PEPSIAMERICAS 2003 FORM 10-K

10-K 1 pas10k-2003.htm PEPSIAMERICAS, INC. 2003 FORM 10-K PEPSIAMERICAS 2003 FORM 10-K Index

2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

/x/	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 3, 2004.

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

Commission File Number 001-15019

PEPSIAMERICAS, INC.

(Exact name of registrant as specified in its charter)

Delaware		13-6167838
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4000 Dain Rauscher Plaza, 60 South Sixth Street Minneapolis, Minnesota		55402
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code (612) 661-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, $0.01 par value

Each class is registered on:

Preferred Stock, $0.01 par value

New York Stock Exchange

Preferred Share Purchase Rights

Pacific Stock Exchange

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 and (2) has been subject to such filing requirements for the past 90 days. Yes / x / No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes / x / No / /

As of June 28, 2003, the aggregate market value of the registrant's common stock held by non-affiliates was $1,815.1 million (based on the closing sale price of the registrant's common stock as reported on the New York Stock Exchange). The number of shares of common stock outstanding at that date was 144,054,186 shares.

The number of shares of common stock outstanding as of March 1, 2004 was 145,851,322.

DOCUMENTS INCORPORATED BY REFERENCE

Information required by Part III of this document is incorporated by reference to specified portions of the registrant's definitive proxy statement for the annual meeting of shareholders to be held April 22, 2004.

Index

PART I

Item 1. Business.

General

On November 30, 2000, Whitman Corporation merged with PepsiAmericas, Inc. (the “former PepsiAmericas”), and in January 2001, the combined entity changed its name to PepsiAmericas, Inc. (collectively referred to as “PepsiAmericas,” “we,” “our” and “us”). We manufacture, distribute and market a broad portfolio of beverage products in the United States ("U.S."), Central Europe and the Caribbean.

We account for approximately 19 percent of all Pepsi-Cola beverage products sold in the U.S. We serve a significant portion of an 18 state region, primarily in the Midwest. Outside the U.S., we serve Central European and Caribbean markets, including Poland, Hungary, the Czech Republic, Republic of Slovakia, Puerto Rico, Jamaica, Barbados, the Bahamas, and Trinidad and Tobago. We serve areas with a total population of more than 118 million people.

We sell a variety of brands that we bottle under licenses from PepsiCo, Inc. (“PepsiCo”) or PepsiCo joint ventures which accounted for approximately 92 percent of our total volume in 2003. In some territories, we manufacture, package, sell and distribute products under brands licensed by companies other than PepsiCo, and in some territories we distribute our own brands, such as the Toma brands in Central Europe (see “Products and Packaging”).

Our primary distribution channels for the retail sale of our products are supermarkets, mass merchandisers, vending machines, convenience stores, gas stations, fountain channels, such as restaurants or cafeterias, and other channels, such as small grocery stores, drug stores and educational institutions. Our fastest growing channels have been mass merchandisers and supermarkets.

We deliver our products through these channels using primarily a direct-to-store delivery system. In our exclusive territories, we are responsible for selling products, providing timely service to our existing customers and identifying and obtaining new customers. We are also responsible for local advertising and marketing, as well as the execution in our 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 fountain equipment and cold drink vending machines and coolers, as well as investment in trucks and warehouse facilities.

Our annual, quarterly and current reports, and all amendments to those reports, are included on our website at www.pepsiamericas.com, and are made available, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our corporate governance guidelines, code of business conduct and ethics and key committee charters are available on our website and in print upon written request to PepsiAmericas, Inc., 4000 Dain Rauscher Plaza, 60 South Sixth Street, Minneapolis, Minnesota 55402, Attention: Investor Relations.

Relationship with PepsiCo

PepsiCo held, directly and indirectly, 39.9 percent of PepsiAmericas’ outstanding common stock as of fiscal year end 2003.

While we manage all phases of our operations, including pricing of our products, PepsiAmericas and PepsiCo exchange production, marketing and distribution information, benefiting both companies’ respective efforts to lower costs, improve productivity and increase product sales.

We have entered into a number of significant transactions and agreements with PepsiCo, and we expect to enter into additional transactions and agreements with PepsiCo in the future.

We purchase concentrate from PepsiCo and manufacture, package, distribute and sell carbonated and non-carbonated beverages under various bottling agreements with PepsiCo. These agreements give us the right to manufacture, package, sell and distribute beverage products of PepsiCo in both bottles and cans and fountain syrup in specified territories. These agreements provide PepsiCo with the ability to set prices of concentrates, as well as the terms of payment and other terms and conditions under which we purchase such concentrates. See “Franchise Agreements” for discussion of significant agreements. We also purchase finished beverage products from PepsiCo, as well as products from certain of its affiliates.

Other significant transactions and agreements with PepsiCo include arrangements for marketing, promotional and advertising support; manufacturing services related to PepsiCo’s national account customers; and procurement of raw materials (see "Related Party Transactions" in Item 7 and Note 19 to the Consolidated Financial Statements).

Index

Products and Packaging

Our portfolio of beverage products includes some of the best recognized trademarks in the world. Our three largest brands in terms of volume are Pepsi, Diet Pepsi and Mountain Dew. 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, as well as some of our own brands. Our principal beverage brands are listed below:

U.S. Operations

Brands Licensed from PepsiCo

Brands Licensed from PepsiCo
Joint Ventures

Brands Licensed from Others

Pepsi	Lipton Teas	Dr Pepper
Diet Pepsi	Starbucks Frappuccino	Diet Dr Pepper
Mountain Dew		Red Fusion
Diet Mountain Dew		Hawaiian Punch
Mountain Dew Code Red		Citrus Hill
Diet Mountain Dew Code Red		Avalon
Mountain Dew Amp		Sunny Delight
Mountain Dew Live Wire		Juice Tyme
Caffeine Free Pepsi		Seagram's
Caffeine Free Diet Pepsi		Nesbitt Lemonade
Pepsi Twist		Crush
Diet Pepsi Twist		Squirt
Pepsi One		Sunkist
Pepsi Blue		Canada Dry
Pepsi Vanilla		Schweppes
Diet Pepsi Vanilla		All Sport
Wild Cherry Pepsi		Yoo-Hoo
Sierra Mist		Klarbrunn
Diet Sierra Mist
Slice Flavors
Mug Root Beer
Aquafina
Aquafina Essentials
FruitWorks
Dole
South Beach (SoBe)
Tropicana Juice Drinks
Gatorade

Central Europe Operations

Brands Licensed from PepsiCo

Company-Owned Brands

Brands Licensed from Others

Pepsi	Toma (carbonated soft drinks,	Schweppes Sodas, Tonic and
Pepsi Max	iced teas, juices and waters)	Water
Pepsi Light	Switezianka Water	Dr Pepper
Mirinda	JU's juices	Canada Dry Ginger Ale
Seven-Up	Kristalykeserv soft drinks	Hortex Fruit Juices
Kristalyviz	Kristalyszolo	Rauch Iced Tea and Fruit Juices
Aqua Minerale	Soda water	Lipton Iced Teas
Pepsi Twist		American Bull - Energy Drink
Pepsi Twist Light		Korunni Water
Pepsi Blue
Tropicana Twister
Gatorade
Mountain Dew
Wild Cherry Pepsi

Index

Caribbean Operations

Brands Licensed from PepsiCo

Brands Licensed from PepsiCo
Joint Ventures

Brands Licensed from Others

Pepsi	Lipton Brisk	Seven-Up**
Diet Pepsi	Lipton Iced Tea	Diet Seven-Up**
Caffeine Free Pepsi		Juice Tyme
Caffeine Free Diet Pepsi		Sunkist
Pepsi One		Schweppes
Pepsi Blue		White Rock Mixers***
Wild Cherry Pepsi		Welch Foods Fruit Juice
Pepsi Twist		FUZE
Diet Pepsi Twist		Fizz
Pepsi X		Aquapure
Mountain Dew		Guarana Antarctica
Diet Mountain Dew		Welchs CSD**
Mountain Dew Code Red		Peardrax****
Mug Root Beer		Cydrax****
Aquafina		Mauby
Evervess Mixers		Malta
Cherry Seven-Up
Slice
Ting*
Mirinda
Desnoes & Geddes*
Junkamoo
JU-C
Ginger Beer
Tropicana
Fruit Works
Gatorade
South Beach (SoBe)

*	Brands owned by PepsiCo in the Caribbean and owned by us outside the Caribbean.
**	Brands owned by Cadbury Schweppes in Puerto Rico and owned by PepsiCo elsewhere in the Caribbean.
***	Brand owned by White Rock Beverages USA.
****	Brands owned by Whiteway, UK.

In addition to the above brands, we began distribution of snack food products in Trinidad and Tobago pursuant to a joint-venture agreement with Frito-Lay, Inc., a subsidiary of PepsiCo, in 2003.

Our beverages are available in different package types, including but not limited to, two-liter bottles; multi-pack and single serve offerings of one-liter, half-liter, 20-ounce and 24-ounce bottles; and multi-packs of 6, 12, 18 and 24 cans. Syrup is also sold in larger packages for fountain use.

Territories

We currently have the exclusive rights to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of 18 states, primarily in the Midwest region of the United States, and in Poland, Hungary, the Czech Republic, Republic of Slovakia, Puerto Rico, Jamaica, Barbados, the Bahamas, and Trinidad and Tobago. We derive approximately 85 percent of our revenue from U.S. operations and approximately 15 percent of our revenue from non-U.S. operations (see Note 18 to the Consolidated Financial Statements).

Index

Sales, Marketing and Distribution

Our business is highly seasonal and subject to weather conditions, which have a significant impact on sales. Our sales and marketing approach varies by region and channel to respond to the unique local competitive environment. In the U.S., the channels with larger stores can accommodate a number of beverage suppliers and, therefore, marketing efforts tend to focus on increasing the amount of shelf space and the number of displays in any given outlet. In locations where our products are purchased for immediate consumption, marketing efforts are aimed not only at securing the account but also on providing equipment that facilitates the sale of cold product, such as vending machines, visi-coolers and fountain equipment.

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 higher and more stable selling prices. For example, a packaged product that is sold cold for immediate consumption generally has better margins than a product sold to take home. This cold drink channel includes vending machines and coolers. The full service vending channel has the highest gross margin of any distribution channel, because it eliminates the middleman and enables us to establish the retail price. We own a majority of the vending machines used to dispense our products. We will continue to invest in vending machines in the near term, specifically those dispensing product in 20-ounce polyethylene terephthalate ("PET") bottles, as well as to refurbish certain cold drink equipment in our various centers in the U.S. and Puerto Rico.

In the U.S., we distribute directly to a majority of customers in our licensed territories through a direct-to-store distribution system. Our sales force is key to our selling efforts as they continually interact with our customers to promote and sell our products. We are migrating to a pre-sell system in a significant portion of our U.S. markets. In a pre-sell environment, account sales managers call accounts in advance to determine how much product and promotional material to deliver. We have completed the conversion in approximately 60 percent of our markets at the end of 2003, and expect to be substantially complete with our conversion to a pre-sell system in 2004.

In the U.S., this direct-to-store distribution system is used for all packaged goods and some fountain accounts. We have the exclusive right to sell and deliver fountain syrup to local customers in our territories. We have a number of managers who are responsible for calling on prospective fountain accounts, developing relationships, selling products and interacting with customers on an ongoing basis. We also manufacture and distribute fountain products and provide fountain equipment service to PepsiCo customers in certain of our territories in accordance with various agreements.

In 2003, we opened a telephone sales center (“Tel-Sell”) in Fargo, North Dakota to service our small format accounts that do not warrant in-person sales representatives under our new pre-sell environment. This Tel-Sell center, called Pepsi Connect, will provide the level of service these customers need in a cost effective manner to us. In addition, we expect that Pepsi Connect will increase volume and fill distribution voids in those customers it services. The current plan is to bring locations onto Pepsi Connect in conjunction with the roll out of our next generation selling systems and it is expected that all locations will be on Pepsi Connect by the end of 2004, except for the legacy PepsiAmericas locations. Those locations will be brought onto Pepsi Connect upon completion of the integration of their sales platforms onto our next generation selling system.

In the non-U.S. markets, we use both direct-to-store distribution systems and third party distributors. In the less developed non-U.S. markets, small retail outlets represent a large percentage of the market. However, with the emergence of larger, more sophisticated retailers in Central Europe, the percentage of total soft drinks sold to supermarkets and other larger accounts is increasing. In order to leverage the existing infrastructure in Central Europe and the Caribbean, we continue to migrate to an alternative sales and distribution strategy in which third party distributors are used in certain locations in an effort to reduce delivery costs and expand our points of distribution.

