreement, non-cola bottling agreements, master syrup agreement and country
specific bottling agreements which will govern the preparation, bottling and
distribution of beverages in PBG's territories. The Pepsi beverage agreements
permit PBG to use the concentrates purchased from PepsiCo to bottle and
distribute a variety of beverages under certain authorized brand names, and to
utilize, under certain conditions, trademarks of PepsiCo to promote such
products.
The accompanying Combined Financial Statements are presented on a carve-out
basis and include the historical results of operations and assets and
liabilities directly related to PBG and have been prepared from PepsiCo's
historical accounting records.
PBG was allocated $42 million of overhead costs related to PepsiCo's
corporate administrative functions in 1996 and 1997 and $40 million in 1998. The
allocation was based on a specific identification of PepsiCo's administrative
costs attributable to PBG and, to the extent that such identification was not
practicable, on the basis of PBG's sales as a percentage of PepsiCo's sales. The
allocated costs are included in selling, delivery and administrative expenses in
the Combined Statements of Operations. Management believes that such allocation
methodology is reasonable. Subsequent to the offering, PBG will be required to
manage these functions and will be responsible for the expenses associated with
the operations of a public company. In addition, PBG expects to change from a
non-compensatory, broad-based stock option program to an alternative program.
While no program has been finally determined or approved by the board of
directors, management anticipates that the new plan could cost up to an
additional $12 million per year.
PBG's operations have been financed through its operating cash flows and
advances from PepsiCo. PBG's interest expense includes an allocation of
PepsiCo's interest expense based on PepsiCo's
F-7
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
weighted average interest rate applied to a debt level of $3.3 billion. The $3.3
billion of debt has been determined by management to be an appropriate
allocation in the historical financial statements related to PBG's operations
because it is the amount of long-term debt that is expected to be outstanding as
of the date of the offering. PBG was allocated interest expense of $205 million
in 1996 and 1997 and $210 million in 1998. This allocation reflects PepsiCo's
weighted average interest rate of 6.2% in 1996 and 1997 and 6.4% in 1998.
PBG has obtained or expects to obtain debt funding and will use
substantially all of the proceeds to settle certain amounts due to PepsiCo prior
to the offering. On February 9, 1999, Bottling Group, LLC issued $2.3 billion of
debt. The debt, which is guaranteed by PepsiCo, is comprised of $1 billion of
5 3/8% notes due 2004 and $1.3 billion of 5 5/8% notes due 2009. In addition,
prior to the offering, PBG expects to incur an additional $1 billion of long
term debt.
Income tax was calculated as if PBG had filed separate income tax returns.
PBG's future effective tax rate will depend largely on its structure and tax
strategies as a separate, independent company.
Allocations of corporate overhead and interest costs have been deemed to
have been paid by PBG to PepsiCo, in cash, in the period in which the cost was
incurred. Amounts paid to third parties for interest were $18 million, $21
million and $20 million in 1996, 1997 and 1998, respectively. Amounts paid to
third parties for income taxes were not significant in the years presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of the Combined Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of net sales and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF COMBINATION The accounts of all wholly-owned subsidiaries of PBG
are included in the accompanying Combined Financial Statements. Intercompany
accounts and transactions have been eliminated in combination.
FISCAL YEAR PBG's fiscal year ends on the last Saturday in December and, as
a result, a fifty-third week is added every five or six years. Fiscal years
1996, 1997 and 1998 consisted of 52 weeks.
REVENUE RECOGNITION PBG recognizes revenue when goods are delivered to
customers. Sales terms do not allow a right of return unless product freshness
dating has expired.
ADVERTISING AND MARKETING COSTS PBG is involved in a variety of programs to
promote its products. Advertising and marketing costs included in selling,
delivery and administrative expenses are expensed in the year incurred. For
interim reporting purposes, these expenses are charged ratably in relation to
sales over the year in which incurred. Advertising and marketing costs were $213
million, $210 million and $233 million in 1996, 1997 and 1998, respectively.
BOTTLER INCENTIVES PepsiCo and other brand owners, at their sole
discretion, provide PBG with various forms of marketing support. This marketing
support is intended to cover a variety of programs and initiatives, including
direct marketplace support, capital equipment funding and shared media and
advertising support. Based on the objective of the programs and initiatives,
marketing support is recorded as an adjustment to net sales or a reduction of
selling, delivery and administrative expenses. Direct marketplace support is
primarily funding by PepsiCo and other brand owners of sales discounts and
similar programs is recorded as an adjustment to net sales. Capital equipment
funding is designed to support the purchase and placement of marketing equipment
and is recorded within selling, delivery
F-8
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
and administrative expenses. Shared media and advertising support is recorded as
a reduction to advertising and marketing expense within selling, delivery and
administrative expenses. There are no conditions or other requirements which
could result in a repayment of marketing support received.
The total amount of bottler incentives received from PepsiCo and other brand
owners in the form of marketing support amounted to $421 million, $463 million,
and $536 million for 1996, 1997 and 1998, respectively. Of these amounts, $238
million, $235 million, and $247 million for 1996, 1997 and 1998 were recorded in
net sales, and the remainder was recorded in Selling, delivery and
administrative expenses. The amount of bottler incentives received from PepsiCo
was more than 90% of total bottler incentives in each of the three years, with
the balance received from the other brand owners.
STOCK-BASED EMPLOYEE COMPENSATION PBG measures stock-based compensation
cost in accordance with Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," and its related interpretations. Accordingly,
compensation cost for PepsiCo stock option grants to PBG employees is measured
as the excess of the quoted market price of PepsiCo's capital stock at the grant
date over the amount the employee must pay for the stock. PepsiCo's policy is to
grant stock options at fair value at the date of grant.
CASH EQUIVALENTS Cash equivalents represent funds temporarily invested with
original maturities not exceeding three months.
INVENTORIES Inventories are valued at the lower of cost computed on the
first-in, first-out method or net realizable value.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at
cost. Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets as follows: 20 to 33 years for buildings and
improvements and 3 to 10 years for equipment.
INTANGIBLE ASSETS Intangible assets, which are principally franchise rights
and goodwill, arose from the allocations of purchase prices of businesses
acquired. Franchise rights and goodwill are evaluated at the date of acquisition
and amortized on a straight-line basis over their estimated useful lives which
is in most cases between 20 to 40 years.
RECOVERABILITY OF LONG-LIVED ASSETS PBG reviews all long-lived assets,
including intangible assets, when facts and circumstances indicate that the
carrying value of the asset may not be recoverable.
An impaired asset is written down to its estimated fair value based on the
best information available. Estimated fair value is generally based on either
appraised value or measured by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future cash
flows. Accordingly, actual results could vary significantly from such estimates.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT PBG uses futures contracts and
options on futures to hedge against the risk of adverse movements in the price
of certain commodities used in the manufacture of its products. In order to
qualify for deferral hedge accounting of unrealized gains and losses, such
instruments must be designated and effective as a hedge of an anticipatory
transaction. Changes in the value of instruments that PBG uses to hedge
commodity prices are highly correlated to the changes in the value of the
purchased commodity. Management reviews the correlation and effectiveness of
these financial instruments on a periodic basis. Financial instruments that do
not meet the criteria for hedge accounting treatment are marked-to-market with
the resulting unrealized gain or loss recorded as other income and expense.
Realized gains and losses that result from the early termination of
financial instruments used for hedging purposes are deferred and are included in
cost of sales when the anticipated transaction actually occurs.
F-9
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
Premiums paid for the purchase of options on futures are recorded as a
prepaid expense in the Combined Balance Sheets and are amortized as an
adjustment to cost of sales over the duration of the option contract.
FOREIGN EXCHANGE GAINS AND LOSSES The balance sheets of PBG's foreign
subsidiaries that do not operate in highly inflationary economies are translated
at the exchange rates in effect at the balance sheet date while the statements
of operations are translated at the average rates of exchange during the year.
The resulting translation adjustments of PBG's foreign subsidiaries are recorded
directly to accumulated other comprehensive loss. Foreign exchange gains and
losses reflect transaction and translation gains and losses arising from the
re-measurement into U.S. dollars of the net monetary assets of businesses in
highly inflationary countries. Russia is considered a highly inflationary
economy for accounting purposes and all foreign exchange gains and losses are
included in the Combined Statements of Operations.
NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of net income and other gains and losses affecting stockholder's equity that are
excluded from net income. The only components of comprehensive income or loss
are net income, foreign currency translation and a minimum pension liability
adjustment. These financial statements reflect the adoption of SFAS 130. Other
items of comprehensive income or loss are reported in the Combined Statements of
Accumulated Other Comprehensive Loss.
In June 1997, the FASB issued Statement of Financial Accounting Standard
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes standards for reporting information about operating segments
and related disclosures about products and services, geographic areas and major
customers. SFAS 131 requires that the definition of operating segments align
with the measurements used internally to assess performance. These financial
statements reflect the adoption of SFAS 131.
In June 1998, the FASB issued Statement of Financial Accounting Standard
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts which are collectively referred to as derivatives, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. PBG is currently assessing the effects of adopting
SFAS 133, and has not yet made a determination of the impact on its financial
position or results of operations. SFAS 133 will be effective for PBG's first
quarter of fiscal year 2000.
EARNINGS PER SHARE PBG's historical capital structure is not indicative of
its prospective capital structure and, accordingly, historical earnings per
share information has not been presented in the Combined Financial Statements.
Unaudited pro forma earnings per share has been presented on the basis of the
number of shares of capital stock of PBG deemed to be outstanding as of the date
of the offering.
F-10
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
NOTE 3--UNUSUAL IMPAIRMENT AND OTHER CHARGES AFFECTING COMPARABILITY
<TABLE>
<CAPTION>
1998
---------
<S> <C>
RUSSIA
Asset impairment charges:
Property, plant and equipment................................................................. $ 157
Intangible assets............................................................................. 37
---------
Total asset impairment.......................................................................... 194
Restructuring costs............................................................................. 18
---------
Total Russia charges............................................................................ 212
U.S. AND CANADA
Employee related costs.......................................................................... 10
---------
TOTAL UNUSUAL ITEMS............................................................................... $ 222
---------
---------
After tax................................................................................... $ 218
---------
---------
</TABLE>
The 1998 unusual impairment and other charges of $222 million are comprised
of the following:
- A fourth quarter charge of $212 million for asset impairment of $194
million and other charges of $18 million related to the restructuring of
PBG's Russian bottling operations. The economic turmoil in Russia which
accompanied the devaluation of the ruble in August 1998 had an adverse
impact on these operations. Consequently in the fourth quarter PBG
experienced a significant drop in demand, resulting in lower net sales and
increased operating losses. Additionally, since net sales in Russia are
denominated in rubles, whereas a substantial portion of costs and expenses
are denominated in U.S. dollars, operating margins were further eroded. In
response to these conditions, PBG has reduced its cost structure primarily
through closing facilities, renegotiating manufacturing contracts and
reducing the number of employees. PBG has also evaluated the resulting
impairment of long-lived assets, triggered by the reduction in utilization
of assets caused by the lower demand, the adverse change in the business
climate and the expected continuation of operating losses and cash
deficits in that market. The impairment charge reduced the net book value
of the assets to their estimated fair market value based primarily on
values recently paid for similar assets in that marketplace.
- A fourth quarter charge of $10 million for employee related costs, mainly
relocation and severance, resulting from the separation of Pepsi-Cola
North America's concentrate and bottling organizations.
At year end 1998, $24 million remains in other accrued liabilities relating
to these actions. PBG anticipates that substantially all of these accrued
liabilities will be paid by the end of the first quarter 1999.
INCOME TAX BENEFIT PBG recognized an income tax benefit of $46 million in
the fourth quarter of 1998 upon the settlement of a disputed claim with the
Internal Revenue Service relating to the deductibility of the amortization of
acquired franchise rights. The settlement also resulted in the reduction of
goodwill and income taxes payable by $194 million.
F-11
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
NOTE 4--INVENTORIES
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Raw materials and supplies............................................... $ 104 $ 120
Finished goods........................................................... 153 176
--------- ---------
$ 257 $ 296
--------- ---------
--------- ---------
</TABLE>
NOTE 5--PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Land..................................................................... $ 141 $ 151
Buildings and improvements............................................... 699 813
Production and distribution equipment.................................... 1,815 1,989
Marketing equipment...................................................... 1,164 1,368
Other.................................................................... 102 95
--------- ---------
3,921 4,416
Accumulated depreciation................................................. (2,003) (2,361)
--------- ---------
$ 1,918 $ 2,055
--------- ---------
--------- ---------
</TABLE>
NOTE 6--INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Franchise rights and other identifiable intangibles...................... $ 3,175 $ 3,460
Goodwill................................................................. 1,580 1,539
--------- ---------
4,755 4,999
Accumulated amortization................................................. (1,076) (1,193)
--------- ---------
$ 3,679 $ 3,806
--------- ---------
--------- ---------
</TABLE>
Identifiable intangible assets principally arise from the allocation of the
purchase price of businesses acquired and consist primarily of territorial
franchise rights. Amounts assigned to such identifiable intangibles were based
on their estimated fair value at the date of acquisition. Goodwill represents
the residual purchase price after allocation to all identifiable net assets.
NOTE 7--ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Accounts payable......................................................... $ 313 $ 328
Accrued compensation and benefits........................................ 151 174
Trade incentives......................................................... 148 163
Other current liabilities................................................ 199 216
--------- ---------
$ 811 $ 881
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
NOTE 8--SHORT-TERM BORROWINGS AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Short-term borrowings
Current maturities of long-term debt................................... $ 29 $ 48
Borrowings under lines of credit....................................... 11 64
--------- ---------
$ 40 $ 112
--------- ---------
--------- ---------
Long-term debt due to third parties
5.1% notes due 2003.................................................... $ -- $ 39
17.5% notes due 1999................................................... 35 35
6.2% notes due 2000.................................................... 33 --
Other loans due 1999-2012 with interest rates of 6%-12%................ 27 28
--------- ---------
95 102
Capital lease obligations.............................................. 30 7
--------- ---------
125 109
Less current maturities of long-term debt.............................. 29 48
--------- ---------
$ 96 $ 61
--------- ---------
--------- ---------
Allocation of PepsiCo long-term debt..................................... $ 3,300 $ 3,300
</TABLE>
Maturities of long-term debt as of December 26, 1998 are: 1999--$46 million,
2000-$1 million, 2001--$3 million, 2002--$4 million, 2003--$41 million and
thereafter, $7 million.
PBG has available short-term bank credit lines of approximately $81 million
and $95 million at December 27, 1997 and December 26, 1998, respectively. These
lines are denominated in various foreign currencies to support general operating
needs in their respective countries. The weighted average interest rate of these
lines of credit outstanding at December 27, 1997 and December 26, 1998 was 8.6%
and 8.7%, respectively.
NOTE 9--LEASES
PBG has noncancelable commitments under both capital and long-term operating
leases. Capital and operating lease commitments expire at various dates through
2021. Most leases require payment of related executory costs, which include
property taxes, maintenance and insurance.
Future minimum commitments under noncancelable leases are set forth below:
<TABLE>
<CAPTION>
COMMITMENTS
------------------------
<S> <C> <C>
CAPITAL OPERATING
----------- -----------
1999..................................................................... $ 2 $ 46
2000..................................................................... 2 41
2001..................................................................... 1 37
2002..................................................................... 1 33
2003..................................................................... 1 23
Later years.............................................................. 4 107
--- -----
$ 11 $ 287
--- -----
--- -----
</TABLE>
F-13
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
At December 26, 1998, the present value of minimum payments under capital
leases was $7 million after deducting $4 million representing imputed interest.
Rental expense was $42 million, $35 million and $45 million for 1996, 1997
and 1998, respectively.
NOTE 10--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
COMMODITY PRICES PBG uses futures contracts and options on futures in the
normal course of business to hedge anticipated purchases of certain raw
materials used in PBG's manufacturing operations.
Deferred gains and losses at year end 1997 and 1998, as well as gains and
losses recognized as part of cost of sales in 1996, 1997 and 1998 were not
significant. There were no outstanding commodity contracts at December 27, 1997.
At December 26, 1998, commodity contracts involving notional amounts of $71
million were outstanding. These notional amounts do not represent amounts
exchanged by the parties and thus are not a measure of PBG's exposure; rather,
they are used as the basis to calculate the amounts due under the agreements.
INTEREST RATE RISK Prior to the offering, PBG had minimal external interest
rate risk to manage. Subsequent to this offering, however, PBG intends to manage
any significant interest rate exposure by using financial derivative instruments
as part of a program to manage the overall cost of borrowing.
FOREIGN EXCHANGE RISK As currency exchange rates change, translation of the
statements of operations of our international business into U.S. dollars affects
year-over-year comparability. PBG has not historically hedged translation risks
because cash flows from international operations have generally been reinvested
locally, nor historically have we entered into hedges to minimize the volatility
of reported earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of PBG's financial
instruments approximates fair value due to the short maturity of PBG's financial
instruments and since interest rates approximate fair value for long-term debt.
PBG does not use any financial instruments for trading or speculative purposes.
NOTE 11--PENSION AND POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS
U.S. employees of PBG participate in PepsiCo sponsored noncontributory
defined benefit pension plans which cover substantially all full-time salaried
employees, as well as certain hourly employees. Benefits generally are based on
years of service and compensation or stated amounts for each year of service.
All plans are funded and contributions are made in amounts not less than minimum
statutory funding requirements nor more than the maximum amount that can be
deducted for U.S. income tax purposes. Net pension expense for the defined
benefit pension plans for PBG's foreign operations was not significant.
It is intended that PBG will assume the existing defined benefit pension
plan obligations for PBG's as of the offering date and trust assets from the
funded plans will be transferred based upon actuarial determinations in
accordance with regulatory requirements.
F-14
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
POSTRETIREMENT BENEFITS
PepsiCo has historically provided postretirement health care benefits to
eligible retired employees and their dependents, principally in the U.S.
Retirees who have 10 years of service and attain age 55 are eligible to
participate in the postretirement benefit plans. The plans are not funded and
since 1993 have included retiree cost sharing. It is intended that PBG will
assume the related obligations from PepsiCo for PBG employees.
<TABLE>
<CAPTION>
PENSION
-------------------------------
Components of net periodic benefit cost: 1996 1997 1998
- ----------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................. $ 17 $ 22 $ 24
Interest cost............................................................................ 28 35 37
Expected return on plan assets........................................................... (34) (41) (45)
Amortization of transition asset......................................................... (3) (4) (2)
Amortization of prior service amendments................................................. 3 4 4
--- --------- ---------
Net periodic benefit cost................................................................ 11 16 18
Settlement loss.......................................................................... -- -- 1
--- --------- ---------
Net periodic benefit cost including settlements.......................................... $ 11 $ 16 $ 19
--- --------- ---------
--- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT
-------------------------------
Components of net periodic benefit cost: 1996 1997 1998
- ----------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................. $ 4 $ 3 $ 4
Interest cost............................................................................ 15 15 12
Amortization of prior service amendments................................................. (5) (5) (5)
Amortization of net (gain)/loss.......................................................... 2 -- --
--- --------- ---------
Net periodic benefit cost................................................................ $ 16 $ 13 $ 11
--- --------- ---------
--- --------- ---------
--- --------- ---------
</TABLE>
F-15
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
Prior service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits.
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
-------------------- --------------------
Change in the benefit obligation: 1997 1998 1997 1998
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Obligation at beginning of year....................................... $ 485 $ 545 $ 180 $ 164
Service cost.......................................................... 22 24 3 4
Interest cost......................................................... 35 37 15 12
Plan amendments....................................................... 5 5 -- --
Actuarial (gain)/loss................................................. 24 78 (23) 19
Benefit payments...................................................... (26) (36) (11) (12)
Settlement (gain) -- (5) -- --
--------- --------- --------- ---------
Obligation at end of year............................................. $ 545 $ 648 $ 164 $ 187
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
PENSION POSTRETIREMENT
-------------------- --------------------
Change in the fair value of assets: 1997 1998 1997 1998
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fair value at beginning of year....................................... $ 480 $ 602 $ -- $ --
Actual return on plan assets.......................................... 134 (26) -- --
Employer contributions................................................ 14 5 11 12
Benefit payments...................................................... (26) (36) (11) (12)
Settlements........................................................... -- (4) -- --
--------- --------- --------- ---------
Fair value at end of year............................................. $ 602 $ 541 -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-16
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Selected information for the plans with accumulated benefit obligations in excess of plan assets:
PENSION POSTRETIREMENT
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
Projected benefit obligation............................ $ (23) $ (648) $ (164) $ (187)
<S> <C> <C> <C> <C> <C>
Accumulated benefit obligation.......................... (7) (575) (164) (187)
Fair value of plan assets............................... -- 541 N/A N/A
Funded status as recognized on the Combined Balance Sheets:
<CAPTION>
PENSION POSTRETIREMENT
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Funded status at end of year............................ $ 57 $ (107) $ (164) $ (187)
Unrecognized prior service cost......................... 34 34 (27) (22)
Unrecognized (gain)/loss................................ (65) 82 1 20
Unrecognized transition asset........................... (3) (1) -- --
--------- --------- --------- ---------
Net amounts recognized.................................. $ 23 $ 8 $ (190) $ (189)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Weighted-average assumptions at end of year:
<TABLE>
<CAPTION>
PENSION
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Discount rate for benefit obligation...................................... 7.7% 7.2% 6.8%
Expected return on plan assets............................................ 10.0% 10.0% 10.0%
Rate of compensation increase............................................. 4.8% 4.8% 4.8%
</TABLE>
The discount rate assumptions used to compute the postretirement benefit
obligation at year-end were 7.4% in 1997 and 6.9% in 1998 .
COMPONENTS OF PENSION ASSETS
The pension plan assets are principally stocks and bonds.
HEALTH CARE COST TREND RATES
An average increase of 6.7% in the cost of covered postretirement medical
benefits is assumed for 1999 for employees who retired before cost sharing was
introduced. This average increase is then projected to decline gradually to 5.5%
in 2005 and thereafter.
F-17
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
An average increase of 6.5% in the cost of covered postretirement medical
benefits is assumed for 1999 for employees who retired after cost sharing was
introduced. This average increase is then projected to decline gradually to zero
in 2000 and thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for postretirement medical plans. A one percentage point change
in assumed health care costs would have the following effects:
<TABLE>
<CAPTION>
1% 1%
INCREASE DECREASE
---------- ----------
<S> <C> <C>
Effect on total of 1998 service and interest cost scomponents............................. $ 1 $ (1)
Effect on the 1998 accumulated postretirement benefit obligation.......................... $ (8) $ (7)
</TABLE>
NOTE 12--EMPLOYEE STOCK OPTION PLANS
At the offering date PBG expects to offer its full-time employees below the
middle management level a one-time founders grant of options to purchase 100
shares of PBG stock. These options will have an exercise price equal to the
initial public offering price. Approximately 3.6 million shares of common stock
have been reserved and will be issuable upon exercise of these options.
In addition, PBG has adopted a long-term incentive plan for middle and
senior management employees. Middle and senior management employees will receive
an option grant that will vary according to salary and level within PBG. These
options will have an exercise price equal to the initial public offering price.
Approximately million shares of common stock have been reserved and will be
issuable upon exercise of these options.
When employed by PepsiCo, PBG employees were granted stock options under
PepsiCo's three long-term incentive plans: the SharePower Stock Option Plan; the
Long-Term Incentive Plan; and the Stock Option Incentive Plan.
- Prior to 1997, SharePower options were granted annually to essentially all
full-time employees and become exercisable ratably over 5 years from the
grant date and must be exercised within 10 years from the grant date.
There were no SharePower options granted in 1997. All SharePower options
granted in 1998 become exercisable in 3 years from the grant date and must
be exercised within 10 years from the grant date.
- Most LTIP options were granted every other year to senior management
employees. Most of these options become exercisable after 4 years and must
be exercised within 10 years from the grant date. In addition, the LTIP
allows for grants of performance share units. The maximum value of a unit
is fixed at the value of a share of PepsiCo stock at the grant date and
vests 4 years from the grant date. Payment of units are made in cash
and/or stock and the payment amount is determined based on the attainment
of prescribed performance goals. Amounts expensed for peformance share
units for PBG employees in 1996, 1997 and 1998 were not significant.
In 1998 the LTIP was modified. Under the revised program, executives are
granted stock options which vest over a three year period and must be
exercised within 10 years from the grant date. In addition to these option
grants, executives may receive an additional grant or cash based upon the
achievement of PepsiCo performance objectives over three years. PBG
accrues compensation expense for the cash portion of the LTIP grant.
F-18
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
- Stock Option Incentive Plan options are granted to middle management
employees and, prior to 1997, were granted annually. These options are
exercisable after one year and must be exercised within 10 years after
their grant date. In 1998, this plan was combined with the LTIP.
The amounts presented below represent options granted under PepsiCo employee
stock option plans. The pro forma amounts below are not necessarily
representative of the effects of stock-based awards on future net income because
the plans eventually adopted by PBG may differ from PepsiCo stock option plans
and accordingly (1) future grants of employee stock options to PBG management
may not be comparable to awards made to employees while PBG was a part of
PepsiCo, and (2) the assumptions used to compute the fair value of any stock
option awards will be specific to PBG and therefore, may not be comparable to
the PepsiCo assumptions used.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
(OPTIONS IN MILLIONS) OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ----------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 24.1 $ 16.76 26.4 $ 19.87 24.5 $ 19.13
Granted........................... 5.2 32.43 0.2 33.97 7.4 36.50
Exercised......................... (2.1) 14.97 (3.2) 14.97 (4.4) 15.35
Forfeited......................... (0.8) 20.76 (0.6) 23.24 (0.6) 28.68
PepsiCo modification (a).......... -- -- 1.7 -- -- --
--- ------ --- ------ --- ------
Outstanding at end of year.......... 26.4 $ 19.87 24.5 $ 19.13 26.9 $ 24.33
--- ------ --- ------ --- ------
--- ------ --- ------ --- ------
Exercisable at end of year.......... 13.3 $ 15.04 14.7 $ 15.90 14.2 $ 17.26
--- ------ --- ------ --- ------
--- ------ --- ------ --- ------
Weighted average fair value of
options granted during the year... $ 9.32 $ 9.64 $ 9.74
------ ------ ------
------ ------ ------
</TABLE>
(a) In 1997, PepsiCo spun off its restaurant businesses to its shareholders. In
connection with this spin-off, the number of options for PepsiCo capital
stock were increased and their exercise prices were decreased to preserve
the economic value of those options that existed just prior to the spin-off
for the holders of PepsiCo stock options.
Stock options outstanding at December 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF REMAINING CONTRACTUAL WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- ---------------------------------- ----------- ------------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 8.17 to $16.37 8.3 3.40 $ 13.47 7.7 $ 13.42
$16.87 to $37.72 18.6 7.48 29.09 6.5 21.87
--- -----------
26.9 6.17 24.33 14.2 17.26
--- -----------
--- -----------
</TABLE>
F-19
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
PBG adopted the disclosure provisions of Statement of Financial Accounting
Standard 123, "Accounting for Stock-Based Compensation", but continues to
measure stock-based compensation cost in accordance with APB Opinion 25 and its
related interpretations. If PBG had measured compensation cost for the PepsiCo
stock options granted to its employees in 1996, 1997 and 1998 under the fair
value based method prescribed by SFAS 123, net income or loss would have been
changed to the pro forma amounts set forth below:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- ---------
<S> <C> <C> <C>
Net Income (Loss)
Reported......................................................... $ 49 $ 59 $ (146)
Pro forma........................................................ 43 44 (164)
</TABLE>
The fair value of PepsiCo stock options granted to PBG employees used to
compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions used by PepsiCo:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate........................................ 6.0% 5.8% 4.7%
Expected life.................................................. 6 years 3 years 5 years
Expected volatility............................................ 20% 20% 23%
Expected dividend yield........................................ 1.5% 1.32% 1.14%
</TABLE>
See Note 18 for more information related to accelerated vesting of PepsiCo
stock options in connection with this offering.
F-20
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
NOTE 13--INCOME TAXES
The details of the provision for income taxes are set forth below:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C> <C>
Current: Federal.................................................. $ 65 $ 31 $ (84)
Foreign.................................................. 6 3 4
State.................................................... 10 5 (13)
--------- --------- ---------
81 39 (93)
--------- --------- ---------
Deferred: Federal.................................................. 7 17 45
Foreign.................................................. -- (2) (5)
State.................................................... 1 2 7
--------- --------- ---------
8 17 47
--------- --------- ---------
$ 89 $ 56 $ (46)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S................................................................. $ 213 $ 177 $ 116
Foreign............................................................. (75) (62) (308)
--------- --------- ---------
$ 138 $ 115 $ (192)
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of income taxes calculated at the U.S. federal tax
statutory rate to PBG's provision for income taxes is set forth below:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income taxes computed at the U.S. federal statutory rate............... 35.0% 35.0% (35.0%)
State income tax, net of federal tax benefit........................... 4.8 4.4 --
Effect of lower taxes on foreign results............................... (0.2) (9.5) (12.2)
U.S. goodwill and other nondeductible expenses......................... 11.8 14.8 7.5
U.S. franchise rights.................................................. 10.7 -- (24.0)
Russia impairment and other charges.................................... -- -- 38.7
Other, net............................................................. 2.4 4.0 1.0
--- --- ---------
Total effective income tax rate........................................ 64.5% 48.7% (24.0%)
--- --- ---------
--- --- ---------
</TABLE>
F-21
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
The details of the 1997 and 1998 deferred tax liabilities (assets) are set forth
below:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Intangible assets and property, plant and equipment...................... $ 1,201 $ 1,252
Other.................................................................... 35 112
--------- ---------
Gross deferred tax liabilities........................................... $ 1,236 $ 1,364
--------- ---------
--------- ---------
Net operating loss carryforwards......................................... (76) (123)
Employee benefit obligations............................................. (85) (85)
Bad debts................................................................ (20) (20)
Various liabilities and other............................................ (152) (164)
--------- ---------
Gross deferred tax assets................................................ (333) (392)
Deferred tax asset valuation allowance................................... 80 135
--------- ---------
Net deferred tax assets.................................................. (253) (257)
--------- ---------
Net deferred tax liability............................................... $ 983 $ 1,107
--------- ---------
--------- ---------
Included in:
Prepaid expenses, deferred income taxes and other current assets......... $ (93) $ (95)
Deferred income taxes.................................................... 1,076 1,202
--------- ---------
$ 983 $ 1,107
--------- ---------
--------- ---------
</TABLE>
Valuation allowances, which reduce deferred tax assets to an amount that
will more likely than not be realized, have increased by $47 million in 1996,
decreased by $4 million in 1997 and increased by $55 million in 1998.
Net operating loss carryforwards totaling $464 million at December 26, 1998,
are available to reduce future taxes in Spain and Russia. Of these
carryforwards, $8 million expire in 1999 and $456 million expire at various
times between 2000 and 2005. A full valuation allowance has been established for
these net operating loss carryforwards based upon PBG's projection that these
losses will expire before they can be used.
NOTE 14--GEOGRAPHIC DATA
PBG operates in one industry--carbonated soft drinks and other
ready-to-drink beverages. PBG does business in 41 states and the District of
Columbia in the U.S. Outside the U.S., PBG does business in eight Canadian
provinces, Spain, Greece and Russia.
<TABLE>
<CAPTION>
NET SALES
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
U.S.............................................................. $ 5,476 $ 5,584 $ 5,886
Other countries.................................................. 1,127 1,008 1,155
--------- --------- ---------
$ 6,603 $ 6,592 $ 7,041
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-22
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
U.S.............................................................. $ 4,792 $ 4,918 $ 5,024
Other countries.................................................. 982 934 980
--------- --------- ---------
$ 5,774 $ 5,852 $ 6,004
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in other assets on the Combined Balance Sheets are $32 million, $64
million and $1 million of investments in joint ventures at December 28, 1996,
December 27, 1997 and December 26, 1998, respectively. PBG's equity loss in such
joint ventures was $1 million, $12 million and $5 million in 1996, 1997 and
1998, respectively, which is included in selling, delivery and administrative
expenses.
NOTE 15--TRANSACTIONS WITH PEPSICO
PBG purchases concentrate from PepsiCo to be used in the production of
carbonated soft drinks and other ready-to-drink beverages. PBG also produces or
distributes other products and purchases finished goods and concentrate through
various arrangements with PepsiCo or PepsiCo joint ventures. Such purchases are
reflected in cost of sales.
PepsiCo and PBG share a business objective of increasing availability and
consumption of Pepsi-Cola beverages. Accordingly, PepsiCo provides PBG with
various forms of marketing support to promote Pepsi-Cola beverages. This support
covers a variety of initiatives, including marketplace support, marketing
programs, capital equipment investment and shared media expense. PepsiCo and PBG
each record their share of the cost of marketing programs in their financial
statements. Based on the objective of the programs and initiatives, marketing
support is recorded as an adjustment to net sales or a reduction of selling,
delivery and administrative expense.
PBG manufactures and distributes fountain products and provides fountain
equipment service to PepsiCo customers in some territories in accordance with
the Pepsi beverage agreements. PBG pays a royalty fee to PepsiCo for the
AQUAFINA trademark.
PepsiCo provides certain administrative support to PBG, including
procurement of raw materials, transaction processing such as accounts payable
and credit and collection, certain tax and treasury services and information
technology maintenance and systems development. PBG also subleases its
headquarters building from PepsiCo. These services are more fully described in
the shared services agreement between the two companies.
The Combined Statements of Operations include the following income (expense)
amounts as a result of transactions with PepsiCo:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales..................................................... $ 220 $ 216 $ 228
Cost of sales................................................. (1,067) (1,187) (1,349)
Selling, delivery and administrative expenses................. 167 206 213
</TABLE>
F-23
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
There are no minimum fees or payments that PBG is required to make to
PepsiCo, nor is PBG obligated to PepsiCo under any minimum purchase
requirements. There are no conditions or requirements that could result in the
repayment of any marketing support payments received by PBG from PepsiCo.
The table below presents the activity in advances from PepsiCo. The amount
of net income to or loss for each period is deemed to be payable to or
receivable from PepsiCo and is included as an adjustment to the advances from
PepsiCo.
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................................... $ 1,249 $ 1,161 $ 1,403
Net income (loss)................................................ 49 59 (146)
Amounts received to fund bottler acquisitions and investments in
affiliates..................................................... 26 49 546
Insurance prepayment to a PepsiCo affiliate...................... 165
Short-term borrowings and long-term debt......................... (51) 98 (30)
Cash collections less trade disbursements, transferred to
PepsiCo........................................................ (112) (129) (168)
--------- --------- ---------
Balance at end of period......................................... $ 1,161 $ 1,403 $ 1,605
--------- --------- ---------
--------- --------- ---------
Average balance during period.................................... $ 1,513 $ 1,371 $ 1,651
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 16--CONTINGENCIES
PBG is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, in excess of
amounts already recognized arising from such claims or contingencies is not
likely to have a material adverse effect on PBG's annual results of operations,
financial condition, or liquidity.
NOTE 17--ACQUISITIONS
During 1998, PBG acquired independent PepsiCo bottlers in the U.S., Canada
and the remaining interest in its bottling joint venture in Russia for an
aggregate cash purchase price of $546 million. The aggregate purchase price
exceeded the fair value of the net assets acquired, including the resulting tax
effect, by approximately $474 million which was recorded in intangible assets.
Of this amount, $37 million related to PBG's Russian acquisition which was part
of the fourth quarter 1998 unusual impairment and other charges. See Note 3. The
following table presents the unaudited pro forma combined results of PBG and the
acquisitions noted above as if they had occurred at the beginning of fiscal year
1997 and 1998. The pro forma information does not necessarily represent what the
actual combined results would have been for these periods and is not intended to
be indicative of future results.
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998
--------- ---------
<S> <C> <C>
Net sales............................................................................ $ 6,984 $ 7,248
Net income (loss).................................................................... 63 (138)
</TABLE>
F-24
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS --CONTINUED
TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
Subject to the completion of the offering, substantially all non vested
PepsiCo stock options held by PBG employees will vest on a date determined by
PepsiCo. As a result, PBG will incur a non-cash charge equal to the difference
between the market price of PepsiCo capital stock and the exercise price of
these options at the vesting date. Based on the market price of PepsiCo capital
stock on February 23, 1999, the pre-tax and after-tax compensation charge would
be $70 million.
During 1999, PBG agreed to acquire certain U.S. and Russia territories from
Whitman Corporation for an aggregate cash purchase price of $137 million. These
acquisitions will be accounted for by the purchase method. The purchase prices
have been preliminarily allocated to the estimated fair value of the assets
acquired and liabilities assumed. Franchise rights, goodwill and other
intangibles that will be recorded in connection with these acquisitions are $77
million and will be amortized over 40 years.
NOTE 19--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Our fiscal year ends on the last Saturday in December and generally consists
of 52 weeks, though certain of our fiscal years will consist of 53 weeks. This
last occurred in 1994 and will next occur in 2000. Fiscal years 1996, 1997 and
1998 consisted of 52 weeks. Each of the first three quarters of each fiscal year
consists of 12 weeks and the fourth quarter consists of 16 weeks.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL YEAR ENDED
1997 QUARTER QUARTER QUARTER QUARTER DECEMBER 27, 1997
- ----------------------------------- ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 1,306 $ 1,585 $ 1,786 $ 1,915 $ 6,592
Gross profit....................... 561 673 735 791 2,760
Operating income (loss)............ 47 141 159 (12) 335
Net income (loss).................. (3) 52 54 (44) 59
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL YEAR ENDED
1998 QUARTER QUARTER QUARTER QUARTER DECEMBER 26, 1998
- ----------------------------------- ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 1,340 $ 1,686 $ 1,963 $ 2,052 $ 7,041
Gross profit....................... 563 696 794 807 2,860
Operating income (loss)............ 39 103 156 (243)(1) 55
Net income (loss).................. (6) 22 45 (207)(2) (146)
</TABLE>
(1) Includes $222 million for unusual impairment and other charges. See Note 3.
(2) Includes a $46 million tax benefit as a result of reaching final agreement
to settle a disputed claim with the Internal Revenue Service. See Notes 3
and 13.
F-25
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Combined Balance Sheet as of December 26,
1998 and the unaudited Condensed Combined Statement of Operations for the fiscal
year ended December 26, 1998 have been prepared from the Combined Financial
Statements presented elsewhere in this prospectus.
In 1998, PBG acquired Pepsi-Cola Allied Bottlers, Inc., Gray Beverage Inc.
and Pepsi International Bottlers, LLC for aggregate cash consideration of $546
million. During the first quarter of 1999 PBG has agreed to acquire certain U.S.
and Russian territories from Whitman Corporation for an aggregate purchase price
of $137 million.
In connection with the formation of PBG and Bottling LLC, Bottling LLC
issued $2.3 billion of indebtedness incurred by PepsiCo through a sale of notes,
which is unconditionally guaranteed by PepsiCo and is expected to remain
outstanding after the offering. Also, prior to the offering, PBG will incur
$ of indebtedness through a sale of notes. Accordingly, PBG is expected to
have $ billion of long-term indebtedness outstanding after the offering and
the application of the net proceeds of the offering.
PBG and its primary operating subsidiary, Bottling LLC were formed in
January 1999. In connection with the formation of PBG and Bottling LLC, PepsiCo
contributed bottling businesses and assets used in the bottling businesses to
PBG which will be held by Bottling LLC. As a result of the contribution of the
assets, PBG will own % of Bottling LLC and PepsiCo will directly own the
remaining %. Accordingly, the unaudited Pro Forma Condensed Combined Statement
of Operations reflect PepsiCo's % share of the combined net income of Bottling
LLC as minority interest.
The accompanying unaudited Pro Forma Condensed Combined Financial Statements
of PBG as of and for the fiscal year ended December 26, 1998 give effect to the
acquisitions of certain bottlers, the indebtedness described above, and, with
respect to the Pro Forma Condensed Combined Balance Sheet, gives effect to the
offering and the application of the estimated net proceeds therefrom and related
transactions as described in the notes. For purposes of the Pro Forma Condensed
Combined Statement of Operations, such transactions are assumed to have occurred
on the first day of fiscal 1998. For purposes of the Pro Forma Condensed
Combined Balance Sheet, the transactions are assumed to have occurred on
December 26, 1998.
Management believes that the assumptions used provide a reasonable basis for
presenting the significant effects directly attributable to the acquisitions of
certain bottlers, the indebtedness incurred, the offering and the application of
the net proceeds therefrom. The Pro Forma Condensed Combined Financial
Statements do not necessarily reflect what PBG's results of operations or
financial position would have been had such transactions been completed as of
the dates indicated nor does it give effect to any events other than those
discussed in the notes to the unaudited Pro Forma Condensed Combined Financial
Statements or to project the results of operations or financial position of PBG
for any future period or date. These should be read in conjunction with the
Combined Financial Statements, "Use of Proceeds", and "Management's Discussion
and Analysis of Results of Operations and Financial Condition", included
elsewhere in this prospectus.
