As filed with Securities and Exchange Commission on June 10, 1999
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE PEPSI BOTTLING GROUP, INC. BOTTLING GROUP, LLC
(Exact name of Registrant as specified in its charter)
Delaware Delaware
(State or jurisdiction of incorporation or organization)
2086 2086
(Primary Standard Industrial Classification Code Number)
13-4038356 13-4042452
(I.R.S. Employer Identification Number)
One Pepsi Way One Pepsi Way
Somers, NY 10589 Somers, NY 10589
(914) 767-6000 (914) 767-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------------------
Pamela C. McGuire Pamela C. McGuire
Senior Vice President, General Managing Director
Counsel and Secretary Bottling Group, LLC
The Pepsi Bottling Group, Inc. One Pepsi Way
One Pepsi Way Somers, NY 10589
Somers, NY 10589 (914) 767-7982
(914) 767-7982
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-----------------------
Copies to:
Winthrop B. Conrad, Jr.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4890
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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 number of the earlier effective registration statement for the
same offering. |_| _______
<TABLE>
CALCULATION OF REGISTRATION FEE
==========================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Aggregate Offering Registration
Securities to be Registered Registered Price Per Unit Price Fee(1)
- -------------------------------------------- ------------------- ---------------- -------------------- ----------------
<S> <C> <C> <C> <C>
7% Series B Senior Notes due 2029........... $1,000,000,000 100% $1,000,000,000 $278,000
Guarantees of 7% Series B
Senior Notes due 2029(2)................. -- -- -- None
==========================================================================================================================
</TABLE>
(1) Calculated in accordance with Rule 457(f)(2) under the Securities Act.
(2) The 7% Series B Senior Notes due 2029 are guaranteed by Bottling Group,
LLC. There is no separate consideration for the guarantees.
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.
==============================================================================
<PAGE>
Information in this document is not complete and may be changed. This
document is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where such offer is not permitted.
Subject to Completion, dated ________, 1999
PRELIMINARY PROSPECTUS [LOGO]
$1,000,000,000
THE PEPSI BOTTLING GROUP, INC.
Offer to Exchange
All Outstanding
7% Senior Notes due 2029
for
7% Series B Senior Notes due 2029
-----------------------
This is an offer to exchange all outstanding, unregistered 7% Senior Notes
you now hold for new, substantially identical 7% Series B Senior Notes that
will be free of the transfer restrictions that apply to the old notes. Like the
old notes, payment of principal and interest on the new notes will be
unconditionally and irrevocably guaranteed on a senior unsecured basis by
Bottling Group, LLC which is the principal operating subsidiary of PBG. See
"Summary."
This offer will expire at 5:00 p.m., New York City time, on , 1999, unless
we extend it. You must tender your old, unregistered notes by the deadline to
obtain new, registered notes. Tenders of outstanding notes may be withdrawn at
any time prior to the expiration of the exchange offer. The exchange of notes
will not be a taxable exchange for U.S. federal income tax purposes. We will
not receive any proceeds from the exchange offer.
We agreed with the initial purchasers of the old notes to make this offer
and register the new notes. This offer applies to any and all old notes
tendered by the deadline.
The new notes will not trade on any established exchange. The new notes
have the same financial terms and covenants as the old notes, and are subject
to the same business and financial risks.
See "Risk Factors" on page 13 of this prospectus for a discussion of risks
to be considered in connection with your investment decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
, 1999
<PAGE>
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. Each letter of transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of new notes
received in exchange for old notes acquired by such broker-dealer as a result
of market making activities or other trading activities. PBG and Bottling LLC
have agreed that, prior to the close of business on the 180th day following the
expiration date (as defined herein), it will make this prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
-----------------------
TABLE OF CONTENTS
Summary.....................................................................3
Risk Factors...............................................................13
Forward-Looking Statements.................................................20
Rationale for the Separation of PBG from PepsiCo...........................21
Use of Proceeds............................................................23
Ratio of Earnings to Fixed Charges.........................................23
Capitalization.............................................................24
Exchange Offer.............................................................25
Selected Combined Financial and Operating Data.............................33
Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................................35
Business of PBG............................................................50
Management.................................................................64
Relationship with PepsiCo and Certain Transactions.........................73
Description of the Notes and the Guarantees................................79
Plan of Distribution.......................................................92
Legal Matters..............................................................92
Experts....................................................................93
Additional Information.....................................................93
Index to Financial Statements.............................................F-1
-----------------------
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."
2
<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 noncarbonated 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 benefit from a sharper definition of our role
and are able to execute our business strategy more effectively on a local
market level. The most significant advantages of the separation include:
o We are free to focus more closely on sales and service in our
territories.
o We are able to shift our performance emphasis to growth in operating
cash flow.
3
<PAGE>
o We have incentives for management and employees based upon our
results.
o We 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.
Our business interests continue to be aligned with those of PepsiCo, which
shares our objective of increasing availability and consumption of Pepsi-Cola
beverages. We work closely with PepsiCo and expect to benefit from this
relationship in a number of ways including:
o We have the benefit of PepsiCo's worldwide marketing expertise and
advertising programs.
o We expect that PepsiCo will continue to provide us with significant
marketing support and funding.
o Under a shared services agreement, we 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.
o 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.
o 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 $73
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:
o Liquid refreshment beverage sales have grown at a 6% average annual
rate in recent years and we expect that this growth will continue.
o Changes in lifestyle have resulted in increased demand for convenient
ready-to-drink beverages instead of drinks prepared at home.
o 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.
o 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
4
<PAGE>
largest competitor in recent years. These areas are: the amount of investment
in the cold drink business; the pace of consolidation 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:
o We are investing significantly in placements of vending machines and
coolers to increase cold drink availability in the marketplace.
o We expect to play a key role in the consolidation of PepsiCo's U.S.
and Canadian bottling system.
o We are undertaking a number of initiatives to reduce costs by
improving productivity and becoming more efficient in our operations.
o 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.
o We intend to increase penetration of established brands such as
MOUNTAIN DEw and new brands such as PEPSI ONE and AQUAFINA.
o Internationally, low per capita consumption levels present
opportunities for volume growth. We are implementing distribution and
marketing initiatives to take advantage of these opportunities.
o 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
PepsiCo owns 35.4% of our outstanding common stock and 100% of our
outstanding Class B common stock, together representing 43.5% of the voting
power of all classes of our voting stock. PepsiCo also owns 7.1% of the equity
of Bottling LLC, our principal operating subsidiary, giving PepsiCo economic
ownership of 40.0% of our combined operations. 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 owns.
PBG's principal executive offices are located at One Pepsi Way, Somers,
New York, 10589 and its telephone number is (914) 767-6000.
Bottling LLC
Payment of principal and interest on the new notes will be unconditionally
and irrevocably guaranteed by Bottling LLC. Bottling LLC currently owns
substantially all of the property, plant and equipment used in PBG's
operations. Bottling LLC is a Delaware limited liability company. We own,
directly or indirectly, 92.9% of the equity of Bottling LLC and the balance is
held indirectly by PepsiCo. The combined financial statements of Bottling LLC
are set forth elsewhere in this prospectus.
Bottling LLC's principal executive offices are located at One Pepsi Way,
Somers, New York 10589 and its telephone number is (914) 767-6000.
5
<PAGE>
The Exchange Offer
Securities Offered........................ $1,000,000,000 in aggregate
principal amount of 7% Series B
Senior Notes due 2029 (the "new
notes").
Old Notes................................. 7% Senior Notes due 2029.
Registration Rights Agreement............. We sold the old notes on March 8,
1999 to Credit Suisse First Boston
Corporation, Lehman Brothers Inc.,
Salomon Smith Barney Inc., Bear,
Stearns & Co. Inc., Chase
Securities Inc., Warburg Dillon
Read LLC and Blaylock & Partners,
L.P., the initial purchasers. The
initial purchasers then sold the
old notes to institutional
investors. Simultaneously with the
initial sale of the old notes, PBG
and Bottling LLC entered into a
registration rights agreement with
the initial purchasers, which
provides for the exchange offer.
The exchange offer satisfies your
rights under the registration
rights agreement. After the
exchange offer is over, you will
not be entitled to any exchange or
registration rights with respect
to your old notes. Therefore, if
you do not exchange your old
notes, you will not be able to
reoffer, resell or otherwise
dispose of your old notes unless
(1) you comply with the
registration and prospectus
delivery requirements of the
Securities Act of 1933, as amended
(the "Securities Act"), or (2) you
qualify for an exemption from such
Securities Act requirements.
The Exchange Offer........................ PBG is offering to exchange
$1,000,000,000 in aggregate
principal amount of its 7% Series
B Senior Notes due 2029 which have
been registered under the
Securities Act for outstanding 7%
Senior Notes due 2029 sold in the
March 1999 private offering. To
exchange your old notes, you must
properly tender them, and we must
accept them. We will exchange all
old notes that you validly tender
and do not validly withdraw. We
will issue registered new notes at
or promptly after the end of the
exchange offer.
Resales................................... We believe that you can offer for
resale, resell or otherwise
transfer the new notes without
complying with the registration
and prospectus delivery
requirements of the Securities Act
if:
o you acquire the new notes in
the ordinary course of your
business;
o you are not participating, do
not intend to participate,
and have no arrangement or
understanding with any person
to participate, in the
distribution of the new
notes;
6
<PAGE>
o you are not an "affiliate" of
PBG, as defined in Rule 405
of the Securities Act, and
o you are not a broker dealer
who acquired old notes as a
result of market-making
activities or other trading
activities.
If any of these conditions is not
satisfied and you transfer any new
notes without delivering a proper
prospectus or without qualifying
for a registration exemption, you
may incur liability under the
Securities Act. We will not assume
or indemnify you against such
liability.
Each broker-dealer that receives
new notes for its own account in
exchange for old notes, where such
old notes were acquired by such
broker-dealer as a result of
market-making activities or other
trading activities, must
acknowledge that it will deliver a
prospectus in connection with any
resale of such new notes. See
"Plan of Distribution." A
broker-dealer may use this
prospectus for an offer to resell,
a resale or other retransfer of
the new notes.
Expiration Date........................... The exchange offer expires at 5:00
p.m., New York City time, on ,
1999, unless we extend the
expiration date.
Conditions to the
Exchange Offer........................ The exchange offer is subject to
customary conditions, some of
which we may waive in our
discretion.
Procedures for Tendering
Old Notes............................. Each holder of old notes who
wishes to accept the exchange
offer must:
o complete, sign and date the
accompanying letter of
transmittal, or a facsimile
thereof; or
o arrange for The Depository
Trust Company to transmit
certain required information
to the exchange agent in
connection with a book-entry
transfer.
You must mail or otherwise deliver
such documentation and your old
notes to The Chase Manhattan Bank,
as exchange agent, at the address
set forth under "The Exchange
Offer--Exchange Agent."
Failure to Exchange will
Affect You Adversely.................. If you are eligible to participate
in the exchange offer and you do
not tender your old notes, you
will not have any further
registration or exchange rights
and your old notes
7
<PAGE>
will continue to be subject to
some restrictions on transfer.
Accordingly, the liquidity of the
old notes could be adversely
affected. See "Risk Factors."
Special Procedures for
Beneficial Owners..................... If you are a beneficial owner
whose old notes are registered in
the name of a broker, dealer,
commercial bank, trust company or
other nominee, and you wish to
tender your old notes in the
exchange offer, please contact the
registered holder as soon as
possible and instruct them to
tender on your behalf and comply
with the instructions set forth
elsewhere in this prospectus.
Withdrawal Rights......................... You may withdraw the tender of
your old notes at any time before
5:00 p.m., New York City time, on
, 1999, unless we extend
the date.
Guaranteed Delivery Procedures............ If you wish to tender your old
notes and time will not permit
your letter of transmittal and
other required documents to reach
the exchange agent by the
Expiration Date, or the procedure
for book-entry transfer cannot be
completed on time or certificates
for registered notes cannot be
delivered on time, you may tender
your old notes pursuant to the
procedures described in this
prospectus under the heading "The
Exchange Offer--Guaranteed
Delivery Procedures."
Certain Tax
Considerations........................ The exchange of old notes is not a
taxable event for United States
federal income tax purposes.
Exchange Agent............................ The Chase Manhattan Bank.
8
<PAGE>
Summary of Terms of the New Notes
The form and terms of the new notes are the same as the form and terms of
the old notes, except that the new notes will be registered under the
Securities Act. As a result, the new notes will not bear legends restricting
their transfer and will not contain the registration rights and liquidated
damages provisions contained in the old notes. The new notes represent the same
obligation as the old notes. Both the old notes and the new notes are governed
by the same Indenture.
Issuer.................................... The Pepsi Bottling Group, Inc.
Aggregate Amount.......................... $1,000,000,000 principal amount of
7% Series B Senior Notes due 2029.
Interest.................................. Interest will accrue on the new
notes from the date of initial
issuance and will be payable on
March 1, and September 1 of each
year, beginning September 1, 1999.
Holders of new notes will receive
interest on September 1, 1999 from
the date of initial issuance of
the new notes, plus an amount
equal to the accrued, but unpaid,
interest on the old notes.
Maturity Date............................. March 1, 2029
Guarantor................................. Bottling LLC
Guarantees................................ Bottling LLC will unconditionally
and irrevocably guarantee the full
and punctual payment of principal
and interest and all other
monetary obligations on the new
notes. The guarantees will rank
equally with all of Bottling LLC's
other senior unsecured
indebtedness.
Ranking................................... The new notes will be senior
unsecured obligations of PBG and
will rank pari passu with all of
the other existing and future
senior unsecured indebtedness of
PBG. See "Description of the Notes
and the Guarantees--Ranking."
Mandatory Redemption...................... None
Optional Redemption....................... The new notes may be redeemed, in
whole or in part, at any time at
the option of PBG, at the
redemption prices set forth under
"Description of the Notes and the
Guarantees -- Redemption."
Certain Covenants......................... Both the old notes and the new
notes are governed by the same
indenture. The indenture contains
certain covenants that will limit,
among other things, for so long as
the new notes are outstanding, the
ability of PBG and Bottling LLC
to:
o grant certain additional
liens without securing the
new notes or the Guarantees,
as the case may be, equally
and ratably;
9
<PAGE>
o enter into certain
sale-leaseback transactions;
and
o merge, consolidate or sell
all or substantially all of
their assets.
These covenants are, however,
subject to significant exceptions
and qualifications. See
"Description of the Notes and the
Guarantees -- Certain Covenants."
Use of Proceeds........................... We will not receive any proceeds
from the issuance of the new notes
and we will pay the expenses of
the exchange offer.
Form of the New Notes..................... The new notes will be represented
by one or more permanent global
securities in registered form
deposited with The Chase Manhattan
Bank, as custodian, for the
benefit of DTC. You will not
receive notes or guarantees in
registered form unless one of the
events set forth under the heading
"Description of the Notes and the
Guarantees -- Book-Entry, Delivery
and Form-- Definitive Notes"
occurs. Instead, beneficial
interests in the new notes will be
shown on, and transfers of these
interests will be effected only
through, records maintained in
book-entry form by DTC with
respect to its participants.
Absence of a Public Market for
the New Notes......................... PBG does not intend to apply for a
listing of the new notes on any
securities exchange. PBG cannot
make any assurances regarding the
liquidity of the market for the
new notes, the ability of holders
to sell their new notes or the
price at which holders may sell
their new notes. See "Plan of
Distribution."
Governing Law............................. State of New York.
Trustee................................... The Chase Manhattan Bank.
10
<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 of PBG, the Condensed Combined Financial Statements of PBG, the
unaudited Pro Forma Condensed Combined Financial Statements of PBG, the
accompanying notes and the definition of EBITDA contained in the section
entitled "Selected Combined Financial and Operating Data."
The summary pro forma statement of operations data gives effect to the
following as if they had actually occurred on the first day of the periods
presented:
o The initial public offering of 100,000,000 shares of our common stock;
o The 1998 acquisitions of Pepsi-Cola Allied Bottlers, Inc., Gray
Beverage Inc. and Pepsi International Bottlers, LLC;
o The 1999 acquisitions of certain U.S. and Russian territories from
Whitman Corporation. However, the 1999 acquisitions did not have a
significant impact on 1999 operating results, therefore, pro forma
first quarter 1999 results were not adjusted for these acquisitions;
o The change in interest expense on $3.3 billion of debt outstanding
after giving effect to the initial public offering; and
o PepsiCo's 7.1% 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 March 20, 1999:
o The initial public offering; and
o The $3.3 billion of debt outstanding after the initial public
offering.
Earnings per share data are based upon the 55 million shares of capital
stock owned by PepsiCo and outstanding prior to the initial public offering.
Pro forma earnings per share is based upon the 155 million shares of capital
stock outstanding after the initial public offering.
The statement of operations data set forth below includes unusual items
and events that affect comparability with other years:
o 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
PBG Combined Financial Statements for more information on the 1998
items.
11
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended 12 Weeks Ended
-------------------------------------- ------------------------------
Pro Pro
Forma Forma
Dec. 28 Dec. 27 Dec. 26 Dec. 26 Mar. 21 Mar. 20 Mar. 20
1996 1997 1998 1998 1998 1999 1999
--------- --------- --------- --------- --------- --------- ----------
(in millions, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Revenues................................. $ 6,603 $ 6,592 $ 7,041 $ 7,323 $ 1,340 $ 1,452 $ 1,452
Cost of sales................................ 3,844 3,832 4,181 4,341 777 835 835
--------- --------- --------- -------- --------- --------- ---------
Gross profit................................. 2,759 2,760 2,860 2,982 563 617 617
Selling, delivery and administrative
expenses.................................. 2,392 2,425 2,583 2,686 524 575 575
Unusual impairment and other charges......... -- -- 222 222 -- -- --
--------- --------- --------- -------- --------- --------- ---------
Operating income............................. 367 335 55 74 39 42 42
Interest expense, net........................ 225 222 221 201 52 46 46
Foreign currency loss (gain)................. 4 (2) 26 27 -- 1 1
--------- --------- --------- -------- --------- --------- ---------
Income (loss) before income taxes and
minority interest ........................ 138 115 (192) (154) (13) (5) (5)
Income tax expense (benefit)................. 89 56 (46) (31) (7) (2) (2)
--------- --------- --------- -------- --------- --------- ---------
Income (loss) before minority interest....... 49 59 (146) (123) (6) (3) (3)
Minority interest............................ -- -- -- 3 -- -- (1)
--------- --------- --------- -------- --------- --------- ---------
Net income (loss)............................ $ 49 $ 59 $ (146) $ (120) $ (6) $ (3) (4)
========= ========= ========= ======== ========= ========= =========
Basic and diluted earnings (loss) per share.. $ 0.89 $ 1.07 $ (2.65) $ (0.77) $ (0.11) $ (0.06) $ (0.02)
Weighted average shares outstanding.......... 55 55 55 155 55 55 155
Other Financial Data:
EBITDA....................................... $ 792 $ 774 $ 721 $ 140 $ 150
Cash provided by operations.................. 451 548 625 50 63
Cash used for investments.................... (376) (564) (1,046) (227) (183)
Cash provided by (used for) financial........ (66) 63 370 174 99
Capital expenditures......................... (418) (472) (507) (77) (82)
Balance Sheet Data (at period end):
Total assets................................. $ 7,052 $ 7,188 $ 7,322 $ 7,278 $ 7,414 $ 7,447
Long-term debt:
Allocation of PepsiCo long-term debt...... 3,300 3,300 3,300 3,300 -- --
Due to third parties...................... 127 96 61 133 3,322 3,300
--------- --------- --------- -------- --------- ---------
Total long-term debt.................... 3,427 3,396 3,361 3,433 3,322 3,300
Advances from PepsiCo........................ 1,162 1,403 1,605 1,535 1,734 --
Minority interest............................ -- -- -- -- -- 254
Accumulated comprehensive loss............... (102) (184) (238) (185) (227) (227)
Stockholders' equity (deficit)............... (102) (184) (238) (185) (227) 1,495
</TABLE>
12
<PAGE>
RISK FACTORS
The new notes, like the old notes, entail risk. In making your investment
decision, you should consider the risks associated with the nature of our
business and the risk factors relating to the exchange offer in addition to the
other information contained in this prospectus. You should carefully consider
the following factors before making a decision to exchange your notes.
Risks Associated with Exchange Offer
If you fail to exchange old notes, you may be unable to sell them.
Because we did not register the old notes under the Securities Act or any
state securities laws, nor do we intend to after the exchange offer, the old
notes may only be transferred in limited circumstances under the securities
laws. If the holders of the old notes do not exchange their notes in the
exchange offer, they lose their right to have the old notes registered under
the Securities Act, subject to certain limitations. A holder of old notes after
the exchange offer may be unable to sell the notes.
To exchange the old notes for the new notes, the Exchange Agent must
receive (1) certificates for the old notes or a book-entry confirmation of the
transfer of the old notes into the exchange agent's account at DTC, (2) a
completed and signed letter of transmittal with any required signature
guarantees, or an Agent's Message in the case of a book entry transfer, and (3)
any other documents required by the letter of transmittal. Holders of old notes
who want to exchange their notes should allow enough time to guarantee timely
delivery. We are under no duty to give notice of defective exchanges.
There is no public market for the new notes, so you may be unable to sell new
notes.
The new notes are new securities for which there is currently no market.
Consequently, the new notes will be relatively illiquid, and you may be unable
to sell your new notes. We do not intend to apply for listing of the new notes
on any securities exchange or for the inclusion of the new notes in any
automated quotation system. Accordingly, we cannot assure you that a liquid
market for the new notes will develop.
You must tender the old notes in accordance with proper procedures in order to
ensure the exchange will occur.
The exchange of the old notes for the new notes can only occur if the
proper procedures, as detailed in this prospectus, are followed. The new notes
will be issued in exchange for the old notes only after timely receipt by the
Exchange Agent of the old notes or a book-entry confirmation, a properly
completed and executed letter of transmittal (or an Agent's Message in lieu
thereof) and all other required documentation. If you want to tender your old
notes in exchange for new notes, you should allow sufficient time to ensure
timely delivery. Neither the Exchange Agent nor PBG is under any duty to give
you notification of defects or irregularities with respect to tenders of old
notes for exchange. Old notes that are not tendered or are tendered but not
accepted due to, among other things, an invalid tender will, following the
exchange offer, continue to be subject to the existing transfer restrictions.
In addition, if you are an affiliate of PBG or you tender the old notes in the
exchange offer in order to participate in a distribution of the new notes, you
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
For additional information, please refer to the sections entitled "Exchange
Offer" and "Plan of Distribution" later in this prospectus.
13
<PAGE>
Risks Associated with the Nature of Our Business
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.
Because we depend upon PepsiCo to provide us with concentrate, funding and
various services, changes in our relationship with PepsiCo could reduce
our operating income.
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. PepsiCo does not have to continue to provide support
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 operating income.
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, we 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 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 arm's-length negotiations between independent
parties. For more information about these arrangements, see "Relationship with
PepsiCo and Certain Transactions."
14
<PAGE>
PepsiCo has 43.5% of the combined voting power of all of our classes of voting
stock and is 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:
o the nature, quality and pricing of services or products provided to us
by PepsiCo or by us to PepsiCo;
o potential acquisitions of bottling territories and/or assets from
PepsiCo or other independent PepsiCo bottlers;
o the divestment of parts of our bottling operations;
o the payment of dividends by us; or
o 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 August 1998 experienced significant devaluation against the U.S.
dollar. 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.
15
<PAGE>
Bad weather in our peak season could result in lower sales.
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:
o 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;
o limiting our ability to obtain additional financing to fund our
growth strategy, working capital, capital expenditures, debt service
requirements or other purposes; and
o limiting our ability to react to changing market conditions, changes
in industry and economic downturns.
After giving effect to the initial public offering and the application of
the net proceeds, at March 20, 1999 we had $3.3 billion of indebtedness
outstanding after giving effect to the application of proceeds for the initial
public offering. Our historical financial statements reflect an allocation of
PepsiCo's interest expense based upon the indebtedness outstanding after giving
effect to the application of proceeds from the initial public 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 which could increase our costs.
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 concentrates and
packaging constitute approximately 43% and 47%, respectively, of our total raw
material costs.
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 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, by our ability to successfully integrate acquired
businesses into ours and by the requirement that we obtain PepsiCo's
approval of any acquisition of an independent PepsiCo bottler.
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.
16
<PAGE>
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.
PepsiCo no longer funds our substantial capital requirements and we may be
unable to obtain replacement funding on similar terms or in the amounts we
expect to require, which could cause us to reduce our planned capital
expenditures and could result in a material adverse effect on our growth
prospects.
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. In the past, our capital needs, including those for
working capital, have been satisfied by PepsiCo as part of its overall capital
plan. Since our separation from PepsiCo, PepsiCo has not provided 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 only recently begun operations as a stand-alone company and may not
be able to successfully implement our strategy without PepsiCo's support.
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
for the periods prior to our separation from PepsiCo 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 those periods 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 did not operate as, a single
stand-alone business for those periods presented.
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 members of our management, the loss of whom could
disrupt our business operations.
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.
17
<PAGE>
If our Year 2000 program is not successful, the high volume transaction
processing systems on which we depend may be disrupted.
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 cannot assure you that any corrective actions
to these applications will be completed on time. 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 Results of Operations and
Financial Condition--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. 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.
The government may adopt regulations that could increase our costs or our
liabilities.
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.
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. 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 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 92.9% interest in Bottling LLC. We depend 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 depends upon the terms of Bottling LLC's indebtedness, as well
as Bottling LLC's financial condition, results of operations, cash flow and
18
<PAGE>
future business prospects. We will receive 92.9% of any distribution made by
Bottling LLC based on our 92.9% ownership interest and PepsiCo will receive the
remaining 7.1% of any such distribution.
At March 20, 1999, Bottling LLC had $2.3 billion of indebtedness. 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.
PepsiCo's 43.5% 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 has 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 holder of the new notes might consider in its
best interest. These provisions include the requirement that:
o the number of directors shall be no more than 15; and
o 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 the new notes.
19
<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:
o our anticipated growth strategies;
o competition in the beverage industry;
o our continuing relationship with PepsiCo;
o anticipated trends in the beverage industry;
o social, political and economic situations in foreign countries where
we have operations;
o our ability to continue to control costs; and
o 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.
20
<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 benefit from a sharper definition of our role
and are able to execute our business strategy more effectively on a local
market level. The most significant advantages of the separation include:
o Focus on sales and service in our territories. We are 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.
o Shift in performance measures. We are 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.
o Targeted incentives for management and employees. Our performance can
now be measured and rewarded based upon the results we achieve. Our
equity securities provide a basis for management and employee
incentives that are directly related to our performance.
o Capital structure and financial policies appropriate for a bottling
company. As a separate entity, we 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 provide an additional
form of consideration for possible future acquisitions and
financings.
Our business interests continue to be aligned with those of PepsiCo, which
shares our objective of increasing availability and consumption of Pepsi-Cola
beverages. We work closely with PepsiCo and benefit from this relationship in a
number of ways including:
o Marketing support and funding. We 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.
o Shared services. Under the terms of a shared services agreement, we
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.
o 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.
o 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 92.9% 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
21
<PAGE>
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.
22
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. In consideration
for issuing the new notes, we will exchange old notes of like principal amount,
the terms of which are identical in all material respects to the new notes. The
old notes surrendered in exchange for new notes will be retired and canceled
and cannot be reissued. Accordingly, issuance of the new notes will not result
in any increase in our indebtedness. We have agreed to bear the expenses of the
exchange offer. No underwriter is being used in connection with the exchange
offer.
The net proceeds from the issuance and sale of the old notes was
approximately $984 million (after deduction of underwriting discounts and
commissions and transaction expenses). We used those net proceeds to repay
outstanding indebtedness, to repay intercompany obligations to PepsiCo and to
pay a portion of the purchase price of bottling businesses to be acquired by
us.
RATIO OF EARNINGS TO FIXED CHARGES
We have calculated the PBG ratio of earnings to fixed charges in the
following table by dividing earnings by fixed charges. For this purpose,
earnings include pre-tax income plus fixed charges and losses recognized from
equity investments reduced by undistributed income from equity investments.
Fixed charges include interest expense, capitalized interest and one-third of
net rent expense, which is the portion of rent deemed representative of the
interest factor.
<TABLE>
<CAPTION>
Fiscal Year 12 Weeks Ended(C)
------------------------------------------------------------ ---------------------
($ in millions)
March 21 March 20
1994 1995 1996 1997 1998(B) 1998 1999
------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes
and cumulative effect of accounting
changes and minority interest...... $ 63 $ 110 $ 138 $ 115 $ (192) $ (13) $ (5)
Undistributed (income) loss from
equity investments.............. (1) (3) 1 12 5 4 --
Fixed charges excluding
capitalized interest............ 247 256 238 238 245 57 50
------------ --------- --------- --------- --------- --------- ---------
Earnings as adjusted............... $ 309 $ 363 $ 377 $ 365 $ 58 $ 48 $ 45
============ ========= ========= ========= ========= ========= =========
Fixed charges:
Interest expense................ $ 234 $ 243 $ 224 $ 226 $ 230 $ 54 $ 47
Capitalized interest............ 1 1 1 1 1 -- --
Interest portion of rental
expense...................... 13 13 14 12 15 3 3
------------ --------- --------- --------- --------- --------- ---------
Total fixed charges................ $ 248 $ 257 $ 239 $ 239 $ 246 $ 57 $ 50
============ ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges......................... 1.25 1.41 1.58 1.53 (A) (A) (A)
<FN>
- -------------------
(A) As a result of the losses incurred in the fiscal year ended December 26,
1998 and the quarters ended March 21, 1998 and March 20, 1999, PBG was
unable to fully cover the indicated fixed charges. Earnings did not cover
fixed charges by $188 million in 1998 and by $9 million and $5 million in
the quarters ended March 21, 1998 and March 20, 1999, respectively.
(B) Excluding the impact of an unusual impairment charge of $222 million in 1998, the ratio of earnings to fixed charges would
have been 1.14.
(C) First quarter operating results are affected by business seasonality.
Please refer to the "Effect of Seasonality" in "Management's Discussion
and Analysis of Results of Operations and Financial Condition" section of
this prospectus.
</FN>
</TABLE>
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<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of March 20,
1999 as adjusted to reflect the application of proceeds from the initial public
offering. You should read the table in conjunction with the Combined Financial
Statements of PBG, the Condensed Combined Financial Statements of PBG, the
unaudited Pro Forma Condensed Combined Financial Statements of PBG, and the
accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 20, 1999
--------------------------------
Actual As Adjusted
---------- -----------
(in millions, except share data)
<S> <C> <C>
Short-term borrowings............................................... $ 106 $ --
---------- ---------
Long-term debt
PBG debt......................................................... 1,000 1,000
Bottling LLC debt................................................ 2,300 2,300
Other............................................................ 22 --
---------- ---------
Total long-term debt.......................................... 3,322 3,300
---------- ---------
Advances from PepsiCo............................................... 1,734 --
Minority interest................................................... -- 254
Stockholders' equity:
Preferred stock, par value $.01 per share; 20.0 million
shares authorized; no shares issued or outstanding
as adjusted................................................... -- --
Common stock, par value $.01 per share; 300.0 million
shares authorized; 154.9 million shares issued and
outstanding as adjusted....................................... -- 2
Class B common stock, par value $.01 per share; 100,000
shares authorized; 88,000 shares issued and outstanding
as adjusted................................................... -- --
Additional paid-in capital....................................... -- 1,720
Accumulated other comprehensive loss............................. (227) (227)
---------- ---------
Total stockholders' equity (deficit).......................... (227) 1,495
---------- ---------
Total capitalization........................................ $ 4,935 $ 5,049
========= =========
</TABLE>
24
<PAGE>
EXCHANGE OFFER
Purpose of the Exchange Offer
We initially sold the old notes in a private offering on March 8, 1999 to
Credit Suisse First Boston Corporation, Lehman Brothers Inc., Salomon Smith
Barney Inc., Bear, Stearns & Co. Inc., Chase Securities Inc., Warburg Dillon
Read LLC and Blaylock & Partners, L.P. pursuant to a purchase agreement dated
March 8, 1999 between us and them. These initial purchasers of the old notes
resold them to qualified institutional buyers in reliance on, and subject to
the restrictions imposed under, Rule 144A under the Securities Act and outside
the United States in accordance with the provisions of Regulation S under the
Securities Act.
In connection with the private offering of the old notes, we entered into
a registration rights agreement dated March 8, 1999, with the initial
purchasers, in which we agreed, among other things:
o to file with the SEC on or before July 6, 1999, a registration
statement relating to an exchange offer for the old notes;
o to use our reasonable best efforts to cause such exchange offer
registration statement to be declared effective under the Securities
Act on or before September 7, 1999;
o upon the effectiveness of the registration statement, to offer the
holders of the old notes the opportunity to exchange their old notes
for a like principal amount of new notes; and
o to keep the exchange offer open for not less than 30 days (or longer,
if required by applicable law) after notice of the exchange offer is
mailed to holders of old notes.
We are making the exchange offer to satisfy your registration rights under
the exchange and registration rights agreement. If we fail to fulfill such
obligations, we must pay you as a holder of outstanding old notes, additional
interest at a rate of 0.25% per annum, for the first 90-day period immediately
following any registration default and the additional interest rate shall
increase by an additional 0.25% per annum with respect to each subsequent
90-day period until all registration defaults have been cured, up to a maximum
additional interest rate of 0.5% per annum.
We encourage you to read the entire text of the registration rights
agreement, which is included as Exhibit 4.2 to this registration statement. We
expressly qualify all discussion of the exchange offer and registration rights
agreement by the terms of the agreement itself.
Effect of the Exchange Offer
Based on several no-action letters issued by the staff of the SEC to third
parties in unrelated transactions, we believe that you may offer for resale,
resell or otherwise transfer any new notes issued to you in the exchange offer
without registration of your new notes or of a prospectus, if
o you are acquiring the new notes in the ordinary course of your
business;
o you are not participating, do not intend to participate and have no
arrangement or understanding with any person to participate, in a
distribution of the new notes;
o you are not an affiliate of PBG (as defined in Rule 405 under the
Securities Act); and
o you are not a broker-dealer who acquired old notes as a result of
market-making activities or other trading activities.
25
<PAGE>
If you are an affiliate of PBG or an initial purchaser or if you have any
arrangement or understanding with any person to participate in a distribution
of the new notes:
o you will not be able to rely on the interpretations of the staff of
the SEC in connection with any offer for resale, resale or other
transfer of new notes; and
o you must comply with the registration and prospectus delivery
requirements of the Securities Act, or have an exemption available to
you, in connection with any offer for resale, resale or other
transfer of the new notes.
Each broker-dealer that receives new notes for its own account in exchange
for old notes it acquired as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of its new notes. This will not be an admission by
the broker-dealer that it is an underwriter within the meaning of the
Securities Act. See "Plan of Distribution."
Terms of the Exchange Offer
o We will accept all old notes validly tendered and not withdrawn prior
to 5:00 p.m., New York City time, on the expiration date of the
exchange offer. You should read "--Expiration Date; Extensions;
Amendments" below for an explanation of how the expiration date may
be amended.
o We will issue and deliver $1,000 principal amount of new notes in
exchange for each $1,000 principal amount of outstanding old notes
accepted in the exchange offer. Holders may exchange some or all of
their old notes in minimum denominations of $100,000 and integral
multiples of $1,000 in excess thereof.
o By tendering old notes in exchange for new notes and by signing the
letter of transmittal (or delivering an Agent's Message in lieu
thereof), you will be representing that among other things:
o any new notes to be received by you will be acquired in the
ordinary course of your business;
o you have no arrangement or understanding with any person to
participate in the distribution of the new notes;
o you are not an affiliate (as defined in Rule 405 under the
Securities Act) of PBG, or, if you are an affiliate, you will
comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable; and
o you are not a broker-dealer who acquired old notes as a result
of market-making activities or other trading activities.
o We are sending this prospectus and the letter of transmittal to all
registered holders of old notes as of the close of business on ,
1999.
o We are not conditioning the exchange offer upon the tender of any
minimum amount of old notes.
o We have provided for customary conditions, which we may waive in our
discretion. See "--Conditions of the Exchange Offer."
o We may accept tendered old notes by giving oral (promptly confirmed
in writing) or written notice to the exchange agent. The exchange
agent will act as your agent for the purpose of receiving the new
notes from us and delivering them to you.
26
<PAGE>
o You will not be required to pay brokerage commissions or fees or,
subject to the instructions in the letter of transmittal, transfer
taxes with respect to the exchange of old notes. We will pay all
charges and expenses in connection with the exchange offer other than
taxes specified under "--Transfer Taxes."
Expiration Date; Extension; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on ,
1999, unless we, in our sole discretion, extend it. We may extend the exchange
offer at any time and from time to time by giving oral (promptly confirmed in
writing) or written notice to the exchange agent and by timely public
announcement. We may also accept all properly tendered old notes as of the
expiration date and extend the expiration date in respect of the remaining
outstanding old notes.
We may, in our sole discretion,
o amend the terms of the exchange offer in any manner;
o delay acceptance of, or refuse to accept, any old notes not
previously accepted;
o extend the exchange offer; or
o terminate the exchange offer.
We will give prompt notice of any amendment to the registered holders of
the old notes. If we materially amend the exchange offer, we will promptly
disclose the amendment in a manner reasonably calculated to inform you of the
amendment and we will extend the exchange offer to the extent required by law.
Procedures for Tendering
Only a holder of old notes may tender them in the exchange offer. For
purposes of the exchange offer, the term "holder" or "registered holder"
includes any participant in DTC (as defined below) whose name appears on a
security position listing as a holder of old notes. To tender in the exchange
offer, you must:
o complete, sign and date the letter of transmittal or a facsimile
of it or deliver an Agent's Message in lieu thereof;
o have the signatures thereon guaranteed if required by the letter
of transmittal; and
o mail or deliver the letter of transmittal or facsimile thereof
and any other required documents, to the exchange agent before
5:00 p.m., New York City time, on the expiration date.
Prior to the expiration date, the exchange agent must receive a timely
confirmation of a book-entry transfer of tendered old notes into its account at
The Depository Trust Company ("DTC") and timely receipt of an Agent's Message
pursuant to the procedures for book-entry transfer as provided for herein and
in the letter of transmittal, or the holder must comply with the guaranteed
delivery procedures described below under " -- Guaranteed Delivery Procedures."
