FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934 For the quarterly period ended March 20, 1999 (12 weeks)
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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Commission file number 1-14893
THE PEPSI BOTTLING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4038356
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(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
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(Address of principal executive offices) (Zip Code)
914-767-6000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES NO X
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Number of shares of Capital Stock outstanding as of April 17, 1999:
155,000,000
THE PEPSI BOTTLING GROUP, INC.
INDEX
Page No.
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Part I Financial Information
Item 1. Financial Statements
Condensed Combined Statements of Operations-
12 weeks ended March 21, 1998 and March 20, 1999 2
Condensed Combined Statements of Cash Flows -
12 weeks ended March 21, 1998 and March 20, 1999 3
Condensed Combined Balance Sheets -
December 26, 1998, March 20, 1999 and Pro Forma
March 20, 1999 4
Notes to Condensed Combined Financial Statements 5-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Independent Accountants' Review Report 17
Part II Other Information and Signatures
Item 6. Exhibits and Reports on Form 8-K 18
-1-
PART I - FINANCIAL INFORMATION
Item 1.
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
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Gross Profit .......................................... 563 617
Selling, delivery and administrative expenses ......... 524 575
------- -------
Operating Income 39 42
Interest expense, net 52 46
Foreign currency loss - 1
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Loss before income taxes .............................. (13) (5)
Income tax benefit .................................... (7) (2)
------- -------
Net Loss .............................................. $ (6) $ (3)
======= =======
Weighted Average Basic and Diluted Shares Outstanding 55 55
Basic and Diluted Loss Per Share ...................... $ (.11) $ (.06)
Pro Forma Weighted Average Basic and Diluted
Shares Outstanding (see note 8) .................... 155 155
Pro Forma Basic and Diluted Loss Per Share (see note 8) $ (.03) $ (.02)
See accompanying notes to Condensed Combined Financial Statements.
-2-
<TABLE>
<CAPTION>
THE PEPSI BOTTLING GROUP, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
in millions, unaudited
12 Weeks Ended
March 21, March 20,
1998 1999
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Cash Flows - Operations
<S> <C> <C>
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)
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Net change in operating working capital ............................. (74) (55)
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Net Cash Provided by Operations.............................................. 50 63
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Cash Flows - Investments
Capital expenditures...................................................... (77) (82)
Acquisitions of bottlers and investments in affiliates.................... (140) (104)
Other, net................................................................ (10) 3
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Net Cash Used by Investments................................................. (227) (183)
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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
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Net Cash Provided by Financing............................................... 174 99
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Effect of Exchange Rate Changes on Cash and Cash Equivalents................. - (1)
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Net Decrease in Cash and Cash Equivalents.................................... (3) (22)
Cash and Cash Equivalents - Beginning of Period.............................. 86 36
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Cash and Cash Equivalents - End of Period.................................... $ 83 $ 14
====== ======
See accompanying notes to Condensed Combined Financial Statements.
</TABLE>
-3-
<TABLE>
<CAPTION>
THE PEPSI BOTTLING GROUP, INC.
CONDENSED COMBINED BALANCE SHEETS
in millions, except share amounts
Pro Forma
(Unaudited) (Unaudited)
December March 20, March 20,
26,1998 1999 1999
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ASSETS (See note 8)
Current Assets
<S> <C> <C>
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
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Total Assets ........................................... $ 7,322 $ 7,414 $ 7,447
======= ======= =======
LIABILITIES AND SHAREHOLDERS' 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 -
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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 -
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Total Liabilities ...................................... 7,560 7,641 5,952
Shareholders' 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)
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Total Shareholders' Equity ............................. (238) (227) 1,495
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Total Liabilities and Shareholders' Equity ......... $ 7,322 $ 7,414 $ 7,447
======= ======= =======
See accompanying notes to Condensed Combined Financial Statements.
</TABLE>
-4-
THE PEPSI BOTTLING GROUP, INC.
unaudited
tabular dollars in millions, except per share data
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
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 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 PBG's Registration Statement on Form S-1,
which was declared effective on March 30, 1999. 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.
-5-
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:
- Jeff Bottling Company, Inc. in New York in January.
- Princetonco and Marionco with territories in Virginia and West
Virginia in March.
During 1998, the following acquisitions occurred for an aggregate cash purchase
price of $546 million:
- The remaining 75% interest in our Russian bottling joint venture,
Pepsi International Bottlers, LLC in February.
- Gray Beverages, Inc. in Canada in May.
- 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
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Net revenues................................................. $ 1,396
=======
Net loss..................................................... $ (8)
=======
Pro forma loss per share (see "Loss per Share" in note 8).... $ (.05)
=======
-6-
<TABLE>
<CAPTION>
Note 4 - Inventories
December March 20,
26, 1998 1999
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<S> <C> <C>
Raw materials and supplies......................... $ 120 $ 111
Finished goods..................................... 176 201
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$ 296 $ 312
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Note 5 - Property, Plant and Equipment, net
December March 20,
26, 1998 1999
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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
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4,416 4,469
Accumulated depreciation........................ (2,361) (2,391)
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$ 2,055 $ 2,078
======= =======
Note 6 - Long-Term Debt and Interest Expense
December March 20,
26, 1998 1999
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5 5/8% notes due 2009........................... $ - $ 1,300
5 3/8% notes due 2004........................... - 1,000
7% notes due 2029............................... - 1,000
Other........................................... 173 128
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173 3,428
Less current maturities of long-term debt....... 112 106
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$ 61 $ 3,322
======= =======
Allocation of PepsiCo long-term debt............ $ 3,300 $ -
</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 Group, LLC and are
guaranteed by PepsiCo. PBG issued the 7% senior notes, which are guaranteed by
Bottling Group, 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%.