Franchise Agreements

We conduct our business primarily under agreements with PepsiCo. These agreements with PepsiCo give us the exclusive rights to produce, market and distribute Pepsi-Cola products in authorized containers and to use the related trade names and trademarks in the specified territories. These agreements require us, among other things, to purchase our concentrate for cola beverages solely from PepsiCo, at prices established by PepsiCo, and to promote diligently the sale and distribution of Pepsi brand products.

Our Pepsi franchise agreements are issued in perpetuity, subject to termination only upon failure to comply with their terms. We also have similar arrangements with other companies whose brands we produce and distribute.

Set forth below is a summary of the significant PepsiCo franchise agreements to which we are a party.

Index

Terms of the Master Bottling Agreement. The Master Bottling Agreement (the “Bottling Agreement”) under which we manufacture, package, sell and distribute cola beverages bearing the Pepsi-Cola and Pepsi trademarks was entered into in November 2000. The Bottling Agreement gives us the exclusive and perpetual right to distribute cola beverages for sale in specified territories in authorized containers. The Bottling Agreement provides that we will purchase our entire requirements of concentrates for the cola beverages from PepsiCo at prices, and on terms and conditions, determined from time to time by PepsiCo. PepsiCo may determine from time to time what types of containers to authorize for us to use. PepsiCo has no rights under the Bottling Agreement with respect to the prices at which we sell our products.

Under the Bottling Agreement we are obligated to:

(1)

maintain plants, equipment, staff and facilities capable of manufacturing, packaging and distributing the beverages in the authorized containers, and in compliance with all requirements in sufficient quantities, to meet the demand of the territories;

(2)

make necessary adaptations to equipment to permit the successful introduction and delivery of products in sufficient quantities;

(3)

undertake adequate quality control measures prescribed and allow PepsiCo representatives to inspect all equipment and facilities to ensure compliance;

(4)

push vigorously the sale of the beverages throughout the territories;

(5)

increase and fully meet the demand for the cola beverages in our territories using 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 Bottling Agreement by us.

The Bottling Agreement requires that we meet with PepsiCo on an annual basis to discuss the business plan for the following three years. At these meetings we are obligated to present the plans necessary to perform the duties required under the Bottling Agreement. These plans include marketing, management, advertising and financial plans. Subsequently, on a quarterly basis, we are required to report on the status of the implementation of the approved plans. If we carry out our annual plan in all material respects, we will be deemed to have satisfied our obligations according to the Bottling Agreement.

The 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 Bottling Agreement also imposes requirements with respect to the use of PepsiCo's trademarks, authorized containers, packaging and labeling.

PepsiCo can terminate the Bottling Agreement if any of the following occur:

(1)

we become insolvent, file for bankruptcy or adopt a plan of dissolution or liquidation;

(2)

any person or group of persons, without PepsiCo's consent, acquires the right of beneficial ownership, which is more than 15 percent of any class of voting securities of PepsiAmericas, and if that person or group of persons does not terminate that ownership within 30 days;

(3)

any disposition of any voting securities of one of our bottling subsidiaries or substantially all of our bottling assets without PepsiCo's consent;

(4)

we do not make timely payments for concentrate purchases;

(5)

we fail to meet quality control standards on products, equipment and facilities; or

(6)

we fail to present or carry out approved plans in all material respects and do not rectify the situation within 120 days.

We are prohibited from assigning, transferring or pledging the Bottling Agreement without PepsiCo’s prior consent.

Index

Terms of the Master Fountain Syrup Agreement. The Master Fountain Syrup Agreement (the “Syrup Agreement”) grants us the exclusive right to manufacture, sell and distribute fountain syrup to local customers in our territories. The Syrup Agreement also grants us the right to act as a manufacturing and delivery agent for national accounts within our territories that specifically request direct delivery without using a middleman. In addition, PepsiCo may appoint us to manufacture and deliver fountain syrup to national accounts that elect delivery through independent distributors. Under the Syrup Agreement, we have the exclusive right to service fountain equipment for all of the national account customers within our territories. The Syrup Agreement provides that the determination of whether an account is local or national is at the sole discretion of PepsiCo.

The 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 Syrup Agreement, which we entered into in November 2000, 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 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. If PepsiCo terminates the Syrup Agreement without cause, PepsiCo is required to pay us the fair market value of our rights thereunder. The Syrup Agreement will terminate if PepsiCo terminates the Bottling Agreement.

Advertising

We obtain the benefits of national advertising campaigns conducted by PepsiCo and the other beverage companies whose products we sell. We supplement PepsiCo’s national ad campaign by purchasing advertising in our local markets, including the use of television, radio, print and billboards. We also make extensive use of in-store, point-of-sale displays to reinforce the national and local advertising and to stimulate demand.

Raw Materials and Manufacturing

Expenditures for concentrate and packaging constitute our largest individual raw material costs. We buy various soft drink concentrates from PepsiCo and other soft drink companies and mix them with other ingredients in our plants, 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 8-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 purchase all raw materials and supplies, other than concentrates, from multiple suppliers. PepsiCo acts as our agent for the purchase of such raw materials (see "Related Party Transactions" in Item 7 and Note 19 to the Consolidated Financial Statements for further discussion of PepsiCo's procurement services).

A portion of our contractual cost of cans, plastic bottles and fructose is subject to price fluctuations based on commodity price changes in aluminum, resin and corn, respectively. We use derivative financial instruments to hedge the price risk associated with anticipated purchases of cans. PepsiCo acts as our agent for the execution of such derivative contracts (see Item 7A, Quantitative and Qualitative Disclosures about Market Risk).

The inability of suppliers to deliver concentrates or other products to us could adversely affect operating results. None of the raw materials or supplies currently in use are in short supply, although factors outside of our control could adversely impact the future availability of these supplies.

Competition

The carbonated soft drink business is highly competitive. Our principal competitors are bottlers who produce, package, sell and distribute Coca-Cola carbonated soft drink products. In addition to Coca-Cola bottlers, we compete with bottlers and distributors of nationally advertised and marketed carbonated soft drink products, bottlers and distributors of regionally advertised and marketed carbonated soft drink products, as well as bottlers of private label carbonated soft drink products sold in chain stores. In 2003, the carbonated soft drink products of PepsiCo represented approximately 33 percent of total carbonated soft drink sales in the U.S. We estimate that in each U.S. territory in which we operate, between 65 percent and 80 percent of soft drink sales from supermarkets, drug stores and mass merchandisers are accounted for by us and Coca-Cola bottlers. The industry competes 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.

Index

Employees

We employed approximately 14,500 people worldwide as of fiscal year end 2003. This included approximately 10,300 employees in our U.S. operations and approximately 4,200 employees in our non-U.S. operations. Employment levels are subject to seasonal variations. We are a party to collective bargaining agreements covering approximately 5,400 employees. Sixteen agreements covering approximately 1,100 employees will be renegotiated in 2004 in the U.S. We regard our employee relations as generally satisfactory.

Government Regulation

Our operations and properties are subject to regulation by various federal, state and local governmental entities and agencies as well as non-U.S. governmental entities. As a producer of beverage products, we are subject to production, packaging, quality, labeling and distribution standards in each of the countries where we have operations including, in the U.S., 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 both in the U.S. and abroad. These laws and regulations include, in the U.S., 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 these concerns and that we are in substantial compliance with applicable laws and regulations with the exception of our operations in Puerto Rico and Jamaica, as described below.

In Puerto Rico, wastewater from our bottling plant is discharged pursuant to a permit to a collection and treatment system owned by the Puerto Rico Aqueduct and Sewer Authority ("PRASA"). The former PepsiAmericas previously entered into a stipulation with PRASA which allowed the former PepsiAmericas to discharge wastewater in excess of pretreatment standards, for which the former PepsiAmericas paid a surcharge. In 1998, the former PepsiAmericas applied to have the permit reissued. On October 29,1998, PRASA reissued the permit but without the excess wastewater and surcharge provision. In August 2003, we completed negotiations with PRASA and have been issued a new permit and effluent standards. We have agreed to complete three wastewater treatment projects by February 2005 that will allow us to fully comply with PRASA's new standards. We estimate that the cost of a new water treatment system should not have a material effect on our consolidated results of operations, financial condition or liquidity.

In Jamaica, we are subject to the regulatory oversight of the Ministry of Labor and Bureau of Standards. We are required to obtain and maintain licenses relating to the safety and operation of our bottling plant in Jamaica. We are currently in compliance with such requirements. In addition, we are subject to the regulatory oversight of the National Resources Conservation Authority ("NRCA"). A plan to reduce the discharge of effluent from our bottling plant has been submitted to the NRCA. The NRCA requires us to monitor wastewater discharge and submit relevant periodic data to the NRCA. Although levels of effluent discharge are currently in excess of the NRCA's Trade Effluent Standards, no penalties or fines have been incurred to date. If an agreement with the NRCA cannot be reached with respect to wastewater discharge, the NRCA may require us to construct a water treatment facility. The cost of any such treatment facility would be shared by a bottler operating on the property contiguous to our leased property in Jamaica. We estimate that the cost of a new water treatment system should not have a material effect on our consolidated results of operations, financial condition or liquidity.

We expect that the countries in which we operate in Central Europe will be integrated into the European Union (“EU”) during 2004 and their ascension into the EU will be completed on May 1, 2004. In connection with their ascension, our Central European operations are completing the documentation necessary for entry. There are costs associated with implementing our plan for entry into the EU, which were incurred in 2003 and will be incurred in 2004. In addition, upon entry into the EU, price supports for sugar will be removed and our costs are expected to increase by approximately $6 to $8 million in 2004 for the period May 1 through December 31. We have increased our net pricing and expect to maintain the pricing discipline necessary to cover these additional costs. While there are short-term costs associated with our markets entering the EU, we expect long-term benefits from their entry in terms of improved economic conditions, lower costs for shipments of product between markets and the ability to leverage our production capacity across the markets we serve, as well as other markets in the EU.

Environmental Matters

Current operations. We maintain a program to facilitate compliance with federal, state and local laws and regulations relating to management of wastes, to the discharge or emission of materials used in production, and such other laws and regulations relating to the protection of the environment. The capital costs of such management and compliance, including the modification of existing plants and the installation of new manufacturing processes, are not material to our continuing operations.

Index

Discontinued Operations – Remediation. Under the agreement pursuant to which we sold our subsidiaries, Abex Corporation and Pneumo Abex Corporation (collectively, “Pneumo Abex”), in 1988 and a subsequent settlement agreement entered into in September 1991, we have assumed indemnification obligations for certain environmental liabilities of Pneumo Abex, after any insurance recoveries. Pneumo Abex has been and is subject to a number of environmental cleanup proceedings, including proceedings under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 regarding release or disposal of wastes at on-site and off-site locations. In some proceedings, federal, state and local government agencies are involved and other major corporations have been named as potentially responsible parties. Pneumo Abex also is subject to private claims and lawsuits for remediation of properties owned by Pneumo Abex and its subsidiaries.

There is an inherent uncertainty in assessing the total cost of remediating a given site. This is because of the nature of the remediation and allocation process and the fact that the remediations are at different stages of resolution. Any assessment of expenses is speculative until the later stages of remediation and is dependent upon a number of variables beyond the control of any party. Furthermore, there are often timing considerations in that a portion of the expense incurred by Pneumo Abex, and any resulting obligation of ours to indemnify Pneumo Abex, may not occur for a number of years.

In the latter part of 2001, we investigated the use of insurance products to mitigate risks related to our indemnification obligations under the 1988 agreement, as amended. The insurance carriers required that we employ an outside consultant to perform a comprehensive review of the former facilities operated or impacted by Pnuemo Abex. Advances in retrospective risk evaluation and increased experience (and therefore available data) at our former facilities, made this comprehensive review possible. The consultant’s review was completed in the fourth quarter of 2001. It provided a contingent indemnification liability for all known sites operated or impacted by Pneumo Abex and resulted in the $111.0 million charge, or $71.2 million net of tax, recorded in the fourth quarter of 2001.