Any financial institution that is a participant in DTC's system may make
book-entry delivery of the old notes by causing DTC to transfer the old notes
into the exchange agent's account in accordance with DTC's procedures. Although
book-entry transfer into the exchange agent's account at DTC will effect
delivery of old notes, you must deliver the letter of transmittal (or facsimile
thereof or an Agent's Message in lieu thereof), with any required signature
guarantees and any other required documents, to the exchange agent at its
address set forth under "--Exchange Agent" before 5:00 p.m., New York City
time, on the expiration date.
27
<PAGE>
Delivery of documents to DTC in accordance with DTC's procedures does NOT
constitute delivery to the exchange agent.
The tender by a holder of old notes will constitute an agreement between
such holder, PBG and the exchange agent in accordance with the terms and
subject to the conditions specified in this prospectus and in the letter of
transmittal. If a holder tenders less than all the old notes held, the holder
should fill in the amount of old notes being tendered in the appropriate box on
the letter of transmittal. The exchange agent will deem the entire amount of
old notes delivered to it to have been tendered unless the holder has indicated
otherwise.
The method of delivery of the letter of transmittal and all other required
documents to the exchange agent is at your election and risk. Instead of
delivery by mail, we recommend that you use an overnight or hand delivery
service. In all cases, you should allow sufficient time to ensure delivery to
the exchange agent prior to the expiration date. Do not send your letter of
transmittal or other required documents to us.
Signature Requirements and Signature Guarantee
You must arrange for an "eligible institution" to guarantee the signatures
on a letter of transmittal or a notice of withdrawal. The following are
"eligible institutions":
o a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.,
o a commercial bank or trust company having an office or correspondent
in the United States or
o an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act.
A signature guarantee is not required with respect to old notes tendered
for the account of an eligible institution or if the Special Issuance
Instructions or Special Delivery Instructions box in the Letter of Transmittal
is not completed.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, sign or endorse any required documents, they should so indicate when
signing, and unless waived by us, submit evidence satisfactory to us of their
authority to so act with the letter of transmittal.
Conditions of the Exchange Offer
We will determine all questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of the tendered old
notes in our sole discretion. Our determination will be final and binding. We
may reject any and all old notes which are not properly tendered or any old
notes of which our acceptance would, in the opinion of our counsel, be
unlawful. We also may waive any irregularities or conditions of tender as to
particular old notes. Our interpretation of the terms and conditions of the
exchange offer (including the instructions in the letter of transmittal) will
be final and binding on all parties. Unless waived, you must cure any defects
or irregularities in connection with tenders of old notes within such time as
we shall determine.
Although we intend to notify tendering holders of defects or
irregularities with respect to tenders of old notes, neither we nor anyone else
has any duty to do. Neither we nor anyone else shall incur any liability for
failure to give such notification. Your old notes will not be deemed tendered
until you have cured or we have waived any irregularities. As soon as
practicable following the expiration date the exchange agent will return any
old notes that we reject due to improper tender or otherwise unless you cured
all defects or irregularities or we waive them.
We reserve the right in our sole discretion:
o to purchase or make offers for any old notes that remain outstanding
subsequent to the expiration date;
28
<PAGE>
o to terminate the exchange offer, as set forth in "--Conditions of the
Exchange Offer"; and
o to the extent permitted by applicable law, to purchase old notes in
the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers may differ from the terms of the
exchange offer.
We will not be required to accept for exchange, or to issue new notes for,
any old notes, and we may terminate or amend the exchange offer before the
acceptance of old notes if, in our judgment, any of the following conditions
has occurred or exists or has not been satisfied:
o the exchange offer, or the making of any exchange by a holder of old
notes, violates applicable interpretations of the SEC staff;
o any person shall have initiated or threatened an action or proceeding
in any court or by or before any governmental agency or body with
respect to the exchange offer; or
o any legislative or regulatory body shall have adopted or enacted any
law, statute, rule or regulation that can reasonably be expected to
impair our ability to proceed with the exchange offer.
If we determine that we may terminate the exchange offer for any of these
reasons, we may:
o refuse to accept any old notes and return any old notes that have been
tendered to the tendering holders,
o extend the exchange offer and retain all old notes tendered prior to
the expiration date of the exchange offer, subject to the rights of
the holders of the tendered old notes to withdraw such old notes; or
o waive such termination event with respect to the exchange offer and
accept the properly tendered old notes that have not been withdrawn.
If we determine that such waiver constitutes a material change in the
exchange offer, we will promptly disclose such change in a manner reasonably
calculated to inform the holders of such change and we will extend the exchange
offer to the extent required by law.
We may assert or waive any of these conditions in our complete discretion.
Book-Entry Transfer
The exchange agent will make a request promptly after the date of this
prospectus to establish an account with respect to the old notes. Subject to
the establishment of the account, any financial institution that is a
participant in DTC's system may make book-entry delivery of old notes by
causing DTC to transfer them into the exchange agent's account with respect to
the old notes. Each institution must do this in accordance with DTC's Automated
Tender Offer Program procedures for such transfer. However, the exchange agent
will only exchange the old notes so tendered after a timely confirmation of
their book-entry transfer into the exchange agent's account, and timely receipt
of an Agent's Message and any other documents required by the letter of
transmittal.
The term "Agent's Message" means a message, transmitted by DTC to, and
received by, the exchange agent and forming part of the confirmation of a
book-entry transfer, which states that:
o DTC has received an express acknowledgment from a participant
tendering old notes stating the aggregate principal amount of old
notes which have been tendered by such participant and that
participant has received the letter of transmittal and agrees to be
bound by its terms, and
29
<PAGE>
o PBG may enforce such agreement against the participant.
Although you may effect delivery of old notes through DTC into the
exchange agent's account at DTC, you must provide the exchange agent a
completed and executed letter of transmittal with any required signature
guarantee (or an Agent's Message in lieu thereof) and all other required
documents prior to the expiration date. If you comply with the guaranteed
delivery procedures described below, you must provide the letter of transmittal
(or an Agent's Message in lieu thereof) to the exchange agent within the time
period provided. Delivery of documents to DTC does not constitute delivery to
the exchange agent.
Guaranteed Delivery Procedures
If you wish to tender your old notes and (1) cannot deliver the letter of
transmittal or any other required documents to the exchange agent prior to the
expiration date or (2) cannot complete the procedure for book-entry transfer on
a timely basis, you may instead effect a tender if:
o you make the tender through an eligible institution;
o prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of
guaranteed delivery (by facsimile transmittal, mail or hand delivery)
specifying the name and address of the holder and the principal
amount of such old notes tendered, stating that the tender is being
made, and guaranteeing that, within three New York Stock Exchange
trading days after the date of execution of the notice of guaranteed
delivery, the old notes being tendered, a properly completed and duly
executed Letter of Transmittal or a confirmation of a book-entry
transfer into the exchange agent's account at DTC and an Agent's
Message and any other documents required by the letter of
transmittal, will be deposited by the eligible institution with the
exchange agent; and
o the exchange agent receives such old Notes and Letter of Transmittal
or confirmation of a book-entry transfer into its account at DTC and
an Agent's Message and all other documents required by the letter of
transmittal within three New York Stock Exchange trading days after
the date of execution of the notice of guaranteed delivery.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw tendered
old notes at any time before 5:00 p.m., New York City time, on the expiration
date.
To do so, you must provide the exchange agent with a written or facsimile
transmission notice of withdrawal before 5:00 p.m., New York City time, on the
expiration date.
Any notice of withdrawal must
o identify the old notes to be withdrawn (including the principal
amount of the old notes and the name and number of the account at DTC
to be credited); and
o be signed by you in the same manner as the original signature on your
letter of transmittal (including any required signature guarantee) or
be accompanied by documents of transfer sufficient to permit the
registrar to register the transfer of the withdrawn old notes into
your name.
We will determine all questions as to the validity, form and eligibility
(including time of receipt) of all withdrawal notices. Our determination shall
be final and binding on all parties. We will not deem any old notes so
withdrawn to be validly tendered for purposes of the exchange offer and will
not issue new notes with respect to them unless the
30
<PAGE>
holder of the old notes so withdrawn validly retenders them. You may retender
withdrawn old notes by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the expiration date.
Exchange Agent
We have appointed The Chase Manhattan Bank, which also acts as the trustee
under the indenture, as exchange agent for the exchange offer. In this
capacity, the exchange agent has no fiduciary duties and will be acting solely
on the basis of our directions. You should direct all communications with the
exchange agent, including requests for assistance or for additional copies of
this prospectus or of the letter of transmittal as follows:
<TABLE>
<S> <C> <C>
Facsimile Transmission Number By Hand/Overnight Delivery By Registered or Certified Mail:
(For Eligible Institutions Only) The Chase Manhattan Bank The Chase Manhattan Bank
(212) 638-7375, or 55 Water Street 55 Water Street
(212) 344-9367 Room 234, North Building Room 234, North Building
New York, New York 10041 New York, New York 10041
Attention: Carlos Esteves Attention: Carlos Esteves
For General Information and to Confirm Receipt of Facsimile by Telephone:
(212) 638-0828
</TABLE>
Delivery to an address or facsimile number other than those listed above
will not constitute a valid delivery.
Fees and Expenses
We will bear all expenses of the exchange offer. We are making the
principal solicitation pursuant to the exchange offer by mail. Our officers and
regular employees and our affiliates may also make solicitations in person, by
telegraph, telephone or facsimile transmission.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We will, however, pay the
exchange agent reasonable and customary fees for its services and will
reimburse its reasonable out-of-pocket costs and expenses and will indemnify
the exchange agent for all losses and claims incurred by it as a result of the
exchange offer. We may also pay brokerage houses and other custodians, nominees
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this prospectus, letters of transmittal and related
documents to the beneficial owners of the old notes and in handling or
forwarding tenders for exchanges.
Transfer Taxes
We will pay any transfer taxes applicable to the exchange of old notes
pursuant to the exchange offer. If, however, a transfer tax is imposed for any
reason other than the exchange of old notes pursuant to the exchange offer,
then the amount of any of these transfer taxes (whether imposed on the
registered holder thereof or any other person) will be payable by the tendering
holder. For example, the tendering holder will pay transfer taxes, if:
o new notes for principal amounts not tendered, or accepted for
exchange are to be registered or issued in the name of any person
other than the registered holder of the old notes tendered; or
o tendered old notes are registered in the name of any person other
than the person signing the letter of transmittal.
If you do not submit satisfactory evidence of payment of taxes for which
you are liable or exemption from them with your letter of transmittal, we will
bill you for the amount of these transfer taxes directly.
31
<PAGE>
Accounting Treatment
We will record the new notes at the same carrying value as the old notes,
which is the principal amount as reflected in our accounting records on the
date of the exchange. Accordingly, we will not recognize any gain or loss for
accounting purposes. We will capitalize the expenses of the exchange offer for
accounting purposes. We will classify these expenses as prepaid expenses and
include them in other assets on our balance sheet. We will amortize these
expenses on a straight line basis over the life of the new notes.
Consequences of a Failure to Exchange Old Notes
Holders of old notes who do not tender their old notes in the exchange
offer will continue to hold such old notes and will be entitled to all the
rights under the indenture. By making the exchange offer, we will satisfy our
obligation to provide you with new notes and register your old notes for
resale.
All untendered old notes will continue to be subject to the restrictions
on transfer set forth in the indenture. Accordingly, after the completion of
the exchange offer, you will only be able to offer for sale, sell or otherwise
transfer untendered old notes as follows:
o to us;
o pursuant to a registration statement that has been declared effective
under the Securities Act;
o for so long as the old notes are eligible for resale pursuant to Rule
144A under the Securities Act, to a person you reasonably believe is
a qualified institutional buyer within the meaning of Rule 144A, that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that the transfer is
being made in reliance on the exemption from the registration
requirements of the Securities Act provided by Rule 144A;
o pursuant to offers and sales that occur outside the United States to
foreign persons in transactions complying with the provisions of
Regulation S under the Securities Act; or
o pursuant to any other available exemption from the registration
requirements of the Securities Act.
The tender and acceptance in the exchange offer of old notes could
adversely affect the liquidity of the trading market for any untendered old
notes.
32
<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 of
PBG, the Condensed Combined Financial Statements of PBG, the unaudited Pro
Forma Condensed Combined Financial Statements of PBG, and the accompanying
notes included elsewhere in this prospectus. The financial information for the
fiscal years 1996, 1997 and 1998 and the quarters ended March 21, 1998 and
March 20, 1999 has been derived from, and is qualified completely by reference
to, the Combined Financial Statements and the Condensed 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 1998 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 1999
acquisitions of certain territories from Whitman Corporation, as well as the
initial public offering and related transactions. These transactions have been
recorded as if they had actually occurred on the first day of the periods
presented with respect to pro forma statement of operations data and, except to
the extent that a transaction occurred earlier, on March 20, 1999 with respect
to pro forma balance sheet data. The 1999 acquisitions did not have a
significant impact on 1999 operating results, therefore, pro forma first
quarter 1999 results were not adjusted for these 1999 acquisitions. 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.
Earnings per share data are based upon the 55 million shares of capital
stock owned by PepsiCo and outstanding prior to the initial public offering.
Pro forma earnings per share is based upon the 155 million shares of capital
stock outstanding after the initial public offering.
The Statement of Operations Data set forth below includes unusual items
and events that affect comparability with other years:
o 1994 consisted of 53 weeks. The fifty-third week increased 1994 net
revenues by $68 million, income before income taxes by $3 million and
net income by $2 million.
o 1994 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.
o 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
impairment 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.
33
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended 12 Weeks Ended
------------------------------------------------------ -------------------------------
Pro Pro
Forma Forma
Dec. 31 Dec. 30 Dec. 28 Dec. 27 Dec. 26 Dec. 26 Mar. 21 Mar. 20 Mar. 20
1994 1995 1996 1997 1998 1998 1998 1999 1999
--------- -------- -------- -------- -------- --------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Revenues....................... $ 5,950 $ 6,393 $ 6,603 $ 6,592 $ 7,041 $ 7,323 $ 1,340 $ 1,452 $ 1,452
Cost of sales...................... 3,432 3,771 3,844 3,832 4,181 4,341 777 835 835
--------- -------- -------- -------- -------- --------- ---------- --------- ---------
Gross profit....................... 2,518 2,622 2,759 2,760 2,860 2,982 563 617 617
Selling, delivery and adminis-
trative expenses................ 2,221 2,273 2,392 2,425 2,583 2,686 524 575 575
Unusual impairment and other
charges......................... -- -- -- -- 222 222 -- -- --
--------- -------- -------- -------- -------- --------- ---------- --------- ---------
Operating income................... 297 349 367 335 55 74 39 42 42
Interest expense, net.............. 231 239 225 222 221 201 52 46 46
Foreign currency loss (gain)....... 3 -- 4 (2) 26 27 -- 1 1
--------- -------- -------- -------- -------- --------- ---------- --------- ---------
Income (loss) before income taxes,
cumulative effect of accounting
changes and minority interest... 63 110 138 115 (192) (154) (13) (5) (5)
Income tax expense (benefit)....... 46 71 89 56 (46) (31) (7) (2) (2)
--------- -------- -------- -------- -------- --------- ---------- --------- ---------
Income (loss) before cumulative
effect of accounting changes
and minority interest.......... 17 39 49 59 (146) (123) (6) (3) (3)
Cumulative effect of accounting
changes......................... (11) -- -- -- -- -- -- -- --
Minority interest.................. -- -- -- -- -- 3 -- -- (1)
--------- -------- -------- -------- -------- -------- ---------- --------- ---------
Net income (loss).................. $ 6 $ 39 $ 49 $ 59 $ (146) $ (120) $ (6) $ (3) $ (4)
========= ======== ======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings (loss)
per share....................... $ 0.11 $ 0.71 $ 0.89 $ 1.07 $ (2.65) $ (0.77) $ (0.11) $ (0.06) $ (0.02)
Weighted average shares outstanding 55 55 55 55 55 155 55 55 155
Other Financial Data:
EBITDA............................. $ 681 $ 767 $ 792 $ 774 $ 721 $ 140 $ 150
Cash provided by operations........ 484 431 451 548 625 50 63
Cash used for investments.......... (310) (355) (376) (564) (1,046) (227) (183)
Cash provided by (used for)
financing...................... (160) (66) (66) 63 370 174 99
Capital expenditures............... (432) (358) (418) (472) (507) (77) (82)
Balance Sheet Data (at period end):
Total assets....................... $ 6,847 $ 7,082 $ 7,052 $ 7,188 $ 7,322 $ 7,278 $ 7,414 $ 7,447
Long-term debt:
Allocation of PepsiCo long-term
debt.......................... 3,300 3,300 3,300 3,300 3,300 3,300 -- --
Due to third parties............ 135 131 127 96 61 133 3,322 3,300
--------- -------- -------- -------- -------- -------- ---------- --------- ---------
Total long-term debt.......... 3,435 3,431 3,427 3,396 3,361 3,433 3,322 3,300
Advances from PepsiCo.............. 1,265 1,251 1,162 1,403 1,605 1,535 1,734 --
Minority interest.................. -- -- -- -- -- -- -- 254
Accumulated comprehensive loss..... (112) (66) (102) (184) (238) (185) (227) (227)
Stockholders' equity (deficit)..... (112) (66) (102) (184) (238) (185) (227) 1,495
</TABLE>
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
Financial Statements. Our Combined Financial Statements, our unaudited
Condensed Combined Financial Statements and the accompanying notes (together,
the "Financial Statements"), 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. For the periods before we operated as
an independent entity, the 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 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.
o 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 revenues to PepsiCo's consolidated
net revenues. 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 our 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 this alternative
program has not been finalized or approved by the board of directors,
management anticipates that the new plan could cost up to an
additional $12 million per year.
o Interest expense included in the Financial Statements reflects an
allocation of PepsiCo's interest costs based upon debt outstanding
after the initial public offering and application of the proceeds
from the initial public offering. Because PBG was not a stand-alone
entity and did not historically 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 will pay on the third party
debt outstanding at the initial public offering date, see our
unaudited Pro Forma Condensed Combined Financial Statements.
o Income tax expense has been reflected in the Financial Statements as
if we had actually filed a separate income tax return. In the
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.
We recognize revenue when we deliver our products to customers. Any
discounts are recognized at the same time as a reduction of revenue. Our sales
terms do not allow a right of return unless the product freshness date expires,
in which case we will typically replace the product.
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
35
<PAGE>
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.
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 revenues. 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,
respectively, were recorded in net revenues, 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. The cost of this price increase will be offset
in substantial part with increases in the 1999 level of marketing support and
funding from PepsiCo. We spent $1,013 million, $1,077 million and $1,222
million on concentrate in 1996, 1997 and 1998, respectively.
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. PepsiCo has contributed $37 million, $39
million and $61 million in funding for Russia in each of the years 1996, 1997
and 1998, respectively.
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 "Bad weather in our peak season could result in lower sales"
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. Our unaudited Pro Forma
Condensed Combined Statement of Operations for 1998 reflects 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
revenues 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.
36
<PAGE>
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
revenues 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 activities and to fund operations were $71 million and $156 million
in 1997 and 1998, respectively. Cash for investing activities 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 revenues and increased operating losses. Additionally, since net
revenues 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
In connection with the consummation of the initial public offering,
substantially all non-vested PepsiCo stock options held by PBG employees
vested. As a result, PBG will incur a non-cash compensation charge in the
second quarter of 1999 equal to the difference between the market price of
PepsiCo capital stock and the exercise price of these options at the vesting
date. We currently estimate this non-cash charge to be approximately $50
million.
Use of EBITDA
As a separate entity, we 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 are 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. You should refer to the section entitled "Selected Combined
Financial and Operating Data" for a definition of EBITDA.
Results of Operations
The following discussion and analysis of our results of operations,
financial condition and cash flows should be read along with the Financial
Statements and the accompanying notes appearing elsewhere in this prospectus.
37
<PAGE>
The table below sets forth, for the periods indicated, Combined Statements
of Operations data as a percentage of net revenues.
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net revenues.............................................. 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>
The table below sets forth volume growth, excluding the impact of
acquisitions, by brand for the periods indicated.
<TABLE>
<CAPTION>
% Growth 1997 Brand % Growth 1998 Brand
1997 vs. 1996 Portfolio 1998 vs. 1997 Portfolio
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
PEPSI-COLA Trademark.............. 0% 58% 4% 57%
MOUNTAIN DEW...................... 11 14 8 14
DR PEPPER......................... 7 6 3 6
7UP............................... 2 3 (2) 3
LIPTON BRISK...................... 17 3 17 3
MUG............................... 10 2 19 2
AQUAFINA.......................... 85 1 63 2
All Other......................... 8 13 6 13
-- --- -- --
Total.......................... 4% 100% 5% 100%
=== ===
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
<TABLE>
<CAPTION>
1997 1998 $ Change % Change
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Amounts in millions
- -------------------
Reported
Net revenues...................................... $ 6,592 $ 7,041 $ 449 6.8%
Operating income.................................. 335 55 (280) (83.6)
EBITDA............................................ 774 721 (53) (6.8)
Ongoing*
Net revenues...................................... $ 6,592 $ 7,041 $ 449 6.8%
Operating income.................................. 335 277 (58) (17.3)
EBITDA............................................ 774 721 (53) (6.8)
<FN>
- -------------------
* Operating income excludes $222 million of unusual impairment and other charges in 1998.
See Note 3 to the Combined Financial Statements.
</FN>
</TABLE>
38
<PAGE>
The table below sets forth volume and net revenue growth by specified
geographic region, excluding the impact of acquisitions and foreign currency
fluctuations by assuming constant foreign exchange rates for the years
presented.
<TABLE>
<CAPTION>
Contribution
to Total To Total
Volume Volume Net Revenue Net Revenue
Growth Growth Growth Growth
--------- --------- --------- --------
<S> <C> <C> <C> <C>
U.S. and Canada................................... 5% 89% 5% 91%
Spain............................................. 6 8 7 9
Greece............................................ 2 0 7 2
Russia............................................ 21 3 (11) (2)
-- --- ---- ---
Total.......................................... 5% 100% 5% 100%
</TABLE>
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%. International volume
growth was led by Russia which increased 21%, excluding the impact of
acquisitions, and Spain which increased 6%. Excluding the impact of
acquisitions, volume increased 5% in our combined U.S. and Canadian markets, 6%
in our international markets and 5% overall. Volume growth was led by cola
products which were up 4%, led by the U.S. introduction of PEPSI ONE in the
fourth quarter of 1998, which contributed one percentage point of total growth.
MOUNTAIN DEW increased 8% and expanded distribution increased AQUAFINA volume
by 63%.
Worldwide net revenue growth of 6.8% was fueled by strong volume gains and
acquisitions of bottlers in the U.S., Canada and Russia. Net revenues grew 5%,
excluding the impact of acquisitions and foreign currency fluctuations. Volume
gains contributed five percentage points of net revenue growth. Unfavorable
foreign currency fluctuations in Canada, Spain and Greece reduced net revenue
growth by one percentage point, while bottler acquisitions contributed three
percentage points to net revenue 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.
o Cost of sales as a percentage of net revenues 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 revenues in the higher margin cold drink
channel was insufficient to offset those margin declines.
o 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 U.S. and Canada. Spending on vending machines and
coolers at customer locations in the combined U.S. and Canadian
markets was approximately 20% higher in 1998 as compared to 1997,
driving increases in the costs associated with placing, depreciating
and servicing these assets.
o Operating losses in Russia were $80 million in 1998 compared to $48
million in 1997. Volume increased 21% over 1997. However, net
revenues, excluding the impact of acquisitions, declined 11% in U.S.
dollars due to the devaluation and the reduction in pricing resulting
from the economic downturn. Our operating
39
<PAGE>
margins were further adversely affected since a substantial portion
of our expenses are denominated in U.S. dollars. 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. Approximately 40% of our operating losses in Russia were
the result of the additional 75% interest in this Russian bottling
joint venture.
In the fourth quarter of 1998, we recorded $222 million of charges
relating to the following:
o A charge of $212 million for asset impairment of $194 million and
other charges of $18 million related to our Russian operations.
o 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.
Fiscal 1997 Compared to Fiscal 1996
<TABLE>
<CAPTION>
Amounts in millions 1996 1997 $ Change % Change
- ------------------- ------ ------ ------- --------
<S> <C> <C> <C> <C>
Net revenues.............................................. $6,603 $6,592 $(11) (0.2)%
Operating income.......................................... 367 335 (32) (8.7)
EBITDA.................................................... 792 774 (18) (2.3)
</TABLE>
40
<PAGE>
The table set forth below shows volume and net revenue growth by specified
geographic region, excluding the impact of acquisitions and foreign currency
fluctuations by assuming constant foreign exchange rates for the years
presented.
Contribution
Contribution to Total
to Total Net Net
Volume Volume Revenue Revenue
Growth Growth Growth Growth
------ ------------ ------- ------------
U.S. and Canada................ 4% 111% 2% 116%
Spain.......................... (2) (5) (2) (9)
Greece......................... (4) (2) (4) (4)
Russia.........................(18) (4) (4) (3)
Total....................... 4% 100% 1% 100%
=== ===
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.
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%. Excluding the impact of divestitures,
worldwide volume grew 4%. The growth was driven by 11% volume growth in
MOUNTAIN DEW, a 17% increase in LIPTON BRISK and a 10% increase in MUG. In
addition, expanded distribution drove AQUAFINA volume up 85%, while the growth
of cola products was flat.
Worldwide net revenues in 1997 declined by 0.2% compared to 1996.
Excluding the impact of the sale of our St. Petersburg, Russia operations and
foreign currency fluctuations, net revenues grew 1%. Volume gains contributed
four percentage points of net revenue growth. Pricing declines resulting from
the competitive pricing environment in the U.S. 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 revenue 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.
o Cost of sales as a percentage of net revenues 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 revenues.
o 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.
41
<PAGE>
Interest Expense, net
In 1997, net interest expense decreased $3 million or 1.3% due primarily
to external debt reductions in our international markets.
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.
First Quarter 1999 Compared to First Quarter 1998
Management believes that constant territory performance results are better
indicators of operating trends and performance, particularly in light of our
stated intention of acquiring additional bottling territories and of industry
practice. Accordingly, on a going forward basis our discussion and analysis
will focus on constant territory operating results, which are achieved by
adjusting 1999 results to exclude 1999 acquisitions and 1998 results to include
the results of 1998 acquisitions, as if they had occurred on the first day of
fiscal year 1998. Constant territory operating results also exclude foreign
currency fluctuations by assuming constant foreign exchange rates for the
periods presented. The results for the 12 week periods ended March 21, 1998 and
March 20, 1999 are presented both on an as reported and constant territory
basis.
Overview
EBITDA, which is computed as operating income plus the sum of depreciation
and amortization, is a key indicator that management and the industry use to
evaluate our operating performance. On a reported basis, first quarter EBITDA
was $150 million, a 7% increase over the comparable period in 1998. On a
constant territory basis, EBITDA grew 5% which was ahead of our expectations
for the first quarter indicating that we are on track to deliver our
anticipated growth of 8-10% for full year 1999.
In line with our strategy to be a key consolidator of PepsiCo's bottling
system, 1999 results are impacted by the 1998 acquisitions of Gray Beverages,
Inc. in Canada, Pepsi-Cola Allied Bottlers, Inc. in New York and Connecticut
and Pepsi International Bottlers, LLC in Russia. In addition, in February
1999, PBG acquired Jeff Bottling Company, Inc. in New York and in March 1999
PBG acquired Pepsi-Cola General Bottlers of Princeton, Inc. and Pepsi-Cola
General Bottlers of Virginia, Inc., whose territories are in Virginia and West
Virginia.
EBITDA
Constant
Reported Territory
Change Change
-------- ---------
Growth........................................ 7% 5%
On a constant territory basis, the growth in EBITDA reflects a 4% growth
in North America volume, a modest increase in revenue per physical case,
favorable raw material costs and reduced operating losses in Russia. These
positive factors were partially offset by a one-time $6 million cash cost
incurred to eliminate PBG's previous practice of collecting deposits on plastic
shells used to carry our product to market.
42
<PAGE>
Volume
Constant
Reported Territory
Change Change
-------- ---------
North America................................ 9% 4%
Outside North America........................ (3%) (13%)
Total........................................ 8% 3%
Our worldwide physical case volume grew 8% on a reported basis and 3% on a
constant territory basis. In North America, which includes the U.S. and Canada,
constant territory volume increased 4% driven by solid growth in both the take
home and cold drink channels of our business. Trademark Pepsi brands, driven by
Pepsi One, contributed one point of growth while Mountain Dew and other
flavored carbonated soft drinks contributed two points and Aquafina, Lipton and
other alternative beverages contributed one point. Outside North America our
volumes decreased 13% on a constant territory basis driven by the economic
turmoil in Russia which began last August with the devaluation of the ruble.
Net Revenues
Net revenues for the quarter were $1,452 million, an 8% increase over the
prior year. On a constant territory basis net revenues grew 4%. This increase
was driven by strong North America volume growth and an approximate 1% increase
in revenue per physical case driven largely by improved pricing and changes in
channel and package mix in our North American business.
Cost of Sales
Cost of sales as a percentage of net revenues improved by one-half point
on a reported basis and one point on a constant territory basis to 57.5%. This
improvement was driven by lower packaging costs partially offset by the
February increase in North America concentrate prices.
Selling, delivery and administrative expenses
Selling, delivery and administrative expenses as a percentage of net
revenues grew seven tenths of a point to 39.6% on a constant territory basis.
This primarily reflects increased selling and delivery costs resulting from an
increase in our North American sales force and our continued 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
North America. These increases were partially funded through reduced general
and administrative costs from effective leveraging of our North America cost
structure and reduced operating costs in Russia as our cost structure benefited
from our fourth quarter 1998 restructuring actions. In addition, 1999 expense
also included a $6 million one-time cash cost for shell deposits.
Interest expense, net
Interest expense decreased by $6 million to $46 million due to a lower
weighted average interest rate, which went from 6.4% in the prior year to 5.9%
in the current year.
Provision for Income Taxes
PBG's full year forecasted tax rate for 1999 is 40% and this rate has been
applied to first quarter results. This rate corresponds to an effective tax
rate of 53.5% in 1998. The decrease of 13.5 points is primarily due to the
reduced impact of fixed non-deductible permanent expenses on higher anticipated
pretax income in 1999.
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<PAGE>
Liquidity and Capital Resources
Liquidity Prior to and Upon Our Separation from PepsiCo and the Initial
Public Offering of our Common Stock
Prior to and upon our separation from PepsiCo and the initial public
offering, our capital investments and acquisitions were 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 our Combined
Balance Sheets, Combined Statements of Cash Flows, Condensed Combined Balance
Sheets and Condensed Combined Statements of Cash flows.
Financing Transactions
On February 9, 1999, Bottling LLC assumed $1 billion of 53/8% Senior Notes
due 2004 and $1.3 billion of 55/8% 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 obligations. The proceeds from the sale of
the March 8, 1999 old notes were used to repay these obligations.
On March 5, 1999, we issued $2.5 billion Series B Senior Notes due 2000.
These notes were irrevocably and unconditionally guaranteed on a senior,
unsecured basis by Bottling LLC. A substantial portion of the net proceeds from
the sale of the Series B notes was applied against our intercompany
obligations, which include advances from PepsiCo, and the balance was used to
pay a portion of the purchase price of bottling businesses acquired and to be
acquired by us. The amounts applied exceeded the recorded amounts of advances
from PepsiCo based on amounts at December 26, 1998 by $682 million because the
amounts applied are based, in part, on the fair value of certain assets
transferred to us in connection with our formation and the formation of
Bottling LLC, which exceeded the book carrying value. The excess amount of
proceeds applied to advances from PepsiCo was treated for financial reporting
purposes as a reduction of additional paid-in capital. All of the net proceeds
of the initial public offering, together with available cash, were used to
repay the $2.5 billion Series B notes.
On March 8, 1999, we issued the old notes. These notes were irrevocably
and unconditionally guaranteed on a senior, unsecured basis by Bottling LLC.
The net proceeds from the sale of the old notes were used to repay the Series A
notes described above, to repay intercompany obligations to PepsiCo and to pay
a portion of the purchase price of bottling businesses to be acquired by us
which are reflected in our unaudited 1998 Pro Forma Condensed Combined
Financial Statements and the accompanying notes included elsewhere in the
prospectus.
On March 30, 1999, we offered 100,000,000 shares of our common stock for
sale to the public in an underwritten initial public offering. Proceeds from
the offering, after expenses, were $2.2 billion, all of which was used to repay
the $2.5 billion Series B notes.
After giving effect to the foregoing financing transactions, we had
outstanding $1 billion of long-term indebtedness, guaranteed by Bottling LLC,
and Bottling LLC had outstanding $2.3 billion of long-term indebtedness
guaranteed by PepsiCo.
In April 1999, PBG entered into a $500 million commercial paper program
that is supported by a credit facility. The credit facility consists of two
$250 million components, one of which is one year in duration and the other of
which is five years in duration.
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The debt levels reflected in our historical combined financial statements
are based upon the debt we have outstanding. 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 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.
Capital Expenditures
We have incurred and will require capital for ongoing infrastructure,
including investment in developing markets and acquisitions.
o 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.
o 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 $82 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 and
Condensed 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.
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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 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.
First Quarter 1999 Compared to First Quarter 1998
Net cash provided by operating activities increased 26% to $63 million
reflecting favorable working capital cash flows resulting from the timing of
cash payments on current liabilities.
Net cash used by investments decreased from $227 million in the first
quarter of 1998 to $183 million over the same period in 1999 mainly related to
the timing of acquisitions, which were $36 million, or 26%, lower in the first
quarter of 1999. However, capital expenditures increased by $5 million, or 6%,
driven by a 17% increase in North America as we continue to invest heavily in
cold drink equipment and an 89% reduction in spending outside North America
mainly in Russia where our existing infrastructure is adequate for current
operations.
Net cash provided by financing decreased by $75 million to $99 million for
the first quarter 1999 mainly due to 1998 borrowings in Russia related to the
purchase of Pepsi International Bottlers LLC, which was paid down in the first
quarter of 1999.
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.
We use futures contracts and options on futures in the normal course of
business to hedge anticipated purchases of certain raw materials used in our
manufacturing operations. There were no outstanding contracts at December 27,
1997. The table below presents information on contracts outstanding at December
26, 1998 for aluminum purchases. All of these contracts mature in 1999.
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Futures
Contract Options
-------- ---------
(dollars in millions)
Volume (thousands of metric tons)................ 13 38
Carrying amount.................................. $ -- $ 1
Fair value amount................................ $ (1) $ 1
Notional amount.................................. $ 17 $ 53
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. 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
revenues. 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 remeasurement 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 our 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.
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 PBG have the potential for operational problems if
they lack the ability to handle the transition to the Year 2000. We have
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established teams to identify and correct Year 2000 issues. We have engaged
International Business Machines ("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 91% of the systems already compliant. This percentage is expected
to increase to 97% in the second quarter of 1999 and 100% in the third quarter
of 1999. Inventories and assessments of systems embedded in manufacturing and
other facilities are in progress and are 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, senior management and the board of directors are also monitoring the
progress of the remediation programs.
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 of 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 and we have already visited 37 of them. 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. 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 assessment 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 $3 million was spent in the first quarter of 1999, $26
million and $7 million in full year 1998 and 1997, respectively. 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, and 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 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 alternative 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 of 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 customers to pay on a timely
basis. We typically experience below average sales in January due to the
seasonality of our business. 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
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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 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 area affected. Accordingly, while we believe our
actions in this regard should have the effect of lessening Year 2000 risks, we
are unable to estimate such risks or to estimate the ultimate Year 2000 risks
on our operations.
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 reviewing contracts with suppliers and others in order to
determine whether there are terms in those contracts that represent embedded
derivative instruments that, under SFAS 133, require separate accounting
treatment. We have not yet completed that review. Historically, we did not
utilize foreign currency or interest rate derivative financial instruments
because we had no material interest rate risk due to our limited third party
borrowings and did not hedge our foreign currency translation risk. We may
utilize certain derivative financial instruments subsequent to the offering
and, under SFAS 133, those instruments would be required to be recorded in the
balance sheet at their fair value at the date of adoption. Since our review of
our contracts is not complete and we have not yet made a determination of the
nature and extent of our future use of derivative financial instruments, we are
not yet able to make a determination of the impact of the adoption of SFAS 133
on our financial position and results of operations.
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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 $73 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 table sets forth the category mix by volume for the U.S.:
1997 Category Mix by Volume--U.S. Liquid Refreshment Beverage Industry
Carbonated Soft Drinks.......................................... 70%
Bottled Water................................................... 16
Shelf-stable Juices and Juice Drinks............................ 8
Sports Drinks................................................... 3
Ready-to-drink Tea and Coffee................................... 3
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.
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 noncarbonated
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
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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 table sets forth the carbonated soft drink channel mix by
volume in the U.S.:
1998 U.S. Carbonated Soft Drink Channel Mix
Supermarkets and Other Retail.............................. 44%
Fountain and Restaurants................................... 25
Convenience and Gas Stores................................. 11
Vending.................................................... 11
Mass Merchandisers......................................... 9
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:
(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:
o 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.
o Changes in consumer lifestyle
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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:
o making products easier to purchase and more readily available
for consumption by expanding points of access, especially for
cold single-serve products;
o creating innovative packaging; and
o 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 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.
o 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.
o 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 table sets forth 1997 per capita consumption of carbonated
soft drinks in selected countries:
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Carbonated Soft Drink Consumption Per Capita in 1997
8 oz. Servings
Country Per Year
-------- --------------
U.S.* 859
Mexico 495
Canada* 460
United Kingdom 336
Greece* 281
Spain* 227
Poland 141
Russia* 65
China 17
* Countries in which we operate
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 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:
o 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-
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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.
o 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 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.
o 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.
o 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
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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.
o 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, 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.
o 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
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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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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:
United States and Canada
- -------------------------------------------------------------------------------
Brands Licensed
Brands Licensed from PepsiCo Brands Licensed
from PepsiCo Joint Ventures from Others
- -------------------------- ---------------------------- --------------------
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
Spain Greece Russia
- --------------------------- ----------------------- -------------------------
Brands Licensed from PepsiCo
- -------------------------------------------------------------------------------
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 7UPLight KAS (flavors and mixers)
KAS (juices, flavors and IVI (waters and flavors
mixers)
RADICAL FRUIT
- -------------------
(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 table below:
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1998 PBG U.S. Brand Mix
Pepsi........................................... 42%
Mountain Dew.................................... 17
Diet Pepsi...................................... 16
Other........................................... 25
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 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.
