Coca-Cola Consolidated
Annual Report 2000

Plain-text annual report

2 0 0 0 A n n u a l R e p o r t Coca-Cola Bottling Co. Consolidated (CCBCC) is the second largest Coca-Cola bottler in the United States. The Company is a leader in the manu- facturing, marketing and distribution of soft drinks. With corporate offices in Charlotte, N.C., the Company does business in 11 states, primarily in the Southeast. The Company has one of the highest per capita soft drink consumption rates in the world and manages bottling territories with a consumer base of close to 18 million people. Coca-Cola Bottling Co. Consolidated is listed on the NASDAQ National Market System under the symbol COKE. This annual report is printed on recycled paper. F i n a n c i a l S u m m a r y In Thousands (Except Per Share Data) Fiscal Year Net sales Gross margin 2000 1999 1998 $ 995,134 $ 972,551 $ 928,502 464,893 429,438 393,583 Restructuring expense 2,232 Income before income taxes 9,835 4,986 23,245 Net income 6,294 3,241 14,878 Average Common and Class B Common shares outstanding Basic net income per share Basic net income plus amortization expense per share* 8,733 8,588 $ $ .72 2.02 $ $ .38 1.63 8,365 1.78 3.01 $ $ * Includes CCBCC’s share of Piedmont Coca-Cola Bottling Partnership’s amortization expense. Amortization expense has been adjusted for income taxes at the Company’s marginal tax rate. Certain prior year amounts have been reclassified to conform to current year classifications. L e t t e r T o S h a r e h o l d e r s I f we assessed last year’s performance of Coca-Cola Bottling Co. Consolidated in sports terms, we might say 2000 was a rebuilding year. Typical of an athletic team’s rebuilding year, we suffered some setbacks, made strategic adjustments, learned from our experiences, redefined our vision and put a new plan into effect. We believe we have emerged from this year of rebuilding as a much CCBCC is constantly stronger Company that is better positioned for the future. innovating the way we To understand how your Company performed in 2000, it’s important do business. The high- to consider the obstacles we encountered. First, we faced a challenging business environment and a slowing economy. Fuel costs escalated, and tech Norand unit is one we experienced considerable price increases in packaging and other costs such novel tool. Route of goods — including an unprecedented increase in concentrate pricing. Further, the Company endured a five-month labor strike in West salesmen are able to Virginia which impacted sales and profitability during the second and use the hand-held device to quickly and accurately measure product levels at third quarters. Faced with these obstacles, the major objective in 2000 was to improve the financial health of the business. The key components in this strategy included increasing prices to improve margins, managing expenses and paying down debt to improve interest costs and coverage. We had an operationally focused plan to manage the price/volume vending machines and equation and increase productivity in 2000 and beyond. determine which In 2000, we increased net selling prices by 6.5 percent, which had a short-term negative impact on volume. In spite of products need to this one-year downturn, our volume performance on a multiyear be replenished. basis is very strong and consistent with other major Coca-Cola bottlers. In fact, in the fourth quarter we saw sales rebounding with an increase in sales volume. We took steps to reduce spending following several years of significant incremental investments in both equipment and human resources. We also set out to be more efficient and improve productivity. Your Company has begun to see the results of our investment in our value chain initiative that you will read about later in this report. In addition, the Company has taken steps to consolidate operations, including merging several sales centers and divesting a small part of our selling territories — areas in Kentucky and Ohio — which were a better 3 L e t t e r T o S h a r e h o l d e r s geographic fit with another Coca-Cola bottler. This divestiture allowed the Company to reorganize its business in West Virginia to be more efficient. Net income for 2000 was $6.3 million compared to $3.2 million in 1999, including the one-time gain from the sale of the Kentucky and Ohio territories. Operating cash flow grew to $142 million, up about 5 percent. Free cash flow increased significantly which enabled us to pay down debt by $60 million — or 8 percent. This lower debt load should not only reduce interest costs in 2001, but should also improve our interest coverage ratios. As the nation’s second largest Coca-Cola bottler, our relationship with The Coca-Cola Company is important. As The Coca-Cola Company Chairman and Chief Executive Officer Frank Harrison, III and President and Chief continues to move forward with its rebuilding and streamlining of Operating Officer Bill operations, our relationship remains strong. We are optimistic about The Coca-Cola Company’s future and look forward to further enhancing Elmore visit an exciting our working relationship while building long-term shareholder value for new CCBCC facility in you, our