At the end of fiscal year 2003, we had $119.2 million accrued to cover potential indemnification obligations, compared to $138.1 million recorded at the end of fiscal year 2002. Of the total amount accrued, $20.0 million was classified as current liabilities at the end of fiscal year 2003 and $25.5 million at the end of fiscal year 2002. The amounts exclude possible insurance recoveries and are determined on an undiscounted cash flow basis. The estimated indemnification liabilities include expenses for the remediation of identified sites, payments to third parties for claims and expenses (including product liability and toxic tort claims), administrative expenses, and the expenses of on-going evaluations and litigation. We expect a significant portion of the accrued liabilities will be disbursed during the next 10 years. All estimated costs for the sites discussed below are included in the $119.2 million accrued as of the end of fiscal year 2003.

We continue to have environmental exposure related to the remedial action required at a facility in Portsmouth, Virginia (consisting principally of soil treatment and removal) for which we have an indemnity obligation to Pneumo Abex. This is a Superfund site, which the United States Environmental Protection Agency required to be remediated. Through 2003, we had made indemnity payments of approximately $40.1 million (excluding $3.1 million of recoveries from other responsible parties) for remediation of the Portsmouth site. We have accrued and expect to incur an estimated $6.4 million to complete the remediation and for administration and legal defense costs over the next several years.

We also have financial exposure related to certain remedial actions required at a facility that manufactured hydraulic and related equipment in Willits, California. Various chemicals and metals contaminate this site. In August 1997, a final consent decree was issued in the case of the People of the State of California and the City of Willits, California v. Remco Hydraulics, Inc. This final consent decree was amended in December 2000 and established a trust whose officers are obligated to investigate and clean up this site. We are currently funding the investigation and interim remediation costs on a year-to-year basis according to the final consent decree. Through 2003, we have made indemnity payments of approximately $26.7 million for investigation and remediation at the Willits site (consisting principally of soil removal, groundwater and surface/water treatment). We have accrued $38.2 million for future remediation and trust administration costs, with the majority of this amount being spent in the next several years.

We also have indemnity obligations related to several investigations regarding on-site and off-site disposal of wastes generated at a facility in Mahwah, New Jersey. Through 2003, we have not indemnified a significant amount for remediation but have accrued approximately $16.5 million for certain remediation, long-term monitoring and administration expenses, which are expected to be incurred over the next several years. We will also be investigating the potential for additional potentially responsible parties.

Index

Although we have certain indemnification obligations for environmental liabilities at a number of sites other than Portsmouth, Willits or Mahwah, including Superfund sites, it is not anticipated that additional expense at any specific site will have a material effect on us. In the case of some of the sites, the volumetric contribution for which we have an obligation has in most cases been estimated and other large, financially viable parties are responsible for substantial portions of the remainder. In our opinion, based upon information currently available, the ultimate resolution of these claims and litigation, including potential environmental exposures, and considering amounts already accrued, should not have a material effect on our financial condition, although amounts recorded in a given period could be material to our results of operations or cash flows for that period.

Discontinued Operations – Insurance. During the second quarter of 2002, as part of a comprehensive program concerning environmental liabilities related to the former Whitman Corporation subsidiaries, we purchased new insurance coverage related to the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries. In addition, a trust, which was established in 2000 with the proceeds from an insurance settlement, purchased insurance coverage and funded coverage for remedial and other costs (“Finite Funding”) related to the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries. In conjunction with the purchase of the insurance policies, we recorded a charge to discontinued operations of $9.8 million, or $6.0 million after tax. This charge represented amounts expended by us as well as a reduction of funds in the Trust available to pay expenses related to sites for which we have indemnification obligations.

Essentially all of the assets of the Trust were expended by the Trust in connection with the purchase of the insurance coverage, the Finite Funding and related expenses. These actions have been taken to fund remediation and related costs associated with the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries and to protect against additional future costs in excess of our self-insured retention. The original amount of self-insured retention (the amount we must pay before the insurance carrier is obligated to begin payments) was $114.0 million of which $13.0 million has been eroded, leaving a remaining self-insured retention of $101.0 million at the end of fiscal year 2003. The estimated range of aggregate exposure related only to the remediation costs of such environmental liabilities is approximately $50 million to $90 million. We had accrued $71.5 million at the end of 2003 for remediation costs, which is our best estimate of the contingent liabilities related to these environmental matters. The Finite Funding may be used to pay a portion of the $71.5 million and thus reduces our future cash obligations. The Finite Funding amounts recorded were $24.2 million and $25.3 million at the end of fiscal year 2003 and 2002, respectively, and are recorded in “Other assets,” net of $3.0 million and $16.6 million, respectively, recorded in current assets.

In addition, we had recorded other receivables of $10.6 million in 2003 and $20.6 million in 2002 for future probable amounts to be received from insurance companies and other responsible parties. Of this total, $1.6 million and $5.3 million were included in “Other current assets.” The remaining $9.0 million and $15.3 million were recorded in “Other assets” in the Consolidated Balance Sheets as of fiscal year end 2003 and 2002, respectively.

Discontinued Operations – Product Liability and Toxic Tort Claims. We also have certain indemnification obligations related to product liability and toxic tort claims that might emanate from the 1988 agreement with Pneumo Abex. Other companies not owned by or associated with us also are responsible to Pneumo Abex for the financial burden of all asbestos product liability claims filed against Pneumo Abex after a certain date in 1998, except for certain claims indemnified by us.

We have received year-end 2003 claim statistics from Pneumo Abex and the other indemnitors. Based on those reports, we have or may have potential indemnification obligations for slightly less than 15 percent of all of Pneumo Abex active and open asbestos claims at the end of fiscal year 2003. The active and open claims for which we have or may have indemnification obligations are approximately 9,000. Of those claims, over 7,100 are asserted in two mass-filed lawsuits (one filed in each of 2001 and 2002) that purport to assert thousands of claims against dozens of defendants. We believe that the vast majority of those claims lack merit and are of marginal value, if any. Excluding these mass-filed claims, the largest group of remaining claims is less than 1,000 and the annual number of individual claims within that group has been less than 100 per year for each year during the period 2000 to 2003. Sales of the asbestos-containing product at issue for that group ceased before 1980 and, therefore, we expect a decreasing rate of claims.

As of fiscal year-end 2003, the number of underlying product liability lawsuits (including asbestos-related claims) that are or may be indemnifiable by us has been reduced by more than 85 percent from its high point. Much of the reduction occurred in the years 2000 and 2001, as well as in 2003. Our employees and agents manage or monitor the defense of the underlying claims that are or may be indemnifiable by us.

Index

At the end of fiscal year 2003, we had accrued $5.8 million related to product liability. These accruals primarily relate to probable asbestos claim settlements and legal defense costs. We also have additional amounts accrued for legal and other costs associated with obtaining insurance recoveries for previously resolved and current open claims and their related costs. These amounts are included in the total liabilities of $119.2 million accrued at the end of 2003. In addition to the known and probable asbestos claims, we may be subject to additional asbestos claims that are possible for which no reserve has been established at the end of 2003. These additional reasonably possible claims are primarily asbestos related and the aggregate exposure related to these possible claims is estimated to be in the range of $6 million to $17 million. These amounts are undiscounted and do not reflect any insurance recoveries that we will pursue from insurers for these claims.

In addition, two lawsuits have been filed in California, which name several defendants including certain of our prior subsidiaries. The lawsuits allege that we and our former subsidiaries are liable for personal injury and/or property damage resulting from environmental contamination at the Willits facility. There are approximately 550 plaintiffs in the lawsuits seeking an unspecified amount of damages, punitive damages, injunctive relief and medical monitoring damages. We are actively defending the lawsuits. At this time, we do not believe these lawsuits are material to our business or financial condition, although at this stage of the proceedings we are unable to reasonably estimate the range of possible loss, if any.

We have other indemnification obligations related to product liability matters. In our opinion, based on the information currently available and the amounts already accrued, these claims should not have a material effect on our financial condition.

We also participate in and monitor insurance-recovery efforts for the claims against Pneumo Abex. Recoveries from insurers vary year by year because certain insurance policies exhaust and other insurance policies become responsive. Recoveries also vary due to delays in litigation, limits on payments in particular periods, and because insurers sometimes seek to avoid their obligations based on positions that we believe are improper. We, assisted by our consultants, monitor the financial ratings of insurers that issued responsive coverage and the claims submitted by Pneumo Abex.

Executive Officers of the Registrant

Our executive officers and their ages as of March 1, 2004 were as follows:

Age

Position

Robert C. Pohlad

Chairman of the Board and Chief Executive Officer

Kenneth E. Keiser

President and Chief Operating Officer

G. Michael Durkin, Jr.

Executive Vice President and Chief Financial Officer

James. W. Nolan

Executive Vice President, U.S. Operations

Larry D. Young

Executive Vice President, Corporate Affairs

Jay S. Hulbert

Senior Vice President, Worldwide Supply Chain

Anne D. Sample

Senior Vice President, Human Resources

Alexander H. Ware

Senior Vice President, Planning and Corporate Development

Timothy W. Gorman

Vice President and Controller

Kathryn C. Koessel

Vice President, Investor Relations

Andrew R. Stark

Vice President and Treasurer

Each executive officer has been appointed to serve until his or her successor is duly appointed or his or her earlier removal on resignation from office. There are no familial relationships between any director or executive officer. The following is a brief description of the business background of each of our executive officers.

Mr. Pohlad became Chief Executive Officer of PepsiAmericas in November 2000, was named Vice Chairman in January 2001 and became Chairman in January 2002. Mr. Pohlad served as Chairman, Chief Executive Officer and director of the former PepsiAmericas prior to the merger with Whitman Corporation, a position he had held since 1998. From 1987 to present, Mr. Pohlad has also served as President of Pohlad Companies. Prior to 1987, Mr. Pohlad was Northwest Area Vice President of the Pepsi-Cola Bottling Group. Mr. Pohlad is also a director of MAIR Holdings, Inc.

Mr. Keiser was named President and Chief Operating Officer in January 2002 with responsibilities for the global operations of PepsiAmericas. Mr. Keiser was President and Chief Operating Officer, U.S. of PepsiAmericas since November 30, 2000. Mr. Keiser served as President and Chief Operating Officer of the former PepsiAmericas prior to the merger with Whitman Corporation, a position he had held since 1998. Mr. Keiser was President and Chief Operating Officer of Delta Beverage Group, Inc. (“Delta”), a wholly-owned subsidiary of the former PepsiAmericas, from 1990 to November 2000.

Mr. Durkin has served as Executive Vice President and Chief Financial Officer since February 2004. Prior to his role as Executive Vice President and Chief Financial Officer, Mr. Durkin served as Senior Vice President and Chief Financial Officer of PepsiAmericas and before that as Senior Vice President, East Group, for a subsidiary of Whitman Corporation. Prior to this position, Mr. Durkin was Vice President, Customer Development of PepsiCo's Heartland Business Unit, which was acquired by PepsiAmericas from PepsiCo in 1999.

Index

Mr. Nolan was named Executive Vice President, U.S. Operations of PepsiAmericas in December 2002. Prior to this appointment he served as Senior Vice President of PepsiAmericas West Group since joining the company in December 2001. Prior to joining PepsiAmericas, Mr. Nolan held numerous positions throughout a 21-year career at PepsiCo, most recently as Senior Vice President Sales and Market Development (from December 1998 to April 2001) and Chief Customer Officer (from May 1994 to December 1998) for Pepsi-Cola North America.

Mr. Young has been with PepsiAmericas since 1982. He served as Vice President and Managing Director of our operations in Poland in 1996 and later that year became President of our Central Europe operations. He became Executive Vice President and Chief Operating Officer in 1998. In February 2000, Mr. Young was elected to the position of President and Chief Operating Officer. In connection with the merger with the former PepsiAmericas in November 2000, Mr. Young was named President and Chief Operating Officer, International. In December 2002, Mr. Young was named Executive Vice President, Corporate Affairs.

Mr. Hulbert was named Senior Vice President, Worldwide Supply Chain of PepsiAmericas in December 2002. From November 2000 through December 2002, he served as Senior Vice President, Operations of PepsiAmericas. Prior to the merger of the former PepsiAmericas and Whitman Corporation, Mr. Hulbert held the position of Director of Operations of Delta.

Ms. Sample was named Senior Vice President, Human Resources in May 2001. Ms. Sample joined Pepsi-Cola North America in the late 1980’s as a Human Resources Manager in the field operations and was later promoted to the corporate office. She left the Pepsi system in 1997 to pursue other opportunities at companies such as WalkerDigital and Citibank.