P-1
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
IN MILLIONS, EXCEPT PER SHARE DATA, UNAUDITED
FISCAL YEAR ENDED DECEMBER 26, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
<S> <C> <C> <C> <C>
PRO FORMA
ACTUAL ACQUISITIONS(A) FINANCING AS ADJUSTED
--------- ------------- ----------- -----------
NET SALES......................................................... $ 7,041 $ 282 $ -- $ 7,323
Cost of sales..................................................... 4,181 160 -- 4,341
--------- ----- ----- -----------
GROSS PROFIT...................................................... 2,860 122 -- 2,982
Selling, delivery and administrative expenses..................... 2,583 95 -- 2,678
Unusual impairment and other charges.............................. 222 -- -- 222
--------- ----- ----- -----------
OPERATING INCOME.................................................. 55 27 -- 82
Interest expense, net............................................. 221 -- (b)
Foreign currency loss (gain)...................................... 26 1
--------- ----- ----- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST........... (192) 26
Income tax expense (benefit)...................................... (46) 10 (c)
--------- ----- ----- -----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST........................ (146) 16
Minority interest................................................. -- -- (d)
--------- ----- ----- -----------
NET INCOME (LOSS)................................................. $ (146) $ 16 $ $
--------- ----- ----- -----------
--------- ----- ----- -----------
PRO FORMA BASIC AND DILUTED NET INCOME (LOSS) PER SHARE........... $ $
--------- -----------
--------- -----------
PRO FORMA BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING...
</TABLE>
See accompanying notes to unaudited Pro Forma Condensed Combined Financial
Statements.
P-2
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
IN MILLIONS, UNAUDITED
DECEMBER 26, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
------------------------------ PRO FORMA OFFERING AS FURTHER
ACTUAL ACQUISITIONS(A) FINANCING AS ADJUSTED (C) ADJUSTED
--------- ----------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 36 $ 2 $ $ $ $
Trade accounts receivable................. 808 9
Other current assets...................... 474 8
--------- ----- ----------- ----------- ----------- ------
TOTAL CURRENT ASSETS...................... 1,318 19
Property, plant and equipment, net........ 2,055 30
Intangible assets, net.................... 3,806 77
Other assets.............................. 143 1
--------- ----- ----------- ----------- ----------- ------
TOTAL ASSETS.............................. $ 7,322 $ 127 $ $ $ $
--------- ----- ----------- ----------- ----------- ------
--------- ----- ----------- ----------- ----------- ------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities............................. $ 881 $ 8 $ $ $ $
Short-term borrowings..................... 112 --
Other..................................... 32 --
--------- ----- ----------- ----------- ----------- ------
TOTAL CURRENT LIABILITIES................. 1,025 8
Allocation of PepsiCo long-term debt...... 3,300 --
Long-term debt due to third parties....... 61 -- (b)
Other liabilities......................... 367 1
Deferred income taxes..................... 1,202
Advances from PepsiCo..................... 1,605 118
--------- ----- ----------- ----------- ----------- ------
Minority interest......................... -- -- -- -- --
TOTAL LIABILITIES......................... 7,560 127
STOCKHOLDER'S EQUITY
Additional paid in capital................ -- --
Accumulated other comprehensive income
(loss).................................. (238) --
--------- ----- ----------- ----------- ----------- ------
TOTAL STOCKHOLDER'S EQUITY................ -- --
--------- ----- ----------- ----------- ----------- ------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY.................................. $ 7,322 $ 127 $ $ $ $
--------- ----- ----------- ----------- ----------- ------
--------- ----- ----------- ----------- ----------- ------
</TABLE>
See accompanying notes to unaudited Pro Forma Condensed Combined Financial
Statements.
P-3
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) PRO FORMA ADJUSTMENTS FOR THE CONDENSED COMBINED STATEMENT OF OPERATIONS
(a) Reflects the impact of certain 1998 and 1999 acquisitions of bottlers,
for aggregate cash consideration of $683 million. The acquisitions have
been accounted for using the purchase method.
(b) Reflects interest of $ resulting from the net effect of
eliminating the PepsiCo interest expense allocation and recording
interest expense based on $ of external debt using an average
interest rate of %. A change in the interest rate of 1/8% would result
in movement of interest expense of $ annually.
(c) Reflects the estimated tax impact of the pro forma adjustments using an
effective tax rate of 39.8%.
(d) In connection with the formation of PBG and Bottling LLC PepsiCo
contributed bottling businesses and assets used in the bottling
businesses to PBG which will be held by Bottling LLC. As a result of the
contribution of the assets, PBG will own % of Bottling LLC and
PepsiCo will directly own the remaining %. Accordingly, the unaudited
Pro Forma Statement of Operations reflects PepsiCo's % share of the
combined net income of Bottling LLC as minority interest.
(2) PRO FORMA ADJUSTMENTS FOR THE CONDENSED COMBINED BALANCE SHEET
(a) Reflects the net assets acquired including resulting goodwill of $77
million from an expected first quarter 1999 acquisition of certain U.S.
and Russian territories from Whitman Corporation for cash consideration
of $137 million.
(b) Reflects the estimated $ of combined external debt PBG expects
to incur prior to the offering to settle certain amounts due to PepsiCo.
This debt will be made up of the following:
- $1 billion, 5 3/8% notes due 2004 and $1.3 billion, 5 5/8% notes due
2009 both issued on February 9, 1999 to be incurred by Bottling LLC.
- $ , % notes to be incurred by PBG.
(c) Reflects the estimated net proceeds from issuance of shares of PBG
capital stock from this offering.
(3) INCREMENTAL CORPORATE OVERHEAD COSTS
PBG expects to change from a non-compensatory, broad-based stock option
program to an alternative program. Since, no program has been finally
determined or approved by the board of directors, this charge is not
reflected in the Pro Forma Condensed Combined Statement of Operations.
Management anticipates that the new plan could cost up to an additonal $12
million per year.
(4) NON-CASH COMPENSATION CHARGE
Subject to the completion of the offering, substantially all nonvested
PepsiCo options held by PBG employees will vest on a date determined by
PepsiCo. As a result, PBG will incur a non-cash charge equal to the
difference between the market price of PepsiCo capital stock and the
exercise price of these options at the vesting date. Based on the market
price of PepsiCo capital stock on February 23, 1999, the pre-tax and after
tax compensation charge would be $70 million. Since this charge would be a
one-time event, the charge is not reflected in the Pro Forma Condensed
Combined Statement of Operations.
P-4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 1999 (the 25(th) day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
SHARES
THE PEPSI BOTTLING GROUP, INC.
COMMON STOCK
------------------
PROSPECTUS
------------------
MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
SANFORD C. BERNSTEIN & CO., INC.
SCHRODER & CO. INC.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
-----------
<S> <C>
Registration fee...................................................................................... $ 278,000
NASD Filing fee....................................................................................... 30,500
New York Stock Exchange listing fee................................................................... *
Transfer agent's fees................................................................................. *
Printing and engraving expenses....................................................................... *
Legal fees and expenses............................................................................... *
Accounting fees and expenses.......................................................................... *
Blue Sky fees and expenses............................................................................ *
Miscellaneous......................................................................................... *
-----------
Total........................................................................................... $ *
-----------
-----------
</TABLE>
- ------------------------
* To be filed by amendment
Each of the amounts set forth above, other than the Registration fee and the
NASD filing fee, is an estimate.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article Eighth of the Registrant's certificate of incorporation provides for
indemnification by the Registrant of its directors, officers and employees to
the fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's Certificate of Incorporation
provides for such limitation of liability.
The Registrant maintains standard policies of insurance under which coverage
is provided (a) to its directors and officers against loss rising from claims
made by reason of breach of duty or other wrongful act, and (b) to the
Registrant with respect to payments which may be made by the Registrant to such
officers and directors pursuant to the above indemnification provision or
otherwise as a matter of law.
II-1
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (CONTINUED)
The proposed forms of Underwriting Agreement filed as Exhibit 1 to this
Registration Statement provide for indemnification of directors and officers of
the Registrant by the underwriters against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1996, the Registrant has sold the following securities
without registration under the Securities Act of 1933:
None
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement*
3.1 Certificate of incorporation+
3.2 Bylaws+
4 Form of common stock certificate*
5 Opinion of Davis Polk & Wardwell*
10.1 Form of Master Bottling Agreement*
10.2 Form of the Master Syrup Agreement*
10.3 Form of Non-Cola Bottling Agreement*
10.4 Form of Separation Agreement
10.5 Form of Shared Services Agreement*
10.6 Form of Tax Separation Agreement
10.7 Form of Employee Programs Agreement
10.8 Form of Registration Rights Agreement
21 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP
23.2 Consent of Davis Polk & Wardwell (included in Exhibit 5)
24 Power of Attorney+
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
(b) The following financial statement schedule is filed as part of this
Registration Statement:
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes:
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS. (CONTINUED)
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Purchase, New
York, on the 26th day of February, 1999.
<TABLE>
<S> <C> <C>
THE PEPSI BOTTLING GROUP, INC.
By: /s/ PAMELA C. MCGUIRE
-----------------------------------------
Pamela C. McGuire
Senior Vice President, General Counsel and
Secretary
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Principal Executive February 26, 1999
Craig E. Weatherup Officer and Director
*
- ------------------------------ Principal Financial February 26, 1999
John T. Cahill Officer and Director
*
- ------------------------------ Controller and Principal February 26, 1999
Peter A. Bridgman Accounting Officer
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ PAMELA C. MCGUIRE
-------------------------
Pamela C. McGuire
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THE PEPSI BOTTLING GROUP, INC.
IN MILLIONS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ----------------------------------------
AT CHARGED TO BALANCE
BEGINNING COSTS AND CHARGED TO AT END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------- --------------- ----------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED:
DECEMBER 28, 1996
Allowance for losses on trade
accounts receivable......... $ 65 $ 8 $ 4 (a) $ 12 (b) $ 65
DECEMBER 27, 1997
Allowance for losses on trade
accounts receivable......... $ 65 $ 6 $ 2 (a) $ 28 (b) $ 45
DECEMBER 26, 1998
Allowance for losses on trade
accounts receivable......... $ 45 $ 13 $ -- $ 12 (b) $ 46
</TABLE>
- ------------------------
(a) Represents recoveries of amounts previously written off.
(b) Charge off of uncollectible accounts.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIALLY NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------- ---------------------------------
<C> <S> <C>
1 Form of Underwriting Agreement*.............................................
3.1 Certificate of incorporation+...............................................
3.2 Bylaws+.....................................................................
4 Form of common stock certificate*...........................................
5 Opinion of Davis Polk & Wardwell*...........................................
10.1 Form of Master Bottling Agreement*..........................................
10.2 Form of the Master Syrup Agreement*.........................................
10.3 Form of Non-Cola Bottling Agreement*........................................
10.4 Form of Separation Agreement................................................
10.5 Form of Shared Services Agreement*..........................................
10.6 Form of Tax Separation Agreement............................................
10.7 Form of Employee Programs Agreement.........................................
10.8 Form of Registration Rights Agreement.......................................
21 Subsidiaries of the Registrant*.............................................
23.1 Consent of KPMG LLP.........................................................
23.2 Consent of Davis Polk & Wardwell (included in Exhibit 5)....................
24 Power of Attorney+..........................................................
27 Financial Data Schedule.....................................................
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 10.4
SEPARATION AGREEMENT
SEPARATION AGREEMENT, dated as of February ___, 1999 (as amended,
supplemented or otherwise modified, this "Agreement"), by and between PepsiCo,
Inc., a North Carolina corporation ("PEPSICO" or the "CORPORATION"), and The
Pepsi Bottling Group, Inc., a Delaware corporation ("PBG") and, as of the date
hereof, a wholly-owned subsidiary of PepsiCo.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, PepsiCo's Board of Directors has determined that separation
from the Corporation of a substantial portion of the Corporation's bottling
assets and businesses and majority public ownership of such assets and
businesses is in PepsiCo's best interests;
WHEREAS, PepsiCo is consolidating the assets and operations of a
substantial portion of the bottling businesses owned by it and its subsidiaries
and affiliates (PepsiCo and its subsidiaries and affiliates (other than the PBG
Group as hereinafter defined) are collectively referred to herein as the
"PEPSICO GROUP") into PBG and its subsidiaries (PBG and its direct and indirect
subsidiaries and its affiliates are collectively referred to herein as the "the
PBG GROUP"); and
WHEREAS, PepsiCo intends that PBG issue approximately 63% of its common
stock to the public in an underwritten offering (the "OFFERING") (The date at
which such sales of PBG common stock are settled with the Underwriters shall
hereafter be referred to as the "OFFERING DATE");
NOW, THEREFORE, in consideration of the mutual promises herein, the
Parties (as such term is defined in Section 19 hereof) hereby agree as follows:
Section 1. THE SEPARATION. Prior to the Offering Date, PepsiCo
transferred a substantial portion of its bottling assets (including the stock of
certain subsidiaries) to the PBG Group and the Bottling Group, LLC, a Delaware
limited liability company wholly-owned by the PepsiCo Group ("BOTTLING GROUP,
LLC"). Thereafter, a PepsiCo subsidiary borrowed $2.3 billion, secured by a
PepsiCo guarantee (the "PEPSICO GUARANTEE") and, prior to the Offering Date,
such debt was assumed by Bottling Group, LLC. Also prior to the Offering Date,
PBG will borrow approximately $4.5 billion, with a portion of the proceeds
transferred to PepsiCo in payment of certain intercompany debt obligations and a
portion of the proceeds used to acquire certain domestic and international
bottling operations from Whitman Corporation ("Whitman") in a separate
transaction (described in Section 12(b) below). Subsequent to the Offering Date,
PBG will use a portion of the proceeds to acquire certain international bottling
operations from PepsiCo. The PBG Group will transfer its bottling assets to
Bottling Group, LLC in exchange for an
<PAGE>
approximately 95% interest in such entity (diluting PepsiCo's interest in
Bottling Group, LLC to approximately 5%).
Section 2. THE OFFERING. On the Offering Date, PBG will sell
approximately 63% of its Common Stock, and the proceeds thereof will be applied
against a portion of the approximately $4.5 billion of PBG borrowings set forth
in Paragraph 1 hereof.
Section 3. GOVERNANCE DOCUMENTS. PBG shall take all action necessary
such that, on the Offering Date, the Certificate of Incorporation and Bylaws of
PBG shall be substantially in the forms filed with the Securities and Exchange
Commission as exhibits to the Form S-1 relating to the Offering (as amended,
supplemented or otherwise modified, the "S-1").
Section 4. BOOKS, RECORDS, SERVICES AND ACCESS TO INFORMATION.
(a) PepsiCo shall make available to PBG, during normal business hours
and in a manner which shall not reasonably interfere with PepsiCo's business,
the services set forth on Schedule A hereto to the extent that the same are
reasonably required to assist in effecting an orderly transition following the
Offering.
(b) From and after the Offering Date, PepsiCo shall afford PBG and its
authorized employees and representatives reasonable access (including access to
persons or firms possessing relevant information and records) and reasonable
duplicating rights during normal business hours to, or, at PepsiCo's option,
copies of, all records, books, contracts, instruments, data and other
information (collectively, "INFORMATION") within the PepsiCo Group's possession
relating to any member of the PBG Group, insofar as such access or copies are
reasonably required by PBG.
(c) PBG shall afford to PepsiCo and its authorized employees and
representatives reasonable access (including access to persons or firms
possessing relevant information and records) and reasonable duplicating rights
during normal business hours to, or, at PBG's option, copies of, all Information
within the PBG Group's possession relating to any member of the PepsiCo Group,
insofar as such access or copies are reasonably required by PepsiCo.
(d) Information may be required under this Section 4, without
limitation, for audit, accounting, claims, litigation and tax purposes, as well
as for purposes of fulfilling disclosure and reporting obligations. In lieu of
retaining any specific Information, either Party may, in writing, offer to
deliver such Information to the other. If such offer is not accepted within
ninety (90) days, the Information so offered shall be retained or destroyed in
accordance with PepsiCo's Record Retention Policy. If such offer is accepted,
the Party accepting delivery shall pay the reasonable out-of-pocket costs of the
delivery. Each Party shall maintain the Information in accordance with the
manner it treats similar material relating to its ongoing business.
2
<PAGE>
(e) At all times from and after the Offering Date, each Party will use
its reasonable best efforts to make available to the other, upon written
request, its officers, directors, employees and agents as witnesses to the
extent that the same may reasonably be required in connection with any legal,
administrative or other proceedings in which the requesting Party may from time
to time be involved.
(f) Except as otherwise specifically provided for herein, a Party
providing Information, or witnesses to the other hereunder shall be entitled to
receive from the recipient, upon the presentation of appropriate invoices
therefor, payments for such amounts relating to supplies, disbursements, and
such other costs and out-of-pocket expenses as are reasonably incurred in
providing such Information, or witnesses; PROVIDED THAT to the extent such
amounts, disbursement costs and expenses constitute Separation Expenses (as
defined in Section 20 of this Agreement), they shall be borne by PepsiCo.
Invoices shall be due and payable within thirty (30) days of receipt.
(g) PepsiCo shall arrange for the transportation of existing corporate
records in its possession relating to the PBG Group, including original
corporate minute books, stock ledgers and certificates, and corporate seals of
each corporation included in the PBG Group, and all active agreements, deeds to
real property, active litigation files and filings with foreign governments, if
any, to PBG's address set forth in Section 25 hereof.
Section 5. CONFIDENTIALITY. Each member of the PepsiCo Group and each
member of the PBG Group shall hold, and cause each of their respective officers,
employees, agents, consultants and advisors to hold, in strict confidence, all
non-public Information concerning the other Party furnished it by such other
Party or its representatives pursuant to this Agreement, unless compelled to
disclose such Information by judicial or administrative process or, in the
opinion of counsel, by other requirements of law (in which case such Party shall
promptly notify the other Party so that the other Party may seek a protective or
other appropriate remedy); and each Party shall not release or disclose such
Information to any other person, except its auditors, attorneys, financial
advisors, bankers and other consultants and advisors who shall be bound by the
provisions of this Section 5. Each Party shall be deemed to have satisfied its
obligations hereunder with respect to confidential Information supplied by the
other Party if it exercises the same care as it does with respect to preserving
the confidentiality of its own similar information.
Section 6. INDEMNIFICATION.
(a) Notwithstanding any other provision of this Agreement, no member of
the PBG Group (other than Bottling Group, LLC) shall indemnify PepsiCo for, hold
PepsiCo harmless from, or otherwise bear the economic burden of any loss
incurred by PepsiCo under the PepsiCo Guarantee. Subject to the preceding
sentence, effective on the Offering Date, except as otherwise provided in the
agreements attached hereto, PBG agrees to indemnify and hold harmless each
member of the PepsiCo Group and each of their respective officers, directors,
employees and agents from and against any and all
3
<PAGE>
losses, liabilities, claims, suits, damages, costs and expenses (including,
without limitation, reasonable attorneys' fees and any and all expenses
reasonably incurred in investigating, preparing or defending against any pending
or seriously threatened litigation or claim) (collectively, "LOSSES") arising
out of or related in any manner to any item set forth on Schedule B hereto.
Similarly, effective on the Offering Date, except as otherwise provided in the
attachments hereto, PepsiCo agrees to indemnify and hold harmless each member of
the PBG Group and each of their respective officers, directors, employees and
agents from and against any and all Losses arising out of or related in any
manner to any item set forth on Schedule C hereto.
(b) If any action is brought or any claim is made against a Party or
person in respect of which indemnity may be sought pursuant to subsection 6(a)
above (the "INDEMNITEE"), the Indemnitee shall, within twenty (20) days after
the receipt of information indicating that an action or claim is likely, notify
in writing the Party from whom indemnification is sought (the "INDEMNITOR") of
the institution of the action or the making of the claim, and the Indemnitor
shall have the right, and at the request of the Indemnitee, shall have the
obligation, to assume the defense of the action or claim, including the
employment of counsel. If the Indemnitor assumes the defense of the action or
claim, the Indemnitor shall be entitled to settle the action or claim on behalf
of the Indemnitee without the prior written consent of the Indemnitee, unless
such settlement would materially affect the ongoing business of the Indemnitee.
(c) The Indemnitee shall have the right to employ its own counsel, but
the fees and expenses of that counsel shall be the responsibility of the
Indemnitee unless (i) the employment of that counsel shall have been authorized
in writing by the Indemnitor in connection with the defense of the action or
claim; (ii) the Indemnitor shall not have employed counsel to have charge of the
defense of such action or claim; or (iii) the Indemnitee shall have reasonably
concluded that there may be defenses available to it which are different from or
additional to those available to the Indemnitor (in which case the Indemnitor
shall not have the right to direct any different defense of the action or claim
on behalf of the Indemnitee). The Indemnitee shall, in any event, be kept fully
informed of the defense of any such action or claim. Except as expressly
provided above, in the event that the Indemnitor shall not previously have
assumed the defense of an action or claim, at such time as the Indemnitor does
assume the defense of the action or claim, the Indemnitor shall not thereafter
be liable to any Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in investigating, preparing or defending against such action or
claim.
(d) Anything in this Section 6 to the contrary notwithstanding, the
Indemnitor shall not be liable for indemnification with respect to any
settlement of any claim or action effected without its written consent;
PROVIDED, HOWEVER, that if after due notice the Indemnitor refuses to defend a
claim or action, the Indemnitee shall have the right to defend and/or settle
such claim or action, and the Indemnitee shall not be precluded from making a
claim against the Indemnitor for reasonable expenses and liabilities resulting
from such defense and/or settlement in accordance with this Section 6.
4
<PAGE>
(e) Notwithstanding the foregoing provisions of this Section 6, there
may be particular actions or claims which reasonably could result in both
Parties being liable to the other under the indemnification provisions of this
Agreement. In such events, the Parties shall endeavor, acting reasonably and in
good faith, to agree upon a manner of conducting the defense and settlement of
the action or claim with a view to minimizing the legal expenses and associated
costs that might otherwise be incurred by the Parties, such as, by way of
illustration only, agreeing to use the same legal counsel.
(f) The indemnification provisions of this Section 6 shall not inure to
the benefit of any third party. By way of illustration only, an insurer who
would otherwise be obligated to pay any claim shall not be relieved of the
responsibility with respect thereto, or, solely by virtue of the indemnification
provisions hereof, have any subrogation rights with respect thereto, it being
expressly understood and agreed that no insurer or any other third party shall
be entitled to a "windfall" (i.e., a benefit they would not be entitled to
receive in the absence of the indemnification provisions) by virtue of these
indemnification provisions.
Section 7. TAXES. PepsiCo and PBG have entered into a Tax Separation
Agreement, substantially in the form attached hereto as Attachment 1 (as
amended, supplemented or otherwise modified, the "TAX AGREEMENT"), regarding
their respective rights and obligations with respect to taxes of the PBG Group
for all periods through the Offering Date and certain other tax-related matters.
In the event of a conflict between the terms of the Tax Agreement and the terms
of this Agreement, the terms of the Tax Agreement shall govern.
Section 8. EMPLOYEE BENEFITS. PepsiCo and PBG have entered into an
Employee Programs Agreement, substantially in the form attached hereto as
Attachment 2 (as amended, supplemented or otherwise modified, the "EMPLOYEE
PROGRAMS Agreement"), which allocates assets, liabilities and responsibilities
between them with respect to certain employee compensation and benefit plans and
programs and certain other related matters. In the event of a conflict between
the Employee Programs Agreement and the terms of this Agreement, the terms of
the Employee Programs Agreement shall govern.
Section 9. SERVICES. PepsiCo and PBG have entered into a Shared
Services Agreement "SHARED SERVICES Agreement"), setting forth the arrangements
between the Parties with respect to services and support. In the event of a
conflict between the Shared Services Agreement and the terms of this Agreement,
the terms of the Shared Services Agreement shall govern.
Section 10. LEASE ASSIGNMENT. PepsiCo and PBG have entered into an
Assignment of Lease, substantially in the form attached hereto as Attachment 3
(as amended, supplemented or otherwise modified, the "Assignment"), relating to
an Agreement of Lease between Redux Realty, Inc. and PepsiCo, Inc. for the
office complex
5
<PAGE>
in Somers, New York, (the "LEASE") pursuant to which PepsiCo has assigned its
rights and delegated its duties under the Lease to PBG.
Section 11. REGISTRATION RIGHTS. PepsiCo and PBG have entered into a
Registration Rights Agreement substantially in the form attached hereto as
Attachment 4, pursuant to which PepsiCo may require PBG, with certain
exceptions, to register under the Securities Act of 1933, as amended, shares of
PBG's common stock owned by PepsiCo, and to include such shares in any future
registration of PBG common stock.
Section 12. TRANSFER OF ENTITIES, OPERATIONS, ASSETS AND LIABILITIES.
(a) Prior to the Offering Date, PepsiCo and PBG shall use reasonable
efforts to cause the entities, operations, assets (other than trademarks and
other intellectual property and any rights appurtenant thereto) and
corresponding liabilities relating to the bottling territories and businesses
set forth on Schedule D hereto (the "BOTTLING BUSINESSES") to be included as
part of the PBG Group. Except as otherwise provided in this Agreement, the Tax
Agreement, the Employee Programs Agreement, the Shared Services Agreement, the
Assignment and the Insurance Agreement (as hereinafter defined), including,
without limitation, the Schedules and Attachments attached hereto and to each
such Agreement, PepsiCo shall bear the reasonable costs of effecting such
conveyances.
(b) PepsiCo shall bear all costs relating to the transfer of bottling
entities, operations, assets and corresponding liabilities by the PBG Group or
the PepsiCo Group to Whitman, pursuant to a Contribution and Merger Agreement
among Whitman, PepsiCo and a PepsiCo subsidiary, dated January 25, 1999, upon
the receipt of appropriate invoices therefor. PepsiCo will reimburse PBG for any
such costs within 30 days of receipt of such invoices.
(c) PepsiCo shall bear all costs relating to the transfer of bottling
entities, operations, assets and corresponding liabilities by the PBG Group or
the PepsiCo Group to any other PepsiCo anchor or master bottler, pursuant to an
agreement with the PepsiCo Group, upon the receipt of appropriate invoices
therefor. PepsiCo will reimburse PBG for any such costs within 30 days of
receipt of such invoices.
(d) Except as expressly provided herein (including, without limitation,
in the first sentence of Section 6(a)), PBG agrees to assume and pay all
contracts, obligations and liabilities of each member of the PepsiCo Group
associated in any way with the Bottling Businesses, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, including, without
limitation, all obligations of any member of the PepsiCo Group acting as a
guarantor of obligations associated in any way with any of the Bottling
Businesses (other than with respect to the PepsiCo Guarantee), and all
obligations under leases and other executory contracts and liabilities, whether
arising as a result of the transactions contemplated hereby, existing on the
date hereof, or based on facts or actions arising on or prior to the Offering
Date, whether or not such obligations
6
<PAGE>
shall have been disclosed herein, and whether or not reflected on the opening
balance sheet of the PBG Group prepared pursuant to Section 16 hereof (the
"OPENING BALANCE SHEET").
(e) In the event that the transfer of all such assets and liabilities
of the Bottling Businesses is not accomplished by the Offering Date, the Parties
agree that PBG shall have DE FACTO control and equitable ownership of such
entities, operations and assets, and DE FACTO responsibility for the obligations
and liabilities intended to be transferred to the PBG Group; PROVIDED, HOWEVER,
that if any uncompleted steps financially affect either PepsiCo or PBG, the
Parties agree to use their respective best efforts to equitably resolve any such
financial impact.
(f) In the event that any trademark or other intellectual property
asset or any right appurtenant thereto relating to the Bottling Businesses is
transferred to PBG, PBG agrees to take such action as may be necessary or
appropriate to cause such trademark or other intellectual property asset or any
right appurtenant thereto to be properly assigned to PepsiCo or its designee.
PepsiCo shall bear the reasonable costs of effecting such assignment.
(g) Notwithstanding any other provision of this Agreement, if a member
of the PBG Group (including Bottling Group, LLC) is liable on a debt as to
which, or as to any portion of which, there is a guarantee or similar obligation
of any member of the PepsiCo Group, including, without limitation, the
approximately $2.3 billion debt referred to in Section 1 hereof, then, unless
PepsiCo has given its prior written consent, PBG will not, and will cause each
member of the PBG Group (including Bottling Group, LLC) not to, take any action
relating to such debt or the PepsiCo Group guarantee, including (i) the
repayment, refinancing or modification of the terms of such debt, or (ii)
modification of the terms, or cancellation, of such guarantee or similar
obligation.
(h) This Section 12 shall not inure to the benefit of any third party.
Section 13. LETTERS OF CREDIT, GUARANTEES AND CONTINGENT LIABILITIES.
(a) PBG shall use its best efforts to cause the beneficiaries of all of
the PepsiCo Group's letters of credit, guarantees (other than the PepsiCo
Guarantee) and other contingent liabilities relating to any of the Bottling
Businesses (including, without limitation, commercial letters of credit,
financing guarantees, performance guarantees, lease guarantees, comfort letters,
insurance and workers' compensation liabilities, and the letters of credit,
guarantees and other contingent liabilities identified on Schedule E hereto)
(collectively, the "BOTTLING CONTINGENT LIABILITIES") which will not have
expired on or prior to the Offering Date, to release and terminate all such
Bottling Contingent Liabilities on or prior to August 1, 1999 and, where
necessary or appropriate, to accept substitute letters of credit, guarantees or
contingent liabilities issued for the account of PBG or to post sufficient cash
collateral on behalf of PBG. PepsiCo shall assist PBG in obtaining such releases
and substitutions. PBG hereby agrees to provide to PepsiCo,
7
<PAGE>
prior to August 15, 1999, a schedule (the "PBG CONTINGENT LIABILITY SCHEDULE")
listing all of the letters of credit, guarantees and other contingent
liabilities relating to any of the Bottling Businesses which have not been
released, terminated, or replaced with a Qualified Letter of Credit (as such
term is hereinafter defined). From and after the Offering Date, PBG will pay a
fee based upon the maximum exposure related to any Beverage Contingent
Liabilities which were not released, terminated or replaced prior to the
Offering Date. With respect to leases, the term "maximum exposure" shall mean
the sum of future nominal lease payments. Such fee will be equal to the LIBOR
margin, plus utilization and commitment fees for a borrowing under PBG's senior
credit facility as in effect from time to time and will be expressed as a
percentage of the value of the underlying exposure. Such fee shall be payable
monthly in advance until such time as each such Bottling Contingent Liability
has been released, terminated or replaced by a Qualified Letter of Credit. For
purposes of this Agreement, a Bottling Contingent Liability shall be deemed to
be released or terminated only whenthe relevant document evidencing such
Bottling Contingent Liability has been canceled and returned to PepsiCo.
Notwithstanding the foregoing, PBG shall at all times indemnify and hold
harmless each member of the PepsiCo Group from and against all losses,
liabilities and obligations incurred with respect to such Bottling Contingent
Liabilities. Without limiting the foregoing, PBG shall, upon demand, reimburse
PepsiCo within fifteen days for any amounts actually paid by any member of the
PepsiCo Group with respect to any such Beverage Contingent Liabilities.
(b) For purposes of this Agreement, the term "QUALIFIED LETTER OF
CREDIT" shall mean an irrevocable, transferable letter of credit issued to
PepsiCo or its relevant subsidiary or affiliate by a bank that is an A Credit
(as such term is hereinafter defined), substantially in the form attached as
Schedule F hereto, with a term extending to the last possible expiration date of
the Bottling Contingent Liabilities covered thereby and with a maximum drawing
amount that shall equal the full amount of all remaining obligations and
foreseeable claims under the Bottling Contingent Liabilities covered thereby
(assuming the exercise of all extension options with respect to the underlying
obligations). In the event of any change in the law regarding letters of credit
generally that affects the language in a Qualified Letter of Credit, PBG shall,
at the request of PepsiCo, provide a new Qualified Letter of Credit containing
modifying language as approved by PepsiCo. The language contained in the form of
letter of credit attached as Schedule F hereto shall be deemed to be approved by
PepsiCo. For purposes of this Agreement, the term "A CREDIT" shall mean a
corporation or banking association whose long-term debt obligations are rated A+
or A1 or better by Standard & Poor's or by Moody's, respectively, or their
successors in interest that are "nationally recognized statistical rating
organizations."
(c) PBG agrees that no member of the PBG Group shall modify, amend or
extend (including, without limitation, pursuant to any existing option to
extend) any of the leases or other obligations of the PBG Group which have been
guaranteed by a member of the PepsiCo Group so as to increase or in any way
enlarge the duration of any of the obligations or liabilities of any member of
the PepsiCo Group pursuant to those
8
<PAGE>
guarantees without first obtaining the prior written approval of PepsiCo, which
approval may be withheld by PepsiCo in its sole discretion.
Section 14. INSURANCE AND RISK MANAGEMENT SERVICES.
(a) All policies of liability, fire, workers' compensation and other
forms of insurance maintained by the PepsiCo Group insuring the products,
properties, assets and/or operations of the Bottling Businesses shall continue
in full force and effect up to and through the Offering Date, and except as set
forth on Schedule G hereto, shall be terminated effective 11:59:59 p.m. on the
Offering Date. Any refunds of prepaid premiums with respect to such terminated
insurance shall be for PepsiCo's account. Any retrospective adjustments to
casualty premiums with respect to such terminated insurance shall be for PBG's
account. PepsiCo shall be responsible for obtaining initial insurance coverage
for PBG from and after the Offering Date in such amounts as are agreed upon by
the Parties. PBG shall be liable for payment of all premiums with respect to
such initial insurance coverage and all subsequent coverage which PBG thereafter
elects to obtain. For purposes of this Section, insurance coverage includes, but
is not limited to, ERISA fidelity bonds and/or fiduciary insurance.
(b) With respect to any insurance programs relating to the PBG Group
(including, without limitation, any casualty insurance programs such as public
and products liability insurance, insured or self-insured workers' compensation
insurance and automobile liability insurance), PBG shall be liable for payment
of all claims arising out of incidents, known or unknown, reported or
unreported, which occur prior to, on or after the Offering Date. Any reserves
under these insurance programs relating to the PBG Group for periods ending
prior to, on or after the Offering Date shall be for the account of PBG. Such
reserves shall be included as liabilities of PBG, and any charge or credit to
the reserves shall be for PBG's account.
(c) PepsiCo and Hillbrook Insurance Company, Inc. ("Hillbrook") have
entered into an Insurance and Risk Management Services Agreement (the "IRM
AGREEMENT"), which provides for the transfer of certain casualty insurance
liabilities to Hillbrook and requires Hillbrook to provide risk management
services to the PepsiCo Group's U.S. operations. PepsiCo, Hillbrook and PBG have
entered into an Insurance Agreement, substantially in the form attached hereto
as Attachment 5 (as amended, supplemented or otherwise modified, the "INSURANCE
AGREEMENT"), pursuant to which PepsiCo has assigned its rights under the IRM
Agreement with respect to the Bottling Businesses to PBG. In the event of a
conflict between the Insurance Agreement and the terms of this Agreement, the
terms of the Insurance Agreement shall govern.
Section 15. BANKING AND OTHER ARRANGEMENTS. The responsibility for bank
accounts used exclusively by the PBG Group shall be transferred from PepsiCo to
PBG on or prior to the Offering Date. Normal procedures will be followed for
receipts and disbursements funding prior to the Offering Date.
9
<PAGE>
Section 16. PROCEDURES FOR CLOSING AND DELIVERY OF BOOKS AND BALANCE
SHEET AND PAYMENT OF CERTAIN AMOUNTS TO PEPSICO. Financial statements of PBG as
of the Offering Date, which shall be summaries of the combined accounting
ledgers of the PBG Group as of the close of the _____ accounting period of the
1999 fiscal year, and which shall include an Opening Balance Sheet, shall be
prepared by PepsiCo within 30 days after the Offering Date and reviewed and
agreed to by PBG within 15 days after such financial statements are prepared.
PepsiCo shall bear all expenses in connection with the preparation and review of
such financial statements. PepsiCo and PBG agree that the principles for
determining the Opening Balance Sheet are as follows:
(a) TOTAL ASSETS shall be determined through the normal reporting
process using U.S. generally accepted accounting principles ("GAAP") as applied
on a basis substantially consistent with the basis used in the preparation of
the financial statements of PBG presented in the S-1 and standard PepsiCo
definitions and accounting practice, consistently applied.
(b) NON-INTEREST BEARING LIABILITIES shall be determined through the
normal reporting process using GAAP as applied on a basis substantially
consistent with the basis used in the preparation of the financial statements of
PBG presented in the S-1 and standard PepsiCo definitions and accounting
practice, consistently applied. Accrued tax liabilities shall be treated in
accordance with the provisions of the Tax Agreement.
(c) NET ASSETS is the sum of total assets less non-interest bearing
liabilities. Net Assets shall be determined in accordance with the following
capitalization procedure:
(i) SHORT AND LONG-TERM DEBT shall be determined through the
normal reporting process using GAAP as applied on a basis
substantially consistent with the basis used in the preparation of the
financial statements of PBG presented in the S-1 and standard PepsiCo
definitions and accounting practice, consistently applied. The Opening
Balance Sheet will reflect approximately $3.3 billion of debt
obligations incurred by PBG and Bottling Group, LLC prior to the
Offering Date.
(ii) STOCKHOLDERS' EQUITY of PBG will equal the difference
between the total Net Assets less the Short and Long-Term Debt on
PBG's Opening Balance Sheet as of the Offering Date.
Section 17. OPERATION UNTIL CLOSING. PBG agrees, on behalf of itself
and each member of the PBG Group that, through the Offering Date, the Bottling
Businesses shall be operated in the ordinary course of business, consistent with
past practice.
Section 18. DE-IDENTIFICATION. As soon as practicable after the
Offering Date, and in no event later than 120 days after such Date, PBG shall
eliminate all exterior and interior signage and other identification in its
possession or control, and cease using any
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letterhead, which identifies PBG or any other entity within the PBG Group as a
subsidiary of PepsiCo.
Section 19. PARTIES. As used in this Agreement, the term "PARTIES"
shall include the PepsiCo Group and its successors, and the PBG Group and its
successors. Each of PepsiCo and PBG agrees that it shall cause each of its
subsidiaries and affiliates to comply fully with the terms of this Agreement.
Section 20. EXPENSES. Except as otherwise provided in this Agreement
(including, without limitation, the Schedules and Attachments hereto), all
expenses in connection with the Offering and separation (the "Separation
Expenses") shall be borne by PepsiCo and all expenses in connection with the
ongoing operations and/or businesses of the PBG Group shall be borne by PBG. PBG
hereby agrees that the expenses set forth on Schedule H hereto are the only
expenses which constitute Separation Expenses for purposes of this Agreement.
Section 21. TAX GROSS-UP. If any amount paid by any member of the
PepsiCo Group or the PBG Group, as the case may be, pursuant to this Agreement
results in any increased Tax liability or reduction of any Tax Asset of the PBG
Group or the PepsiCo Group, respectively, then PepsiCo or PBG, as appropriate,
shall indemnify the other Party and hold it harmless from and against any
interest or penalty attributable to such increased Tax liability or the
reduction of such Tax Asset and shall pay to the other Party, in addition to
amounts otherwise owed, the After-Tax Amount. If any amount paid by any member
of the PepsiCo Group or the PBG Group, as the case may be, pursuant to this
Agreement makes allowable to a member of the PBG Group or a member of the
PepsiCo Group, respectively, a Tax Benefit which would not, but for such
payment, be allowable, then any payment made pursuant to this Agreement shall be
reduced by the present value of such Tax Benefit, calculated in accordance with
Section 5(d) of the Tax Agreement. Capitalized terms used in this Section 19 but
not otherwise defined in this Agreement shall have the meanings assigned to such
terms in the Tax Agreement.
Section 22. SURVIVAL. All of the provisions of this Agreement shall
survive the Offering Date.
Section 23. OTHER PROVISIONS. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina, may not be
assigned by either Party without the written consent of the other, and shall
bind and inure to the benefit of the Parties hereto and their respective
successors and permitted assignees. This Agreement may not be amended,
supplemented or otherwise modified except by an agreement in writing signed by
PepsiCo and PBG. This Agreement may be executed in counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
Section 24. DISPUTE RESOLUTION. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement ("Dispute")
promptly by
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negotiation between executives with authority to settle the Dispute. If the
Dispute has not been resolved by negotiation within 45 (forty-five) calendar
days of the disputing party's notice of the Dispute, or if the parties'
executives failed to meet within 20 (twenty) calendar days of the notice, the
parties shall endeavor to settle the Dispute by mediation under the then current
Center for Public Resource's Model Mediation Procedure for Business Disputes.
Notwithstanding the foregoing, if a Dispute arises in which time is of the
essence, either party may institute legal action. Each party will continue to
perform this Agreement pending the final resolution of the Dispute.
Section 25. NOTICES. Any notice, demand, claim or other communication
under this Agreement shall be in writing and shall be deemed to have been given
(i) upon the delivery thereof if delivered personally (including, without
limitation, by courier), (ii) three days after being sent by certified mail,
return receipt requested, postage prepaid, or (iii) upon receipt of confirmation
of a telecopy transmission, in each case to the Parties at the following
addresses (or at such other address as a Party may specify by notice to the
other):
If to PepsiCo:
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577-1444
Telecopy No.: (914) 253-3123
Attention: General Counsel
If to PBG:
The Pepsi Bottling Group, Inc.
One Pepsi Way
Somers, New York 10589-2201
Telecopy No. (914) 767-7944
Attention: General Counsel
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed as of the date and year first above written.
PepsiCo, Inc.
By
--------------------------------
[Name]
[Title]
The Pepsi Bottling Group, Inc.
By
--------------------------------
[Name]
[Title]
13
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SCHEDULE B
PBG INDEMNIFICATION OBLIGATIONS
Items with respect to which PBG will indemnify the PepsiCo Group in
accordance with Section 6 of this Separation Agreement:
(1) All Losses arising out of or related in any manner to any of the
Bottling Businesses and the PBG Group, as such businesses have been conducted in
the past, are currently conducted or may in the future be conducted, whether or
not such Losses are asserted prior to the Offering Date and whether or not such
Losses are based upon PepsiCo or any of its subsidiaries or affiliates being a
direct party to a transaction or agreement.