shareholders. Considering the formidable challenges we faced during the year, Charlotte, N.C. The new we are pleased with Coca-Cola Consolidated’s performance in 2000. sales center, adjacent We want to affirm our commitment to long-term profitable growth and increased shareholder value. We are grateful to a truly outstanding to Snyder Production management team for their leadership and creativity and to all our employees for their continued dedication and hard work. We have a strong team in place; we’re ready for the future. Center (SPC), places Charlotte’s bulk, conventional and cold drink departments together under one roof. J. Frank Harrison, III Chairman of the Board of Directors and Chief Executive Officer William B. Elmore President and Chief Operating Officer 5 Q u e s t i o n s & A n s w e r s w i t h P r e s i d e n t a n d C O O B i l l E l m o r e “I want to welcome Bill Elmore as the Company’s new president and chief operating officer,” said Frank Harrison.“Bill has been a part of the Coca-Cola Consolidated family since 1985, and he has held a leadership role in virtually every department and function in the Company. Like Jim Moore, Bill is a superior leader who has the talent and vision to guide this Company’s operations for many years to come.” A discussion with Bill on the outlook for 2001 appears below. Q What are Coca-Cola Consolidated’s priorities for 2001? A We are dedicated to continuing to improve the financial health of the Company, primarily through targeted price increases and disciplined capital and operating expense management that allows us to further pay down debt. As we move forward, we must have a balanced approach that delivers appropriate financial results while continuing to grow our consumer franchise. Our key priorities include managing the price/volume equation, increasing productivity, implementing our value chain initiative, improving the efficiencies of our distribution systems and technical service function, strengthening our cold drink business, managing our key customer and supplier relationships and executing in the marketplace. Q How do you effectively manage the price/volume equation? A Managing the price/volume equation is our most important priority as well as our most challenging task. As with all consumer products that are price elastic, when prices increase, volume — at least temporarily — declines. We witnessed that last year. It is important to note that over the last 20 years or so, soft drink prices have actually declined relative to inflation. While our industry has become much more productive, most, if not all, of the cost savings have benefited the consumer. In 2000, we took the necessary step to pass on our increased costs, and as expected, volume declined. Going forward, price increases must be more in line with inflation. At the same time, we plan to be more surgical and responsive in pricing actions. It’s important that we protect sales volume and market share while getting price realization. I’m confident we’ll be able to do that — and in fact, in the fourth quarter of 2000, we saw volume begin to rebound. Q How do you continue to improve productivity? A Productivity is already a core competency within Coca-Cola Consolidated. Some tools that are just becoming available to us will enable us to increase efficiencies in almost every aspect of our business. These tools emerged from our value chain, distribution and technical services initiatives. Using these tools and, in some cases, redesigned processes, will help us grow margin and manage capital and operating expenditures while becoming much more efficient. Eye-catching glass- front venders are the latest introduction into the marketplace. Workplace break rooms and other locations where people seek refresh- ment will benefit from this new tool. Consumers can see the technology at work as their bever- age of choice gently drops into the arm and the drink is placed upright into the receptacle. 7 Q u e s t i o n s & A n s w e r s w i t h P r e s i d e n t a n d C O O B i l l E l m o r e Take the value chain initiative. The goal is to improve decision-making in our manufacturing and transportation systems. We have made a major investment in value chain that is already beginning to generate returns, such as improved efficiencies in sales forecasting, production, product movement, inventory management and warehouse layout. Better processes require less inventory buffer which translates into lower investment in working capital, reduced losses from damaged product, improved warehouse efficiencies, increased manufacturing productivity and lower transportation costs. By the second quarter of 2001, our entire system will have implemented the value chain processes. These improvements in sales forecasting, raw materials procurement and automated production scheduling are showing appreciable improvement in manufacturing productivity and warehouse costs. Q What changes do you expect in your distribution systems? A Much like the value chain process, we are looking at every aspect of our distribution systems and have discovered innovative ways to improve productivity. Our goal is to provide satisfactory customer service at a lower cost. We’re looking at various