Mr. Ware has served as Senior Vice President, Planning and Corporate Development since January 2003. Prior to January, he served as Vice President Finance for the East Group of PepsiAmericas. He joined the Company as Director of Finance for PepsiCo's Heartland Business Unit, which was acquired by PepsiAmericas from PepsiCo in 1999. Prior to this position, he had served in various strategic planning and corporate development roles within PepsiCo since 1994.

Mr. Gorman has been with PepsiAmericas since 1984 and has served in various finance and tax positions. Mr. Gorman served as Vice President and Controller beginning in 2003. Prior to his position as Vice President and Controller, Mr. Gorman was Vice President, Planning and Reporting.

Ms. Koessel was named Vice President, Investor Relations in September 2003. Prior to joining PepsiAmericas, Ms. Koessel had extensive experience in investor relations and advising corporations on financial strategy and corporate positioning, as well as crisis management. She was most recently with Deutsche Bank, where she held a number of positions including the global media sector specialist and the entertainment analyst in equity research. Prior to Deutsche Bank, she was Vice President of Investor Relations for barnesandnoble.com and Senior Vice President of Investor Relations and Financial Operations for Security Capital Group, Inc.

Mr. Stark joined PepsiAmericas in 1993, working in compensation and benefits. Since 1996, he has served in various treasury positions, being named Assistant Treasurer in August 1998. In July 2002, Mr. Stark was named Vice President and Treasurer. Prior to joining PepsiAmericas, Mr. Stark spent five years working for United Airlines in finance and human resources roles.

Item 2. Properties.

Our U.S. manufacturing facilities include eleven combination bottling/canning plants, four bottling plants and one canning plant with a total manufacturing area of approximately 1.3 million square feet. Non-U.S. manufacturing facilities include two owned plants in Poland, three owned plants in Hungary, two owned plants in the Czech Republic, one owned plant in Republic of Slovakia, one owned plant in Puerto Rico, one leased plant in Jamaica, one owned plant in the Bahamas and one owned plant in Trinidad. In addition, we operate 102 distribution facilities in the U.S., 38 distribution facilities in Central Europe and 8 distribution facilities in the Caribbean. Fifty-four of the distribution facilities are leased and less than eight percent of our U.S. production is from our one leased domestic plant. We believe all facilities are adequately equipped and maintained and capacity is sufficient for our current needs. We currently operate a fleet of approximately 6,100 vehicles in the U.S. and approximately 2,000 vehicles internationally to service and support our distribution system.

In addition, we own various industrial and commercial real estate properties in the U.S. We also own a leasing company, which leases approximately 2,000 railcars, comprised of locomotives, flatcars and hopper cars, to the Illinois Central Railroad Company.

Index

Item 3. Legal Proceedings.

From approximately 1945 to 1995, various entities owned and operated a facility that manufactured hydraulic equipment in Willits, California. The plant site is contaminated by various chemicals and metals. On August 23, 1999, an action entitled Donna M. Avila, et al. v. Willits Environmental Remediation Trust, Remco Hydraulics, Inc., M-C Industries, Inc., Pneumo Abex Corporation and Whitman Corporation, Case No. C99-3941 CAL, was filed in U.S. District Court for the Northern District of California. On January 16, 2001, a second lawsuit, entitled Pamela Jo Alrich, et al. v. Willits Environmental Remediation Trust, et al., Case No. C 01 0266 SI, against essentially the same defendants was filed in the same court. In the two lawsuits, individual plaintiffs claim that PepsiAmericas is liable for personal injury and/or property damage resulting from environmental contamination at the facility. As of fiscal year end 2002, there were approximately 550 plaintiffs in the lawsuits seeking an unspecified amount of damages, punitive damages, injunctive relief and medical monitoring damages from PepsiAmericas. We are actively defending the lawsuits. At this time, we do not believe these lawsuits are material to the business or financial condition of PepsiAmericas, although at this stage of the proceeding, we are unable to reasonably estimate the range of possible loss.

PepsiAmericas and our subsidiaries are defendants in numerous other lawsuits in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our financial condition, although amounts recorded in any given period could be material to the results of operations or cash flows for that period.

See also "Environmental Matters" in Item 1 and Note 17 to the Consolidated Financial Statements.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The common stock of PepsiAmericas is listed and traded on the New York Stock Exchange and the Pacific Stock Exchange. The table below sets forth the reported high and low sales prices as reported for New York Stock Exchange Composite Transactions for our common stock and indicates our dividends for each quarterly period for the fiscal years 2003 and 2002.

Common Stock

High

Low

Dividend

2003:

1st quarter

13.83

11.06

–

2nd quarter

13.50

11.16

0.04

3rd quarter

15.10

12.30

–

4th quarter

17.33

14.10

–

2002:

1st quarter

14.63

11.65

–

2nd quarter

15.96

14.00

0.04

3rd quarter

15.09

11.58

–

4th quarter

15.98

11.12

–

On February 17, 2004, we announced that our Board of Directors declared a quarterly dividend of $0.075 per share on PepsiAmericas common stock. The dividend is payable April 1, 2004 to shareholders of record on March 12, 2004. In declaring the quarterly dividend, the Board announced its decision to change its practice of reviewing dividend declarations on an annual basis. Instead, the Board will institute a practice of reviewing dividend declarations on a quarterly basis. This quarterly dividend marks the first declaration under this new quarterly approach.

There were 12,265 shareholders of record as of March 4, 2004.

Index

Item 6. Selected Financial Data.

The following table presents summary operating results and other information of PepsiAmericas and should be read along with Management's Discussion and Analysis, the Consolidated Financial Statements and accompanying notes included elsewhere in this Form 10-K (in millions, except per share and employee data).

For the fiscal years (1)

2003

2002

2001

2000

1999

OPERATING RESULTS:
Net sales:
U.S.	$	2,739.4		$	2,760.5		$	2,699.7		$	2,225.6		$	1,940.8
Central Europe		310.4			298.4			270.6			270.1			186.8
Caribbean		187.0			180.9			173.7			14.7			–

Worldwide	$	3,236.8		$	3,239.8		$	3,144.0		$	2,510.4		$	2,127.6

Operating income (loss):
U.S.	$	315.7		$	314.7		$	297.0		$	246.7		$	228.3
Central Europe		0.5			( 10.6	)		( 27.1	)		( 24.7	)		( 46.8	)
Caribbean		0.1			( 3.4	)		( 1.5	)		1.0			–

Worldwide		316.3			300.7			268.4			223.0			181.5
Interest expense, net		( 69.6	)		( 76.4	)		( 90.8	)		( 84.0	)		( 63.9	)
Other (expense) income, net		( 6.5	)		( 4.1	)		( 3.7	)		2.1			( 46.0	)

Income from continuing operations before income taxes and minority interest		240.2			220.2			173.9			141.1			71.6
Income taxes		82.6			84.5			83.8			69.6			22.1
Minority interest		–			–			–			–			6.6

Income from continuing operations		157.6			135.7			90.1			71.5			42.9
Income (loss) from discontinued operations after taxes		–			( 6.0	)		( 71.2	)		8.9			( 51.7	)

Net income (loss)	$	157.6		$	129.7		$	18.9		$	80.4		$	( 8.8	)

Cash dividends per share	$	0.04		$	0.04		$	0.04		$	0.04		$	0.08

Weighted average common shares:
Basic		143.1			152.1			155.9			139.0			123.3
Incremental effect of stock options and awards		1.0			0.9			0.7			0.5			0.9

Diluted		144.1			153.0			156.6			139.5			124.2

Income (loss) per share-basic:
Continuing operations	$	1.10		$	0.89		$	0.58		$	0.51		$	0.35
Discontinued operations		–			( 0.04	)		( 0.46	)		0.07			( 0.42	)

Net income (loss)	$	1.10		$	0.85		$	0.12		$	0.58		$	( 0.07	)

Income (loss) per share-diluted:
Continuing operations	$	1.09		$	0.89		$	0.58		$	0.51		$	0.35
Discontinued operations		–			( 0.04	)		( 0.46	)		0.07			( 0.42	)

Net income (loss)	$	1.09		$	0.85		$	0.12		$	0.58		$	( 0.07	)

OTHER INFORMATION:
Total assets	$	3,580.7		$	3,562.6		$	3,419.3		$	3,335.6		$	2,864.3
Long-term debt	$	1,078.4		$	1,080.7		$	1,083.4		$	860.1		$	809.0
Capital investments	$	158.3		$	219.2		$	218.6		$	165.4		$	165.4
Depreciation and amortization	$	170.2		$	163.8		$	202.1		$	166.4		$	126.6
Number of employees at year end		14,500			15,200			15,400			15,400			11,700

(1) Amounts presented prior to fiscal year 2003 are presented as reported and are not adjusted for the pro forma impact of the prospective adoption in the first quarter of 2003 of Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” (See Note 1 to the Consolidated Financial Statements).

Index

Comparability in the table is impacted by the merger with the former PepsiAmericas on November 30, 2000, as well as the territories acquired from PepsiCo in 1999.

The following were recorded during the periods presented:

In fiscal year 2003:

•

Our fiscal year ends on the Saturday closest to December 31 and results in an additional week, or fifty-three weeks, of operating results in fiscal year 2003 in our U.S. operations. PepsiAmericas' fiscal year end policy only impacts the U.S. operations. The Central European and Caribbean operations are based upon a calendar year ended December 31, 2003 and, therefore, do not have an additional week of operating results. All other fiscal years presented in the table of "Selected Financial Data" contain fifty-two weeks of operating results in the U.S. The 53rd week contributed $33.9 million to net sales and $4.9 million to operating income in the U.S.

•

We recorded net special charges of $6.4 million. These charges consisted primarily of a $5.8 million charge in the first quarter of 2003 related to the reduction in workforce in the U.S. and charges related to the changes in the production, marketing and distribution strategies in our international operations. The U.S. special charges were primarily for severance costs and related benefits, including the acceleration of restricted stock awards. In addition, as a result of excess severance costs identified, we recorded a reversal of $0.2 million related to the first quarter of 2003 charge in the U.S. We also recorded special charges of $0.8 million related to a change in the production and distribution strategy in Barbados, which consisted primarily of asset write-downs. In addition, we recorded additional special charges of $2.1 million related to the changes in the marketing and distribution strategy in Poland, the Czech Republic and Republic of Slovakia, offset by a special charge reversal of $2.1 million related primarily to favorable outcomes with outstanding lease commitments and severance in Poland. The initial special charge was based on an estimate that no sublease income would offset our lease commitments.

•

During the first quarter of 2003, the investors in the $150 million, face value 5.79 percent notes notified us that they would exercise their option to purchase and resell the notes pursuant to the remarketing agreement, unless we elected to redeem the notes. In March 2003, we exercised our option and elected to redeem the notes at fair value pursuant to the remarketing agreement. As a result, we recorded a loss on the early extinguishment of debt of $8.8 million ($5.4 million after taxes) in “Interest expense, net.”

•

We recorded an additional gain of $2.1 million ($1.3 million after taxes) on the previous sale of a parcel of land in downtown Chicago for the reversal of accruals related to the favorable resolution of certain contingencies. The gain is reflected in "Other (expense) income, net."

•

We favorably settled a tax refund case for $12.4 million with the Internal Revenue Service that arose from the 1990 termination of our Employee Stock Ownership Plan (“ESOP”). The tax settlement consisted of $6.4 million of interest income ($4.0 million after taxes) and a tax benefit of $6.0 million recorded in “Income taxes.” During 2003, we recorded a net tax benefit of $7.7 million related primarily to the reversal of certain tax accruals, offset by additional tax liabilities recorded. Included in the net tax benefit of $7.7 million are tax benefits of $6.0 million from the favorable settlement of the ESOP case and a tax benefit of $6.0 million related mainly to the reversal of tax liabilities due to the settlement of various income tax audits through the 1999 tax year. These tax benefits were offset, in part, by net additional tax accruals of $4.3 million for contingent liabilities arising in 2003.

In fiscal year 2002:

•

We recorded net special charges of $2.6 million. These charges included $5.7 million relating to changes in the distribution and marketing strategies in Poland, the Czech Republic and Republic of Slovakia. Also included in the charges was $0.2 million in additional severance costs relating to the fiscal 2000 special charge. We also identified and reversed $3.3 million in excess severance and related exit costs, including $2.2 million relating to the Hungary special charges recorded in fiscal 2001, and $1.1 million relating to previous special charges (see Note 6 to the Consolidated Financial Statements). These net special charges reduced the U.S. and Central Europe operating income by $0.2 million and $2.4 million, respectively.