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 supermarket channel 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%.
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 table 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
Supermarkets and Other Retail........................ 64%
Convenience and Gas Stores........................... 12
Vending.............................................. 10
Mass Merchandisers................................... 8
Fountain and Restaurants............................. 6
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
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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 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.
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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.
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.
o 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.
o 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.
o 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
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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 [were renewed or] 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.
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.
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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 nonreturnable 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 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
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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.
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MANAGEMENT
Executive Officers and Directors of PBG
The following table sets forth certain information regarding our executive
officers, senior management and directors, as of [June] 1999:
Name Age Position
---- --- --------
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
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 are directors of PBG. They will hold office
until the first annual meeting of our stockholders, 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. Mr.
Weatherup intends to resign as a director of PepsiCo on the date the offering
is completed. 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.
Linda G. Alvarado, 46, is the President of Alvarado Construction, Inc., a
general contracting firm specializing in commercial, industrial, environmental
and heavy engineering projects. Ms. Alvarado assumed her present position in
1976. She is also a director of Pitney Bowes, Inc., Cyprus Amax Minerals
Company, Engelhard Corp. and U.S. West, Inc.
Barry H. Beracha, 57, has been the Chairman of the Board and Chief
Executive Officer of The Earthgrains Company since 1993. Earthgrains was
formerly part of Anheuser-Busch Companies, where Mr. Beracha served from 1967
to 1996. From 1979 to 1993, he held the position of Chairman of the Board of
Anheuser-Busch Recycling
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Corporation. From 1976 to 1995, Mr. Beracha was also Chairman of the Board of
Metal Container Corporation. Mr. Beracha is also a director of St. Louis
University.
Thomas H. Kean, 63, has been the President of Drew University since 1990
and was the Governor of the State of New Jersey from 1982 to 1990. Mr. Kean is
also a director of Amerada Hess Corporation, Aramark Corporation, Bell
Atlantic, Fiduciary Trust Company International and United Healthcare
Corporation. He is also Chairman of Carnegie Corporation of New York.
Thomas W. Jones, 49, is the Co-Chairman and Chief Executive Officer of SSB
Citi Asset Management Group, a position he assumed in October 1998. Previously
Mr. Jones was Chairman and Chief Executive Officer of Salomon Smith Barney
Asset Management. From 1989 to 1993, Mr. Jones was Chief Financial Officer of
the Teachers Insurance and Annuity Association-College Retirement Equities
Fund, where he also served as President and Chief Operating Officer from 1993
to 1997, and Vice Chairman from 1995 to 1997. He is also a director of Federal
Home Loan Mortgage Corporation and Thomas & Betts.
Susan Kronick, 47, is Chairman and Chief Executive Officer of Burdines, a
division of Federated Department Stores, a position she has held since June
1997. From 1993 to 1997, Ms. Kronick served as President of Federated's
Rich's/Lazarus/Goldsmith's division. She spent the previous 20 years at
Bloomingdale's, where her last position was as Senior Executive Vice President
and Director of Stores. Ms. Kronick is also a director of Union Planters
National Bank and Bank of Miami.
Robert F. Sharpe, Jr., 47, is Senior Vice President, Public Affairs,
General Counsel and Secretary of PepsiCo. He joined PepsiCo in January 1998 as
Senior Vice President, General Counsel and Secretary. Mr. Sharpe was Senior
Vice President and General Counsel of RJR Nabisco Holdings Corp. from 1996
until 1998. He was previously Vice President, Tyco International Ltd. from
1994 to 1996 and Vice President, Assistant General Counsel and Secretary of
RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. from 1989 to 1994.
Karl M. von der Heyden, 62, is a Director and Vice Chairman of the Board
of PepsiCo, a position he has held since September 1996. He also served as
Chief Financial Officer of PepsiCo until March 1998. Mr. von der Heyden was
Co-Chairman and Chief Executive Officer of RJR Nabisco from March through May
1993 and Chief Financial Officer from 1989 to 1993. He served as President and
Chief Executive Officer of Metallgesellschaft Corp. from 1993 to 1994, Mr. von
der Heyden is also a director of Federated Department Stores, Inc. and Zeneca
Group PLC.
Board Compensation and Benefits
Employee directors do not receive additional compensation for serving on
our board of directors. Non-employee directors are compensated entirely in
options to purchase our common stock and received an initial grant of options
to purchase approximately $225,000 of common stock at the initial public
offering price of $23 per share. Options were and 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 deferrals are in our
common stock equivalents. Non-employee directors also received 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 do 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 are all non-employee directors.
Audit/Affiliated Transactions Committee Responsibilities. Our audit/
affiliated transactions committee:
o recommends to the board the selection, retention or termination of
our independent auditors;
o approves the level of non-audit services provided by the independent
auditors;
o reviews the scope and results of the work of our internal auditors;
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o reviews the scope and approves the estimated cost of the annual audit;
o reviews the annual financial statements and the results of the audit
with management and the independent auditors;
o reviews with management and the independent auditors the adequacy of
our internal accounting controls;
o reviews with management and the independent auditors the significant
recommendations made by the auditors with respect to changes in
accounting procedures and internal accounting controls;
o reviews and approves 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; and
o reports to the board on its review and makes such recommendations as
it deems appropriate.
Executive Development and Compensation Committee Responsibilities. Our
executive development and compensation committee:
o administers our Long-Term Incentive Plan, Executive Incentive
Compensation Plan and related programs;
o approves, or refers to the board of directors for approval, changes
in such plans and the compensation programs to which they relate; and
o reviews and approves the compensation and development of our senior
executives.
Nominating Committee Responsibilities. The nominating committee:
o identifies candidates for future board membership;
o develops criteria for selection of candidates for election as
directors;
o proposes to the board a slate of directors for election by the
stockholders at each annual meeting; and
o proposes to the board candidates to fill board vacancies as they
occur.
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.
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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.
Stock Ownership of Directors and Executive Officers of PBG
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
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 Annual Compensation 1998 Long-Term Compensation
------------------------------------ ------------------------------
Awards Payouts
---------- ------------
PepsiCo
Securities Long-Term
Other Annual Underlying Incentive All Other
Name and Principal Salary Bonus Compensation Options Plan Payouts Compensation
Position ($) ($) ($) (#) ($) ($)(1)
- -------------------- -------- -------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Craig E. Weatherup
Chairman and
Chief Executive
Officer.......... $792,307 $844,000 $131,182(2) 156,486(3) -- $11,698(4)
Craig D. Jung
Chief Operating
Officer.......... 307,731 144,220 7,065 53,625(3) -- --
John T. Cahill
Executive Vice
President and
Chief Financial
Officer.......... 357,577 237,500 7,065 51,490(3) -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
1998 Annual Compensation 1998 Long-Term Compensation
------------------------------------ ------------------------------
Awards Payouts
---------- ------------
PepsiCo
Securities Long-Term
Other Annual Underlying Incentive All Other
Name and Principal Salary Bonus Compensation Options Plan Payouts Compensation
Position ($) ($) ($) (#) ($) ($)(1)
- -------------------- -------- -------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Margaret D. Moore
Senior Vice
President and
Treasurer........ 264,708 136,450 6,224 31,428(3) -- --
Pamela C. McGuire
Senior Vice
President, General
Counsel and
Secretary........ 217,408 93,680 4,949 17,066(3) -- --
</TABLE>
- -------------------
(1) 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.
(2) This amount includes $107,153 from the use of corporate transportation in
1998.
(3) All such options vested and became exercisable at the date of the initial
public offering.
(4) Of this amount, $2,086 is for life insurance, as discussed in note (1)
above, and $9,612 is preferential earnings on income deferred by Mr.
Weatherup since 1986. In order to earn a preferential return, Mr.
Weatherup elected a risk feature under which, if he terminated his
employment, he would forfeit all his deferred income.
Stock Option Grants in Last Fiscal Year
The following table sets forth information concerning grants of stock
options made to the named executive officers during our fiscal year ended
December 26, 1998. All grants relate to PepsiCo capital stock.
PepsiCo Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
----------------------------------------------------------------- -----------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#)(1) Fiscal Year(2) ($/Share) Date 5%($)(3) 10%($)(3)
- --- -------------- -------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 vested and became exercisable on the date of the initial
public offering.
(2) Includes approximately 14,700,000 options granted to employees under
PepsiCo's SharePower Stock Option Plan.
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<PAGE>
(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 was assumed by us at the date of the initial
public 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.
Aggregated PepsiCo Option Exercises in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options at FY-End Money Options at FY-End (1)
---------------------------- -------------------------------
Shares
Acquired on
Name Exercise (#) Value 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(2) $31,842,379 $35,860,759
Craig D. Jung...... -- -- 114,958 162,311(3) 2,666,813 1,403,184
John T. Cahill..... -- -- 209,523 153,858(3) 5,242,681 1,416,124
Margaret D. Moore.. 26,751 770,488 131,119 87,730(3) 3,085,501 864,181
Pamela C. McGuire.. 26,917 770,657 125,799 58,364(3) 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.
(2) 453,901 of these options were canceled and the remainder became
exercisable on the date the initial public offering was completed.
(3) All of these options became exercisable on the date the initial public
offering was completed.
Pension Plans
Many of our salaried employees have been participants in PepsiCo's
Salaried Employees Retirement Plan. We have adopted 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:
Years of Service
------------------------------------
Renumeration 30 35 40
------------ -------- -------- --------
$ 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
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<PAGE>
Years of Service
------------------------------------
Renumeration 30 35 40
------------ -------- -------- --------
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
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 1999 Long-Term Incentive Plan
Generally. Prior to the initial public offering, the PBG 1999 Long-Term
Incentive Plan was approved by our board of directors and by PepsiCo as our
sole stockholder at the time. The PBG 1999 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 appreciation rights
and restricted stock grants. The term of the PBG 1999 Long-Term Incentive Plan
is two years.
Administration. The PBG 1999 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 1999 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 1999 Long-Term Incentive Plan grants powers to the executive
development and compensation committee to amend and terminate the PBG 1999
Long-Term Incentive Plan.
Eligibility. Key employees of PBG and its divisions, subsidiaries and
affiliates have been or will be granted awards under the PBG 1999 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 Initial Public Offering
As of the initial public offering, the executive development and
compensation committee of our board of directors made the following stock
option grants to our executive officers named in the tables above:
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
---------------------------------------------------------------- -------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Granted Employees in Base Price Expiration
Name (#)(1) Fiscal year ($/sh)(2) Date 5%(3) 10%(3)
- ---- --------------- ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Craig E. Weatherup. 1,086,956 8.9% $23.00 (1) $15,722,366 $39,843,562
Craig D. Jung...... 264,130 2.2 23.00 (1) 3,820,535 9,681,985
John T. Cahill..... 264,130 2.2 23.00 (1) 3,820,535 9,681,985
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
---------------------------------------------------------------- -------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Granted Employees in Base Price Expiration
Name (#)(1) Fiscal year ($/sh)(2) Date 5%(3) 10%(3)
- ---- --------------- ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Margaret D. Moore.. 117,394 1.0 23.00 (1) 1,698,015 4,303,105
Pamela C. McGuire.. 143,478 1.2 23.00 (1) 2,075,352 5,259,350
</TABLE>
- ------------------
(1) These options were granted as of the date the initial public offering was
completed and consist of non-qualified stock options. Except for the
options granted to Mr. Weatherup, these options will become exercisable
three years after the completion of the initial public offering. One-third
of Mr. Weatherup's options become exercisable one year after the initial
public offering date, one-third become exercisable two years after the
initial public offering date, and the remaining one-third become
exercisable three years after the initial public offering date. All of
these options expire ten years after the initial public offering date.
(2) Based upon the public initial public offering price of $23.00 per share.
(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, than the option grants described in the table will be valueless.
PBG 1999 Executive Incentive Compensation Plan
Generally. Prior to the initial public offering, PBG's 1999 Executive
Incentive Compensation Plan was approved by our board of directors and by
PepsiCo as our sole stockholder at the time. The PBG 1999 Executive Incentive
Compensation 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 1999 Executive Incentive Compensation Plan vests
broad powers in the executive development and compensation committee to
administer and interpret the PBG 1999 Executive Incentive Compensation 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 1999
Executive Incentive Compensation 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 initial public offering:
o our Chief Executive Officer will own shares of our common stock with
a value of at least five times his annual salary;
o our Chief Operating and Chief Financial Officers will own shares with
a value of at least three times their respective annual salaries; and
o 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 was transferred to PBG as of the initial public offering. They
have elected to transfer approximately $4,000,000, $1,000,000 and $250,000,
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respectively, from their deferral investments into a PBG phantom stock
investment as of the initial public offering. This transfer will satisfy all or
substantially all of their respective PBG stock ownership requirements.
Founder's Grant. At the time of the initial public offering, the executive
development and compensation committee made 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 had an exercise price equal to
the initial public offering price of $23 per share; 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 15 to the notes to
Combined Financial Statements. For purposes of governing certain on-going
relationships between us and PepsiCo, we have entered into, or continued 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. PepsiCo has 43.5% 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 owns. As a major stockholder of PBG, PepsiCo is able to
significantly influence the outcome of all matters requiring stockholder
action. Of the persons currently on 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 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
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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 as cooperative
advertising and sales promotion programs that would require our cooperation and
support. Although PepsiCo has advised us that
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<PAGE>
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
arm's-length negotiations. Consequently, the agreement contains provisions that
are less favorable to us than the exclusive bottling appointments for cola
beverages currently in effect for independent bottlers in the United States.
Terms of the Non-Cola Bottling Agreements. The beverage products covered
by the non-cola bottling agreements are beverages licensed to us by PepsiCo,
consisting of MOUNTAIN DEW, DIET MOUNTAIN DEW, 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
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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.
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.
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Description of Other Agreements with PepsiCo
We have entered into other agreements with PepsiCo, governing the
relationships between us and PepsiCo, and providing for the allocation of tax
and other liabilities and obligations relating to periods prior to and after
the initial public offering. 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, 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 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 initial public offering date and
taxes resulting from transactions effected in connection with the initial
public offering. The tax separation agreement also expresses each party's
intention with respect to certain of our tax attributes after the initial
public 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 make available to each other. 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.
Under the terms of the separation agreement, we have agreed to use our
best efforts to release, terminate or replace, prior to August 1, 1999, 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 August 1, 1999, 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 that date. Under the separation agreement, after August
1, 1999 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 our guarantee, a qualified letter of credit or cash
collateral provided by us or on our behalf. 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.
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PepsiCo's Agreement to Combine Bottling Businesses with Whitman. In May
1999, PepsiCo combined certain of PepsiCo's bottling businesses and assets in
the Midwestern United States and Central Europe with those of Whitman
Corporation in a newly created Whitman entity. Whitman assumed liabilities
associated with the U.S. operations of PepsiCo being transferred to it and
acquired certain of PepsiCo's operations in Central Europe for cash. PepsiCo
received $300 million in net proceeds plus 35% of the common stock in the newly
created Whitman entity. Whitman agreed to undertake a stock repurchase program
that is anticipated to raise PepsiCo's stake in the new Whitman to
approximately 40%.
The new Whitman operates 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 new Whitman board
of directors or under the terms of an offer made to all new Whitman
shareholders.
Whitman also transferred to us bottling operations in Virginia, West
Virginia and St. Petersburg, Russia. This transfer was not subject to approval
by Whitman shareholders.
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DESCRIPTION OF THE NOTES AND THE GUARANTEES
General
The new notes will be issued by PBG pursuant to an indenture, among PBG,
as issuer, Bottling LLC, as guarantor (the "Guarantor"), and The Chase
Manhattan Bank, as trustee (the "Trustee"). The terms of the new notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939, as amended (the "TIA"). The new notes are
subject to all such terms, and holders of the new notes are referred to the
indenture and the TIA for a statement thereof. The following summary of select
provisions of the indenture does not purport to be complete and is qualified in
its entirety by reference to the indenture, including the definitions therein
of certain terms used below. The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The new notes will be in fully registered form and will be represented
initially by one or more global notes (the "Global Notes"). The Global Notes
will be deposited with a custodian of and registered in the name of a nominee
of The Depository Trust Company ("DTC"). Beneficial interests in the Global
Notes will be shown on, and transfers thereof will be effected only through,
records maintained in book-entry form by DTC and its participants. See "--
Book-Entry, Delivery and Form."
Ranking
The new notes will be general unsecured obligations of PBG and will rank
pari passu with all other existing and future unsecured and unsubordinated
indebtedness of PBG. The new notes are not secured by any assets of PBG.
Accordingly, the new notes will be effectively subordinated to any secured
obligations of PBG to the extent of the value of the assets securing such
obligations. As of the date hereof, PBG does not have any material secured
long-term debt obligations.
PBG is primarily a holding company with limited direct operations and
assets other than its interest in Bottling LLC. Consequently, PBG is dependent
upon the cash flow of its subsidiaries, including Bottling LLC, to meet its
obligations, including its obligations under the new notes. As a result, the
new notes will be effectively subordinated to all existing and future
indebtedness and other liabilities and commitments of PBG's subsidiaries
(except for Bottling LLC) with respect to the cash flow and assets of those
subsidiaries. At the date hereof, PBG's subsidiaries had approximately $2.3
billion of indebtedness.
The indenture does not contain any provision that will restrict PBG or
Bottling LLC from entering into one or more additional indentures providing for
the issuance of debt securities or warrants, or from incurring, assuming, or
becoming liable with respect to any indebtedness or other obligation, whether
secured or unsecured, or from paying dividends or making other distributions on
its capital stock, or from purchasing or redeeming its capital stock. The
indenture does not contain any financial ratios or specified levels of net
worth or liquidity to which PBG or Bottling LLC must adhere. In addition, the
indenture does not contain any provision that would require that PBG
repurchase, redeem, or otherwise modify the terms of any of the new notes upon
a change in control or other event involving PBG that may adversely affect the
creditworthiness of PBG or the value of the new notes.
Guarantees
Bottling LLC will unconditionally and irrevocably guarantee on an
unsecured basis, to each holder and to the Trustee and its successors and
assignees (i) the full and punctual payment of principal and interest on the
new notes when due, whether at maturity, by acceleration, by redemption or
otherwise and all other monetary obligations of PBG under the indenture and the
new notes and (ii) in the case of any extension of time of payment or renewal
of any new notes or any of such other monetary obligation, that the same will
be promptly paid in full when due or performed in accordance with the terms of
such extension or renewal.
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The guarantees rank equally with all other senior unsecured obligations of
Bottling LLC. At the date hereof, other than obligations related to the old
notes, Bottling LLC has approximately $2.3 billion of indebtedness.
The obligations of Bottling LLC are limited to the maximum amount which,
after giving effect to all other contingent and fixed liabilities of Bottling
LLC, will result in the obligations of Bottling LLC under the guarantees not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. If the guarantees were challenged by a creditor of Bottling LLC, it
is possible that the amount for which Bottling LLC would be liable would be
limited (or the rights of holders of the new notes under the guarantees would
be subject to avoidance or subordination) by application of fraudulent
conveyance or equitable subordination principles.
Bottling LLC may consolidate with or merge into or sell its assets to PBG
without limitation, or with other persons upon the terms and conditions set
forth in the indenture.
Principal, Maturity and Interest
The new notes will be general unsecured obligations of PBG, limited in
aggregate principal amount to $1,000,000,000 and will mature at par on March 1,
2029 (the "Maturity Date"). Each new note will bear interest at 7% per annum of
the principal amount then outstanding from the original issuance date of the
new notes, payable semi-annually in arrears on each March 1, and September 1,
beginning September 1, 1999.
The interest rate on the new notes is subject to increase in certain
circumstances if the registration statement of which this prospectus is a part
is not declared effective on a timely basis or if certain other conditions are
not satisfied, all as further described under "Exchange Offer."
Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. If a payment date is not a Business Day, payment may be
made on the next succeeding day that is a Business Day, and no interest shall
accrue for the intervening period. Principal, premium, if any, and interest on
the new notes will be payable at the office or agency of PBG maintained for
such purpose within the City and State of New York or, at the option of PBG,
payment of interest on the new notes may be made by check mailed to the holders
of the new notes at their respective addresses set forth in the register of
holders of new notes. A holder of $10,000,000 or more in aggregate principal
amount of new notes will be entitled to receive payments of interest, other
than interest due at maturity or any date of redemption or repayment, by wire
transfer of immediately available funds, provided, that the Trustee receives
from such holder a written request with appropriate wire transfer instructions
no later than 15 calendar days prior to the applicable interest payment date.
Until otherwise designated by PBG, PBG's office or agency in New York will be
the office of the Trustee maintained for such purpose. The new notes will be
issued in minimum denominations of $100,000 and integral multiples of $1,000 in
excess thereof. The Trustee initially will be Paying Agent and Registrar under
the indenture, and PBG may act as Paying Agent or Registrar under the
indenture.
Notwithstanding the foregoing paragraph, payments of principal, premium,
if any, and interest, with respect to new notes represented by a Global Note
will be made to DTC or its nominee, as the case may be, as the registered owner
thereof. None of PBG, the Trustee, or any Paying Agent for the new notes will
have any responsibility or liability for any aspect of the records relating to,
or for payments made on account of, beneficial ownership interests in a Global
Note, or for maintaining, supervising, or reviewing any records relating to
such beneficial ownership interests.
PBG expects that, immediately upon receipt of any payment of principal,
premium, or interest with respect to the new notes represented by a Global
Note, DTC will credit each participant's account with the amount of such
payment that is proportionate to its respective ownership interest in the
principal amount of such Global Note (as shown on the records of DTC). Payments
by participants to persons who hold beneficial interests in such Global Note
through such participants will be the responsibility of such participants.
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Redemption
PBG will not be required to make mandatory redemption or sinking fund
payments prior to maturity of the new notes.
The new notes will be redeemable, in whole or in part, at any time at the
option of PBG, at a redemption price equal to the greater of (i) 100% of the
principal amount of the new notes being redeemed or (ii) as determined by an
Independent Investment Banker, the sum of the present values of the remaining
scheduled payments of principal and interest on the new notes being redeemed
from the redemption date to the Maturity Date discounted to the date of
redemption on a semi-annual basis (assuming a 360-day year consisting of twelve
30-day months) at a discount rate equal to the Treasury Rate (as defined below)
plus 25 basis points plus, for (i) or (ii) above, whichever is applicable,
accrued and unpaid interest on such new notes to the date of redemption.
The new notes will be subject to redemption upon not less than 30 days',
but not more than 60 days' prior notice mailed to each holder of new notes to
be redeemed at its registered address by first-class mail. If less than all the
new notes are to be redeemed at any time, selection of new notes for redemption
will be made by the Trustee by such method as the Trustee shall deem fair and
appropriate; provided any new notes redeemed in part shall be in multiples of
$1,000. If any new note is to be redeemed in part only, the notice of
redemption that relates to such new note shall state the portion of the
principal amount thereof to be redeemed. A new note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original new note. On and after the redemption
date, interest will cease to accrue on new notes or portions thereof called for
redemption unless PBG defaults in the payment thereof.
"Treasury Rate" means, with respect to any redemption date for the new
notes (i) the yield, under the heading which represents the average for the
immediately preceding week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which
is published weekly by the Board of Governors of the Federal Reserve System and
which establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury Constant Maturities,"
for the maturity corresponding to the Comparable Treasury Issue (if no maturity
is within three months before or after the applicable Maturity Date, yields for
the two published maturities most closely corresponding to the Comparable
Treasury Issue shall be determined and the Treasury Rate shall be interpolated
or extrapolated from such yields on a straight line basis, rounding to the
nearest month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not contain
such yields, the rate per annum equal to the semi-annual equivalent yield to
maturity of the Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such redemption date. The Treasury
Rate shall be calculated on the third Business Day preceding the redemption
date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the new notes to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of such new notes. "Independent Investment Banker" means one of
the Reference Treasury Dealers appointed by the Trustee after consultation with
PBG.
"Comparable Treasury Price" means with respect to any redemption date for
the new notes (i) the average of four Reference Treasury Dealer Quotations for
such redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (ii) if the Trustee obtains fewer than four such
Reference Treasury Dealer Quotations, the average of all such quotations.
"Reference Treasury Dealer" means, each of Credit Suisse First Boston
Corporation, Lehman Brothers Inc., Salomon Smith Barney Inc. and one other
primary U.S. Government securities dealer in New York City (each, a "Primary
Treasury Dealer") appointed by the Trustee in consultation with PBG; provided,
however, that if any of the foregoing shall cease to be a Primary Treasury
Dealer, PBG shall substitute therefor another Primary Treasury Dealer.
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"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined
by the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third Business Day preceding such redemption date.
Except as set forth above, the new notes will not be redeemable by PBG
prior to maturity.
Certain Covenants
The indenture contains covenants including, among others, the following:
Limitation on Liens. The indenture contains a covenant that neither PBG
nor any Restricted Subsidiary of PBG will incur, suffer to exist or guarantee
any Debt, secured by a mortgage, pledge or lien (a "Lien") on any Principal
Property or on any shares of stock of any Restricted Subsidiary of PBG unless
PBG or such first mentioned Restricted Subsidiary secures or causes such
Restricted Subsidiary to secure all the outstanding notes or the guarantees, as
the case may be (and any other Debt of PBG or such Restricted Subsidiary, at
the option of PBG or such Restricted Subsidiary, as the case may be, not
subordinate to the notes or the guarantees, as the case may be), equally and
ratably with (or prior to) such secured Debt, for as long as such secured Debt
shall be so secured. This restriction will not, however, apply to Debt secured
by: (i) Liens existing prior to the issuance of the old and new notes; (ii)
Liens on property of or shares of stock of or Debt of any corporation existing
at the time such corporation becomes a Restricted Subsidiary of PBG; (iii)
Liens on property or shares of stock existing at the time of acquisition
(including acquisition through merger or consolidation); (iv) any Lien securing
indebtedness incurred to finance all or any part of the purchase price or cost
of construction or property (or additions, substantial repairs, alterations or
substantial improvements thereto), provided that such Lien and the indebtedness
secured thereby are incurred within 365 days of the later of acquisition or
completion of construction (or addition, repair, alteration or improvement) and
full operation thereof; (v) Liens in favor of PBG or any Restricted
Subsidiaries of PBG; (vi) Liens in favor of, or required by contracts with,
governmental entities; and (vii) any extension, renewal, or refunding referred
to in any of the preceding clauses (i) through (vi), provided that in the case
of a Lien permitted under clause (i), (ii), (iii), (iv) or (v) the Debt secured
is not increased nor the Lien extended to any additional assets.
Notwithstanding the foregoing, PBG or any Restricted Subsidiaries of PBG
may incur, suffer to exist or guarantee any Debt secured by a Lien on any
Principal Property or on any shares of stock of any Restricted Subsidiary of
PBG if, after giving effect thereto, the aggregate amount of Exempted Debt does
not exceed 15% of Consolidated Net Tangible Assets.
Limitation on Sale-Leaseback Transactions. (a) PBG will not, and will not
permit, any of its Restricted Subsidiaries to, sell or transfer, directly or
indirectly, except to PBG or a Restricted Subsidiary of PBG, any Principal
Property as an entirety, or any substantial portion thereof, with the intention
of taking back a lease of all or part of such property, except a lease for a
period of three years or less at the end of which it is intended that the use
of such property by the lessee will be discontinued; provided that,
notwithstanding the foregoing, PBG or any of its Restricted Subsidiaries may
sell a Principal Property and lease it back for a longer period (i) if PBG or
such Restricted Subsidiary would be entitled, pursuant to the covenant
described under "--Limitations on Liens" to create a Lien on the property to be
leased securing Debt in an amount equal to the Attributable Debt with respect
to the sale and lease-back transaction without equally and ratably securing the
outstanding notes or (ii) if (A) PBG promptly informs the Trustee of such
transactions, (B) the net proceeds of such transactions are at least equal to
the fair value (as determined by a Board Resolution) of such property and (C)
PBG causes an amount equal to the net proceeds of the sale to be applied to the
retirement (whether by redemption, cancellation after open-market purchases, or
otherwise), within 365 days after receipt of such proceeds, of Funded Debt
having an outstanding principal amount equal to such net proceeds or (ii) to
the purchase or acquisition (or in the case of property, the construction) of
property or assets used in the business of PBG or any Restricted Subsidiary of
PBG, within 365 days after receipt of such proceeds.
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(b) Notwithstanding the foregoing paragraph (a), PBG or any Restricted
Subsidiary of PBG may enter into sale and lease-back transactions in addition
to those permitted by the foregoing paragraph (a), and without any obligation
to retire any outstanding Funded Debt or to purchase property or assets,
provided that at the time of entering into such sale and lease-back
transactions and after giving effect thereto, Exempted Debt does not exceed 15%
of Consolidated Net Tangible Assets.
Consolidation, Merger, Conveyance or Transfer. The indenture provides that
PBG and Bottling LLC may consolidate or merge with or into, or transfer or
lease all or substantially all of its assets to, any corporation that is
organized and validly existing under the laws of any domestic jurisdiction, and
may permit any such corporation to consolidate with or merge into PBG or
Bottling LLC or convey, transfer, or lease all or substantially all of its
assets to PBG or Bottling LLC, provided, (i) that either PBG or Bottling LLC
will be the surviving corporation or, if not, that the successor corporation
will expressly assume by a supplemental indenture the due and punctual payment
of the principal, premium, if any, and interest on the new notes and the
performance of every covenant of the indenture to be performed or observed by
PBG or Bottling LLC, (ii) PBG, Bottling LLC or such successor corporation will
not, immediately after such merger, consolidation, sale, conveyance or lease be
in default in the performance of any such obligations, and (iii) PBG shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, conveyance, transfer or lease
complies with the indenture. In the event of any such consolidation, merger,
conveyance, transfer or lease, any such successor corporation will succeed to
and be substituted for the issuer or guarantor, as the case may be, as issuer
or guarantor, as the case may be, on the new notes with the same effect as if
it had been named in the indenture as the issuer or as guarantor, as the case
may be.
Reports to Holders. PBG and Bottling LLC shall comply with the
provisions of Section 314(a) and 314(c) of the TIA.
PBG and Bottling LLC have each agreed that so long as it is not subject to
Section 13 or 15(d) of the Exchange Act, upon the request of a holder of the
new notes, it will promptly furnish or cause the Trustee to furnish to such
holder or to a prospective purchaser of a new note designated by such holder,
as the case may be, the information required to be delivered by it pursuant to
Rule 144A (d)(4) under the Securities Act to permit compliance with Rule 144A
in connection with resales of the new notes.
There are no other restrictive covenants contained in the Indenture.
Events of Default and Remedies
The indenture provides that each of the following events constitutes an
Event of Default (each, an "Event of Default"):
(i) failure to make any payment of principal when due (whether at
maturity, upon redemption or otherwise) on the new notes;
(ii) failure to make any payment of interest when due on the new
notes, which failure is not cured within 30 days;
(iii) failure of PBG or Bottling LLC to observe or perform any of its
other respective covenants or warranties under the indenture for the
benefit of the holders of the new notes, which failure is not cured within
90 days after notice is given as specified in the indenture;
(iv) certain events of bankruptcy, insolvency, or reorganization of
PBG or any Material Domestic Subsidiary of PBG;
(v) the maturity of any Debt of PBG or any Material Domestic
Subsidiary of PBG having a then outstanding principal amount in excess
of $50 million shall have been accelerated by any holder or holders thereof
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or any trustee or agent acting on behalf of such holder or holders, in
accordance with the provisions of any contract evidencing, providing for
the creation of or concerning such Debt or failure to pay at the stated
maturity (and the expiration of any grace period) any Debt of PBG or any
Material Domestic Subsidiary of PBG having a then outstanding principal
amount in excess of $50 million; and
(vi) the guarantee of the new notes ceases to be in full force and
effect or the Guarantor denies or disaffirms its obligations under the
guarantee of the new notes, except as a result of a transaction permitted
under the provisions described in "--Certain Covenants--Consolidation,
Merger, Conveyance or Transfer."
If any Event of Default (other than an Event of Default specified in
clause (iv) in the above paragraph) occurs and is continuing, then either the
Trustee or the holders of no less than 25% in aggregate principal amount of the
outstanding notes may declare the principal of all outstanding notes, and the
interest, if any, accrued thereon, to be immediately due and payable. If an
Event of Default relating to certain acts of bankruptcy, insolvency or
reorganization of PBG or any Material Domestic Subsidiary of PBG occurs, the
principal amount and accrued interest, if any, on all the notes as of the date
of such Event of Default will ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or the
holders of the notes. However, declarations of default may be rescinded and
past defaults may be waived by the holders of a majority in principal amount of
the outstanding notes, with certain exceptions, as described below.
The indenture requires the Trustee to give to the holders of the new notes
notice of all uncured defaults known to the Trustee within 90 days after such
default occurs (the term "default" used here to include the Events of Default
summarized above, exclusive of any grace period or requirement that notice of
default be given), provided, however, that except in the case of a default in
the payment of principal or interest, if any, on the outstanding notes, the
Trustee will be protected in withholding such notice if it in good faith
determines that the withholding of such notice is in the interest of the
holders of the outstanding notes.
No holder of any notes may institute any action under the indenture unless
and until (i) such holder has given the Trustee written notice of an Event of
Default, (ii) the holders of not less than 25% in aggregate principal amount of
the outstanding notes have requested the Trustee to institute proceedings in
respect of such Event of Default, (iii) such holder or holders has or have
offered the Trustee such reasonable indemnity as the Trustee may require, (iv)
the Trustee has failed to institute an action for 60 days thereafter, and (v)
no inconsistent direction has been given to the Trustee during such 60-day
period by the holders of not less than 25% in aggregate principal amount of the
outstanding notes.
The holders of a majority in aggregate principal amount of the outstanding
notes will have the right, subject to certain limitations, to direct the time,
method, and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee with
respect to the notes. The indenture provides that if an Event of Default shall
have occurred and be continuing, the Trustee, in exercising its rights and
powers under the indenture, will be required to use the degree of care of a
prudent person in the conduct of his or her own affairs. The indenture further
provides that the Trustee will not be required to expend or risk its own funds,
or otherwise incur any financial liability in the performance of any of its
duties under the indenture, unless it has reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
reasonably assured.
The holders of not less than a majority in principal amount of the
outstanding notes may, on behalf of the holders of all notes, waive any past
default with respect to the notes, except a default not theretofore cured, (i)
in the payment of principal or interest of any notes, or (ii) in respect of a
covenant or provision in the indenture that cannot be modified without the
consent of the holder of each outstanding note.
PBG and Bottling LLC are each required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate signed by certain
officers of PBG or Bottling LLC, as the case may be, stating whether such
officers have obtained knowledge of any Event of Default with respect to PBG or
Bottling LLC, as the case may be.
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Defeasance and Discharge of Covenants
The indenture will be discharged with respect to the new notes and will
cease to be of further effect as to all notes when
(1) either
(a) all notes theretofore authenticated and delivered
(except lost, stolen or destroyed notes which have been replaced or
paid and notes for whose payment money has theretofore been deposited
in trust or segregated and held in trust by PBG and thereafter repaid
to PBG or discharged from such trust) have been delivered to the
Trustee canceled or for cancellation; or
(b) all notes not theretofore delivered to the Trustee canceled
or for cancellation
(i) have become due and payable, or
(ii) will become due and payable within one year, or
(iii) are to be called for redemption under arrangements
satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of
PBG,
and in any of the cases described in (i), (ii) or (iii), above, PBG has
deposited or caused to be deposited with the Trustee, as trust funds in
trust for the purpose, an amount of money in U.S. dollars, sufficient
non-callable U.S. Government Obligations the principal and interest on
which when due, will be sufficient, or a combination thereof, sufficient
to pay and discharge the entire indebtedness on such notes with respect to
principal and accrued and unpaid interest to the date of such deposit (in
the case of notes that have become due and payable), or to maturity or
redemption, as the case may be;
(2) PBG has paid or caused to be paid all sums payable by it with
respect to the notes under the indenture;
(3) no Event of Default or event which with notice or lapse of time
would become an Event of Default with respect to the notes has occurred
and be continuing with respect to such notes on the date of such deposit;
(4) PBG has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel each stating that all conditions precedent to
satisfaction and discharge of this indenture with respect to the notes
have been complied with, and, in the case of the Opinion of Counsel,
stating
(i) such deposit and defeasance will not cause the
holders of such notes to recognize income, gain or loss for Federal
income tax purposes and such holders will be subject to Federal
income tax on the same amount and in the same manner and at the same
times as would have been the case if such option had not been
exercised, and
(ii) either that no requirement to register under the
Investment Company Act of 1940, as amended, will arise as a result of
the satisfaction and discharge of the indenture or that any such
registration requirement has been complied with; and
(5) such deposit and defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument to which PBG is a party.
The indenture also provides that PBG, at its option
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(i) will be discharged from any and all obligations with respect to the
new notes (except for certain obligations to replace any such new notes
that have been stolen, lost, or mutilated, and to maintain paying agencies
and hold moneys for payment in trust in respect to such new notes), or
(ii) need not comply with certain covenants of the indenture with respect
to the new notes (including those described in the preceding paragraphs
captioned "--Certain Covenants"), in each case:
(a) if PBG has deposited or caused to be deposited irrevocably
with the Trustee, as trust funds in trust, specifically pledged as
security for, and dedicated solely to, the benefit of holders of the
new notes, U.S. dollars, non-callable U.S. Government Obligations,
or a combination thereof, sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and
discharge the entire indebtedness on such new notes with respect to
principal and accrued and unpaid interest to the date of such
deposit (in the case of new notes that have become due and payable),
or to maturity or redemption, as the case may be,
(b) no Event of Default or event which with notice or lapse
of time would become an Event of Default with respect to the new
notes has occurred and be continuing with respect to such new notes
on the date of such deposit,
(c) PBG has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each stating that all conditions precedent
to defeasance and discharge of the indenture have been complied
with, and, in the case of the Opinion of Counsel stating that
(x) such deposit and defeasance will not cause the
holders of such new notes to recognize income, gain, or loss for
Federal income tax purposes as a result of PBG's exercise of
such option and such holders will be subject to Federal income
tax on the same amount and in the same manner and at the same
times as would have been the case if such option had not been
exercised, which opinion of counsel must be based upon a ruling
of the Internal Revenue Service to the same effect or a change
in applicable Federal income tax law or related treasury
regulations after the date of the indenture, and
(y) either that no requirement to register under the
Investment Company Act of 1940, as amended, will arise as a
result of the satisfaction and discharge of the indenture or
that any such registration requirement has been complied with,
and
(d) with respect to defeasance under clause (i) above 123 days
shall have passed during which no Event of Default under (iv) as
described under "--Events of Default and Remedies" has occurred.