(2) All Losses arising out of or related in any manner to any letters
of credit, guarantees or contingent liabilities relating to (i) any of the
Bottling Businesses, or (ii) any obligations of any member of the PBG Group
(including, without limitation, commercial letters of credit, financing
guarantees, performance guarantees, lease guarantees, comfort letters, and
insurance and workers' compensation liabilities), whether or not such Losses are
asserted prior to the Offering Date.
(3) All Losses arising out of or in any way related to the Agreement of
Lease between Redux Realty, Inc. and PepsiCo, all of the rights and duties under
such Agreement having been transferred by PepsiCo to PBG pursuant to an
Assignment of Lease dated February ___, 1999.
(4) All Losses arising out of or in any way related to the pension
transition services described on Schedule A hereto.
(5) All Losses arising out of or related in any manner to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
registration statement on Form S-1 (No. 333-70291) relating to the Offering or
any amendment thereto (the "REGISTRATION STATEMENT"), including the Rule 430A
Information, or any preliminary or final prospectus (or any amendment or
supplement thereto), other than Losses arising from or related in any manner to
untrue statements or omissions or alleged untrue statements or omissions
relating to PepsiCo, Inc. For purposes of this Agreement, the term "Rule 430A
Information" shall mean the information included in any prospectus that was
omitted from the Registration Statement at the time it became effective but that
is deemed to be part of such Registration Statement at the time it became
effective pursuant to paragraph (b) of Rule 430A of the Securities Act of 1933,
as amended.
<PAGE>
SCHEDULE C
PEPSICO INDEMNIFICATION OBLIGATIONS
Items with respect to which PepsiCo will indemnify the PBG Group in
accordance with Section 5 of this Separation Agreement:
(1) All Losses arising out of or related in any manner to the PepsiCo,
Pepsi-Cola, Frito-Lay or Tropicana businesses, as such businesses have been
conducted in the past, are currently conducted or may in the future be
conducted, whether or not such Losses are asserted prior to the Offering Date
and whether or not such Losses are based upon PepsiCo or any of its subsidiaries
or affiliates being a direct party to a transaction or agreement.
(2) All Losses arising out of or related in any manner to any
contingent liabilities relating to (i) the Pepsi-Cola, Frito-Lay or Tropicana
businesses, or (ii) any obligations of any member of the PepsiCo Group, whether
or not such Losses are asserted prior to the Offering Date.
(3) All Losses arising out of or related in any manner to OCEAN SPRAY
CRANBERRIES, INC. V. PEPSICO, INC., including, without limitation appeals,
further litigation, arbitration or claims relating to such case or the claims
asserted therein.
(4) All Losses arising out of or related in any manner to HOSPITAL
CORPORATION INTERNATIONAL LIMITED AND AMERICAN MEDICAL CENTERS, INC. V. PEPSICO,
INC., including, without limitation, appeals, further litigation or claims
relating to such case or the claims asserted therein.
(5) One-half of all Losses arising out of or related in any manner to
HAMAR V. PEPSICO, INC., including, without limitation, appeals, further
litigation or claims relating to such case or the claims asserted therein.
(6) One-half of all Losses arising out of or related in any manner to
LOUISA V. PEPSICO, INC., including, without limitation, appeals, further
litigation or claims relating to such case or the claims asserted therein.
(7) All Losses arising out of or related in any manner to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, or any preliminary or final prospectus (or any amendment or
supplement thereto), relating to PepsiCo, Inc.
<PAGE>
Exhibit 10.6
TAX SEPARATION AGREEMENT
between
PEPSICO, INC.,
on behalf of itself
and the members
of the PEPSICO GROUP
and
THE PEPSI BOTTLING GROUP, INC.,
on behalf of itself
and the members
of the PBG GROUP
<PAGE>
TAX SEPARATION AGREEMENT
This Agreement is entered into as of the __ day of ________,
1999 between PepsiCo, Inc. ("PepsiCo"), a North Carolina corporation, on behalf
of itself and the members of the PepsiCo Group, and The Pepsi Bottling Group,
Inc. ("PBG"), a North Carolina corporation, on behalf of itself and the members
of the PBG Group.
W I T N E S S E T H:
WHEREAS, pursuant to the tax laws of various jurisdictions,
certain members of the PBG Group, as defined below, presently file certain tax
returns on an affiliated, consolidated, combined, unitary, fiscal unity or other
group basis (including as permitted by Section 1501 of the Internal Revenue Code
of 1986, as amended (the "Code")) with certain members of the PepsiCo Group, as
defined below (each such group, a "Consolidated Group");
WHEREAS, PepsiCo and PBG intend to enter into a Separation
Agreement providing for the consolidation of the assets and operations of a
substantial portion of the bottling business owned by PepsiCo and its
subsidiaries and affiliates into PBG and its subsidiaries and affiliates;
WHEREAS, PBG intends to effect an initial public offering of
approximately __% of its common stock (the "Offering");
WHEREAS, PepsiCo and PBG desire to set forth their agreement on
the rights and obligations of PepsiCo, PBG and the members of the PepsiCo Group
and the PBG Group, respectively, with respect to the handling and allocation of
federal, state, local and foreign Taxes incurred in Taxable periods beginning
prior to the Offering Date, Taxes resulting from transactions effected in
connection with the Offering (the "Restructuring") and various other Tax
matters;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties agree as follows:
<PAGE>
1. DEFINITIONS
(a) As used in this Agreement:
"Affiliate" of any Person shall mean (i) any individual,
corporation, partnership or other entity directly or indirectly owning more than
50 percent (by vote or value) of, owned more than 50 percent (by vote or value)
by, or under more than 50 percent (by vote or value) common ownership with, such
Person, and (ii) any entity that is entitled to the benefit of any Tax Asset of
such Person under applicable law, any entity with any Tax Asset to which such
Person is entitled to the benefit of under applicable law, or any entity which
is entitled or required to transfer or assign income, revenues, receipts, or
gains to such Person under applicable law.
"After-Tax Amount" shall mean an additional amount necessary to
reflect the hypothetical Tax consequences of the receipt or accrual of any
payment, using the maximum statutory rate (or rates, in the case of an item that
affects more than one Tax) applicable to the recipient of such payment for the
relevant year, reflecting for example, the effect of the deductions available
for interest paid or accrued and for Taxes such as state and local income Taxes.
"Bottling Business" shall mean any business activity associated
with the operation or development of companies manufacturing soft drinks from
concentrate and distributing such soft drinks, as determined by the PepsiCo
Senior Vice President and Treasurer, in accordance with past practice; PROVIDED,
HOWEVER, that "Bottling Business" shall exclude the marketing, manufacture,
distribution and sale of concentrate.
"Consolidated Group" shall have the meaning ascribed to it in
the first "whereas" clause in this Agreement; PROVIDED, HOWEVER, that
"Consolidated Group" shall also include (i) PepsiCo or any Affiliate of PepsiCo
that filed (or will file) any Pre-Offering Period Returns that reflect the
income, assets or operations of a Bottling Business and (ii) any Affiliate of
PBG that filed (or will file) any Pre-Offering Period Returns that reflect the
income, assets or operations of a Non-Bottling Business.
"Federal Tax" shall mean any Tax imposed under Subtitle A of the
Code and any related penalty imposed under Subtitle F of the Code.
"Final Determination" shall mean (i) with respect to Federal
Taxes, (A) a "determination" as defined in Section 1313(a) of the Code, or (B)
the date of acceptance by or on behalf of the IRS of Form 870-AD (or any
successor form thereto), as a final resolution of Tax liability for any Taxable
period, except that a Form 870-AD (or successor form thereto) that reserves the
right of the taxpayer to
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<PAGE>
file a claim for refund or the right of the IRS to assert a further deficiency
shall not constitu a Final Determination with respect to the item or items so
reserved; (ii) with respect to Taxes other than Federal Taxes, any final
determination of liability in respect of a Tax that, under applicable law, is
not subject to further appeal, review or modification through proceedings or
otherwise; (iii) with respect to any Tax, any final disposition by reason of the
expiration of the applicable statute of limitations or applicable foreign
equivalent; or (iv) with respect to any Tax, the payment of Tax by PepsiCo, PBG,
or any member of the PepsiCo Group or the PBG Group, whichever is responsible
for payment of such Tax under applicable law, with respect to any item
disallowed or adjusted by a Taxing Authority, provided that the provisions of
Section 8 hereof have been complied with, or, if such section is inapplicable,
that the party responsible under the terms of this Agreement for such Tax is
notified by the party paying such Tax that it has determined that no action
should be taken to recoup such disallowed item, and the other party agrees with
such determination.
"IRS" shall mean the Internal Revenue Service.
"LIBOR" shall be determined on the basis of the offered rates
for deposits in U.S. Dollars for a period of 30 days which appear on the Reuters
Screen LIBO Page as of 11:00 a.m., London time. If at least two rates appear on
the Reuters Screen LIBO Page, the rate will be the arithmetic mean of such
rates.
"Non-Bottling Business" shall mean any business other than a
Bottling Business.
"Non-Resident Owned Investment Corporation" shall have the
meaning ascribed to it for Canadian tax purposes.
"Offering" shall mean the underwritten initial public offering
of PBG common stock.
"Offering Date" shall mean the date of closing of the Offering.
"PBG Group" shall mean PBG and its Affiliates immediately after
the Offering Date, including any predecessors thereto; PROVIDED, HOWEVER, that
for purposes of determining whether an entity is a member of the PBG Group, a
transfer of beneficial ownership of an entity shall be treated as a transfer of
title, regardless of whether title has actually passed; PROVIDED FURTHER, that
to the extent that PepsiCo or an Affiliate of PepsiCo or an Affiliate of PBG
conducted at least one Bottling Busine and a Non-Bottling Business, each
Bottling Business shall be treated for purposes of this Agreement as a separate
corporation that is a member of the PBG Group, unless such Bottling Business
continues to be conducted by an Affiliate of PepsiCo immediately after the
Offering Date or
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<PAGE>
unless such Bottling Business is transferred to Heartland Territories Holdings,
Inc. pursuant to the Contribution and Merger Agreement dated as of January 25,
1999 among Whitman Corporation, PepsiCo and Heartland Territories Holdings,
Inc., and the Non-Bottling Business shall be treated for purposes of this
Agreement as a separate corporation that is a member of the PepsiCo Group;
PROVIDED FURTHER, that if with respect to any Pre-Offering Period any Affiliate
of PepsiCo was involved solely in the conduct of a Bottling Business, such
member shall be treated as a member of the PBG Group for such Pre-Offering
Period, unless such Bottling Business continues to be conducted by an Affiliate
of PepsiCo immediately after the Offering Date, or unless such Bottling Business
is transferred to Heartland Territories Holdings, Inc. pursuant to the
Contribution and Merger Agreement dated as of January 25, 1999 among Whitman
Corporation, PepsiCo and Heartland Territories Holdings, Inc.; and PROVIDED
FURTHER, that if with respect to any Pre-Offering Period any Affiliate of PBG
was not involved in the conduct of a Bottling Business, such member shall not be
treated as a member of the PBG Group for such Pre-Offering Period.
Notwithstanding anything to the contrary herein, the PBG Group shall include any
entity (and any Affiliate thereof) that is sold by PepsiCo or any member of the
PepsiCo Group to PBG or any member of the PBG Group after the Offering Date in
connection with the Restructuring, including but not limited to Pepsi-Cola
Bottling Global B.V., Pepsi-Cola Bottling Finance B.V., Centro-Mediterranea De
Bebidas Carbonicas PepsiCo, S.A., Dornfell, International Bottlers LLC,
International Bottlers Management Co LLC, International Bottlers Management Co.
LLC, Pepsi International Bottlers (Krasnoyarsk), Pepsi International Bottlers
(Nizhny Novgorod), Pepsi International Bottlers (Novosibirsk), Pepsi
International Bottlers (Samara), Pepsi International Bottlers (Yekaterinburg),
PepsiCo Holdings OOO, Pepsi-Cola Soft Drink Factory of Sochi, OOO, International
Bottlers Employment Co. LLC, Pepsi International Bottlers LLC, PepsiCo IVI S.A.,
and Spirituosen S.A.
"PBG Tax Liability" shall mean, with respect to any Consolidated
Group and any Taxable period, the PBG Group's share of the Tax liability of such
Consolidated Group, computed as if the relevant members of the PBG Group were
not and never were part of such Consolidated Group, but rather were a separate
affiliated group of corporations filing a similar group Return (PROVIDED,
HOWEVER, that transactions with any member of the PepsiCo Group included in such
Consolidated Group shall not be taken into account until the first Taxable
period in which such transaction is required to be taken into account for Tax
purposes under applicable law). Such computation shall be made (A) without
regard to the income, deductions (including net operating loss and capital loss
deductions) and credits in any year of any member of the PepsiCo Group, except
to the extent that a payment was made to any member of the PepsiCo Group with
respect thereto, (B) by taking account of any Tax Asset of the PBG Group,
including net operating loss and capital loss carryforwards and carrybacks and
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<PAGE>
minimum Tax credits from earlier years of the PBG Group, and without reduction
for any such Tax Assets used by any member of the PepsiCo Group, except to the
extent that a payment was made to any member of the PBG Group with respect
thereto, (C) by applying the maximum applicable statutory Tax rate in effect
under applicable law during the relevant year, and (D) reflecting the positions,
elections and accounting methods used by the Consolidated Group in preparing the
relevant Return for the Consolidated Group. Notwithstanding anything in this
agreement to the contrary, any payment by Pepsi-Cola of Canada Ltd. or any of
its Canadian Affiliates to a Non-Resident Owned Investment Corporation which is
attributable to the Canadian Taxable income of a Bottling Business and which is
characterized as a payment of interest for Canadian income Tax purposes shall be
treated as a payment made by the PBG Group.
"PepsiCo Group" shall mean, with respect to any Taxable period,
PepsiCo and its Affiliates (including their predecessors and successors) at any
time prior to the Offering other than those Affiliates comprising the PBG Group.
"PepsiCo Tax Liability" shall mean, with respect to any
Consolidated Group and any Taxable period, the PepsiCo Group's share of the Tax
liability of such Consolidated Group, computed as if the relevant members of the
PepsiCo Group were not and never were part of such Consolidated Group, but
rather were a separate affiliated group of corporations filing a similar group
Return (PROVIDED, HOWEVER, that transactions with any member of the PBG Group
included in such Consolidated Group shall not taken into account until the first
Taxable period in which such transaction is required to be taken into account
for Tax purposes under applicable law). Such computation shall be made (A)
without regard to the income, deductions (including net operating loss and
capital loss deductions) and credits in any year of any member of the PBG Group,
except to the extent that a payment was made to any member of the PBG Group with
respect thereto, (B) by taking account of any Tax Asset of the PepsiCo Group,
including net operating loss and capital loss carryforwards and carrybacks and
minimum Tax credits from earlier years of the PepsiCo Group, and without
reduction for any such Tax Assets used by any member of the PBG Group, except to
the extent that a payment was made to any member of the PepsiCo Group with
respect thereto, (C) by applying the maximum applicable statutory Tax rate in
effect under applicable law during the relevant year, and (D) reflecting the
positions, elections and accounting methods used by the Consolidated Group in
preparing the relevant Return for the Consolidated Group. Notwithstanding
anything in this agreement to the contrary, any payment by Pepsi-Cola of Canada
Ltd. or any of its Canadian Affiliates to a Non-Resident Owned Investment
Corporation which is attributable to the Canadian Taxable income of a
Non-Bottling Business and which is characterized as a payment of interest for
Canadian income Tax purposes shall be treated as a payment made by the PepsiCo
Group.
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<PAGE>
"PepsiCo Senior Vice President and Treasurer" shall include any
successor position or title; PROVIDED, HOWEVER, that if such successor position
or title does not have responsibility for Tax matters, then the most senior
position or title that has responsibility for Tax matters shall be substituted
for the PepsiCo Senior Vice President and Treasurer in this Agreement.
"Person" shall have the meaning ascribed to it in Section
7701(a)(1) of the Code.
"Post-Offering Period" shall mean any taxable period (or portion
thereof) beginning after the close of business on the Offering Date.
"Pre-Offering Period" shall mean any Taxable period ending on or
before the close of business on the Offering Date; PROVIDED that if a Taxable
period ending after the Offering Date contains any days which fall prior to or
on the Offering Date, any portion of such Taxable period up to and including the
Offering Date shall also be included in the Pre-Offering Period.
"Prime" shall mean the rate announced from time to time as
"prime" by Chase Manhattan Bank as its prime rate with respect to the applicable
currency.
"Restructuring" shall have the meaning ascribed to it in the
fourth "whereas" clause in this Agreement; PROVIDED, HOWEVER, that
"Restructuring" shall exclude any transaction effected in the ordinary course of
normal business operations.
"Return" shall mean any Tax return, statement, report, form,
election, claim or surrender (including estimated Tax returns and reports,
extension requests and forms, and information returns and reports) required to
be filed with any Taxing Authority.
"Tax" (and the correlative meaning, "Taxes," "Taxing" and
"Taxable") shall mean (A) any tax imposed under Subtitle A of the Code, or any
net income, gross income, gross receipts, alternative or add-on minimum, sales,
use, business and occupation, value-added, trade, goods and services, ad
valorem, franchise, profits, license, business royalty, withholding, payroll,
employment, capital, excise, transfer, recording, severance, stamp, occupation,
premium, property, asset, real estate acquisiti environmental, custom duty, or
other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and any penalty, addition to tax or
additional amount imposed by a Taxing Authority; (B) any liability of a member
of the PepsiCo Group or the PBG Group, as the case may be, for the payment of
any amounts of
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<PAGE>
the type described in clause (A) for any Taxable period resulting from such
member being a part of a Consolidated Group pursuant to the application of
Treasury Regulation Section 1.1502-6 or any similar provision applicable under
state, local or foreign law; or (C) any liability of a member of the PepsiCo
Group or the PBG Group for the payment of any amounts described in clause (A) as
a result of any express or implied obligation to indemnify any other party.
"Tax Asset" shall mean any net operating loss, net capital loss,
investment Tax credit, foreign Tax credit, target jobs Tax credit, low income
housing credit, research and experimentation credit, charitable deduction, or
any other loss, credit or Tax attribute, including additions to basis of
property and attributes which reduce or offset value-added Tax liability, which
could reduce any Tax (domestic or foreign), including, without limitation,
deductions, credits, or alternative minimum ne operating loss carryforwards
related to alternative minimum Taxes.
"Tax Packages" shall mean one or more packages of information
that are (i) reasonably necessary for the purpose of preparing Returns of any
Consolidated Group with respect to a Pre-Offering Period and (ii) completed in
all material respects in accordance with the standards that PepsiCo has
established for its subsidiaries with respect to the relevant Pre-Offering
Period.
"Tax Proceeding" shall mean any Tax audit, dispute or proceeding
(whether administrative or judicial).
"Taxing Authority" shall mean any governmental authority
(domestic or foreign), including, without limitation, any state, municipality,
political subdivision or governmental agency, responsible for the imposition of
any Tax.
(b) Any term used in this Agreement which is not defined in this
Agreement shall, to the extent the context requires, have the meaning assigned
to it in the Code or the applicable Treasury regulations thereunder (as
interpreted in administrative pronouncements and judicial decisions) or in
comparable provisions of applicable law.
2. ADMINISTRATIVE AND COMPLIANCE MATTERS.
(a) SOLE TAX SHARING AGREEMENT. Any and all existing Tax sharing
agreements or arrangements, written or unwritten, between any member of the
PepsiCo Group and any member of the PBG Group shall be or shall have been
terminated as of the date of this Agreement. As of the date of this Agreement,
neither the members of the PBG Group nor the members of the PepsiCo Group shall
have any further rights or liabilities thereunder, and this
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Agreement shall be the sole Tax sharing agreement between members of the PBG
Group and the members of the PepsiCo Group. Notwithstanding the foregoing, if
any such termination is not binding on any Taxing Authority, the PBG Group shall
hold the affected member of the PepsiCo Group harmless against any adverse
effect which would have been avoided if such termination had been given effect
by such Taxing Authority.
(b) DESIGNATION OF AGENT. PBG and each member of the PBG Group,
and PepsiCo and each member of the PepsiCo Group, as the case may be, in each
case with respect to any Consolidated Group of which such Person is a member,
hereby irrevocably authorize PepsiCo or PBG, as the case may be, and consistent
with past practice and applicable law, to designate a member of the PepsiCo
Group or the PBG Group, as appropriate, or a successor of such member, as its
agent, coordinator, and administrator, the purpose of taking any and all actions
(including the execution of waivers of applicable statutes of limitation)
necessary or incidental to the filing of any Return, any amended Return, or any
claim for refund (even where an item or Tax Asset giving rise to an amended
Return or refund claim arises in a Post-Offering Period), credit or offset of
Tax or any other proceedings, and for the purpose of making payments to, or
collecting refunds from, any Taxing Authority, in each case relating only to any
Pre-Offering Period. Such designated member of the PepsiCo Group or the PBG
Group, as the case may be, as agent, covenants to PBG or PepsiCo, respectively,
that it shall be responsible to see that all such administrative matters
relating thereto shall be handled promptly and appropriately.
(c) PRE-OFFERING PERIOD RETURNS. (i) With respect to a
Consolidated Group, the member of the PepsiCo Group or the PBG Group, as
applicable, that is required by applicable law to file the Returns for all
Pre-Offering Periods will prepare such Returns with the assistance of the PBG
Group or the PepsiCo Group, respectively. With respect to each Consolidated
Group, either a member of the PepsiCo Group or a member of the PBG Group, as
consistent with past practice and applicable law, will file the Pre-Offering
Period Returns for such Consolidated Group. PepsiCo and the members of the
PepsiCo Group shall have the right with respect to any Consolidated Group
Returns to determine (x) the manner in which such returns, documents or
statements shall be prepared and filed, including, without limitation, the
manner in which any item of income, gain, loss, deduction or credit shall be
reported; PROVIDED, HOWEVER, that such returns, documents or statements shall be
prepared in accordance with past practice (unless such past practice is no
longer permissible under the Code or other applicable law), (y) whether any
extensions should be requested, and (z) the elections that will be made by any
member of the PepsiCo Group or the PBG Group. In addition, with respect to all
Pre-Offering Periods, except as provided in Section 8(b), PepsiCo and the
members of the PepsiCo Group shall have the right to (i) contest, compromise or
settle any adjustment or deficiency proposed,
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asserted or assessed as a result of any audit of any consolidated return filed
by the PepsiCo Group or the PBG Group, (ii) file, prosecute, compromise or
settle any claim for refund, (iii) determine whether any refunds to which the
PepsiCo Group may be entitled shall be received by way of refund or credited
against the Tax liability of the PepsiCo Group and (iv) determine whether a
deposit will be made with a Taxing Authority to stop the running of interest.
With respect to the 1998 and 1999 Tax years, PBG and the members of the PBG
Group shall prepare and deliver to PepsiCo all Tax Packages no later than June
1, 1999 and December 1, 1999, respectively.
(ii) To the extent that any Return for a Pre-Offering Period
reflects any transaction effected in connection with the Restructuring, PepsiCo
shall have complete discretion in determining the amount of any Tax liability
resulting from the Restructuring which will be shown on such Return. For the
purpose of exercising such discretion, any such Return that is not a
Consolidated Group Return and that is filed by a member of the PBG Group shall
be submitted by such member of the PBG Group to PepsiCo (together with any
relevant schedules, statements and, to the extent requested by PepsiCo,
supporting documentation) at least 45 days prior to the due date (including
extensions) of such Return. To the extent necessary to determine the amount of
any Tax liability resulting from the Restructuring which will be shown on such
Return, PepsiCo shall have the right to review all work papers and procedures
used to prepare such Return. If, within 10 business days after delivery of any
such Return, PepsiCo objects to the amount of any Tax liability shown on such
Return and resulting from the Restructuring, the Return shall be adjusted in the
manner PepsiCo deems appropriate and as so adjusted shall be binding upon the
parties without further adjustment.
3. TAX SHARING.
(a) GENERAL. For each Taxable period of each Consolidated Group
during which income, profits, gains, net worth, receipts, sales, loss or credit
against Tax of at least one member of each of the PBG Group and the PepsiCo
Group are includible in a Return of such Consolidated Group, the PBG Group or
the PepsiCo Group, as appropriate, shall pay, as provided in this Section 3, to
the PepsiCo Group or the PBG Group, respectively, an amount equal to the PBG Tax
Liability or the PepsiCo Tax Liability, as appropriate, for such Taxable period,
if any. Any Return filed by an entity described in clause (i) of the definition
of Consolidated Group shall be treated as required to be filed by the PepsiCo
Group and any payment made prior to the Offering Date with respect to such
Return shall be treated as having been made by the PepsiCo Group. Any Return
filed by an entity described in clause (ii) of the definition of Consolidated
Group shall be treated as required to be filed by the PBG Group and any payment
made prior to the Offering Date with respect to such Return shall be treated as
having been made by the PBG Group; PROVIDED, HOWEVER, that any Tax liability
attributable to
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any sales and use or property Tax Returns that relate to a Pre-Offering Period,
that are prepared by PBG or an Affiliate of PBG on behalf of a member of the
PepsiCo Group and that relate solely to Taxes of a Non-Bottling Businesses will
be a Tax liability of the PepsiCo Group.
(b) ESTIMATED PAYMENTS. Not later than 3 days after a member
of the PepsiCo Group or a member of the PBG Group, as the case may be, makes
an estimated Tax payment with respect to a Taxable period of a Consolidated
Group, whether or not such payment is made prior to the Offering Date, the
PepsiCo Group shall (i) in good faith determine the amount of the PBG Tax
Liability or the PepsiCo Tax Liability, as appropriate, pursuant to this
Agreement and (ii) deliver a written statement to PBG reflecting the
determination described above. Not later than 5 business days after receipt
of such statement, the PBG Group shall pay to the PepsiCo Group or the
PepsiCo Group shall pay to the PBG Group, as appropriate, the amount so
determined in accordance with Section 9 hereof.
(c) PAYMENT OF TAXES AT YEAR-END.
(i) Not later than 5 business days before a member of the
PepsiCo Group or a member of the PBG Group, as the case may be, is required to
file a Return (after taking extensions into account) with respect to any
Consolidated Group for which payments are to be made under this Agreement,
whether or not such Return is filed prior to the Offering Date, the PepsiCo
Group shall deliver to the PBG Group a written statement setting forth the
difference, calculated in good faith, between (x) the PBG T Liability or the
PepsiCo Tax Liability, as appropriate, for such Return, and (y) the aggregate
amount of payments with respect to the PBG Tax Liability or the PepsiCo Tax
Liability, as appropriate, for such year made pursuant to Section 3(b) or
otherwise, including estimated Tax payments made by way of intercompany account
transfers. Not later than 5 business days after such Return is required to be
filed, the PBG Group shall pay to the PepsiCo Group or the PepsiCo Group shall
pay to the PBG Group, as appropriate, in accordance with Section 9 hereof, an
amount equal to such difference, if any.
(ii) If the determination of the PBG Tax Liability or the
PepsiCo Tax Liability, as the case may be, with respect to any Consolidated
Group reflects a Tax Asset that was not used to reduce the Tax liability of the
PBG Group or the PepsiCo Group, respectively, but may under applicable law be
used to reduce the Tax liability of the PepsiCo Group or the PBG Group, as the
case may be, for any Tax period, PepsiCo shall pay to PBG or PBG shall pay to
PepsiCo, as appropriate, the actual Tax saving produced by such Tax Asset within
30 days after such Tax saving is claimed on a Return, and the future Returns of
the PBG Group or the PepsiCo Group, respectively, shall be adjusted to reflect
such use. The amount of any such Tax saving for any Tax period shall be the
amount of the
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reduction in Taxes payable to a Taxing Authority (or the increase in any Tax
refund) with respect to such period as compared to the Taxes that would have
been payable to a Taxing Authority (or the Tax refund that would have been
received) by the Consolidated Group with respect to such period in the absence
of such Tax Asset.
(iii) With respect to each Return described in Section 3(a)
above and previously filed by a Consolidated Group, and for which the PBG Tax
Liability or the PepsiCo Tax Liability, as the case may be, has not been
satisfied in full, or for which the PBG Group has not paid the PepsiCo Group in
full for a Tax saving produced by the use of a Tax Asset of the PepsiCo Group,
or for which the PepsiCo Group has not paid the PBG Group in full for a Tax
saving produced by the use of a Tax Asset of the PBG Group, the PBG Group shall
pay to the PepsiCo Group or the PepsiCo Group shall pay to the PBG Group, as
appropriate, within 30 days of demand therefor, the amount in respect of such
Return as determined in good faith by the PepsiCo Senior Vice President and
Treasurer.
(d) CARRYBACKS AND CERTAIN OTHER MATTERS.
(i) With respect to each Consolidated Group, PepsiCo shall pay
to PBG or PBG shall pay to PepsiCo, as appropriate, the actual benefit received
by such Consolidated Group from the use in any Pre-Offering Period of any Tax
Asset of the PBG Group or the PepsiCo Group, respectively, arising in a
Post-Offering Period. Such benefit shall be considered equal to the excess of
the amount of Tax that would have been payable (or of the Tax refund that would
have been receivable) by such Consolidated Group in the absence of such
carryback over the amount of Tax actually payable (or of the Tax refund actually
receivable) by such Consolidated Group. Payment of the amount of such benefit
shall be made within 30 days of the receipt by any member of the PepsiCo Group
or the PBG Group, as the case may be, of any refund, credit or other offset
attributable thereto from the relevant Taxing Authority, and the future Returns
of the PBG Group or the PepsiCo Group, respectively, shall be adjusted to
reflect such use.
(ii) Notwithstanding the definitions of PBG Tax Liability or
PepsiCo Tax Liability or any other provision in this Agreement, any loss
recognized upon any sale to PBG or any member of the PBG Group of any Bottling
Business (including but not limited to Pepsi-Cola Bottling Global B.V. and
PepsiCo IVI S.A.), or any assets used in a Bottling Business, shall be treated
as a Tax Asset of the PepsiCo Group.
(iii) Reference is made to a certain Agreement (the "Spanish
Agreement") entered into on December 22, 1998, by and between PepsiCo on
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behalf of itself and its affiliates and General Mills, Inc. on behalf of itself
and its affiliates. In accordance with the Spanish Agreement, PepsiCo will
assign all of its rights and obligations under the Spanish Agreement to PBG.
Notwithstanding anything to the contrary in this Agreement, Snack Ventures
Inversiones, S.L. ("Inversiones") shall pay to Centro-Levantina De Bebidas
Carbonicas PepsiCo, S.L. ("Centro") one-half of the actual tax savings, if any,
Inversiones, together with Snack Ventures, S.A. ("SVSA"), are able to achieve
solely as a result of offsetting losses of Centro against profits of Inversiones
and/or SVSA (after using all other available losses) through the tax
consolidation achieved by the SVE Spanish '98 Restructuring (as defined in the
Spanish Agreement), only as those tax savings are realized by Inversiones,
together with SVSA, and then on the last day of the statutory term for the
period for which payment of the taxes is due.
If any tax savings initially obtained from the SVE Spanish '98
Restructuring are subsequently reduced or any assessments, fines, penalties,
interest charges, liabilities, loss of tax benefits or credits are paid or
incurred as a result of, or any other form of loss or liability arise from or
are associated with the SVE Spanish '98 Restructuring (all together referred to
as "Adjustment Losses"), PBG shall pay or cause Centro to reimburse Inversiones
for one-half of all Adjustment Losses, not exceed the total paid to Centro
pursuant to the preceding paragraph, plus interest at SVE's cost of funds,
computed from the date of each payment made to Centro under the preceding
paragraph.
(iv) Notwithstanding the definitions of PBG Tax Liability or
PepsiCo Tax Liability or any other provision in this Agreement, any Tax
liability, Tax Asset or refund of Tax resulting from the matters relating to the
Section 936 Tax case shall be treated as a Tax liability or Tax Asset of, or a
refund of Tax attributable to, the PepsiCo Group, respectively.
(v) Notwithstanding the definitions of PBG Tax Liability or
PepsiCo Tax Liability or any other provision in this Agreement, any Tax
liability, Tax Asset or refund of Tax resulting from the sale of Redux Realty,
Inc. shall be treated as a Tax liability or Tax Asset of, or a refund of Tax
attributable to, the PepsiCo Group, respectively.
(e) TREATMENT OF ADJUSTMENTS.
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(i) Except as provided in clause (iii) below, if any adjustment
is made in, or if a Taxing Authority assesses any deficiency with respect to, a
Return of a Consolidated Group filed by a member of the PBG Group which would
have increased the PepsiCo Tax Liability under Section 3(c)(i), then within 30
days after a Final Determination of the adjustment, the PepsiCo Group shall pay
to the PBG Group the difference between all payments actually made under Section
3(c)(i) and all payments that wou have been made under Section 3(c)(i) taking
such adjustment into account.
(ii) If any adjustment is made in, or if a Taxing Authority
assesses any deficiency with respect to, a Return of a Consolidated Group filed
by a member of the PepsiCo Group which would have increased the PBG Tax
Liability under Section 3(c)(i), then within 30 days after any member of the
PepsiCo Group makes a payment to a Taxing Authority or makes a deposit with a
Taxing Authority to stop the running of interest with respect to such
adjustment, the PBG Group shall pay to the PepsiCo Group t difference between
all payments actually made under Section 3(c)(i) and all payments that would
have been made under Section 3(c)(i) taking such adjustment into account.
(iii) If, subsequent to the payment by the PepsiCo Group or the
PBG Group, as the case may be (the "Payor Group"), to the PBG Group or the
PepsiCo Group, respectively (the "Payee Group"), of any amount referred to in
Section 3(c)(ii), 3(c)(iii) or 3(d)(i) above, there shall be (A) a Final
Determination which results in a disallowance or a reduction of the relevant Tax
Asset or (B) a reduction in the amount of the benefit realized by the Payor
Group from such Tax Asset as the result of a Fin Determination or the use by the
Payor Group of a Tax Asset of a member of the Payor Group, the Payee Group shall
repay to the Payor Group the amount which would not have been payable to the
Payee Group pursuant to Section 3(c)(ii), 3(c)(iii) or 3(d)(i) had the amount of
the benefit been determined in light of such event. In addition, the Payee Group
shall hold each member of the Payor Group harmless for any penalty or interest
payable by any member of the Payor Group as a result of any such event referred
to in the preceding sentence. Any amounts payable under this Section 3(e)(iii)
shall be paid by the Payee Group within 30 days of demand therefor. To the
extent the Payee Group's repayment obligation arises due to the use by the Payor
Group of a Tax Asset of a member of the Payor Group, the Payee Group shall pay
to the Payor Group interest on the amount repaid to the Payor Group from the
date such amount was paid by the Payor Group until such repayment at Prime.
(iv) Any refunds or credits of Tax (including a return of a
deposit described in Section 3(e)(ii)) received by a member of the PepsiCo Group
or the PBG Group, as the case may be, relating to a Pre-Offering Period, to the
extent attributable to any item of income, loss, credit, deduction or other Tax
attribute of any member of the PBG Group or the PepsiCo Group, respectively,
shall be paid
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by the PepsiCo Group or the PBG Group, respectively, to the PBG Group or the
PepsiCo Group, respectivel within 30 days of receipt; provided that no such
payment shall be required to the extent such refund or credit is attributable to
(x) a Tax Asset of the PBG Group or PepsiCo Group, respectively, for which
payment has previously been made by the PepsiCo Group or the PBG Group,
respectively, pursuant to Section 3(c) or 3(d)(i), or (y) an adjustment for
which payment in respect thereof has previously been made pursuant to Section
3(e)(i), 3(e)(ii) or 3(e)(iii); and PROVIDED FURTHER that, in determining the
extent to which a refund is attributable to any item of income, loss, credit, or
other Tax attribute of a member of the PepsiCo Group or the PBG Group, if the
portion of any such refund represents interest with respect to Taxes and the
items or Tax attributes to which such interest relates are not readily
identifiable, then the PepsiCo Senior Vice President and Treasurer shall in good
faith determine the allocation such interest among the items and Tax attributes
of the members of the PepsiCo Group and the PBG Group.
4. CERTAIN REPRESENTATIONS AND COVENANTS.
(a) PBG REPRESENTATIONS. PBG and each member of the PBG Group
represent that as of the date hereof, and covenants that on the Offering Date,
there is no plan or intention (i) to liquidate, merge or consolidate PBG NRO or
PBG Amalco with any other person subsequent to the Offering Date, (ii) to sell
or otherwise dispose of any asset, or cease business operations in any bottling
territory of PBG NRO or PBG Amalco subsequent to the Offering Date, in a manner
that would result in any increased Tax liability or reduction of any Tax Asset
of the PepsiCo Group or any member thereof, (iii) to take any action
inconsistent with the information and representations furnished to any Taxing
Authority, legal counsel or accounting firm in connection with the request for a
ruling or comparable pronouncement by a Taxing Authority, or with the delivery
of an opinion by such counsel or accounting firm, with respect to the
Restructuring, regardless of whether such information or representations were
included in the ruling or pronouncement issued by the Taxing Authority or the
opinion delivered by such counsel or accounting firm, (iv) to take any action
that contravenes any existing gain recognition agreement or other agreement with
a Taxing Authority to which any member of the PBG Group or the PepsiCo Group is
a party, (v) to liquidate, merge or consolidate White Co., Inc. or any direct or
indirect subsidiary of White Co., Inc., (vi) to liquidate, merge or consolidate
Pepsi-Cola de Espana, S.L. with any other Person, or (vi) to file an entity
classification election under Treasury Regulations Section 301.7701-3 to treat
Pepsi-Cola de Espana, S.L. as a corporation.
(b) PBG COVENANTS. PBG covenants to PepsiCo that, without the
prior written consent of the PepsiCo Senior Vice President and Treasurer, (i)
during the two-year period following the Offering Date, neither PBG NRO nor
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PBG Amalco will liquidate, merge or consolidate with any other person, (ii)
during the two-year period following the Offering Date neither PBG NRO nor PBG
Amalco will sell, exchange, distribute or otherwise dispose of its assets or
cease business operations in any bottling territory, in a manner that would
result in any increased Tax liability or reduction of any Tax Asset of the
PepsiCo Group or any member thereof, (iii) PBG will not take any action that
contravenes any existing gain recognition agreement or other agreement with a
Taxing Authority to which any member of the PBG Group or the PepsiCo Group is a
party, (iv) on or after the Offering Date, PBG will not, nor will it permit any
member of the PBG Group to, make or change any accounting method, amend any
Return or take any Tax position on any Return, take any other action, omit to
take any action or enter into any transaction that results in any increased Tax
liability or reduction of any Tax Asset of the PepsiCo Group or any member
thereof in respect of any Pre-Offering Period, (v) PBG will not, nor will it
permit any member of the PBG Group to, take any action inconsistent with the
information and representations furnished to any Taxing Authority, legal counsel
or accounting firm in connection with a request for a ruling or comparable
pronouncement by a Taxing Authority or with the delivery of an opinion by such
counsel or accounting firm, with respect to the Restructuring, regardless of
whether such information or representations were included in the ruling or
pronouncement issued by such Taxing Authority or the opinion delivered by such
counsel or accounting firm, (vi) PBG NRO and PBG Amalco will each, for a minimum
of two years following the date of such distribution, continue the active
conduct of the historic business relied upon to satisfy the requirements of
Section 355(b) of the Code, (vii) no member of the PBG Group will take any
action that would result in PBG Amalco ceasing to be treated as a branch of PBG
NRO for United States tax purposes, (viii) during the two-year period following
the Offering Date, neither White Co., Inc. nor any direct or indirect subsidiary
of White Co., Inc. will liquidate, merge or consolidate with any other person,
and (ix) during the two-year period following the Offering Date, Pepsi-Cola de
Espana, S.L. will not liquidate, merge or consolidate with any other Person, and
(x) during the two-year period following the Offering Date, neither PBG nor any
member of the PBG Group will file an entity classification election under
Treasury Regulations Section 301.7701-3 to treat Pepsi-Cola de Espana, S.L. as a
corporation.
(c) DEDUCTIONS AND CERTAIN TAXES RELATED TO OPTIONS. The PepsiCo
Group shall file Returns claiming (x) the Tax deductions attributable to the
exercise of options to purchase stock of PepsiCo which are held by employees or
former employees of the PBG Group and (y) any other similar compensation related
Tax deductions. Accordingly, (i) the PepsiCo Group shall be entitled to any such
Tax deductions, (ii) the Returns of the PepsiCo Group and the PBG Group shall
reflect the entitlement of the PepsiCo Group to such deductions, (iii) to the
extent any such deductions are disallowed, the PBG Group shall file amended
Returns claiming such deductions and shall pay to the PepsiCo Group an
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amount equal to the actual benefit received by the PBG Group in respect of such
deductions, and (iv) to the extent a Taxing Authority determines that the
PepsiCo Group is liable for Taxes under the Federal Insurance Contributions Act,
the Federal Unemployment Tax Act or any state employment Tax law in connection
with the exercise of such an option, the PBG Group shall pay to the PepsiCo
Group an amount equal to the Tax paid by the PepsiCo Group as a result of such
Tax liability within 30 days of demand therefor. If, at any time subsequent to a
disallowance described in the immediately preceding clause (iii), the PepsiCo
Senior Vice President and Treasurer determines that the PBG Group shall claim
all subsequent Tax deductions attributable to the exercise of options to
purchase PepsiCo stock which are held by employees or former employees of the
PBG Group, (i) the Returns of the PepsiCo Group and the PBG Group filed after
such determination shall reflect such determination, (ii) not later than 3 days
prior to the due date of any such Return, PBG shall notify the PepsiCo Senior
Vice President and Treasurer of the amount of Tax deductions it intends to claim
on such Return with respect to such options or other compensation related Tax
deductions, and (iii) the PBG Group shall pay to the PepsiCo Group an amount
equal to the actual benefit received by the PBG Group in respect of such
deductions. For purposes of the immediately preceding clause (i), the PepsiCo
Senior Vice President and Treasurer will have the right to determine the amount
of such Tax deductions that will be claimed by the PBG Group on any such Return.