•

We recorded a gain of $3.5 million ($2.1 million, after taxes) related to the sale of a parcel of land in downtown Chicago, which is reflected in "Other (expense) income, net." See further discussion of a previous charge in fiscal year 1999.

•

Loss from discontinued operations included a charge of $9.8 million ($6.0 million after tax) in the second quarter of 2002 resulting from the purchase of new insurance policies concerning the environmental liabilities related to previously sold subsidiaries (see "Environmental Matters" in Item 1 and Note 17 to the Consolidated Financial Statements).

Index

In fiscal year 2001:

•

We recorded special charges of $13.8 million. These charges included fourth quarter charges of $9.2 million for severance costs and other costs related to changing our marketing and distribution strategy in Hungary, as well as for the write-down of marketing equipment in the U.S. Also included in the 2001 charges was a first quarter charge of $4.6 million related to further organizational changes resulting from the merger with the former PepsiAmericas. This charge was principally composed of severance and related benefits. These charges reduced U.S. and Central Europe operating income by $6.3 million and $7.5 million, respectively.

•

We recorded a gain on pension curtailment of $8.9 million in connection with the integration of the former Whitman Corporation and former PepsiAmericas U.S. benefit plans (see Note 13 to the Consolidated Financial Statements).

•

Loss from discontinued operations included a charge of $111.0 million ($71.2 million after tax) for environmental liabilities related to previously sold subsidiaries (see “Environmental Matters” in Item 1 and Note 17 to the Consolidated Financial Statements).

In fiscal year 2000:

•

We recorded special charges of $21.7 million. The charges were for employee related costs of $17.1 million in connection with the merger with the former PepsiAmericas, as well as charges of $4.6 million for the closure of one of our existing production facilities to remove excess capacity. These charges reduced U.S. operating income by $21.7 million.

•

Income from discontinued operations of $8.9 million, net of tax of $5.8 million, included the reversal of prior accruals resulting from certain insurance settlements for environmental matters related to a former subsidiary, Pneumo Abex, net of increased environmental and related accruals.

•

We sold our operations in the Baltics and recorded a gain of $2.6 million, which is reflected in “Other (expense) income, net.”

In fiscal year 1999:

•

We recorded special charges of $27.9 million related to staff reduction costs and asset write-downs, principally related to the acquisition of U.S. and Central Europe territories from PepsiCo. These charges reduced U.S. and Central Europe operating income by $7.3 million and $20.6 million, respectively.

•

We entered into a contract for the sale of property in downtown Chicago and recorded a charge of $56.3 million to reduce the book value of the property, which is reflected in “Other (expense) income, net.”

•

We recorded a gain of $13.3 million related to the sale of franchises in Marion, Virginia; Princeton, West Virginia and the St. Petersburg area of Russia. This gain is reflected in “Other (expense) income, net.”

•

Loss from discontinued operations after taxes of $51.7 million included after tax amounts related to a $12 million settlement of environmental litigation filed against Pneumo Abex, a previously sold subsidiary, as well as increases of $69.8 million in accruals related to the indemnification obligation to Pneumo Abex, primarily for environmental matters.

Non-GAAP Measurements

In addition to the GAAP results provided in this Form 10-K, we have provided non-GAAP measurements in our Annual Report, which include operating income and net income as adjusted for unusual items, free cash flow and return on invested capital (“ROIC”). Reconciliation from GAAP results to non-GAAP measurements and details of the unusual items are presented in the tables below.

Our management, as well as certain investors, use these non-GAAP measures to analyze our current and future financial performance. These non-GAAP measurements do not replace the presentation of our GAAP financial results. These measurements simply provide supplemental information to assist our management and certain investors in analyzing our performance. We have provided this information to investors to enable them to perform meaningful comparisons of past, present and future performance and as a means to better understand the results of our core on-going operations.

Index

We believe these non-GAAP measures provide useful information to investors regarding our results of operations. This belief is based upon the value of summarizing infrequent or significant transactions that impacted our current results of operations that are not necessarily indicative of our future results of operations, nor comparable with our results of operations of prior periods. These non-GAAP measures are used for no purpose other than to provide supplemental information to assist our management and investors in analyzing our operational performance.

Free Cash Flow. Free cash flow is a measure of the cash that is freely available, after the payment of interest and tax, for distribution in the form of dividends, for reduction in borrowings, and for reinvestments in our business. We define free cash flow as cash generated from operations, less capital investments and cash flow used by discontinued operations. The proceeds of disposals and cost of acquisitions are excluded from the calculation. Free cash flow can be defined as a formula as follows:

	+	Cash from operating activities per Consolidated Statements of Cash Flows
	–	Capital investments
	–	Cash outflow from discontinued operations
	=	Free cash flow

Free cash flow in any one year may be affected by investment initiatives or by the timing of routine cash receipts and disbursements. The reconciliation to the most comparable U.S. GAAP measurement was calculated as follows (in millions):

	2003			2002			2001

Cash flow from operating activities of continuing operations	$	297.5		$	331.3		$	316.8
Capital expenditures		( 158.3	)		( 219.2	)		( 218.6	)
Cash outflow from discontinued operations		( 4.9	)		( 15.5	)		( 11.3	)

Free cash flow	$	134.3		$	96.6		$	86.9

Return on Invested Capital. We use ROIC as a measure of our profitability and how effectively we allocate our capital in our core operations.

We define ROIC as follows:

Numerator:

	+	Operating income
	+(–)	Special charges (credits)
	+	Amortization expense
	–	Tax expense, adjusted for tax benefit on interest expense and special charges
	=	Net operating profit after taxes, adjusted for interest expense tax benefit and special charges (“NOPAT”)

Denominator:

	+	Total assets
	+	Accumulated amortization
	–	Cash
	–	Current liabilities, excluding debt
	–	Other liabilities, excluding debt
	=	Adjusted average invested capital

Based on the results obtained above, ROIC is calculated as NOPAT divided by the average adjusted invested capital.

Index

For the fiscal years ended 2003, 2002 and 2001, we had an ROIC of 7.0 percent, 6.2 percent and 6.6 percent, respectively. The reconciliation to the most comparable U.S. GAAP measurements for the numerator and denominator are as follows (in millions):

	2003			2002			2001

Calculation of NOPAT:
Operating income	$	316.3		$	300.7		$	268.4
Impact of 53rd week		( 4.9	)		–			–
Amortization expense		0.4			0.7			50.0
Special charges, net		6.4			2.6			13.8
Tax expense, adjusted		( 110.3	)		( 115.5	)		( 134.2	)

NOPAT	$	207.9		$	188.5		$	198.0

Calculation of adjusted invested capital:
Total assets	$	3,580.7		$	3,562.6		$	3,419.3
Accumulated amortization		254.8			254.4			253.7
Cash		( 69.0	)		( 113.8	)		( 64.4	)
Current liabilities, excluding short-term debt		( 399.6	)		( 394.9	)		( 388.1	)
Other liabilities, excluding long-term debt		( 337.7	)		( 335.3	)		( 262.3	)

Adjusted invested capital	$	3,029.2		$	2,973.0		$	2,958.2
Average adjusted invested capital*	$	2,977.1		$	3,025.9		$	3,021.5

ROIC		7.0	%		6.2	%		6.6	%

* Amounts represent the average of adjusted invested capital for each period-end for the 13 months prior to the fiscal year ends presented.

Adjusted comparisons. In order to better reflect our comparative fiscal year operating performance, we have provided the table below that summarizes the unusual items that impact comparability for the periods presented (in millions):

	Net Sales			Operating Income			Income from Continuing Operations			Diluted Income Per Share - Continuing Operations


Fiscal year 2003, as reported	$	3,236.8		$	316.3		$	157.6		$	1.09
Impact of 53rd week		( 33.9	)		( 4.9	)		( 3.1	)
Special charges, net		–			6.4			3.9
Interest income: ESOP settlement		–			–			( 4.0	)
Tax benefit: ESOP settlement		–			–			( 6.0	)
Early extinguishment of debt		–			–			5.4
Gain on land sale		–			–			( 1.3	)
Additional tax accruals		–			–			4.3
Reversal of certain tax accruals		–			–			( 6.0	)

Fiscal year 2003, as adjusted	$	3,202.9		$	317.8		$	150.8		$	1.05


Fiscal year 2002, as reported	$	3,239.8		$	300.7		$	135.7		$	0.89
EITF Issue No. 02-16 adjustment		( 83.3	)		–			–
Special charges, net		–			2.6			1.6
Gain on land sale		–			–			( 2.1	)

Fiscal year 2002, as adjusted	$	3,156.5		$	303.3		$	135.2		$	0.89


Fiscal year 2001, as reported	$	3,144.0		$	268.4		$	90.1		$	0.58
EITF Issue No. 02-16 adjustment		( 69.6	)		–			–
Exclude goodwill amortization		–			49.8			48.3
Special charges, net		–			13.8			8.5
Gain on pension curtailment		–			( 8.9	)		( 5.4	)

Fiscal year 2001, as adjusted	$	3,074.4		$	323.1		$	141.5		$	0.90

Index

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Annual Report on Form 10-K contains certain forward-looking statements of expected future developments, as defined in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Form 10-K refer to our expectations regarding continuing operating improvement and other matters. These forward-looking statements reflect our expectations and are based on currently available data; however, actual results are subject to future risks and uncertainties, which could materially affect actual performance. Risks and uncertainties that could affect such performance include, but are not limited to, the following: competition, including product and pricing pressures; changing trends in consumer tastes; changes in our relationship and/or support programs with PepsiCo and other brand owners; market acceptance of new product offerings; weather conditions; cost and availability of raw materials; availability of capital; labor and employee benefit costs; unfavorable interest rate and currency fluctuations; costs of legal proceedings; outcomes of environmental claims and litigation; changing legislation; and general economic, business and political conditions in the countries and territories where we operate. These events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

We manufacture, distribute, and market a broad portfolio of beverage products in the U.S., Central Europe and the Caribbean. We sell a variety of brands that we bottle under franchise agreements with various brand owners, including PepsiCo or PepsiCo joint ventures. In some territories, we manufacture, package, sell and distribute our own brands, such as Toma brands in Central Europe. Our territories in the U.S. include a significant portion of an 18 state region, primarily in the Midwest. In Central Europe, we serve Poland, Hungary, the Czech Republic, and Republic of Slovakia. In the Caribbean, our territories include Puerto Rico, Jamaica, Barbados, the Bahamas, and Trinidad and Tobago.

We measure our operating performance and manage our business to optimize shareholder value through five key drivers, including balance between volume and pricing, a controlled cost structure, strong execution in the marketplace, and improved utilization of our international infrastructure to achieve profitability in our combined international operations. An overview of our operating performance and these factors in fiscal year 2003, as well as the challenges and opportunities we face in achieving improved operating performance in 2004, is summarized as follows:

Volume. Worldwide volume declined 2.7 percent in fiscal year 2003, compared to the prior year. Excluding the benefit of the 53rd week (see “Fiscal Year” in Results of Operations), worldwide volume would have declined 3.7 percent, and U.S. volume would have decreased 3.5 percent. The volume declines were primarily the result of continued declines in our single serve package and trademark Pepsi and trademark Mountain Dew volume, as well as the weak performance in the first quarter of 2003. Trademark Pepsi and trademark Mountain Dew comprise approximately 80 percent of our total volume. In fiscal year 2004, we have marketing and merchandising plans that will emphasize the single serve package and our core brands in an effort to stabilize volume and reverse the declining volume trends. In addition, we continue to focus on package innovation as a driver of volume growth, with the introduction of the eight-ounce can in the fourth quarter of 2003, and the continued rollout of our “Fridge-Mate” package in the U.S. operations. We anticipate that worldwide volume growth in 2004, compared to 2003 excluding the 53rd week in the U.S., will be approximately 1 percent as a result of these initiatives, as the declining trends continue to reverse, as begun in the fourth quarter of 2003.

Pricing. The impact of the 3.7 percent worldwide volume decline, on a comparable selling week basis, was offset by our disciplined pricing structure that we initiated in 2003. Worldwide net selling price improved 5.3 percent in fiscal year 2003 compared to the prior year, driven primarily by the pricing improvements in the U.S. of 4.4 percent. Maintaining our pricing discipline is a key factor in achieving operating income growth, and we anticipate maintaining worldwide net pricing growth in the range of 2 to 3 percent in fiscal year 2004, compared to fiscal year 2003 excluding the 53rd week in the U.S.