Modification of the Indenture
With certain exceptions, the holders of not less than a majority in
aggregate principal amount of outstanding notes may, on behalf of the holders
of all then outstanding notes, consent to a modification of the indenture
affecting all such holders' rights thereunder and/or under the notes, provided,
however, the right of any holder of any outstanding note to receive payment
when due of any payment of principal or interest payable with respect to such
note, or to institute suit for the enforcement of any such payment, will not be
impaired or affected without the consent of each such holder.
The indenture may be modified by PBG, Bottling LLC and the Trustee without
the consent of any of the holders of the new notes to:
(i) evidence the succession of another corporation to PBG or
Bottling LLC,
(ii) add to the covenants of PBG or Bottling LLC,
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(iii) surrender any right or power of PBG or Bottling LLC,
(iv) cure any ambiguity or defect, correct or supplement any
provision of the indenture which may be inconsistent with any other
provisions of the indenture, provided that such action pursuant to this
clause (iv) shall not adversely affect the interests of the holders of
the new notes in any respect,
(v) add any provisions expressly permitted by the TIA,
(vi) evidence and provide for the acceptance of a successor trustee,
(vii) to add to the rights of the holders, and
(viii) establish additional Events of Default,
provided that no modification may be made with respect to the matters described
in clauses (ii), (iii), (iv), (vi) or (viii) if it is reasonably determined
that to do so would adversely affect the interests of the holders of any
outstanding notes.
Concerning the Trustee
The Chase Manhattan Bank, the Trustee under the indenture, is also the
trustee under other indentures under which unsecured debt of PepsiCo, PBG and
Bottling LLC is outstanding, has from time to time made loans to PepsiCo and
may participate as a lender under the Bank Facility, and has performed other
services for PepsiCo, PBG and Bottling LLC in the normal course of its
business, including the establishment and management of investment accounts.
The indenture will contain certain limitations on the rights of the
Trustee, should it become a creditor of PBG or Bottling LLC, or both, to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict or resign.
Governing Law
The indenture and the new notes will be governed by, and construed in
accordance with, the laws of the State of New York.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full description of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
For purposes of the indenture, unless otherwise specifically indicated, the
term "consolidated" with respect to any Person refers to such Person
consolidated with its Subsidiaries. For purposes of the following definitions
and the indenture generally, all calculations and determinations shall be made
in accordance with U.S. GAAP and shall be based upon the consolidated financial
statements of PBG, prepared in accordance with U.S. GAAP, consistently applied.
"Attributable Debt" for a lease means the aggregate of present values
(discounted at a rate per annum equal to the average interest rate borne by the
new notes determined on a weighted average basis and compounded semi-annually)
of the obligations of PBG or any Restricted Subsidiary of PBG for net rental
payments during the remaining term of such lease (including any period for
which such lease has been extended or may at the option of the lessor, be
extended). The term "net rental payments" under any lease of any period shall
mean the sum of the rental and other payments required to be paid in such
period by the lessee thereunder, not including, however, any amounts required
to be paid by such lessee on account of maintenance and repairs,
reconstruction, insurance, taxes, assessments, water rates or similar charges
required to be paid by such lessee thereunder or any amounts required to be
paid by such lessee thereunder contingent upon the amount of sales, maintenance
and repairs, reconstruction, insurance, taxes, assessments,
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water rates or similar charges. Attributable Debt may be reduced by the present
value of the rental obligations, calculated on the same basis, that any
sublessee has for all or part of the leased property.
"Board of Directors" means, with respect to any Person, (i) the board of
directors of such Person or (ii) any duly authorized committee of that board.
"Board Resolution" means, with respect to any Person, a copy of a
resolution of the Board of Directors certified by the Secretary or an Assistant
Secretary of such Person to have been duly adopted by the Board of Directors
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Business Day" means any day other than a Saturday or Sunday that is
neither a legal holiday nor a day on which banking institutions in New York are
authorized or required by law, regulation, or executive order to be closed.
"Consolidated Net Tangible Assets" means, with respect to PBG, the total
amount of assets of PBG and its Subsidiaries minus (i) all applicable
depreciation, amortization, and other valuation reserves, (ii) the amount of
assets resulting from write-ups of capital assets (except write-ups in
connection with accounting for acquisitions in accordance with U.S. GAAP),
(iii) all current liabilities of PBG and its Subsidiaries (excluding any such
liabilities that are intercompany items) and (iv) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the latest quarterly consolidated balance
sheet of PBG and its Subsidiaries prepared in accordance with U.S. GAAP.
"Debt" means any debt for borrowed money, capitalized lease obligations
and purchase money obligations, or any guarantee of such debt, in any such case
which would appear on the consolidated balance sheet of PBG as a liability.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Exempted Debt" means the sum, without duplication, of the following items
outstanding as of the date Exempted Debt is being determined: (i) Debt incurred
after the date of the Indenture and secured by liens created or assumed or
permitted to exist pursuant to the covenant as described under the second
paragraph of "--Certain Covenants --Limitation on Liens," and (ii) Attributable
Debt of PBG and its Restricted Subsidiaries in respect of all sale and
lease-back transactions with regard to any Principal Property entered into
pursuant to the covenant as described under paragraph (b) of "--Certain
Covenants--Limitation on Sale-Leaseback Transactions."
"Funded Debt" means all Debt having a maturity of more than one year from
the date of its creation or having a maturity of less than one year but by its
terms being renewable or extendible, at the option of PBG in respect thereof,
beyond one year from its creation.
"Material Domestic Subsidiary" means any Subsidiary which (i) is a
"significant subsidiary" as that term in defined in Rule 1-02(w) of Regulation
S-X under the Securities Act, and (ii) has its principal operations located
within the 50 states of the United States of America, the District of Columbia
or Puerto Rico.
"Maturity Date" means March 1, 2029.
"Officer" means, with respect to any Person, the Chairman of the Board,
Chief Executive Officer, the Executive Vice President, the Treasurer, and the
Assistant Treasurer of such Person, or any other officer or officers of such
Person pursuant to an applicable Board Resolution.
"Officers' Certificate" means, with respect to any Person, a certificate
signed on behalf of such Person by any two Officers of such Person, that meets
the applicable requirements of the indenture.
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"Opinion of Counsel" means, with respect to PBG or the Trustee, a written
opinion of counsel to PBG or the Trustee, as the case may be, which counsel may
be an employee of PBG or the Trustee, as the case may be.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, or government, or any agency or political subdivision thereof.
"Principal" of any Debt (including the notes) means the principal amount
of such Debt plus the premium, if any, on such Debt.
"Principal Property" means, with respect to PBG, any single manufacturing
or processing plant, office building, or warehouse owned or leased by PBG or a
Subsidiary of PBG, in each case, located in the fifty states of the United
States, the District of Columbia or Puerto Rico other than a plant, warehouse,
office building, or portion thereof which, in the opinion of PBG's Board of
Directors evidenced by a Board Resolution, is not of material importance to the
business conducted by PBG and its Subsidiaries as an entirety.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Restricted Subsidiary" means (x) any Subsidiary (i) substantially all of
the property of which is located, or substantially all of the business of which
is carried on, within the fifty states of the United States of America, the
District of Columbia or Puerto Rico and (ii) which owns or leases any Principal
Property and (y) any guarantor of the Notes.
"Subsidiary" of a specified Person means any at least a majority of whose
outstanding Voting Stock shall at the time be owned, directly or indirectly, by
the specified Person or by one or more of its Subsidiaries, or both.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as
in force as of the date hereof; provided that, with respect to every
supplemental indenture executed pursuant to this Indenture, the TIA shall be as
then in effect.
"U.S. GAAP" means accounting principles as are generally accepted in the
United States of America at the date of any computation required or permitted
under the indenture.
"U.S. Government Obligations" means (i) securities that are direct
obligations of the United States of America, the payment of which is
unconditionally guaranteed by the full faith and credit of the United States of
America and (ii) securities that are obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America, the payment of which is unconditionally guaranteed by the full
faith and credit of the United States of America, and also includes depository
receipts issued by a bank or trust company as custodian with respect to any of
the securities described in the preceding clauses (i) and (ii), and any payment
of interest or principal payable under any of the securities described in the
preceding clauses (i) and (ii) that is held by such custodian for the account
of the holder of a depository receipt, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt, or from any amount received
by the custodian in respect of such securities, or from any specific payment of
interest or principal payable under the securities evidenced by such depository
receipt.
"Voting Stock" means, as applied to any Person, capital stock (or other
interests, including partnership interests) of any class or classes (however
designated), the outstanding shares of which have, by the terms thereof,
ordinary voting power to elect a majority of the members of the board of
directors (or other governing body) of such Person, other than stock having
such power only by reason of the happening of a contingency.
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Book-Entry, Delivery and Form
General
The new notes will be issued in the form of one or more fully registered
Global Notes. The Global Notes will be deposited with a custodian of and
registered in the name of a nominee of DTC.
Upon issuance of the Global Notes, DTC or its nominee will credit, on its
book-entry registration and transfer system, to the accounts of institutions
that have accounts with DTC or its nominee ("participants") with the respective
principal amounts of new notes exchanged by such participant (or by persons
holding through such participant). Ownership of beneficial interests in the
Global Notes will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global Notes
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to
participants' interests) for such Global Notes, or by participants or persons
that hold interests through participants (with respect to beneficial interests
of persons other than participants). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Notes.
So long as DTC, or its nominee, is the registered holder of any Global
Notes, DTC or such nominee, as the case may be, will be considered the sole
legal owner and holder of such new notes for all purposes under the indenture
and the new notes. Except as set forth below, owners of beneficial interests in
Global Notes will not be entitled to have such Global Notes registered in their
names, will not receive or be entitled to receive physical delivery in exchange
therefor and will not be considered to be the owners or holders of such Global
Notes for any purpose under the new notes or the indenture. PBG understands
that under existing industry practice, in the event an owner of a beneficial
interest in a Global Note desires to take any action that DTC, as the holder of
such Global Note, is entitled to take, DTC would authorize the participants to
take such action, and that the participants would authorize beneficial owners
owning through such participants to take such action or would otherwise act
upon the instructions of beneficial owners owning through them.
Any payment of principal, premium, if any, or interest due on the new
notes on maturity or otherwise will be made available by PBG to the Trustee by
such date. As soon as possible thereafter, the Trustee will make such payments
to DTC or its nominee, as the case may be, as the registered owner of the
Global Notes representing such new notes in accordance with existing
arrangements between the Trustee and DTC.
PBG expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Notes, will
credit immediately the accounts of the related participants with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Note as shown on the records of DTC. PBG also expects
that payments by participants to owners of beneficial interests in the Global
Notes held through such participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in "street name," and will
be the responsibility of such participants.
None of PBG, the Trustee, or any Paying Agent for the Global Notes will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in any of the
Global Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for other aspects of the relationship
between DTC and its participants or the relationship between such participants
and the owners of beneficial interests in the Global Notes owning through such
participants.
As long as the new notes are represented by a Global Note, DTC's nominee
will be the holder of the new notes and therefore will be the only entity that
can exercise a right to repayment or repurchase of the new notes. Notice by
participants or by owners of beneficial interests in a Global Note held through
such participants of the exercise of the option to elect repayment of
beneficial interests in new notes represented by a Global Note must be
transmitted to DTC
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in accordance with its procedures on a form required by DTC and provided to
participants. In order to ensure that DTC's nominee will exercise on a timely
basis a right to repayment with respect to a particular new note, the
beneficial owner of such new note must instruct the broker or other participant
to exercise a right to repayment. Different firms have cut-off times for
accepting instructions from their customers and, accordingly, each beneficial
owner should consult the broker or other participant through which it holds an
interest in a new note in order to ascertain the cut-off time by which such an
instruction must be given in order for timely notice to be delivered to DTC.
PBG will not be liable for any delay in delivery of notices of the exercise of
the option to elect repayment.
Unless and until exchanged in whole or in part for new notes in definitive
form in accordance with the terms of the new notes, the Global Notes may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or another nominee of DTC or by DTC of any such nominee to a successor
of DTC or a nominee of each successor.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Trustee nor PBG will
have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations. PBG and the Trustee may conclusively
rely on, and shall be protected in relying on, instructions from DTC for all
purposes.
Definitive Notes
The Global Notes shall be exchangeable for corresponding definitive notes
(the "Definitive Notes") registered in the name of persons other than DTC or
its nominee only if (A) DTC (i) notifies PBG that it is unwilling or unable to
continue as depositary for any of the Global Notes or (ii) at any time ceases
to be a clearing agency registered under the Exchange Act, (B) there shall have
occurred and be continuing an Event of Default with respect to the new notes or
(C) PBG executes and delivers to the Trustee, an order that the Global Notes
shall be so exchangeable. Any Definitive Notes will be issued only in fully
registered form, and shall be issued without coupons in minimum denominations
of $100,000 and integral multiples of $1,000 in excess thereof. Any Definitive
Notes so issued will be registered in such names and in such denominations as
DTC shall request.
The Clearing System
DTC has advised PBG as follows: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and "a clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities of participants and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of participants, thereby eliminating
the need for physical movement of securities certificates. DTC's participants
include securities brokers and dealers (which may include the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's book-entry system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, whether directly or
indirectly.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. A broker-dealer may use this
prospectus, as it may be amended or supplemented from time to time, in
connection with new notes received in exchange for old notes where the new
notes were acquired as a result of market-making activities or other trading
activities. We have agreed that, for a period of 180 days after the expiration
date, we will make this prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In addition,
until ________, 1999, all dealers effecting transactions in the new notes may
be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers. Broker-dealers may sell from time to time new notes they
receive for their own account pursuant to the exchange offer through:
o one or more transactions in the over-the-counter market;
o in negotiated transactions;
o through the writing of options on the new notes; or
o a combination of such methods of resale.
Such broker-dealers may sell at:
o market prices prevailing at the time of resale;
o prices related to such prevailing market prices; or
o negotiated prices.
Any broker-dealer may resell directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from the broker-dealer or the purchasers of the new notes. Any
broker-dealer that resells new notes that it received for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of the new notes may be deemed to be an "underwriter" within the
meaning of the Securities Act. Any profit on any underwriter's resale of new
notes and any commission or concessions received by any underwriters may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act by acknowledging that
it will deliver and by delivering a prospectus.
For a period of 180 days after the expiration date we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests them in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the securities) other
than commissions or concessions of any brokers or dealers and will indemnify
the holders of the securities (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Davis Polk & Wardwell will pass upon the validity of the new notes for us.
92
<PAGE>
EXPERTS
Our combined financial statements and schedule as of December 27, 1997 and
December 26, 1998, and for each of the three years in the period ended December
26, 1998, and Bottling LLC's financial statements for the same periods,
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-4 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the new notes offered for exchange
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.
We are 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.
93
<PAGE>
[This Page Intentionally Left Blank]
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
Combined Financial Statements of PBG
Report of Independent Auditors................................................... F-3
Combined Statements of Operations--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998. F-4
Combined Statements of Cash Flows--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998. F-5
Combined Balance Sheets--
December 27, 1997 and December 26, 1998....................................... F-6
Combined Statements of Accumulated Other Comprehensive Loss--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998. F-7
Notes to Combined Financial Statements........................................... F-8
Condensed Combined Financial Statements of PBG -- unaudited
Independent Accountant's Review Report........................................... F-26
Condensed Combined Statements of Operations --
12 weeks ended March 21, 1998 and March 20, 1999.............................. F-27
Condensed Combined Statements of Cash Flows --
12 weeks ended March 21, 1998 and March 20, 1999.............................. F-28
Condensed Combined Balance Sheets --
December 26, 1998, March 20, 1999 and Pro Forma March 20, 1999................ F-29
Notes to Condensed Combined Financial Statements................................. F-30
Pro Forma Condensed Combined Financial Statements of PBG-- unaudited ............ F-36
Pro Forma Condensed Combined Statement of Operations--
Fiscal year ended December 26, 1998........................................... F-37
Pro Forma Condensed Combined Statement of Operations --
12 weeks ended March 20, 1999................................................. F-38
Pro Forma Condensed Combined Balance Sheet--
March 20, 1999................................................................ F-39
Notes to Unaudited Pro Forma Condensed Combined Financial Statements............. F-40
Combined Financial Statements of Bottling Group, LLC
Report of Independent Auditors................................................... F-41
Combined Statements of Operations--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998. F-42
F - 1
<PAGE>
Combined Statements of Cash Flows--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998. F-43
Combined Balance Sheets--
December 27, 1997 and December 26, 1998....................................... F-44
Combined Statements of Accumulated Other Comprehensive Loss--
Fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998. F-45
Notes to Combined Financial Statements........................................... F-46
Condensed Combined Financial Statements of Bottling Group, LLC -- unaudited
Condensed Combined Statements of Operations--
12 weeks ended March 21, 1998 and March 20, 1999.............................. F-62
Condensed Combined Statements of Cash Flows --
12 weeks ended March 21, 1998 and March 20, 1999.............................. F-63
Condensed Combined Balance Sheets --
December 26, 1998 and March 20, 1999.......................................... F-64
Notes to Condensed Combined Financial Statements................................. F-65
</TABLE>
F - 2
<PAGE>
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 8, 1999
/s/ KPMG LLP
F - 3
<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 Revenues.................................................... $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)
====== ====== ======
Basic and Diluted Earnings (Loss) Per Share..................... $ 0.89 $ 1.07 $(2.65)
Weighted Average Basic and Diluted Shares Outstanding........... 55 55 55
</TABLE>
See accompanying notes to Combined Financial Statements.
F - 4
<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 - 5
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
COMBINED BALANCE SHEETS
in millions
December 27, 1997 and December 26, 1998
<TABLE>
<CAPTION>
1998
Pro Forma
1997 1998 (unaudited)
------- ------- -------------
(See Note 19)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................................................... $ 86 $ 36 $ 36
Trade accounts receivable, less allowance of $45 and $46, in 1997 and 1998,
respectively.................................................................. 808 808 808
Inventories.................................................................... 257 296 296
Prepaid expenses, deferred income taxes and other current assets............... 185 178 178
------- ------- ------
Total Current Assets.......................................................... 1,336 1,318 1,318
Property, plant and equipment, net............................................. 1,918 2,055 2,055
Intangible assets, net......................................................... 3,679 3,806 3,806
Other assets................................................................... 255 143 183
------- ------- ------
Total Assets.................................................................. $ 7,188 $ 7,322 $7,362
======= ======= ======
LIABILITIES AND ACCUMULATED OTHER
COMPREHENSIVE LOSS
Current Liabilities
Accounts payable and other current liabilities................................. $ 811 $ 881 $ 881
Trade accounts payable to PepsiCo.............................................. 23 23 23
Income taxes payable........................................................... 273 9 9
Short-term borrowings.......................................................... 40 112 2,500
------- ------- ------
Total Current Liabilities..................................................... 1,147 1,025 3,413
Allocation of PepsiCo long-term debt........................................... 3,300 3,300 --
Long-term debt due to third parties............................................ 96 61 3,300
Other liabilities.............................................................. 350 367 367
Deferred income taxes.......................................................... 1,076 1,202 1,202
Advances from PepsiCo.......................................................... 1,403 1,605 (682)
------- ------- ------
Total Liabilities............................................................. 7,372 7,560 7,600
Accumulated other comprehensive loss........................................... (184) (238) (238)
------- ------- ------
Total Liabilities and Accumulated Other Comprehensive Loss.................... $ 7,188 $ 7,322 $7,362
======= ======= ======
</TABLE>
See accompanying notes to Combined Financial Statements.
F - 6
<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............ $ (66)
Comprehensive income:
Net income........................... $ 49
Currency translation adjustment...... (36) (36)
----- -----
Total comprehensive income............. $ 13
=====
Balance at December 28, 1996............ (102)
Comprehensive loss:
Net income........................... $ 59
Currency translation adjustment...... (82) (82)
----- -----
Total comprehensive loss............... $ (23)
=====
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)
=====
$(238)
=====
Balance at December 26, 1998............
</TABLE>
See accompanying notes to Combined Financial Statements.
F - 7
<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. 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 revenues were
derived from the sale of Pepsi-Cola beverages.
Following the initial public offering, PepsiCo will own 35.4% of PBG's
outstanding common stock and 100% of PBG's outstanding Class B common stock,
together representing 43.5% of the voting power of all classes of PBG's voting
stock. PepsiCo will also own 7.1% of the equity of Bottling, LLC, PBG's
principal operating subsidiary, giving PepsiCo economic ownership of 40.0% of
PBG's combined operations.
PBG was incorporated in Delaware in January 1999. Its amended certificate
of incorporation provides for initial authorized capital of 300,000,000 shares
of common stock, par value $.01 per share, 100,000 shares of Class B common
stock, par value $.01 per share, and 20,000,000 shares of preferred stock, par
value $.01 per share. In connection with the transfer of bottling assets to it,
PBG issued 389,805 shares of its common stock and 665 shares of its Class B
common stock to PepsiCo and its subsidiaries. Pursuant to a stock split
declared by PBG's board of directors and the conversion by PepsiCo and its
subsidiaries of a portion of its Class B common stock immediately after the
stock split, prior to the initial public offering PBG had 55,000,000 shares of
its capital stock outstanding, consisting of 54,912,000 shares of common stock
and 88,000 shares of its Class B common stock. The PBG board has authorized
issuance of 100,000,000 shares of common stock in connection with the initial
public offering.
The two classes of capital stock are substantially identical, except for
voting rights. 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. 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 initial public offering, PBG expects to enter into a master
bottling agreement, non-cola bottling agreements, master syrup agreement and
country specific bottling agreements which 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 revenues as a
percentage of PepsiCo's revenues. 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 initial public offering, PBG will be required to manage these functions
and will be responsible for
F - 8
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
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 this alternative program has not been
finalized 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 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 expected to be outstanding as of the date the initial public
offering is completed. 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.
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 revenues 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. At fiscal year-end 1996, 1997 and 1998, reserves for
returned product were $2 million.
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.
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 revenues or a reduction
of selling, delivery and administrative expenses. Direct marketplace support is
primarily funding by PepsiCo and other brand
F - 9
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
owners of sales discounts and similar programs and is recorded as an adjustment
to net revenues. Capital equipment funding is designed to support the purchase
and placement of marketing equipment and is recorded 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. 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 revenues, 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
F - 10
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
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.
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.
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 February 1998, the FASB issued Statement of Financial Accounting
Standard 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 standardized the disclosures of pensions and other
postretirement benefits into a combined disclosure but did not affect results
of operations or financial position. These financial statements reflect the
adoption of SFAS 132.
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 Basic and diluted earnings per share attributed to PBG
common stock were determined based on net income divided by the 55 million
shares of common stock and Class B common stock outstanding prior to the
initial public offering. For purposes of the earnings per share calculation,
the shares outstanding prior to the initial public offering are treated as
outstanding for all periods presented. There were no potentially dilutive
securities outstanding during the periods presented.
F - 11
<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
1998
------
Russia
Asset impairment charges
Buildings............................................. $ 35
Production equipment.................................. 63
Marketing, distribution and other assets.............. 59
Intangible assets..................................... 37
----
194
Restructuring costs
Manufacturing contract renegotiations................. 5
Employee severance.................................... 6
Facility closure...................................... 7
----
Total Russia charges.................................... 212
U.S. and Canada
Employee related costs.................................. 10
----
Total Unusual Items...................................... $222
====
After tax............................................... $218
====
The 1998 unusual impairment and other charges of $222 million are
comprised of the following:
o 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 revenues and increased operating losses.
Additionally, since net revenues 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 four of its 26 distribution facilities,
renegotiating manufacturing contracts and reducing the number of
employees, primarily in sales and operations, from approximately
4,500 to 2,000. 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 from $245 million to $51 million, their
estimated fair market value based primarily on values recently paid
for similar assets in that marketplace.
Although PBG does not believe that additional charges will be
required in Russia based on current conditions, additional charges
could be required if there were significant further deterioration in
economic conditions.
At year end 1998, $14 million remained in other accrued liabilities
relating to these actions, of which $7 million relates to lease
termination costs on facilities, $4 million for manufacturing
contract renegotiation and the balance for employee severance. PBG
anticipates that most of these accrued liabilities will be paid by
the end of the first quarter of 1999.
F - 12
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
o A fourth quarter charge of $10 million for employee related costs,
mainly relocation and severance, resulted from the separation of
Pepsi-Cola North America's concentrate and bottling organizations.
This charge comprises $8 million for relocation and $2 million for
the severance of approximately 60 sales, general management and other
employees of which approximately 50 ceased employment prior to year
end. At year end 1998, $9 million remained 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.
Note 4--Inventories
1997 1998
------- -------
Raw materials and supplies............. $ 104 $ 120
Finished goods......................... 153 176
------- -------
$ 257 $ 296
======= =======
Note 5--Property, Plant and Equipment, net
1997 1998
------- -------
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
======= =======
Note 6--Intangible Assets, net
1997 1998
------- -------
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
======== =======
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.
F - 13
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
Note 7--Accounts Payable and Other Current Liabilities
1997 1998
------- -------
Accounts payable.......................... $ 313 $ 328
Accrued compensation and benefits......... 151 174
Trade incentives.......................... 148 163
Other current liabilities................. 199 216
------- -------
$ 811 $ 881
======= ======
Note 8--Short-term Borrowings and Long-term Debt
1997 1998
------- ------
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
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.
The $3.3 billion allocation of PepsiCo long-term debt has been determined
by management to be an appropriate allocation in the financial statements
related to PBG's operations. PBG's interest expense includes an allocation of
PepsiCo's weighted average interest rate of 6.2% in 1996 and 1997 and 6.4% in
1998. The related allocated interest expense was $205 million in 1996 and 1997
and $210 million in 1998. See note 19 for refinancing subsequent to December
26, 1998.
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.
F - 14
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
Note 9--Leases
PBG has noncancellable commitments under both capital and long-term
operating leases. Capital and operating lease commitments expire at various
dates through 2021. Most leases require payment of related executory costs,
which include property taxes, maintenance and insurance.
Future minimum commitments under noncancellable leases are set forth
below:
Commitments
--------------------
Capital Operating
------- ---------
1999...................... $ 2 $ 46
2000...................... 2 41
2001...................... 1 37
2002...................... 1 33
2003...................... 1 23
Later years............... 4 107
--- ----
$11 $287
=== ====
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 initial public 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.
F - 15
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
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 its employees as of the offering date and trust assets
from the funded plans will be transferred based upon actuarial determinations
in accordance with regulatory requirements.
Postretirement Benefits
PepsiCo has historically provided postretirement health care benefits to
eligible retired employees and their dependents, principally in the United
States. 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.
Pension
------------------------
Components of net periodic benefit cost: 1996 1997 1998
- ---------------------------------------- ------ ------ ------
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
====== ====== ======
Postretirement
------------------------
Components of net periodic benefit cost: 1996 1997 1998
- ---------------------------------------- ------ ------ ------
Service cost............................... $ 4 $ 3 $ 4
Interest cost.............................. 15 15 12
Amortization of prior service amendments... (5) (5) (5)
Amortization of net loss................... 2 -- --
------ ------ ------
Net periodic benefit cost.................. $ 16 $ 13 $ 11
====== ====== ======
F - 16
<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.
Pension Postretirement
--------------- ------------------
Changes in the benefit obligation: 1997 1998 1997 1998
- ---------------------------------- ------ ------ ------ ------
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
====== ====== ====== ======
Pension Postretirement
--------------- ------------------
Changes in the fair value of assets: 1997 1998 1997 1998
- ------------------------------------ ------ ------ ------ ------
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)
Settlement gain..................... -- (4) -- --
------ ------ ------ ------
Fair value at end of year........... $ 602 $ 541 $ -- $ --
====== ====== ====== ======
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)
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:
Pension Postretirement
--------------- ------------------
1997 1998 1997 1998
------ ------ ------ ------
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)
====== ====== ====== ======
F - 17
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
Weighted-average assumptions at end of year:
Pension
----------------------------------
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
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.
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:
1% 1%
Increase Decrease
-------- --------
Effect on total of 1998 service and interest
cost components.................. $1 $ (1)
Effect on the 1998 accumulated postretirement
benefit obligation.............. 8 (7)
Note 12--Employee Stock Option Plans
At the initial public offering date, PBG expects to offer its full-time
employees below the middle-management level a one-time founder's grant of
options to purchase 100 shares of PBG stock. These options 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 8 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.
F - 18
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
o 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.
o 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 performance 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.
o 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>
1996 1997 1998
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options 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>
F - 19
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
(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>
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Range of Exercise Price Options Contractual 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>
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:
1996 1997 1998
------ ------ -------
Net Income (Loss)
Reported...................... $ 49 $ 59 $(146)
Pro forma..................... 43 44 (164)
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:
1996 1997 1998
------ ------ -------
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%
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:
1996 1997 1998
------ ------ -------
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)
====== ====== =======
1996 1997 1998
------ ------ -------
Income (loss) before income taxes:
U.S.................................. $ 213 $ 177 $ 116
Foreign.............................. (75) (62) (308)
------ ------ -------
$ 138 $ 115 $ (192)
====== ====== =======
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:
1996 1997 1998
------ ------ -------
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)%
==== ==== =====
The details of the 1997 and 1998 deferred tax liabilities (assets) are set
forth below:
1997 1998
------ ------
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)
------ ------
F - 21
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
1997 1998
------ ------
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
====== ======
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.
Net Revenues
-------------------------
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
====== ====== =======
Long-Lived Assets
-------------------------
1996 1997 1998
------ ------ -------
U.S................................. $4,792 $4,918 $ 5,024
Other countries..................... 982 934 980
------ ------ -------
$5,774 $5,852 $ 6,004
====== ====== ========
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.
F - 22
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
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 revenues 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. Beginning in 1998, a PepsiCo
affiliate has provided casualty insurance to PBG. 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:
1996 1997 1998
------ ------ -------
Net revenues............................ $ 220 $ 216 $ 228
Cost of sales........................... (1,067) (1,187) (1,349)
Selling, delivery and administrative
expenses.............................. 167 206 213
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.
1996 1997 1998
------ ------ -------
Balance at beginning of period.......... $1,251 $1,162 $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............................... (113) (130) (168)
------ ------ ------
F - 23
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
1996 1997 1998
------ ------ -------
Balance at end of period................ $1,605 $1,403 $ 1,605
====== ====== =======
Average balance during period........... $1,513 $1,371 $ 1,651
====== ====== =======
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.
Unaudited
---------------
1997 1998
------ ------
Net revenues............................ $6,984 $ 7,248
Net income (loss)....................... 50 (135)
Note 18--Subsequent Events (unaudited)
In connection with the consummation of the initial public offering,
substantially all non-vested PepsiCo stock options held by PBG employees
vested. As a result, PBG will incur a non-cash compensation charge in the
second quarter equal to the difference between the market price of the PepsiCo
capital stock and the exercise price of these options at the vesting date. We
currently estimate this non-cash charge to be approximately $50 million.
During 1999, PBG acquired certain U.S. and Russian territories from
Whitman Corporation, Jeff Bottling Company, Inc., an independent PepsiCo
bottler with territories in New York, and the Leader Beverage Corporation, an
independent PepsiCo bottler with territories in Connecticut, for an aggregate
purchase price of approximately $200 million in cash and debt. These
acquisitions will be accounted for by the purchase method. The purchase price
has been preliminarily allocated to the estimated fair value of the assets
acquired and liabilities assumed. Franchise rights, goodwill and other
intangible assets that will be recorded in connection with this acquisition
will be amortized over 40 years.
In April, PBG entered into a $500 million commercial paper program that is
supported by a credit facility. The credit facility consists of two $250
million components, one of which is one year in duration and the other of which
is five years in duration.
F - 24
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
tabular dollars in millions, except per share data
On April 26, 1999, the Board of Directors of PBG declared a quarterly
dividend of $.02 per share. The dividend is payable on June 30, 1999 to PBG
shareholders of record on June 16, 1999.
Note 19--Refinancing
PBG has obtained 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 LLC issued $2.3 billion of debt. The debt, which is
guaranteed by PepsiCo, is comprised of $1 billion of 53/8% notes due 2004 and
$1.3 billion of 55/8% notes due 2009. In addition, on March 8, 1999, PBG issued
$1 billion of 7% senior notes, due 2029, which are guaranteed by Bottling LLC.
In addition, prior to the initial public offering, PBG issued or assumed
an aggregate $3.25 billion of short-term indebtedness. This indebtedness will
be repaid using the proceeds of the long-term debt issued on March 8, 1999, the
initial public offering and available cash. $2,287 million of the proceeds of
PBG's short-term indebtedness has been applied against advances from PepsiCo.
The amounts applied exceeded the recorded amounts of advances from PepsiCo. by
$682 million because the amounts applied are based, in part, on the fair value
of certain assets transferred to PBG in connection with the formation of PBG
and Bottling LLC, which exceeded the book carrying value. The excess amount of
proceeds applied to advances from PepsiCo will not be repaid and will be
treated for financial reporting purposes as a reduction of additional paid-in
capital.
Note 20--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>
Fiscal year
ended
First Second Third Fourth December 27,
Quarter Quarter Quarter Quarter 1997
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues....................... $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
Fiscal year
ended
First Second Third Fourth December 26,
Quarter Quarter Quarter Quarter 1998
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues...................... $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
of the Combined Financial Statements.
(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 of the Combined Financial Statements.
F - 25
<PAGE>
Independent Accountants' Review Report
The Board of Directors
The Pepsi Bottling Group, Inc.
We have reviewed the accompanying condensed combined balance sheet of The Pepsi
Bottling Group, Inc. as of March 20, 1999 and the related condensed combined
statements of operations and cash flows for the twelve weeks ended March 21,
1998 and March 20, 1999. These condensed combined financial statements are the
responsibility of The Pepsi Bottling Group, Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed combined financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the combined balance sheet of The Pepsi Bottling Group, Inc. as of
December 26, 1998, and the related combined statements of operations, cash
flows and accumulated other comprehensive loss for the fifty-two week period
then ended and in our report dated March 8, 1999, we expressed an unqualified
opinion on those combined financial statements. In our opinion, the information
set forth in the accompanying condensed combined balance sheet as of December
26, 1998, is fairly presented, in all material respects, in relation to the
combined balance sheet from which it has been derived.
KPMG LLP
New York, New York
April 14, 1999
F - 26
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
CONDENSED COMBINED STATEMENTS OF OPERATIONS
in millions except per share amounts, unaudited
12 Weeks Ended
----------------------
March 21, March 20,
1998 1999
--------- ---------
Net Revenues..................................... $ 1,340 $ 1,452
Cost of sales 777 835
--------- ---------
Gross Profit..................................... 563 617
Selling, delivery and administrative expenses.... 524 575
--------- ---------
Operating Income................................. 39 42
Interest expense, net............................ 52 46
Foreign currency loss............................ -- 1
--------- ---------
Loss before income taxes......................... (13) (5)
Income tax benefit............................... (7) (2)
--------- ---------
Net Loss......................................... $ (6) $ (3)
========= =========
Basic and Diluted Loss Per Share................. $ (0.11) $ (0.06)
Weighted Average Basic and Diluted Shares
Outstanding................................... 55 55
Pro Forma Basic and Diluted Loss Per Share
(see note 8)................................... $ (0.03) $ (0.02)
Pro Forma Weighted Average Basic and
Diluted Shares Outstanding (see note 8)........ 155 155
See accompanying notes to Condensed Combined Financial Statements.
F - 27
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
in millions, unaudited
12 Weeks Ended
----------------------
March 21, March 20,
1998 1999
--------- ---------
Cash Flows - Operations
Net loss......................................... $ (6) $ (3)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation.................................. 74 79
Amortization.................................. 27 29
Deferred income taxes......................... 12 (1)
Other non-cash charges and credits, net ...... 17 14
Changes in operating working capital,
excluding effects of acquisitions and
dispositions;
Trade accounts receivable.................. 48 (17)
Inventories................................ (34) (15)
Prepaid expenses, deferred income
taxes and other current assets........... (11) (12)
Accounts payable and other current
liabilities.............................. (95) 3
Trade accounts payable to PepsiCo.......... 18 (14)
--------- --------
Net change in operating working capital.. (74) (55)
--------- --------
Net Cash Provided by Operations.................. 50 63
--------- --------
Cash Flows - Investments.........................
Capital expenditures............................. (77) (82)
Acquisitions of bottlers and investments
in affiliates.................................. (140) (104)
Other, net....................................... (10) 3
--------- --------
Net Cash Used for Investments.................... (227) (183)
--------- --------
Cash Flows - Financing
Short-term borrowings - three months or less..... 14 --
Proceeds from third party debt................... 38 3,300
Replacement of PepsiCo allocated debt............ -- (3,300)
Payments of third party debt..................... (1) (45)
Increase in advances from PepsiCo................ 123 144
--------- --------
Net Cash Provided by Financing................... 174 99
--------- --------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents............................... -- (1)
--------- --------
Net Decrease in Cash and Cash Equivalents........ (3) (22)
Cash and Cash Equivalents - Beginning of Period.. 86 36
--------- ---------
Cash and Cash Equivalents - End of Period........ $ 83 $ 14
========= =========
See accompanying notes to Condensed Combined Financial Statements.