methods to deliver our products in more efficient ways, from changing the size of our trucks to technology improvements to how we sell our products. The benefits of improving our distribution systems include achieving better sales results, reducing delivery costs, reducing employee turnover and improving warehouse efficiencies. I’m encouraged by what we have already learned and look forward to expanding these initiatives throughout the Company in the next few years. Q In the past, the Company has placed an emphasis on its cold drink A Coca-Cola Consolidated has a highly developed cold drink business that business. Is cold drink still a priority? continues to be a critically important part of our success, and we are doing a number of things to strengthen this key channel. We have more than 175,000 pieces of cold drink equipment in place, and our goal is to increase sales through this large asset base. We’re growing our customer base and at the same time taking steps to make sure each account and location is profitable. Another innovative tool we will use to grow our cold drink business is on-line vending. This new technology uses radios placed on vending machines to communicate to us when product is needed or if the machine is in need of repair. The tool provides data to ensure that we have the right inventory for our various brands while reducing out-of-stock conditions. It also enables us to significantly reduce the amount of time that a machine is inoperable due to mechanical problems. Because it communicates to us when a delivery is needed, unnecessary trips to deliver product are eliminated, allowing us to achieve greater sales and lower operating costs. 9 The introduction of Dasani has been one of the biggest success stories in recent CCBCC history. Available in a variety of packages and outlets — including vending machines — Dasani has become a favorite of consumers who love the fresh taste of this purified, mineral-enhanced water. At Snyder Production Center, the bottles are labeled before being packaged for distribution. Q u e s t i o n s & A n s w e r s w i t h P r e s i d e n t a n d C O O B i l l E l m o r e Another way to improve our cold drink business is to better manage the service and repair of our cold drink assets. I’m excited about our technical service initiative. We have instituted a parts management system, which has dramatically improved parts ordering and inventory efficiencies. In addition, we have decided to outsource our vender refurbishment. The benefits of this initiative include increased sales and profit per asset, reduction in parts expense, reduction in facility capital requirements, improved vender delivery productivity and increased technician productivity. Q What are some of the key constituent groups Coca-Cola Consolidated A There are a number of key relationships that are critical to our success. is reaching out to? Those constituencies include The Coca-Cola Company, our key customers and suppliers, other Coca-Cola bottlers, our employees, community leaders in the cities and towns where we do business and our consumers. Our partners at The Coca-Cola Company have experienced a major restructuring over the last year or so. There is new leadership and a new approach toward the franchise company’s relationship with the bottler system. We have an excellent relationship with The Coca-Cola Company, and we are working well together to meet mutual goals. It is a two-way relationship. Just as a strong Coca-Cola Company is important to our success, The Coca-Cola Company needs strong and profitable bottler partners. We enjoy excellent relationships with both our key customers and key suppliers, based on our core values of honesty, integrity and respect. Consolidation among customers and suppliers has reduced the number while increasing the size and power of many of these groups. These changing dynamics make it necessary to work with neighboring Coca-Cola bottlers to effectively meet the needs of large retail accounts that cross territory lines. We have taken some innovative steps so that our key customers can deal with the Coca-Cola system as seamlessly as possible. Coca-Cola Consolidated’s employees make everything possible. I believe this Company has the best workforce in the industry. We are continuing to take steps to develop our employee associates and build a workforce that reflects the diversity of our communities. Our goal is also to provide attractive compensation and benefits programs that will enable us to retain our most valuable assets — our people. Further, we understand that our consumers are the backbone of our success, and we recognize that the economic health of the communities where we do business has a direct impact on our business. So, we will continue to reach out to civic, business, political, religious and charitable leaders in order to help build stronger communities for both our employees and consumers. Shoppers can’t walk by CCBCC’s prominent grocery store displays without taking notice. Attractive, creative product displays in key locations in stores ensure our consumers don’t have to search for us ... we’re right in front of them. This kind of convenience keeps our consumers happy while boosting sales. 