For purposes of each of the two immediately preceding clauses (iii), the actual
benefit shall be considered equal to the excess of the amount of Tax that would
have been payable to a Taxing Authority (or of the Tax refund that would have
been receivable) by the PBG Group in the absence of such deduction over the
amount of Tax actually payable to a Taxing Authority (or of the Tax refund
actually receivable ) by the PBG Group. Payment of the amount referred to in the
first clause (iii) of this Section 4(c) shall be made within 30 days of the
receipt by any member of the PBG Group of any refund, credit or other offset
attributable thereto from the relevant Taxing Authority. Payment of the amount
referred to in the second clause (iii) of this Section 4(c) shall be made not
later than 3 days after the due date of the estimated Tax payment immediately
following when any member of the PBG Group becomes entitled to any refund,
credit or other offset attributable to such deduction. PBG agrees to act as
PepsiCo's pay agent for purposes of administering and accounting for PepsiCo
stock options held by employees or former employees of the PBG Group.
5. INDEMNITIES.
(a) PBG INDEMNITY. PBG and each member of the PBG Group will
jointly and severally indemnify PepsiCo and the members of the PepsiCo Group
that were members of a Consolidated Group that included such PBG Affiliate
against and hold them harmless from:
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(i) any Tax liability of the PBG Group;
(ii) any liability or damage resulting from a breach by PBG or
any member of the PBG Group of any representation or covenant made by PBG
herein;
(iii) any Tax liability attributable to the Restructuring that
is attributable to any action of PBG or any member of the PBG Group, without
regard to whether the PepsiCo Senior Vice President and Treasurer has consented
to such action;
(iv) any Tax liability resulting from the recapture, pursuant to
Section 904(f) of the Code, of an overall foreign loss for a Pre-Offering Period
to the extent that the PepsiCo Senior Vice President and Treasurer determines
that such loss is attributable to operations of the Bottling Business in a
Pre-Offering Period;
(v) any increase in any Tax liability, or any reduction of any
Tax Asset, of any member of the PepsiCo Group resulting from a Final
Determination of a Taxing Authority relating to the pricing of goods or services
provided by a member of the PepsiCo Group to a member of the PBG Group;
(vi) any Canadian withholding Tax imposed on a distribution by a
Non-Resident Owned Investment Corporation to a member of the PepsiCo Group if
(x) such distribution was made to secure a refund of Canadian income Tax
attributable to an adjustment made in, or a deficiency assessed with respect to,
the Canadian Taxable income of a Bottling Business for a Pre-Offering Period or
(y) such distribution was made in connection with a payment by Pepsi-Cola of
Canada Ltd. or any of its Canadian Affiliates to a Non-Resident Owned Investment
Corporation and such payment was attributable to the Canadian Taxable income of
a Bottling Business and the Canadian income Tax deduction for such payment is
disallowed; and
(vii) all liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and attorneys' fees and
expenses), losses, damages, assessments, settlements or judgments arising out of
or incident to the imposition, assessment or assertion of any Tax liability or
damage described in (i), (ii), (iii), (iv) or (v) including those incurred in
the contest in good faith in appropriate proceedings relating to the imposition,
assessment or assertion of any such Tax, liability or damage.
(b) PEPSICO INDEMNITY. PepsiCo and each member of the PepsiCo
Group will jointly and severally indemnify PBG and the members of the PBG Group
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that were members of a Consolidated Group that included such PepsiCo Affiliate
against and hold them harmless from:
(i) any Tax liability of the PepsiCo Group;
(ii) any Tax liability relating to a Pre-Offering Tax Period and
resulting from the ownership by a member of the PepsiCo Group of a 50 percent or
less interest in a joint venture conducting a Bottling Business;
(iii) any Tax liability resulting from the Restructuring, other
than any such liabilities described in Section 5(a);
(iv) any liability or damage resulting from a breach by PepsiCo
or any member of the PepsiCo Group of any representation or covenant made by
PepsiCo herein;
(v) any increase in any Tax liability, or any reduction of any
Tax Asset, of any member of the PBG Group resulting from a Final Determination
of a Taxing Authority relating to the pricing of goods or services provided by a
member of the PBG Group to a member of the PepsiCo Group; and
(vi) all liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and attorneys' fees and
expenses), losses, damages, assessments, settlements or judgments arising out of
or incident to the imposition, assessment or assertion of any Tax liability or
damage described in (i), (ii), (iii), (iv) or (v) including those incurred in
the contest in good faith in appropriate proceedings relating to the imposition,
assessment or assertion of any such Tax, liability or damage.
If a member of the PepsiCo Group ceases to be an Affiliate of PepsiCo as a
result of a sale of its stock to a third party (whether or not treated as a sale
or exchange of stock for Tax purposes), such member of the PepsiCo Group shall
be released from its obligations under this Agreement upon such sale and neither
PepsiCo nor any member of the PepsiCo Group shall have any obligation to
indemnify PBG or any member of the PBG Group under Section 5(b)(iii) for any
liability or damage attributable to actions taken by such Affiliate after such
sale.
(c) DISCHARGE OF INDEMNITY. PBG, PepsiCo and the members of the
PBG Group and PepsiCo Group, respectively, shall discharge their obligations
under Sections 5(a) and 5(b) hereof, respectively, by paying the relevant amount
within 30 days of demand therefor. The PepsiCo Group shall be entitled to make
such a demand at any time after a member of the PepsiCo Group makes a payment or
deposit in respect of a Tax for which any member of the PBG Group has an
obligation under Section 5(a). The PB Group shall be entitled to make
18
<PAGE>
such a demand at any time after a Final Determination of an obligation of any
member of the PepsiCo Group under Section 5(b). Any such demand shall include a
statement showing the amount due under Section 5(a) or 5(b), as the case may be.
Calculation mechanics relating to items described in Section 5(a)(i) and 5(b)(i)
are set forth in Section 3(c). Notwithstanding the foregoing, if either PBG,
PepsiCo or any member of the PBG Group or PepsiCo Group disputes in good faith
the fact or the amount of its obligation under Section 5(a) or Section 5(b),
then no payment of the amount in dispute shall be required until any such good
faith dispute is resolved in accordance with Section 16 hereof; PROVIDED,
HOWEVER, that any amount not paid within 30 days of demand therefor shall bear
interest as provided in Section 9.
(d) TAX BENEFITS. (i) If an indemnification obligation of any
member of the PepsiCo Group or any member of the PBG Group, as the case may be,
under this Section 5 arises in respect of an adjustment, or in respect of a
Canadian withholding Tax described in section 5(a)(vi), that makes allowable to
a member of the PBG Group or a member of the PepsiCo Group, respectively, any
deduction, amortization, exclusion from income or other allowance (a "Tax
Benefit") which would not, but for such adjustment or withholding tax, be
allowable, or if any transaction effected as part of the Restructuring results
in an indemnification obligation of any member of the PepsiCo Group under
Section 5(b)(iii) and makes allowable to a member of the PBG Group a Tax Benefit
which would not, but for such transaction, be allowable, then any payment by any
member of the PepsiCo Group or any member of the PBG Group, respectively,
pursuant to this Section 5 shall be an amount equal to (x) the amount otherwise
due but for this subsection (d), minus (y) the present value of the product of
the Tax Benefit multiplied (i) by the maximum applicable federal, foreign or
state, as the case may be, corporate tax rate in effect at the time such Tax
Benefit becomes allowable to a member of the PBG Group or a member of the
PepsiCo Group (as the case may be) or (ii) in the case of a credit, by 100
percent. The present value of such product shall be determined by discounting
such product from the time the Tax Benefit becomes allowable at a rate equal to
Prime.
(ii) If as a result of any adjustment any member of the PepsiCo
Group makes a payment to any Taxing Authority in respect of a Tax resulting from
the Restructuring and such adjustment makes allowable to a member of the PBG
Group any Tax Benefit which would not, but for such adjustment, be allowable,
then the PBG Group shall pay to the PepsiCo Group the amount described in clause
(y) of Section 5(d)(i). The present value of the product referred to in such
clause (y) shall be determined by discounting such product from the time the Tax
Benefit becomes allowable at a rate equal to Prime.
(e) For purposes of this Section 5, in the case of Taxes that
are imposed on a periodic basis and are payable for a Tax period that includes
(but
19
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does not end on) the Offering Date, the portion of such Tax related to the
portion of such Tax period ending on the Offering Date shall (x) in the case of
any Taxes other than Taxes based upon or related to income, sales, gross
receipts, or wages, be deemed to be the amount of such Tax for the entire Tax
period multiplied by a fraction the numerator of which is the number of days in
the Tax period ending on the Offering Date and the denominator of which is the
number of days in the entire Tax period, and (y) in the case of any Tax based
upon or related to income, sales, gross receipts, or wages, be deemed equal to
the amount which would be payable if the relevant Tax period ended on the
Offering Date.
6. GUARANTEES. PepsiCo or PBG, as the case may be, shall guarantee the
obligations of each member of the PepsiCo Group or the PBG Group, respectively,
under this Agreement.
7. COMMUNICATION AND COOPERATION.
(a) CONSULT AND COOPERATE. PBG and PepsiCo shall consult and
cooperate (and shall cause each member of the PBG Group or the PepsiCo Group,
respectively, to cooperate) fully at such time and to the extent reasonably
requested by the other party in connection with all matters subject to this
Agreement. Such cooperation shall include, without limitation,
(i) the retention and provision on reasonable request of any and
all information including all books, records, documentation or other
information pertaining to Tax matters relating to the PepsiCo Group and the
PBG Group, any necessary explanations of information, and access to
personnel, until one year after the expiration of the applicable statute of
limitation (giving effect to any extension, waiver, or mitigation thereof);
(ii) the execution of any document that may be necessary or
helpful in connection with any required Return or in connection with any
audit, proceeding, suit or action; and
(iii) the use of the parties' best efforts to obtain any
documentation from a governmental authority or a third party that may be
necessary or helpful in connection with the foregoing.
(b) PROVIDE INFORMATION. PepsiCo and PBG shall keep each other
fully informed with respect to any material development relating to the matters
subject to this Agreement.
(c) TAX ATTRIBUTE MATTERS. PepsiCo and PBG shall promptly advise
each other with respect to any proposed Tax adjustments relating to a
Consolidated Group, which are the subject of an audit or investigation, or are
the
20
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subject of any proceeding or litigation, and which may affect any Tax
liability or any Tax attribute of PepsiCo, PBG, the PepsiCo Group, the PBG
Group or any member of the PBG Group or the PepsiCo Group (including, but
not limited to, basis in an asset or the amount of earni and profits).
8. AUDITS AND CONTEST.
(a) Notwithstanding anything in this Agreement to the contrary,
PepsiCo shall have full control over all matters relating to any Return or any
Tax Proceeding relating to any Tax matters of at least one member of the PepsiCo
Group or any Tax liability resulting from the Restructuring. PBG may, at its own
expense, participate in any such Tax Proceeding. Except as provided in Section
8(b), PepsiCo shall have absolute discretion with respect to any decisions to be
made, or the nature of any action to be taken, with respect to any matter
described in the preceding sentence. PepsiCo shall act in good faith with
respect to the matters described in this Section 8(a).
(b) (i) No settlement of any Tax Proceeding relating to any
matter which would cause a payment obligation under Sections 5(a) or 5(b) shall
be accepted or entered into by or on behalf of the party entitled to receive a
payment under either Section 5(a) or 5(b), whichever is applicable, unless the
party ultimately responsible for such payment under either Section 5(a) or 5(b),
whichever is applicable (the "Indemnitor"), consents thereto in writing (which
consent shall not be unreasonably withheld or delayed); PROVIDED, HOWEVER, that,
notwithstanding anything to the contrary in this Agreement, PepsiCo may settle
any Tax Proceeding if it determines, in its sole reasonable judgment, that PBG
is not cooperating in such Tax Proceeding. If the Indemnitor does not respond to
the indemnified party's request for consent within 30 days, the Indemnitor will
be deemed to have consented to the settlement.
(ii) Notwithstanding anything to the contrary in this Agreement,
in the event a Tax Proceeding involves an issue that is common to both the
PepsiCo Group and the PBG Group, PepsiCo shall use its best efforts to settle
such issues on behalf of the PepsiCo Group and the PBG Group on a consistent
basis.
(iii) With respect to any Tax Proceeding that relates to a PBG
Tax liability, PepsiCo agrees to act in good faith on behalf of PBG and the
members of the PBG Group in settling such Tax Proceeding.
(c) The indemnified party agrees to give notice to the
Indemnitor of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought hereunder
within 30 days of such assertion or commencement, or such earlier time that
would allow the Indemnitor to timely respond to such claim, suit action or
proceeding.
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(d) With respect to Returns relating to Taxes solely
attributable to the PBG Group, PBG and the members of the PBG Group shall have
full control over all matters relating to any Tax Proceeding in connection
therewith. PBG and the members of the PBG Group shall have absolute discretion
with respect to any decisions to be made, or the nature of any action to be
taken, with respect to any matter described in the preceding sentence.
9. PAYMENTS. All payments to be made hereunder shall be made in immediately
available funds. Except as otherwise provided, all payments required to be made
pursuant to this Agreement will be due 30 days after the receipt of notice of
such payment or, where no notice is required, 30 days after the fixing of
liability or the resolution of a dispute. Payments shall be deemed made when
received. Any payment that is not made by the PepsiCo Group when due shall bear
interest at LIBOR minus 10 basis points as quoted from time to time, for each
day until paid. Any payment that is not made by the PBG Group when due shall
bear interest at LIBOR plus 40 basis points, as quoted from time to time, for
each day until paid. If, pursuant to a Final Determination, any amount paid by
PepsiCo or the members of the PepsiCo Group or PBG or the members of the PBG
Group, as the case may be, pursuant to this Agreement results in any increased
Tax liability or reduction of any Tax Asset of PBG or any member of the PBG
Group or PepsiCo or any member of the PepsiCo Group, respectively, then PepsiCo
or PBG, as appropriate, shall indemnify the other party and hold it harmless
from any interest or penalty attributable to such increased Tax liability or the
reduction of such Tax Asset and shall pay to the other party, in addition to
amounts otherwise owed, the After-Tax Amount. With respect to any payment
required to be made under this Agreement, the PepsiCo Senior Vice President and
Treasurer has the right to designate, by written notice to PBG, which member of
the PBG Group or the PepsiCo Group, as the case may be, will make or receive
such payment and in which currency such payment will be made.
10. NOTICES. Any notice, demand, claim, or other communication under this
Agreement shall be in writing and shall be deemed to have been given upon the
delivery or mailing thereof, as the case may be, if delivered personally or sent
by certified mail, return receipt requested, postage prepaid, to the parties at
the following addresses (or at such other address as a party may specify by
notice to the other):
22
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If to PepsiCo or the PepsiCo Group, to:
Matthew M. McKenna
Senior Vice President and Treasurer
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, New York 10577-1444
If to PBG or the PBG Group, to:
Peter Bridgman
Senior Vice President and Controller
The Pepsi Bottling Group, Inc.
One Pepsi Way
Somers, New York 10589-2201
At such time that PBG hires a Vice President of Taxes, notices to PBG or the PBG
Group shall be given to the Vice President of Taxes, or such successor position
or title.
11. COSTS AND EXPENSES.
(i) Except as expressly set forth in this Agreement, each party
shall bear its own costs and expenses incurred pursuant to this Agreement. For
purposes of this Agreement, costs and expenses shall include, but not be limited
to, reasonable attorney fees, accountant fees and other related professional
fees and disbursements. Notwithstanding anything to the contrary in this
Agreement, the PBG Group will be responsible for its allocable portion, as
determined by the PepsiCo Senior Vice Preside and Treasurer, of (i) all costs
and expenses attributable to filing any Return that reflects the income, assets
or operations of the PBG Group and (ii) all costs and expenses incurred by
PepsiCo in complying with the provisions of Section 7 of this Agreement.
(ii) With respect to all Tax Proceedings, costs shall be
allocated in good faith by the PepsiCo Senior Vice President and Treasurer. Each
party hereto shall be liable for its allocable portion of such costs as provided
in Section 5.
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12. EFFECTIVENESS; TERMINATION AND SURVIVAL. This Agreement shall become
effective upon the closing of the Offering. All rights and obligations arising
hereunder with respect to a Pre-Offering Tax Period shall survive until they are
fully effectuated or performed and, provided, further, that notwithstanding
anything in this Agreement to the contrary, this Agreement shall remain in
effect and its provisions shall survive for one year after the full period of
all applicable statutes of limitation or applicable foreign equivalent (giving
effect to any extension, waiver or mitigation thereof) and, with respect to any
claim hereunder initiated prior to the end of such period, until such claim has
been satisfied or otherwise resolved.
13. SECTION HEADINGS. The headings contained in this Agreement are inserted
for convenience only and shall not constitute a part hereof or in any way affect
the meaning or interpretation of this Agreement.
14. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS.
(a) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein. No alteration, amendment, modification, or waiver of any of the terms of
this Agreement shall be valid unless made by an instrument signed by an
authorized officer of each of PepsiCo and PBG, or in the case of a waiver, by
the party against whom the waiver is to be effective.
(b) AMENDMENTS AND WAIVERS. No failure or delay by any party in
exercising any right, power or privilege hereunder shall operate as a waiver
hereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any right, power or privilege. This
Agreement shall not be waived, amended or otherwise modified except in writing,
duly executed by all of the parties hereto.
15. GOVERNING LAW AND INTERPRETATION. This Agreement shall be construed and
enforced in accordance with the laws of the State of North Carolina without
giving effect to laws and principles relating to conflicts of law.
16. DISPUTE RESOLUTION. If the parties hereto are unable to resolve any
disagreement or dispute relating to this Agreement, including but not limited to
whether a transaction is part of the Restructuring and whether a Tax liability
is a PepsiCo Tax Liability or a PBG Tax Liability, such dispute shall be
resolved in good faith by the PepsiCo Senior Vice President and Treasurer.
24
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17. COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same Agreement.
18. ASSIGNMENTS; THIRD PARTY BENEFICIARIES. Except as provided below, this
Agreement shall be binding upon and shall inure only to the benefit of the
parties hereto and their respective successors and assigns, by merger,
acquisition of assets or otherwise (including but not limited to any successor
of a party hereto succeeding to the Tax attributes of such party under
applicable law). This Agreement is not intended to benefit any person other than
the parties hereto and such successors and assigns, and no such other person
shall be a third party beneficiary hereof. If, during the period beginning on
the Offering Date and ending upon the expiration of the survival period set
forth in Section 12, any corporation becomes an Affiliate of PBG, such Affiliate
shall be bound by the terms of this Agreement and PBG shall provide evidence to
PepsiCo of such Affiliate's agreement to be bound by the terms of this
Agreement.
19. AUTHORIZATION, ETC. Each of the parties hereto hereby represents and
warrants that it has the power and authority to execute, deliver and perform
this Agreement, that this Agreement has been duly authorized by all necessary
corporate action on the part of such party, that this Agreement constitutes a
legal, valid and binding obligation of each such party, and that the execution,
delivery and performance of this Agreement by such party does not contravene or
conflict with any provision or law or of its charter or bylaws or any agreement,
instrument or order binding on such party.
25
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first written above.
PepsiCo on its own behalf and
on behalf of the members of
the PepsiCo Group.
By:
--------------------------
PBG on its own behalf and
on behalf of the members of
the PBG Group.
By:
--------------------------
<PAGE>
Exhibit 10.7
EMPLOYEE PROGRAMS AGREEMENT
BETWEEN
PEPSICO, INC.
AND
THE PEPSI BOTTLING GROUP, INC.
Dated as of ___________, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1 DEFINITIONS AND REFERENCES......................................................................................2
1.01 DEFINITIONS.............................................................................................2
(a) Action..........................................................................................2
(b) Agreement.......................................................................................2
(c) ASO Contract....................................................................................2
(d) Award...........................................................................................2
(e) Benefit Liability...............................................................................2
(f) Bottling Businesses.............................................................................2
(g) Bulk Asset Transfer.............................................................................3
(h) Close of the Offering Date......................................................................3
(i) Code............................................................................................3
(j) Deferral Programs...............................................................................3
(k) DRIP3
(l) ERISA...........................................................................................3
(m) Executive Programs..............................................................................3
(n) Foreign Plan....................................................................................4
(o) Governmental Authority..........................................................................4
(p) Group Insurance Policy..........................................................................4
(q) Health and Welfare Plans........................................................................4
(r) Hiring Company..................................................................................4
(s) HMO 4
(t) HMO Agreements..................................................................................5
(u) Immediately after the Offering Date.............................................................5
(v) Individual Agreement............................................................................5
(w) Indemnitee......................................................................................5
(x) Indemnitor......................................................................................5
(y) Initial Asset Transfer..........................................................................5
(z) Liabilities.....................................................................................5
(aa) Long-Term Incentive Plan.......................................................................5
(bb) LTD VEBA.......................................................................................6
(cc) Master Trust...................................................................................6
(dd) Material Feature...............................................................................6
(ee) Offering.......................................................................................6
(ff) Offering Date..................................................................................6
(gg) Participating Company..........................................................................6
(hh) PBG Common Stock...............................................................................6
(ii) PBG Group......................................................................................7
(jj) PBG Hourly Pension Plan........................................................................7
(kk) Pension Equalization Plan......................................................................7
(ll) Pension Plan...................................................................................7
(mm) PepsiCo Executive..............................................................................7
(nn) PepsiCo Group..................................................................................7
(oo) PepsiCo Leave of Absence Programs..............................................................7
(pp) Person.........................................................................................7
(qq) Plan...........................................................................................8
(rr) Plan Termination Liability.....................................................................8
(ss) Prior Company..................................................................................8
(tt) Reimbursement Plans............................................................................8
(uu) Savings Plan...................................................................................8
(vv) Separation Agreement...........................................................................8
</TABLE>
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<TABLE>
<S> <C> <C>
(ww) Shared Services Agreement......................................................................8
(xx) SharePower Plan................................................................................8
(yy) Short-Term Incentive Plan......................................................................9
(zz) Stock Option Incentive Plan....................................................................9
(aaa) Stock Purchase Plan...........................................................................9
(bbb) Subsequent Asset Transfer.....................................................................9
(ccc) Subsidiary....................................................................................9
(ddd) Transferred Individual........................................................................9
(eee) Transition Individual........................................................................11
(fff) Transition Period............................................................................11
1.02 REFERENCES.............................................................................................12
2 GENERAL PRINCIPLES.............................................................................................13
2.01 ASSUMPTION OF LIABILITIES..............................................................................13
2.02 PBG GROUP PARTICIPATION IN PEPSICO PLANS...............................................................13
(a) Participation in PepsiCo Plans.................................................................13
(b) PepsiCo's General Obligations as Plan Sponsor..................................................13
(c) PBG's General Obligations as Participating Company.............................................14
(d) Termination of Participating Company Status....................................................14
2.03 ESTABLISHMENT OF THE PBG PLANS.........................................................................14
2.04 TERMS OF PARTICIPATION BY TRANSFERRED INDIVIDUALS......................................................14
3 DEFINED BENEFIT PLANS..........................................................................................16
3.01 ESTABLISHMENT OF MIRROR PENSION TRUSTS.................................................................16
3.02 ASSUMPTION OF PENSION PLAN, CHESAPEAKE PENSION PLAN, AND PENSION EQUALIZATION PLAN LIABILITIES AND
ALLOCATION OF INTERESTS IN THE PEPSICO PENSION TRUST...............................................16
(a) Assumption of Liabilities by PBG Pension Plan and Hourly Pension Plan..........................16
(b) Asset Allocations and Transfers................................................................16
3.03 ACTION IN EVENT OF PBGC INTERVENTION...................................................................18
3.04 PEPSI-COLA ALLIED BOTTLERS INC. PENSION PLAN...........................................................18
3.05 MULTIEMPLOYER PLANS....................................................................................18
4 DEFINED CONTRIBUTION PLANS.....................................................................................20
4.01 SAVINGS PLAN...........................................................................................20
(a) Savings Plan Trust.............................................................................20
(b) Savings Plan Participation.....................................................................20
(c) Assumption of Liabilities and Transfer of Assets...............................................20
(d) Specific Stock Funds in the PBG Savings Plan...................................................21
(e) Miscellaneous Funds............................................................................21
4.02 ERIE BOTTLING CORPORATION SALARIED EMPLOYEES 401(K) WAGE REDUCTION AND PROFIT SHARING PLAN AND
SYRACUSE PEPSI-COLA ROUTE SALESMEN COLLECTIVE BARGAINING UNIT DEFINED CONTRIBUTION PENSION PLAN....21
5 HEALTH AND WELFARE PLANS.......................................................................................22
5.01 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES......................................................22
5.02 ESTABLISHMENT OF PBG LTD VEBA..........................................................................22
5.03 LTD VEBA ASSET TRANSFERS...............................................................................22
5.04 CONTRIBUTIONS TO, INVESTMENTS OF, AND DISTRIBUTIONS FROM LTD VEBAS.....................................24
5.05 VENDOR CONTRACTS.......................................................................................24
(a) ASO Contracts, Group Insurance Policies, HMO Agreements, and Letters of Understanding..........24
(b) Effect of Change in Rates......................................................................25
5.06 PEPSICO SALARY CONTINUATION............................................................................25
5.07 POST-EMPLOYMENT HEALTH AND LIFE INSURANCE BENEFITS.....................................................25
5.08 COBRA AND HIPAA........................................................................................26
</TABLE>
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<TABLE>
<S> <C> <C>
5.09 LEAVE OF ABSENCE PROGRAMS..............................................................................26
5.10 POST-OFFERING TRANSITIONAL ARRANGEMENTS................................................................26
(a) Continuance of Elections, Co-Payments, and Maximum Benefits....................................26
(b) Administration.................................................................................27
(c) PepsiCo Reimbursement Plans....................................................................27
5.11 SEVERANCE PROGRAMS.....................................................................................28
5.12 APPLICATION OF ARTICLE 5 TO THE PBG GROUP..............................................................28
6 EXECUTIVE PROGRAMS.............................................................................................29
6.01 ASSUMPTION OF OBLIGATIONS..............................................................................29
6.02 SHORT-TERM INCENTIVE PLANS.............................................................................29
6.03 LONG-TERM INCENTIVE PLAN AND STOCK OPTION INCENTIVE PLAN...............................................29
(a) Stock Options..................................................................................29
(b) 1996 Performance Units.........................................................................30
(c) 1998 And Later Variable Awards.................................................................31
6.04 DEFERRAL PROGRAMS......................................................................................31
(a) PepsiCo Executive Income Deferral Program......................................................31
(b) PepsiCo Performance Share Unit Deferral Program................................................32
(c) PepsiCo Option Gains Deferral Program..........................................................32
6.05 EXECUTIVE LOAN PROGRAM.................................................................................33
6.06 SPLIT-DOLLAR AGREEMENTS................................................................................33
6.07 STOCK OPTION RECORDKEEPING ACCOUNTS....................................................................33
6.8 AUTOMOBILE PROGRAM......................................................................................34
7 MISCELLANEOUS BENEFITS.........................................................................................35
7.01 SHAREPOWER PLAN........................................................................................35
(a) Treatment of Outstanding Grants Under PepsiCo SharePower Plan..................................35
(b) Recordkeeping Accounts.........................................................................35
7.02 STOCK PURCHASE PLAN....................................................................................36
8 TRANSITIONAL ARRANGEMENTS......................................................................................37
8.01 TRANSITION INDIVIDUALS/RECOGNITION OF SERVICE..........................................................37
8.02 PENSION PLANS..........................................................................................37
(a) Assumption of Liabilities/Noncommencement of Pensions..........................................37
(b) Asset Transfers................................................................................37
8.03 SAVINGS PLAN...........................................................................................38
8.04 HEALTH AND WELFARE PLANS...............................................................................38
(a) Continuation of Elections, Co-Payments, and Maximum Benefits...................................38
(b) Reimbursement Plans............................................................................38
8.05 EXECUTIVE PROGRAMS.....................................................................................39
(a) Long-Term Incentive Plan and Stock Option Incentive Plan.......................................39
(b) Deferral Programs..............................................................................39
8.06 SHAREPOWER PLAN AND OTHER PBG OPTION PLANS.............................................................39
8.07 SHORT-TERM INCENTIVE PLAN..............................................................................39
9 GENERAL........................................................................................................41
9.01 PAYMENT OF AND ACCOUNTING TREATMENT FOR EXPENSES AND BALANCE SHEET AMOUNTS.............................41
(a) Expenses.......................................................................................41
(b) Balance Sheet Amounts..........................................................................41
9.02 SHARING OF PARTICIPANT INFORMATION.....................................................................41
9.03 RESTRICTIONS ON EXTENSION OF OPTION EXERCISE PERIODS, AMENDMENT OR MODIFICATION OF OPTION TERMS AND
CONDITIONS.........................................................................................41
9.04 NON-SOLICITATION OF EMPLOYEES/OTHERS...................................................................42
9.05 REPORTING AND DISCLOSURE AND COMMUNICATIONS TO PARTICIPANTS............................................42
</TABLE>
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<TABLE>
<S> <C> <C>
9.06 PLAN AUDITS............................................................................................42
(a) Audit Rights with Respect to the Allocation or Transfer of Plan Assets.........................42
(b) Audit Rights With Respect to Information Provided..............................................43
(c) Audits Regarding Vendor Contracts..............................................................44
(d) Audit Assistance...............................................................................44
9.07 BENEFICIARY DESIGNATIONS/RELEASE OF INFORMATION/RIGHT TO REIMBURSEMENT.................................44
9.08 REQUESTS FOR INTERNAL REVENUE SERVICE RULINGS AND UNITED STATES DEPARTMENT OF LABOR OPINIONS AND
SATISFACTION OF OBLIGATIONS ARISING FROM VOLUNTARY COMPLIANCE PROGRAMS.............................44
(a) Cooperation....................................................................................44
(b) Applications...................................................................................45
(c) Voluntary Compliance Programs..................................................................45
9.09 FIDUCIARY AND RELATED MATTERS..........................................................................45
9.10 NO THIRD-PARTY BENEFICIARIES; NON-TERMINATION OF EMPLOYMENT............................................45
9.11 COLLECTIVE BARGAINING..................................................................................46
9.12 CONSENT OF THIRD PARTIES...............................................................................46
9.13 FOREIGN PLANS..........................................................................................46
9.14 EFFECT IF OFFERING DOES NOT OCCUR......................................................................46
9.15 RELATIONSHIP OF PARTIES................................................................................46
9.16 AFFILIATES.............................................................................................47
9.17 DISPUTE RESOLUTION.....................................................................................47
9.18 INDEMNIFICATION........................................................................................47
9.19 W-2 MATTERS............................................................................................48
9.20 CONFIDENTIALITY........................................................................................49
9.21 NOTICES................................................................................................49
9.22 INTERPRETATION.........................................................................................49
9.23 GOVERNING LAW/EXECUTION................................................................................49
APPENDIX A PEPSICO EXECUTIVE PROGRAMS............................................................................51
APPENDIX B PBG HEALTH AND WELFARE PLANS..........................................................................52
APPENDIX C FOREIGN PLANS.........................................................................................53
</TABLE>
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EMPLOYEE PROGRAMS AGREEMENT -1- EMPLOYEE PROGRAMS AGREEMENT
This EMPLOYEE PROGRAMS AGREEMENT, dated as of _________, 1999, is by
and between PepsiCo, Inc., a North Carolina corporation ("PepsiCo" or the
"Corporation"), and The Pepsi Bottling Group, Inc., a Delaware corporation
("PBG").
WHEREAS, PepsiCo's Board of Directors has determined that separation
from the Corporation of a substantial portion of the Corporation's bottling
assets and businesses and majority public ownership of such assets and
businesses is in the best interests of PepsiCo and its shareholders; and
WHEREAS, PepsiCo is consolidating the assets and operations of a
substantial portion of the bottling businesses owned by it and its Subsidiaries
into PBG and its Subsidiaries; and
WHEREAS, PepsiCo intends to sell approximately sixty-three percent
(63%) of the Common Stock of PBG to the public in an underwritten offering (the
"Offering"); and
WHEREAS, PepsiCo and PBG have entered into a Separation Agreement,
dated as of ______________, 1999 (the "Separation Agreement"), and several other
agreements that will govern certain matters relating to the Offering and the
relationship of PepsiCo and PBG and their respective Subsidiaries following the
Offering; and
WHEREAS, pursuant to the Separation Agreement, PepsiCo and PBG have
agreed to enter into this Agreement for the purpose of allocating assets,
liabilities, and responsibilities with respect to certain employee compensation
and benefit plans and programs between them;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and in the Separation Agreement, the Parties (as that term is defined in
the Separation Agreement) agree as follows:
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ARTICLE
1
DEFINITIONS AND REFERENCES
1.01 DEFINITIONS
For purposes of this Agreement, capitalized terms used (other than the
formal names of PepsiCo Plans (as defined below)) and not otherwise defined
shall have the respective meanings assigned to them below or as assigned to them
in the Separation Agreement (as defined above):
(a) ACTION
"Action" means any demand, action, cause of action, suit, countersuit,
arbitration, inquiry, proceeding, or investigation by or before any Governmental
Authority or any arbitration or mediation tribunal, pending or threatened, known
or unknown.
(b) AGREEMENT
"Agreement" means this Employee Programs Agreement, including all the
attached Appendices.
(c) ASO CONTRACT
"ASO Contract" means an administrative services only contract, related
prior practice, or related understanding with a third-party administrator that
pertains to any PepsiCo Health and Welfare Plan or any PBG Health and Welfare
Plan.
(d) AWARD
"Award" means an award under a Long-Term Incentive Plan or a Short-Term
Incentive Plan or, as the context or facts may require, any other award under
another incentive or special bonus, incentive, or award program or arrangement.
(e) BENEFIT LIABILITY
"Benefit Liability" shall mean one hundred percent (100%) of the
present value of the Transition Individual's accrued benefit under the Prior
Company's Pension Plan calculated as of the end of the year in which the
transfer occurs. The assumptions used in determining the value of the Transition
Individual's accrued benefit shall be: (i) the mortality table and interest rate
prescribed under the General Agreement on Tariffs and Trade ("GATT"); (ii) the
average of the turnover rates for the Prior Company and the Hiring Company; and
(iii) an expected retirement age of 61; PROVIDED, HOWEVER, that in no event
shall such Benefit Liability calculation fail to satisfy the requirements of
Section 414(l) of the Code.
(f) BOTTLING BUSINESSES
"Bottling Businesses" shall mean all of PepsiCo's bottling assets and
businesses.
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(g) BULK ASSET TRANSFER
"Bulk Asset Transfer" is defined in Section 3.02(b)(2).
(h) CLOSE OF THE OFFERING DATE
"Close of the Offering Date" means 11:59:59 P.M., Eastern Time, on the
Offering Date.
(i) CODE
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor federal income tax law. Reference to a specific Code provision also
includes any proposed, temporary, or final regulation in force under that
provision.
(j) DEFERRAL PROGRAMS
"Deferral Programs," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Executive Income Deferral Program (including, the PepsiCo
Performance Share Unit Deferral Program, and the PepsiCo Option Gains Deferral
Program). When immediately preceded by "PBG" or when the applicable Hiring
Company or Prior Company is a member of the PBG Group, "Deferral Plan" means the
executive income deferral program (including the, performance share unit
deferral program and the option gains deferral program) to be established or
maintained by PBG pursuant to Section 2.03.
(k) DRIP
"DRIP," when immediately preceded by "PepsiCo" or when the applicable
Hiring Company or Prior Company is a member of the PepsiCo Group, means the
PepsiCo Dividend Reinvestment Plan. When immediately preceded by "PBG" or when
the applicable Hiring Company or Prior Company is a member of the PBG Group,
"DRIP" means the dividend reinvestment plan or program, if any, established by
PBG.
(l) ERISA
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended. Reference to a specific provision of ERISA also includes any proposed,
temporary, or final regulation in force under that provision.
(m) EXECUTIVE PROGRAMS
"Executive Programs," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the executive benefit and nonqualified plans, programs, and arrangements
established, maintained, agreed upon, or assumed by a member of the PepsiCo
Group for the benefit of employees and former employees of members of the
PepsiCo Group before the Close of the Offering Date, including the plans and
programs listed in Appendix A. When immediately preceded by "PBG" or when the
applicable Hiring Company or Prior Company is a member of the PBG Group,
"Executive Programs" means the executive benefit plans and programs to be
established or which are
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maintained by PBG pursuant to Section 2.03 that correspond to the respective
PepsiCo Executive Programs, including those plans and programs listed in
Appendix A.
(n) FOREIGN PLAN
"Foreign Plan," when immediately preceded by "PepsiCo," means a Plan
maintained by the PepsiCo Group or when immediately preceded by "PBG," a plan to
be established or which is maintained by the PBG Group, in either case for the
benefit of employees who are compensated under a payroll which is administered
outside the 50 United States, its territories and possessions, and the District
of Columbia.
(o) GOVERNMENTAL AUTHORITY
"Governmental Authority" means any federal, state, local, foreign, or
international court, government, department, commission, board, bureau, agency,
official, or other regulatory, administrative, or governmental authority,
including the Department of Labor, the Internal Revenue Service, and the Pension
Benefit Guaranty Corporation.
(p) GROUP INSURANCE POLICY
"Group Insurance Policy" means a group insurance policy issued in
connection with any PepsiCo Health and Welfare Plan, or any PBG Health and
Welfare Plan, as applicable.
(q) HEALTH AND WELFARE PLANS
"Health and Welfare Plans," when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the health and welfare benefit plans, programs, and policies which
are sponsored by PepsiCo. When immediately preceded by "PBG" or when the
applicable Hiring Company or Prior Company is a member of the PBG Group, "Health
and Welfare Plans" means the benefit plans, programs, and policies corresponding
to those plans, programs, and policies sponsored by PepsiCo as of the Offering
Date, including those plans, programs, and policies listed in Appendix B to this
Agreement which will be sponsored by a member of the PBG Group Immediately after
the Offering Date.
(r) HIRING COMPANY
"Hiring Company," with respect to a Transition Individual described in
Section 1.01(eee) (1) or (4), means a member of the PepsiCo Group, and, with
respect to a Transition Individual described in Section 1.01(eee) (2) or (3),
means a member of the PBG Group.
(s) HMO
"HMO" means a health maintenance organization that provides benefits
under the PepsiCo Health and Welfare Plans or the PBG Health and Welfare Plans,
as applicable.
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(t) HMO AGREEMENTS
"HMO Agreements" means contracts, letter agreements, practices, and
understandings with HMOs that provide medical, dental, or vision services under
the PepsiCo Health and Welfare Plans and the PBG Health and Welfare Plans, as
applicable.
(u) IMMEDIATELY AFTER THE OFFERING DATE
"Immediately after the Offering Date" means 12:00 A.M., Eastern Time,
on the day after the Offering Date.
(v) INDIVIDUAL AGREEMENT
"Individual Agreement" means an individual contract or agreement
(whether written or unwritten) entered into between a member of the PepsiCo
Group or a member of the PBG Group and any employee or individual who will be an
employee of, or otherwise assigned to, the PBG Group Immediately after the
Offering Date that establishes the right of such individual to special
compensation or benefits, special bonuses, supplemental pension benefits, hiring
bonuses, loans, guaranteed payments, special allowances, tax equalization
payments, special expatriate compensation payments, disability benefits, share
units granted (and payable in the form of cash or otherwise) under individual
phantom share agreements, or other forms of compensation and benefits, or that
provides benefits similar to those identified in Appendix A.
(w) INDEMNITEE
"Indemnitee" is defined in Section 9.18.
(x) INDEMNITOR
"Indemnitor" is defined in Section 9.18.
(y) INITIAL ASSET TRANSFER
"Initial Asset Transfer" is defined in Section 3.02(b)(2).
(z) LIABILITIES
"Liabilities" means any and all losses, claims, charges, debts,
premiums, demands, actions, costs, and expenses (including any current or future
benefit payments or other entitlements, and administrative and related costs and
expenses of any Plan, program, service or consulting agreement, or arrangement),
of any nature whatsoever, whether absolute or contingent, matured or unmatured,
liquidated or unliquidated, accrued or unaccrued, known or unknown, whether or
not imposed or determined by a court, whenever arising.
(aa) LONG-TERM INCENTIVE PLAN
"Long-Term Incentive Plan," when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the PepsiCo 1987 Long-Term Incentive Plan, the PepsiCo 1994
Long-Term Incentive Plan, and any other long-term incentive or stock-based
incentive plans established or assumed by a member of
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the PepsiCo Group by reason of merger, acquisition, or otherwise. When
immediately preceded by "PBG" or when the applicable Hiring Company or Prior
Company is a member of the PBG Group, "Long-Term Incentive Plan" means the
long-term incentive plan to be established or assumed by PBG pursuant to Section
2.03.