F - 28
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
CONDENSED COMBINED BALANCE SHEETS
in millions, except share amounts
<TABLE>
Pro Forma
(Unaudited) (Unaudited)
December 26 March 20 March 20
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS (See note 8)
Current Assets
Cash and cash equivalents.................................................. $ 36 $ 14 $ 14
Trade accounts receivable, less allowance of $46 and $49 at December 26,
1998 and March 20, 1999, respectively.................................... 808 821 821
Inventories................................................................ 296 312 312
Prepaid expenses, deferred income taxes and other current assets........... 178 190 183
----------- ----------- ------------
Total Current Assets...................................................... 1,318 1,337 1,330
Property, plant and equipment, net......................................... 2,055 2,078 2,078
Intangible assets, net..................................................... 3,806 3,854 3,854
Other assets............................................................... 143 145 185
----------- ----------- ------------
Total Assets.............................................................. $ 7,322 $ 7,414 $ 7,447
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities............................. $ 890 $ 887 $ 887
Trade accounts payable to PepsiCo.......................................... 23 12 12
Short-term borrowings...................................................... 112 106 --
----------- ----------- ------------
Total Current Liabilities................................................. 1,025 1,005 899
Allocation of PepsiCo long-term debt....................................... 3,300 -- --
Long-term debt due to third parties........................................ 61 3,322 3,300
Other liabilities.......................................................... 367 363 363
Deferred income taxes...................................................... 1,202 1,217 1,136
Minority interest.......................................................... -- -- 254
Advances from PepsiCo...................................................... 1,605 1,734 --
----------- ----------- ------------
Total Liabilities......................................................... 7,560 7,641 5,952
Stockholders' Equity
Common stock, par value $.01 per share:
Authorized 300,000,000 shares, issued 55,000,000 Shares (pro forma issued
155,000,000 shares)....................................................... -- -- 2
Additional paid in capital................................................. -- -- 1,720
Accumulated comprehensive loss............................................. (238) (227) (227)
---------- ---------- ------------
Total Stockholders' Equity................................................ (238) (227) 1,495
---------- ---------- ------------
Total Liabilities and Stockholders' Equity.............................. $ 7,322 $ 7,414 $ 7,447
========== ========== ============
</TABLE>
See accompanying notes to Condensed Combined Financial Statements.
F - 29
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
unaudited
tabular dollars in millions, except per share data
Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. consists of bottling operations located in
the United States, Canada, Spain, Greece and Russia. Prior to its formation,
and for the periods presented, PBG was an operating unit of PepsiCo, Inc. PBG
was incorporated in Delaware in January 1999 and, prior to its initial public
offering and for the periods presented, PepsiCo owned all 55,000,000 shares of
outstanding common stock.
The accompanying Condensed 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. Certain estimates, assumptions and allocations
were made in preparing such financial statements. Therefore, these financial
statements may not necessarily be indicative of the results of operations,
financial position or cash flows that would have existed had PBG been a
separate, independent company.
On March 31, 1999, 100,000,000 shares of PBG common stock were offered for
sale at $23 per share in an initial public offering generating $2.2 billion in
net proceeds, which were used to fund acquisitions and repay obligations to
PepsiCo. Subsequent to the offering, PepsiCo continued to own 55,000,000 shares
of common stock consisting of 54,912,000 shares of common stock and 88,000
shares of Class B common stock. PepsiCo's ownership represents 35.4% of the
outstanding common stock and 100% of the outstanding Class B common stock
together representing 43.5% of the voting power of all classes of PBG's voting
stock. Subsequent to the offering, PepsiCo also owns 7.1% of the equity of
Bottling Group, LLC, PBG's principal operating subsidiary, giving PepsiCo
economic ownership of 40.0% of PBG's combined operations. The pro forma
condensed combined financial information presented elsewhere in this document
reflects the impact of the offering.
The accompanying Condensed Combined Balance Sheet at March 20, 1999 and
the Condensed Combined Statements of Operations and Cash Flows for the 12 weeks
ended March 21, 1998 and March 20, 1999 have not been audited, but have been
prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. These Condensed Combined Financial Statements
should be read in conjunction with the audited combined financial statements
for the year ended December 26, 1998 as presented in this prospectus. In the
opinion of management, this interim information includes all material
adjustments, which are of a normal and recurring nature, necessary for a fair
presentation.
Note 2 - Seasonality of Business
The results for the first quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation, amortization and
interest, which are not significantly impacted by business seasonality.
Note 3 - Acquisitions
During 1998 and 1999, PBG acquired the exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from several independent PepsiCo
franchise bottlers. These acquisitions were accounted for by the purchase
method. During the first quarter of 1999, the following acquisitions occurred
for an aggregate cash purchase price of $104 million:
F - 30
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--Continued
unaudited
tabular dollars in millions, except per share data
o Jeff Bottling Company, Inc. in New York in January.
o Pepsi-Cola General Bottlers of Princeton, Inc. and Pepsi-Cola General
Bottlers of Virginia, Inc. with territories in Virginia and West
Virginia in March.
During 1998, the following acquisitions occurred for an aggregate cash
purchase price of $546 million:
o The remaining 75% interest in our Russian bottling joint venture,
Pepsi International Bottlers, LLC in February.
o Gray Beverages, Inc. in Canada in May.
o Pepsi-Cola Allied Bottlers, Inc. in New York and Connecticut in
November.
The following table presents the first quarter 1998 unaudited pro forma
combined results of PBG and the 1998 acquisitions noted above as if they had
occurred at the beginning of fiscal year 1998. The performance results of the
1999 acquisitions have been excluded, as their impact on the financial
statements was not significant. The pro forma information does not necessarily
represent what the actual combined results would have been for the first
quarter and is not intended to be indicative of future results.
March 21
1998
--------
Net revenues.................................................. $ 1,396
========
Net loss...................................................... $ (8)
========
Pro forma loss per share (see "Loss per Share" in note 8)..... $ (.05)
========
Note 4 - Inventories
December 26 March 20
1998 1999
----------- --------
Raw materials and supplies......... $ 120 $ 111
Finished goods..................... 176 201
----- -----
$ 296 $ 312
===== =====
F - 31
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--Continued
unaudited
tabular dollars in millions, except per share data
Note 5 - Property, Plant and Equipment, net
December 26 March 20
1998 1999
----------- ---------
Land...................................... $ 151 $ 146
Buildings and improvements................ 813 832
Production and distribution equipment..... 1,989 1,987
Marketing equipment....................... 1,368 1,414
Other..................................... 95 90
--------- -------
4,416 4,469
Accumulated depreciation.................. (2,361) (2,391)
--------- -------
$ 2,055 $ 2,078
========= =======
Note 6 - Long-Term Debt and Interest Expense
December 26 March 20
1998 1999
----------- ---------
5 5/8% notes due 2009....................... $ -- $ 1,300
5 3/8% notes due 2004....................... -- 1,000
7% notes due 2029........................... -- 1,000
Other....................................... 109 65
-------- -------
109 3,365
Less current maturities of long-term debt... 48 43
-------- -------
$ 61 $ 3,322
======== =======
Allocation of PepsiCo long-term debt........ $ 3,300 $ --
The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8%
senior notes were issued on February 9, 1999 by Bottling LLC and are guaranteed
by PepsiCo. PBG issued the 7% senior notes, which are guaranteed by Bottling
LLC, on March 8, 1999.
First quarter 1999 interest expense was determined using $3.3 billion of
allocated debt and PepsiCo's weighted average interest rate of 5.75% until the
above PBG debt was issued. Once issued, the actual PBG interest rates were used
to determine interest expense for the remainder of the period. First quarter
1998 interest expense was calculated using $3.3 billion of allocated debt and
PepsiCo's weighted average interest rate of 6.4%.
Note 7 - Comprehensive Income (Loss)
12 Weeks Ended
-----------------------
March 21 March 20
1998 1999
-------- --------
Net Loss.............................. $ (6) $ (3)
Currency translation adjustment....... (1) 11
------ ------
F - 32
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--Continued
unaudited
tabular dollars in millions, except per share data
12 Weeks Ended
-----------------------
March 21 March 20
1998 1999
-------- --------
Comprehensive Income (Loss)........... $ (7) $ 8
====== ======
Note 8 - Pro Forma Financial Information
The following table sets forth the Pro Forma Condensed Combined Statements
of Operations reflecting the offering adjustments described below:
12 Weeks Ended
-----------------------
March 21 March 20
1998 1999
-------- --------
Net revenues..................................... $ 1,340 $ 1,452
Cost of sales.................................... 777 835
------- -------
Gross profit..................................... 563 617
Selling, delivery and administrative expenses.... 524 575
------- -------
Operating income................................. 39 42
Interest expense, net............................ 46 46
Foreign currency loss............................ -- 1
------- -------
Loss before income taxes and minority interest... (7) (5)
Income tax benefit............................... (4) (2)
------- -------
Net loss before minority interest................ (3) (3)
Minority interest................................ (1) (1)
------- -------
Net loss......................................... $ (4) $ (4)
======= =======
Basic and diluted loss per share................. $ (0.03) $ (0.02)
======= =======
Weighted average shares outstanding.............. 155 155
Refinancing
On February 9, 1999, Bottling LLC issued $2.3 billion of debt. The debt,
which is guaranteed by PepsiCo, consists of $1.0 billion of 5 3/8% senior notes
due 2004 and $1.3 billion of 5 5/8% senior notes due 2009. On March 8, 1999,
PBG issued $1.0 billion of 7% senior notes, due 2029, which are guaranteed by
Bottling LLC. In addition, PBG incurred $40 million of deferred financing costs
in conjunction with the issuance of this debt.
F - 33
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--Continued
unaudited
tabular dollars in millions, except per share data
The Pro Forma Condensed Statements of Operations for the 12 weeks ended
March 21, 1998 and March 20, 1999 reflect PBG's weighted average interest rate
of 6.1% on the debt described above as if the debt had been outstanding from
the first day of the periods presented.
Minority Interest
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 owns 92.9% of Bottling LLC and PepsiCo owns the remaining 7.1%.
Accordingly, the pro forma financial information reflects PepsiCo's share of
combined net income as minority interest on the Pro Forma Condensed Combined
Statements of Operations and PepsiCo's share of combined net assets of Bottling
LLC as minority interest on the Condensed Combined Balance Sheet.
Loss per Share
PBG's historical capital structure is not representative of its current
structure due to PBG's initial public offering that became effective on April
6, 1999. Immediately preceding the offering, PBG had 55 million shares of
common stock outstanding. In connection with the offering, 100 million shares
were sold to the public generating $2.2 billion of net proceeds, which were
used to fund acquisitions and repay obligations to PepsiCo. The pro forma
information contained in the Condensed Combined Balance Sheet has been adjusted
to reflect the offering and the Pro Forma Condensed Combined Statements of
Operations have been adjusted to reflect the 155 million shares of common stock
as if this stock had been outstanding for the entire 12 week periods in 1998
and 1999.
Note 9 - Supplemental Cash Flow Information
12 Weeks Ended
----------------------
March 21 March 20
1998 1999
-------- --------
Liabilities incurred and/or assumed in connection
with acquisitions of bottlers..................... $ 22 $ 16
Interest paid to third parties...................... $ 5 $ 2
Amounts paid to third parties for income taxes were not significant in the
periods presented.
Note 10 - Subsequent Events
In connection with the consummation of the offering, substantially all
non-vested PepsiCo stock options held by PBG employees vested. As a result, PBG
will incur a non-cash compensation charge in the second quarter equal to the
difference between the market price of the PepsiCo capital stock and the
exercise price of these options at the vesting date. We currently estimate this
non-cash charge to be approximately $50 million.
PBG acquired the St. Petersburg, Russia territory from Whitman Corporation
on March 31, 1999 and Leader Beverage Corporation, an independent PepsiCo
bottler with territories in Connecticut, on April 16, 1999 for an aggregate
purchase price of $72 million in cash and debt. These acquisitions will be
accounted for by the purchase method. The purchase price has been preliminarily
allocated to the estimated fair value of the assets acquired and liabilities
assumed. Franchise rights, goodwill and other intangible assets that will be
recorded in connection with this acquisition will be amortized over 40 years.
F - 34
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--Continued
unaudited
tabular dollars in millions, except per share data
In April, PBG entered into a $500 million commercial paper program that is
supported by a credit facility. The credit facility consists of two $250
million components, one of which is one year in duration and the other of which
is five years in duration.
On April 26, 1999, the Board of Directors of PBG declared a quarterly
dividend of $.02 per share. The dividend is payable on June 30, 1999 to PBG
shareholders of record on June 16, 1999.
Note 11 - New Accounting Standards
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 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.
F - 35
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Combined Balance Sheet as of March 20,
1999 and the unaudited Pro Forma Condensed Combined Statements of Operations
for the fiscal year ended December 26, 1998 and the 12 weeks ended March 20,
1999 have been prepared from the Combined Financial Statements and the
Condensed Combined Financial Statements presented elsewhere in this prospectus.
In 1998, PBG acquired Pepsi-Cola Allied Bottlers, Inc., Gray Beverages
Inc. and Pepsi International Bottlers, LLC for aggregate cash consideration of
$546 million. During 1999 PBG has acquired 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
incurred $2.3 billion of indebtedness through the sale of notes, which is
unconditionally guaranteed by PepsiCo. Also, on March 8, 1999, PBG incurred $1
billion of indebtedness through a sale of notes. Accordingly, PBG has $3.3
billion of long-term indebtedness outstanding.
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 are held by Bottling LLC. As a result of the contribution of assets,
PBG owns 92.9% of Bottling LLC and PepsiCo owns the remaining 7.1%.
Accordingly, the unaudited Pro Forma Condensed Combined Financial Statements
reflect PepsiCo's 7.1% share of the combined net income (loss) and net assets
of Bottling LLC as minority interest.
The accompanying unaudited Pro Forma Condensed Combined Financial
Statements of PBG as of and for the 12 weeks ended March 20, 1999 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 initial public offering
and the application of the net proceeds therefrom and the 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 each period presented. First quarter 1999 results were not
adjusted to reflect 1999 acquisitions as these acquisitions did not have a
significant impact on 1999 operating results. For purposes of the Pro Forma
Condensed Combined Balance Sheet, such transactions are assumed to have
occurred on March 20, 1999.
Management believes that the assumptions used provide a reasonable basis
for presenting the significant effects directly attributable to the
acquisitions of certain bottlers and the indebtedness incurred. The unaudited
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
unaudited Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the Combined Financial Statements, the Condensed Combined
Financial Statements and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" included elsewhere in this prospectus.
F - 36
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
in millions
Fiscal year ended December 26, 1998
<TABLE>
Pro Forma
Pro Forma Acquisitions As Further
1998 Financing As Adjusted (a) Adjusted
------ --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Revenues................................... $7,041 $ -- $ 7,041 $ 282 $ 7,323
Cost of sales.................................. 4,181 -- 4,181 160 4,341
------ -------- --------- ---------- ---------
Gross Profit................................... 2,860 -- 2,860 122 2,982
Selling, delivery and administrative expenses.. 2,583 -- 2,583 103 2,686
Unusual impairment and other charges........... 222 -- 222 -- 222
------ -------- --------- ---------- ---------
Operating Income............................... 55 -- 55 19 74
Interest expense, net.......................... 221 (20)(b) 201 -- 201
Foreign currency loss.......................... 26 -- 26 1 27
------ -------- --------- ---------- ---------
Income (loss) before income taxes and minority
Interest................................. (192) 20 (172) 18 (154)
Income tax expense (benefit)................... (46) 8 (c) (38) 7 (c) (31)
------ -------- --------- ---------- ---------
Income (loss) before minority interest......... (146) 12 (134) 11 (123)
Minority Interest.............................. -- 4 (d) 4 (1)(d) 3
------ -------- --------- ---------- ---------
Net Income (Loss).............................. $ (146) $ 16 $ (130) $ 10 $ (120)
====== ======== ========= ========== =========
Basic and Diluted Net Loss Per Share
Historical -- based on 55 million shares
outstanding.................................. $(2.65)
Pro Forma -- based on 155 million shares
outstanding (e).............................. $ (0.84) $ (0.77)
========= ========
</TABLE>
See accompanying Notes to unaudited Pro Forma Condensed Combined
Financial Statements
F - 37
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
in millions
12 weeks ended March 20, 1999
<TABLE>
Pro Forma
1999 Offering As Adjusted
-------- -------- -----------
<S> <C> <C> <C>
Net Revenues................................................ $ 1,452 $ -- $ 1,452
Cost of sales............................................... 835 -- 835
-------- -------- ---------
Gross Profit................................................ 617 -- 617
Selling, delivery and administrative expenses............... 575 -- 575
-------- -------- ---------
Operating Income............................................ 42 -- 42
Interest expense, net....................................... 46 -- (b) 46
Foreign currency loss....................................... 1 -- 1
-------- -------- ---------
Income before income taxes and minority Interest............ (5) -- (5)
Income tax benefit.......................................... (2) -- (2)
-------- -------- ---------
Income before minority interest............................. (3) -- (3)
Minority interest........................................... -- (1)(d) (1)
-------- -------- ---------
Net Loss.................................................... $ (3) $ (1) $ (4)
======== ======== =========
Basic and Diluted Net Loss Per Share
Historical -- based on 55 million shares outstanding........ $ 0.06
========
Pro Forma -- based on 155 million shares outstanding (e).... $ (0.02)
=========
</TABLE>
See accompanying Notes to unaudited Pro Forma Condensed Combined
Financial Statements
F - 38
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
in millions
March 20, 1999
<TABLE>
Pro forma
March 20 March 20
1999 1999
-------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................ $ 14 $ 14
Trade accounts receivable, net................... 821 821
Inventories...................................... 312 312
Prepaid expenses and other current assets........ 190 183
-------- ---------
Total Current Assets....................... 1,337 1,330
Property, plant and equipment, net............... 2,078 2,078
Intangible assets, net........................... 3,854 3,854
Other assets (a)................................. 145 185
-------- ---------
Total Assets............................... $ 7,414 $ 7,447
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities... $ 887 $ 887
Trade accounts payable to PepsiCo................ 12 12
Short-term borrowings............................ 106 --
-------- ---------
Total Current Liabilities.................. 1,005 899
Long-term debt due to third parties (a).......... 3,322 3,300
Other liabilities................................ 363 363
Deferred income taxes............................ 1,217 1,136
Minority interest (b)............................ -- 254
Advances from PepsiCo (c)........................ 1,734 --
-------- ---------
Total Liabilities.......................... 7,641 5,952
Stockholders' Equity
Common Stock, par value $.01 per share:
Authorized 300,000,000 shares, issued 55,000,000
Shares (pro forma issued 155,000,000) (c)..... -- 2
Additional paid in capital (c)................... -- 1,720
Accumulated comprehensive loss................... (227) (227)
-------- ---------
Total Stockholders' Equity................. (227) 1,495
-------- ---------
Total Liabilities and Stockholders' Equity. $ 7,414 $ 7,447
======== =========
</TABLE>
F - 39
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Pro Forma Adjustments for the Condensed Combined Statements 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.
These acquisitions do not reflect any adjustments for marketplace
support PBG may have received for these territories.
(b) Reflects a reduction in interest resulting from the net effect of
eliminating the PepsiCo interest expense allocation and recording
interest expense based on actual weighted average interest expense
of 6.0% on $3.3 billion of external debt issued. Pro Forma interest
expense also includes $4.0 million of annual amortization of
deferred financing costs related to the issuance of the $3.3 billion
of external debt.
(c) Reflects the estimated tax impact of the pro forma adjustments using
an effective tax rate of 38.9% for 1998 and 40.0% for 1999.
(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 are held by Bottling LLC. As a result of the
contribution of assets, PBG owns 92.9% of Bottling LLC and PepsiCo
owns the remaining 7.1%. Accordingly, the unaudited Pro Forma
Condensed Combined Statement of Operations reflects PepsiCo's 7.1%
share of the combined net income (loss) of Bottling LLC as minority
interest.
(e) Reflects the sale of 100 million shares of common stock in the
initial public offering.
(2) Pro Forma Adjustments for the Condensed Combined Balance Sheet
(a) On February 9, 1999, Bottling LLC issued $2.3 billion of debt. The
debt, which is guaranteed by PepsiCo, consists of $1.0 billion of 5
3/8% senior notes due 2004 and $1.3 billion of 5 5/8% senior notes
due 2009. On March 8, 1999, PBG issued $1.0 billion of 7.0% senior
notes due 2029, which are guaranteed by Bottling LLC. In addition,
PBG incurred $40 million of deferred financing costs in conjunction
with the issuance of this debt.
(b) In connection with the formation of PBG and Bottling LLC, PepsiCo
contributed bottling businesses and assets used in the bottling
businesses to PBG which are held by Bottling LLC. As a result of the
contribution of the assets, PBG owns 92.9% of Bottling LLC and
PepsiCo owns the remaining 7.1%. Accordingly, the pro forma
financial information reflects PepsiCo's share of combined net
assets of Bottling Group, LLC as minority interest on the Condensed
Combined Balance Sheet.
(c) On March 31, 1999, 100 million shares of PBG common stock were
offered for sale at $23 per share in an initial public offering
generating $2.2 billion in net proceeds, which were used to fund
acquisitions and repay obligations to PepsiCo.
(3) Incremental Corporate Overhead Costs
Bottling LLC expects to change from a non-compensatory, broad-based stock
option program to an alternative program. Since this alternative program
has not been finalized or approved by the board of directors, this charge
is not reflected in the Pro Forma Condensed Combined Statements of
Operations. Management anticipates that the new plan could cost up to an
additional $12 million per year.
(4) Non-cash Compensation Charge
Upon completion of the initial public offering of PBG, substantially all
non-vested PepsiCo options held by Bottling LLC employees vested. As a
result , Bottling LLC will incur a non-cash compensation charge in the
second quarter of 1999 equal to the difference between the market price
of the PepsiCo capital stock and the exercise price of these options at
the vesting date. We currently estimate this non-cash charge to be
approximately $50 million. Since this charge would be a one-time event,
the charge is not reflected in the Pro Forma Condensed Combined
Statements of Operations.
F - 40
<PAGE>
BOTTLING GROUP, LLC
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Bottling Group, LLC
We have audited the accompanying combined balance sheets of Bottling
Group, LLC 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 Bottling Group, LLC. 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 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 Bottling
Group, LLC 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 8, 1999
/s/ KMPG LLP
F - 41
<PAGE>
BOTTLING GROUP, LLC
COMBINED STATEMENTS OF OPERATIONS
in millions
Fiscal years ended December 28, 1996,
December 27, 1997 and December 26, 1998
<TABLE>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net Revenues...................................................... $ 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............................................. 163 160 157
Foreign currency loss (gain)...................................... 4 (2) 26
------- ------- -------
Income (loss) before income taxes and minority interest........... 200 177 (128)
Income tax expense (benefit)...................................... 6 1 (1)
------- ------- -------
Income (loss) before minority interest............................ 194 176 (127)
Minority interest................................................. (7) (4) (4)
------- ------- -------
Net Income (Loss)................................................. $ 187 $ 172 $ (131)
======= ======= =======
</TABLE>
See accompanying notes to Combined Financial Statements.
F - 42
<PAGE>
BOTTLING GROUP, LLC
COMBINED STATEMENTS OF CASH FLOWS
in millions
Fiscal years ended December 28, 1996,
December 27, 1997 and December 26, 1998
<TABLE>
1996 1997 1998
------ ------ --------
<S> <C> <C> <C>
Cash Flows - Operations
Net income (loss)................................................................ $ 187 $ 172 $ (131)
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
Other non-cash charges and credits, net........................................ (2) 1 102
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............... 2 (66) 10
Accounts payable and other current liabilities................................. (6) 48 64
Trade accounts payable to PepsiCo.............................................. (9) 7 --
------ ----- -------
Net change in operating working capital.......................................... (79) 15 95
------ ----- -------
Net Cash Provided by Operations....................................................... 531 627 732
------ ----- -------
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....................................................................... 1 (80) (5)
------ ----- -------
Net Cash Used for Investments......................................................... (388) (578) (1,027)
------ ----- -------
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 owners' net investment.................................... (185) 96 214
------ ----- -------
Net Cash Provided by (Used for) Financing............................................. (134) (2) 244
------ ----- -------
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 Period....................................... 31 40 86
------ ----- -------
Cash and Cash Equivalents - End of Period............................................. $ 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 - 43
<PAGE>
BOTTLING GROUP, LLC
COMBINED BALANCE SHEETS
in millions
December 27, 1997 and December 26, 1998
<TABLE>
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............................... 92 83
------- -------
Total Current Assets........................................................................... 1,243 1,223
Property, plant and equipment, net............................................................. 1,918 2,055
Intangible assets, net......................................................................... 3,679 3,806
Other assets................................................................................... 255 143
------- -------
Total Assets............................................................................. $ 7,095 $ 7,227
======= =======
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities................................................. 811 881
Trade accounts payable to PepsiCo.............................................................. 23 23
Short-term borrowings.......................................................................... 40 112
------- -------
Total Current Liabilities...................................................................... 874 1,016
Allocation of PepsiCo long-term debt........................................................... 2,300 2,300
Long-term debt due to third parties............................................................ 96 61
Other liabilities.............................................................................. 285 321
Deferred income taxes.......................................................................... 111 134
Minority Interest.............................................................................. 93 112
------- -------
Total Liabilities........................................................................ 3,759 3,944
Owners' Equity
Owners' net investment......................................................................... 3,520 3,521
Accumulated other comprehensive loss........................................................... (184) (238)
------- -------
Total Owners' Equity..................................................................... 3,336 3,283
------- -------
Total Liabilities and Owners' Equity..................................................... $ 7,095 $ 7,227
======= =======
</TABLE>
See accompanying notes to Combined Financial Statements.
F - 44
<PAGE>
BOTTLING GROUP, LLC
COMBINED STATEMENTS OF ACCUMULATED
OTHER COMPREHENSIVE LOSS
in millions
Fiscal years ended December 28, 1996,
December 27, 1997 and December 26, 1998
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Loss
------------- -------------
Balance at December 30, 1995 $ (66)
Comprehensive income:
Net Income........................ $ 187
Currency translation adjustment... (36) (36)
-------- --------
Total comprehensive income.............. $ 151
========
Balance at December 28, 1996............ (102)
Comprehensive income:
Net Income........................ $ 172
Currency translation adjustment... (82) (82)
-------- --------
Total comprehensive income.............. $ 90
========
Balance at December 27, 1997............ (184)
Comprehensive loss:
Net Loss.......................... $ (131)
Currency translation adjustment... (35) (35)
Minimum pension liability adjustment (19) (19)
-------- --------
Total comprehensive loss................ $ (185)
========
Balance at December 26, 1998............ $ (238)
========
See accompanying notes to Combined Financial Statements.
F - 45
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
tabular dollars in millions, except per share data
Note 1 - Description of Business and Basis of Presentation
Bottling Group, LLC ("Bottling LLC") is the principal operating subsidiary
of The Pepsi Bottling Group, Inc. ("PBG") and consists of substantially all of
the operations and assets of PBG. Bottling LLC, which is fully consolidated by
PBG, consists of bottling operations located in the United States, Canada,
Spain, Greece and Russia. Prior to its formation, and for the periods
presented, Bottling LLC was an operating unit of PepsiCo, Inc.
PBG was incorporated in Delaware in January 1999 and prior to its initial
public offering of 100,000,000 shares of common stock, which became effective
on March 30, 1999, PBG was an operating unit of PepsiCo. Subsequent to the
initial public offering, PepsiCo owns 55,000,000 shares of PBG common stock
consisting of 54,912,000 shares of common stock and 88,000 shares of Class B
common stock. PepsiCo's ownership of PBG represents 35.4% of the outstanding
common stock and 100% of the outstanding Class B common stock together
representing 43.5% of the voting power of all classes of PBG's voting stock.
In connection with the formation of Bottling LLC, PepsiCo and PBG
contributed bottling businesses and assets used in the bottling businesses to
Bottling LLC. As a result of the contribution of assets, PBG owns 92.9% of
Bottling LLC and PepsiCo owns the remaining 7.1%.
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 Bottling LLC and have been prepared from
PepsiCo's historical accounting records.
On March 9, 1999, PBG issued $1 billion of 7% senior notes due 2029, which
are guaranteed by Bottling LLC. Bottling LLC also guarantees that to the extent
there is available cash, Bottling LLC will distribute pro rata to all members
sufficient cash such that aggregate cash distributed to PBG will enable PBG to
pay its taxes and make interest payments on the $1 billion 7% senior notes due
2029.
Bottling LLC 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 Bottling LLC and, to the extent that such
identification was not practicable, on the basis of Bottling LLC's revenues as
a percentage of PepsiCo's revenues. 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.
In addition, Bottling LLC expects to change from a non-compensatory,
broad-based stock option program to an alternative program. While this
alternative has not been finalized or approved by the board of directors,
management anticipates that the new plan could cost up to an additional $12
million per year.
Bottling LLC's operations have been financed through its operating cash
flows and advances from PepsiCo. Interest expense includes an allocation of
PepsiCo's interest expense based on PepsiCo's weighted average interest rate
applied to a debt level of $2.3 billion. The $2.3 billion of debt has been
determined by management to be an appropriate allocation in the historical
financial statements related to Bottling LLC's operations because it is the
amount of long-term debt that is expected to be outstanding upon PBG becoming a
separate public company. Bottling LLC was allocated interest expense of $143
million in 1996 and 1997 and $147 million in 1998. This allocation reflects
PepsiCo's weighted average interest rate of 6.2% in 1996 and 1997 and 6.4% in
1998.
Allocations of corporate overhead and interest costs have been deemed to
have been paid by Bottling LLC 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.
F - 46
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Combination The accounts of all wholly-owned subsidiaries of
Bottling LLC are included in the accompanying Combined Financial Statements.
Intercompany accounts and transactions have been eliminated in combination.
Fiscal Year Bottling LLC'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 Bottling LLC recognizes revenue when goods are
delivered to customers. Sales terms do not allow a right of return unless
product freshness dating has expired. At fiscal year-end 1996, 1997 and 1998,
reserves for returned product were $2 million.
Advertising and Marketing Costs Bottling LLC 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. 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 Bottling LLC 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 revenues 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 and is recorded as an adjustment to net
revenues. Capital equipment funding is designed to support the purchase and
placement of marketing equipment and is recorded within selling, delivery and
administrative expenses. Shared media and advertising support is recorded as a
reduction to advertising and marketing expenses 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,
respectively, were recorded in net revenues, 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 other brand owners.
Stock-Based Employee Compensation Bottling LLC measures stock-based
compensation costs 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 Bottling LLC
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.
F - 47
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
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 and 40 years.
Recoverability of Long-Lived Assets Bottling LLC reviews all long-lived
assets, including intangible assets, when the facts and circumstances indicate
that the carrying value of the assets 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 judgement is necessary to estimate discounted future
cash flows. Accordingly, actual results could vary significantly from such
estimates.
Income Taxes Bottling LLC is a limited liability company, taxable as a
partnership for U.S. tax purposes and, as such, will pay no U.S. federal or
state income taxes. The federal and state distributable share of income,
deductions and credits of Bottling LLC will be allocated to Bottling LLC's
members based on their percentage ownership. However, Bottling LLC's foreign
affiliates will pay taxes in their respective foreign jurisdictions and will
record the appropriate deferred tax results in consolidation. Deferred income
taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for income tax purposes. In accordance with Statement of Financial
Accounting Standards 109, "Accounting for Income Taxes," these deferred taxes
are measured by applying currently enacted tax laws. Deferred taxes associated
with Bottling LLC's U.S. operations are recorded directly by Bottling LLC's
members.
Minority Interest PBG has direct minority ownership in one of Bottling
LLC's subsidiaries. PBG's share of combined income or loss and assets and
liabilities in the subsidiary is accounted for as minority interest.
Financial Instruments and Risk Management Bottling LLC 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 Bottling LLC 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 - 48
<PAGE>
BOTTLING GROUP, LLC
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 Bottling LLC'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 exchange rates during
the year. The resulting translation adjustments of Bottling LLC'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 stockholders' 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.
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 February 1998, the FASB issued Statement of Financial Accounting
Standard 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 standardized the disclosures of pensions and other
postretirement benefits into a combined disclosure but did not affect results
of operations or financial position. These financial statements reflect the
adoption of SFAS 132.
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 measures those
instruments at fair value. Bottling LLC 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
Bottling LLC's first quarter of fiscal year 2000.
F - 49
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
Note 3 - Unusual Impairment and Other Charges Affecting Comparability
1998
----
Russia
Asset impairment charges
Buildings........................................... $ 35
Production equipment................................ 63
Marketing, distribution and other assets............ 59
Intangible assets................................... 37
----
194
Restructuring costs
Manufacturing contract renegotiations............... 5
Employee severance.................................. 6
Facility closure.................................... 7
----
Total Russia charges................................ 212
U.S. and Canada
Employee related costs................................. 10
----
Total Unusual Items...................................... $222
====
The 1998 unusual impairment and other charges of $222 million are
comprised of the following:
o A fourth quarter charge of $212 million for asset impairment of $194
million and other charges of $18 million related to the restructuring
of Bottling LLC'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 Bottling LLC experienced a significant drop in demand,
resulting in lower net revenues and increased operating losses.
Additionally, since net revenues 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, Bottling LLC has reduced its cost structure
primarily through closing four of its 26 distribution facilities,
renegotiating manufacturing contracts and reducing the number of
employees, primarily in sales and operations, from approximately
4,500 to 2,000. Bottling LLC 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 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 from $245 million to $51 million, their
estimated fair market value based primarily on values recently paid
for similar assets in that marketplace.
Although Bottling LLC does not believe that additional charges will
be required in Russia based on current conditions, additional charges
could be required if there were significant further deterioration in
economic conditions.
At year end 1998, $14 million remained in other accrued liabilities
relating to these actions, of which $7 million related to lease
termination costs on facilities, $4 million for manufacturing
contract
F - 50
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
renegotiations and the balance for employee severance. Bottling LLC
anticipates that most of these accrued liabilities will be paid by
the end of the first quarter of 1999.
o A fourth quarter charge of $10 million for employee related costs,
mainly relocation and severance, resulted from the separation of
Pepsi-Cola North America's concentrate and bottling organizations.
This charge comprises $8 million for relocation and $2 million for
the severance of approximately 60 sales, general management and other
employees of which approximately 50 ceased employment prior to
year-end. At year-end 1998, $9 million remained in other accrued
liabilities relating to these actions. Management anticipates that
substantially all of these accrued liabilities will be paid by the
end of the first quarter 1999.
Note 4 - Inventories
<TABLE>
1997 1998
---- ----
<S> <C> <C>
Raw materials and supplies.................. $104 $120
Finished goods.............................. 153 176
---- ----
$257 $296
==== ====
Note 5 - Property, Plant and Equipment, net
1997 1998
------ ------
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
====== ======
Note 6 - Intangible Assets, net
1997 1998
------ ------
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.
F - 51
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
Note 7 - Accounts Payable and Other Current Liabilities
1997 1998
------ ------
Accounts payable......................................... $ 313 $ 328
Accrued compensation and benefits........................ 151 174
Trade incentives......................................... 148 163
Other current liabilities................................ 199 216
------ ------
$ 811 $ 881
====== ======
Note 8 - Short-term Borrowings and Long-term Debt
1997 1998
------ ------
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..................... $2,300 $2,300
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.
The $2.3 billion allocation of PepsiCo long-term debt has been determined
by management to be an appropriate allocation in the financial statements
related to Bottling LLC's operations. Bottling LLC's interest expense includes
an allocation of PepsiCo's weighted average interest rate of 6.2% in 1996 and
1997 and 6.4% in 1998. The related allocated interest expense was $143 million
in 1996 and 1997 and $147 million in 1998. Interest expense based on PBG's
actual weighted average interest rate of 5.6% on $2.3 billion of external debt
would have been $129 million.
Bottling LLC 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.
F - 52
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
Note 9 - Leases
Bottling LLC 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 noncancellable leases are set forth
below:
Commitments
----------------------
Capital Operating
------- ---------
1999...................... $ 2 $ 46
2000...................... 2 41
2001...................... 1 37
2002...................... 1 33
2003...................... 1 23
Later years............... 4 107
---- ----
$ 11 $287
==== ====
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 Bottling LLC uses futures contracts and options on
futures in the normal course of business to hedge anticipated purchases of
certain raw materials used in its 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 Bottling LLC's exposure;
rather, they are used as the basis to calculate the amounts due under the
agreements.
Interest Rate Risk For the periods presented, Bottling LLC had minimal
external interest rate risk to manage. However, Bottling LLC 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 going
forward.
Foreign Exchange Risk As currency exchange rates change, translation of
the statements of operations of our international business into U.S. dollars
affects year-to-year comparability. Bottling LLC 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.
F - 53
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
Fair Value of Financial Instruments The carrying amount of Bottling LLC's
financial instruments approximates fair value due to the short maturity of the
financial instruments and since interest rates approximate fair value for
long-term debt. Bottling LLC does not use any financial instruments for trading
or speculative purposes.
Note 11 - Pension and Postretirement Benefit Plans
Pension Benefits
U.S. employees of Bottling LLC participate in PepsiCo sponsored
noncontributory defined 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 Bottling LLC's foreign operations was not
significant.
It is intended that Bottling LLC will assume the existing defined benefit
pension plan obligations for its employees as of PBG's initial public offering
date and trust assets from the funded plans will be transferred based upon
actuarial determinations in accordance with regulatory requirements.
Postretirement Benefits
PepsiCo has historically provided postretirement health care benefits to
eligible retired employees and their dependents, principally in the United
States. 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 Bottling LLC
will assume the related obligations from PepsiCo for Bottling LLC employees.
Pension
----------------------
Components of net periodic benefit costs: 1996 1997 1998
---- ---- ----
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
=== === ===
Postretirement
----------------------
Components of net periodic benefit costs: 1996 1997 1998
---- ---- ----
Service cost.................................... $ 4 $ 3 $ 4
Interest cost................................... 15 15 12
Amortization of prior service amendments........ (5) (5) (5)
Amortization of net loss........................ 2 -- --
---- ---- ----
Net periodic benefit cost....................... $ 16 $ 13 $ 11
==== ==== ====
F - 54
<PAGE>
BOTTLING GROUP, LLC
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.
Pension Postretirement
------------- ----------------
Change in the benefit obligation: 1997 1998 1997 1998
---- ---- ---- ----
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
==== ==== ==== ====
Pension Postretirement
------------- ----------------
Change in the fair value of assets: 1997 1998 1997 1998
---- ---- ---- ----
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)
Settlement gain.................... -- (4) -- --
---- ---- ---- ----
Fair value at end of year.......... $602 $541 $ -- $ --
==== ==== ==== ====
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)
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:
Pension Postretirement
------------- ----------------
1997 1998 1997 1998
---- ---- ---- ----
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)
==== ===== ===== =====
F - 55
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
Weighted-average assumptions at end of year:
Pension
------------------------------
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
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.