Controllable costs. We continue to focus on our controllable costs. On a comparable basis, adjusting for the impact of the 53rd week and assuming that EITF 02-16 had been in effect, we reduced the rate of growth in our selling, delivery and administrative ("SD&A") expenses in fiscal year 2003 to 2.2 percent, compared to 8.4 percent growth in fiscal year 2002 from fiscal year 2001. In fiscal year 2004, we will continue the focus on cost containment.

Index

Execution in marketplace. We continue to focus on execution in the marketplace, including our next generation selling system and call center investments in 2003. Our next generation selling system improves the technology base supporting our selling process and improves the execution of the selling process in the marketplace. As we convert to our next generation selling system, we are moving from a conventional route system to a pre-sell system. In the conventional route sales system, a route driver simultaneously takes the customer’s order and delivers product to the customer. In the pre-sell environment, a dedicated sales person takes the customer’s order and a delivery person subsequently delivers a pre-determined order to the customer. This new selling system is expected to increase distribution through the use of a dedicated sales team, decrease costs associated with handling products and allow us to optimize our delivery routing structure. We will continue to have some rollout costs related to such investments in 2004.

In addition, in 2003 we opened “Pepsi Connect,” our dedicated call center in Fargo, North Dakota. This call center will take orders for the small format accounts whose volume does not justify a dedicated sales person. This call center will allow us to provide the service these customers deserve at the appropriate cost.

Profitability in our international operations. The profitability in our international operations has been a challenge in the past due to macroeconomic and political conditions, as well as the competitive environments in which we operate; however, in fiscal year 2003, we achieved profitability in our combined international operations for the first time. Operating income in our international operations was $0.6 million in fiscal year 2003, compared to a combined operating loss of $14.0 million in the prior year. Profitability was achieved in our international operations due to several factors, including the successful rollout of the alternative sales and distribution strategy in Central Europe. This strategy involves the use of third party distributors in the less densely populated rural areas. Poland is the last country to complete the migration to the alternative distribution strategy. Once completed, which is expected by the second quarter of 2004, we anticipate annual savings of approximately $7 million. In addition, we have better leveraged the infrastructure in the Caribbean in several ways, including the sourcing of production for Barbados from an already existing manufacturing location and the utilization of a third party distributor, as well as expanding our portfolio of products for distribution in Trinidad. We will continue to experience the benefit from these initiatives in 2004; however, in Central Europe, we will be faced with the challenges of entrance into the European Union (“EU”) in May 2004. We anticipate higher costs in Central Europe in 2004, including costs incurred for entry into the European Union and higher sugar prices due to the elimination of price supports, which we plan to mitigate, in part, by our continued focus on achieving and maintaining higher net pricing.

Our success in achieving operating income growth from the above factors, our efforts in driving lower borrowing costs and a lower effective tax rate, as well as our disciplined approach to capital spending and managing working capital effectively have driven significant increases in free cash flows. Our increase in free cash flow puts us in a very good financial position in 2004, for which there are several options available to us. We continue to examine the optimal uses of this cash and the options include increasing our dividends, repurchasing stock, investing in the business and pursuing acquisitions with a high economic return. In January 2004, we acquired the franchise rights to manufacture and distribute Dr Pepper in 13 counties in Arkansas for approximately $17.5 million. In addition, on February 17, 2004, we announced that our Board of Directors declared a quarterly dividend of $0.075 per share on PepsiAmericas common stock. The dividend is payable April 1, 2004 to shareholders of record on March 12, 2004. In declaring the quarterly dividend, the Board announced its decision to change its practice of reviewing dividend declarations on an annual basis. Instead, the Board will institute a practice of reviewing dividend declarations on a quarterly basis. This quarterly dividend marks the first declaration under this new quarterly approach.

The above overview should not be considered by itself in determining full disclosure, and should be read in conjunction with the other sections of this Annual Report on Form 10-K.

The following discussion and analysis includes six major categories: critical accounting policies, related party transactions, results of operations, liquidity and capital resources, recently issued accounting pronouncements, and discussion of our market risks. The discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K.

Critical Accounting Policies

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to use estimates. We base our estimates on historical experience, available information and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and revisions to estimates are included in our results for the period in which the actual amounts or revisions become known. Presented in our notes to the Consolidated Financial Statements is a summary of our most significant accounting policies used in the preparation of such statements. Significant estimates in the Consolidated Financial Statements include goodwill impairment, environmental liabilities, income taxes and casualty insurance costs which are described in further detail below:

Index

Goodwill Impairment. Goodwill is tested for impairment at least annually, using a two-step approach at the reporting unit level: U.S., Central Europe and the Caribbean. First, we estimate the fair value of the reporting units primarily using discounted estimated future cash flows. If the carrying value exceeds the fair value of the reporting unit, the second step of the goodwill impairment test is performed to measure the amount of the potential loss. Goodwill impairment is measured by comparing the “implied fair value” of goodwill with its carrying amount. The impairment evaluation requires the use of considerable management judgment to determine the fair value of the reporting units using discounted future cash flows, including estimates and assumptions regarding amount and timing of cash flows, cost of capital and growth rates.

Environmental Liabilities. We continue to be subject to certain indemnification obligations under agreements related to previously sold subsidiaries, including potential environmental liabilities (see "Environmental Matters" in Item 1 and Note 17 to the Consolidated Financial Statements). We have recorded our best estimate of our probable liability under those indemnification obligations, with the assistance of outside consultants and other professionals. Such estimates and the recorded liabilities are subject to various factors, including possible insurance recoveries, the allocation of liabilities among other potentially responsible parties, the advancement of technology for means of remediation, possible changes in the scope of work at the contaminated sites, as well as possible changes in related laws, regulations, and agency requirements.

Income Taxes. Our effective income tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect management’s best estimate of the outcome of future tax audits. We have established valuation allowances against substantially all of the non-U.S. net operating losses to reflect the uncertainty of our ability to fully utilize these benefits given the limited carryforward periods permitted by the various jurisdictions. The evaluation of the realizability of our net operating losses requires the use of considerable management judgment to estimate the future taxable income for the various jurisdictions, for which the ultimate amounts and timing of such estimates may differ. The valuation allowance can also be impacted by changes in the tax regulations.

Significant judgment is required in determining our contingent tax liabilities. We have established contingent tax liabilities using management’s best judgment and adjust these liabilities as warranted by changing facts and circumstances. A change in our tax liabilities in any given period could have a significant impact on our results of operations and cash flows for that period.

Casualty Insurance Costs. Due to the nature of our business, we require insurance coverage for certain casualty risks. We are self-insured for workers compensation, product and general liability up to $1 million per occurrence and automobile liability up to $2 million per occurrence. The casualty insurance costs for our self-insurance program represent the ultimate net cost of all reported and estimated unreported losses incurred during the fiscal year. We do not discount casualty insurance liabilities.

Our liability for casualty costs is estimated using individual case-based valuations and statistical analyses and is based upon historical experience, actuarial assumptions and professional judgment. These estimates are subject to the effects of trends in loss severity and frequency and are based on the best data available to us. These estimates, however, are also subject to a significant degree of inherent variability, including the relatively recent increases in medical costs. We evaluate these estimates with our actuarial advisors on an annual basis and we believe that they are appropriate and within acceptable industry ranges, although an increase or decrease in the estimates or economic events outside our control could have a material impact on our results of operations and cash flows. Accordingly, the ultimate settlement of these costs may vary significantly from the estimates included in our Consolidated Financial Statements.

Related Party Transactions

Transactions with PepsiCo

PepsiCo is considered a related party due to the nature of our franchise relationship and PepsiCo’s ownership interest in us. As of fiscal year end 2003, PepsiCo held, directly and indirectly, 39.9 percent of PepsiAmericas’ outstanding common stock. Approximately 92 percent of our total volume is derived from the sale of Pepsi-Cola products. We have entered into transactions and agreements with PepsiCo from time to time, and we expect to enter into additional transactions and agreements with PepsiCo in the future. Material agreements and transactions between our company and PepsiCo are described below.

Index

Bottling Agreements and Purchases of Concentrate and Finished Products. We purchase concentrates from PepsiCo and manufacture, package, distribute and sell carbonated and non-carbonated beverages under various bottling agreements with PepsiCo. These agreements give us the right to manufacture, package, sell and distribute beverage products of PepsiCo in both bottles and cans and fountain syrup in specified territories. These agreements include a Master Bottling Agreement and a Master Fountain Syrup Agreement for beverages bearing the "Pepsi-Cola" and "Pepsi" trademarks in the United States. We also have entered into bottling and distribution agreements for non-cola products in the United States, and international bottling agreements for countries outside the United States. These agreements provide PepsiCo with the ability to set prices of concentrates, as well as the terms of payment and other terms and conditions under which we purchase such concentrates. Concentrate purchases from PepsiCo included in cost of goods sold totaled $671.7 million, $641.9 million and $619.5 million for the fiscal years ended 2003, 2002 and 2001, respectively. In addition, we bottle water under the "Aquafina" trademark pursuant to an agreement with PepsiCo that provides for payment of a royalty fee to PepsiCo, which totaled $25.9 million, $22.8 million and $16.1 million for the fiscal years ended 2003, 2002 and 2001, respectively, and is included in cost of goods sold. We also purchase finished beverage products from PepsiCo and certain of its affiliates, including tea, concentrate and finished beverage products from a Pepsi/Lipton partnership, as well as finished beverage products from a PepsiCo/Starbucks partnership. Such purchases are reflected in cost of goods sold and totaled $90.8 million, $90.7 million and $75.2 million for the fiscal years ended 2003, 2002 and 2001, respectively.

A portion of our contractual cost of cans is subject to price fluctuations based on commodity price changes in aluminum. We use derivative financial instruments to hedge the price risk associated with anticipated purchases of cans (see Note 12 to the Consolidated Financial Statements). PepsiCo acts as our agent for the execution of such derivative contracts.

Bottler Incentives and Other Support Arrangements. PepsiCo and PepsiAmericas share a business objective of increasing availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo provides us with various forms of bottler incentives to promote their brands. The level of this support is negotiated regularly and can be increased or decreased at the discretion of PepsiCo. The bottler incentives cover a variety of initiatives, including direct marketplace, shared media and advertising support, to support volume and market share growth. Worldwide bottler incentives from PepsiCo totaled approximately $165.8 million, $154.2 million, and $138.0 million for the fiscal years ended 2003, 2002 and 2001. There are no conditions or requirements that could result in the repayment of any support payments received by us.

Under the 2003 marketing support program, and in conjunction with the prospective adoption of EITF Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor” in the first quarter of 2003, bottler incentives that are directly attributable to incremental expenses incurred are reported as either an increase to net sales or a reduction to SD&A expenses, commensurate with the recognition of the related expense. Such bottler incentives include amounts received for direct support of advertising commitments and exclusivity agreements with various customers. All other bottler incentives are recognized as a reduction of cost of goods sold when the related products are sold based on the agreements with vendors. Such bottler incentives primarily include base level funding amounts which are fixed in amount based on the previous year’s volume and variable amounts that are reflective of the current year’s volume performance. Prior to the adoption of EITF Issue No. 02-16 and under previous marketing support programs, bottler incentives were primarily recognized as an increase to net sales or as a reduction in SD&A expenses based on the objectives of the programs and initiatives.

Based on information received from PepsiCo, PepsiCo provided indirect marketing support to our marketplace, which consisted primarily of media expenses. This indirect support is not reflected or included in our Consolidated Financial Statements, as these amounts were paid by PepsiCo on our behalf to a third party.

Manufacturing and National Account Services. We provide manufacturing services to PepsiCo in connection with the production of certain finished beverage products, and also provide certain manufacturing, delivery and equipment maintenance services to PepsiCo's national account customers. Net amounts paid or payable by PepsiCo to us for these services were $18.6 million, $23.5 million, and $25.4 million for fiscal years 2003, 2002 and 2001, respectively.

Other Transactions. PepsiCo provides procurement services to us pursuant to a shared services agreement. Under such agreement, PepsiCo negotiates with various suppliers the cost of certain raw materials by entering into raw material contracts on our behalf. In addition, PepsiCo collects and remits to us certain rebates from the various suppliers related to our procurement volume. The raw material contracts obligate us to purchase certain minimum volumes. In 2003 and 2002, we paid $2.4 million and $1.9 million, respectively, to PepsiCo for such services. In 2001, we paid $3.0 million related to the procurement of raw materials, processing of accounts payable and credit and collection, certain payroll tax services and information technology maintenance to PepsiCo. The payments related to procurement are included in costs of goods sold and payments related to other services are recorded in SD&A expenses.