11 A T r i b u t e Coca-Cola Bottling Co. Consoli- dated would not be what it is today without the leadership and dedicated service of James L. Moore, Jr. The employees and shareholders of CCBCC are fortunate that Jim Moore joined Coca-Cola Consolidated in March 1987. For the past 14 years, Jim has guided this organization through acquisitions, pricing pressures and volume fluctuations, changes in the industry and in the company, new product launches, technological triumphs, the move to sell in new and innovative venues and more. Jim has been a hands-on leader. of North Carolina. He and his wife, Sue, have In a 1990 interview, he was asked why he two adult daughters and one grandson. Prior still spent so much time in the trade. He to his distinguished career in the soft drink responded, “I need to get a regular dose of industry, Jim served his country (1964-66) reality. I believe it is absolutely essential to as a military intelligence officer, including be in the trade, talking with customers and a tour in Vietnam. He currently serves working with our own people. Otherwise, as chairman of Charlotte’s Presbyterian you can end up breathing your own exhaust. Hospital board of trustees and is a member My view is simply that very little good is of the board of directors of Park Meridian accomplished by just sitting behind a desk.” Financial Corporation. Having done most every job in the As Jim moves into his new role as “At the end of 2000, Jim Moore ended a remarkable 14-year tenure as president and chief operating officer of Coca-Cola Consolidated,” said Frank Harrison. “I want to personally thank Jim for his out- standing service to this Company. Jim is an excellent operator and a leader who is one of the most respected people in the soft drink industry. I look forward to his continued support soft drink business from district manager to Vice Chairman of the Board, his fellow and guidance as vice chairman of Coca-Cola Consolidated’s Board of Directors.” 12 CEO, Jim understands the business and the Board members and CCBCC management people in it intimately. We at CCBCC were wish him well and thank him for his the beneficiaries of his no-nonsense, “roll-the- profound contributions to the Company sleeves-up-and-get-the-job-done” attitude. he has nurtured for more than a decade. A 1964 graduate of Davidson College, His wisdom, knowledge and hard work Jim also earned an MBA from the University will continue to add value to our Company. Table of Contents Management’s Discussion and Analysis ...................................................................... 14 Report of Independent Accountants............................................................................ 20 Report of Management ............................................................................................... 21 Consolidated Balance Sheets ....................................................................................... 22 Consolidated Statements of Operations ...................................................................... 24 Consolidated Statements of Cash Flows...................................................................... 25 Consolidated Statements of Changes in Stockholders’ Equity ..................................... 26 Notes to Consolidated Financial Statements ............................................................... 27 Selected Financial Data ............................................................................................... 46 Summary of Quarterly Stock Prices............................................................................. 47 Directors and Executive Officers................................................................................. 48 Corporate Information ................................................................................ Inside Cover C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 13 2000 Management’s Discussion and Analysis INTRODUCTION The Company Coca-Cola Bottling Co. Consolidated (the “Company”) is engaged in the production, marketing and distribution of products of The Coca-Cola Company, which include some of the most recognized and popular beverage brands in the world. The Company is currently the sec- ond largest bottler of products of The Coca-Cola Com- pany in the United States. The Company also distributes several other beverage brands. The Company’s product offerings include carbonated soft drinks, teas, juices, isotonics and bottled water. The Company has expanded its bottling territory primarily throughout the Southeast via acquisitions and, combined with internally generated growth, has increased its sales from $130 mil- lion in 1984 to almost $1 billion in 2000. The Company is also a partner with The Coca-Cola Company in a partnership that operates additional bottling territory with net sales of $287 million in 2000. Acquisitions and Divestitures During 2000, the Company sold most of its bottling territory in Kentucky and Ohio to another Coca-Cola bottler. After a management review of the Company’s operations, it was determined that this territory could be operated more efficiently by another Coca-Cola bot- tler due primarily to geographic proximity to the cus- tomers. Without the requirement to service this terri- tory, the Company was able to reorganize operations in its West Virginia territory to further improve efficien- cies. Management believes that the combination of the proceeds from the sale and the efficiencies gained will lead to higher profitability and better returns in this part of our bottling territory. 