(bb) LTD VEBA
"LTD VEBA," when immediately preceded by "PepsiCo," means the PepsiCo
Long Term Disability Benefit Trust. When immediately preceded by "PBG," "LTD
VEBA" means the welfare benefit fund to be established by PBG pursuant to
Section 5.02 that corresponds to the PepsiCo LTD VEBA.
(cc) MASTER TRUST
"Master Trust," when immediately preceded by "PepsiCo," means the
master trusts evidenced by the PepsiCo Master Trust Agreement, dated February 1,
1978, and the PepsiCo Special Master Trust Agreement, dated September 11, 1985,
as amended from time to time, and currently associated with, among other plans,
the PepsiCo Pension Plan and the Chesapeake Pension Plan. When immediately
preceded by "PBG," "Master Trust" means the master trust(s) to be established or
maintained by PBG pursuant to Section 3.01 that corresponds to the PepsiCo
Master Trust.
(dd) MATERIAL FEATURE
"Material Feature" means any feature of a Plan that could reasonably be
expected to be of material importance to the sponsoring employer or the
participants and beneficiaries of the Plan, which could include, depending on
the type and purpose of the particular Plan, the class or classes of employees
eligible to participate in such Plan, the nature, type, form, source, and level
of benefits provided by the employer under such Plan and the amount or level of
contributions, if any, required or permitted to be made by participants (or
their dependents or beneficiaries) to such Plan.
(ee) OFFERING
"Offering" has the meaning given that term under the Separation
Agreement.
(ff) OFFERING DATE
"Offering Date" has the meaning given that term under the Separation
Agreement.
(gg) PARTICIPATING COMPANY
"Participating Company" means any Person (other than an individual)
that is participating in a Plan sponsored by a member of the PepsiCo Group or a
member of the PBG Group, as the context requires.
(hh) PBG COMMON STOCK
"PBG Common Stock" has the meaning given that term in the Separation
Agreement.
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(ii) PBG GROUP
"PBG Group" has the meaning given that term under the Separation
Agreement.
(jj) PBG HOURLY PENSION PLAN
"PBG Hourly Pension Plan" means the plan to be established or
maintained by PBG pursuant to Section 2.03 that corresponds to the Chesapeake
Pension Plan.
(kk) PENSION EQUALIZATION PLAN
"Pension Equalization Plan," when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the PepsiCo Pension Equalization Plan. When immediately preceded by
"PBG" or when the applicable Hiring Company or Prior Company is a member of the
PBG Group, "Pension Equalization Plan" means the plan to be established or
maintained by PBG pursuant to Section 2.03 that corresponds to the PepsiCo
Pension Equalization Plan.
(ll) PENSION PLAN
"Pension Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Salaried Employees Retirement Plan. When immediately preceded
by "PBG" or when the applicable Hiring Company or Prior Company is a member of
the PBG Group, "Pension Plan" means the plan to be established or maintained by
PBG pursuant to Section 2.03 that corresponds to the PepsiCo Pension Plan. When
immediately preceded by "Chesapeake," "Pension Plan," means the Chesapeake
Pension Plan, otherwise known as the "Pepsi Cola Hourly Pension Plan."
(mm) PEPSICO EXECUTIVE
"PepsiCo Executive" means an employee or former employee of a member of
the PepsiCo Group or a member of the PBG Group who, as of the Close of the
Offering Date, is or was eligible to participate in or receive a benefit under
any PepsiCo Executive Program.
(nn) PEPSICO GROUP
"PepsiCo Group" has the meaning given that term under the Separation
Agreement.
(oo) PEPSICO LEAVE OF ABSENCE PROGRAMS
"PepsiCo Leave of Absence Programs" means the leave of absence programs
offered from time to time under the personnel policies and practices of PepsiCo
and leaves offered, or required to be offered, in accordance with the Family and
Medical Leave Act of 1993, as amended.
(pp) PERSON
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity, or any Governmental Authority.
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(qq) PLAN
"Plan," when immediately preceded by "PepsiCo" or "PBG," means any
plan, policy, program, payroll practice, on-going arrangement, contract, trust,
insurance policy, or other agreement or funding vehicle, whether written or
unwritten, providing benefits to employees or former employees of the PepsiCo
Group or the PBG Group, as applicable.
(rr) PLAN TERMINATION LIABILITY
"Plan Termination Liability" shall be calculated in accordance with
Section 414(l) of the Code using actuarial assumptions used by the PBGC to value
liabilities for terminating plans as of the Offering Date.
(ss) PRIOR COMPANY
"Prior Company," with respect to a Transition Individual described in
Section 1.01(eee) (1) or (4), means a member of the PBG Group and, with respect
to a Transition Individual described in Section 1.01(eee) (2) or (3), means a
member of the PepsiCo Group.
(tt) REIMBURSEMENT PLANS
"Reimbursement Plans," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Health Care Reimbursement Plan and the PepsiCo Dependent Care
Reimbursement Plan, as applicable. When immediately preceded by "PBG" or when
the applicable Hiring Company or Prior Company is a member of the PBG Group,
"Reimbursement Plans" means the health care reimbursement account plan and the
dependent care reimbursement plan to be established or maintained by PBG
pursuant to Section 2.03 that corresponds to the corresponding PepsiCo
Reimbursement Plan.
(uu) SAVINGS PLAN
"Savings Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Long Term Savings Program. When immediately preceded by "PBG"
or when the applicable Hiring Company or Prior Company is a member of the PBG
Group, "Savings Plan" means the PBG Long Term Savings Program to be established
by PBG pursuant to Section 2.03
(vv) SEPARATION AGREEMENT
"Separation Agreement" is defined in the preamble of this Agreement.
(ww) SHARED SERVICES AGREEMENT
"Shared Services Agreement" means the Shared Services Agreement
entered into by PepsiCo and PBG governing certain matters related to the
relationship of the parties after the Offering.
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(xx) SHAREPOWER PLAN
"SharePower Plan" means the PepsiCo SharePower Stock Option Plan.
(yy) SHORT-TERM INCENTIVE PLAN
"Short-Term Incentive Plan," when immediately preceded by "PepsiCo"
means the PepsiCo 1994 Executive Incentive Compensation Plan, the PepsiCo
Executive Incentive Plan, the Middle Management Incentive Compensation Plan, and
any other special compensation, bonus, or incentive compensation programs. When
immediately preceded by "PBG," "Short-Term Incentive Plan" means the executive
incentive compensation plan, executive incentive plan, the middle management
compensation plan, and any other special compensation, bonus, or incentive
compensation programs to be established or maintained by PBG pursuant to Section
2.03.
(zz) STOCK OPTION INCENTIVE PLAN
"Stock Option Incentive Plan" means the "PepsiCo, Inc. 1995 Stock
Option Incentive Plan" and any predecessor plans.
(aaa) STOCK PURCHASE PLAN
"Stock Purchase Plan," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Capital Stock Purchase Plan. When immediately preceded by
"PBG" or when the applicable Hiring Company or Prior Company is a member of the
PBG Group, "Stock Purchase Plan" means the employee stock purchase plan to be
established or maintained by PBG pursuant to Section 2.03.
(bbb) SUBSEQUENT ASSET TRANSFER
"Subsequent Asset Transfer" is defined in Section 3.02(b)(2).
(ccc) SUBSIDIARY
"Subsidiary" of any Person means any corporation or other organization,
whether incorporated or unincorporated, of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is, directly or
indirectly, owned or controlled by such Person or by any one or more of its
Subsidiaries, or by such Person and one or more of its Subsidiaries; PROVIDED,
HOWEVER, that no Person that is not directly or indirectly wholly owned by any
other Person shall be a Subsidiary of such other Person unless such other Person
controls, or has the right, power, or ability to control, that Person.
(ddd) TRANSFERRED INDIVIDUAL
"Transferred Individual" means any individual who, as of the Close of
the Offering Date: (1) is either then actively employed by, or then on a leave
of absence from, a member of the PBG Group or Bottling Businesses; or (2) is
neither then actively employed by, nor then on a leave of
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absence from, PepsiCo or a member of the PBG Group or Bottling Businesses, but
(A) whose most recent (through the Close of the Offering Date) active employment
with PepsiCo or a past or present affiliate of PepsiCo was with an entity or a
corporate division of the Bottling Businesses or in the concentrate business of
Pepsi-Cola North America, and the predecessors of any such entities, to the
extent such information is available, and who has not had an intervening period
of employment covered by an agreement under which assets and liabilities with
respect to the individual were or are to be transferred from a PepsiCo Pension
Plan to any other plan maintained by an entity that is not part of the PepsiCo
Group, or (B) who otherwise is identified pursuant to a methodology approved by
PepsiCo and PBG, which methodology shall be consistent with the intent of the
parties that former employees of PepsiCo or a past or present affiliate of
PepsiCo and such other individuals who performed services for PepsiCo (including
non-employees) will be aligned with the entity for which they most recently
(through the Close of the Offering Date) were employed or otherwise provided
services. An alternate payee under a qualified domestic relations order (within
the meaning of Code Section 414(p) and ERISA Section 206(d)), alternate
recipient under a qualified medical child support order (within the meaning of
ERISA Section 609(a)), beneficiary, or covered dependent, in each case, of an
employee or former employee described in (1) or (2) above shall also be a
Transferred Individual with respect to the interest of such alternate payee,
alternate recipient, beneficiary, or covered dependent in that employee's or
former employee's benefit under the applicable Plans. Such an alternate payee,
alternate recipient, beneficiary, or covered dependent shall not otherwise be
considered a Transferred Individual with respect to his or her own benefits
under any applicable Plans, unless he or she is a Transferred Individual by
virtue of either of the first two sentences of this definition. In addition,
PepsiCo and PBG may agree to designate any other individuals, or group of
individuals, as Transferred Individuals. An individual may be a Transferred
Individual pursuant to this definition regardless of whether such individual is,
as of the Offering Date, alive, actively employed, on a temporary leave of
absence from active employment, on layoff, terminated from employment, retired
or on any other type of employment, post-employment, or independent contract
status relative to PepsiCo or PBG or to a PepsiCo or PBG Plan, and regardless of
whether, as of the Close of the Offering Date, such individual is then receiving
any benefits from a PepsiCo or PBG Plan. Solely for purposes of assigning any
Liabilities from PepsiCo to PBG under this Agreement, an individual may be a
Transferred Individual regardless of whether the individual is, or was, a common
law employee, independent contractor, temporary employee, temporary service
worker, consultant, freelancer, agency employee, leased employee, on-call
worker, incidental worker, or nonpayroll worker of a member of the PepsiCo Group
or of the PBG Group or in any other employment, non-employment, or retainer
arrangement or other relationship with any member of the PepsiCo Group or the
PBG Group. Nothing contained in this Agreement shall permit, or be construed or
interpreted to permit, any non-employee of PepsiCo or PBG to participate, at any
time, in any Plan of PepsiCo or PBG. Transferred Individual includes any
individual who is on an international assignment whether paid on a U.S. payroll
or a payroll outside the U.S. if such individual otherwise falls within any of
the above categories. Notwithstanding anything to the contrary in this
definition, the term Transferred Individual under this Agreement shall not
include any individual who (i) is considered a "Transferred Individual" under
the Employee Benefits Agreement between PepsiCo and Heartland Territories
Holdings, Inc. and who becomes or will become an employee of the Whitman
Corporation or an affiliate thereof as a result of the transactions contemplated
by the
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Contribution and Merger Agreement, dated January 25, 1999, between Whitman
Corporation, PepsiCo, Inc. and Heartland Territories Holdings, Inc. or (ii) as
of the Offering Date, is actively employed in connection with, or on a leave of
absence (other than long-term disability) from, the Bottling Businesses in
either the Wilmington, North Carolina or Winston Salem, North Carolina market
units and whose employment is or will be transferred to PepCom Industries, Inc.
or an affiliate thereof as a result of the sale of such bottling businesses by
PepsiCo, Inc. to PepCom Industries, Inc. or an affiliate thereof.
(eee) TRANSITION INDIVIDUAL
"Transition Individual" means any individual who:
(1) is a Transferred Individual who during the Transition Period
becomes an employee of a member of the PepsiCo Group, without an intervening
period of employment with an unrelated employer, as a result of a transfer of
employment arranged and agreed to by each party's Chief Personnel Officer or
designee thereof; or
(2) is an employee of a member of the PepsiCo Group as of the
Offering Date (and is not a Transferred Individual) who during the Transition
Period becomes an employee of a member of the PBG Group, without an intervening
period of employment with an unrelated employer, as a result of a transfer of
employment arranged and agreed to by each party's Chief Personnel Officer or
designee thereof; or
(3) is a Transferred Individual who during the Transition Period
(A) becomes an employee of a member of the PepsiCo Group and (B) subsequently
becomes an employee of a member of the PBG Group, in each case without an
intervening period of employment with an unrelated employer and as a result of a
transfer of employment arranged and agreed to by each party's Chief Personnel
Officer or designee thereof; or
(4) is an employee of a member of the PepsiCo Group as of the
Offering Date (and is not a Transferred Individual) who during the Transition
Period (A) becomes an employee of a member of the PBG Group and (B) subsequently
becomes an employee of a member of the PepsiCo Group, in each case without an
intervening period of employment with an unrelated employer and as a result of a
transfer of employment arranged and agreed to by each party's Chief Personnel
Officer or designee thereof.
An alternate payee under a qualified domestic relations order, (within
the meaning of Code Section 414(p) and ERISA Section 206(d)), alternate
recipient under a qualified medical child support order (within the meaning of
ERISA Section 609(a)), beneficiary, or covered dependent, in each case, of an
individual described in clause (1), (2), (3), or (4) of this Section 1.01(eee)
shall also be a Transition Individual with respect to that individual's benefit
under the applicable Plans. Such an alternate payee, alternate recipient,
beneficiary, or covered dependent shall not otherwise be considered a Transition
Individual with respect to his or her own benefits under any applicable Plans,
unless he or she is a Transition Individual by virtue of clause (1), (2), (3),
or (4) of this Section 1.01(eee).
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(fff) TRANSITION PERIOD
"Transition Period" means the period beginning Immediately after the
Offering Date and ending on the second anniversary of the Offering Date;
PROVIDED, HOWEVER, that the Transition Period shall automatically be extended on
a year-to-year basis after the second anniversary of the Offering Date, unless
either party provides the other party with written notice of its desire for the
Transition Period to end. In order to be effective, such written notice must be
provided at least ninety (90) days prior to the scheduled expiration of the
Transition Period.
1.02 REFERENCES
Unless the context clearly indicates otherwise, reference to a
particular Article, Section, or subsection means the Article, Section, or
subsection so delineated in this Agreement.
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ARTICLE
2
GENERAL PRINCIPLES
2.01 ASSUMPTION OF LIABILITIES
PBG hereby assumes and agrees to pay, perform, fulfill, and discharge,
in accordance with their respective terms and conditions, all of the following
(regardless of when or where such Liabilities arose or arise or were or are
incurred): (i) all Liabilities to or relating to Transferred Individuals arising
out of or resulting from employment by, the performance of services for, or any
other type of financial relationship with, a member of the PepsiCo Group before
becoming Transferred Individuals (including Liabilities under PepsiCo Plans and
PBG Plans) and thereafter, (ii) all other Liabilities to or relating to
Transferred Individuals and other employees or former employees of a member of
the PBG Group, and their dependents and beneficiaries, to the extent relating
to, arising out of or resulting from future, present, or former employment with,
or the provision of services for, a member of the PBG Group or the Bottling
Businesses (including Liabilities under PepsiCo Plans and PBG Plans), (iii) all
Liabilities relating to, arising out of, or resulting from any other actual or
alleged employment, the performance of services for, or any other type of
financial relationship with the PBG Group or the Bottling Businesses; (iv) all
Liabilities under any Individual Agreements relating to Transferred Individuals,
and (v) all other Liabilities relating to, arising out of, or resulting from
obligations, liabilities, and responsibilities expressly assumed or retained by
a member of the PBG Group or a PBG Plan pursuant to this Agreement. PBG shall
assume all such Liabilities described in this Agreement, except for each
Liability that is expressly retained in writing by PepsiCo or excluded in
writing by PepsiCo from those being assumed by PBG.
2.02 PBG GROUP PARTICIPATION IN PEPSICO PLANS
(a) PARTICIPATION IN PEPSICO PLANS
Subject to the terms and conditions of this Agreement, each member of
the PBG Group that is, as of the date of this Agreement, a Participating Company
in any of the PepsiCo Plans shall continue as such through the Close of the
Offering Date unless, for periods before the Offering Date, the parties mutually
agree otherwise. Effective as of any date before the Offering Date, a member of
the PBG Group not described in the preceding sentence may, at its request and
with the consent of PepsiCo (which consent shall not be unreasonably withheld),
become a Participating Company in any or all of the PepsiCo Plans in which
Transferred Individuals participate.
(B) PEPSICO'S GENERAL OBLIGATIONS AS PLAN SPONSOR
PepsiCo shall continue through the Close of the Offering Date to
administer, or cause to be administered, in accordance with their terms and
applicable law, the PepsiCo Plans and PepsiCo shall have the sole discretion and
authority to interpret the PepsiCo Plans through such date and during any
subsequent period.
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(c) PBG'S GENERAL OBLIGATIONS AS PARTICIPATING COMPANY
PBG shall perform with respect to its participation in the PepsiCo
Plans, and shall cause each other member of the PBG Group that is a
Participating Company in any PepsiCo Plan to perform the duties of a
Participating Company as set forth in such Plans, and any written or oral
procedures adopted pursuant thereto, including: (i) assisting in the
administration of claims, to the extent requested by the claims administrator or
plan administrator of the applicable PepsiCo Plan, (ii) cooperating fully with
PepsiCo Plan auditors, benefit personnel and benefit vendors, (iii) preserving
the confidentiality of all financial and business arrangements PepsiCo has or
may have with any vendors, claims administrators, trustees or any other entity
or individual with whom PepsiCo has entered into an agreement relating to the
PepsiCo Plans, and (iv) preserving the confidentiality of participant health
information (including health information in relation to leaves under the Family
and Medical Leave Act of 1993, as amended).
(d) TERMINATION OF PARTICIPATING COMPANY STATUS
Unless otherwise provided, effective as of the Close of the Offering
Date, PBG and each member of the PBG Group shall cease to be a Participating
Company in the PepsiCo Plans.
2.03 ESTABLISHMENT OF THE PBG PLANS
Effective Immediately after the Offering Date, unless otherwise
provided, PBG shall adopt, or shall cause to be adopted, the PBG Pension Plan,
the PBG Hourly Pension Plan, the PBG Pension Equalization Plan, the PBG Savings
Plan, the PBG Health and Welfare Plans listed in Appendix B, and the PBG
Executive Programs for the benefit of Transferred Individuals and other current,
future, and former employees of the PBG Group. Except for the PBG Long-Term
Incentive Plan, the foregoing PBG Plans as in effect Immediately after the
Offering Date shall be substantially identical in all Material Features to the
corresponding PepsiCo Plans as in effect as of the Close of the Offering Date.
The PBG Long-Term Incentive Plan shall be adopted by PBG and approved by PepsiCo
as sole shareholder of PBG, before the Close of the Offering Date, to become
effective Immediately after the Offering Date.
2.04 TERMS OF PARTICIPATION BY TRANSFERRED INDIVIDUALS
The PBG Plans shall be, with respect to Transferred Individuals, in all
respects the successors in interest to, shall recognize all rights and
entitlements as of the Close of the Offering Date under, and shall not provide
benefits that duplicate benefits provided by, the corresponding PepsiCo Plans
for such Transferred Individuals. PepsiCo and PBG shall agree on methods and
procedures, including amending the respective Plan documents, to prevent
Transferred Individuals from receiving duplicative benefits from the PepsiCo
Plans and the PBG Plans. PBG shall not permit any PBG Plan to commence benefit
payments to any Transferred Individual until it receives notice from PepsiCo
regarding the date on which payments under the corresponding PepsiCo Plan shall
cease. With respect to Transferred Individuals, each PBG Plan shall provide that
all service, all compensation, and all other benefit-affecting determinations
that, as of the Close of the Offering Date, were recognized under the
corresponding PepsiCo Plan (for periods immediately before the Close of the
Offering Date) shall, as of Immediately after the Offering Date, receive full
recognition, credit, and validity and be taken into account under such PBG Plan
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to the same extent as if such items occurred under such PBG Plan, except to the
extent that duplication of benefits would result. The provisions of this
Agreement for the transfer of assets, if any, from certain trusts relating to
PepsiCo Plans (including Foreign Plans) to the corresponding trusts relating to
PBG Plans (including Foreign Plans) are based upon the understanding and
agreement of the parties that each such PBG Plan will assume all Liabilities of
the Transferred Individuals and corresponding PepsiCo Plan to or relating to
Transferred Individuals, as provided for herein. If there are any legal or other
authoritative reasons that any such Liabilities are not effectively assumed by
the appropriate PBG Plan, then the amount of assets transferred to the trust
relating to such PBG Plan from the trust relating to the corresponding PepsiCo
Plan shall be recomputed, AB INITIO, as set forth below but taking into account
the retention of such Liabilities by such PepsiCo Plan, and assets shall be
transferred by the trust relating to such PBG Plan to the trust relating to such
PepsiCo Plan so as to place each such trust in the position it would have been
in, had the initial asset transfer been made in accordance with such recomputed
amount of assets.
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ARTICLE
3
DEFINED BENEFIT PLANS
3.01 ESTABLISHMENT OF MIRROR PENSION TRUSTS
Effective Immediately after the Offering Date, PBG shall establish, or
cause to be established, the PBG Master Trust which shall be qualified under
Code Section 401(a), be exempt from taxation under Code Section 501(a)(1), and
form part of the PBG Pension Plan and the PBG Hourly Pension Plan.
3.02 ASSUMPTION OF PENSION PLAN, CHESAPEAKE PENSION PLAN, AND PENSION
EQUALIZATION PLAN LIABILITIES AND ALLOCATION OF INTERESTS IN THE
PEPSICO PENSION TRUST
(a) ASSUMPTION OF LIABILITIES BY PBG PENSION PLAN AND HOURLY
PENSION PLAN
Immediately after the Offering Date all Liabilities to or relating to
Transferred Individuals under the PepsiCo Pension Plan, the Chesapeake Pension
Plan, and the PepsiCo Pension Equalization Plan shall cease to be Liabilities of
the PepsiCo Pension Plan, the Chesapeake Pension Plan, and the PepsiCo Pension
Equalization Plan, as applicable, and shall be assumed in full and in all
respects by the PBG Pension Plan, the PBG Hourly Pension Plan, and the PBG
Pension Equalization Plan, respectively. No pension benefits with respect to a
Transferred Individual from the PepsiCo Pension Plan, the Chesapeake Pension
Plan or the PepsiCo Pension Equalization Plan shall commence while such
Transferred Individual is employed by the PBG Group.
(b) ASSET ALLOCATIONS AND TRANSFERS
(1) CALCULATION OF ASSET ALLOCATION
(A) As soon as practicable after the Close of the Offering
Date, PepsiCo shall cause to be calculated the Plan Termination Liability for
each of the PepsiCo Pension Plan and the Chesapeake Pension Plan.
(B) If the amount of the assets of either the PepsiCo Pension
Plan or the Chesapeake Pension Plan, determined as of the Close of the Offering
Date, is greater than or equal to the Plan Termination Liability for that Plan,
then, to the extent permitted under Section 414(l) of the Code and within the
assets held in the PepsiCo Master Trust, as of the Close of the Offering Date,
with respect to the PepsiCo Pension Plan and the Chesapeake Pension Plan, assets
equal to the Plan Termination Liability with respect to Transferred Individuals
under the affected Plan shall be transferred to the PBG Pension Plan or the PBG
Hourly Pension Plan, as appropriate.
(C) If the amount of the assets of either the PepsiCo Pension
Plan or the Chesapeake Pension Plan, determined as of the Close of the Offering
Date, is less than the Plan Termination Liability for that Plan, then assets of
the affected Plan shall be allocated between the PepsiCo and PBG Plans in
accordance with ERISA Section 4044.
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(2) TRANSFER OF ASSETS TO PBG PENSION TRUSTS
Effective Immediately after the Offering Date, PepsiCo shall cause to
be transferred from the PepsiCo Master Trust to the PBG Master Trust an initial
amount of assets in cash ("the Initial Asset Transfer"). The amount of the
Initial Asset Transfer shall be an estimate, determined by PepsiCo in its sole
discretion, of the cash required by the PBG Pension Plan and PBG Hourly Pension
Plan to make payment of benefits and appropriate expenses from the PBG Master
Trust in accordance with the plans from Immediately after the Offering Date to
the time of the Bulk Asset Transfer, described below. In the event that the
Initial Asset Transfer provides insufficient cash for this purpose and upon
PBG's written request therefor, PepsiCo will cause to be transferred other
amounts of assets in cash ("Subsequent Asset Transfer"), but only to the extent
required to make cash payments as described above.
As soon as practicable after the calculation of each plan's interest in
the Master Trust pursuant to Section 3.02(b)(1), but in no event before PepsiCo
(or its authorized representative) determines that the calculation and the data
on which it is based are acceptably complete, accurate, and consistent, PepsiCo
will cause the appropriate amount of assets to be transferred from the PepsiCo
Master Trust to the PBG Master Trust (the "Bulk Asset Transfer"). The amount of
assets to be transferred in the Bulk Asset Transfer shall be equal to the
aggregate of interests of the PBG Pension Plan and PBG Hourly Pension Plan
determined pursuant to Section 3.02(b)(1), adjusted by PepsiCo as of the date of
the Bulk Asset Transfer to the extent necessary to reflect a proportionate share
of additional pension contributions, actual investment gains and losses
experienced in the PepsiCo Master Trust, benefit payments, expenses, the Initial
Asset Transfer, Subsequent Asset Transfers, data corrections, enhancements, and
computational refinements from Immediately after the Offering Date through the
date of the actual transfer of such assets.
The specific assets to be transferred from the PepsiCo Master Trust to
the PBG Master Trust in the Bulk Asset Transfer shall represent a reasonable
cross-section of the asset classes in the PepsiCo Master Trust consistent with
the objective of enabling PBG to implement an investment program for the PBG
Master Trust, but in no event shall PepsiCo or the PepsiCo Master Trust be
required to incur unreasonable transaction costs in the process of transferring
assets and subsequently re-balancing the investment portfolio held by the
PepsiCo Master Trust. Furthermore, PepsiCo shall not be required to transfer any
specific asset or any portion of any specific fund or investment manager
account; PROVIDED, HOWEVER, that PepsiCo shall transfer interests in group
annuity contracts held by the PepsiCo Master Trust to the extent such group
annuity contracts (in whole or in part, as the case may be) specifically cover
the accrued pension benefits of Transferred Individuals or Transition
Individuals. In transferring specific assets, PepsiCo makes no representation as
to the appropriateness of the resulting asset allocation or investment
performance resulting from the specific assets transferred. By accepting the
assets transferred, PBG acknowledges that it and not PepsiCo is serving as the
fiduciary for the PBG Master Trust with respect to the determination and actual
transfer of assets from the PepsiCo Master Trust and that, acting as fiduciary
for the PBG Pension Plan and PBG Hourly Pension Plan, PBG further acknowledges
that it is able to change the asset allocation as it deems appropriate at any
time. Once the assets have been transferred to and received by the PBG Master
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Trust, such event shall fully and finally foreclose any issue or matter of any
nature whatsoever by PBG, the PBG Master Trust, the PBG Pension Plan, the PBG
Hourly Pension Plan, or any other trust(s) related to such plans against
PepsiCo, the PepsiCo Master Trust, the PepsiCo Pension Plan, the Chesapeake
Pension Plan or any other trust(s) related to such plans with respect to the
condition, identity, or value of such assets and PBG shall fully indemnify
PepsiCo, its employees, officers, directors, and the PepsiCo Pension Plan, the
Chesapeake Pension Plan, the PepsiCo Master Trust, and any trustees or
fiduciaries thereof regarding any Liability or legal or regulatory issue of any
nature with respect thereto.
3.03 ACTION IN EVENT OF PBGC INTERVENTION
Notwithstanding any provision of this Agreement to the contrary, in the
event that at any time the Pension Benefit Guaranty Corporation ("PBGC") asserts
that the Offering may provide justification for the PBGC to seek termination of
the PepsiCo Pension Plan and/or the Chesapeake Pension Plan pursuant to ERISA
Section 4042 or otherwise asserts that the transaction may increase unreasonably
the long-run loss to the PBGC (within the meaning of ERISA Section 4042(a)(4))
with respect to the PepsiCo Pension Plan and/or the Chesapeake Pension Plan, (i)
PepsiCo may, in its sole discretion, retain all assets and Liabilities with
respect to Transferred Individuals and Transition Individuals under the PepsiCo
Pension Plan, the Chesapeake Pension Plan and/or the PepsiCo Pension
Equalization Plan and require PBG to provide equivalent benefits under plans
maintained by it with an offset for any benefits continued to be provided under
the PepsiCo Pension Plan, the Chesapeake Pension Plan and/or the PepsiCo Pension
Equalization Plan, (ii) PepsiCo and PBG may enter into negotiations with the
PBGC to resolve these issues and, upon resolving such issues to the satisfaction
of both PepsiCo and PBG, PBG shall fully comply with the terms of this Article
and the terms of any such agreement with the PBGC, or (iii) reach such other
agreement as may be satisfactory to PepsiCo and PBG. In any case and
notwithstanding any other provision of this Agreement, PBG shall be fully
responsible and liable for any obligation to, agreement with, or undertaking (on
behalf of or relating to the PBG Pension Plan and/or the PBG Hourly Pension
Plan) to the PBGC and shall hold PepsiCo free from and fully indemnify it
against any such obligation, agreement, or undertaking. If PepsiCo, in its sole
discretion, retains any liability of any Transferred Individual under the
PepsiCo Pension Equalization Plan, PBG shall fully reimburse PepsiCo for the
full cash costs of, including any administrative expenses relating to, any such
liability.
3.04 PEPSI-COLA ALLIED BOTTLERS INC. PENSION PLAN
PBG shall continue to be responsible for all Liabilities relating to
the Pepsi-Cola Allied Bottlers Inc. Pension Plan (the "Allied Bottlers Pension
Plan"). Effective no later than the Close of the Offering Date, PBG or a member
of the PBG Group shall become the plan sponsor and administrator of the Allied
Bottlers Pension Plan.
3.05 MULTIEMPLOYER PLANS
Effective as of the Offering Date, PBG shall assume all Liability with
respect to Transferred Individuals' participation in "multiemployer plans" as
such term is defined in ERISA Section 3(37)(A). PBG further agrees to assume,
pay, perform, fulfill, and discharge all Liabilities relating to Transferred
Individuals (regardless of when or where such Liabilities arose or arise or
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were or are incurred) arising out of or resulting from the imposition of
withdrawal liability under Subtitle E of Title IV of ERISA as a result of a
complete or partial withdrawal of PepsiCo, any member of the PepsiCo Group, PBG,
or any member of the PBG Group from any "multiemployer plan".
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ARTICLE
4
DEFINED CONTRIBUTION PLANS
4.01 SAVINGS PLAN
(a) SAVINGS PLAN TRUST
Effective as soon as practicable after the Offering Date, PBG shall
establish, or cause to be established, a trust qualified under Code Section
401(a), which shall be exempt from taxation under Code Section 501(a)(1), and
form part of the PBG Savings Plan.
(b) SAVINGS PLAN PARTICIPATION
Until a date mutually agreed to by the parties (the "Savings Plan
Transfer Date"), but in no event after the date on which PBG establishes the
trust described in Section 4.01(a), each Transferred Individual shall be allowed
to continue to participate in the PepsiCo Savings Plan on the same terms and
conditions as such Transferred Individual participated in the PepsiCo Savings
Plan prior to the Offering Date; PROVIDED, HOWEVER, that any contributions made
in respect of Transferred Individuals after the Offering Date shall not be
invested in the PepsiCo Capital Stock Fund under the PepsiCo Savings Plan.
(c) ASSUMPTION OF LIABILITIES AND TRANSFER OF ASSETS
Effective on the Savings Plan Transfer Date: (i) the PBG Savings Plan
shall assume and be solely responsible for all Liabilities to or relating to
Transferred Individuals under the PepsiCo Savings Plan; (ii) the PBG Savings
Plan shall assume and be solely responsible for all ongoing rights of
Transferred Individuals for future participation (including the right to make
contributions through payroll deductions) in the PBG Savings Plan; and (iii)
PepsiCo shall cause the accounts of the Transferred Individuals under the
PepsiCo Savings Plan which are held by its related trust as of the Savings Plan
Transfer Date to be transferred to the PBG Savings Plan and its related trust,
and PBG shall cause such transferred accounts to be accepted by such plan and
trust. Effective no later than the Savings Plan Transfer Date, PBG shall use its
reasonable best efforts to enter into such agreements to accomplish such
assumptions and transfers, the maintenance of the necessary participant records,
the appointment of State Street Bank and Trust Company (or any successor to such
financial institution) as initial trustee under the PBG Savings Plan, and the
engagement of State Street Bank and Trust Company (or any successor to such
financial institution) as initial recordkeeper under such plans. As soon as
practicable after the Savings Plan Transfer Date, assets related to the accounts
of all Transferred Individuals shall be transferred from the PepsiCo Savings
Plan to the PBG Savings Plan in cash or in kind, at PepsiCo's discretion, and,
to the extent practicable, shall be invested in investment options in the PBG
Savings Plan which are comparable to the investment options in which such
accounts were invested immediately before the Savings Plan Transfer Date. No
benefits with respect to a Transferred Individual from the PepsiCo Savings Plan
shall be paid while he or she is employed by the PBG Group after the Savings
Plan Transfer Date.
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(d) SPECIFIC STOCK FUNDS IN THE PBG SAVINGS PLAN
Effective as of the Savings Plan Transfer Date, a PepsiCo capital stock
fund shall be included as an investment option under the PBG Savings Plan and
shall be maintained under the PBG Savings Plan at least through December 31,
2000. Effective as of the Savings Plan Transfer Date, a Tricon capital stock
fund shall be included as an investment option under the PBG Savings Plan and
shall be maintained under the PBG Savings Plan at least through December 31,
1999.
(e) MISCELLANEOUS FUNDS
In the event that PepsiCo determines that it is not feasible or
appropriate to transfer in-kind the assets of a particular investment fund from
the PepsiCo Savings Plan to the PBG Savings Plan, then the value of the assets
in the affected investment, as of the close of business on the Savings Plan
Transfer Date (plus actual earnings or losses attributable to such amount from
the Offering Date to the date the assets are actually transferred) shall be
transferred in cash to the PBG Savings Plan and PBG shall invest such cash in
its plan and trust in the same manner and proportion as it was invested in the
PepsiCo Savings Plan or otherwise at the direction of the affected participant.
4.02 ERIE BOTTLING CORPORATION SALARIED EMPLOYEES 401(K) WAGE REDUCTION AND
PROFIT SHARING PLAN AND SYRACUSE PEPSI-COLA ROUTE SALESMEN COLLECTIVE
BARGAINING UNIT DEFINED CONTRIBUTION PENSION PLAN
Effectively Immediately after the Offering Date, PBG shall be solely
responsible for all Liabilities relating to the Erie Bottling Plan Corporation
Salaried Employees 401(k) Wage Reduction and Profit Sharing Plan (the "Erie
Bottling Plan"). Effective no later than the Close of the Offering Date, PBG
shall substitute itself or another member of the PBG Group for Pepsi-Cola
Metropolitan Company, Inc. as the plan sponsor and administrator of the Erie
Bottling Plan. Effective no later than the Close of the Offering Date, PBG shall
assume full responsibility and shall substitute itself or another member of the
PBG Group as the plan sponsor and administrator of the Syracuse Pepsi-Cola Route
Salesmen Collective Bargaining Unit Defined Contribution Pension Plan.
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ARTICLE
5
HEALTH AND WELFARE PLANS
5.01 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES
Immediately after the Offering Date, all Liabilities for or relating to
Transferred Individuals under the PepsiCo Health and Welfare Plans, shall cease
to be Liabilities of PepsiCo or the PepsiCo Health and Welfare Plans and shall
be assumed by PBG and the corresponding PBG Health and Welfare Plans. Thus, PBG
and the PBG Health and Welfare Plans shall be responsible for all Liabilities
that pertain to Transferred Individuals regardless of when incurred, including
all reported claims that are unpaid, all incurred but not reported claims as of
the Close of the Offering Date, and all claims incurred after the Close of the
Offering Date that pertain to Transferred Individuals under the PepsiCo Health
and Welfare Plans and the PBG Health and Welfare Plans. PBG shall be required to
make all payments due or payable to Transferred Individuals under the
appropriate PBG Health and Welfare Plans for the period beginning Immediately
after the Offering Date, including all reported claims that are unpaid and all
incurred but not reported claims as of the Close of the Offering Date. All
treatments which have been pre-certified for or are being provided on an
on-going basis to a Transferred Individual under the PepsiCo Health and Welfare
Plans as of the Close of the Offering Date shall continue to be provided without
interruption under the appropriate PBG Health and Welfare Plan until such
treatment is concluded or discontinued pursuant to applicable plan rules and
limitations, and PBG and the PBG Health and Welfare Plans shall be responsible
for all Liabilities relating to, arising out of, or resulting from such
pre-certified or on-going treatments as of the Close of the Offering Date.
Unless otherwise provided in this Agreement, PBG shall not be entitled to assets
associated with any PepsiCo Health and Welfare Plan. Notwithstanding any of the
foregoing in this Section 5.01: (i) PepsiCo shall transfer to PBG any reserve
maintained on PepsiCo's books as of the Offering Date in respect of claims
incurred but not reported with respect to Transferred Individuals; and (ii)
neither PBG nor a PBG Health and Welfare Plan shall assume any Liability with
respect to a claim incurred on or prior to the Close of the Offering Date for
which PepsiCo or a PepsiCo Health and Welfare Plan has insurance coverage.
Furthermore, PBG shall pay to PepsiCo any accrued but unpaid premiums for
insurance coverage in respect of periods prior to the Offering Date.
5.02 ESTABLISHMENT OF PBG LTD VEBA
On or before the Offering Date, PBG shall establish, or cause to be
established, the PBG LTD VEBA, for the purpose of funding long-term disability
benefits under the PBG Health and Welfare Plans. Such trust shall constitute a
voluntary employees' beneficiary association under Code Section 501(c)(9) which
is exempt from the imposition of federal income tax under Code Section 501(a),
and shall meet the requirements of Code Sections 419 and 419A.
5.03 LTD VEBA ASSET TRANSFERS
This Section 5.03 shall govern the transfer of assets from the PepsiCo
LTD VEBA to the PBG LTD VEBA. Before the Offering Date, PepsiCo shall determine
the aggregate present
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value, as of December 31, 1998, of the future benefit obligations of each
PepsiCo Plan funded by the PepsiCo LTD VEBA ("VEBA Plans") separately with
respect to two groups of individuals referred to herein as the "Transferred LTD
Individuals" and the "PepsiCo LTD Individuals." For purposes of this Section
5.03, the composition of these two groups of individuals shall be as follows:
(a) the "Transferred LTD Individuals" group shall be comprised of the
Transferred Individuals who, as of December 31, 1998, are eligible to receive
benefits under a VEBA Plan or whose dates of disability occurred on or before
December 31, 1998, and who subsequently, but for the application of this
Agreement and without any intervening period of active employment, would become
eligible for benefits under a VEBA Plan; and (b) the "PepsiCo LTD Individuals"
group shall be comprised of all individuals (including Transferred LTD
Individuals) who, as of the December 31, 1998, are eligible to receive benefits
under a VEBA Plan or whose date of disability occurred on or before December 31,
1998, and who subsequently, but for the application of this Agreement and
without an intervening period of active employment, would become eligible for
benefits under a VEBA Plan. These aggregate present values of future benefit
obligations shall be determined by the actuary appointed by PepsiCo, for
purposes of providing necessary actuarial services for the PepsiCo LTD VEBA,
using the following actuarial methodology: (a) each aggregate present value of
future benefit obligation amount shall be equal to the disabled life reserve
(inclusive of the incurred but not reported ("IBNR") reserve through December
31, 1998 but exclusive of IBNR thereafter) for the applicable population and
VEBA Plan calculated as of December 31, 1998 using census information for the
applicable population requested from the third-party administrator (Aetna) which
is as of December 31, 1998; (b) the actuarial basis for each disabled life
reserve will be calculated using an interest rate assumption of 7% compounded
annually and a termination of disability assumption based on rates of recovery
and mortality developed from the 1975 study of the Society of Actuaries of
experience under Group LTD policies for durations of disablement of three years
or less; (c) for durations of disablement in excess of three years, assumed
terminations shall be based on a modification of the 1952 Disability Study. As
soon as practicable after such aggregate present value of future benefit
obligation determinations are made, there shall be segregated within the PepsiCo
LTD VEBA an amount of assets having a fair market value on the date of
segregation equal to the amount calculated as [(A)/(B)] x (C), where "(A)" is
the aggregate present value of future benefit obligations of the VEBA Plans
determined as described above for Transferred LTD Individuals; "(B)" is the
aggregate present value of future benefit obligations of the VEBA Plans
determined as described above for PepsiCo LTD Individuals; and "(C)" is the
market value of the PepsiCo LTD VEBA assets on the date of segregation. This
amount is referred to herein as "PBG LTD VEBA Amount." Commencing on the date
that such segregation of assets occurs, PepsiCo shall direct the trustee of the
PepsiCo LTD VEBA to separately account for payments made with respect to
Transferred LTD Individuals and deduct such payments from the PBG LTD VEBA
Amount. As soon as practicable after the Offering Date, PepsiCo shall direct the
trustee of the PepsiCo LTD VEBA to transfer cash to the trustee of the PBG LTD
VEBA in an amount equal to the PBG LTD VEBA Amount, less claims payments and
administrative and trust expenses deducted from such PBG LTD VEBA Amount through
the Offering Date, plus a proportionate amount of the earnings related to such
LTD VEBA Amount, and PBG shall direct the trustee of the PBG LTD VEBA to accept
such cash transfer, including any adjustments or subsequent true-ups with
respect thereto. In addition, as soon as practicable after the Offering Date,
PepsiCo shall transfer to PBG an additional amount in cash equal to the premiums
paid with respect to
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Transferred Individuals, less payments made with respect to such Transferred
Individuals who have been approved for long-term disability after January 1,
1999, in respect of the period commencing on January 1, 1999 and ending on the
Offering Date. At the request of PepsiCo, PBG shall establish the PBG LTD VEBA
before the Offering Date and shall accept the transfer of assets and Liabilities
from the PepsiCo LTD VEBA (in connection with the VEBA Plans' Transferred
Individuals) before such Offering Date. All contributions in respect of
Transferred Individuals after the date on which such assets and Liabilities are
transferred shall be placed in the PBG LTD VEBA.