During fiscal year 2002, we paid $3.3 million to PepsiCo for the SoBe distribution rights, of which approximately $0.2 million of amortization expense is included in SD&A expenses for the fiscal years ended 2003 and 2002, respectively.

Index

Beginning in September 2003, we purchased snack food products from Frito-Lay, Inc., a subsidiary of PepsiCo, for sale and distribution in Trinidad. Amounts paid or payable to PepsiCo and its affiliates for snack food products were $0.3 million in fiscal year 2003.

At the end of fiscal years 2003 and 2002, net amounts due from (to) PepsiCo related to the above transactions amounted to ($2.1) million and $27.7 million, respectively.

The Consolidated Statements of Income include the following income and (expense) transactions with PepsiCo (in millions):

	2003			2002			2001

Net sales:
Bottler incentives	$	7.5		$	84.8		$	71.5
Manufacturing and national account services		18.6			23.5			25.4

	$	26.1		$	108.3		$	96.9


Cost of goods sold:
Purchases of concentrate	$	( 671.7	)	$	( 641.9	)	$	( 619.5	)
Purchases of finished products		( 90.8	)		( 90.7	)		( 75.2	)
Bottler incentives		142.6			19.2			16.7
Aquafina royalty fees		( 25.9	)		( 22.8	)		( 16.1	)
Procurement services		( 2.4	)		( 1.9	)		( 2.1	)

	$	( 648.2	)	$	( 738.1	)	$	( 696.2	)


Selling, delivery and administrative expenses:
Bottler incentives	$	15.7		$	50.2		$	49.8
Purchases of advertising materials		( 1.8	)		( 2.6	)		( 4.3	)
Other		( 0.2	)		( 0.2	)		( 0.9	)

	$	13.7		$	47.4		$	44.6

Agreements and Relationships with Dakota Holdings, LLC and Mr. Pohlad

Under the terms of the PepsiAmericas Merger Agreement, Dakota Holdings, LLC, a Delaware limited liability company whose members at the time of the PepsiAmericas merger included PepsiCo and Pohlad Companies, was required to elect a contingent payment alternative in exchanging its shares of the former PepsiAmericas. Mr. Pohlad is the President and the owner of one-third of the capital stock of Pohlad Companies. Accordingly, in connection with the transaction, Dakota Holdings, LLC acquired the right to receive up to 6,669,747 shares of our common stock if certain performance levels were met for the years 2000 through 2002. The Affiliated Transaction Committee of the Board, which oversaw the process of determining whether the contingent payments were earned under the PepsiAmericas Merger Agreement, determined that no shares were issuable pursuant to this right.

In connection with the PepsiAmericas merger, Dakota Holdings, LLC became the owner of 14,562,970 shares of our common stock, including 377,128 shares purchasable pursuant to the exercise of a warrant. In November 2002, the members of Dakota Holdings, LLC entered into a redemption agreement pursuant to which the PepsiCo membership interests were redeemed in exchange for certain assets of Dakota Holdings, LLC. As a result, Dakota Holdings, LLC became the owner of 12,027,557 shares of our common stock, including 311,470 shares purchasable pursuant to the exercise of a warrant.

Index

Transactions with Pohlad Companies

In February 2002, we entered into an Aircraft Joint Ownership Agreement with Pohlad Companies. Pursuant to the Aircraft Joint Ownership Agreement we purchased a one-eighth interest in a Lear Jet aircraft owned by Pohlad Companies. We paid approximately $1.6 million related to the jet in fiscal year 2002, which included our capitalized portion of the purchase price ($1.5 million) and the related SD&A expenses associated with the jet ($0.1 million). SD&A expenses associated with the jet in 2003 were $0.1 million.

In addition, we paid Pohlad Companies, or its subsidiaries, for various services, which totaled approximately $0.1 million, $0.7 million and $0.3 million in 2003, 2002 and 2001, respectively.

Other Transactions

Transactions with Bottlers in which PepsiCo Holds an Equity Interest. We sell finished beverage products to other bottlers, including The Pepsi Bottling Group, Inc., a bottler in which PepsiCo owns an equity interest. These sales occur in instances where the proximity of our production facilities to the other bottlers’ markets or lack of manufacturing capability, as well as other economic considerations, make it more efficient or desirable for the other bottlers to buy finished product from us. Our sales to other bottlers, including those in which PepsiCo owns an equity interest, were approximately $64.6 million, $71.6 million, and $79.0 million for the fiscal years ended 2003, 2002, and 2001, respectively. Our purchases from such other bottlers for the fiscal years ended 2003, 2002, and 2001 were not material.

Results of Operations

In the discussions of our results of operations below, the number of cases sold is referred to as volume. Net pricing is net sales divided by number of cases and gallons sold for our core businesses, which include bottles and cans (including bottle and can volume from vending equipment sales) as well as food service. Changes in net pricing include the impact of sales price (or rate) changes, as well as the impact of brand, package and geographic mix. Net pricing and reported volume amounts exclude contract, commissary, private label, concentrate, and vending (other than bottles and cans) revenue and volume. Contract sales represent sales of manufactured product to other franchised bottlers and typically decline as excess manufacturing capacity is utilized. Cost of goods sold per unit is the cost of goods sold for our core businesses divided by related number of cases and gallons sold.

Items Impacting Comparability

Fiscal Year. Our fiscal year ends on the Saturday closest to December 31 and as a result, a 53rd week (the “53rd week”) is added every five to six years. Fiscal year 2003 consisted of 53 weeks ended on January 3, 2004. Fiscal years 2002 and 2001 consisted of 52 weeks ended on December 28, 2002 and December 29, 2001, respectively. Our fiscal year end policy only impacts our U.S. operations. Our CEG and Caribbean operations fiscal years end on December 31st and therefore are not impacted by the 53rd week. The following table illustrates the approximate dollars (in millions) and percentage points of growth that the incremental week contributed to our 2003 operating results:

	Dollars		Percentage Points


Net sales	$	33.9		1.0%
Gross profit		13.1		1.0%
Selling, delivery and administrative expenses		8.2		0.8%
Operating income		4.9		1.5%

Impact of Emerging Issues Task Force Issue No. 02-16. In the first quarter of 2003, we prospectively adopted EITF Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor.” EITF Issue No. 02-16 concludes that certain consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor's products, and therefore, should be recorded as a reduction of cost of goods sold when recognized in the customer's income statement, unless certain criteria are met. This presumption is overcome if the consideration paid to the customer is directly attributable (offsetting) to incremental and separately identifiable expenses incurred elsewhere in the income statement. Prior to the adoption of EITF Issue No. 02-16, bottler incentives (marketing support programs) from brand owners were recognized as an increase to net sales or as a reduction in SD&A expenses based on the objectives of the programs and initiatives. In accordance with EITF Issue No. 02-16, we recorded certain bottler incentives as a reduction of cost of goods sold beginning in the first quarter of 2003 to properly account for new agreements. Bottler incentives that are directly attributable to incremental expenses incurred are reported as either an increase to net sales or a reduction to SD&A expenses, commensurate with the recognition of the related expense. All other bottler incentives are recognized as a reduction of cost of goods sold when the related products are sold based on the agreements with vendors.

Index

Assuming that EITF Issue No. 02-16 had been in place at the beginning of fiscal year 2002 and 2001, the following adjustments would have been made to our fiscal year 2002 and 2001 reported results (in millions):

	2002			2001

Net sales
As reported	$	3,239.8		$	3,144.0
EITF Issue No. 02-16 adjustment		( 83.3	)		( 69.6	)

Adjusted comparisons	$	3,156.5		$	3,074.4


Cost of goods sold
As reported	$	1,967.4		$	1,912.1
EITF Issue No. 02-16 adjustment		( 121.5	)		( 89.9	)

Adjusted comparisons	$	1,845.9		$	1,822.2


SD&A
As reported	$	968.4		$	908.6
EITF Issue No. 02-16 adjustment		38.2			20.3

Adjusted comparisons	$	1,006.6		$	928.9

Operating Results - 2003 compared with 2002

Volume. Sales volume growth (declines) for 2003 and 2002 were as follows:

	2003			2002

U.S.		(2.3%	)		1.9%
Central Europe		(6.7%	)		12.1%
Caribbean		4.3%			(0.4%	)

Worldwide		(2.7%	)		3.5%

In 2003, worldwide volume decreased 2.7 percent compared to the prior year, mainly attributable to volume declines of 2.3 percent in the U.S. and 6.7 percent in Central Europe offset by Caribbean volume growth of 4.3 percent. Excluding the benefit of the 53rd week, worldwide volume would have declined 3.7 percent, and U.S. volume would have decreased 3.5 percent compared to the prior year. The decline in worldwide volumes for the year was mainly due to the weak performance in the first quarter of 2003 in the U.S. and Central Europe, the continued impact of lower single serve package volumes, and the impact of volume declines in trademark Pepsi and trademark Mountain Dew. However, volume declines slowed throughout 2003 ending with the impact of a decrease in worldwide volume of 2.5 percent in the fourth quarter and a slight increase in U.S. volume of 0.4 percent, excluding the benefit of the 53rd week, compared to the prior year.

The decline in U.S. volume of 3.5 percent in fiscal year 2003, excluding the benefit of the 53rd week, reflected the weak performance in the first quarter of 2003, as well as continued softness in single serve package volume and trademark Pepsi and trademark Mountain Dew, as consumer demands shifted and higher net selling prices were maintained. We experienced softness across all channels, including continued volume declines in the small format channel. From a brand perspective, the decline in U.S. volume included mid single-digit declines in trademark Pepsi, driven mainly by lower volumes in brand Pepsi, offset, in part, by the introduction of Pepsi Vanilla in the third quarter of 2003. The low single-digit declines in trademark Mountain Dew reflected lower volumes in brand Mountain Dew, offset, in part, by the introduction of LiveWire in the second quarter of 2003 and volume increases in Diet Mountain Dew. Trademark Pepsi and trademark Mountain Dew comprise almost 80 percent of our total volume. During 2003, we continued to achieve growth in Sierra Mist and trademark Lipton. Trademark Aquafina volumes were relatively flat compared to the same period in the prior year. In fiscal year 2004, we have marketing and merchandising plans that will emphasize the single serve package and our core trademarks, Pepsi and Mountain Dew, in an effort to stabilize volume. In addition, we continue to focus on package innovation as a driver of volume growth, with the introduction of the eight-ounce can in the fourth quarter of 2003, and the continued rollout of Fridge-Mate. We anticipate 1 to 2 percent volume increases in the U.S. in fiscal year 2004 compared to 2003, excluding the 53rd week, as a result of these marketing and product innovation initiatives.

Index

Total volume in Central Europe decreased 6.7 percent during 2003, and reflected volume declines in all four countries. Volume declined year-over-year in Central Europe due to several factors, including continued competitive pressures in the water and carbonated soft drink categories and poor weather conditions in the first quarter of 2003 in certain markets. In Central Europe, carbonated soft drinks account for approximately 64 percent of total volume, while the water category comprises approximately 28 percent of our volume. A new market entrant in the value-priced water segment negatively impacted our volume trends as we maintained our pricing structure. Overall, we have maintained a similar disciplined pricing structure in Central Europe as we have in the U.S., despite the competitive pressures, which has negatively impacted our volume trends, but has positively contributed to our operating profit. In 2004, we will continue to re-evaluate the balance between volume and pricing in the various markets to ensure maximization of our operating profits. We expect Central Europe's volume to be flat in fiscal year 2004, compared to 2003, due to the impact of increased pricing which will be necessary to offset the effect of higher sugar costs expected to be incurred with the EU ascension in May 2004.

Total volume in the Caribbean increased 4.3 percent compared to the same period last year primarily reflecting volume improvements in Puerto Rico and Trinidad. Puerto Rico accounts for approximately 70 percent of total volume in the Caribbean. Overall, trademark Pepsi volume grew in the mid single digits and accounts for approximately 60 percent of the total Caribbean volume. Aquafina, Lipton and Tropicana volume also improved over the prior year, while Seven Up volume declined from the prior year. We anticipate continued volume growth in the Caribbean in fiscal year 2004 of approximately 2.5 to 3.5 percent.