-7-
<TABLE>
<CAPTION>
Note 7 - Comprehensive Income (Loss)
12 Weeks Ended
March 21, March 20,
1998 1999
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<S> <C> <C>
Net Loss ............................................... $ (6) $ (3)
Currency translation adjustment ........................ (1) 11
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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
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Net revenues ........................................... $ 1,340 $ 1,452
Cost of sales .......................................... 777 835
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Gross profit ........................................... 563 617
Selling, delivery and administrative expenses .......... 524 575
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Operating income ....................................... 39 42
Interest expense, net .................................. 46 46
Foreign currency loss .................................. - 1
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Loss before income taxes and minority interest ......... (7) (5)
Income tax benefit ..................................... (4) (2)
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Net loss before minority interest ...................... (3) (3)
Minority interest ...................................... (1) (1)
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Net loss ............................................... $ (4) $ (4)
======= =======
Basic and diluted loss per share ....................... $ (0.03) $ (0.02)
======= =======
Weighted average shares outstanding .................... 155 155
</TABLE>
-8-
Refinancing
On February 9, 1999, Bottling Group, 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 Group, LLC. In addition, PBG incurred $40 million of deferred
financing costs in conjunction with the issuance of this debt.
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 Group, LLC, PepsiCo
contributed bottling businesses and assets used in the bottling businesses to
PBG which will be held by Bottling Group, LLC. As a result of the contribution
of the assets, PBG owns 92.9% of Bottling Group, 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 Group, 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
<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
Amounts paid to third parties for income taxes were not significant in the
periods presented.
</TABLE>
-9-
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.
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.
-10-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The Business
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. 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 annual volume is sold in the United States and
Canada.
General
Management's discussion and analysis should be read in conjunction with
PBG's Condensed Combined Financial Statements and accompanying footnotes along
with the cautionary statements at the end of this section.
Management believes that constant territory performance results are better
indicators of operating trends and performance. Constant territory operating
results 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. 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.
Results of Operations
- ---------------------
Overview
EBITDA, which is computed as operating income plus the sum of depreciation
and amortization, is a key indicator 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
Princetonco and Marionco, whose territories are in Virginia and West Virginia.
-11-
EBITDA
Constant
Reported Territory
Change Change
------ ------
Growth....................................... 7% 5%
EBITDA is used by management as an important indicator of operating
performance. It is not, however, required under GAAP and should not be
considered an alternative to measurements required by GAAP such as net income or
cash flows.
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.
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.
-12-
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.
Liquidity and Capital Resources
- -------------------------------
Cash Flows
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.
-13-
Euro
- ----
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between existing currencies and one common
currency, the Euro. Beginning in January 2002, new Euro-denominated bills and
coins will be issued, and existing 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 the 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
established teams to identify and correct Year 2000 issues. We have engaged IBM
to help set testing strategy and complete some of the offsite remediation.
Information technology systems with non-compliant code are expected to be
modified or replaced with systems that are Year 2000 compliant. Similar actions
are being taken with respect to systems embedded in manufacturing and other
facilities. The teams are also charged with investigating the Year 2000
readiness of suppliers, customers and other third parties and with developing
contingency plans where necessary.
Key information technology systems have been inventoried and assessed for
compliance, and detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are well underway with
approximately 91% of the systems already compliant. This percentage is expected
to increase to 97% in the second quarter and 100% in the third quarter.
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.
-14-
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.
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.
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 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.
-15-
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.
Cautionary Statements
- ---------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute `forward looking
statements' as defined by the Private Securities Litigation Reform Act of 1995.
These `forward looking statements' are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. Among the events and uncertainties that could
adversely affect future periods are lower-than-expected net pricing resulting
from marketplace competition, material changes from expectations in the cost of
raw materials and ingredients, an inability to achieve the expected timing for
returns on cold drink equipment and employee infrastructure expenditures,
material changes in expected levels of marketing support payments from PepsiCo,
Inc., an inability to meet projections for performance in newly acquired
territories, unexpected costs and business risks associated with Year 2000
compliance by PBG, its customers and/or suppliers, unexpected costs associated
with conversion to the common European currency and unfavorable interest rate
and currency fluctuations. We caution that in addition to the above cautionary
statements, all forward-looking statements contained herein should be read in
conjunction with the detailed cautionary statements found on pages eleven to
eighteen of PBG's Registration Statement on Form S-1, which was declared
effective on March 30, 1999.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosures made on this matter in our
Registration Statement on Form S-1, which was declared effective on March 30,
1999.
-16-
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 not presented herein; 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
-17-
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
See Index to Exhibits on page 20.
-18-
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Registrant)
Date: May 12, 1999 Peter A. Bridgman
- ------------------ -----------------
Senior Vice President and
Controller
Date: May 12, 1999 John T. Cahill
- ------------------ --------------
Executive Vice President and
Chief Financial Officer
-19-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
Exhibit 27.1 Financial Data Schedule 12 weeks ended March 20, 1999
Exhibit 27.2 Financial Data Schedule 12 weeks ended March 21, 1998
-20-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE PEPSI
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<PERIOD-END> MAR-21-1998
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<LOSS-PROVISION> 3
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