14 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d During 1999 and 1998, the Company expanded its bottling territory by acquiring four Coca-Cola bottlers as follows: • Carolina Coca-Cola Bottling Company, Inc., a Coca-Cola bottler with operations in central South Carolina in May 1999; • The bottling rights and operating assets of a small Coca-Cola bottler in north central North Carolina in May 1999; • Lynchburg Coca-Cola Bottling Co., Inc., a Coca-Cola bottler with operations in central Virginia in October 1999; and • The bottling rights and operating assets of a Coca-Cola bottler located in Florence, Alabama in January 1998. Acquisition related costs including interest expense and non-cash charges such as amortization of intangible assets will be incurred. To the extent these expenses are incurred and not offset by cost savings or increased sales, the Company’s acquisition strategy may depress short-term earnings. The Company believes that contin- ued growth through selected acquisitions will enhance long-term stockholder value. New Accounting Pronouncements The Financial Accounting Standards Board (“FASB”) has issued Statement No. 133, “Accounting for Deriva- tive Instruments and Hedging Activities.” As subse- quently amended by FASB Statement No. 138, State- ment No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Statement No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Deriva- Management’s Discussion and Analysis tives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commit- ments through earnings or recognized in other compre- hensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The Company will adopt the provisions of Statement No. 133 in the first quarter of 2001. The adoption of Statement No. 133 will not have a material impact on the earnings and financial position of the Company. The Year in Review The year 2000 was a transitional year for the Company. During the latter part of the 1990’s, the Company expe- rienced above industry average volume growth. How- ever, net selling prices had not increased, even at the rate of inflation. During 2000, the Company was faced with significant cost increases for concentrate, certain pack- aging materials and fuel. Additionally, marketing sup- port the Company had historically received from The Coca-Cola Company was adjusted downward signifi- cantly and interest rates on the Company’s floating rate debt increased. In the face of the aforementioned cost increases, the Company raised its net selling prices during the year by approximately 6.5% over 1999. As with most consumer products, increases in selling prices temporarily dampened sales demand. The increase in prices was the primary driver behind a decline in unit sales volume of approximately 5% for the year on a constant territory basis. Unit sales volume declined 5.5% through the first three quarters of 2000. However, volume increased by 1% during the fourth quarter of the year. Higher net selling prices more than offset volume declines and resulted in an increase in net sales of 2.3% in 2000 to $995 million. On a constant territory basis, net sales increased by approximately 1% in 2000. Income from operations plus depreciation and amortiza- tion increased from $135 million in 1999 to $142 mil- lion in 2000, an increase of 5%. Net income for 2000 increased to $6.3 million from $3.2 million in 1999. Net income for 2000 includes a gain, net of tax, of $5.6 million related to the sale of bottling territory pre- viously discussed. During 2000, the Company also recorded a provision for impairment of certain fixed assets of $2.0 million, net of tax. After several years of significant capital spending, the Company was well positioned in 2000 with a strong infrastructure to support the business. The investment in infrastructure in prior years allowed the Company to significantly reduce capital spending in 2000 to $49.2 million from over $264.1 million in 1999, which included approximately $155 million for the purchase of equipment that was previously leased. The Company anticipates capital spending to be lower in 2001 than it was in the late 1990’s. As a result of increased cash flow from operations, reduced capital spending and the sale of bottling territory in Kentucky and Ohio, the Com- pany reduced its long-term debt by approximately $60 million during 2000. The Company continues to focus on its key long- term objectives including increasing per capita con- sumption, operating cash flow and stockholder value. We believe we will be able to achieve these objectives over the long-term because of superior products, a solid relationship with our strategic partner, The Coca-Cola Company, select acquisitions, an experienced manage- ment team and a work force of approximately 6,000 talented individuals working together as a team. We are committed to working with