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 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:
1% 1%
Increase Decrease
-------- --------
Effect on total of 1998 service and interest cost
components............................................ $1 $(1)
Effect on the 1998 accumulated postretirement
benefit obligation.................................... 8 (7)
Note 12 - Employee Stock Option Plans
Upon the initial public offering of PBG, PBG expects to offer Bottling
LLC's full-time employees below the middle-management level a one-time
founder's grant of options to purchase 100 shares of PBG stock. These options
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 Bottling LLC's
middle and senior management employees. Middle and senior management employees
will receive an option grant that will vary according to salary and level
within Bottling LLC. These options will have an exercise price equal to the
initial public offering price. Approximately 8 million shares of common stock
have been reserved and will be issuable upon the exercise of these options.
F - 56
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
When employed by PepsiCo, Bottling LLC 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.
o 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 date of grant.
o 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 performance 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. Bottling
LLC accrues compensation expense for the cash portion of the LTIP grant.
o 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 Bottling LLC may differ from PepsiCo
stock option plans and accordingly (1) future grants of employee stock options
to Bottling LLC management may not be comparable to awards made to employees
while Bottling LLC was a part of PepsiCo, and (2) the assumptions used to
compute the fair value of any stock option awards will be specific to Bottling
LLC and, therefore, may not be comparable to the PepsiCo assumptions used.
<TABLE>
1996 1997 1998
(options in millions) --------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
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
==== ====== ==== ====== ==== ======
</TABLE>
F - 57
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
<TABLE>
1996 1997 1998
(options in millions) --------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
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>
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Price Options Contractual 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>
Bottling LLC adopted the disclosure provisions of Statement of Financial
Accounting Standards 123, "Accounting for Stock-Based Compensation," but
continues to measure stock-based compensation costs in accordance with APB
Opinion 25 and its related interpretations. If Bottling LLC had measured
compensation costs 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:
1996 1997 1998
---- ---- ----
Net Income (Loss)
Reported.................. $187 $172 $(131)
Pro forma................. 181 157 (149)
The fair value of PepsiCo stock options granted to Bottling LLC 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 by PepsiCo:
1996 1997 1998
---- ---- ----
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%
See Note 18 for more information related to accelerating vesting of
PepsiCo stock options in connection with PBG's initial public offering and the
formation of Bottling LLC.
F - 58
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
Note 13 - Income Taxes
Bottling LLC is a limited liability company, taxable as a partnership for
U.S. tax purposes and, as such, will pay no U.S. federal or state income taxes.
The federal and state distributable share of income, deductions and credits of
Bottling LLC will be allocated to Bottling LLC's members based on their
percentage ownership. However, Bottling LLC's foreign affiliates will pay taxes
in their respective foreign jurisdictions. The foreign tax expense for 1996 and
1997 was $6 million and $1 million, respectively, and the foreign tax benefit
for 1998 was $1 million.
The details of the 1997 and 1998 deferred tax liabilities (assets) are set
forth below:
1997 1998
---- ----
Intangible assets and property, plant and equipment... $112 $131
Other................................................. 14 17
---- ----
Gross deferred tax liabilities........................ 126 148
---- ----
Net operating loss carryforwards...................... (76) (123)
Various liabilities and other......................... (19) (26)
---- ----
Gross deferred tax assets............................. (95) (149)
Deferred tax asset valuation allowance................ 80 135
---- ----
Net deferred tax assets............................... (15) (14)
---- ----
Net deferred tax liability............................ $111 $134
==== ====
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 the
carryforwards, $8 million expire in 1999 and $456 million expire at various
times between 2000 and 2005. A full valuation has been established for these
net operating loss carryforwards based upon Bottling LLC's projection that
these losses will expire before they can be used.
Note 14 - Geographic Data
Bottling LLC operates in one industry - carbonated soft drinks and other
ready-to-drink beverages. Bottling LLC does business in 41 states and the
District of Columbia in the U.S. Outside the U.S., Bottling LLC does business
in eight Canadian provinces, Spain, Greece and Russia.
Net Revenues
------------------------------
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
====== ====== ======
F - 59
<PAGE>
BOTTLING GROUP, LLC
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.
Bottling LLC'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
Bottling LLC purchases concentrate from PepsiCo to be used in
the production of carbonated soft drinks and other ready-to-drink beverages.
Bottling LLC 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 Bottling LLC share a business objective of
increasing availability and consumption of Pepsi-Cola beverages. Accordingly,
PepsiCo provides Bottling LLC with various forms of marketing support to
promote PepsiCola beverages. This support covers a variety of initiatives,
including marketplace support, marketing programs, capital equipment investment
and shared media expense. PepsiCo and Bottling LLC 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 revenues or a reduction to selling, delivery and
administrative expense.
Bottling LLC manufactures and distributes fountain products and
provides fountain equipment service to PepsiCo customers in some territories
in accordance with the agreements with PBG and PepsiCo. Bottling LLC pays a
royalty fee to PepsiCo for the Aquafina trademark.
PepsiCo provides certain administrative support to Bottling
LLC, including procurement of raw materials, transaction processing such as
accounts payable and credit and collections, certain tax and treasury services
and information technology maintenance and systems development. Beginning in
1998, a PepsiCo affiliate has provided casualty insurance to Bottling LLC.
Bottling LLC also subleases its headquarters building from PepsiCo.
The Combined Statements of Operations include the following
income (expense) amounts as a result of the transactions with PepsiCo:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net revenues........................... $ 220 $ 216 $ 228
Cost of sales.......................... (1,067) (1,187) (1,349)
Selling, delivery and administrative... 167 206 213
</TABLE>
There are no minimum fees or payments that Bottling LLC is
required to make to PepsiCo, nor is Bottling LLC 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
from PepsiCo.
F-60
<PAGE>
BOTTLING GROUP, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
tabular dollars in millions, except per share data
Note 16 - Contingencies
Bottling LLC 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 our annual
results of operations, financial condition or liquidity.
Note 17 - Acquisitions
During 1998, Bottling LLC 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 net assets acquired by approximately
$474 million which was recorded in intangible assets. Of this amount, $37
million related to the 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 Bottling LLC 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>
Unaudited
-------------------
1997 1998
------ ------
<S> <C> <C>
Net revenues................... $6,984 $7,248
Net income (loss).............. 163 (120)
</TABLE>
Note 18 - Subsequent Events (unaudited)
In connection with the consummation of the initial public
offering of PBG and the formation of Bottling LLC, substantially all
non-vested PepsiCo stock options held by Bottling LLC employees vested. As a
result, Bottling LLC will incur a non-cash compensation charge in the second
quarter of 1999 equal to the difference between the market price of the
PepsiCo capital stock and the exercise price of these options at the vesting
date. We currently estimate this non-cash charge to be approximately $50
million.
During 1999, Bottling LLC acquired certain U.S. and Russian
territories from Whitman Corporation, Jeff Bottling Company, Inc., an
independent PepsiCo bottler with territories in New York, and the Leader
Beverage Corporation, an independent PepsiCo bottler with territories in
Connecticut, for an aggregate purchase price of approximately $200 million in
cash and debt. These acquisitions will be accounted for by the purchase
method. The purchase price has been preliminarily allocated to the estimated
fair value of the assets acquired and liabilities assumed. Franchise rights,
goodwill and other intangible assets that will be recorded in connection with
these acquisitions will be amortized over 40 years.
F-61
<PAGE>
BOTTLING GROUP, LLC
CONDENSED COMBINED STATEMENTS OF OPERATIONS
in millions except per share amounts, unaudited
<TABLE>
<CAPTION>
12 Weeks Ended
----------------------
March 21 March 20
1998 1999
-------- --------
<S> <C> <C>
Net Revenues....................................... $1,340 $1,452
Cost of sales...................................... 777 835
------ ------
Gross Profit....................................... 563 617
Selling, delivery and administrative expenses...... 524 575
------ ------
Operating Income................................... 39 42
Interest expense, net.............................. 37 30
Foreign currency loss.............................. -- 1
------ ------
Income before income taxes and minority interest... 2 11
Income tax expense................................. -- --
------ ------
Income before minority interest.................... 2 11
Minority interest.................................. -- 1
------ ------
Net Income......................................... $ 2 $ 12
====== ======
</TABLE>
See accompanying notes to Condensed Combined Financial Statements.
F-62
<PAGE>
BOTTLING GROUP, LLC
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
in millions, unaudited
<TABLE>
<CAPTION>
12 Weeks Ended
-------------------
March 21 March 20
1998 1999
-------- ---------
<S> <C> <C>
Cash Flows - Operations
Net income................................................. $ 2 $ 12
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation............................................. 74 79
Amortization............................................. 27 29
Other non-cash charges and credits, net.................. 21 12
Changes in operating working capital, excluding
effects of acquisitions and dispositions;..............
Trade accounts receivable.............................. 48 (17)
Inventories............................................ (34) (15)
Prepaid expenses, deferred income taxes and
other current assets.................................. (10) (10)
Accounts payable and other current liabilities......... (95) 3
Trade accounts payable to PepsiCo...................... 18 (14)
----- -------
Net change in operating working capital.................. (73) (53)
----- -------
Net Cash Provided by Operations............................. 51 79
----- -------
Cash Flows - Investments
Capital expenditures....................................... (77) (82)
Acquisitions of bottlers and investments in
affiliates................................................ (140) (104)
Other, net................................................. (10) 3
----- -------
Net Cash Used for Investments............................... (227) (183)
----- -------
Cash Flows - Financing
Short-term borrowings - three months or less............... 14 --
Proceeds from third party debt............................. 38 2,300
Replacement of PepsiCo allocated debt...................... -- (2,300)
Payments of third party debt............................... (1) (45)
Increase in owners' net investment......................... 122 128
----- -------
Net Cash Provided by Financing.............................. 173 83
----- -------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... -- (1)
----- -------
Net Decrease in Cash and Cash Equivalents................... (3) (22)
Cash and Cash Equivalents - Beginning of Period............. 86 36
----- -------
Cash and Cash Equivalents - End of Period................... $ 83 $ 14
===== =======
</TABLE>
See accompanying notes to Condensed Combined Financial Statements.
F-63
<PAGE>
BOTTLING GROUP, LLC
CONDENSED COMBINED BALANCE SHEETS
in millions, except share amounts
<TABLE>
<CAPTION>
(Unaudited)
December 26 March 20
1998 1999
----------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............................. $ 36 $ 14
Trade accounts receivable, less allowance of $46 and
$49 at December 26, 1998 and March 20, 1999,
respectively......................................... 808 821
Inventories............................................ 296 312
Prepaid expenses and other current assets.............. 83 93
------ ------
Total Current Assets................................ 1,223 1,240
Property, plant and equipment, net..................... 2,055 2,078
Intangible assets, net................................. 3,806 3,854
Other assets........................................... 143 145
------ ------
Total Assets........................................ $7,227 $7,317
====== ======
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities......... $881 $878
Trade accounts payable to PepsiCo...................... 23 12
Short-term borrowings.................................. 112 106
------ ------
Total Current Liabilities........................... 1,016 996
Allocation of PepsiCo long-term debt................... 2,300 -
Long-term debt due to third parties.................... 61 2,322
Other liabilities...................................... 321 317
Deferred income taxes.................................. 134 131
Minority interest...................................... 112 112
------ ------
Total Liabilities................................... 3,944 3,878
Owners' Equity
Owners' net investment................................. 3,521 3,666
Accumulated other comprehensive loss................... (238) (227)
------ ------
Total Owners' Equity................................ 3,283 3,439
------ ------
Total Liabilities and Owners' Equity................ $7,227 $7,317
====== ======
</TABLE>
See accompanying notes to Condensed Combined Financial Statements.
F-64
<PAGE>
BOTTLING GROUP, LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
unaudited
tabular dollars in millions, except per share data
Note 1 - Description of Business and Basis of Presentation
Bottling Group, LLC ("Bottling LLC") is the principal operating
subsidiary of The Pepsi Bottling Group, Inc. ("PBG") and consists of
substantially all of the operations and assets of PBG. Bottling LLC, which is
fully consolidated by PBG, consists of bottling operations located in the
United States, Canada, Spain, Greece and Russia. Prior to its formation, and
for the periods presented, Bottling LLC was an operating unit of PepsiCo, Inc.
PBG was incorporated in Delaware in January 1999 and prior to
its initial public offering of 100,000,000 shares of common stock, which
became effective on March 30, 1999, PBG was an operating unit of PepsiCo.
Subsequent to the initial public offering, PepsiCo owns 55,000,000 shares of
common stock consisting of 54,912,000 shares of common stock and 88,000 shares
of Class B common stock. PepsiCo's ownership of PBG represents 35.4% of the
outstanding common stock and 100% of the outstanding Class B common stock
together representing 43.5% of the voting power of all classes of PBG's voting
stock.
In connection with the formation of Bottling LLC, PepsiCo and
PBG contributed bottling businesses and assets used in the bottling businesses
to Bottling LLC. As a result of the contribution of assets, PBG owns 92.9% of
Bottling LLC and PepsiCo owns the remaining 7.1%.
The accompanying Condensed Combined Financial Statements are
presented on a carve-out basis and include the historical results of
operations and assets and liabilities directly related to Bottling LLC and
have been prepared from PepsiCo's historical accounting records.
On March 9, 1999, PBG issued $1 billion of 7% senior notes, due
2029, which is guaranteed by Bottling LLC. Bottling LLC also guarantees, that
to the extent there is available cash, Bottling LLC will distribute pro rata
to all members sufficient cash such that aggregate cash distributed to PBG
will enable PBG to pay its taxes and make interest payments on the $1 billion
7% senior notes due 2029.
The accompanying Condensed Combined Balance Sheet at March 20,
1999 and the Condensed Combined Statements of Operations and Cash Flows for
the 12 weeks ended March 21, 1998 and March 20, 1999 have not been audited,
but have been prepared in conformity with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. These Condensed Combined Financial
Statements should be read in conjunction with the audited combined financial
statements for the year ended December 26, 1998 as presented in this
prospectus. In the opinion of management, this interim information includes
all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation.
Note 2 - Seasonality of Business
The results for the first quarter are not necessarily
indicative of the results that may be expected for the full year because of
business seasonality. The seasonality of our operating results arises from
higher sales in the second and third quarters versus the first and fourth
quarters of the year, combined with the impact of fixed costs, such as
depreciation, amortization and interest, which are not significantly impacted
by business seasonality.
Note 3 - Acquisitions
During 1998 and 1999, Bottling LLC acquired the exclusive right
to manufacture, sell and distribute Pepsi-Cola beverages from several
independent PepsiCo franchise bottlers. These acquisitions were accounted for
by the purchase
F-65
<PAGE>
BOTTLING GROUP, LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--Continued
unaudited
tabular dollars in millions, except per share data
method. During the first quarter of 1999, the following acquisitions occurred
for an aggregate cash purchase price of $104 million:
o Jeff Bottling Company, Inc. in New York in January.
o Pepsi-Cola General Bottlers of Princeton, Inc. and Pepsi-Cola General
Bottlers of Virginia, Inc. with territories in Virginia and West
Virginia in March.
During 1998, the following acquisitions occurred for an aggregate cash
purchase price of $546 million:
o The remaining 75% interest in our Russian bottling joint venture, Pepsi
International Bottlers, LLC in February.
o Gray Beverages, Inc. in Canada in May.
o Pepsi-Cola Allied Bottlers, Inc. in New York and Connecticut in November.
The following table presents the first quarter 1998 unaudited
pro forma combined results of Bottling LLC and the 1998 acquisitions noted
above as if they had occurred at the beginning of fiscal year 1998. The
performance results of the 1999 acquisitions have been excluded, as their
impact on the financial statements was not significant. The pro forma
information does not necessarily represent what the actual combined results
would have been for the first quarter and is not intended to be indicative of
future results.
<TABLE>
<CAPTION>
March 21
1998
--------
<S> <C>
Net revenues............................ $1,396
======
Net income.............................. $ --
======
</TABLE>
Note 4 - Inventories
<TABLE>
<CAPTION>
December 26 March 20
1998 1999
----------- ----------
<S> <C> <C>
Raw materials and supplies......... $ 120 $ 111
Finished goods..................... 176 201
------ ------
$ 296 $ 312
====== ======
</TABLE>
F-66
<PAGE>
BOTTLING GROUP, LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
unaudited
tabular dollars in millions, except per share data
Note 5 - Property, Plant and Equipment, net
<TABLE>
<CAPTION>
December 26 March 20
1998 1999
----------- ----------
<S> <C> <C>
Land...................................... $ 151 $ 146
Buildings and improvements................ 813 832
Production and distribution equipment..... 1,989 1,987
Marketing equipment....................... 1,368 1,414
Other..................................... 95 90
------- -------
4,416 4,469
Accumulated depreciation.................. (2,361) (2,391)
------- -------
$ 2,055 $ 2,078
======= =======
</TABLE>
Note 6 - Long-Term Debt and Interest Expense
<TABLE>
<CAPTION>
December 26 March 20
1998 1999
----------- ----------
<S> <C> <C>
5 5/8% notes due 2009.................. $ -- $ 1,300
5 3/8% notes due 2004.................. -- 1,000
Other.................................. 109 65
------- -------
109 2,365
Less current maturities of long-term
debt................................. 48 43
------- -------
$ 61 $ 2,322
======= =======
Allocation of PepsiCo long-term debt... $ 2,300 --
</TABLE>
The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of
5 3/8% senior notes were issued on February 9, 1999 by Bottling LLC and are
guaranteed by PepsiCo.
First quarter 1999 interest expense was determined using $2.3
billion of allocated debt and PepsiCo's weighted average interest rate of
5.75% until the above Bottling LLC debt was issued. Once issued, Bottling
LLC's actual interest rates were used to determine interest expense for the
remainder of the period. First quarter 1998 interest expense was calculated
using $2.3 billion of allocated debt and PepsiCo's weighted average interest
rate of 6.4%.
Note 7 - Comprehensive Income
<TABLE>
<CAPTION>
12 Weeks Ended
--------------------------
March 21 March 20
1998 1999
-------- --------
<S> <C> <C>
Net Income............................. $ 2 $ 12
Currency translation adjustment........ (1) 11
------- -------
Comprehensive Income................... $ 1 $ 23
======= =======
</TABLE>
F-67
<PAGE>
BOTTLING GROUP, LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
unaudited
tabular dollars in millions, except per share data
Note 8 - Supplemental Cash Flow Information
<TABLE>
<CAPTION>
12 Weeks Ended
----------------------
March 21 March 20
1998 1999
-------- --------
<S> <C> <C>
Liabilities incurred and/or assumed in
connection with acquisitions of bottlers............. $ 22 $ 16
Interest paid to third parties........................ $ 5 $ 2
</TABLE>
Amounts paid to third parties for income taxes were not
significant in the periods presented.
Note 9 - Subsequent Events
In connection with the consummation of the initial public
offering of PBG and the formation of Bottling LLC, substantially all
non-vested PepsiCo stock options held by Bottling LLC employees vested. As a
result, Bottling LLC will incur a non-cash compensation charge in the second
quarter of 1999 equal to the difference between the market price of the
PepsiCo capital stock and the exercise price of these options at the vesting
date. We currently estimate this non-cash charge to be approximately $50
million.
Bottling LLC acquired the St. Petersburg, Russia territory from
Whitman Corporation on March 31, 1999 and Leader Beverage Corporation, an
independent PepsiCo bottler with territories in Connecticut, on April 16, 1999
for an aggregate purchase price of $72 million in cash and debt. These
acquisitions will be accounted for by the purchase method. The purchase price
has been preliminarily allocated to the estimated fair value of the assets
acquired and liabilities assumed. Franchise rights, goodwill and other
intangible assets that will be recorded in connection with this acquisition
will be amortized over 40 years.
Note 10 - New Accounting Standards
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 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.
Bottling LLC 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 Bottling LLC's first
quarter of fiscal year 2000.
F-68
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. 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 bylaws, 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.
Item 21. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this
Registration Statement:
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation.(+)
3.2 Bylaws.(+)
3.3 Amendments to Certificate of Incorporation.(+)
4.1 Indenture, dated as of March 8, 1999, by and among The
Pepsi Bottling Group, Inc., as obligor, Bottling Group
LLC, as guarantor, and The Chase Manhattan Bank, as
trustee, relating to $1,000,000,000, 7% Senior Notes due
2029 and $1,000,000,000 7% Series B Senior Notes due
2029.*
4.2 Registration Rights Agreement dated March 8, 1999 by and
among The Pepsi Bottling Group Inc., Bottling Group LLC,
Credit Suisse First Boston Corporation, Lehman Brothers
Inc., and Salomon Smith Barney Inc., on behalf of the
initial purchasers.
5.0 Opinion of Davis Polk & Wardwell as to the legality of the
securities being registered.
10.1 Form of Master Bottling Agreement.(+)
10.2 Form of Master Fountain 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.(+)
II-1
<PAGE>
Exhibit
Number Description
------ -----------
10.7 Form of Employee Programs Agreement.(+)
10.9 Indenture dated as of February 8, 1999 among Pepsi Bottling
Holdings, Inc., PepsiCo, Inc and The Chase Manhattan Bank,
as trustee, relating to $1,000,000,000 5 3/8% Senior
Notes due 2004 and $1,300,000,000 5 3/8% Senior Notes
due 2009. (+)
10.10 First Supplemental Indenture dated as of February 8, 1999
among Pepsi Bottling Holding, Inc., Bottling Group, LLC,
PepsiCo, Inc. and The Chase Manhattan Bank, as trustee,
supplementing the Indenture dated as of February 8, 1999
among Pepsi Bottling Holdings, Inc., PepsiCo, Inc. and The
Chase Manhattan Bank, as trustee.(+)
10.11 Indenture dated as of February 25, 1999 between PepsiCo,
Inc. and The Chase Manhattan Bank, as trustee, relating to
$750,000,000 Series A Senior Notes due 2000.(+)
10.12 First Supplemental Indenture dated as of February 26, 1999
among The Pepsi Bottling Group, Inc., Bottling Group, LLC,
PepsiCo, Inc. and The Chase Manhattan Bank, as trustee,
supplementing the Indenture dated as of February 25, 1999
between PepsiCo, Inc. and The Chase Manhattan Bank, as
trustee.(+)
10.13 Indenture dated as of March 5, 1999 among The Pepsi
Bottling Group, Inc., Bottling Group, LLC and The Chase
Manhattan Bank, as trustee, relating to $2,500,000,000
Series B Senior Notes due 2000. (+)
12 Statement re Computation of Ratio of Earnings to Fixed
Charges.
21 Subsidiaries of the Registrant.(+)
23.1 Consent of KPMG LLP.
23.2 Consent of Davis Polk & Wardwell (contained in Exhibit 5).
24 Powers of Attorney (contained on signature page).
25 Statement of Eligibility of The Chase Manhattan Bank, as
Trustee, on Form T-1.
27.1 Financial Data Schedule of PBG for fiscal year ended
December 26, 1998.
27.2 Financial Data Schedule of PBG for twelve weeks ended
March 20, 1999.
27.3 Financial Data Schedule of Bottling Group, LLC for fiscal
year ended December 26, 1998.
27.4 Financial Data Schedule of Bottling Group, LLC for twelve
weeks ended March 20, 1999.
99.1 Form of Letter of Transmittal respecting the offer to
exchange 7% Series B Senior Notes due 2029 which have been
registered under the Securities Act for 7% Senior Notes due
2029.
99.2 Form of Notice of Guaranteed Delivery.
+ Previously filed under corresponding exhibit numbers with PBG's registration
statement on Form S-1 (Registration No. 333-70291) pursuant to the Securities
Act of 1933, as amended.
* Previously filed as exhibit 10.14 with PBG's registration statement on Form
S-1 (Registration No. 333-70291) pursuant to the Securities Act of 1933, as
amended.
(b) Financial Statement Schedules:
The following financial statement schedule is filed as part of this
Registration Statement:
Schedule II - Valuation and Qualifying Accounts
Item 22. Undertakings.
The undersigned hereby undertakes:
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 20 of
this Registration Statement, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission
II-2
<PAGE>
such indemnification is against public policy as expressed in the Securities 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
Registration 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 Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of this Registration
Statement through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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, as
amended, The Pepsi Bottling Group, Inc., a Delaware corporation, has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Somers, New York, on the 10th day
of June, 1999.
The Pepsi Bottling Group, Inc.
By: /s/ Pamela C. McGuire
---------------------------------------------
Pamela C. McGuire
Senior Vice President,
General Counsel and Secretary
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Pamela C. McGuire and Steven
M. Rapp, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and revocation, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement and any and all additional registration statements pursuant to Rule
462(b) relating to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and things requisite and necessary to be done, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signatures Title Date
/s/ Craig E. Weatherup
- -------------------------------------
Craig E. Weatherup Principal Executive Officer and Director June 10, 1999
/s/ John T. Cahill
- -------------------------------------
John T. Cahill Principal Financial Officer and Director June 10, 1999
Controller and Principal Accounting
/s/ Peter A. Bridgman
- -------------------------------------
Peter A. Bridgman Officer June 10, 1999
/s/ Linda G. Alvarado
- -------------------------------------
Linda G. Alvarado Director June 10, 1999
/s/ Barry H. Beracha
- -------------------------------------
Barry H. Beracha Director June 10, 1999
/s/ Thomas H. Kean
- -------------------------------------
Thomas H. Kean Director June 10, 1999
/s/ Thomas W. Jones
- -------------------------------------
Thomas W. Jones Director June 10, 1999
/s/ Susan Kronick
- -------------------------------------
Susan Kronick Director June 10, 1999
/s/ Robert F. Sharpe, Jr.
- -------------------------------------
Robert F. Sharpe, Jr. Director June 10, 1999
/s/ Karl M. von der Heyden
- -------------------------------------
Karl M. von der Heyden Director June 10, 1999
</TABLE>
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Bottling Group, LLC., a Delaware limited liability company, has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Somers, New York, on the 10th day
of June, 1999.
Bottling Group, LLC
By: s/ Pamela C. McGuire
----------------------------
Pamela C. McGuire
Managing Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Pamela C. McGuire and Steven
M. Rapp, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and revocation, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement and any and all additional registration statements pursuant to Rule
462(b) relating to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and things requisite and necessary to be done, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signatures Title Date
/s/ Craig E. Weatherup
- ---------------------------------
Craig E. Weatherup Principal Executive Officer June 10, 1999
/s/ John T. Cahill
- --------------------------------- Principal Financial Officer and Managing
John T. Cahill Director June 10, 1999
/s/ Peter A. Bridgman
- ---------------------------------
Peter A. Bridgman Principal Accounting Officer June 10, 1999
/s/ Pamela C. McGuire
- ---------------------------------
Pamela C. McGuire Managing Director June 10, 1999
/s/ Matthew M. McKenna
- ---------------------------------
Matthew M. McKenna Managing Director June 10, 1999
</TABLE>
II-5
<PAGE>
Until __________, 1999, all dealers effecting transactions in
the registered securities, whether or not participating in this distribution,
may be required to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
EXHIBIT 4.2
THE PEPSI BOTTLING GROUP, INC.
7% Senior Notes due 2029
REGISTRATION RIGHTS AGREEMENT
March 8, 1999
Credit Suisse First Boston Corporation
Lehman Brothers Inc.
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
Warburg Dillon Read LLC
Blaylock & Partners, L.P.
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Ladies and Gentlemen:
The Pepsi Bottling Group, Inc., a Delaware corporation (the "Issuer"),
proposes to issue and sell to Credit Suisse First Boston Corporation, Lehman
Brothers Inc., Salomon Smith Barney Inc., Bear, Stearns & Co. Inc., Chase
Securities Inc., Warburg Dillon Read LLC and Blaylock & Partners, L.P.
(collectively, the "Initial Purchasers"), upon the terms set forth in a
purchase agreement of even date herewith (the "Purchase Agreement"),
$1,000,000,000 aggregate principal amount of its 7% Senior Notes due 2029 (the
"Notes") to be unconditionally guaranteed (the "Guarantees") by Bottling Group,
LLC, a Delaware limited liability company ("the "Guarantor" and together with
the Issuer, the "Offerors"). The Notes and the Guarantees are together referred
to as the "Initial Securities." The Initial Securities will be issued pursuant
to an Indenture, dated as of March 8, 1999 (the "Indenture"), among the Issuer,
the Guarantor and The Chase Manhattan Bank, as trustee (the "Trustee"). As an
inducement to the Initial Purchasers to enter into the Purchase Agreement, the
Offerors agree with the Initial Purchasers, for the benefit of the holders of
the Initial Securities (including, without limitation, the Initial Purchasers),
the Exchange Securities (as defined below) and the Private Exchange Securities
(as defined below) (collectively the "Holders"), as follows:
1. Registered Exchange Offer. The Offerors shall, at their own cost,
prepare and, not
<PAGE>
later than 120 days after (or if the 120th day is not a business day, the first
business day thereafter) the date of original issue of the Initial Securities
(the "Issue Date"), file with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Exchange Offer Registration
Statement") on an appropriate form under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to a proposed offer (the "Registered
Exchange Offer") to the Holders of Transfer Restricted Securities (as defined
in Section 6 hereof), who are not prohibited by any law or policy of the
Commission from participating in the Registered Exchange Offer, to issue and
deliver to such Holders, in exchange for the Initial Securities, a like
aggregate principal amount of debt securities (the "Exchange Securities") of
the Offerors issued under the Indenture and identical in all material respects
to the Initial Securities (except for the transfer restrictions relating to the
Initial Securities and the provisions relating to the matters described in
Section 6 hereof) that would be registered under the Securities Act. The
Offerors shall use their best efforts to cause such Exchange Offer Registration
Statement to become effective under the Securities Act within 180 days (or if
the 180th day is not a business day, the first business day thereafter) after
the Issue Date of the Initial Securities and shall keep the Exchange Offer
Registration Statement effective for not less than 30 days (or longer, if
required by applicable law) after the date notice of the Registered Exchange
Offer is mailed to the Holders (such period being called the "Exchange Offer
Registration Period"). The Exchange Securities will be issued under the
Indenture.
If the Offerors effect the Registered Exchange Offer, the Offerors will be
entitled to close the Registered Exchange Offer 30 days after the commencement
thereof provided that the Offerors have accepted all the Initial Securities
theretofore validly tendered in accordance with the terms of the Registered
Exchange Offer.
Following the declaration of the effectiveness of the Exchange Offer
Registration Statement, the Offerors shall promptly commence the Registered
Exchange Offer, it being the objective of such Registered Exchange Offer to
enable each Holder of Transfer Restricted Securities (as defined in Section 6
hereof) electing to exchange the Initial Securities for Exchange Securities
(assuming that such Holder is not an affiliate of the Offerors within the
meaning of the Securities Act, acquires the Exchange Securities in the ordinary
course of such Holder's business and has no arrangements or understandings with
any person to participate in the distribution of the Exchange Securities and is
not prohibited by any law or policy of the Commission from participating in the
Registered Exchange Offer) to trade such Exchange Securities from and after
their receipt without any limitations or restrictions under the Securities Act
and without material restrictions under the securities laws of the several
states of the United States.
The Offerors acknowledge that, pursuant to current interpretations by the
Commission's staff of Section 5 of the Securities Act, in the absence of an
applicable exemption therefrom, (i) each Holder which is a broker-dealer
electing to exchange Initial Securities, acquired for its own account as a
result of market-making activities or other
2
<PAGE>
trading activities, for the Exchange Securities (an "Exchanging Dealer"), is
required to deliver a prospectus containing the information set forth in (a)
Annex A hereto on the cover, (b) Annex B hereto in the "Exchange Offer
Procedures" section and the "Purpose of the Exchange Offer" section, and (c)
Annex C hereto in the "Plan of Distribution" section of such prospectus in
connection with a sale of any such Exchange Securities received by such
Exchanging Dealer pursuant to the Registered Exchange Offer and (ii) an Initial
Purchaser that elects to sell Securities (as defined below) acquired in
exchange for Initial Securities constituting any portion of an unsold allotment
is required to deliver a prospectus containing the information required by
Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in
connection with such sale.
The Offerors shall use their best efforts to keep the Exchange Offer
Registration Statement effective and to amend and supplement the prospectus
contained therein, in order to permit such prospectus to be lawfully delivered
by all persons subject to the prospectus delivery requirements of the
Securities Act for such period of time as such persons must comply with such
requirements in order to resell the Exchange Securities; provided, however,
that (i) in the case where such prospectus and any amendment or supplement
thereto must be delivered by an Exchanging Dealer or an Initial Purchaser, such
period shall end on the earlier of 180 days from the close of the Registered
Exchange Offer and the date on which all Exchanging Dealers and the Initial
Purchasers have sold all Exchange Securities held by them (unless such period
is extended pursuant to Section 3(j) below) and (ii) the Offerors shall make
such prospectus and any amendment or supplement thereto available to any
broker-dealer for use in connection with any resale of any Exchange Securities
for a period of not less than 180 days after the consummation of the Registered
Exchange Offer.
If, upon consummation of the Registered Exchange Offer, any Initial
Purchaser holds Initial Securities acquired by it as part of its initial
distribution, the Offerors, simultaneously with the delivery of the Exchange
Securities pursuant to the Registered Exchange Offer, shall issue and deliver
to such Initial Purchaser upon the written request of such Initial Purchaser,
in exchange (the "Private Exchange") for the Initial Securities held by such
Initial Purchaser, a like principal amount of debt securities of the Issuer
issued under the Indenture, guaranteed by the Guarantor and identical in all
material respects (including the existence of restrictions on transfer under
the Securities Act and the securities laws of the several states of the United
States, but excluding provisions relating to the matters described in Section 6
hereof) to the Initial Securities (the "Private Exchange Securities"). The
Initial Securities, the Exchange Securities and the Private Exchange Securities
are herein collectively called the "Securities".
In connection with the Registered Exchange Offer, the Offerors shall:
(a) mail to each Holder a copy of the prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
3
<PAGE>
(b) keep the Registered Exchange Offer open for not less than 30 days
(or longer, if required by applicable law) after the date on which notice
of the Registered Exchange Offer is mailed to the Holders;
(c) utilize the services of a depositary for the Registered Exchange
Offer with an address in the Borough of Manhattan, The City of New York,
which may be the Trustee or an affiliate of the Trustee;
(d) permit Holders to withdraw tendered Securities at any time prior
to the close of business, New York time, on the last business day on which
the Registered Exchange Offer shall remain open; and
(e) otherwise comply with all applicable laws.
As soon as practicable after the close of the Registered Exchange Offer or
the Private Exchange, as the case may be, the Offerors shall:
(x) accept for exchange all the Securities validly tendered and not
withdrawn pursuant to the Registered Exchange Offer and the Private
Exchange;
(y) deliver to the Trustee for cancellation all the Initial
Securities so accepted for exchange; and
(z) cause the Trustee to authenticate and deliver promptly to each
Holder, the Initial Securities, Exchange Securities or Private Exchange
Securities, as the case may be, equal in principal amount to the Initial
Securities of such Holder so accepted for exchange.
The Indenture will provide that the Exchange Securities will not be
subject to the transfer restrictions set forth in the Indenture and that all
the Securities will vote and consent together on all matters as one class and
that none of the Securities will have the right to vote or consent as a class
separate from one another on any matter.
Interest on each Exchange Security and Private Exchange Security issued
pursuant to the Registered Exchange Offer and in the Private Exchange will
accrue from the last interest payment date on which interest was paid on the
Initial Securities surrendered in exchange therefor or, if no interest has been
paid on the Initial Securities, from the date of original issue of the Initial
Securities.
Each Holder participating in the Registered Exchange Offer shall be
required to represent to the Offerors that at the time of the consummation of
the Registered Exchange Offer (i) any Exchange Securities received by such
Holder will be acquired in the ordinary course of business, (ii) such Holder
will have no arrangements or understanding with any person to participate in
the distribution of the Securities or the Exchange Securities within
4
<PAGE>
the meaning of the Securities Act, (iii) such Holder is not an "affiliate," as
defined in Rule 405 of the Securities Act, of the Offerors or if it is an
affiliate, such Holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (iv) if
such Holder is not a broker-dealer, that it is not engaged in, and does not
intend to engage in, the distribution of the Exchange Securities and (v) if
such Holder is a broker-dealer, that it will receive Exchange Securities for
its own account in exchange for Initial Securities that were acquired as a
result of market-making activities or other trading activities and that it will
be required to acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Securities.
Notwithstanding any other provisions hereof, the Offerors will ensure that
(i) any Exchange Offer Registration Statement and any amendment thereto and any
prospectus forming part thereof and any supplement thereto complies in all
material respects with the Securities Act and the rules and regulations
thereunder, (ii) any Exchange Offer Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, except for statements
or omissions made in reliance upon, and in conformity with, information
furnished to the Offerors by or on behalf of the Holders ("Holders'
Information"), and (iii) any prospectus forming part of any Exchange Offer
Registration Statement, and any supplement to such prospectus, does not include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading except for Holders' Information.
2. Shelf Registration. If, (i) because of any change in law or in
applicable interpretations thereof by the staff of the Commission, the Offerors
are not permitted to effect a Registered Exchange Offer, as contemplated by
Section 1 hereof, (ii) the Exchange Offer Registration Statement is not
declared effective within 180 days of the Issue Date, (iii) any Initial
Purchaser so requests with respect to the Initial Securities (or the Private
Exchange Securities) not eligible to be exchanged for Exchange Securities in
the Registered Exchange Offer and held by it following consummation of the
Registered Exchange Offer or (iv) any Holder (other than an Exchanging Dealer)
is not eligible to participate in the Registered Exchange Offer or, in the case
of any Holder (other than an Exchanging Dealer) that participates in the
Registered Exchange Offer, such Holder does not receive freely tradeable
Exchange Securities on the date of the exchange, or (v) the Offerors so elect,
then the Offerors shall take the following actions:
(a) The Offerors shall, at their cost, as promptly as practicable
(but in no event more than 30 days after so required or requested pursuant
to this Section 2) file with the Commission and thereafter shall use their
best efforts to cause to be declared effective a registration statement
(the "Shelf Registration Statement" and, together with the Exchange Offer
Registration Statement, a "Registration Statement") on an appropriate form
under the Securities Act relating to the offer and sale of the Transfer
Restricted Securities (as defined in Section 6 hereof) by the Holders
thereof from
5
<PAGE>
time to time in accordance with the methods of distribution set forth in
the Shelf Registration Statement and Rule 415 under the Securities Act
(hereinafter, the "Shelf Registration"); provided, however, that no Holder
(other than an Initial Purchaser) shall be entitled to have the Securities
held by it covered by such Shelf Registration Statement unless such Holder
agrees in writing to be bound by all the provisions of this Agreement
applicable to such Holder.