5.04 CONTRIBUTIONS TO, INVESTMENTS OF, AND DISTRIBUTIONS FROM LTD VEBAS
PepsiCo shall have sole authority to direct the trustee of the PepsiCo
LTD VEBA, as to the timing and manner of any contributions to the PepsiCo LTD
VEBA, the investment of any trust assets, and the distributions and/or transfers
of trust assets, in accordance with applicable law to PepsiCo, PBG, any
Participating Company in the trusts, any paying agent, any successor trustee, or
any other Person.
5.05 VENDOR CONTRACTS
(a) ASO CONTRACTS, GROUP INSURANCE POLICIES, HMO AGREEMENTS, AND
LETTERS OF UNDERSTANDING
(1) Before the Offering Date, PepsiCo shall, in its sole
discretion, take such steps as are necessary under each ASO Contract, Group
Insurance Policy, HMO Agreement, letter of understanding, and arrangement in
existence as of the date of this Agreement to permit PBG to participate in the
terms and conditions of such ASO Contract, Group Insurance Policy, HMO
Agreement, letter of understanding, or arrangement from Immediately after the
Offering Date through December 31, 1999. PepsiCo, in its sole discretion, may
cause one or more of its ASO Contracts, Group Insurance Policies, HMO
Agreements, letters of understanding, and arrangements into which PepsiCo enters
after the date of this Agreement to allow PBG to participate in the terms and
conditions thereof. Nothing contained in this Section 5.05(a) shall preclude
PepsiCo from choosing to enter into ASO Contracts, Group Insurance Policies, HMO
Agreements, letters of understandings, or other arrangements with new or
different vendors.
(2) PepsiCo shall have the right to determine, and shall
promptly notify PBG of, the manner in which PBG's participation in the terms and
conditions of ASO Contracts, Group Insurance Policies, HMO Agreements, letters
of understanding and arrangements as set forth above shall be effectuated. Such
terms and conditions shall include the financial and termination provisions,
performance standards, methodologies, auditing policies, quality measures,
reporting requirements, and target claims. PBG hereby authorizes PepsiCo to act
on its behalf to extend to PBG the terms and conditions of the ASO Contracts,
Group Insurance Policies, HMO Agreements, and letters of understanding and
arrangements. PBG shall fully cooperate with PepsiCo in such efforts, and, for
periods through December 31, 1999, PBG shall not perform any act, including
discussing any alternative arrangements with any third party, or fail to take
any action that would prejudice PepsiCo's efforts and financial arrangements
under the Health and Welfare Plans.
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(b) EFFECT OF CHANGE IN RATES
PepsiCo and PBG shall use their reasonable best efforts to cause each
of the insurance companies, HMOs, paid provider organizations and third-party
administrators providing services and benefits under the PepsiCo Health and
Welfare Plans and the PBG Health and Welfare Plans to maintain the premium
and/or administrative rates based on the aggregate number of participants in the
PepsiCo Health and Welfare Plans and the PBG Health and Welfare Plans, from the
Close of the Offering Date through December 31, 1999, separately rated or
adjusted for the demographics, experience or other relevant factors related to
the covered participants of PepsiCo and PBG, respectively. To the extent they
are not successful in such efforts, PepsiCo and PBG shall each bear the revised
premium or administrative rates for health and welfare benefits attributable to
the individuals covered by their respective Health and Welfare Plans.
5.06 PEPSICO SALARY CONTINUATION
Any final determination made or settlements entered into by PepsiCo
with respect to claims incurred under the PepsiCo Salary Continuation Plan by
Transferred Individuals prior to the Offering Date shall be final and binding.
PepsiCo shall transfer to PBG, effective Immediately after the Offering Date,
and PBG shall assume responsibility for (i) administering all claims incurred by
Transferred Individuals before the Close of the Offering Date that are
administered by PepsiCo as of the Close of the Offering Date, and (ii) all
Liabilities under the PepsiCo Salary Continuation Plan to Transferred
Individuals as of the Close of the Offering Date, in the same manner, and using
the same methods and procedures, as PepsiCo used in determining and paying such
claims. Effective Immediately after the Offering Date, PBG shall have sole
discretionary authority to make any necessary determinations with respect to
such claims, including entering into settlements with respect to such claims,
and shall be solely responsible for any costs, liabilities or related expenses
of any nature whatsoever related to such claims, payments or obligations.
5.07 POST-EMPLOYMENT HEALTH AND LIFE INSURANCE BENEFITS
As soon as practicable after the Offering Date, PBG shall determine all
Transferred Individuals who are, to the best knowledge of PBG, receiving
post-employment health coverage and/or post-employment life insurance coverage
under the PepsiCo Health and Welfare Plans as of the Close of the Offering Date,
and the type of post-employment health coverage and the level of post-employment
life insurance coverage for which they are eligible, as applicable. With respect
to Transferred Individuals receiving post-employment health benefits or
post-employment life insurance benefits under the PepsiCo Health and Welfare
Plans as of the Close of the Offering Date, PBG agrees to provide
post-employment health and post-employment life insurance benefits Immediately
after the Offering Date which are substantially the same as those
post-employment health and post-employment life insurance benefits to which they
were entitled under the PepsiCo Health and Welfare Plans as of the Close of the
Offering Date. Nothing contained in the Section 5.07 shall preclude PBG from
amending or terminating its post-employment health and post-employment life
insurance plans after the Offering Date. This Section 5.07 shall also apply to
Transferred Individuals on long-term disability as of the Close of the Offering
Date.
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5.08 COBRA AND HIPAA
Effectively Immediately after the Offering Date, PBG or a member of the
PBG Group shall be responsible for administering compliance and providing
coverage in accordance with the health care continuation coverage requirements
for "group health plans" under Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), and the portability
requirements (including the requirements for issuance of certificates of
creditable coverage) under the Health Insurance Portability and Accountability
Act of 1996 with respect to (a) all Transferred Individuals and any
beneficiaries and dependents thereof who experienced a COBRA qualifying event or
loss of coverage under the PepsiCo Health and Welfare Plans at any time through
the Close of the Offering Date; and (b) all Transferred Individuals and other
employees and former employees of PBG or a member of the PBG Group and any
beneficiaries and dependents thereof who experience a COBRA qualifying event or
loss of coverage under the PBG Health and Welfare Plans after the Close of the
Offering Date. Effective Immediately after the Offering Date, PBG or a member of
the PBG Group shall be responsible for filing all necessary employee change
notices with respect to these persons identified in Section 5.08(a) and (b)
above in accordance with applicable law.
5.09 LEAVE OF ABSENCE PROGRAMS
Effective Immediately after the Offering Date, PBG or a member of the
PBG Group shall assume sole responsibility for the administration and compliance
of all leaves of absences and related programs (including compliance with the
Family and Medical Leave Act) affecting Transferred Individuals.
5.10 POST-OFFERING TRANSITIONAL ARRANGEMENTS
(a) CONTINUANCE OF ELECTIONS, CO-PAYMENTS, AND MAXIMUM BENEFITS
(1) PBG shall cause the PBG Health and Welfare Plans to
recognize and maintain all coverage and contribution elections made by
Transferred Individuals under the PepsiCo Health and Welfare Plans in effect for
the period immediately prior to the Offering Date and shall apply such elections
under the PBG Health and Welfare Plans for the remainder of the period or
periods for which such elections are by their terms applicable (subject to
applicable election change rights). PepsiCo shall cause the claims administrator
for the PepsiCo Health and Welfare Plans to transfer to the claims administrator
for the PBG Health and Welfare Plan all data necessary to maintain such coverage
and elections.
(2) PBG shall cause the PBG Health and Welfare Plans to
recognize and give credit for (A) all amounts applied to deductibles,
out-of-pocket maximums, and other applicable benefit coverage limits with
respect to such expenses which have been incurred by Transferred Individuals
under the PepsiCo Health and Welfare Plans for the remainder of the benefit
limit year in which the Offering occurs, and (B) all benefits paid to
Transferred Individuals under the PepsiCo Health and Welfare Plans, during and
prior to the benefit limit year in which the Offering occurs, for purposes of
determining when such persons have reached their lifetime maximum benefits under
the PBG Health and Welfare Plans.
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(3) Subject to Section 5.08, PBG shall recognize and cover under
the PBG Health and Welfare Plans all eligible employee populations covered by
the PepsiCo Health and Welfare Plans (pertaining to Transferred Individuals) as
of the Close of the Offering Date (determined under the applicable Plan
documents), including all categories of part-time employees (which are fully or
partially eligible for employer contributions).
(4) PBG shall (A) provide coverage to Transferred Individuals
under the PBG Health and Welfare Plans without the need to undergo a physical
examination or otherwise provide evidence of insurability, and (B) recognize and
maintain all irrevocable assignments and elections made by Transferred
Individuals in connection with their life insurance coverage under the PepsiCo
Health and Welfare Plans and any predecessor plans.
(b) ADMINISTRATION
(1) COORDINATION OF BENEFITS FOR SPOUSES AND DEPENDENTS
Effective as of the earlier of the first January 1 or the first status
change (as defined under the PBG Health and Welfare Plans) that occurs after the
Offering Date, PBG shall cause the PBG Health and Welfare Plans to permit
eligible Transferred Individuals to cover their lawful spouses as dependents if
such lawful spouses are active or retired PepsiCo employees (but were not
otherwise covered as a dependent under the PepsiCo Health and Welfare Plans or
other PepsiCo Plans due to their previous status as both employee and dependent
of a PepsiCo employee). As of the earlier of the first January 1 or the first
status change (as defined under the PBG Health and Welfare Plans) that occurs
Immediately after the Offering Date, PepsiCo shall cause the PepsiCo Health and
Welfare Plans to permit eligible PepsiCo employees to cover their lawful spouses
as dependents if such lawful spouses are active or retired PBG employees. All
benefits provided under any such Health and Welfare Plans to a lawful spouse or
dependent of the other company's employees shall be coordinated pursuant to the
terms and conditions of the applicable PepsiCo and PBG Plans.
(2) HEALTH CARE FINANCING ADMINISTRATION DATA MATCH
Effective Immediately after the Offering Date, PBG shall assume all
Liabilities relating to, arising out of or resulting from claims verified by
PepsiCo or PBG under the Health Care Financing Administration data match reports
that relate to Transferred Individuals. PBG and PepsiCo shall share all
information necessary to verify Health Care Financing Administration data match
reports regarding Transferred Individuals. PBG shall not change any employee
identification numbers assigned by PepsiCo without notifying PepsiCo of the
change and the new Employee Identification Number.
(c) PEPSICO REIMBURSEMENT PLANS
To the extent any Transferred Individual contributed to an account
under the PepsiCo Reimbursement Plans during the calendar year that includes the
Offering Date, effective Immediately after the Offering Date, PBG shall
recognize any such Transferred Individual's account balance, determined as of
the Close of the Offering Date, and PBG shall thereafter be solely responsible
for making any and all payments relative to such account balance of the
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Transferred Individual for all claims during such calendar year under the PBG
health care reimbursement plan or PBG Dependent Care Reimbursement Plan.
5.11 SEVERANCE PROGRAMS
Effective Immediately after the Offering Date, PBG shall be responsible
for all Liabilities relating to the Pepsi-Cola Bottling Company Severance Plan
and all other severance programs and obligations, both written and unwritten,
that may pertain to Transferred Individuals. Effective no later than the Close
of the Offering Date, PBG shall substitute itself or another member of the PBG
Group for PepsiCo as the plan sponsor and administrator of the Pepsi-Cola
Bottling Company Severance Plan. Effective Immediately after the Offering Date,
PBG shall amend, or shall cause the member of the PBG Group that is substituted
for PepsiCo as the plan sponsor, to amend the Pepsi-Cola Bottling Company
Severance Plan, with respect to Transferred Individuals whose employment is
terminated after the Close of the Offering Date, to (i) eliminate coverage for
all employees who, as of the Close of the Offering Date, are employees of
Pepsi-Cola Company of North America's concentrate business, and (ii) remain and
otherwise modify such plan to remove any reference to the Pepsi-Cola Bottling
Company. Furthermore, PBG shall be solely responsible for all Liabilities in
connection with each Individual Agreement. As of the date of this Agreement,
PepsiCo has, to its best knowledge, provided PBG with a copy of each Individual
Agreement.
5.12 APPLICATION OF ARTICLE 5 TO THE PBG GROUP
Any reference in this Article 5 to "PBG" shall include a reference to
another member of the PBG Group when and to the extent PBG has caused the other
member of the PBG Group to (a) become a party to an ASO Contract, Group
Insurance Policy, HMO Agreement, letter of understanding or arrangement
associated with a PBG Health and Welfare Plan, (b) become a self-insured entity
for the purposes of one or more PBG Health and Welfare Plans, (c) assume all or
a portion of the Liabilities or, subject to the terms and conditions of the
Shared Services Agreement, the administrative responsibilities with respect to
benefits which arose before the Close of the Offering Date under a PepsiCo
Health and Welfare Plan and which were expressly assumed by PBG pursuant to this
Agreement, or (d) take any other action, extend any coverage, assume any other
Liability or fulfill any other responsibility that PBG would otherwise be
required to take under the terms of this Article 5, unless it is clear from the
context that the particular reference is not intended to include another member
of the PBG Group. In all such instances in which a reference in this Article 5
to "PBG" includes a reference to another member of the PBG Group, PBG shall be
responsible to PepsiCo for ensuring that the other member of the PBG Group
complies with the applicable terms of this Agreement and that the Transferred
Individuals employed by such member of the PBG Group shall have the same rights
and entitlements to benefits under the applicable PBG Health and Welfare Plans
that the Transferred Individual would have had, if he or she had instead been
employed by PBG.
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ARTICLE
6
EXECUTIVE PROGRAMS
6.01 ASSUMPTION OF OBLIGATIONS
Consistent with the principles set forth in Article 2 and except as
otherwise provided herein, effective Immediately after the Offering Date, the
PBG Group shall assume and be solely responsible for all Liabilities to or
relating to Transferred Individuals under all PepsiCo Executive Programs. PBG
shall be solely responsible for all such Liabilities, notwithstanding any
failure by PBG to complete its obligations under this Article 6.
6.02 SHORT-TERM INCENTIVE PLANS
With respect to all Awards that would otherwise be payable under a
PepsiCo Short-Term Incentive Plan to Transferred Individuals for the 1999
performance year, PBG shall be solely responsible for determining (a) the extent
to which established performance criteria have been met, and (b) the payment
level for each Transferred Individual for the 1999 performance year, and PBG
shall be solely responsible for paying all such Awards. Nothing contained in
this Section 6.02 shall entitle PBG to any contributions from PepsiCo for any
Short-Term Incentive Plan payment made by PBG under this Section.
6.03 LONG-TERM INCENTIVE PLAN AND STOCK OPTION INCENTIVE PLAN
The treatment of outstanding Awards described in this Section 6.03
shall apply to Transferred Individuals, including Transferred Individuals who
are compensated under a payroll which is administered outside the 50 United
States, its territories and possessions, and the District of Columbia; PROVIDED,
HOWEVER, if such treatment is not legally permitted, or results in adverse
consequences for PepsiCo, any of its affiliates or the Transferred Individual,
as determined by PepsiCo in its sole discretion, PepsiCo may determine, in its
sole discretion, a different treatment.
(a) STOCK OPTIONS
Effective Immediately after the Offering Date, each Award or grant,
regardless of the date granted, that is outstanding under the PepsiCo Stock
Option Incentive Plan or PepsiCo Long-Term Incentive Plan, as of the Close of
the Offering Date for Transferred Individuals shall continue to be held as an
option for PepsiCo Capital Stock under the PepsiCo Stock Option Incentive Plan
and PepsiCo Long-Term Incentive Plan, whichever is applicable. Such Award or
grant shall remain outstanding (subject to the terms and conditions of the grant
or award in effect as of the Offering Date) under the PepsiCo Stock Option
Incentive Plan or PepsiCo Long-Term Incentive Plan, whichever is applicable,
after the Offering Date; PROVIDED, HOWEVER, that Transferred Individuals shall
not be deemed to have terminated employment under the PepsiCo Stock Option
Incentive Plan or PepsiCo Long-Term Incentive Plan, whichever is applicable,
until such time as they have terminated employment from the PBG Group. Subject
to the terms of the Shared Services Agreement, PepsiCo shall continue to be
fully responsible for administering and providing for the recordkeeping for such
Transferred Individuals' PepsiCo
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options under the PepsiCo Stock Option Incentive Plan or PepsiCo Long Term
Incentive Plan in a manner consistent with the provisions of such plans. The
determination of which company shall be entitled to any tax deduction and any
other treatment related to any such tax deduction (federal and state) and which
company shall be responsible for withholding and initial payment of any and all
payroll taxes with respect to the exercise of such PepsiCo stock options shall
be made by PepsiCo in accordance with applicable provisions of the Tax
Separation Agreement. Notwithstanding anything to the contrary in this Agreement
or the Tax Separation Agreement, regardless of which party initially pays the
payroll taxes, recordkeeping, plan maintenance and administrative costs and fees
associated with such PepsiCo options, PBG shall bear the full cost of all such
payroll taxes, recordkeeping, plan maintenance, and administrative costs and
fees associated with such PepsiCo options (for Transferred Individuals). At the
end of each of PepsiCo's accounting periods, PBG shall report to PepsiCo in
writing all changes in employment status with respect to Transferred Individuals
who hold PepsiCo options under such plans, and shall cooperate in all respects
with PepsiCo with respect to the tax and financial reporting obligations and
related deductions to be calculated or otherwise determined under this
Agreement. Specifically, if requested to do so by PepsiCo and to the extent
permitted under applicable law, PBG shall act as PepsiCo's pay agent with
respect to reporting income realized by Transferred Individuals as a result of
any option exercises.
(b) 1996 PERFORMANCE UNITS
PepsiCo shall cause each Award under the PepsiCo Long-Term Incentive
Plan consisting of PepsiCo performance unit awards based on the 1996 award year
that is (A) outstanding as of the Close of the Offering Date, and (B) is held by
a Transferred Individual who, as of Immediately after the Offering Date, is an
active employee of, or on leave of absence from and is expected to return to
employment with, the PBG Group, to remain an outstanding Award under the PepsiCo
Long-Term Incentive Plan under the terms and conditions of such performance unit
award in effect as of the Offering Date; PROVIDED, HOWEVER, that (i) Transferred
Individuals shall not be deemed to have terminated employment under the PepsiCo
Long-Term Incentive Plan until such time as they have terminated employment from
the PBG Group, and (ii) PepsiCo, in its sole discretion, shall determine the
extent to which PBG shall undertake responsibility for the administration and
related recordkeeping for Awards for Transferred Individuals, including the
decision to transfer all related recordkeeping and administration to PBG.
Notwithstanding the foregoing, for purposes of determining whether any
performance unit targets have been attained for Awards from the 1996 award year,
(i) performance shall be measured based on the consolidated performance of
PepsiCo and PBG for the 1996 through 1999 performance period, as determined by
PepsiCo, and (ii) the measurement cycle, payout dates, and other terms and
conditions shall remain unchanged except as modified by PepsiCo, in its sole
discretion, or as modified in this subpart (b) for termination of employment.
PBG agrees to furnish PepsiCo with such data and information as may be necessary
for PepsiCo to determine consolidated performance results for the applicable
performance period and PepsiCo, in its sole discretion, shall determine whether
and to what extent performance criteria or targets have been attained, and may
make such adjustments as it deems necessary to determine financial performance.
PepsiCo shall be responsible for all payments under the PepsiCo Long-Term
Incentive Plan for the 1996 award year.
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(c) 1998 AND LATER VARIABLE AWARDS
To the extent a Transferred Individual has an Award under the PepsiCo
Long-Term Incentive Plan consisting of a "variable award" from the 1998 award
year or later that is (A) outstanding as of the Close of the Offering Date, and
(B) held by a Transferred Individual who, as of Immediately after the Offering
Date, is an active employee of, or on leave of absence from and expected to
return to employment with the PBG Group, PBG agrees to assume and be solely
responsible for such Award under the PBG Long-Term Incentive Plan. Other than
the performance measures, each such Award assumed by PBG under the PBG Long-Term
Incentive Plan shall otherwise have the same terms and conditions (including the
performance period) as were applicable to the corresponding PepsiCo Award as of
the Close of the Offering Date, except that references to PepsiCo and its
affiliates shall be amended to refer to PBG and its affiliates. PBG shall assume
all such Awards effective Immediately after the Offering Date. For purposes of
determining whether a "variable award" target has been attained for the 1998
award year and any subsequent year Awards, PBG shall be required to measure its
performance based solely on PBG's performance during the performance period and
PepsiCo shall have no responsibility, financial or otherwise, to Transferred
Individuals for these 1998 or later Awards. To the extent any Award has been
assumed by PBG, any options granted by reason of such Awards shall be in the
form of PBG Capital Stock. PBG shall be solely responsible for all such
Liabilities and Awards of stock options in PBG stock and issuance of any PBG
stock.
6.04 DEFERRAL PROGRAMS
(a) PEPSICO EXECUTIVE INCOME DEFERRAL PROGRAM
(1) TRANSFERRED INDIVIDUALS WHO ARE ACTIVE EMPLOYEES OF PBG
Immediately after the Offering Date, the Liability with respect
to the balance of any Transferred Individual who is actively employed by a
member of the PepsiCo Group as of the Close of the Offering Date in an account
under the PepsiCo Executive Income Deferral Program as of the Close of the
Offering Date shall be transferred to the PBG Executive Income Deferral Program.
The parties shall enter into a Shared Services Agreement pursuant to which
PepsiCo shall, for a period of time to be set forth in that agreement,
administer the PBG Executive Income Deferral Program, at PBG's expense. PBG
agrees to maintain the PBG Executive Income Deferral Program (A) so as to
continue all elections by Transferred Individuals under the PepsiCo Executive
Income Deferral Program, and (B) in a manner that will ensure that as of the
Close of Offering Date, the investment alternatives will be substantially the
same; PROVIDED, HOWEVER, that after the Offering Date, PBG may, in its
discretion, amend, modify or terminate the PBG Executive Income Deferral Program
in any way, including, but not limited to, amending the investment alternatives
and the procedures for making investment elections. Notwithstanding the
foregoing, the PBG Executive Income Deferral Program shall allow account
balances invested in whole or in part in PepsiCo phantom shares as of the Close
of the Offering Date to continue as investments in phantom shares of PepsiCo for
the period commencing on the Offering Date and ending no sooner than December
31, 2000.
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(2) TRANSFERRED INDIVIDUALS WHO ARE NOT ACTIVE EMPLOYEES OF
PBG
The Liability with respect to the balance of any Transferred
Individual under the PepsiCo Executive Income Deferral Program who, as of the
Close of the Offering Date, is not an active employee of or on leave of absence
from and expected to return to employment with, the PBG Group, in an account
under the PepsiCo Executive Income Deferral Program as of the Close of the
Offering Date shall remain an obligation of PepsiCo under the PepsiCo Executive
Income Deferral Program and shall not be transferred to PBG.
(3) TRANSITION INDIVIDUALS
The PepsiCo Executive Income Deferral Program shall allow the
account balance of a Transition Individual that is invested in whole or in part
in PBG phantom shares as of the date such Transition Individual's employment is
transferred to the PepsiCo Group to continue as an investment in phantom shares
of PBG for the period commencing on the date of such transfer and ending no
sooner than December 31, 2000.
(b) PEPSICO PERFORMANCE SHARE UNIT DEFERRAL PROGRAM
Immediately after the Offering Date, any obligations or Liabilities
with respect to the account balance of any Transferred Individual, who is
actively employed as of the Close of the Offering Date, under the PepsiCo share
unit deferral program as of the Close of the Offering Date shall be transferred
to and assumed by PBG under the PBG performance share unit deferral program.
PBG agrees to maintain and continue all elections by Transferred
Individuals under the PepsiCo performance share unit deferral program, and to
provide, as of the Close of the Offering Date, substantially the same investment
choices as provided by the PepsiCo performance share unit deferral program.
After the Close of the Offering Date, PBG may, in its discretion, amend, modify
or terminate the PBG performance share unit deferral program in any way,
including, but not limited to, amending the investment alternatives and the
procedures for making investment elections. Notwithstanding the foregoing, the
PBG performance share unit deferral program shall allow account balances
invested in whole or in part in PepsiCo phantom shares as of the Close of the
Offering Date to continue as investments in phantom shares of PepsiCo for the
period commencing on the Offering Date and ending no sooner than December 31,
2000.
(c) PEPSICO OPTION GAINS DEFERRAL PROGRAM
Effective as of the Close of the Offering Date, any obligations or
Liabilities with respect to the balance of any Transferred Individual under the
PepsiCo Executive Income Deferral Program's option gains deferral program (known
as the "PepsiCo Option Gains Deferral Program") shall be transferred to and
assumed by PBG under the PBG Executive Income Deferral Program's option gains
deferral program (known as the "PBG Option Gains Deferral Program"). After the
Close of the Offering Date, PBG shall have the right to amend or modify the
investment options under the PBG Option Gains Deferral Program, PROVIDED,
HOWEVER, that the PepsiCo phantom stock investment account shall continue as an
investment option under the PBG Option Gains Deferral Program (for deferrals
prior to the Offering Date) for the period
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commencing on the Offering Date and ending no sooner than December 31, 2000. PBG
agrees to maintain and administer the current deferrals under the PepsiCo Option
Gains Deferral Program, as of the Close of the Offering Date, so as to maintain
and continue all elections by Transferred Individuals under the PepsiCo Option
Gains Deferral Program; PROVIDED, HOWEVER, that Transferred Individuals shall
not be permitted to defer any gains by reason of the exercise of any option
after the Close of the Offering Date under the PepsiCo Long-Term Incentive Plan
and Transferred Individuals shall not be credited with any phantom PepsiCo
stock, stock units, or dividend equivalents under the PBG Option Gains Deferral
Program with respect to any deferral elections made after the Close of the
Offering Date.
6.05 EXECUTIVE LOAN PROGRAM
On and after the Offering Date, PepsiCo shall (i) continue to
administer the Transferred Individuals' loans under the PepsiCo Executive Loan
Program and (ii) continue to retain PepsiCo options as security for any
outstanding loan.
6.06 SPLIT-DOLLAR AGREEMENTS
PepsiCo and PBG shall take all actions necessary or appropriate to
assign to PBG, PepsiCo's rights, titles and interests in the split-dollar life
insurance policies issue to or with respect to Transferred Individuals under the
PepsiCo Split Dollar Insurance Program by the Principal and New England Mutual
Life Insurance Companies (or their successors in interest), effective
Immediately after the Offering Date. Such actions shall include PBG's acceptance
of any collateral assignments, policy endorsements or such other documentation
executive by or on behalf of Transferred Individuals or any trustee of any trust
to which such Transferred Individuals' policy rights or incidents of ownership
under the split-dollar life insurance policies have been assigned, and PBG's
entering into such agreements as may be necessary to fulfill any obligations of
PepsiCo to any insurance company or insurance agent or broker under the assigned
split dollar life insurance policies. Effective Immediately after the Offering
Date, PBG shall assume and be solely responsible for all Liabilities and shall
be entitled to all benefits of PepsiCo under such split-dollar life insurance
policies and any related agreements entered in to by Transferred Individuals or
the trustees of their respective trusts.
6.07 STOCK OPTION RECORDKEEPING ACCOUNTS
PepsiCo and PBG shall make their reasonable best efforts to provide
accurate, timely information with respect to stock options granted Transferred
Individuals under the PepsiCo Stock Option Incentive Plan, PepsiCo Long-Term
Incentive Plan and the PBG Long-Term Incentive Plan. Whichever of PepsiCo or PBG
controls, and is responsible for providing the information to a recordkeeper,
that employer may take such action as is necessary to effectuate a correction of
any erroneous or inaccurate information provided to the recordkeepers of the PBG
Long-Term Incentive Plan, the PepsiCo Stock Option Incentive Plan, and/or the
PepsiCo Long-Term Incentive Plan. On or after the Close of the Offering Date,
PepsiCo shall be under no obligation to accept any data correction with respect
to any PBG employee's eligibility for stock option grants under a PepsiCo Plan.
PBG agrees that in the event that any stock option is incorrectly or erroneously
exercised under the PepsiCo Stock Option Incentive Plan or the PepsiCo Long-Term
Incentive Plan, due to the untimely or inaccurate transmission of data by
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PBG to the recordkeeper of the PepsiCo Stock Option Incentive Plan or the
PepsiCo Long-Term Incentive Plan, PBG shall indemnify PepsiCo and hold PepsiCo
and its directors, officers, employees, and the Plans harmless for any
Liabilities arising as a result of such transaction, including reimbursing
PepsiCo for amounts paid to any individual by reason of the improper exercise of
an option. PepsiCo agrees that in the event that any stock option is incorrectly
or erroneously exercised under the PepsiCo Stock Option Incentive Plan or the
PepsiCo Long-Term Incentive Plan, due to the untimely or inaccurate transmission
of data by PepsiCo to the recordkeeper of the PepsiCo Stock Options Incentive
Plan or the PepsiCo Long-Term Incentive Plan, PepsiCo shall indemnify PBG and
hold PBG and its directors, officers, employees, and the Plans harmless for any
Liabilities arising as a result of such transaction.
PBG shall be responsible for the integrity of any data or information
that it provides to the recordkeeper of the PepsiCo Stock Option Incentive Plan
or the PepsiCo Long-Term Incentive Plan. PBG agrees to provide to PepsiCo
unlimited access to records in its possession which may be relevant to
eligibility, vesting, exercise or other aspects of the PepsiCo Stock Option
Incentive Plan or the PepsiCo Long-Term Incentive Plan with respect to any
Transferred Individual or Transition Individual.
PBG shall provide or cause to be provided all such information as may
be reasonably necessary or required by PepsiCo, in its sole discretion, to
prepare any financial returns, records, or reports and shall provide such
information on a timely basis sufficiently far in advance to permit the orderly
preparation and filing of such financial returns, records, and reports.
6.8 AUTOMOBILE PROGRAM
As of the Offering Date, PBG shall assume all of PepsiCo's Liabilities
and obligations with respect to the motor vehicles leased by PepsiCo for
Transferred Individuals pursuant to lease agreements under the PepsiCo Executive
Automobile Program.
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ARTICLE
7
MISCELLANEOUS BENEFITS
7.01 SHAREPOWER PLAN
(a) TREATMENT OF OUTSTANDING GRANTS UNDER PEPSICO SHAREPOWER PLAN
Effective Immediately after the Offering Date, all outstanding stock
option grants under the PepsiCo SharePower Plan as of the Close of the Offering
Date for all Transferred Individuals shall continue to be held as options for
PepsiCo Capital Stock and shall remain under the PepsiCo SharePower Plan after
the Offering Date. Such stock option grants shall continue to be exercisable
under the PepsiCo SharePower Plan in accordance with the terms in effect as of
the date of the Offering Date, except that Transferred Individuals shall not be
deemed to have terminated employment under the PepsiCo SharePower Plan until
such time as they have terminated employment from PBG. At the end of each of
PepsiCo's accounting periods, PBG shall report to PepsiCo all changes in
employment status with respect to Transferred Individuals who continue to hold
options under the PepsiCo SharePower Plan. PBG, as PepsiCo's agent solely for
this purpose, shall be fully responsible for administering and providing for the
recordkeeping for such PepsiCo options under the PepsiCo SharePower Plan in a
manner consistent with provisions of such plan. The determination of which
company shall be entitled to any tax deduction and any other treatment related
to any such tax deduction (federal and state) and which company shall be
responsible for withholding and initial payment of any and all payroll taxes
with respect to the exercise of such PepsiCo stock options shall be made by
PepsiCo in accordance with applicable provisions of the Tax Separation
Agreement. Notwithstanding anything to the contrary in this Agreement or the Tax
Separation Agreement, regardless of which party initially pays the payroll
taxes, recordkeeping, plan maintenance and administrative costs and fees
associated with such PepsiCo options, PBG shall bear the full cost of all such
payroll taxes, recordkeeping, plan maintenance, and administrative costs and
fees associated with such PepsiCo options (for Transferred Individuals). PBG
shall cooperate in all respects with PepsiCo with respect to the tax and
financial reporting obligations and related deductions to be calculated or
otherwise determined under this Agreement. Specifically, if requested to do so
by PepsiCo and to the extent permitted by applicable law, PBG shall act as
PepsiCo's pay agent with respect to reporting income realized by Transferred
Individuals as a result of any option exercises.
The foregoing shall apply to all Transferred Individuals, including
those who are compensated under a payroll which is administered outside the 50
United States, its territories and possessions, and the District of Columbia;
PROVIDED, HOWEVER, if such treatment is not legally permitted, or results in
adverse tax consequence for PepsiCo or the Transferred Individual, as determined
by PepsiCo in its sole discretion, PepsiCo may determine in its sole discretion,
a different treatment.
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(b) RECORDKEEPING ACCOUNTS
PepsiCo and PBG shall make their reasonable best efforts to provide
accurate, timely information with respect to stock options granted Transferred
Individuals under the PepsiCo SharePower Plan. Whichever of PepsiCo or PBG
controls, and is responsible for providing, the information to a recordkeeper,
that employer may take such action as is necessary to effectuate a correction of
any erroneous or inaccurate information provided to the recordkeepers of the
SharePower Plan. On or after the Close of the Offering Date, PepsiCo shall be
under no obligation to accept any data correction with respect to any PBG
employee's eligibility for stock option grants. PBG agrees that in the event
that any stock option is incorrectly or erroneously exercised under the PepsiCo
SharePower Plan, due to the untimely or inaccurate transmission by PBG (or its
agents) of data to the recordkeeper, PBG shall indemnify PepsiCo and hold
PepsiCo and its directors, officers, employees and the Plans harmless for any
Liabilities arising as a result of such transaction, including reimbursing
PepsiCo for amounts paid to any individual by reason of the improper exercise of
an option. PepsiCo agrees that in the event that any stock option is incorrectly
or erroneously exercised under the SharePower Plan, due to the untimely or
inaccurate transmission by PepsiCo of data to the recordkeeper, PepsiCo shall
indemnify PBG and hold PBG and its directors, officers, employees, and the
SharePower Plan harmless for any Liabilities arising as a result of such
exercise.
PBG shall be responsible for administering all grants of stock options
under the PepsiCo SharePower Plan with respect to Transferred Individuals and
for the integrity of any data or information that it provides to the
recordkeeper. PBG agrees to provide to PepsiCo unlimited access to records in
its possession which may be relevant to eligibility, vesting, exercise or other
aspects of the PepsiCo SharePower Plan with respect to any Transferred
Individual or Transition Individual.
PBG shall provide or cause to be provided all such information as may
be reasonably necessary or required by PepsiCo, in its sole discretion, to
prepare any financial returns, records or reports and shall provide such
information on a timely basis sufficiently far in advance to permit the orderly
preparation and filing of such financial returns, records and reports.
7.02 STOCK PURCHASE PLAN
With respect to all Transferred Individuals who have beneficial
ownership of PepsiCo Capital Stock in the PepsiCo Stock Purchase Plan, as of the
day after the purchase date under the PepsiCo Stock Purchase Plan coincident
with or next following the Close of the Offering Date, no further purchases of
PepsiCo Capital Stock shall be permitted by Transferred Individuals. To the
extent permitted by the PepsiCo Stock Purchase Plan and applicable law,
Transferred Individuals shall be permitted to retain beneficial ownership of
PepsiCo Capital Stock in the PepsiCo Stock Purchase Plan, at PBG's expense,
until at least December 31, 1999. As soon as practicable after December 31, 1999
(or earlier to the extent necessary under the terms of the PepsiCo Stock
Purchase Plan or applicable law), PepsiCo shall (a) create individual accounts
under the PepsiCo DRIP and transfer such PepsiCo Capital Stock to those accounts
or (b) take such other action as may be mutually agreed to by PepsiCo and PBG.
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ARTICLE
8
TRANSITIONAL ARRANGEMENTS
8.01 TRANSITION INDIVIDUALS/RECOGNITION OF SERVICE
The parties intend that, for the duration of the Transition Period, the
respective Plans of PepsiCo and PBG shall mutually recognize service,
compensation, and other benefit determining factors (except as otherwise
provided herein with respect to stock options) with respect to each Transition
Individual as if the Transition Individual's service recognized by either the
PepsiCo Group or the PBG Group, respectively, had been performed entirely for
the Hiring Company. In this regard, in determining a Transition Individual's
service under the Hiring Company's Pension Plan (for purposes of this Article
"Pension Plan" shall mean the hourly and/or salaried pension plan), Pension
Equalization Plan, Savings Plan, Stock Purchase Plan, Health and Welfare Plans,
Executive Programs, vacation and payroll practices, and other Plans, the Hiring
Company shall grant full credit for and recognition of the Transition
Individual's service as such may be recognized under the above-mentioned plans
and programs.
8.02 PENSION PLANS
(a) ASSUMPTION OF LIABILITIES/NONCOMMENCEMENT OF PENSIONS
Effective as of the date a Transition Individual is transferred to a
Hiring Company: (i) the Hiring Company's Pension Plan and Pension Equalization
Plan shall assume and be solely responsible for all Liabilities to or relating
to the Transition Individual under the Prior Company's Pension Plan and Pension
Equalization Plan; and (ii) no pension benefits with respect to the Transition
Individual from a Prior Company's Pension Plan or Pension Equalization Plan
shall commence while he or she is employed by the Hiring Company.
(b) ASSET TRANSFERS
PepsiCo or PBG, as applicable, shall arrange to transfer assets
relating to the benefit of each Transition Individual under the Prior Company
Pension Plan to the Hiring Company Pension Plan. The transfer of such assets
shall occur after the end of each year in which a Transition Individual's
employment is transferred, and a single net aggregate transfer shall take place
in accordance with the procedures described in the following paragraph.
The amount of assets to be transferred with respect to a
Transition Individual shall be the Benefit Liability for such Transition
Individual, calculated and paid as of (i) the first business day of the year
following the year in which the Transition Individual's employment is
transferred or (ii) if later, the date on which the assets are transferred;
PROVIDED, HOWEVER, that such calculation shall be based on the Transition
Individual's age, service and earnings as of the date his or her employment is
transferred. The amount of assets so calculated shall be aggregated for all
Transition Individuals transferring from PepsiCo to PBG and for all Transition
Individuals transferring from PBG to PepsiCo. The company responsible for
transferring the greater aggregate amount of assets shall subtract the aggregate
amount of assets to be transferred from
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the other company, and shall arrange to transfer the net aggregate amount so
calculated from its plan and trust to the other company's plan and trust.
8.03 SAVINGS PLAN
Upon a Transition Individual's transfer to a Hiring Company (i) the
Prior Company shall cause the account balances of the Transition Individual
under the Prior Company's Savings Plan which are held by their related trusts to
be transferred to the corresponding Hiring Company's Savings Plan and their
related trusts as soon as practicable after the Transition Individual's date of
transfer; and (ii) the Hiring Company shall cause the transferred account
balances to be accepted by its plans and trusts; and (iii) as soon as the assets
relating to the Transition Individual's account balances have been transferred,
the Hiring Company's Savings Plan shall assume and be solely responsible for all
Liabilities to or relating to the Transition Individual under the corresponding
Prior Company's Savings Plan. If, at the time of transfer, the Transition
Individual is unvested in any portion of his or her account under the Prior
Company's Savings Plan, then, prior to the date of transfer, the Prior Company
and Hiring Company shall agree on the treatment of such unvested portion. Assets
may be transferred from the Prior Company Savings Plan to the Hiring Company
Savings Plan in cash or in kind and, to the extent practicable, the Transition
Individual's account balances shall be invested in comparable investment options
under the Hiring Company Savings Plan as his or her account balances were
invested under the Prior Company Savings Plan immediately before the transfer.
No benefits with respect to the Transition Individual from a Prior Company's
Savings Plan shall commence while he or she is employed by the Hiring Company.
8.04 HEALTH AND WELFARE PLANS
(a) CONTINUATION OF ELECTIONS, CO-PAYMENTS, AND MAXIMUM BENEFITS.