Net Sales. Net sales and net pricing statistics for 2003 and 2002 were as follows (dollar amounts in millions):

Net Sales	2003			2002			Change

U.S.	$	2,739.4		$	2,760.5			( 0.8%	)
Central Europe		310.4			298.4			4.0%
Caribbean		187.0			180.9			3.4%

Worldwide	$	3,236.8		$	3,239.8			( 0.1%	)


Net Pricing Growth (Decline)	2003			2002

U.S.		4.4%			1.6%
Central Europe		13.5%			( 0.8%	)
Caribbean		( 0.3%	)		3.9%

Worldwide		5.3%			0.8%

Net sales in 2003 decreased $3.0 million, or 0.1 percent, to $3,236.8 million compared to $3,239.8 million in 2002. On a comparable basis, assuming that EITF Issue No. 02-16 had been in effect during 2002 and excluding the benefit from the 53rd week in 2003 in the U.S. operations, net sales would have increased $46.4 million, or 1.5 percent, in 2003, compared to the prior year. The 1.5 percent increase in worldwide net sales on a comparable basis primarily reflects an increase in worldwide net average selling prices of 5.3 percent, driven by increased pricing in the U.S. and Central Europe, favorable exchange rates in Central Europe, offset, in part, by the impact of volume declines in both the U.S. and Central Europe. In addition, our Caribbean operations contributed positively to net sales growth in 2003. We anticipate worldwide net selling prices to increase 2 to 3 percent in fiscal year 2004, compared to 2003.

Net sales in the U.S. in 2003 decreased $21.1 million to $2,739.4 million from $2,760.5 million in the prior year. On a comparable basis, assuming that EITF Issue No. 02-16 had been in effect during 2002 and excluding the benefit from the 53rd week in 2003, net sales would have increased $28.2 million, or approximately 1.1 percent over the prior year. The increase in U.S. net sales was the result of improved net selling price per unit of 4.4 percent, which offset the impact of the lower volumes in 2003 versus 2002. The improvement in net pricing was driven by price increases of approximately 2.7 percent and package mix contribution of 1.7 percent. A favorable change in our can mix, including the eight-ounce cans introduced in the fourth quarter of 2003, as well as a reversal in declining trends in our 20-ounce single serve business in the fourth quarter of 2003, contributed to the positive mix impact.

Net sales in Central Europe increased $12.0 million, or 4.0 percent, to $310.4 million in 2003 from $298.4 million in the prior year. The increase was attributed to the favorable impact of changes in foreign exchange rates of approximately $30.0 million and an increase in net pricing, offset by the impact of the 6.7 percent volume declines. Net sales in 2003 compared to the same period in the prior year were also negatively impacted by lower co-packing revenue in the Czech Republic in 2003 of approximately $10 million due to new packaging legislation in Germany. This new legislation negatively impacted the sales of products in returnable bottles due to deposit requirements.

Index

Caribbean net sales increased 3.4 percent to $187.0 million compared to $180.9 million in the prior year. The increase in net sales resulted mainly from volume growth of 4.3 percent and increased net pricing in Puerto Rico and Trinidad, offset, in part, by Jamaica’s decline in net pricing due, in part, to unfavorable foreign exchange rates.

Cost of Goods Sold. Cost of goods sold for 2003 and 2002 were as follows (dollar amounts in millions):

	2003		2002		Change

U.S.	$	1,560.6	$	1,653.8		( 5.6%	)
Central Europe		176.1		177.3		( 0.7%	)
Caribbean		139.9		136.3		2.6%

Worldwide	$	1,876.6	$	1,967.4		( 4.6%	)

Cost of goods sold decreased $90.8 million, or 4.6 percent, to $1,876.6 million compared to $1,967.4 million last year. On a comparable basis, assuming that EITF Issue No. 02-16 had been in effect during 2002 and excluding the costs from the 53rd week in the U.S. operations, cost of goods sold would have increased $9.9 million, or 0.5 percent.

In the U.S., cost of goods sold decreased $93.2 million, to $1,560.6 million from $1,653.8 million in 2002. On a comparable basis, assuming that EITF Issue No. 02-16 had been in effect during 2002 and excluding the costs from the 53rd week, costs of goods sold would have increased $3.5 million, or 0.2 percent. The increase in cost of goods sold on a comparable basis can be attributed to an increase in cost of goods sold per unit. The increase in cost of goods sold per unit in the U.S. reflected higher concentrate costs and increased costs related to product mix. More of our products are being sold in non-returnable PET packages versus can packages, which is a trend we expect to continue. Concentrate prices from PepsiCo beginning in February of 2003 were approximately 2 percent higher than the prior year. In 2004, we anticipate that concentrate pricing will increase approximately 0.7 percent compared to 2003.

In Central Europe, cost of goods sold decreased $1.2 million, or 0.7 percent, to $176.1 million compared to $177.3 million in the previous year. Assuming that EITF Issue No. 02-16 had been in effect during 2002, Central Europe cost of goods sold would have increased $2.8 million in 2003, compared to the prior year, due primarily to the unfavorable impact of foreign exchange rates of approximately $15.1 million. Excluding the impact of foreign exchange rates and on a comparable basis, cost of goods sold decreased $12.3 million, or 7.1 percent, which can be primarily attributed to the volume decline of 6.7 percent for 2003 and the lower costs related to the decline in the German co-packing business in the Czech Republic. Cost of goods sold per unit in Central Europe is expected to increase in 2004 due to higher sugar prices expected to be incurred with the EU ascension in May 2004. Upon entry into the EU, price supports for sugar will be removed and our costs are expected to increase by approximately $6 to $8 million in 2004 for the period May 1 through December 31, 2004.

In the Caribbean, cost of goods sold increased $3.6 million, or 2.6 percent, to $139.9 million compared to $136.3 million in 2002, driven mainly by the increase in volume of 4.3 percent and unfavorable foreign exchange rates in Jamaica, offset, in part, by a lower cost of goods sold per unit.

Selling, Delivery and Administrative Expenses. Selling, delivery and administrative expenses for 2003 and 2002 were as follows (dollar amounts in millions):

	2003		2002		Change

U.S.	$	857.0	$	791.1		8.3%
Central Europe		133.9		129.3		3.6%
Caribbean		46.2		48.0		( 3.8%	)

Worldwide	$	1,037.1	$	968.4		7.1%

In 2003, SD&A expenses increased $68.7 million, or 7.1 percent, to $1,037.1 million from $968.4 million in the previous year. On a comparable basis, assuming that EITF Issue No. 02-16 had been in effect in 2002 and excluding the $8.2 million of costs contributed by the 53rd week of U.S. operations, SD&A expenses would have increased $22.3 million, or 2.2 percent. As a percentage of net sales, SD&A expenses increased to 32.1 percent in 2003, compared to 31.9 percent in the prior year. On a comparable basis, the 2.2 percent increase in SD&A expenses compares favorably to the prior year SD&A growth trend of 8.4 percent due mainly to our focus on controlling costs. Excluding the impact of the 53rd week in 2003, we anticipate that SD&A expenses will increase in the range of 3 to 4 percent in 2004.

Index

In the U.S., SD&A expenses increased $65.9 million to $857.0 million compared to $791.1 million in the prior year. On a comparable basis, assuming that EITF Issue No. 02-16 had been in effect in 2002 and excluding the costs of the 53rd week, SD&A expenses would have increased $23.5 million, or 2.8 percent. As a percentage of net sales and on a comparable basis, SD&A expenses increased to approximately 31.4 percent, compared to 30.8 percent in the prior year. The increase in SD&A expenses was primarily attributed to higher insurance and benefit costs which most likely will continue in 2004.

In Central Europe, SD&A expenses increased $4.6 million to $133.9 million from $129.3 million in the prior year. Excluding the $10.0 million unfavorable impact of foreign currency rates and the $4.0 million unfavorable impact of the adoption of EITF Issue No. 02-16 in 2003, SD&A expenses would have decreased $9.4 million in 2003, compared to the prior year. SD&A expenses as a percentage of net sales and on a comparable basis improved to 43.1 percent in fiscal year 2003, compared to 44.7 percent in the prior year. The decrease in SD&A expense can be mainly attributed to the cost savings related to the migration to an alternative sales and distribution ("AS&D") strategy in the rural areas in Central Europe. Our conversion to the AS&D model should be completed by the second quarter of 2004, and upon completion, we expect cost savings of approximately $7 million annually. Such future cost savings will be offset, in part, by the investment we will make in connection with the EU ascension in May 2004.

SD&A expenses in the Caribbean decreased $1.8 million to $46.2 million in 2003, and improved as a percentage of net sales to 24.7 percent in 2003, from 26.5 percent in the prior year.

Special Charges. During 2003, we recorded special charges, net, of $6.4 million, including the $5.6 million charge, net, in the U.S. related to the reduction in workforce, and net charges of $0.8 million related to the changes in the production, marketing and distribution strategies in our international operations. The U.S. special charge, net, of $5.6 million consisted mainly of severance-related costs, including the acceleration of restricted stock awards, associated with the announced reduction in our U.S. workforce in the first quarter of 2003.

During 2003, we recorded special charges of $2.1 million in Central Europe related to the modification of the distribution method in Poland, the Czech Republic, and Republic of Slovakia, offset by a $2.1 million reversal of special charges recorded in the third quarter of 2003 related to the favorable outcomes associated with lease obligations and severance payments. In the Caribbean, we recorded special charges of $0.8 million that consisted mainly of asset write-downs related to the shutdown of the Barbados manufacturing facility. Similar to the distribution changes we are making in Central Europe, we have rationalized our operation in Barbados. We are now outsourcing our distribution through a local partner and sourcing production from another manufacturing location we operate.

Operating Income. Operating income for 2003 and 2002 was as follows (dollar amounts in millions):

	2003		2002			Change

U.S.	$	315.7	$	314.7			0.3%
Central Europe		0.5		( 10.6	)		*
Caribbean		0.1		( 3.4	)		*

Worldwide	$	316.3	$	300.7			5.2%

* Calculation of percentage change is not meaningful.

Operating income increased $15.6 million, or 5.2 percent, to $316.3 million compared to $300.7 million in 2002, driven mainly by an increase in operating income in our international operations of $14.6 million. The significant factors impacting U.S. operating income in 2003 were the improvements in net pricing and the $4.9 million contribution from the 53rd week, offset, in part, by a special charge, net, of $5.6 million related to the reduction in the U.S. workforce and the impact of volume declines and slightly higher SD&A expenses as a percentage of net sales.

For the first time, we achieved operating profitability in our combined international operations. Operating income in our international operations was $0.6 million in fiscal year 2003, compared to a combined operating loss of $14.0 million in the prior year. Operating income in Central Europe increased $11.1 million to $0.5 million in 2003, compared to a loss of $10.6 million in the prior year, while, in the Caribbean, operating income increased $3.5 million to $0.1 million in 2003, compared to a loss of $3.4 million in the prior year. Approximately $0.5 million of the Caribbean improvement in operating income was related to a change in estimate regarding the lives of certain fixed assets.

Index

Historically, the profitability of our international operations has been a challenge. The infrastructure of our Central Europe and Caribbean operations anticipated a certain growth in market share for PepsiCo branded products; however, the competitive environment, stronger than anticipated preferences to local branded products, as well as the overall macroeconomic and political conditions did not allow us to generate sufficient volume and revenue growth to cover the operating costs present in our current distribution infrastructures. Over the past several years, we have addressed the lack of profitability in our international operations in several ways. In Central Europe, first, we have sought to expand the products we distribute beyond carbonated soft drink brands owned by PepsiCo and Cadbury Schweppes. In 1999, we acquired a local brand in Central Europe, Toma, which allowed for the distribution of juices, still drinks and water under the Toma brand to leverage our existing infrastructure. Secondly, we began modifying our distribution method in Central Europe in 2002 from a conventional direct store delivery model to an alternative model using distributors in rural areas. Poland is the last country to complete the migration to the alternative distribution strategy in the rural areas. Once completed, which is expected by the second quarter of 2004, we anticipate annual savings of approximately $7 million. This change has both expanded our revenue by increasing our points of contact with the end customer and reduced costs.

As it relates to the Caribbean markets, we have better leveraged our infrastructure in the Caribbean in several ways, including the outsourcing of production for Barbados from an already existing manufacturing location and the utilization of a third party distributor, as well as expanding our portfolio of products for distribution in Trinidad.

We expect our international profitability to continue into 2004 as we benefit from these initiatives; however, we will be faced with challenges associated with the E