(b) The Offerors shall use their best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the
prospectus included therein to be lawfully delivered by the Holders of the
relevant Securities, for a period of two years (or for such longer period
if extended pursuant to Section 3(j) below) from the date of its
effectiveness or such shorter period that will terminate when all the
Securities covered by the Shelf Registration Statement (i) have been sold
pursuant thereto or (ii) are no longer restricted securities (as defined
in Rule 144 under the Securities Act, or any successor rule thereof). The
Offerors shall be deemed not to have used their best efforts to keep the
Shelf Registration Statement effective during the requisite period if they
voluntarily take any action that would result in Holders of Securities
covered thereby not being able to offer and sell such Securities during
that period, unless such action is required by applicable law.
(c) Notwithstanding any other provisions of this Agreement to the
contrary, the Offerors shall cause the Shelf Registration Statement and
the related prospectus and any amendment or supplement thereto, as of the
effective date of the Shelf Registration Statement, amendment or
supplement, (i) to comply in all material respects with the applicable
requirements of the Securities Act and the rules and regulations of the
Commission and (ii) (other than with respect to Holders' Information) not
to contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they
were made, not misleading.
3. Registration Procedures. In connection with any Shelf Registration
contemplated by Section 2 hereof and, to the extent applicable, any Registered
Exchange Offer contemplated by Section 1 hereof, the following provisions shall
apply:
(a) The Offerors shall use their reasonable best efforts to: (i)
furnish to each Initial Purchaser, prior to the filing thereof with the
Commission, a copy of the Registration Statement and each amendment
thereof and each supplement, if any, to the prospectus included therein
and, in the event that an Initial Purchaser (with respect to any portion
of an unsold allotment from the original offering) is participating in the
Registered Exchange Offer or the Shelf Registration Statement, the
Offerors shall use their reasonable best efforts to reflect in each such
document, when so filed with the Commission, such comments as such Initial
Purchaser reasonably may propose; (ii) include the information set forth
in Annex A hereto on
6
<PAGE>
the cover, in Annex B hereto in the "Exchange Offer Procedures" section
and the "Purpose of the Exchange Offer" section and in Annex C hereto in
the "Plan of Distribution" section of the prospectus forming a part of the
Exchange Offer Registration Statement and include the information set
forth in Annex D hereto in the Letter of Transmittal delivered pursuant to
the Registered Exchange Offer; (iii) if requested by an Initial Purchaser,
include the information required by Items 507 or 508 of Regulation S-K
under the Securities Act, as applicable, in the prospectus forming a part
of the Exchange Offer Registration Statement; (iv) include within the
prospectus contained in the Exchange Offer Registration Statement a
section entitled "Plan of Distribution," reasonably acceptable to the
Initial Purchasers, which shall contain a summary statement of the
positions taken or policies made by the staff of the Commission with
respect to the potential "underwriter" status of any broker- dealer that
is the beneficial owner (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of Exchange
Securities received by such broker-dealer in the Registered Exchange Offer
(a "Participating Broker-Dealer"), whether such positions or policies have
been publicly disseminated by the staff of the Commission or such
positions or policies, in the reasonable judgment of the Initial
Purchasers based upon advice of counsel (which may be in-house counsel),
represent the prevailing views of the staff of the Commission; and (v) in
the case of a Shelf Registration Statement, include the names of the
Holders who propose to sell Securities pursuant to the Shelf Registration
Statement as selling securityholders.
(b) The Offerors shall advise each of the Initial Purchasers, the
Holders of the Securities and any Participating Broker-Dealer from whom
the Offerors has received prior written notice that it will be a
Participating Broker-Dealer in the Registered Exchange Offer (which notice
pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction
to suspend the use of the prospectus until the requisite changes have been
made) and, if requested by such person, confirm such advice in writing:
(i) when any Registration Statement or any amendment thereto has
been filed with the Commission and when such Registration Statement
or any post-effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or
supplements to any Registration Statement or the prospectus included
therein or for additional information;
(iii) if known by the Offerors, of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose;
(iv) of the receipt by the Offerors or their legal counsel of
any
7
<PAGE>
notification with respect to the suspension of the qualification of
the Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(v) of the happening of any event that requires the Offerors to
make changes in any Registration Statement or the prospectus included
therein in order that such Registration Statement or the prospectus
included therein do not contain an untrue statement of a material
fact nor omit to state a material fact required to be stated therein
or necessary to make the statements therein (in the case of the
prospectus, in light of the circumstances under which they were made)
not misleading.
(c) The Offerors shall make every reasonable effort to obtain the
withdrawal at the earliest possible time, of any order suspending the
effectiveness of any Registration Statement.
(d) The Offerors shall furnish to each Holder of Securities included
within the coverage of any Shelf Registration, without charge, at least
one conformed copy of the Shelf Registration Statement and any
post-effective amendment thereto, including financial statements and
schedules, and, if any such Holder so requests in writing, all exhibits
thereto (including those, if any, incorporated by reference).
(e) The Offerors shall deliver to each Exchanging Dealer and each
Initial Purchaser, and to any other Holder who so requests, without
charge, at least one conformed copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, and, if any Initial Purchaser or any such Holder
requests, all exhibits thereto (including those incorporated by
reference).
(f) The Offerors shall, during the Shelf Registration Period, deliver
to each Holder of Securities included within the coverage of the Shelf
Registration, without charge, as many copies of the prospectus (including
each preliminary prospectus) included in the Shelf Registration Statement
and any amendment or supplement thereto as such person may reasonably
request. The Offerors consent, subject to the provisions of this
Agreement, to the use of such prospectus or any amendment or supplement
thereto by each of the selling Holders of the Securities in connection
with the offering and sale of the Securities covered by such prospectus,
or any amendment or supplement thereto, included in the Shelf Registration
Statement.
(g) The Offerors shall deliver to each Initial Purchaser, any
Exchanging Dealer, any Participating Broker-Dealer and such other persons
required to deliver a prospectus following the Registered Exchange Offer,
without charge, as many copies of the final prospectus included in the
Exchange Offer Registration Statement and any amendment or supplement
thereto as such persons may reasonably request.
8
<PAGE>
The Offerors consent, subject to the provisions of this Agreement, to the
use of such prospectus or any amendment or supplement thereto by any
Initial Purchaser, if necessary, any Participating Broker-Dealer and such
other persons required to deliver a prospectus following the Registered
Exchange Offer in connection with the offering and sale of the Exchange
Securities covered by such prospectus, or any amendment or supplement
thereto, included in such Exchange Offer Registration Statement.
(h) Prior to any public offering of the Securities pursuant to any
Registration Statement, the Offerors shall use their reasonable best
efforts to register or qualify or cooperate with the Holders of the
Securities included therein and their respective counsel in connection
with the registration or qualification of the Securities for offer and
sale under the securities or "blue sky" laws of such jurisdictions as any
Holder of the Securities reasonably requests in writing and do any and all
other acts or things necessary or advisable to enable the offer and sale
in such jurisdictions of the Securities covered by such Registration
Statement; provided, however, that the Offerors shall not be required to
(i) qualify generally to do business in any jurisdiction where they are
not then so qualified or (ii) take any action which would subject them to
general service of process or to taxation in any jurisdiction where it is
not then so subject; and, provided, further that the Offerors shall not be
required to pay any expenses in connection therewith after the effective
date of any applicable Registration Statement.
(i) The Offerors shall cooperate with the Holders of the Securities
to facilitate the timely preparation and delivery of certificates
representing the Securities to be sold pursuant to any Registration
Statement free of any restrictive legends and in such denominations and
registered in such names as the Holders may request in writing a
reasonable period of time prior to sales of the Securities pursuant to
such Registration Statement.
(j) Upon the occurrence of any event contemplated by paragraphs (ii)
through (v) of Section 3(b) above during the period for which the Offerors
are required to maintain an effective Registration Statement, the Offerors
shall promptly prepare and file a post-effective amendment to the
Registration Statement or a supplement to the related prospectus and any
other required document so that, as thereafter delivered to Holders of the
Securities or purchasers of Securities, such prospectus will not contain
an untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
If the Offerors notify the Initial Purchasers, the Holders of the
Securities and any known Participating Broker-Dealer in accordance with
paragraphs (ii) through (v) of Section 3(b) above to suspend the use of
such prospectus until the requisite changes to the prospectus have been
made, then the Initial Purchasers, the Holders of the Securities and any
such Participating Broker-Dealers shall suspend use of such prospectus,
and
9
<PAGE>
the period of effectiveness of the Shelf Registration Statement provided
for in Section 2(b) above and the Exchange Offer Registration Statement
provided for in Section 1 above shall each be extended by the number of
days from and including the date of the giving of such notice to and
including the date when the Initial Purchasers, the Holders of the
Securities and any known Participating Broker-Dealer shall have received
such amended or supplemented prospectus pursuant to this Section 3(j).
(k) Not later than the effective date of the applicable Registration
Statement, the Offerors will provide a CUSIP number for the Securities and
provide the applicable trustee with printed certificates for the
Securities in a form eligible for deposit with The Depository Trust
Company.
(l) The Offerors will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the
Registered Exchange Offer or the Shelf Registration and will make
generally available to their security holders (or otherwise provide in
accordance with Section 11(a) of the Securities Act) an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act, no later
than 45 days after the end of a 12-month period (or 90 days, if such
period is a fiscal year) beginning with the first month of the Offerors'
first fiscal quarter commencing after the effective date of the
Registration Statement, which statement shall cover such 12-month period.
(m) The Offerors shall cause the Indenture to be qualified under the
Trust Indenture Act of 1939, as amended, in a timely manner and containing
such changes, if any, as shall be necessary for such qualification. In the
event that such qualification would require the appointment of a new
trustee under the Indenture, the Offerors shall appoint a new trustee
thereunder pursuant to the applicable provisions of the Indenture.
(n) The Offerors may require each Holder of Securities to be sold
pursuant to the Shelf Registration Statement to furnish to the Offerors
such information regarding the Holder and the distribution of such
Securities as the Offerors may from time to time reasonably require for
inclusion in such Shelf Registration Statement, and the Offerors may
exclude from such registration the Securities of any Holder that
unreasonably fails to furnish such information within a reasonable time
after receiving such request.
(o) The Offerors shall enter into such customary agreements
(including, if requested, an underwriting agreement in customary form) and
take all such other action, if any, as Holders of a majority in aggregate
principal amount of the Securities being sold or the managing underwriters
(if any) shall reasonably request in order to facilitate the disposition
of the Securities pursuant to any Shelf Registration Statement.
10
<PAGE>
(p) In the case of any Shelf Registration, the Offerors shall (i)
make reasonably available for inspection by a representative of, and
Special Counsel (as defined below) acting for Holders of a majority in
aggregate principal amount of the Securities being sold and any
underwriter participating in any disposition pursuant to such Shelf
Registration Statement, all relevant financial and other records,
pertinent corporate documents and properties of the Offerors and (ii)
cause the Offerors' officers, directors, employees, accountants and
auditors to supply all relevant information reasonably requested by such
representative, Special Counsel or any such underwriter (each, an
"Inspector") in connection with such Shelf Registration Statement, in each
case, as shall be reasonably necessary to enable such Inspector, to
conduct a reasonable investigation within the meaning of Section 11 of the
Securities Act; provided, however, that the foregoing inspection and
information gathering shall be coordinated on behalf of the Initial
Purchasers and on behalf of the other parties, by one counsel designated
by and on behalf of such other parties as described in Section 4 hereof.
(q) In the case of any Shelf Registration, the Offerors, if requested
by Holders of a majority in aggregate principal amount of Securities being
sold or the managing underwriters (if any) shall use their reasonable best
efforts to cause (i) their counsel (which may be in-house counsel) to
deliver an opinion relating to the Securities in customary form, (ii)
their officers to execute and deliver all customary documents and
certificates and updates thereof requested by the managing underwriters of
the applicable Securities and (iii) their independent public accountants
provide a comfort letter in customary form, subject to receipt of
appropriate documentation as contemplated, and only if permitted, by
Statement of Auditing Standards No. 72.
(r) In the case of the Registered Exchange Offer, if requested by any
Initial Purchaser or any known Participating Broker-Dealer, the Offerors
shall use their reasonable best efforts to cause (i) their counsel to
deliver to such Initial Purchaser or such Participating Broker-Dealer a
signed opinion in customary form and (ii) their independent public
accountants and the independent public accountants with respect to any
other entity for which financial information is provided in the
Registration Statement to deliver to such Initial Purchaser or such
Participating Broker-Dealer a comfort letter, in customary form.
(s) If a Registered Exchange Offer or a Private Exchange is to be
consummated, upon delivery of the Initial Securities by Holders to the
Offerors (or to such other Person as directed by the Offerors) in exchange
for the Exchange Securities or the Private Exchange Securities, as the
case may be, the Offerors shall mark, or caused to be marked, on the
Initial Securities so exchanged that such Initial Securities are being
canceled in exchange for the Exchange Securities or the Private Exchange
Securities, as the case may be; in no event shall the Initial Securities
be
11
<PAGE>
marked as paid or otherwise satisfied.
(t) The Offerors will use their reasonable best efforts to (i) if the
Initial Securities have been rated prior to the initial sale of such
Initial Securities, confirm such ratings will apply to the Securities
covered by a Registration Statement, or (ii) if the Initial Securities
were not previously rated, cause the Securities covered by a Registration
Statement to be rated with the appropriate rating agencies, if so
requested by Holders of a majority in aggregate principal amount of
Securities covered by such Registration Statement, or by the managing
underwriters, if any.
(u) In the event that any broker-dealer registered under the Exchange
Act shall underwrite any Securities or participate as a member of an
underwriting syndicate or selling group or "assist in the distribution"
(within the meaning of the Conduct Rules (the "Rules") of the National
Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a
Holder of such Securities or as an underwriter, a placement or sales agent
or a broker or dealer in respect thereof, or otherwise, the Offerors will
assist such broker-dealer in complying with the requirements of such
Rules, including, without limitation, by (i) if such Rules, including Rule
2720, shall so require, engaging a "qualified independent underwriter" (as
defined in Rule 2720) to participate in the preparation of the
Registration Statement relating to such Securities, to exercise usual
standards of due diligence in respect thereto and, if any portion of the
offering contemplated by such Registration Statement is an underwritten
offering or is made through a placement or sales agent, to recommend the
yield of such Securities, (ii) indemnifying any such qualified independent
underwriter to the extent of the indemnification of underwriters provided
in Section 5 hereof and (iii) providing such information to such
broker-dealer as may be required in order for such broker-dealer to comply
with the requirements of the Rules.
(v) The Offerors shall use their reasonable best efforts to take all
other steps necessary to effect the registration of the Securities covered
by a Registration Statement contemplated hereby.
4. Registration Expenses. The Offerors shall bear all fees and expenses
incurred in connection with the performance of their obligations under Sections
1 through 3 hereof (including the reasonable fees and expenses, if any, of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Initial Purchasers,
incurred in connection with the Registered Exchange Offer) and, in the event of
a Shelf Registration, shall bear or reimburse the Holders of the Securities
covered thereby for the reasonable fees and disbursements of one firm of
counsel designated by the Holders of a majority in principal amount of the
Securities covered thereby (the "Special Counsel") to act as counsel for the
Holders of the Securities in connection therewith.
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<PAGE>
5. Indemnification and Contribution.
(a) The Issuer and the Guarantor, jointly and severally, agree to
indemnify and hold harmless each Holder of the Securities, any
Participating Broker-Dealer and each person, if any, who controls such
Holder or such Participating Broker-Dealer within the meaning of the
Securities Act or the Exchange Act (each Holder, any Participating
Broker-Dealer and such controlling persons are referred to collectively as
the "Indemnified Parties") from and against any losses, claims, damages or
liabilities, joint or several, or any actions in respect thereof
(including, but not limited to, any losses, claims, damages, liabilities
or actions relating to purchases and sales of the Securities) to which
each Indemnified Party may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in a Registration
Statement or prospectus or in any amendment or supplement thereto or in
any preliminary prospectus relating to a Shelf Registration, or arise out
of, or are based upon, the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they
were made, not misleading, and shall reimburse, as incurred, the
Indemnified Parties for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability or action in respect thereof; provided, however, that
(i) the Issuer and the Guarantor shall not be liable in any such case to
the extent that such loss, claim, damage or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in a Registration Statement or prospectus or in any
amendment or supplement thereto or in any preliminary prospectus relating
to a Shelf Registration in reliance upon and in conformity with any
Holders' Information and (ii) with respect to any untrue statement or
omission or alleged untrue statement or omission made in any preliminary
prospectus relating to a Shelf Registration Statement, the indemnity
agreement contained in this subsection (a) shall not inure to the benefit
of any Holder or Participating Broker- Dealer (or any person controlling
such Holder or Participating Broker-Dealer) from whom the person asserting
any such losses, claims, damages or liabilities purchased the Securities
concerned, to the extent that a prospectus relating to such Securities was
required to be delivered by such Holder or Participating Broker-Dealer
under the Securities Act in connection with such purchase and any such
loss, claim, damage or liability of such Holder or Participating
Broker-Dealer results from the fact that there was not sent or given to
such person, at or prior to the written confirmation of the sale of such
Securities to such person, a copy of the final prospectus if the Issuer or
Guarantor have previously furnished copies thereof to such Holder or
Participating Broker-Dealer; provided further, however, that this
indemnity agreement will be in addition to any liability which the Issuer
or Guarantor may otherwise have to such Indemnified Party. The Issuer and
Guarantor shall also jointly and severally indemnify underwriters, their
officers and directors and each person who controls
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<PAGE>
such underwriters within the meaning of the Securities Act or the Exchange
Act to the same extent as provided above with respect to the
indemnification of the Holders of the Securities if requested by such
Holders.
(b) Each Holder of the Securities, severally and not jointly, will
indemnify and hold harmless the Issuer and Guarantor, their directors and
officers and each person, if any, who controls the Issuer and Guarantor,
as the case may be, within the meaning of the Securities Act or the
Exchange Act from and against any losses, claims, damages or liabilities
or any actions in respect thereof, to which the Issuer or the Guarantor or
any such controlling person may become subject under the Securities Act,
the Exchange Act or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in a Registration
Statement or prospectus or in any amendment or supplement thereto or in
any preliminary prospectus relating to a Shelf Registration, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact necessary to make the statements therein not misleading, but
in each case only to the extent that the untrue statement or omission or
alleged untrue statement or omission was made in reliance upon and in
conformity with written information pertaining to such Holder and
furnished to the Issuer or the Guarantor by or on behalf of such Holder
specifically for inclusion therein; and, subject to the limitation set
forth immediately preceding this clause, shall reimburse, as incurred, the
Issuer or Guarantor, as the case may be, for any legal or other expenses
reasonably incurred by the Issuer or Guarantor, as the case may be, or any
such controlling person in connection with investigating or defending any
loss, claim, damage, liability or action in respect thereof. This
indemnity agreement will be in addition to any liability which such Holder
may otherwise have to the Issuer or Guarantor, as the case may be, or any
of their controlling persons.
(c) Promptly after receipt by an indemnified party under this Section
5 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 5, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party
will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. In case any such action
is brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof the
indemnifying party will not be liable to such indemnified party under this
Section 5
14
<PAGE>
for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in
connection with the defense thereof. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement
of any pending or threatened action in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party unless such settlement (i) includes an
unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not
include a statement as to and an admission of fault, culpability or
failure to act by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 5 is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a) or (b) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to in subsection (a) or (b) above (i) in such
proportion as is appropriate to reflect the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified
party on the other from the exchange of the Securities, pursuant to the
Registered Exchange Offer, or (ii) if the allocation provided by the
foregoing clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities (or actions in respect
thereof) as well as any other relevant equitable considerations. The
relative fault of the parties shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates
to information supplied by the Issuer or Guarantor, as the case may be, on
the one hand or such Holder or such other indemnified party, as the case
may be, on the other, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first sentence
of this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of
this subsection (d). Notwithstanding any other provision of this Section
5(d), the Holders of the Securities shall not be required to contribute
any amount in excess of the amount by which the net proceeds received by
such Holders from the sale of the Securities pursuant to a Registration
Statement exceeds the amount of damages which such Holders have otherwise
been required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this
15
<PAGE>
paragraph (d), each person, if any, who controls such indemnified party
within the meaning of the Securities Act or the Exchange Act shall have
the same rights to contribution as such indemnified party and each person,
if any, who controls the Issuer or Guarantor, as the case may be, within
the meaning of the Securities Act or the Exchange Act shall have the same
rights to contribution as the Issuer or Guarantor, as the case may be.
(e) The agreements contained in this Section 5 shall survive the sale
of the Securities pursuant to a Registration Statement and shall remain in
full force and effect, regardless of any termination or cancellation of
this Agreement or any investigation made by or on behalf of any
indemnified party.
6. Additional Interest Under Certain Circumstances.
(a) Additional interest (the "Additional Interest") with respect to
the Initial Securities and the Private Exchange Securities shall be
assessed as follows if any of the following events occur (each such event
in clauses (1) through (3) below a "Registration Default":
(1) if by the 120th day following the Issue Date (or if such day is not a
business day, the first business day thereafter), a registration
statement has not been filed with the Commission with respect to the
Registered Exchange Offer or the resale of the Securities,
(2) if by the 180th day after the Issue Date (or if such day is not a
business day, the first business day thereafter), the Exchange Offer
Registration Statement is not declared effective or if by the 220th
day after the Issue Date (or if such day is not a business day, the
first business day thereafter), the Shelf Registration Statement is
not declared effective or the Registered Exchange Offer is not
consummated,
(3) if by the 180th day after the Issue Date (or if such day is not a
business day, the first business day thereafter), the Exchange Offer
Registration Statement is declared effective, or if by the 220th day
after the Issue Date (or if such day is not a business day, the first
business day thereafter) the Shelf Registration Statement is declared
effective but:
(a) such registration statements ceases to be effective, prior to
expiration of the time periods described in Sections 1 and 2
hereof, if so required, or
(b) such registration statements cease to be useable in connection
with resales of Securities prior to expiration of the time
periods described in Sections 1 and 2 hereof, if so required
16
<PAGE>
Additional Interest shall accrue on the Initial Securities and the Private
Exchange Notes over and above the interest set forth in the title of the
Securities from and including the date on which any such Registration
Default shall occur to but excluding the date on which all such
Registration Defaults have been cured, at a rate of 0.25% per annum (the
"Additional Interest Rate") for the first 90-day period immediately
following the occurrence of such Registration Default. The Additional
Interest Rate shall increase by an additional 0.25% per annum with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum Additional Interest Rate of 0.5% per annum.
(b) A Registration Default referred to in Section 6(a)(3) hereof
shall be deemed not to have occurred and be continuing in relation to a
Shelf Registration Statement or the related prospectus if (i) such
Registration Default has occurred solely as a result of (x) the filing of
a post-effective amendment to such Shelf Registration Statement to
incorporate annual audited financial information with respect to the
Offerors where such post-effective amendment is not yet effective and
needs to be declared effective to permit Holders to use the related
prospectus or (y) other material events, with respect to the Offerors that
would need to be described in such Shelf Registration Statement or the
related prospectus and (ii) in the case of clause (y), the Offerors are
proceeding promptly and in good faith to amend or supplement such Shelf
Registration Statement and related prospectus to describe such events;
provided, however, that in any case if such Registration Default occurs
for a continuous period in excess of 30 days, Additional Interest shall be
payable in accordance with the above paragraph from the day such
Registration Default occurs until such Registration Default is cured.
(c) Any amounts of Additional Interest due pursuant to clause (1) or
(2) of Section 6(a) above will be payable in the same manner as specified
in the Indenture for the payment of interest on the Securities on the
regular interest payment dates with respect to the Securities. The amount
of Additional Interest will be determined by multiplying the applicable
Additional Interest rate by the principal amount of the Initial Securities
or Private Exchange Notes, as the case may be, multiplied by a fraction,
the numerator of which is the number of days such Additional Interest rate
was applicable during such period (determined on the basis of a 360-day
year comprised of twelve 30-day months), and the denominator of which is
360.
(d) "Transfer Restricted Securities" means each Security until (i)
the date on which such Security has been exchanged by a person other than
a broker-dealer for a freely transferable Exchange Security in the
Registered Exchange Offer, (ii) following the exchange by a broker-dealer
in the Registered Exchange Offer of an Initial Security for an Exchange
Security, the date on which such Exchange Security is sold to a purchaser
who receives from such broker-dealer on or prior to the date of such sale
a copy of the prospectus contained in the Exchange Offer Registration
17
<PAGE>
Statement, (iii) the date on which such Security has been effectively
registered under the Securities Act and disposed of in accordance with the
Shelf Registration Statement or (iv) the date on which such Security is
distributed to the public pursuant to Rule 144 under the Securities Act or
is saleable pursuant to Rule 144(k) under the Securities Act.
7. Rules 144 and 144A. So long as Transfer Restricted Securities remain
outstanding, the Issuer or Guarantor shall each use their respective best
efforts to file the reports required to be filed by them under the Securities
Act and the Exchange Act in a timely manner and, if at any time the Issuer or
Guarantor is not required to file such reports, it will, upon the written
request of any Holder of Securities, make publicly available other information
so long as necessary to permit sales of their securities pursuant to Rules 144
and 144A. So long as Transfer Restricted Securities remain outstanding, the
Issuer or Guarantor covenant that it will take such further action as any
Holder of Securities may reasonably request, all to the extent required from
time to time to enable such Holder to sell Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). So long as
Transfer Restricted Securities remain outstanding, the Issuer or Guarantor will
provide a copy of this Agreement to prospective purchasers of Initial
Securities identified to the Issuer by the Initial Purchasers upon written
request. So long as Transfer Restricted Securities remain outstanding, upon the
written request of any Holder of Initial Securities, the Issuer or Guarantor
shall deliver to such Holder a written statement as to whether they have
complied with such requirements. Notwithstanding the foregoing, nothing in this
Section 7 shall be deemed to require the Issuer or Guarantor to register any of
their securities pursuant to the Exchange Act.
8. Underwritten Registrations. If any of the Transfer Restricted
Securities covered by any Shelf Registration are to be sold in an underwritten
offering, the investment banker or investment bankers and manager or managers
that will administer the offering ("Managing Underwriters") will be selected by
the Holders of a majority in aggregate principal amount of such Transfer
Restricted Securities to be included in such offering, subject to the consent
of the Offerors (which shall not be unreasonably withheld or delayed), and such
Holders shall be responsible for all underwriting commissions and discounts in
connection therewith.
No person may participate in any underwritten registration hereunder
unless such person (i) agrees to sell such person's Transfer Restricted
Securities on the basis reasonably provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and
(ii) completes and executes all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements.
18
<PAGE>
9. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, except by the
Offerors and the written consent of the Holders of a majority in principal
amount of the Securities affected by such amendment, modification,
supplement, waiver or consents.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, first-class
mail, facsimile transmission, or air courier which guarantees overnight
delivery:
(i) if to a Holder of the Securities, at the most current
address given by such Holder to the Offerors.
(ii) if to the Initial Purchasers;
Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, NY 10010-3629
Fax No.: (212) 325-8278
Attention: Transactions Advisory Group
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Fax No.: (212) 735-2000
Attention: Matthew J. Mallow, Esq.
(iii) if to the Offerors, at its address as follows:
The Pepsi Bottling Group, Inc.
One Pepsi Way
Somers, New York 10589
Fax No.: (914) 767-1820
Attention: Controller
19
<PAGE>
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Fax No.: (212) 450-4800
Attention: Winthrop Conrad Jr., Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; three business
days after being deposited in the mail, postage prepaid, if mailed; when
receipt is acknowledged by recipient's facsimile machine operator, if sent by
facsimile transmission; and on the day delivered, if sent by overnight air
courier guaranteeing next day delivery.
(c) No Inconsistent Agreements. The Offerors have not, as of the date
hereof, entered into, nor shall it, on or after the date hereof, enter
into, any agreement with respect to their securities that is inconsistent
with the rights granted to the Holders herein or otherwise conflicts with
the provisions hereof.
(d) Successors and Assigns. This Agreement shall be binding upon the
Offerors and their respective successors and assigns.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
(h) Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any
such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(i) Securities Held by the Offerors. Whenever the consent or approval
of Holders of a specified percentage of principal amount of Securities is
required hereunder, Securities held by the Offerors or their respective
affiliates (other than subsequent Holders of Securities if such subsequent
Holders are deemed to be
20
<PAGE>
affiliates solely by reason of their holdings of such Securities) shall
not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
21
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to Offerors a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the several Initial Purchasers, the Issuer and the Guarantor in
accordance with its terms.
Very truly yours,
The Pepsi Bottling Group, Inc.
By: /s/ Margaret D. Moore
-----------------------------------
Name: Margaret D. Moore
Title: Senior Vice President
and Treasurer
Bottling Group, LLC
By: /s/ Lawrence F. Dickie
-----------------------------------
Name: Lawrence F. Dickie
Title: Managing Director
The foregoing Registration
Rights Agreement is hereby confirmed
and accepted as of the date first
above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
LEHMAN BROTHERS INC.
SALOMON SMITH BARNEY INC.
BEAR, STEARNS & CO, INC.
CHASE SECURITIES INC.
WARBURG DILLON READ LLC
BLAYLOCK & PARTNERS, L.P.
by: CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ Joseph Fashano
-------------------------
Name: Joseph Fashano
Title: Director
22
<PAGE>
ANNEX A
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Securities received in
exchange for Initial Securities where such Initial Securities were acquired by
such broker-dealer as a result of market- making activities or other trading
activities. The Issuer and the Guarantor have agreed that, for a period of 180
days after the Expiration Date (as defined herein), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
23
<PAGE>
ANNEX B
Each broker-dealer that receives Exchange Securities for its own account
in exchange for Initial Securities, where such Initial Securities were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Securities. See "Plan of Distribution."
24
<PAGE>
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received
in exchange for Initial Securities where such Initial Securities were acquired
as a result of market-making activities or other trading activities. The Issuer
and the Guarantor agreed that, for a period of 180 days after the Expiration
Date, it will make this prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In addition,
until , 199 , all dealers effecting transactions in the Exchange Securities may
be required to deliver a prospectus.1
The Issuer will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Securities. Any broker- dealer that resells Exchange Securities that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Securities and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Issuer will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Issuer has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one
- ---------
1 In addition, the legend required by Item 502(e) of Regulation S-K will
appear on the back cover page of the Exchange Offer prospectus.
25
<PAGE>
counsel for the Holders of the Securities) other than commissions or
concessions of any brokers or dealers and will indemnify the Holders of the
Securities (including any broker- dealers) against certain liabilities,
including liabilities under the Securities Act.
26
<PAGE>
ANNEX D
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE
10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name: _____________________________________________
Address: ___________________________________________
___________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that it
is not engaged in, and does not intend to engage in, a distribution of Exchange
Securities. If the undersigned is a broker-dealer that will receive Exchange
Securities for its own account in exchange for Initial Securities that were
acquired as a result of market-making activities or other trading activities,
it acknowledges that it will deliver a prospectus in connection with any resale
of such Exchange Securities; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
27
Exhibit 5
DAVIS POLK & WARDWELL
450 Lexington Avenue
New York, N.Y. 10017
June 10, 1999
The Pepsi Bottling Group, Inc.
One Pepsi Way
Somers, New York 10589
Bottling Group, LLC
One Pepsi Way
Somers, New York 10589
Ladies and Gentlemen:
We have acted as special counsel to The Pepsi Bottling Group, Inc., a
Delaware corporation ("PBG"), and Bottling Group, LLC, a Delaware limited
liability company ("Bottling LLC"), in connection with the Registration
Statement on Form S-4 (the "Registration Statement") to be filed by PBG and
Bottling LLC with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act"), relating to (1) PBG's offer to exchange
(the "Exchange Offer") its 7% Series B Senior Notes due 2029 (the "New Notes")
for its issued and outstanding 7% Senior Notes due 2029 (the "Old Notes"), and
(2) Bottling LLC's guarantees of the New Notes (the "New Notes Guarantees").
We have examined such documents and such matters of fact and law that
we have deemed necessary for the purpose of rendering the opinion expressed
herein.
Upon the basis of the foregoing, we are of the opinion that the New
Notes have been duly authorized by PBG and, when executed, issued, authenticated
and delivered in exchange for the Old Notes in accordance with the Exchange
Offer, will be valid and binding obligations of PBG enforceable in accordance
with their terms, except as such enforceability may be limited by the laws of
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, or
similar laws relating to creditors' rights generally, by any other applicable
federal or state laws, by general principles of equity, or by the discretion of
any court before which any proceeding therefor may be brought.
We are also of the opinion that the New Notes Guarantees have been duly
authorized by Bottling LLC and, when the New Notes, with the New Notes
Guarantees endorsed thereon, have been executed, issued, authenticated and
delivered in exchange for the Old Notes in accordance with the Exchange Offer,
<PAGE>
2 June 10, 1999
the New Notes Guarantees will be valid and binding obligations of Bottling LLC
enforceable in accordance with their terms, except as such enforceability may be
limited by the laws of bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, or similar laws relating to creditors' rights generally,
by any other applicable federal or state laws, by general principles of equity,
or by the discretion of any court before which any proceeding therefor may be
brought.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above, and further consent to the reference
to our name under the caption "Legal Matters" in the prospectus which is a part
of the Registration Statement, without admitting that we are experts within the
meaning of the Securities Act.
Very truly yours,
/s/ Davis Polk & Wardwell
EXHIBIT 12
THE PEPSI BOTTLING GROUP, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions except ratio amounts, unaudited)
12 Weeks Ended
-------------------
3/21/98 3/20/99
------- -------
Earnings:
Income (loss) before taxes and cumulative effect
of accounting changes and minority interest............ $ (13) $ (5)
Undistributed (income) loss from equity investments...... 4 --
Fixed charges excluding capitalized interest............. 57 50
------- -------
Earnings available for fixed charges.................. $ 48 $ 45
======= =======
Fixed Charges:
Interest expense......................................... $ 54 $ 47
Capitalized interest..................................... -- --
Interest portion of rent expense(A)...................... 3 3
Total fixed charges................................... $ 57 $ 50
======= =======
Ratio of Earnings to Fixed Charges....................... (B) (B)
- ---------
(A) One-third of net rent expense is the portion deemed representative of the
interest factor.
(B) As a result of the loss incurred in the 12 weeks ended March 21, 1998 and
March 20, 1999, PBG was unable to cover the indicated fixed charges by $9
million and $5 million, respectively.
<PAGE>
THE PEPSI BOTTLING GROUP, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions except ratio amounts, unaudited)
<TABLE>
Fiscal Year
--------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before taxes and cumulative effect
of accounting changes and minority interest............ $ 63 $ 110 $ 138 $ 115 $ (192)
Undistributed (income) loss from equity investments............... (1) (3) 1 12 5
Fixed charges excluding capitalized interest...................... 247 256 238 238 245
------ ------ ------ ------ ------
Earnings available for fixed charges........................... $ 309 $ 363 $ 377 $ 365 $ 58
====== ====== ====== ====== ======
Fixed Charges:
Interest expense.................................................. $ 234 $ 243 $ 224 $ 226 $ 230
Capitalized interest.............................................. 1 1 1 1 1
Interest portion of rent expense(A)............................... 13 13 14 12 15
------ ------ ------ ------ ------
Total fixed charges............................................ $ 248 $ 257 $ 239 $ 239 $ 246
====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges................................ 1.25 1.41 1.58 1.53 (B)
</TABLE>
- ---------
(A) One-third of net rent expense is the portion deemed representative of the
interest factor.
(B) As a result of the loss incurred in fiscal year 1998, PBG was unable to
cover the indicated fixed charges by $188 million.
2
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., including the related financial statement
schedule, and Bottling Group, LLC, 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. 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
herein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
New York, New York
June 10, 1999
-----------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
--------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
--------------------------------
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
--------------------------------
THE PEPSI BOTTLING GROUP, INC.
(Exact name of obligor as specified in its charter)
Delaware 13-403865
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
One Pepsi Way
Somers, New York 10589
(Address of principal executive offices) (Zip Code)
--------------------------------
7% Series B Senior Notes 2029
(Title of the indenture securities)
-----------------------------------------------
<PAGE>
GENERAL
Item 1.General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington, D.C.,
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
<PAGE>
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in effect,
including the Organization Certificate and the Certificates of Amendment dated
February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being contained
in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 2nd day of June, 1999.
THE CHASE MANHATTAN BANK
By
----------------------------------
James P. Freeman
Vice President
<PAGE>
Item 16.List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of
Amendment dated February 17, 1969, August 31, 1977, December 31, 1980,
September 9, 1982, February 28, 1985, December 2, 1991 and July 10, 1996 (see
Exhibit 1 to Form T-1 filed in connection with Registration Statement No.