To the extent permitted under applicable law, each of PepsiCo and PBG
shall cause the Health and Welfare Plans of itself and its affiliates to
recognize and maintain all coverage and contribution elections made by
Transition Individuals under the Health and Welfare Plans of the other company
and its affiliates. Each Hiring Company shall cause its Health and Welfare Plans
to assume full responsibility for any payments due under such Health and Welfare
Plans with respect to claims submitted by such Transition Individuals on and
after the date of transfer, regardless of when such claim was incurred.
Furthermore, each Hiring Company shall apply such elections under its Health and
Welfare Plans for the remainder of the period or periods for which the elections
are by their terms originally applicable; PROVIDED, HOWEVER, that the Hiring
Company shall cause the Hiring Company Health and Welfare Plans to permit new
coverage and contribution elections by Transition Individuals in the same manner
as such elections were permitted by PepsiCo for transfers between its divisions
before the Offering Date. Each of PepsiCo and PBG shall cause the Health and
Welfare Plans of itself and its affiliates to recognize and give credit for all
amounts applied to deductibles, out-of-pocket maximums, and other applicable
benefit coverage limits with respect to the current year for Transition
Individuals under the Health and Welfare Plans of the other company and its
affiliates.
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(b) REIMBURSEMENT PLANS
To the extent any Transition Individual contributed to an account under
a Prior Company's Reimbursement Plan during a calendar year falling within the
Transition Period, the Prior Company shall be responsible for all claims
incurred by such individual prior to his or her date of transfer. The Hiring
Company shall allow each Transition Individual to make a new contribution
election under the Hiring Company's Reimbursement Plan in accordance with the
terms thereof.
8.05 EXECUTIVE PROGRAMS
(a) LONG-TERM INCENTIVE PLAN AND STOCK OPTION INCENTIVE PLAN
Effective as of the date a Transition Individual is transferred to a
Hiring Company, the Prior Company shall determine whether the Transition
Individual shall retain such stock options, performance units and variable
awards as were granted or awarded and in effect (as of the effective date of
transfer) under the Prior Company Plans or, in consultation with the Hiring
Company, shall direct the Hiring Company (and the Hiring Company shall be
required to agree) to convert such stock options, performance units and variable
awards to stock options, performance units and variable awards under the Hiring
Company's Plans. Service with the Prior Company and the Hiring Company shall be
mutually recognized under each company's Long-Term Incentive Plan and Stock
Option Incentive Plan, as applicable. The Hiring Company and Prior Company shall
mutually agree on which of them shall grant the Transition Individual a stock
option in the year of transfer.
(b) DEFERRAL PROGRAMS
Effective as of the date a Transition Individual is transferred to a
Hiring Company, the Prior Company shall determine whether the Transition
Individual's account balance under the Deferral Programs of the Prior Company
(and any liabilities with respect to such Transition Individual) shall be
transferred to the books and records of the Hiring Company, and an equal amount
of cash to cover such liability shall be transferred to the Hiring Company or,
in the Prior Company's sole discretion, such liability and cash may be retained
by the Prior Company on its books and records. The Transition Individual shall
not be entitled to a distribution from such Deferral Programs at the Prior
Company by reason of the transfer.
8.06 SHAREPOWER PLAN AND OTHER PBG OPTION PLANS
Effective as of the date a Transition Individual is transferred to a
Hiring Company, the Prior Company shall determine whether the Transition
Individual shall retain such stock options as were granted or awarded and in
effect (as of the effective date of transfer) under the Prior Company Plans or
whether another arrangement with respect to such stock options shall apply.
Service with the Prior Company and the Hiring Company shall be mutually
recognized under each company's Long-Term Incentive Plan and Stock Option
Incentive Plan, SharePower Plan or other stock option plan, as applicable.
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8.07 SHORT-TERM INCENTIVE PLAN
To the extent a Transition Individual is hired or rehired by a Hiring
Company during the Transition Period, the payment of any Award under the PepsiCo
Short-Term Incentive Plan or PBG Short-Term Incentive Plan or any comparable or
other incentive or award program shall be paid for in its entirety by the entity
(PepsiCo or PBG) on whose payroll the Transition Individual was employed on
December 31, 1999 (for the 1999 performance year) or December 31, 2000 (for the
2000 performance year) and shall be based on the Transition Individual's period
of employment with both the Hiring Company and the Prior Company during the
performance year in question. Neither PepsiCo nor PBG shall be entitled to any
reimbursement from the other for payments under this Section.
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ARTICLE
9
GENERAL
9.01 PAYMENT OF AND ACCOUNTING TREATMENT FOR EXPENSES AND BALANCE SHEET
AMOUNTS
(a) EXPENSES
All expenses (and the accounting treatment related thereto) through the
Close of the Offering Date regarding matters addressed herein shall be handled
and administered by PepsiCo and PBG in accordance with past PepsiCo accounting
and financial practices and procedures pertaining to such matters. To the extent
expenses that pertain to Transferred Individuals are unpaid as of the Close of
the Offering Date, PBG or any member of the PBG Group shall be solely
responsible for such payment, without regard to any accounting treatment to be
accorded such expense by PepsiCo or PBG on their respective books and records.
The accounting treatment to be accorded all expenses incurred prior to the
Offering Date, whether such expenses are paid by PepsiCo or PBG, shall be
determined by PepsiCo in its sole discretion.
(b) BALANCE SHEET AMOUNTS
PBG shall assume any and all balance sheet liability that relates to
any Liability assumed by it under this Agreement as of the Close of the Offering
Date or thereafter. The balance sheet liabilities to be assumed pursuant to this
Section shall be determined by PepsiCo in its sole discretion consistent with
past accounting practices, consistently applied.
9.02 SHARING OF PARTICIPANT INFORMATION
PepsiCo and PBG shall share, PepsiCo shall cause each applicable member
of the PepsiCo Group to share, and PBG shall cause each applicable member of the
PBG Group to share, with each other and their respective agents and vendors
(without obtaining releases) all participant information necessary for the
efficient and accurate administration of each of the PepsiCo Plans and the PBG
Plans during the Transition Period. PepsiCo and PBG and their respective
authorized agents shall, subject to applicable laws on confidentiality, be given
reasonable and timely access to, and may make copies of, all information
relating to the subjects of this Agreement in the custody of the other party, to
the extent necessary for such administration. Until the Close of the Offering
Date, all participant information shall be provided in the manner and medium
applicable to Participating Companies in the PepsiCo Plans generally, and
thereafter until the end of the Transition Period, all participant information
shall be provided in a manner and medium that is compatible with the data
processing systems of PepsiCo as in effect on the Close of the Offering Date,
unless otherwise agreed to by PepsiCo and PBG.
9.03 RESTRICTIONS ON EXTENSION OF OPTION EXERCISE PERIODS, AMENDMENT OR
MODIFICATION OF OPTION TERMS AND CONDITIONS
PBG agrees that, without the prior written consent of PepsiCo, neither
PBG nor any of its affiliates or Subsidiaries shall take any action to extend
the exercise period of or to provide for additional vesting with respect to any
PepsiCo options for Transferred or Transition Individuals,
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including providing such Transferred or Transition Individuals with leaves of
absences or special termination or severance arrangements. Neither PBG nor any
of its affiliates may in any way or for any purpose modify, alter, amend or
terminate any terms or conditions with respect to any PepsiCo option.
9.04 NON-SOLICITATION OF EMPLOYEES/OTHERS
For the Transitions Period PBG and its affiliates and Subsidiaries will
not, without the prior written consent of PepsiCo, and PepsiCo and its
affiliates and Subsidiaries will not, without the prior written consent of PBG,
whether directly or indirectly, solicit (in writing or orally) for employment or
other services, whether as an employee, officer, director, agent, consultant, or
independent contractor, any person who is or was at the time of such
solicitation an employee, agent, consultant, independent contractor,
representative, officer, or director of the other party; PROVIDED, HOWEVER, that
this covenant shall not apply in cases where such solicitation occurs more than
30 days after the individual to be solicited has had his employment or other
service relationship with the other party terminated.
9.05 REPORTING AND DISCLOSURE AND COMMUNICATIONS TO PARTICIPANTS
While PBG is a Participating Company in the PepsiCo Plans, PBG shall
take, and shall cause each other applicable member of the PBG Group to take, all
actions necessary or appropriate to facilitate the distribution of all PepsiCo
Plan-related communications and materials to employees, participants and
beneficiaries, including summary plan descriptions and related summaries of
material modification, summary annual reports, investment information,
prospectuses, notices and enrollment material for the PBG Plans. PBG shall
assist, and PBG shall cause each other applicable member of the PBG Group to
assist, PepsiCo in complying with all reporting and disclosure requirements of
ERISA for plan years ending on or before December 31, 1999, including the
preparation of Form 5500 annual reports for the PepsiCo Plans, where applicable.
9.06 PLAN AUDITS
(a) AUDIT RIGHTS WITH RESPECT TO THE ALLOCATION OR TRANSFER OF PLAN
ASSETS
The allocation of Pension Plan assets and liabilities pursuant to
Section 3.02 and the transfer of assets from PepsiCo's LTD VEBA pursuant to
Section 5.02, shall, at the election of PBG, be audited on behalf of both
PepsiCo and PBG by an actuarial and benefit consulting firm mutually selected by
the parties; PROVIDED, HOWEVER, that no audit shall be permitted after the date
of the Bulk Asset Transfer, in the case of the Pension Plans, or the actual
transfer of assets, in the case of the PepsiCo LTD VEBA. The scope of such audit
shall be limited to the accuracy of the data and the accuracy of the computation
and adherence to the methodology specified in this Agreement and, except as set
forth in the penultimate sentence of this Section 9.06(a), such audit shall not
be binding on the parties. The actuarial and benefit consulting firm shall
provide its report to both PepsiCo and PBG. No other audit shall be conducted
with respect to the allocation of Plan assets and no issue of any nature
whatsoever may be raised by PBG once the transfer of assets has been completed.
Subject to the following two sentences, no transfer of assets shall occur unless
and until PBG agrees to the allocation of assets. To the extent such
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audit recommends a change to the value of assets allocated to a PBG Plan of less
than 5%, the original determination shall be binding on the parties and shall
not be subject to the dispute resolution process provided in Section 9.17. To
the extent such audit recommends such a change of 5% or more (a "Significant
Allocation Change"), any unresolved dispute between the parties as to whether
and how to make any change in response to such recommendation shall be subject
to the dispute resolution process provided in Section 9.17. PBG shall pay or
shall be responsible for the payment of the full costs of such audit; PROVIDED,
HOWEVER, that in the event such audit recommends a Significant Allocation Change
and such recommendation is attributable to variances in actuarial assumptions or
simplification or modification of the allocation calculated by PepsiCo, PepsiCo
shall be responsible for the full costs of such audit.
(b) AUDIT RIGHTS WITH RESPECT TO INFORMATION PROVIDED
(1) Subject to Section 9.06(b)(2), each of PepsiCo and PBG, and
their duly authorized representatives, shall have the right to conduct audits at
any time upon reasonable prior notice, at their own expense, with respect to all
information provided to it or to any Plan recordkeeper or third-party
administrator by the other party. Subject to Sections 9.06(a) and 9.06(b)(2),
the party conducting the audit shall have the sole discretion to determine the
procedures and guidelines for conducting audits and the selection of audit
representatives. The auditing party shall have the right to make copies of any
records at its expense, subject to the confidentiality provisions set forth in
the Separation Agreement, which are incorporated by reference herein. The party
being audited shall provide the auditing party's representatives with reasonable
access during normal business hours to its operations, computer systems and
paper and electronic files, and provide workspace to its representatives. After
any audit is completed, the party being audited shall have the right to review a
draft of the audit findings and to comment on those findings in writing within
five business days after receiving such draft.
(2) PepsiCo or its authorized representatives may, at PBG's
expense and in accordance with the procedure set forth in this Section
9.06(b)(2), annually conduct audits with respect to any information related to
PepsiCo options granted to Transferred Individuals or Transition Individuals.
PepsiCo shall first conduct a "mini-audit" of PepsiCo option information
relating to a statistically significant number of Transferred and Transition
Individuals. To the extent such mini-audit reveals, in PepsiCo's reasonable
judgment, material concerns as to the integrity of the information related to
PepsiCo options, PepsiCo shall be entitled to conduct a full audit of such
information for all Transferred and Transition Individuals.
(3) The auditing party's audit rights under this Section 9.06(b)
shall include the right to audit, or participate in an audit facilitated by the
party being audited, of any Subsidiaries and affiliates of the party being
audited and of any benefit providers and third parties with whom the party being
audited has a relationship, or agents of such party, to the extent any such
persons are affected by or addressed in this Agreement (collectively, the
"Non-parties"). The party being audited shall, upon written request from the
auditing party, provide an individual (at the auditing party's expense) to
supervise any audit of any such benefit provider or third party. The auditing
party shall be responsible for supplying, at its expense, additional personnel
sufficient to complete the audit in a reasonably timely manner.
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(c) AUDITS REGARDING VENDOR CONTRACTS
From Immediately after the Offering Date through December 31, 2000,
PepsiCo and PBG and their duly authorized representatives shall have the right
to conduct joint audits with respect to any vendor contracts that relate to both
the PepsiCo Health and Welfare Plans and the PBG Health and Welfare Plans. The
scope of such audits shall encompass the review of all correspondence, account
records, claim forms, canceled drafts (unless retained by the bank), provider
bills, medical records submitted with claims, billing corrections, vendor's
internal corrections of previous errors and any other documents or instruments
relating to the services performed by the vendor under the applicable vendor
contracts. PepsiCo and PBG shall agree on the performance standards, audit
methodology, auditing policy and quality measures and reporting requirements
relating to the audits described in this Section 9.06(c) and the manner in which
costs incurred in connection with such audits will be shared.
(d) AUDIT ASSISTANCE
To the extent that either PepsiCo or PBG is required to respond to any
Governmental Authority, vendor or recordkeeper audit, or otherwise conducts an
audit with respect to any provision or obligation of the other party under this
Agreement, PepsiCo or PBG, whichever is applicable shall be required to fully
cooperate with the audit, including providing such records and data as may be
necessary to respond to any document or data request that may arise by reason of
such audit. The party being audited shall provide the auditing party's
representatives with reasonable access during normal business hours to its
operations, computer systems and paper and electronic files, and provides
workspace to its representatives. To the extent the results of an audit result
in any correction to the Liabilities involving any Transferred Individuals, PBG
shall be solely responsible for all such costs and expenses associated with such
Liabilities and any related corrections.
9.07 BENEFICIARY DESIGNATIONS/RELEASE OF INFORMATION/RIGHT TO REIMBURSEMENT
All beneficiary designations, authorizations for the release of
information and rights to reimbursement made by or relating to Transferred
Individuals under PepsiCo Plans shall be transferred to and be in full force and
effect under the corresponding PBG Plans until such beneficiary designations,
authorizations or rights are replaced or revoked by, or no longer apply, to the
relevant Transferred Individual. All beneficiary designations, authorizations to
release information and rights to reimbursement made by or relating to
Transition Individuals under Prior Company Plans shall be transferred to and be
in full force and effect under the corresponding Hiring Company Plans until such
beneficiary designations, authorizations or rights are replaced or revoked by or
no longer apply to the relevant Transition Individual.
9.08 REQUESTS FOR INTERNAL REVENUE SERVICE RULINGS AND UNITED STATES
DEPARTMENT OF LABOR OPINIONS AND SATISFACTION OF OBLIGATIONS ARISING
FROM VOLUNTARY COMPLIANCE PROGRAMS
(a) COOPERATION
PBG shall cooperate fully with PepsiCo on any issue relating to the
transactions contemplated by this Agreement for which PepsiCo elects to seek a
determination letter or
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private letter ruling from the Internal Revenue Service or an advisory opinion
from the United States Department of Labor. PepsiCo shall cooperate fully with
PBG with respect to any request for a determination letter or private letter
ruling from the Internal Revenue Service or advisory opinion from the United
States Department of Labor with respect to any of the PBG Plans relating to the
transactions contemplated by this Agreement.
(b) APPLICATIONS
PepsiCo and PBG shall make such applications to regulatory agencies,
including the Internal Revenue Service and the United States Department of
Labor, as may be necessary to ensure that any transfers of assets from the
PepsiCo LTD VEBA to the PBG LTD VEBA will neither (i) result in any adverse tax,
legal or fiduciary consequences to PepsiCo and PBG, the PepsiCo LTD VEBA, the
PBG LTD VEBA, any participant therein or beneficiaries thereof, any successor
welfare benefit funds established by or on behalf of PBG, or the trustees of
such trusts, nor (ii) contravene any statute, regulation or technical
pronouncement issued by any regulatory agency. Before the Close of the Offering
Date, PBG shall prepare all forms required to obtain favorable determination
letters from the Internal Revenue Service with respect to the tax-exempt status
of the PBG LTD VEBA. PBG and PepsiCo agree to cooperate with each other to
fulfill any filing and/or regulatory reporting obligations with respect to such
transfers.
(c) VOLUNTARY COMPLIANCE PROGRAMS
Immediately after the Offering Date, PBG shall assume all Liabilities
and make all payments, including the payment of excise taxes under Section 4974
of the Code, with respect to Transferred Individuals as required under any
voluntary compliance program.
9.09 FIDUCIARY AND RELATED MATTERS
The parties acknowledge that PepsiCo will not be a fiduciary with
respect to the PBG Plans and that PBG will not be a fiduciary with respect to
the PepsiCo Plans. The Parties also acknowledge that neither Party shall be
deemed to be in violation of this Agreement if it fails to comply with any
provisions hereof based upon its good faith determination that to do so would
violate any applicable fiduciary duties or standards of conduct under ERISA or
other applicable law. Notwithstanding any other provision in this Agreement, the
Parties may take such actions as necessary or appropriate to effectuate the
terms and provisions of this Agreement.
9.10 NO THIRD-PARTY BENEFICIARIES; NON-TERMINATION OF EMPLOYMENT
This Agreement is not intended and shall not be construed as to confer
upon any person other than the parties hereto any rights or remedies hereunder.
No provision of this Agreement or the Separation Agreement shall be construed to
create any right, or accelerate entitlement, to any compensation or benefit
whatsoever on the part of any Transferred Individual or other future, present,
or former employee of the PepsiCo Group or the PBG Group under any PepsiCo Plan
or PBG Plan or otherwise. Without limiting the generality of the foregoing,
except as expressly provided in this Agreement: (i) neither the Offering nor the
termination of the Participating Company status of a member of the PBG Group
shall cause any employee to be deemed to have incurred a termination of
employment which entitles such individual to the commencement of benefits under
any of the PepsiCo Plans, any of the PBG Plans, or any of the Individual
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Agreements; and (ii) nothing in this Agreement other than those provisions
specifically set forth herein to the contrary shall preclude PBG, at any time
after the Close of the Offering Date, from amending, merging, modifying,
terminating, eliminating, reducing, or otherwise altering in any respect any PBG
Plan, any benefit under any Plan or any trust, insurance policy or funding
vehicle related to any PBG Plan.
9.11 COLLECTIVE BARGAINING
To the extent any provision of this Agreement is contrary to the
provisions of any applicable collective bargaining agreement to which PepsiCo or
any affiliate of PepsiCo is a party, the terms of such collective bargaining
agreement shall prevail. Should any provision of this Agreement be deemed to
relate to a topic determined by an appropriate authority to be a mandatory
subject of collective bargaining, PepsiCo or PBG may be obligated to bargain
with the union representing affected employees concerning those subjects. In the
event a force surplus affecting members of a bargaining unit in both the PepsiCo
Group (on the one hand) and the PBG Group (on the other hand) directly results,
due to the provisions of such a collective bargaining agreement, in an employee
involuntarily leaving the payroll of the party not declaring the surplus, then
the party declaring the surplus shall bear the cost of any severance payable to
such employee.
9.12 CONSENT OF THIRD PARTIES
If any provision of this Agreement is dependent on the consent of any
third party (such as a vendor or a union) and such consent is withheld, PepsiCo
and PBG shall use their reasonable best efforts to implement the applicable
provisions of this Agreement to the full extent practicable. If any provision of
this Agreement cannot be implemented due to the failure of such third party to
consent, PepsiCo and PBG shall negotiate in good faith to implement the
provision in a mutually satisfactory manner. The phrase "reasonable best
efforts" as used in this Agreement shall not be construed to require the
incurrence of any non-routine or unreasonable expense or liability or the waiver
of any right.
9.13 FOREIGN PLANS
As soon as practicable after the date of this Agreement, PepsiCo and
PBG shall enter into an agreement regarding the treatment of Foreign Plans
consistent with the principles set forth in Appendix C.
9.14 EFFECT IF OFFERING DOES NOT OCCUR
If the Offering does not occur, then all actions and events that are,
under this Agreement, to be taken or occur effective as of the Close of the
Offering Date, Immediately after the Offering Date, or otherwise in connection
with the Offering, shall not be taken or occur except to the extent specifically
agreed by PBG and PepsiCo.
9.15 RELATIONSHIP OF PARTIES
Nothing in this Agreement shall be deemed or construed by the parties
or any third party as creating the relationship of principal and agent,
partnership or joint venture between the
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parties, it being understood and agreed that no provision contained herein, and
no act of the parties, shall be deemed to create any relationship between the
parties other than the relationship set forth herein.
9.16 AFFILIATES
Each of PepsiCo and PBG shall cause to be performed, and hereby
guarantees the performance of, all actions, agreements and obligations set forth
in this Agreement to be performed by members of the PepsiCo Group or members of
the PBG Group, respectively, where relevant.
9.17 DISPUTE RESOLUTION
Any controversy or claim arising out of or relating to this Agreement,
or the breach hereof, shall be settled in the manner described in Section 22 of
the Separation Agreement.
9.18 INDEMNIFICATION
Effective on the Offering Date, PBG and each member of the PBG Group
agree to jointly and severally indemnify and hold harmless PepsiCo and each
member of the PepsiCo Group and each of their respective officers, directors,
employees and agents and the PepsiCo Plans and any related trusts, including the
PepsiCo Master Trust, and the trustees thereof from and against any and all
losses, Liabilities, claims, suits, damages, costs and expenses (including
without limitation, reasonable attorneys' fees and any and all expenses
reasonably incurred in investigating, preparing or defending against any pending
or seriously threatened litigation or claim) arising out of or related in any
manner to Transferred Individuals and Transition Individuals described in
Section 1.01(eee)(2) and (3). Similarly, effective on the Offering Date, PepsiCo
agrees to indemnify and hold harmless each member of the PBG Group and each of
their respective officers, directors, employees and agents and the PBG Plans and
any related trusts, including PBG Master Trust, from and against any and all
losses, Liabilities, claims, suits, damages, costs and expenses (including,
without, limitation reasonable attorneys' fees and any and all expenses
reasonably incurred in investigating, preparing or defending against any pending
or seriously threatened litigation or claim) arising out of or related in any
manner to Transition Individuals described in Section 1.01(eee)(1) and (4).
If any action is brought or any claim is made against a Party or person
in respect of which indemnity may be sought pursuant to this Section 9.18 (the
"Indemnitee"), the Indemnitee shall, within twenty (20) days after the receipt
of information indicating that an action or claim is likely, notify in writing
the Party from whom indemnification is sought (the "Indemnitor") of the
institution of the action or the making of the claim, and the Indemnitor shall
have the right, and at the request of the Indemnitee, shall have the obligation,
to assume the defense of the action or claim, including the employment of
counsel. If the Indemnitor assumes the defense of the action or claim, the
Indemnitor shall be entitled to settle the action or claim on behalf of the
Indemnitee without the prior written consent of the Indemnitee, unless such
settlement would, in addition to the payment of money, materially affect the
ongoing business or employment of the Indemnitee.
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The Indemnitee shall have the right to interpret the provisions of its
own Plans and to employ its own counsel, but the fees and expenses of that
counsel shall be the responsibility of the Indemnitee unless: (i) the employment
of that counsel shall have been authorized in writing by the Indemnitor in
connection with the defense of the action or claim; (ii) the Indemnitor shall
not have employed counsel to have charge of the defense of such action or claim;
or (iii) such Indemnitee shall have reasonably concluded that there may be
defenses available to it which are different from or additional to those
available to the Indemnitor (in which case the Indemnitor shall not have the
right to direct any different defense of the action or claim on behalf of the
Indemnitee). The Indemnitee shall, in any event, be kept fully informed of the
defense of any such action or claim. Except as expressly provided above, in the
event that the Indemnitor shall not previously have assumed the defense of an
action or claim, at such time as the Indemnitor does assume the defense of the
action or claim, the Indemnitor shall not thereafter be liable to any Indemnitee
for legal or other expenses subsequently incurred by the Indemnitee in
investigating, preparing or defending against such action or claim.
Anything in this Section 9.18 to the contrary notwithstanding, the
Indemnitor shall not be liable for any settlement of any claim or action
effected without its written consent; PROVIDED, HOWEVER, that if after due
notice the Indemnitor refuses to defend a claim or action, the Indemnitee shall
have the right to defend and/or settle such action, and the Indemnitee shall not
be precluded from making a claim against the Indemnitor for reasonable expenses
and liabilities resulting from such defense and/or settlement in accordance with
this Section 9.18.
Notwithstanding the foregoing provisions of this Section 9.18, there
may be particular actions or claims which reasonably could result in both
Parties being liable to the other under the indemnification provisions of this
Agreement. In such events, the Parties shall endeavor, acting reasonably and in
good faith, to agree upon a manner of conducting the defense and settlement of
the action or claim with a view to minimizing the legal expenses and associated
costs that might otherwise be incurred by the Parties, such as, by way of
illustration only, agreeing to use the same legal counsel.
The indemnification provisions of this Section 9.18 shall not inure to
the benefit of any third party. By way of illustration only, an insurer who
would otherwise be obligated to pay any claim shall not be relieved of the
responsibility with respect thereto, or, solely by virtue of the indemnification
provisions, hereof, have any subrogation rights with respect thereto, it being
expressly understood and agreed that no insurer or any other third party shall
be entitled to a "windfall" (i.e., a benefit they would not be entitled to
receive in the absence of the indemnification provisions) by virtue of these
indemnification provisions.
9.19 W-2 MATTERS
Pursuant to the alternative procedure set forth in Internal Revenue
Service Rev. Proc. 96-60, PBG will assume PepsiCo's obligations to furnish Forms
W-2 to all Transferred Individuals for the year in which the Offering Date
occurs. PepsiCo will provide to PBG the information not available to PBG
relating to periods ending on the Offering Date necessary for PBG to prepare and
distribute Forms W-2 to Transferred Individuals for the year in which the
Offering Date occurs, which will include all remuneration earned by Transferred
Individuals before the
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Offering Date and Forms W-4 provided to PepsiCo by Transferred Individuals to
the extent that PBG is not already in possession of such information. PBG shall
prepare and distribute such forms. To the extent permitted by applicable law, in
particular Code Sections 3121(a)(1) and 3306(b)(1), PBG shall be deemed a
successor employer to PepsiCo with respect to Transferred Individuals for
purposes of calculating the annual wage limitation to which state and federal
payroll taxes apply.
9.20 CONFIDENTIALITY
Except as required by applicable law, for the purpose of satisfying any
obligation under this Agreement or with the consent of the other party, neither
PepsiCo nor PBG shall disclose to any Person (other than members of the PepsiCo
Group or the PBG Group) any information (including, but not limited to,
information regarding fees, expenses, assets, Liabilities and Plan terms)
relating to the PepsiCo Plans, PBG Plans, Transferred Individuals or Transition
Individuals. Each of PepsiCo and PBG shall be permitted to disclose such
information within the PepsiCo Group and PBG Group only to the extent reasonably
necessary in the ordinary course of business.
9.21 NOTICES
Any notice, demand, claim, or other communication under this Agreement
shall be in writing and shall be given in accordance with the provisions for
giving notice under the Separation Agreement.
9.22 INTERPRETATION
Words in the singular shall be held to include the plural and vice
versa and words of one gender shall be held to include the other genders as the
context requires. The terms "hereof," "herein," and "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole (including all Exhibits hereto) and not to any particular
provision of this Agreement. The word "including" and words of similar import
when used in this Agreement shall mean "including, without limitation," unless
the context otherwise requires or unless otherwise specified. The word "or"
shall not be exclusive.
9.23 GOVERNING LAW/EXECUTION
This Agreement shall be governed by and construed in accordance with
the laws of the State of North Carolina, may not be assigned by either Party
without the written consent of the other, and shall bind and inure to the
benefit of the Parties hereto and their respective successors and permitted
assignees. This Agreement may not be amended or supplemented except by an
agreement in writing signed by PepsiCo and PBG. This Agreement may be executed
in counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have caused this Employee Benefits
Agreement to be duly executed as of the day and year first above written.
PEPSICO, INC.
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
THE PEPSI BOTTLING GROUP, INC.
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
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APPENDIX A
PEPSICO EXECUTIVE PROGRAMS
PepsiCo Executive Income Deferral Program
- PepsiCo Performance Share Unit Deferral Program
- PepsiCo Option Gains Deferral Program
PepsiCo 1994 Executive Incentive Compensation Plan
Middle Management Incentive Compensation Plan
PepsiCo Inc. Executive Incentive Plan
PepsiCo 1987 Long-Term Incentive Plan
PepsiCo 1995 Stock Option Incentive Plan
PepsiCo 1994 Long-Term Incentive Plan
Financial Planning (including tax planning and return preparation)
Country Club Program
Split-Dollar Life Insurance
Executive Automobile Program
Executive Loan Program
Individual Agreements (including employment, separation and consulting
agreements, special bonus arrangements, leave of absence agreements and
commitments made in the context of any merger, acquisition or similar activity)
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APPENDIX B
PBG HEALTH AND WELFARE PLANS
Health Plan:
PBG Employees Health Care Program (which includes medical,
post-retirement medical, dental, prescription drug, mental
health/substance abuse, various HMOs and OSCs, vision/hearing,
LensCrafters vision, health care reimbursement, and employee
assistance benefits).
CIGNA International Employee Health Care Plan
Group Insurance Plan:
PBG Employees Group Insurance Program (which includes basic and
optional life benefits and accidental death and dismemberment
benefits).
Disability Plans:
PBG Long Term Disability Plan
PBG Salary Continuation Plan (short-term disability plan)
PBG Salary Continuation Plan for Employees Working in States other than
California
Severance Plans:
PBG Severance Plan
Miscellaneous Plans (ERISA):
PBG Group Legal Services Plan
Cafeteria Plan (non-ERISA):
PBG Benefits Plus (including health care reimbursement plan)
Miscellaneous Plans (non-ERISA):
PBG Dependent Care Reimbursement Plan
PBG Educational Assistance Program
* PBG shall have the right to combine or disaggregate any of the above Plans for
any purpose, including the satisfaction of any disclosure or reporting
requirements under ERISA.
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APPENDIX C
FOREIGN PLANS
This Appendix C describes the principles under which Foreign Plans
shall be treated. For purposes of this Appendix, outside the U.S. means outside
the 50 United States, its territories and possessions, and the District of
Columbia, and employed outside the U.S. means compensated under a payroll which
is administered outside the United States.
C.1 PLANS COVERING ONLY EMPLOYEES OF PEPSICO OR PBG
Effective as of the Close of the Offering Date or such later date as
may be required by applicable law, union, or works council agreement, any
Foreign Plan that covers only individuals employed outside the U.S. by the
PepsiCo Group shall be the sole responsibility of the PepsiCo Group and no
member of the PBG Group shall have any Liability with respect to such a Plan;
and any Foreign Plan that covers only individuals employed outside the U.S. by
the PBG Group shall be the sole responsibility of the PBG Group and no member of
the PepsiCo Group shall have any Liability with respect to such a Plan.
C.2 PLANS COVERING EMPLOYEES OF BOTH PEPSICO AND PBG
(a) TERMINATION OF PARTICIPATION
To the extent legally permitted and except as otherwise provided
herein, effective as of the Close of the Offering Date, or as soon as possible
thereafter, PBG and each other applicable member of the PBG Group shall cease to
be a Participating Company in each Foreign Plan maintained by PepsiCo or the
PepsiCo Group and each other applicable member of the PepsiCo Group shall cease
to be a Participating Company in each Foreign Plan maintained by the PBG Group.
(b) MIRROR PLANS
(1) Effective Immediately after the Offering Date, PBG shall
adopt, or cause to be adopted, Foreign Plans for the benefit of employees of the
PBG Group employed outside the United States who are eligible to participate in
PepsiCo Foreign Plans and shall cause such PBG Foreign Plans to be substantially
identical in all Material Features to the corresponding PepsiCo Foreign Plans as
in effect on the Offering Date; PROVIDED, HOWEVER, that PBG may satisfy this
requirement by extending coverage to such individuals under a Foreign Plan of
the PBG Group which was in effect before the Offering Date and which is, with
respect to all Material Features, at least equal to the corresponding PepsiCo
Foreign Plan.
(2) Effective Immediately after the Offering Date, PepsiCo shall
adopt, or cause to be adopted, Plans for the benefit of employees of the PepsiCo
Group employed outside the United States who are eligible to participate in PBG
Plans and shall cause such Plans to be substantially identical in all Material
Features to the corresponding PBG Foreign Plans as in effect on the Offering
Date; PROVIDED, HOWEVER, that PepsiCo may satisfy this requirement by
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extending or continuing coverage to such individuals under a PepsiCo Foreign
Plan of the PepsiCo Group which was in effect before the Offering Date.
(3) The continuation by PepsiCo or PBG of separate employment
terms and conditions for employees previously covered by the other entity's
Plans shall not continue beyond the time legally required.
(c) TRANSFER OF ASSETS
As of the Close of the Offering Date, PepsiCo and PBG will use their
reasonable best efforts to ensure that, to the extent legally permitted: (i)
Liabilities of the Foreign Plans of PepsiCo relating to Transferred Individuals
shall be assumed by the appropriate Foreign Plans of PBG; and (ii) a portion of
any assets of the Foreign Plans of PepsiCo shall be transferred to the
appropriate Foreign Plans of PBG, and vice versa.
C.3 SEVERANCE ISSUES
If under applicable law, any Transferred Individual employed outside
the U.S. is deemed to have incurred a termination of employment as a result of
the Offering or any other transaction contemplated by the Separation Agreement
or this Agreement, which entitles such individual to receive any payment or
benefit under any Foreign Plan, governmental plan or arrangement or pursuant to
any law or regulation, including severance benefits, notwithstanding such
individual's continued employment by the PBG Group, then PBG shall be liable for
any such payment or benefit and, notwithstanding any other provision hereof, to
the extent legally permitted, appropriate adjustments shall be made to the
treatment of such individual during such continued employment, including not
giving such individual credit for prior service and/or treating such individual
as having been newly hired immediately after such deemed termination, for
purposes of all applicable Foreign Plans. Liability with respect to such
payments shall be the responsibility of PBG.
C.4 LEGALLY PERMITTED
For purposes of this Appendix C, "legally permitted" means permitted
under the laws of the country, the labor union, works council, or collective
agreement without adverse consequences to PepsiCo, PBG or Transferred
Individuals, as determined by PepsiCo, in its sole discretion, including
mandated waiting periods before which working conditions (including benefits)
cannot be changed, and upon receiving required agreement from individual
employees and/or Plan trustees, foundation boards and members, and any other
organizations having a recognized right to determine or affect benefits and/or
funding of the Plan.
C.5 MULTINATIONAL POOLING
PepsiCo and PBG shall keep their existing multinational pooling
arrangements intact so long as the parties mutually agree. If there is any
dividend payable from the consolidated pooling arrangements with respect to the
1999 pool accounting year, that dividend will be allocated between PepsiCo and
PBG proportionately, based on the contribution to the overall
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surplus of the pooling arrangements by the PepsiCo Group and the PBG Group,
respectively. Alternatively, any net deficits incurred under any one (or all)
consolidated pooling arrangement(s) will be apportioned back to the entity which
incurred the deficit proportionately based on each entities' Contribution to the
net deficit.
Any potential additions (local insurance contracts) to the consolidated
pooling arrangement during the remainder of the 1999 international accounting
period will be mutually agreed upon between PepsiCo and PBG.
C.6 FUNDED PENSION PLANS
PepsiCo shall use its reasonable best efforts to allow each Transferred
or Transition Individual employed outside the U.S. who participates in a PepsiCo
foreign pension plan as of the Crossover Date to continue to participate in such
PepsiCo pension plan after the Crossover Date, so long as such pension plan is
in effect. To the extent a Transferred or Transition Individual continues to
participate in a PepsiCo foreign pension plan after the Crossover Date (as
defined below): (i) PepsiCo and PBG shall take all necessary action to cause PBG
to become a participating employer under such foreign pension plan; (ii) if such
plan is the PepsiCo International Retirement Plan or other unfunded foreign
pension plan, PBG shall be liable for the actual cost of all such individual's
benefits under such plan; (iii) if such plan is the [UK Plan], [India Plan] or
other funded foreign pension plan, PBG shall be responsible for all funding
related to benefits accrued in respect of such individual's service and earnings
after the Crossover Date, regardless of the funded status of the plan with
respect to individuals other than Transferred Individuals and Transition
Individuals who continue to participate in the plan; and (iv) PBG shall
reimburse PepsiCo for its administrative expenses related to such individual.
For purposes of this Section C.6, "Crossover Date" shall mean, for a Transferred
Individual, the Offering Date and, for a Transition Individual, his or her date
of transfer.
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Exhibit 10.8
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") dated as of February,
1999, between PepsiCo, Inc., a North Carolina corporation ("PEPSICO"), and The
Pepsi Bottling Group, Inc., a Delaware corporation (the "COMPANY").
WHEREAS, pursuant to a Separation Agreement dated as of _________, 1999
(the "SEPARATION AGREEMENT"), by and between PepsiCo and the Company, and the
initial public offering (the "OFFERING") contemplated by the Separation
Agreement, the common stock, par value $.01 per share (the "COMMON STOCK") of
the Company will become publicly traded; and
WHEREAS, the parties hereto desire to set forth the rights of the
Holders (as hereinafter defined) and the obligations of the Company with respect
to the registration of Shares (as hereinafter defined) under the Securities Act
of 1933, as amended (the "SECURITIES ACT");
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. DEFINED TERMS. In addition to terms defined elsewhere
in this Agreement, as used in this Agreement the following capitalized terms
have the respective meanings set forth below:
"AFFILIATE" shall mean, with respect to any person, any other person
who directly or indirectly through one or more intermediaries controls or is
controlled by or is under common control with such person. For the purposes of
this definition, "CONTROL" when used with respect to any particular person,
means the power to direct the management and policies of such person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "CONTROLLING" and "CONTROLLED" have meanings
correlative to the foregoing.
"BLACKOUT PERIOD" shall have the meaning assigned to such term in
Section 2.1(b).
"BOARD" shall mean the board of directors of the Company.
"CLAIMS" shall have the meaning assigned to such term in
Section 2.6(a).
<PAGE>
"DEMAND PERIOD" shall have the meaning assigned to such term in
Section 2.1(a).
"DEMAND REGISTRATION" shall have the meaning assigned to such term in
Section 2.1(a).
"DEMAND REQUEST" shall have the meaning assigned to such term in
Section 2.1(a).
"EFFECTIVE PERIOD" shall have the meaning assigned to such term in
Section 2.4(a)(iii).
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"HOLDERS" shall mean collectively, PepsiCo and its subsidiaries and
affiliates who from time to time own Shares; each of such entities separately is
sometimes referred to as a "Holder."
"INSPECTORS" shall have the meaning assigned to such term in
Section 2.4(a)(iv).
"MAXIMUM NUMBER" shall have the meaning assigned to such term in
Section 2.2(b).
"OTHER HOLDER" shall mean a holder of Shares other than PepsiCo and its
subsidiaries and affiliates.
"PERSON" shall mean any individual, corporation, company, partnership,
limited liability company, joint venture, trust, group (as such term is used in
Rule 13d-5 under the Exchange Act), business association, government or
political subdivision thereof, governmental body or other entity.
"PIGGY-BACK REGISTRATION" shall have the meaning assigned to such term
in Section 2.2(a).
"PIGGY-BACK REQUEST" shall have the meaning assigned to such term in
Section 2.2(a).
"RECORDS" shall have the meaning assigned to such term in
Section 2.4(a)(iv).
"REGISTERED SHARES" shall have the meaning assigned to such term in
Section 2.4(a)(xviii).
"REGISTRATION" shall have the meaning assigned to such term in
Section 2.2(a)
"REGISTRATION EXPENSES" shall have the meaning assigned to such term in
Section 2.5.
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"SEC" shall mean the United States Securities and Exchange Commission
or any other United States federal agency at the time administering the
Securities Act or the Exchange Act, whichever is the relevant statute.
"SHARES" shall mean shares of the Company's Common Stock (other than
shares of Class B Common Stock), including shares of Common Stock issued as a
result of a stock split, stock dividend or recapitalization.
Section 1.2. GENERAL. Unless the context otherwise requires, references
in this Agreement to any "SECTION" or "ARTICLE" shall mean a section or article
of this Agreement, as the case may be, and the terms "HEREOF," "HEREUNDER" and
"hereto" and words of similar meaning shall mean this Agreement in its entirety
and not any particular provisions of this Agreement. Unless the context
otherwise requires, the terms defined herein include the singular as well as the
plural.
Unless the context otherwise requires, each reference herein to the
Securities Act, the Exchange Act or Rule 144 (or any other rule, regulation or
form promulgated under either such statute) shall be deemed to mean, as of any
time, such statute, rule, regulation or form as then in effect, after all
amendments thereto, or, if not then in effect, any successor statute, rule,
regulation or form as then in effect, after all amendments thereto.
Section 1.3. HEADINGS. The descriptive headings of the several sections
and paragraphs of this Agreement are inserted for convenience only, do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
ARTICLE II
REGISTRATION RIGHTS
Section 2.1. Demand Registrations. (a) At any time following the
OFFERING and prior to a date on which the Company shall have obtained a written
opinion of legal counsel reasonably satisfactory to PepsiCo and addressed to the
Company and the Holders to the effect that the Shares may be publicly offered
for sale in the United States by the Holders without restriction as to manner of
sale and amount of securities sold and without registration or other restriction
under the Securities Act (such period being the "DEMAND PERIOD"), the Holders
shall have the right to require the Company to file a registration statement
under the Securities Act in respect of all or a portion of their Shares (so long
as such request covers at least 2% of the shares of Common Stock then
outstanding), by delivering to the Company written notice stating that such
right is being exercised, specifying the number of the Shares to be included in
such registration statement and describing the intended method of distribution
thereof (a "DEMAND REQUEST"). As promptly as practicable, but in no event later
than forty-five (45) days (one hundred twenty (120) days, if the applicable
registration form is other than Form S-3) after the Company receives a Demand
Request, the Company shall file with the SEC and thereafter use its best efforts
to cause to be declared effective, a registration statement (including, without
limitation, by means of a shelf registration pursuant to Rule 415 under the
Securities Act if so requested and if the Company is then eligible to use
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such a registration)(a "DEMAND REGISTRATION") providing for the registration of
such number of Shares as the Holders shall have demanded be registered for
distribution in accordance with their intended method of distribution.
(b) Anything in this Agreement to the contrary notwithstanding, the
Company shall be entitled to postpone and delay, for a reasonable period of
time, not to exceed one hundred twenty (120) days in the case of clauses (i) and
(ii) below, or sixty (60) days in the case of clause (iii) below (each a
"BLACKOUT PERIOD"), the filing of any Demand Registration if the Company shall
determine that any such filing or the offering of any Shares would (i) in the
good faith judgment of the Board, materially impede, delay or otherwise
interfere with any pending or contemplated material acquisition, corporate
reorganization or other similar material transaction involving the Company, (ii)
based upon advice from the Company's investment banker or financial advisor,
materially adversely affect any pending or contemplated financing or offering or
sale of any class of securities by the Company, or (iii) in the good faith
judgment of the Board require premature disclosure of material non-public
information (other than information relating to an event described in clause (i)
or (ii) of this subsection (b)) which, if disclosed at such time, would be
materially harmful to the interests of the Company and its stockholders;
PROVIDED, HOWEVER, that in the case of a Blackout Period pursuant to clause (i)
or (ii) above, the Blackout Period shall earlier terminate upon the completion
or abandonment of the relevant securities offering or material sale, financing,
acquisition, corporate reorganization or other similar material transaction; and
PROVIDED, FURTHER, that in the case of a Blackout Period pursuant to clause
(iii) above, the Company shall give written notice of its determination to
postpone or delay the filing of any Demand Registration and in the case of
clause (iii) above, the Blackout Period shall earlier terminate upon public
disclosure by the Company of such material non-public information or such time
as such material non-public information shall be publicly disclosed without
breach by any Holder; and PROVIDED, FURTHER, that in the case of a Blackout
Period pursuant to clause (i), (ii) or (iii) above, the Company shall furnish to
each Holder a certificate of an executive officer of the Company to the effect
that an event permitting a Blackout Period has occurred and to the extent
practicable, an approximation of the period of the anticipated delay.
Notwithstanding anything herein to the contrary, the Company shall not exercise
pursuant to clause (i) and (ii) of the preceding sentence the right to postpone
or delay the filing of any Demand Registration more than once in any twelve (12)
month period or more than twice pursuant to clause (iii) of the preceding
sentence in any twelve (12) month period. Upon notice by the Company to the
Holders of any such determination, each of the Holders covenants that it shall
keep the fact of any such notice strictly confidential, and, in the case of a
Blackout Period pursuant to clause (iii) above or Section 2.1(c) below, promptly
halt any offer, sale, trading or transfer by it or any of its Affiliates of any
shares for the duration of the Blackout Period set forth in such notice (or
until such Blackout Period shall be earlier terminated in writing by the
Company) and promptly halt any use, publication, dissemination or distribution
of the Demand Registration, each prospectus included therein, and any amendment
or supplement thereto by it and any of its Affiliates for the duration of the
Blackout Period set forth in such notice (or until such Blackout Period shall be
earlier terminated in writing by the Company) and, if so directed by the
Company, will deliver to the Company any copies then in such Holder's possession
of the prospectus covering such Shares that was in effect at the time of receipt
of such notice. After the expiration of any Blackout Period and without further
request from the Holders, the Company shall effect the filing of the
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relevant Demand Registration and shall use its best efforts to cause any such
Demand Registration to be declared effective as promptly as practicable unless
the Holders shall have, prior to the effective date of such Demand Registration,
withdrawn in writing their initial request.
(c) Anything in this Agreement to the contrary notwithstanding, in case
a Demand Registration has been filed, if a transaction of the type specified in
Section 2.1(b)(i) has occurred, the Company may cause such Demand Registration
to be withdrawn and its effectiveness terminated or may postpone amending or
supplementing such Demand Registration for a reasonable period of time, not to
exceed the Blackout Period applicable to Section 2.1(b)(i).
(d) The Holders may withdraw a Demand Request in their discretion or in
circumstances including, but not limited to, the following: if (i) the Company
is in material breach of its obligations hereunder and has not cured such breach
after having received notice thereof and a reasonable opportunity to do so or
(ii) the withdrawal occurs during a Blackout Period.
(e) The Company may elect to include in any registration statement
filed pursuant to this Section 2.1 any Shares to be issued by it or held by any
of its subsidiaries or by any Other Holders only to the extent such Shares are
offered and sold pursuant to, and on the terms and subject to the conditions of,
any underwriting agreement or distribution arrangements entered into or effected
by the Holders and only to the extent the managing underwriter thereof does not
reasonably and in good faith advise the Holders prior to the consummation of any
Demand Registration that the inclusion in such registration statement of any
such Common Stock to be issued by the Company or sold by any of its subsidiaries
or any Other Holder will not create a substantial risk that the price per share
of Common Stock that the Holders will derive from such Demand Registration will
be adversely affected or that the number of Shares sought to be registered
(including any Shares sought to be registered at the request of the Company and
any Other Holder and those sought to be registered by the Holders) is a greater
number than can reasonably be sold.
(f) The managing underwriter or underwriters for any Demand
Registration shall be selected by PepsiCo, PROVIDED THAT such managing
underwriter or underwriters shall be of recognized national standing, and such
underwriters' commissions shall be reasonably satisfactory to the Company.
Section 2.2. "PIGGY-BACK" REGISTRATIONS. (a) If, at any time following
the Offering, the Company proposes to register any Shares under the Securities
Act on a registration statement on Form S-1, Form S-2 or Form S-3 (or any
equivalent general registration form then in effect) for purposes of a primary
offering, secondary offering or combined offering of Shares, the Company shall
give prompt written notice to all Holders of its intention to do so. Such notice
shall specify, at a minimum, the number of shares of Shares so proposed to be
registered, the proposed date of filing of such registration statement, any
proposed means of distribution of such Shares, any proposed managing underwriter
or underwriters of such offering and a good faith estimate by the Company of the
proposed maximum offering price thereof, as such price is proposed to appear on
the facing page of such registration statement. Upon the written direction of
any Holder (a
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"PIGGY-BACK REQUEST"), given within fifteen (15) business days following the
receipt by such Holder of any such written notice (which direction shall specify
the number of Shares intended to be disposed of by such Holder), the Company
shall include in such registration statement (a "PIGGY-BACK REGISTRATION," and
collectively with a Demand Registration, a "REGISTRATION"), subject to the
provisions of Section 2.2 hereof, such number of Shares as shall be set forth in
such Piggy-Back Request.
(b) In the event that the Company proposes to register Shares in
connection with an underwritten offering and a nationally recognized independent
investment banking firm selected by the Company to act as managing underwriter
thereof reasonably and in good faith shall have advised the Company, any Holder
or any Other Holder intending to offer such Shares in a secondary offering or
combined offering in writing that, in its opinion, the inclusion in the
registration statement of some or all of the Shares sought to be registered by
such Holder or Other Holder creates a substantial risk that the price per share
of Common Stock that the Company, the Holder or the Other Holder will derive
from such registration will be adversely affected or that the number of Shares
sought to be registered is a greater number than can reasonably be sold, the
Company shall include in such registration statement such number of Shares as
the Company, such Holder and Other Holder are so advised can be sold in such
offering without such an effect (the "MAXIMUM NUMBER") as follows and in the
following order or priority: (A) FIRST, such number of Shares as the Company
intended to be registered and sold by the Company and (B) SECOND, in the case of
a secondary offering or a combined offering and if and to the extent that the
number of Shares to be registered under clause (A) is less than the Maximum
Number, such number of Shares as the Holder and any Other Holder shall have
intended to register which, when added to the number of Shares to be registered
under clause (a), is less than or equal to the Maximum Number; PROVIDED THAT, if
such number exceeds the Maximum Number, the Shares of the Holder and such Other
Holders will be excluded on a PRO RATA basis, except as may be agreed to among
the Holders and Other Holders.
(c) No Piggy-Back Registration effected under this Section 2.2 shall be
deemed to have been effected pursuant to Section 2.1 hereof or shall release the
Company of its obligations to effect any Demand Registration upon request as
provided under Section 2.1 hereof.
(d) Notwithstanding any request under this Section 2.2, any Holder may
elect in writing to withdraw its request for inclusion of its Shares in any
registration statement PROVIDED, HOWEVER, that (i) such request must be made in
writing prior to the execution of the underwriting agreement with respect to
such registration and (ii) such withdrawal shall be irrevocable and, after
making such withdrawal, the Holder shall no longer have any right to include
Shares in the registration as to which such withdrawal was made.
(e) If, at any time after giving written notice of its intention to
register any Shares and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason not to register or to delay registration of such
Shares, the Company may, at its election, give written notice of such
determination to all Holders of record of Shares and (i) in the case of a
determination not to register, shall be relieved of its obligation to register
any Shares in connection with such abandoned registration, without prejudice,
however, to the rights of the Holders
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under Section 2.1 and (ii) in the case of a determination to delay such
registration of the Company's Shares, shall be permitted to delay the
registration of such Shares for the same period as the delay in registering such
other Shares.
(f) If, as a result of the proration provisions of this Section 2.2,
any Holder shall not be entitled to include all Shares in a registration that
such Holder has requested to be included, such Holder may elect to withdraw his
request to include his Shares in such registration or may reduce the number
requested to be included, PROVIDED THAT the limitations in subsection (b) shall
apply.
Section 2.3. ADDITIONAL AGREEMENTS. Anything in this Agreement to the
contrary notwithstanding, if at any time the Company shall obtain a written
opinion of legal counsel reasonably satisfactory to PepsiCo and addressed to the
Company and the Holders to the effect that the Shares may be publicly offered
for sale in the United States by the Holders without restriction as to manner of
sale and amount of securities sold and without registration or other restriction
under the Securities Act, the Company shall no longer be obligated to file or
maintain a registration statement with respect to the Shares pursuant to this
Agreement. In such case, the Company shall issue to the Holders certificates
representing the Shares without any legend restricting transfer and shall remove
all stop transfer orders relating to the Shares.
Section 2.4. REGISTRATION PROCEDURES. (a) In connection with each
registration statement prepared pursuant to this Agreement, and in accordance
with the intended method or methods of distribution of the Shares as described
in such registration statement, the Company shall, as soon as reasonably
practicable (and, in any event, subject to the terms of this Agreement,
including, without limitation, Section 2.1(a), at or before the time required by
applicable laws and regulations):
(i) Prepare and file with the SEC a registration statement on an
appropriate registration form of the SEC, with respect to such Shares, which
form shall be available for the sale of Shares in accordance with the intended
methods of distribution thereof, and use its best efforts to cause such
registration statement to become and remain effective promptly; PROVIDED THAT,
before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company will furnish to the Holders and their counsel,
and the sales or placement agent or agents, if any, for the Shares and the
managing underwriter or underwriters, if any, draft copies of all such documents
proposed to be filed at least seven (7) days prior to such filing, which
documents will be subject to the reasonable review of the Holders, the sales or
placement agent or agents, if any, for the Shares and the managing underwriter
or underwriters, if any, and their respective agents and representatives and (x)
the Company will not include in any registration statement information
concerning or relating to any Holder to which PepsiCo shall reasonably object in
writing (unless the inclusion of such information is required by applicable law
or the regulations of any securities exchange to which the Company may be
subject), and (y) the Company will not file any Demand Registration or amendment
thereto or any prospectus or any supplement thereto to which PepsiCo shall
reasonably object in writing;
(ii) Furnish without charge to each Holder, the sales or placement
agent or agents, if any, and the managing underwriter or underwriters, if any,
such reasonable
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number of copies of such registration statement and of each amendment and
supplement thereto (in each case including all exhibits), such number of copies
of the summary, preliminary, final, amended or supplemented prospectuses
included in such registration statement in conformity with the requirements of
the Securities Act and any regulations promulgated thereunder and (upon the
reasonable request by such Holder), any documents incorporated therein by
reference and such other documents as such Holder may reasonably request in
order to facilitate the public sale or other disposition of such Shares (the
Company hereby consenting to the use in accordance with all applicable law of
the prospectus or any amendment or supplement thereto by each Holder in
connection with the offering and sale of the Shares covered by the prospectus or
any amendment or supplement thereto);
(iii) Use its best efforts to keep such registration statement
effective for at least 180 days, which time shall be extended by the aggregate
number of days of all Blackout Periods occurring during such registration (the
"EFFECTIVE PERIOD"); prepare and file with the SEC such amendments,
post-effective amendments and supplements to the registration statement and the
prospectus as may be necessary to maintain the effectiveness of the registration
for the Effective Period and to cause the prospectus (and any amendments or
supplements thereto) to be filed pursuant to Rules 424 and 430A under the
Securities Act and/or any successor rules that may be adopted by the SEC, as
such rules may be amended from time to time; and comply with the provisions of
the Securities Act with respect to the disposition of all Shares covered by such
registration statement during the applicable period in accordance with the
intended method or methods of distribution thereof, as specified in writing by
the Holders;
(iv) Except during any Blackout Period, make available for inspection
by the Holders or by any underwriter, attorney, accountant or other agent
retained by the Holders (collectively, the "INSPECTORS") financial and other
records and pertinent corporate documents of the Company (collectively, the
"RECORDS"), provide the Inspectors with opportunities to discuss the business of
the Company with its officers and provide opportunities to discuss the business
of the Company with the independent public accountants who have certified its
most recent annual financial statements, in each case to the extent customary
for transactions of the size and type intended, as specified by the Holders, but
only to the extent reasonably necessary to enable the Holders or any underwriter
retained by the Holders to conduct a "reasonable investigation" for purposes of
Section 11(a) of the Securities Act. Records which the Company determines, in
good faith, to be confidential and which it notifies the Inspectors are
confidential shall not be disclosed by the Inspector unless (A) the disclosure
of such Records is necessary to avoid or correct a misstatement of a material
fact or omission to state a material fact in the Registration, (B) the
disclosure of such Records is required by any court or governmental body with
jurisdiction over the Holders or Inspector or (C) all of the information
contained in such Records has been made generally available to the public. Each
of the Holders agrees that it will, upon learning that disclosure of such
Records is sought in a court of competent jurisdiction or by any governmental
body, promptly give prior notice to the Company and allow the Company, at its
expense, to undertake appropriate action to prevent disclosure of those Records
deemed confidential;
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(v) If requested by any Holder, promptly incorporate in a prospectus,
prospectus supplement or post-effective amendment, such information as such
Holder reasonably specifies should be included therein, including, without
limitation, information relating to the planned distribution of Shares, the
number of Shares being sold by such Holder, the name and description of such
Holder, the offering price of such Shares and any discount, the names of the
underwriters, commission or other compensation payable in respect of the Shares
being sold, the purchase price being paid therefor to such Holder and
information with respect to any other terms of the underwritten offering of the
Shares to be sold in such offering, except to the extent that the Company is
advised in a written opinion of outside counsel reasonably satisfactory to
PepsiCo that the inclusion of such information is reasonably likely to violate
applicable securities laws; and make all required filings of such prospectus,
prospectus supplement or post-effective amendment promptly after notification of
the matters to be incorporated in such prospectus, prospectus supplement or
post-effective amendment;
(vi) If requested by any Holder, use best efforts to participate in and
assist with a "road show" and other customary marketing efforts in connection
with the sale of Shares pursuant to such registration statement, at such times
and in such manner as the Company and such Holder mutually may determine (and as
do not unreasonably interfere with the Company's operations);
(vii) Use its best efforts to register or qualify the Shares covered by
such registration statement under such other securities or "blue sky" laws of
such jurisdictions in the United States as the Holders shall reasonably request,
keep such registrations or qualifications in effect for so long as the
registration statement remains in effect, and do any and all other acts and
things which may be reasonably necessary to enable the Holders or any
underwriter to consummate the public sale or other disposition of the Shares in
such jurisdictions; PROVIDED, HOWEVER, that in no event shall the Company be
required to qualify to do business as a foreign corporation in any jurisdiction
where it is not so qualified; to execute or file any general consent to service
of process under the laws of any jurisdiction; to take any action that would
subject it to service of process in suits other than those arising out of the
offer and sale of the Shares covered by the registration statement; or to
subject itself to taxation in any jurisdiction where it would not otherwise be
obligated to do so, but for this paragraph (vii);
(viii) Use its best efforts to cause the Shares to be registered with
or approved by such other governmental agencies or authorities as may be
necessary to enable the Holders to consummate the public sale or other
disposition of the Shares;
(ix) Use its best efforts to cause all Shares covered by such
registration statement to be approved for trading on a national interdealer
quotation system or listed on the securities exchanges on which similar
securities issued by the Company are then listed or traded;
(x) Promptly notify each of the Holders, at any time when a prospectus
relating to any of the Shares covered by such registration statement is required
to be delivered under the Securities Act, of the Company's becoming aware that
the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary
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to make the statements therein not misleading in the light of the circumstances
then existing, and, at the request of any Holder, promptly prepare and furnish
to such Holder a reasonable number of copies of a prospectus supplemented or
amended so that, as thereafter delivered to the purchasers of such Shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(xi) Promptly notify the Holders, the sales or placement agent or
agents, if any, for the Shares and the managing underwriter or underwriters, if
any, after becoming aware that the registration statement or any related
prospectus or any amendment or supplement has been filed, and, with respect to
the registration statement or any post-effective amendment, when the same has
become effective, (A) of any request by the SEC for amendments or supplements to
the registration statement or the related prospectus or for additional
information, (B) of the issuance by the SEC of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceedings
for that purpose, (C) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation of any proceeding for such purpose or (D) within
the Effective Period, of the happening of any event which makes any statement in
the registration statement or any post-effective amendment thereto, prospectus
or any amendment or supplement thereto, or any document incorporated therein by
reference untrue in any material respect or which requires the making of any
changes in the registration statement or post-effective amendment thereto or any
prospectus or amendment or supplement thereto so that they will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein (in light of
the circumstances under which they were made) not misleading;
(xii) During the Effective Period, use its best efforts to obtain the
withdrawal of any order suspending the effectiveness of the registration
statement or any post-effective amendment thereto;
(xiii) Permit PepsiCo to participate in the preparation of such
registration statement and all discussions between the Company and the SEC or
its staff with respect to such registration statement, and to require the
insertion therein of material, furnished to the Company in writing, which in the
reasonable judgment of PepsiCo should be included;
(xiv) Deliver promptly to each Holder, upon such Holder's request,
copies of all correspondence between the SEC and the Company, its counsel or
auditors and all memoranda relating to discussions with the SEC or its staff
with respect to the registration statement and permit the Holders to do such
investigation, with respect to information contained in or omitted from the
registration statement, as it deems reasonably necessary. Each of the Holders
agrees that it will use its best efforts not to interfere unreasonably with the
Company's business when conducting any such investigation;
(xv) Provide a transfer agent and registrar for all such Shares covered
by such registration statement not later than the effective date of such
registration statement,
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which transfer agent and registrar may be the Company, subject to any applicable
law or regulations;
(xvi) Cooperate with the Holders and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing such Shares to be sold under the registration
statement, which certificates shall not bear any restrictive legends except as
required by law; and, in the case of an underwritten offering, enable such
Shares to be in such denominations and registered in such names as the managing
underwriter or underwriters, if any, may request in writing at least two (2)
business days prior to any sale of the Shares to the underwriters;
(xvii) Enter into such agreements (including, if the offering is an
underwritten offering, an underwriting agreement) as are customary in
transactions of such kind and take such other actions as are reasonably
necessary in connection therewith in order to expedite or facilitate the
disposition of such Shares; and (A) make such representations and warranties
with respect to the registration statement, post-effective amendment or
supplement thereto, prospectus or any amendment or supplement thereto, and
documents incorporated by reference, if any, to the managing underwriter or
underwriters, if any, of the Shares and, at the option of any Holder, make to
and for the benefit of such Holder the representations, warranties and covenants
of the Company which are being made to the underwriters, in form, substance and
scope as are customarily made by the Company in transactions of such kind
(representations and warranties by the Other Holders shall also be made as are
customary in agreements of that type); PROVIDED THAT the Company shall not be
required to make any representations or warranties with respect to information
specifically provided by Holders or Other Holders for inclusion in the
registration documents; (B) obtain an opinion of counsel to the Company (which
counsel may be internal counsel for the Company) in customary form and covering
matters of the type customarily covered by such an opinion, addressed to such
managing underwriter or underwriters, if any, and to the Holder and dated the
date of the closing of the sale of the Shares relating thereto; (C) obtain a
"comfort" letter or letters from the independent certified public accountants
who have certified the Company's most recent audited financial statements that
are incorporated by reference in the registration statement which is addressed
to the Holder and the managing underwriter or underwriters, if any, and is dated
the date of the prospectus used in connection with the offering of such Shares
and/or the date of the closing of the sale of such Shares relating thereto, such
letter or letters to be in customary form and covering such matters as are
customarily covered by "comfort" letters of such type; (D) deliver such
documents and certificates as may be reasonably requested by the Holders and the
managing underwriter or underwriters, if any, to evidence compliance with any
customary conditions contained in the underwriting agreement or other agreement
entered into by the Company; and (E) undertake such obligations relating to
expense reimbursement, indemnification and contribution as provided in Sections
2.5 and 2.6 hereof; and
(xviii) (a) Comply with all applicable rules and regulations of the SEC
and generally make available to its security holders an earnings statement
(which need not be audited), as soon as reasonably practicable but in no event
later than ninety (90) days after the end of the period of twelve (12) months
commencing on the first day of any fiscal quarter next succeeding each sale by
the Holders of Shares which have been
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registered pursuant to this Agreement (the "REGISTERED SHARES") after the date
hereof, which earnings statement shall cover such twelve (12) month period and
shall satisfy the provisions of Section 11(a) of the Securities Act and may be
prepared in accordance with Rule 158 under the Securities Act.
(b) In the event that the Company would be required, pursuant to
Section 2.4(a)(xi)(D) above, to notify the Holders, the sales or placement agent
or agents, if any, for the Shares and the managing underwriter or underwriters,
if any, thereof, the Company shall, subject to the provisions of Section 2.1(b)
hereof, as promptly as practicable, prepare and furnish to each of the Holders,
to each placement or sales agent, if any, and to each underwriter, if any, a
reasonable number of copies of a prospectus supplemented or amended so that, as
thereafter delivered to purchasers of Registered Shares, such prospectus shall
not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. Each
of the Holders agrees that, upon receipt of any notice from the Company pursuant
to Section 2.4(a)(xi)(D) hereof, such Holder shall, and shall use its best
efforts to cause any sales or placement agent or agents for the Shares and the
underwriters, if any, thereof, to forthwith discontinue disposition of the
Shares until such person shall have received copies of such amended or
supplemented prospectus and, if so directed by the Company, to destroy or to
deliver to the Company all copies, other than permanent file copies, then in its
possession of the prospectus (prior to such amendment or supplement) covering
such Shares as soon as practicable after such Holder's receipt of such notice.
(c) Each of the Holders shall furnish to the Company in writing such
information regarding such Holder and its intended method of distribution of the
Shares as the Company may from time to time reasonably request in writing, but
only to the extent that such information is required in order for the Company to
comply with its obligations under all applicable securities and other laws and
to ensure that the prospectus relating to such Shares conforms to the applicable
requirements of the Securities Act and the rules and regulations thereunder.
Each of the Holders shall notify the Company as promptly as practicable of any
inaccuracy or change in information previously furnished by such Holder to the
Company or of the occurrence of any event, in either case as a result of which
any prospectus relating to the Shares contains or would contain an untrue
statement of a material fact regarding such Holder or its intended method of
distribution of such Shares or omits to state any material fact regarding such
Holder or its intended method of distribution of such Shares required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and promptly furnish
to the Company any additional information required to correct and update any
previously furnished information or required so that such prospectus shall not
contain, with respect to such Holder or the distribution of the Shares, an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) Each of the Holders agrees not to effect any public sale or
distribution of any Shares, including any sale pursuant to Rule 144 under the
Securities Act, and not to effect any such public sale or distribution of any
other equity security of the Company or
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of any security convertible into or exchangeable or exercisable for any equity
security of the Company (in each case, other than as part of such underwritten
public offering) during the ten (10) days prior to, and during the ninety (90)
day period (or such longer period as the Holders agree with the underwriter of
such offering) beginning on, the consummation of any underwritten public
offering of the Shares covered by a registration statement referred to in
Section 2.2 to the extent each such Holder's Registered Shares are being sold
thereunder.
(e) In the case of any registration under Section 2.1 pursuant to an
underwritten offering, or in the case of a registration under Section 2.2, if
the Company has determined to enter into an underwriting agreement in connection
therewith, all Shares to be included in such registration shall be subject to
such underwriting agreement and no person may participate in such registration
unless such person agrees to sell such person's securities on the basis provided
therein and completes and executes all questionnaires, indemnities, underwriting
agreements and other documents (other than powers of attorney) which must be
executed in connection therewith, and provides such other information to the
Company or the underwriter as may be reasonably requested to register such
person's Shares.
Section 2.5. REGISTRATION EXPENSES. The Company agrees to bear and to
pay, or cause to be paid, promptly upon request being made therefor, all
expenses incident to the Company's performance of or compliance with this
Agreement, including, without limitation: (a) all fees and expenses in
connection with the qualification of the Registered Shares for offering and sale
under state securities or "blue sky" laws refereed to in Section 2.4(a)(vii)
hereof, including reasonable fees and disbursements of counsel for any placement
or sales agent or underwriter in connection with such qualifications, (b) all
expenses relating to the preparation, printing, distribution and reproduction of
the registration statement, each prospectus included therein or prepared for
distribution pursuant hereto, each amendment or supplement to the foregoing, the
certificates representing the shares and all other documents relating hereto,
(c) the costs and charges of any escrow agent, transfer agent, registrar, any
custodian or attorney-in-fact appointed to act on behalf of the Holders
(including, without limitation, all salaries and expenses of the Company's
officers and employees performing legal or accounting duties), (d) fees,
disbursements and expenses of the Company's counsel and its other advisors and
experts and independent certified public accountants of the Company (including
the expenses of any opinions or "comfort" letters required by or incident to
such performance and compliance) and (e) the fees and expenses incurred in
connection with the listing of the Shares on The New York Stock Exchange, Inc.
and any other stock exchange or national securities exchange on which Shares
shall at such time be listed (collectively, the "REGISTRATION EXPENSES"). To the
extent that any Registration Expenses are incurred, assumed or paid by the
Holders, any sales or placement agent or agents for the Shares and the
underwriters, if any, thereof, the Company shall reimburse such person for the
full amount of the Registration Expenses so incurred, assumed or paid promptly
after receipt of a request therefor. The Holders shall pay all underwriting
discounts and commissions and any capital gains, income or transfer taxes, if
any, attributable to the sale of the Shares being registered.
Section 2.6. INDEMNIFICATION; CONTRIBUTION. (a) INDEMNIFICATION BY THE
COMPANY. The Company shall, and it hereby agrees to, indemnify and hold harmless
each Holder,
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PepsiCo, its directors, officers, employees and controlling persons, if any,
against any losses, claims, damages or liabilities relating to the offer or sale
of the Shares to which such Holder may become subject, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
(collectively, "CLAIMS") arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any registration
statement, or any preliminary or final prospectus contained therein, or any
amendment or supplement thereto, or any document incorporated by reference
therein, or arise out of or are based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, and the Company shall, and it hereby agrees to, reimburse each
Holder or for any legal or other out-of-pocket expenses reasonably incurred by
them in connection with investigating or defending any such Claims; PROVIDED,
HOWEVER, that the Company shall not be liable to any such Holder in any such
case to the extent that any such Claims arise out of or are based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, or preliminary or final prospectus, or amended or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by such Holder or any agent, underwriter or
representative of such Holder expressly for use therein, or by such Holder's
failure to furnish the Company, upon request, with the information with respect
to such Holder, or any agent, underwriter or representative of such Holder, or
such Holder's intended method of distribution, that is the subject of the untrue
statement or omission or if the Company shall sustain the burden of proving that
such Holder or such agent or underwriter sold securities to the person alleging
such Claims without sending or giving, at or prior to the written confirmation
of such sale, a copy of the applicable prospectus (excluding any documents
incorporated by reference therein) or of the applicable prospectus, as then
amended or supplemented (excluding any documents incorporated by reference
therein), if the Company had previously furnished copies thereof to the such
Holder or such agent or underwriter, and such prospectus corrected such untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement.
(b) INDEMNIFICATION BY THE HOLDERS AND ANY AGENTS OR UNDERWRITERS. Each
Holder shall, and hereby agrees to (i) indemnify and hold harmless the Company,
its directors, officers, employees and controlling persons, if any, against any
Claims to which the Company, its directors, officers, employees and controlling
persons, if any, may become subject, insofar as such Claims (including any
amounts paid in settlement as provided herein), or actions or proceedings in
respect thereof, arise out of or are based upon an untrue statement of a
material fact contained in such registration statement, or any preliminary or
final prospectus contained therein, or any amendment or supplement thereto, or
any document incorporated by reference therein, or arise out of or are based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Holder or
any agent, underwriter or representative of such Holder, expressly for use
therein, and (ii) reimburse the Company for any legal or other out-of-pocket
expenses reasonably incurred by the Company in connection with investigating or
defending any such Claim.
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(c) NOTICE OF CLAIMS, ETC. Promptly after receipt by an indemnified
party under subsection (a) or (b) above of written notice of the commencement of
any action or proceeding for which indemnification under subsection (a) or (b)
may be requested, such indemnified party shall, without regard to whether a
claim in respect thereof is to be made against an indemnifying party pursuant to
the indemnification provisions of, or as contemplated by, this Section 2.6,
notify such indemnifying party in writing of the commencement of such action or
proceeding; but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party in
respect of such action or proceeding on account of the indemnification
provisions of or contemplated by Section 2.6(a) or 2.6(b) hereof unless the
indemnifying party was materially prejudiced by such failure of the indemnified
party to give such notice, and in no event shall such omission relieve the
indemnifying party from any other liability it may have to such indemnified
party. In case any such action or proceeding shall be brought against any
indemnified party and it shall notify an indemnifying party of the commencement
thereof, unless in the reasonable opinion of outside counsel to the indemnified
party a conflict of interest between such indemnified and indemnifying parties
may exist in respect of such claim, such indemnifying party shall be entitled to
participate therein and, to the extent that it shall determine, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and, after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, such indemnifying party shall not be liable to such
indemnified party for any legal or any other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation (unless such indemnified party reasonably
objects to such assumption on the grounds that there may be defenses available
to it which are different from or in addition to the defenses available to such
indemnifying party, in which event the indemnified party shall have the right to
control its defense and shall be reimbursed by the indemnifying party for the
expenses incurred in connection with retaining one separate counsel). If the
indemnifying party is not entitled to, or elects not to, assume the defense of a
claim, it will not be obligated to pay the fees and expenses of more than one
counsel for each indemnified party with respect to such claim. The indemnifying
party will not be subject to any liability for any settlement made without its
consent, which consent shall not be unreasonably withheld or delayed.
(d) PAYMENT. The indemnification required by this Section 2.6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
(e) BENEFICIARIES OF INDEMNIFICATION. The obligations of the Company
under this Section 2.6 shall be in addition to any liability that it may
otherwise have and shall extend, upon the same terms and conditions, to each
employee, officer, director and partner of each Holder, and each person, if any,
who controls any Holder; and the obligations of each Holder contemplated by this
Section 2.6 shall be in addition to any liability that such Holder, or its
respective agents or underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company
(including any person who, with his consent, is named in any registration
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<PAGE>
statement as about to become a director of the Company) and to each person, if
any, who controls the Company within the meaning of the Securities Act.
Section 2.7. UNDERWRITERS. If any of the Shares are to be sold pursuant
to an underwritten offering, the investment banker or bankers and the managing
underwriter or underwriters thereof shall be selected by the Company except in
the case of a Demand Registration, in which the managing underwriter or
underwriters shall be selected by the Holders, PROVIDED THAT such managing
underwriter or underwriters must be of recognized national standing, and such
underwriters' commissions shall be reasonably satisfactory to the Company.
Section 2.8. EXCHANGE ACT FILINGS; RULE 144; RULE 144A. (a) The Company
covenants to and with each Holder that to the extent it shall be required to do
so under the Exchange Act, the Company shall timely file the reports required to
be filed by it under the Exchange Act or the Securities Act (including, but not
limited to, the reports under Sections 13 and 15(d) of the Exchange Act referred
to in subparagraph (c)(1) of Rule 144 adopted by the SEC under the Securities
Act and the rules and regulations adopted by the SEC thereunder) and shall take
such further action as the such Holder may reasonably request, all to the extent
required from time to time to enable the Holders to sell Shares without
registration under the Securities Act within the limitations of the exemption
provided by Rule 144 under the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the SEC.
Upon the request of any Holder, the Company shall deliver to such Holder a
written statement as to whether it has complied with such requirements.
(b) If at any time the Company is not subject to Section 13 or 15(d) of
the Exchange Act and is not exempt from reporting pursuant to Rule 12g3-2(b)
under the Exchange Act, the Company agrees, upon the request of any Holder
seeking to transfer Shares in conformity with Rule 144A under the Securities
Act, to furnish to the such Holder or prospective purchaser of the Shares from
such Holder the information required by Rule 144A(d)(4)(I) under the Securities
Act in the manner and at the times contemplated by such Rule.
(c) The Company covenants to make available "adequate current public
information" concerning the Company within the meaning of Rule 144(c) under the
Securities Act.
Section 2.9. AGREEMENT OF THE HOLDERS. Each Holder agrees not to, and
it shall cause its subsidiaries not to, make any sale, transfer or other
disposition of Shares except in compliance with the registration requirements of
the Securities Act and the rules and regulations thereunder and in accordance
with the terms of this Agreement.
Section 2.10. LEGENDS. (a) Stop transfer restrictions will be given to
the Company's transfer agent(s) with respect to the Shares and will be placed on
the certificates or instruments representing the Shares, and on any certificate
or instrument delivered in substitution therefor, a legend stating in substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
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<PAGE>
AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO SUCH REGISTRATION OR IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT.
(b) The Company hereby agrees that it will cause stop transfer
restrictions to be released with respect to any Shares that are transferred (i)
pursuant to an effective registration statement under the Securities Act, (ii)
pursuant to Rule 144 or 145 under the Securities Act, (iii) in accordance with
the requirements of Rule 903 or 904 of Regulation S under the Securities Act, or
(iv) pursuant to another exemption from the registration requirements of the
Securities Act; PROVIDED, HOWEVER, that in the case of any transfer pursuant to
clause (ii), (iii) or (iv) above, the request for transfer is accompanied by a
written statement signed by the Holder confirming compliance with the
requirements of the relevant exemption from registration; and PROVIDED, FURTHER,
that in the case of any transfer pursuant to clause (iv) above, other than any
transfer by any Holder to one or more of PepsiCo's direct or indirect
subsidiaries, or among such subsidiaries, or by any such subsidiary to PepsiCo,
the Company shall have received a written opinion of counsel reasonably
satisfactory to the Company. The Company further agrees that it will cause the
legend described in subsection (a) of this Section 2.10 to be removed in the
event of any transfer as provided in clause (I), (ii) or (iii) above.
ARTICLE III
MISCELLANEOUS
Section 3.1. TERM OF AGREEMENT; TERMINATION. The term of this Agreement
shall commence on the date hereof and shall terminate upon the expiration of the
Demand Period, PROVIDED, HOWEVER, that the provisions of Section 2.6 of this
Agreement shall survive its termination.
Section 3.2. COMMON STOCK CONVERSIONS. The provisions of this Agreement
shall apply to any and all shares of Common Stock now or hereafter owned by a
Holder, including, without limitation, Shares held as the result of such
Holder's conversion into Common Stock of (i) Class B common stock, par value
$.01 per share, of the Company, or (ii) Membership Interests in Bottling Group,
LLC, or any successor thereto.
Section 3.3. RECAPITALIZATIONS, EXCHANGES, ETC. AFFECTING THE SHARES.
The provisions of this Agreement shall apply to any and all shares of capital
stock of the Company or any successor or assign of the Company (whether by
merger, consolidation, sale of assets or otherwise) which may be issued in
respect of, in exchange for, or in substitution of the Shares, by reason of a
stock dividend, stock split, stock issuance, reverse stock split, combination,
recapitalization, reclassification, merger, consolidation or otherwise. Upon the
occurrence of any such event, amounts hereunder shall be appropriately adjusted.
Section 3.4. OTHER COMPANY SECURITIES. The provisions of this Agreement
shall apply MUTATIS MUTANDIS to any publicly traded security of the Company,
other than the
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<PAGE>
Common Stock, which may be owned by the Holders from time to time during the
Demand Period.
Section 3.5. AMENDMENT. This Agreement may not be amended except by a
written instrument, duly executed by the Company and PepsiCo.
Section 3.6. NOTICES. Except as otherwise provided in this Agreement,
all notices, requests, claims, demands, waivers and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
delivered by hand, when delivered personally or by courier, three days after
being deposited in the mail (registered or certified mail, postage prepaid,
return receipt requested), or when received by facsimile transmission if
promptly confirmed by one of the foregoing means, as follows:
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<PAGE>
IF TO THE COMPANY:
The Pepsi Bottling Group, Inc.
One Pepsi Way
Somers, NY 10589-2201
Attention: General Counsel
IF TO THE HOLDERS:
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577-1444
Attention: General Counsel
Section 3.7. INTEGRATION. This Agreement and the other writings
referred to herein or delivered pursuant hereto which form a part hereof contain
the entire understanding of the parties with respect to its subject matter. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to its subject matter. There are no restrictions, agreements,
promises, representations, warranties, covenants or undertakings with respect to
its subject matter other than those expressly set forth or referred to herein.
Section 3.8. BINDING EFFECT; BENEFIT. This Agreement shall inure to the
benefit of and be binding upon the parties hereto, and their respective
successors and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto, and
their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
Section 3.9. ASSIGNABILITY. Except for (i) any assignment by any Holder
to any other direct or indirect subsidiary of PepsiCo, or (ii) any subsequent
assignments among such direct or indirect subsidiaries, this Agreement shall not
be assignable by any party hereto.
Section 3.10. COUNTERPARTS. This Agreement may be executed by the
parties hereto in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
Section 3.11. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of New York without giving effect to
principles of conflicts of law.
Section 3.12. SEVERABILITY. In the event any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired, and such
unreasonable, unlawful or unenforceable provision shall be
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<PAGE>
interpreted, revised or applied in the manner that renders it lawful and
enforceable to the fullest extent possible under law.
IN WITNESS WHEREOF, the parties named below have hereto signed this
Agreement as of the day and year first above written.
PepsiCo, Inc.
By
---------------------------------
Name:
Title:
The Pepsi Bottling Group, Inc.
By
---------------------------------
Name:
Title:
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<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholder
The Pepsi Bottling Group, Inc.:
The audits referred to in our report on the Combined Financial Statements of
The Pepsi Bottling Group, Inc., included the related financial statement
schedule as of December 26, 1998, and for each of the fiscal years in the
three-year period ended December 26, 1998, included in the registration
statement. Such report is the form of opinion that we expect to issue when the
long-term debt and equity capitalization of The Pepsi Bottling Group, Inc. as
described in Note 1 to the Combined Financial Statements is finalized. This
financial statement schedule is the responsibility of The Pepsi Bottling Group,
Inc.'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 combined financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG LLP
New York, New York
February 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The Pepsi
Bottling Group, Inc. combined financial statements for the 52 week period ended
December 26, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001076405
<NAME> The Pepsi Bottling Group, Inc.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> DEC-26-1998
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 854
<ALLOWANCES> 46
<INVENTORY> 296
<CURRENT-ASSETS> 1,318
<PP&E> 4,416
<DEPRECIATION> 2,361
<TOTAL-ASSETS> 7,322
<CURRENT-LIABILITIES> 1,025
<BONDS> 61
0
0
<COMMON> 0
<OTHER-SE> 1,367
<TOTAL-LIABILITY-AND-EQUITY> 7,322
<SALES> 7,041
<TOTAL-REVENUES> 7,041
<CGS> 4,181
<TOTAL-COSTS> 4,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> (192)
<INCOME-TAX> (46)
<INCOME-CONTINUING> (146)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (146)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