333-06249, which is incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996,
in connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York, on the 2nd day
of June, 1999
THE CHASE MANHATTAN BANK
By /s/James P. Freeman
----------------------------------
James P. Freeman
Vice President
<PAGE>
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business December 31, 1998, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
Dollar
Amounts
ASSETS in Millions
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin........................... $13,915
Interest-bearing balances.................................................... 7,805
Securities:
Held to maturity securities..................................................... 1,429
Available for sale securities................................................... 56,327
Federal funds sold and securities purchased under agreements to
resell
Loans and lease financing receivables:
Loans and leases, net of unearned income $131,095
Less: Allowance for loan and lease losses 2,711
Less: Allocated transfer risk reserve................... 0
-------
Loans and leases, net of unearned income, allowance, and reserve............. 128,384
Trading Assets.................................................................. 48,949
Premises and fixed assets (including capitalized leases)........................ 3,095
Other real estate owned......................................................... 239
Investments in unconsolidated subsidiaries and associated
companies.................................................................... 188
Customers' liability to this bank on acceptances outstanding.................... 1,209
Intangible assets............................................................... 2,081
Other assets.................................................................... 11,352
-------
TOTAL ASSETS.................................................................... $296,717
=======
LIABILITIES
Deposits
In domestic offices............................................................. $105,879
Noninterest-bearing..............................................$39,175
<PAGE>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin........................... $ 13,915
Interest-bearing balances.................................................... 7,805
Securities:
Held to maturity securities..................................................... 1,429
Available for sale securities................................................... 56,327
Federal funds sold and securities purchased under agreements to
resell
Loans and lease financing receivables:
Loans and leases, ent of unearned income $131,095
Less: Allowance for loan and lease losses 2,711
Less: Allocated transfer risk reserve......................... 0
-------
Loans and Leases, net of unearned income, allownace, and reserve............. 128,384
Trading Assets.................................................................. 48,949
Premises and fixed assets (including capitalized leases)........................ 3,095
Other real estate owned......................................................... 239
Investments in unconsolidated subsidiaries and associated companies............. 188
Customers' liability to this bank on acceptances outstanding.................... 1,209
Intangible assets............................................................... 2,081
Other assets.................................................................... 11,352
-------
Interest-bearing................................................. 66,704
-------
In foreign offices, Edge and Agreement, subsidiaries and IBF's 79,294
Noninterest-bearing..............................................$ 4,082
Interest-bearing..................................................75,212
Federal funds purchased and securities sold under agreements to
repurchase...................................................................... 32,546
Demand notes issued to the U.S. Treasury........................................ 629
Trading liabilities............................................................. 36,807
Other borrowed money (includes mortgage indebtedness and obligations
under capitalized leases):
With a remaining maturity of one year or less................................... 4,478
With a remaining maturity of more than one year through three years............. 213
With a remaining maturity of more than three years.............................. 115
Bank's liability on acceptances executed and outstanding ....................... 1,209
Subordinated notes and debentures............................................... 5,408
Other liabilities............................................................... 10,855
TOTAL LIABILITIES 277,433
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................... 0
Common stock.................................................................... 1,211
Surplus (exclude all surplus related to preferred stock)........................ 11,016
Undivided profits and capital reserves.......................................... 6,762
Net unrealized holding gains (losses) on available-for-sale securities.......... 279
<PAGE>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin........................... $ 13,915
Interest-bearing balances.................................................... 7,805
Securities:
Held to maturity securities..................................................... 1,429
Available for sale securities................................................... 56,327
Federal funds sold and securities purchased under agreements to
resell
Loans and lease financing receivables:
Loans and leases, net of unearned income $131,095
Less: Allowance for loan and lease losses 2,711
Less: Allocated transfer risk reserve......................... 0
-------
Loans and leases, net of unearned income, alloance, and reserve.............. 128,384
Trading Assets.................................................................. 48,949
Premises and fixed assets (including capitalized leases)........................ 3,095
Other real estate owned......................................................... 239
Investments in unconsolidated subsidiaries and associated companies............. 188
Customers' liability to this bank on acceptances outstanding.................... 1,209
Intangible assets............................................................... 2,081
Other assets.................................................................... 11,352
-------
Cumulative foreign currency translation adjustments............................. 16
TOTAL EQUITY CAPITAL............................................................ 19,284
TOTAL LIABILITIES AND EQUITY CAPITAL............................................ $296,717
</TABLE>
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named
bank, do hereby declare that this Report of Condition has
been prepared in conformance with the instructions issued
by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness
of this Report of Condition and declare that it has been
examined by us, and to the best of our knowledge and
belief has been prepared in conformance with the in-
structions issued by the appropriate Federal regulatory
authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE )DIRECTORS
WILLIAM B. HARRISON, JR.)
(NY) 16527/002/EXCHANGE/EDGAR/EX99-1ED
LETTER OF TRANSMITTAL
To Tender for Exchange
7% Senior Notes due 2029
of
THE PEPSI BOTTLING GROUP, INC.
Pursuant to the Prospectus dated [ ] __, 1999
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [ ] __,
1999 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE
COMPANY IN ITS SOLE DISCRETION, IN WHICH CASE THE TERM "EXPIRATION DATE" SHALL
MEAN THE LATEST DATE AND TIME TO WHICH THE EXCHANGE OFFER IS EXTENDED. TENDERS
MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
- -------------------------------------------------------------------------------
Delivery to: The Chase Manhattan
Bank, as Exchange Agent
<TABLE>
<S> <C> <C>
By Registered or Certified Mail,
By Facsimile Overnight Courier or by Hand: Confirm by Telephone
(212) 638-7375, or The Chase Manhattan Bank (212) 638-0828
(212) 344-9367 55 Water Street
(For Eligible Institutions Only) Room 234, North Building
New York, New York 10041
Attention: Carlos Esteves
</TABLE>
Delivery of this Letter of Transmittal to an address other than as set
forth above or transmission via a facsimile number other than the one listed
above will not constitute a valid delivery. The instructions set forth in this
Letter of Transmittal should be read carefully before this Letter of
Transmittal is completed.
<PAGE>
The undersigned acknowledges receipt of the Prospectus dated [ ] __, 1999
(the "Prospectus") of The Pepsi Bottling Group, Inc., a Delaware corporation
(the "Company"), and this letter of transmittal (the "Letter of Transmittal"),
which together with the Prospectus constitutes the Company's offer (the
"Exchange Offer") to exchange $1,000 principal amount of its 7% Series B
Senior Notes due 2029 (the "New Notes") for each $1,000 principal amount of
its outstanding 7% Senior Notes due 2029 (the "Old Notes"). Recipients of the
Prospectus should read the requirements described in such Prospectus with
respect to eligibility to participate in the Exchange Offer. Capitalized terms
used but not defined herein have the meaning given to them in the Prospectus.
The undersigned hereby tenders the Old Notes described in the box
entitled "Description of Old Notes" below pursuant to the terms and conditions
described in the Prospectus and this Letter of Transmittal. The undersigned is
the holder (which term, for purposes of the Exchange Offer, includes any
participant in the Book-Entry Transfer Facility (as defined) whose name
appears on a security position listing as a holder of a book-entry interest in
the Global Notes representing Old Notes) of all such Old Notes and the
undersigned represents that it has received from each beneficial owner of such
Old Notes ("Beneficial Owners") a duly completed and executed form of
"Instruction to Holder from Beneficial Owner" accompanying this Letter of
Transmittal, instructing the undersigned to take the action described in this
Letter of Transmittal.
This Letter of Transmittal is to be used by a holder of Old Notes (i) if
certificates representing Old Notes are to be forwarded herewith, (ii) if
delivery of Old Notes is to be made by book-entry transfer to the Exchange
Agent's account at The Depository Trust Company ("DTC") (the "Book-Entry
Transfer Facility"), pursuant to the procedures set forth in the section of
the Prospectus entitled "The Exchange Offer--Procedures for Tendering Old
Notes," or (iii) if a tender is made pursuant to the guaranteed delivery
procedures in the section of the Prospectus entitled "The Exchange
Offer--Guaranteed Delivery Procedures."
The undersigned hereby represents and warrants that the information
received from the beneficial owners is accurately reflected in the boxes
entitled "Beneficial Owner(s)--Purchaser Status" and "Beneficial
Owner(s)--Residence."
Any beneficial owner whose Old Notes are held in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact such holder of Old Notes promptly and instruct such
holder of Old Notes to tender on behalf of the beneficial owner. If such
beneficial owner wishes to tender on such owner's own behalf, such beneficial
owner must, prior to completing and executing this Letter of Transmittal and
delivering its Old Notes, either make appropriate arrangements to record
ownership of the Old Notes in such beneficial owner's name or obtain a
properly completed power of attorney from the holder of Old Notes. The
transfer of record ownership may take considerable time.
In order to properly complete this Letter of Transmittal, a holder of Old
Notes must (i) complete the box entitled "Description of Old Notes," (ii)
complete the boxes entitled "Beneficial Owner(s)--Purchaser Status" and
"Beneficial Owner(s)--Residence," (iii) if appropriate, check and complete the
boxes relating to book-entry transfer, guaranteed delivery, Special Issuance
Instructions and Special Delivery Instructions, (iv) sign the Letter of
Transmittal by completing the box entitled "Sign Here" and (v) complete the
Substitute Form W-9. Each holder of Old Notes should carefully read the
detailed instructions below prior to completing the Letter of Transmittal.
Holders of Old Notes who desire to tender their Old Notes for exchange
and (i) whose Old Notes are not immediately available or (ii) who cannot
deliver their Old Notes and all other documents required hereby to
2
<PAGE>
the Exchange Agent on or prior to the Expiration Date may tender their Old
Notes pursuant to the guaranteed delivery procedures set forth in the section
of the Prospectus entitled "The Exchange Offer--Guaranteed Delivery
Procedures." See Instruction 2.
Holders of Old Notes who wish to tender their Old Notes for exchange must
complete columns (1) through (3) in the box below entitled "Description of Old
Notes," complete the boxes entitled "Beneficial Owner(s)--Purchaser Status"
and "Beneficial Owner(s)--Residence" and sign the box below entitled "Sign
Here." If only those columns are completed, such holder of Old Notes will have
tendered for exchange all Old Notes listed in column (3) below. If the holder
of Old Notes wishes to tender for exchange less than all of such Old Notes,
column (4) must be completed in full. In such case, such holder of Old Notes
should refer to Instruction 5.
3
<PAGE>
<TABLE>
DESCRIPTION OF OLD NOTES
(1) (2) (3) (4)
Principal
Aggregate Amount
Old Note Principal Tendered for
Name(s) and Address(es) of Number(s) Amount Exchange
Holder(s) of Old Note(s), exactly as (attach signed Represented (must be in integral
Name(s) appear(s) in records of the Book-Entry list if by multiples of
Depositary (Please Fill in, if Blank) necessary) Certificate(s)(1) $1,000)(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Total
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unless indicated in the column "Principal Amount Tendered For Exchange,"
any tendering Holder of Old Notes will be deemed to have tendered the
entire aggregate principal amount represented by the column labeled
"Aggregate Principal Amount Represented by Certificate(s)."
(2) The minimum payment tender is $1,000 in principal amount of Old Notes.
All other tenders must be in integral multiples of $1,000.
4
<PAGE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH
DTC, THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (FOR
USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED) ONLY):
Name of Tendering Institution:___________________________________________
Account Number:__________________________________________________________
Transaction Code Number:_________________________________________________
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING
(FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Holder of Note(s):_______________________________________________
Date of Execution of Notice of Guaranteed Delivery:______________________
Window Ticket Number (if available):_____________________________________
Name of Institution which Guaranteed Delivery:___________________________
Account Number (if delivered by book-entry transfer):____________________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:____________________________________________________________________
Address:_________________________________________________________________
_________________________________________________________________________
5
<PAGE>
<TABLE>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 6, 7 and 8) (See Instructions 1, 6, 7 and 8)
- ---------------------------------------------------- -----------------------------------------------------
<S> <C>
To be completed ONLY (i) if the New Notes To be completed ONLY if the New Notes issued
issued in exchange for Old Notes, certificates for in exchange for Old Notes, certificates for Old Notes
Old Notes in a principal amount not exchanged for in a principal amount not exchanged for New Notes,
New Notes, or Old Notes (if any) not tendered for or Old Notes (if any) not tendered for exchange, are
exchange, are to be issued to someone other than to be mailed or delivered (i) to someone other than
the undersigned or (ii) if Old Notes tendered by the undersigned or (ii) to the undersigned at an
book-entry transfer which are not exchanged are to address other than the address shown below the
be returned by credit to an account maintained at undersigned's signature.
the Book-Entry Transfer Facility.
Mail or delivered to:
Issue to:
Name________________________________________________ Name_________________________________________________
(Please Print) (Please Print)
Address_____________________________________________ Address______________________________________________
____________________________________________________ _____________________________________________________
(Zip Code) (Zip Code)
____________________________________________________ _____________________________________________________
(Taxpayer Identification No. or Social Security No.)
(Taxpayer Identification No. or Social Security No.)
Credit Old Notes not exchanged and delivered by
book-entry transfer to the Book-Entry Transfer
Facility (DTC) account set forth below:
____________________________________________________
(Account Number)
- ---------------------------------------------------- ------------------------------------------------------
</TABLE>
6
<PAGE>
BENEFICIAL OWNER(S)--RESIDENCE
STATE OF DOMICILE/PRINCIPAL PLACE PRINCIPAL AMOUNT OF PRIVATE
OF BUSINESS OF EACH BENEFICIAL NOTES HELD FOR ACCOUNT OF
OWNER OF OLD NOTES BENEFICIAL OWNER(S)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
BENEFICIAL OWNER(S)--PURCHASER STATUS
The beneficial owner of each of the Old Notes described herein is (check the
box that applies):
[ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act)
[ ] A non "U.S. person" (as defined in Regulation S of the Securities Act) that
purchased the Old Notes outside the United States in accordance with Rule
904 of the Securities Act
[ ] Other (describe)___________________________________________________________
___________________________________________________________________________
7
<PAGE>
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Pursuant to the offer by The Pepsi Bottling Group, Inc., a Delaware
corporation (the "Company") , upon the terms and subject to the conditions set
forth in the Prospectus dated [ ] __, 1999 (the "Prospectus") and this Letter
of Transmittal (the "Letter of Transmittal"), which together with the
Prospectus constitutes the Company's offer (the "Exchange Offer") to exchange
$1,000 principal amount of its 7% Series B Senior Notes due 2029 (the "New
Notes") for each $1,000 principal amount of its outstanding 7% Senior Notes
due 2029 (the "Old Notes"), the undersigned hereby tenders to the Company for
exchange the Old Notes indicated above.
By executing this Letter of Transmittal and subject to and effective upon
acceptance for exchange of the Old Notes tendered for exchange herewith, the
undersigned will have irrevocably sold, assigned, transferred and exchanged,
to the Company, all right, title and interest in, to and under all of the Old
Notes tendered for exchange hereby, and hereby will have appointed the
Exchange Agent as the true and lawful agent and attorney-in-fact (with full
knowledge that the Exchange Agent also acts as agent of the Company) of such
holder of Old Notes with respect to such Old Notes, with full power of
substitution to (i) deliver certificates representing such Old Notes, or
transfer ownership of such Old Notes on the account books maintained by DTC,
the Book-Entry Transfer Facility, (together, in any such case, with all
accompanying evidences of transfer and authenticity), to the Company, (ii)
present and deliver such Old Notes for transfer on the books of the Company
and (iii) receive all benefits and otherwise exercise all rights and incidents
of beneficial ownership with respect to such Old Notes, all in accordance with
the terms of the Exchange Offer. The power of attorney granted in this
paragraph shall be deemed to be irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that (i) the undersigned
is the owner; (ii) the undersigned has full power and authority to tender,
exchange, assign and transfer the Old Notes and (iii) that when such Old Notes
are accepted for exchange by the Company, the Company will acquire good and
marketable title thereto, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claims. The undersigned will,
upon receipt, execute and deliver any additional claims. The undersigned will,
upon receipt, execute and deliver any additional documents deemed by the
Exchange Agent or the Company to be necessary or desirable to complete the
exchange, assignment and transfer of the Old Notes tendered for exchange
hereby.
By tendering, each holder of Old Notes represents to the Company that (i)
the New Notes to be acquired by the undersigned in exchange for the Old Notes
tendered hereby are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is such holder,
(ii) neither the holder of Old Notes nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such New Notes, (iii) the holder and any such other person
acknowledge and agree that any person who is a broker-dealer registered under
the Exchange Act or is participating in the Exchange Offer for the purpose of
distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the New Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) the holder and any such other person understand that a secondary
resale transaction described in clause (iii) above and any resales of New
Notes obtained by the holder and any such
8
<PAGE>
other person in exchange for the Old Notes originally acquired by the
undersigned directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (v) neither the holder nor any such other person is an
"affiliate," within the meaning of Rule 405 under the Securities Act, of the
Company. If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a distribution of
New Notes. If the undersigned is a broker-dealer that will receive New Notes
for its own account in exchange for Old Notes that were acquired as a result
of market-making activities or other trading activities, it acknowledges that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the undersigned will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For purposes of the Exchange Offer, the Company will be deemed to have
accepted validly tendered Old Notes, when, as and if the Company gives oral or
written notice thereof to the Exchange Agent. Tenders of Old Notes for
exchange may be withdrawn at any time prior to 5:00 p.m. on the Expiration
Date. See "The Exchange Offer--Withdrawal Rights" in the Prospectus. Any Old
Notes tendered by the undersigned and not accepted for exchange will be
returned without expense to the undersigned at the address set forth above
unless otherwise indicated in the box above entitled "Special Delivery
Instructions" as promptly as practicable after the expiration or termination
of the Exchange Offer.
The undersigned acknowledges that the Company's acceptance of Old Notes
validly tendered for exchange pursuant to any one of the procedures described
in the section of the Prospectus entitled "The Exchange Offer" and in the
instructions hereto will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of
the Exchange Offer.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions," please return any Old Notes not tendered for exchange to the
undersigned. Similarly, unless otherwise indicated in the box entitled
"Special Delivery Instructions," please mail any certificates for Old Notes
not tendered or exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signature(s). In the
event that both "Special Issuance Instructions" and "Special Delivery
Instructions" are completed, please issue the certificates representing the
New Notes issued in exchange for the Old Notes accepted for exchange to, and
return any Old Notes not tendered for exchange or not exchanged to, the
person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" and "Special
Delivery Instructions" to transfer any Old Notes from the name of the holder
of Old Note(s) thereof if the Company does not accept for exchange any of the
Old Notes so tendered for exchange or if such transfer would not be in
compliance with any transfer restrictions applicable to such Old Note(s).
IN ORDER TO VALIDLY TENDER OLD NOTES FOR EXCHANGE, HOLDERS OF OLD NOTES
MUST COMPLETE, EXECUTE AND DELIVER THIS LETTER OF TRANSMITTAL.
Except as stated in the Prospectus, all authority herein conferred or
agreed to be conferred shall survive the death, incapacity, or dissolution of
the undersigned, and any obligation of the undersigned hereunder shall be
binding upon the heirs, personal representatives, successors and assigns of
the undersigned. Except as otherwise stated in the Prospectus, this tender for
exchange of Old Notes is irrevocable.
9
<PAGE>
SIGNATURE(S)
_______________________________________________________________________________]
SIGN HERE
(Signature(s) of Owner(s))______________________________________________________
Date: ___________________, 1999
Must be signed by the holder(s) of Old Notes exactly as name(s) appear(s) in
records of Book-Entry Depositary or on a security position listing or by
person(s) authorized to become Old Note holder(s) by certificates and
documents transmitted herewith. If signature is by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, please provide the
following information. (See Instruction 6).
Name(s):_______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Please Print)
Capacity (Full Title):_________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Include Zip Code)
Principal place of business (if different from address listed above):__________
_______________________________________________________________________________
_______________________________________________________________________________
(Including Zip Code)
Area Code and Telephone No.: ( )__________________________________________
Tax Identification or Social Security Nos:_____________________________________
GUARANTEE OF SIGNATURE(S)
(Signature(s) must be guaranteed if required by Instruction 1)
Authorized Signature:__________________________________________________________
Name and Title:________________________________________________________________
Name of Firm:__________________________________________________________________
(Please Print)
Dated: _______________, 1999
10
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by an institution
which is (1) a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., (2) a commercial bank or
trust company having an office or correspondent in the United States, or (3)
an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under
the Securities Exchange Act of 1934 which is a member of one of the following
recognized Signature Guarantee Programs (an "Eligible Institution"):
a. The Securities Transfer Agents Medallion Program (STAMP)
b. The New York Stock Exchange Medallion Signature Program (MSP)
c. The Stock Exchange Medallion Program (SEMP)
Signatures on this Letter of Transmittal need not be guaranteed (i) if
this Letter of Transmittal is signed by the holder(s) of the Old Notes
tendered herewith and such holder(s) have not completed the box entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (ii) if such Old Notes are
tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL
SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by holders
of Old Notes (i) if certificates are to be forwarded herewith or (ii) if
tenders are to be made pursuant to the procedures for tender by book-entry
transfer or guaranteed delivery set forth in the section of the Prospectus
entitled "The Exchange Offer." Certificates for all physically tendered Old
Notes or any timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation"), as well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof, and any other documents required by
this Letter of Transmittal, must be received by the Exchange Agent at its
address set forth on the cover of this Letter of Transmittal prior to the
Expiration Date. Holders of Old Notes who elect to tender Old Notes and (i)
whose Old Notes are not immediately available or (ii) who cannot deliver their
Old Notes and all other documents required hereby to the Exchange Agent on or
prior to the Expiration Date may tender their Old Notes according to the
guaranteed delivery procedures set forth in the Prospectus. Holders may have
such tender effected if: (a) such tender is made through an Eligible
Institution; (b) prior to the Expiration Date, the Exchange Agent has received
from such Eligible Institution a properly completed and duly executed Letter
of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of such Old Notes, the certificate
number(s) of such Old Notes and the amount of Old Notes tendered, stating that
tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificate(s) for all physically tendered Old Notes,
in proper form for transfer or a Book-Entry confirmation, as the case may be,
and all other documents required by this Letter of Transmittal, will be
deposited by such Eligible Institution with the Exchange Agent; and (c) the
certificate(s) for all physically tendered Old Notes in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, together with all
other documents required by this Letter of Transmittal, are received by
11
<PAGE>
the Exchange Agent within three New York Stock Exchange trading days after the
date of execution of the Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED
MAIL, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT
IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NEITHER THIS
LETTER OF TRANSMITTAL NOR ANY OLD NOTES SHOULD BE SENT TO THE COMPANY.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders of Old Notes, by execution of this Letter of Transmittal (or
facsimile hereof, if applicable), waive any right to receive notice of the
acceptance of their Old Notes for exchange.
3. INADEQUATE SPACE. If the space provided in the box entitled
"Description of Old Notes" above is inadequate, the certificate numbers and
principal amounts of the Old Notes being tendered should be listed on a
separate signed schedule affixed hereto.
4. WITHDRAWALS. A tender of Old Notes may be withdrawn at any time prior
to 5:00 p.m. on the Expiration Date by delivery of written notice of
withdrawal to the Exchange Agent at the address set forth on the cover of this
Letter of Transmittal or by compliance with the appropriate procedures of
DTC's Automated Tender Offer Program ("ATOP") system. To be effective, a
notice of withdrawal of Old Notes must (i) specify the name of the person who
tendered the Old Notes to be withdrawn and (ii) identify the Old Notes to be
withdrawn (if certificates for Old Notes have been delivered, including the
certificate number or numbers and principal amount of such Old Notes). Any
such notice of withdrawal must specify the name and number of the account at
DTC, the Book-Entry Transfer Facility, to be credited with the withdrawn Old
Notes. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, the executed notice of withdrawal, guaranteed by an
Eligible Institution (unless such Holder is an Eligible Institution must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will thereafter be deemed
not validly tendered for purposes of the Exchange Offer. Properly withdrawn
Old Notes may be retendered by following one of the procedures described in
the section of the Prospectus entitled "The Exchange Offer--Procedures for
Tendering Old Notes" at any time on or prior to the Expiration Date.
5. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in
integral multiples of $1,000 principal amount. If a tender for exchange is to
be made with respect to less than the entire principal amount of any Old Notes
held by any holder, fill in the principal amount of Old Notes which are
tendered for exchange in column (4) of the box entitled "Description of Old
Notes," as more fully described in the footnotes thereto. In case of a partial
tender for exchange, a new certificate, for the remainder of the principal
amount of the Old Notes, will be sent to such holder of Old Notes unless
otherwise indicated in the
12
<PAGE>
appropriate box on this Letter of Transmittal as promptly as practicable after
the expiration or termination of the Exchange Offer.
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL, ASSIGNMENT AND ENDORSEMENTS.
(a) The signature(s) of the holder of Old Notes on this Letter of
Transmittal must correspond with the name(s) of the holder as recorded in the
records of the Book-Entry Depositary without alternation, enlargement or any
change whatsoever.
(b) If tendered Old Notes are owned by two or more joint owners, all such
owners must sign this Letter of Transmittal.
(c) If any tendered Old Notes are owned in different names on several
certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal and any necessary or required
documents as there are different registrations or certificates.
(d) When this Letter of Transmittal is signed by the holder of the Old
Notes listed and transmitted hereby, no endorsements of Old Notes or powers of
attorney are required. If, however, Old Notes not tendered or not accepted,
are to be issued or returned to a person other than the holder of Old Notes,
then the Old Notes transmitted hereby must be endorsed or accompanied by a
properly completed power of attorney, in a form satisfactory to the Company,
in either case signed exactly as the name(s) of the holder of Old Notes
appear(s) in the records of the Book-Entry Depositary. Signatures on such Old
Notes or powers of attorney must be guaranteed by an Eligible Institution
(unless signed by an Eligible Institution).
(e) If this Letter of Transmittal or powers of attorney are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
proper evidence satisfactory to the Company of such person's authority to so
act must be submitted with this Letter of Transmittal.
(f) If this Letter of Transmittal is signed by a person or persons other
than the holder of Old Notes listed herein, this Letter of Transmittal must be
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the holders that appear on the security position
listing maintained by DTC. Signatures on such powers of attorney must be
guaranteed by an Eligible Institution (unless signed by an Eligible
Institution).
7. TRANSFER TAXES. Holders who tender their Old Notes will not be
obligated to pay transfer taxes in connection therewith. If, however, a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the holder or any other person)
will be payable by the tendering holder. If satisfactory evidence of payment
of such taxes or exemptions therefrom is not submitted with this Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
8. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If the New Notes are to be
issued, or if any Old Notes not tendered for exchange are to be issued or sent
to someone other than the holder of Old Notes or to an address other than that
shown above, the appropriate boxes on this Letter of Transmittal
13
<PAGE>
should be completed. Holders of Old Notes tendering Old Notes by book-entry
transfer may request that Old Notes not accepted be credited to such account
maintained at DTC as such holder of Old Notes may designate.
9. TAX IDENTIFICATION NUMBER. Federal income tax law generally requires
that a tendering holder whose Old Notes are accepted for exchange must provide
the Company (as payer) with such holder's correct Taxpayer Identification
Number ("TIN") on Substitute Form W-9 below, which in the case of a tendering
holder who is an individual, is his or her social security number. If the
Company is not provided with the current TIN or an adequate basis for an
exemption, such tendering holder may be subject to a $50 penalty imposed by
the Internal Revenue Service. In addition, delivery to such tendering holder
of New Notes may be subject to backup withholding in an amount equal to 31% of
all reportable payments made after the exchange. If withholding results in an
overpayment for taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding
and reporting requirements. See the enclosed Guidelines of Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines")
for additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth
below, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN) and that (i) the holder is exempt from backup withholding, or
(ii) the holder has not been notified by the Internal Revenue Service that
such holder is subject to a backup withholding as a result of a failure to
report all interest or dividends or (iii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup
withholding. If the tendering holder of Old Notes is a nonresident alien or
foreign entity not subject to backup withholding, such holder must give the
Company a completed Form W-8, Certificate of Foreign Status. These forms may
be obtained from the Exchange Agent. If the Old Notes are in more than one
name or are not in the name of the actual owner, such holder should consult
the W-9 Guidelines for information on which TIN to report. If such holder does
not have a TIN, such holder should consult the W-9 Guidelines for instructions
on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and
write "applied for" in lieu of its TIN. Note: Checking this box and writing
"applied for" on the form means that such holder has already applied for a TIN
or that such holder intends to apply for one in the near future. If such
holder does not provide its TIN to the Company within 60 days, backup
withholding will begin and continue until such holder furnishes its TIN to the
Company.
10. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of Old Notes tendered
for exchange will be determined by the Company in its sole discretion, which
determination shall be final and binding. The Company reserves the absolute
right to reject any and all tenders of any particular Old Notes not properly
tendered or to reject any particular Old Notes the acceptance of which might,
in the judgment of the Company or its counsel, be unlawful. The Company also
reserves the absolute right, in its sole discretion, to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer. The interpretation of the terms and conditions of the Exchange Offer as
to any particular Old Notes either before or after the Expiration Date
(including the Letter of Transmittal and instructions thereto) by the Company
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such reasonable period of time as the Company shall determine.
Neither the Company, the Exchange Agent nor any other person shall be under
any duty to give
14
<PAGE>
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived.
11. WAIVER OF CONDITIONS. The Company reserves the absolute right to
waive satisfaction of any or all conditions enumerated in the Prospectus.
12. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address listed below for further instructions:
The Chase Manhattan Bank
55 Water Street
Room 234, North Building
New York, New York 10041
Attention: Carlos Esteves
13. REQUESTS FOR INFORMATION OR ADDITIONAL COPIES. Requests for informatio
or for additional copies of the Prospectus and this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover of this Letter of Transmittal.
14. INCORPORATION OF LETTER OF TRANSMITTAL. This Letter of Transmittal
shall be deemed to be incorporated in and acknowledged and accepted by any
tender through DTC's ATOP system by any participant in DTC on behalf of itself
and the beneficial owners of any Old Notes so tendered.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF, IF
APPLICABLE) TOGETHER WITH CERTIFICATES, OR BOOK-ENTRY CONFIRMATION OR THE
NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
15
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(See Instruction 9)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: THE PEPSI BOTTLING GROUP, INC.
- -----------------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE Part 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT
Form W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW.
Department of the Treasury
Internal Revenue Service Social Security Number
OR
Employer Identification
Number
- -----------------------------------------------------------------------------------------------------------------------------------
Payer's Request for CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I Part 2--
Taxpayer Identification CERTIFY THAT
Number ("TIN") (1) the number shown on this form is my correct Taxpayer TIN Applied for [ ]
and Certification Identification Number (or I am waiting for a number
to be issued to me).
(2) I am not subject to backup withholding either because
(a) I am exempt from backup withholding, or (b) I have
not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup
withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me
that I am no longer subject to backup withholding, and
(3) any other information provided on this form is true and
correct.
SIGNATURE_______________________________ DATE ________
- -----------------------------------------------------------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been
notified by the IRS that you are subject to
backup withholding because of under reporting of interest or dividends on your
tax return and you have not been notified by the IRS that you are no longer
subject to backup withholding.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
- -------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification Number has
not been issued to me, and either (a) I have mailed or delivered an
application to receive a Taxpayer Identification Number to the appropriate
Internal Service Center or Social Security Administrative Office or (b) intend
to mail or deliver an application in the near future. I understand that if I
do not provide a Taxpayer Identification Number by the time of the exchange,
31 percent of all reportable payments made to me thereafter will be withheld
until I provide a number.
- ------------------------------------- -----------------------------
Signature Date
16
NOTICE OF GUARANTEED DELIVERY
with respect to
7% Senior Notes due 2029
of
THE PEPSI BOTTLING GROUP, INC.
Pursuant to the Prospectus dated [ ] ___, 1999
THIS FORM, OR ONE SUBSTANTIALLY EQUIVALENT HERETO, MUST BE USED BY ANY
HOLDER OF 7% SENIOR NOTES DUE 2029 (THE "OLD NOTES") OF THE PEPSI BOTTLING
GROUP, INC., A DELAWARE CORPORATION (THE "COMPANY"), WHO WISHES TO TENDER OLD
NOTES PURSUANT TO THE COMPANY'S EXCHANGE OFFER, AS DEFINED IN THE PROSPECTUS
DATED [ ]___, 1999 (THE "PROSPECTUS") AND (i) WHOSE OLD NOTES ARE NOT
IMMEDIATELY AVAILABLE OR (ii) FOR WHOM TIME WILL NOT PERMIT SUCH HOLDERS OF
OLD NOTES OR OTHER REQUIRED DOCUMENTS TO REACH THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE (AS DEFINED IN THE PROSPECTUS), OR THE PROCEDURE FOR
BOOK-ENTRY TRANSFER CANNOT BE COMPLETED ON A TIMELY BASIS. SUCH FORM MAY BE
DELIVERED BY FACSIMILE TRANSMISSION, MAIL OR HAND DELIVERY TO THE EXCHANGE
AGENT. SEE "THE EXCHANGE OFFER--GUARANTEED DELIVERY PROCEDURES" IN THE
PROSPECTUS.
Delivery to: The Chase Manhattan Bank, as Exchange Agent
By Registered or Certified Mail, Overnight Courier or by Hand:
The Chase Manhattan Bank
55 Water Street
Room 234, North Building
New York, New York 10041
Attention: Carlos Esteves
or
By Facsimile:
(212) 638-7375, or
(212) 344-9367
(For Eligible Institutions Only)
Confirm by Telephone:
(212) 638-0828
Delivery of this Notice of Guaranteed Delivery to an address other than
as set forth above or transmission via a facsimile number other than as set
forth above will not constitute a valid delivery.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to the Company upon the terms and subject
to the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes or Book-Entry Interests in Old Notes, as applicable, specified below
pursuant to the guaranteed delivery procedures set forth under the caption
"The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. By so
tendering, the undersigned does hereby make, at and as of the date hereof, the
representations and warranties of a tendering holder of Old Notes set forth in
the Letter of Transmittal. The undersigned hereby tenders the Old Notes listed
below:
CERTIFICATE NUMBERS
(IF AVAILABLE) PRINCIPAL AMOUNT TENDERED
- --------------------------------- ---------------------------------------
- --------------------------------- ---------------------------------------
- --------------------------------- --------------------------------------
All authority herein conferred or agreed to be conferred shall survive
the death, incapacity, or dissolution of the undersigned and every obligation
of the undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned.
If Old Notes will be tendered by SIGN HERE
book-entry transfer:
Name of Tendering Institution: .......................................
Signature(s)
.....................................
The Depository Trust Company
Account No.:.......................... .......................................
Name(s) (Please Print)
.......................................
Address
.......................................
Zip Code
.......................................
Area Code and Telephone Number
Date:...................................
2
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a participant in a Recognized Signature Guarantee
Medallion Program, guarantees deposit with the Exchange Agent of the Letter of
Transmittal (or facsimile thereof or Agent's Message in lieu thereof),
together with the Old Notes tendered hereby in proper form for transfer, or
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at The Depository Trust Company, pursuant to the procedure for
book-entry transfer set forth in the Prospectus, and any other required
documents, all by 5:00 p.m., New York City time, on the third New York Stock
Exchange trading day following the date of execution this Notice of Guaranteed
Delivery.
SIGN HERE
.......................................
Name of Firm
.......................................
Authorized Signature
.......................................
Name (Please Print)
.......................................
.......................................
Address
.......................................
Zip Code
.......................................
Area Code and Telephone No.
Date:..................................
DO NOT SEND CERTIFICATE FOR OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF
CERTIFICATES FOR OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL.
3
<PAGE>
INSTRUCTIONS
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by
the Exchange Agent at one of its addresses set forth on the cover hereof prior
to 5:00 p.m. on the Expiration Date. The method of delivery of this Notice of
Guaranteed Delivery and all other required documents to the Exchange Agent is
at the election and risk of the Holder but, except as otherwise provided
below, the delivery will be deemed made only when actually received by the
Exchange Agent. Instead of delivery by mail, it is recommended that holders
use an overnight or hand delivery service, properly insured. If such delivery
is by mail, it is recommended that the Holder use properly insured, registered
mail with return receipt requested. For a full description of the guaranteed
delivery procedures, see the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures." In all cases, sufficient time should
be allowed to assure timely delivery. No Notice of Guaranteed Delivery should
be sent to the Company.
2. SIGNATURE ON THIS NOTICE OF GUARANTEED DELIVERY; GUARANTEE OF
SIGNATURES. If this Notice of Guaranteed Delivery is signed by the holder(s)
of the Old Notes referred to herein, then the signature must correspond
exactly with the name(s) of the holder(s) that appear on the security position
listing maintained by the Depositary.
If this Notice of Guaranteed Delivery is signed by a person other than
the holder(s) of any Old Notes listed, this Notice of Guaranteed Delivery must
be accompanied by appropriate powers of attorney, in either case signed
exactly as the name or names of the holder(s) that appear on the security
position listing maintained by the Depositary.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of such person's authority so to act must be
submitted with this Notice of Guaranteed Delivery.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
Exchange Offer or the procedure for consenting and tendering as well as
requests for assistance or for additional copies of the Prospectus, the Letter
of Transmittal and this Notice of Guaranteed Delivery, may be directed to the
Exchange Agent at the address set forth on the cover hereof or to your broker,
dealer, commercial bank or trust company.
4
<TABLE> <S> <C>
<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> 1076405
<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> (238)
<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-BASIC> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Pepsi Bottling Group, Inc. condensed combined financial statements for the 12
weeks ended March 20, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 1076405
<NAME> The Pepsi Bottling Group, Inc.
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-25-1998
<PERIOD-END> Mar-20-1998
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 870
<ALLOWANCES> 49
<INVENTORY> 312
<CURRENT-ASSETS> 1,337
<PP&E> 4,469
<DEPRECIATION> 2,391
<TOTAL-ASSETS> 7,414
<CURRENT-LIABILITIES> 1,005
<BONDS> 3,322
0
0
<COMMON> 0
<OTHER-SE> (227)
<TOTAL-LIABILITY-AND-EQUITY> 7,414
<SALES> 1,452
<TOTAL-REVENUES> 1,452
<CGS> 835
<TOTAL-COSTS> 835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (5)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (3)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Bottling Group, LLC 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> 1087835
<NAME> Bottling Group, LLC
<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> 1,223
<PP&E> 4,416
<DEPRECIATION> 2,361
<TOTAL-ASSETS> 7,227
<CURRENT-LIABILITIES> 1,016
<BONDS> 61
0
0
<COMMON> 0
<OTHER-SE> 3,283
<TOTAL-LIABILITY-AND-EQUITY> 7,227
<SALES> 7,041
<TOTAL-REVENUES> 7,041
<CGS> 4,181
<TOTAL-COSTS> 4,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 157
<INCOME-PRETAX> (128)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (131)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Bottling Group, LLC condensed combined financial statements for the 12
weeks ended March 20, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 1087835
<NAME> Bottling Group, LLC
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-25-1998
<PERIOD-END> Mar-20-1998
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 870
<ALLOWANCES> 49
<INVENTORY> 312
<CURRENT-ASSETS> 1,240
<PP&E> 4,469
<DEPRECIATION> 2,391
<TOTAL-ASSETS> 7,317
<CURRENT-LIABILITIES> 996
<BONDS> 2,322
0
0
<COMMON> 0
<OTHER-SE> 3,439
<TOTAL-LIABILITY-AND-EQUITY> 7,317
<SALES> 1,452
<TOTAL-REVENUES> 1,452
<CGS> 835
<TOTAL-COSTS> 835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 11
<INCOME-TAX> 0
<INCOME-CONTINUING> 11
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