The Coca-Cola Company to ensure that we fully utilize our joint resources to maxi- mize the full potential with our consumers and customers. Significant Events of Prior Years On June 1, 1994, the Company executed a management agreement with South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative located in Bishopville, South Carolina. The Company is a member of the cooperative and receives a fee for managing the day-to-day opera- tions of SAC pursuant to this 10-year management agreement. On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont Coca-Cola Bottling Partner- ship (“Piedmont”) to distribute and market soft drink products of The Coca-Cola Company and other third party licensors, primarily in certain portions of North Carolina and South Carolina. The Company provides a portion of the soft drink products to Piedmont and receives a fee for managing the business of Piedmont pursuant to a management agreement. The Company and The Coca-Cola Company, through their respective subsidiaries, each beneficially own a 50% interest in Piedmont. The Company is accounting for its invest- ment in Piedmont using the equity method of accounting. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 15 Management’s Discussion and Analysis RESULTS OF OPERATIONS 2000Comparedto1999 Net Income The Company reported net income of $6.3 million or basic net income per share of $.72 for fiscal year 2000 compared to $3.2 million or $.38 basic net income per share for fiscal year 1999. Diluted net income per share for 2000 was $.71 compared to $.37 in 1999. Net income in 2000 included the gain on the sale of bottling territory discussed above, offset somewhat by a provi- sion for impairment of certain fixed assets. Net Sales and Gross Margin Net sales for 2000 grew by 2.3% to $995 million, com- pared to $973 million in 1999. On a constant territory basis, net sales increased by approximately 1% due to an increase in net selling price for the year of approxi- mately 6.5% partially offset by a decline in unit volume of approximately 5% for the year. Sales growth in 2000 was highlighted by the continued strong growth of Dasani bottled water. Noncarbonated products now account for almost 7% of the Company’s bottle and can volume. Gross margin increased by $35.5 million from 1999 to 2000 representing an 8% increase. The increase in gross margin was driven by higher selling prices, which more than offset a decline in unit volume as discussed above. The Company’s gross margin as a percentage of sales increased from 44.2% in 1999 to 46.7% in 2000. On a per unit basis, gross margin increased 13% in 2000 over 1999. Cost of Sales and Operating Expenses Cost of sales on a per unit basis increased by approxi- mately 2% in 2000. This increase was due to signifi- cantly higher costs for concentrate and increased pack- aging costs, offset somewhat by decreases in manufacturing labor and overhead expenses. Selling, general and administrative (“S,G&A”) expenses increased by $31.3 million or 11% in 2000 over 1999 levels primarily due to a reduction in market- ing funding received from The Coca-Cola Company. Total marketing funding support from The Coca-Cola Company and other beverage companies declined from $63.5 million in 1999 to $49.0 million in 2000. The Company anticipates that marketing funding support in 2001 will be more consistent with amounts received in 2000 than amounts received in 1999. The balance of the increase in S,G&A expenses was due to enhancements in employee compensation programs, higher fuel costs, costs associated with a strike by employees in certain branches of the Company’s West Virginia territory (pri- marily security costs to protect Company personnel and assets) and compensation expense related to a restricted 16 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d stock award for the Company’s Chairman and Chief Executive Officer. The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca-Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and adver- tising expenditures to promote sales in the local territo- ries served by the Company. The Company also benefits from national advertising programs conducted by The Coca-Cola Company and other beverage companies. Certain of the marketing expenditures by The Coca-Cola Company and other beverage companies are made pursuant to annual arrangements. Although The Coca-Cola Company has advised the Company that it intends to provide marketing funding support in 2001, it is not obligated to do so under the Company’s master bottle contract. A portion of the marketing funding and infrastructure support from The Coca-Cola Company is subject to annual performance requirements. The Com- pany is in compliance with all current performance requirements, as amended. Significant decreases in mar- keting support from The Coca-Cola Company or other beverage companies could adversely impact operating results of the Company. Depreciation expense in 2000 increased $4.2 million or 7%. The increase for 2000 was due to significant capital expenditures in 1999 of $264.1 million, of which approximately $155 million related to the pur- chase of equipment that was previously leased. Capital expenditures in 2000 totaled $49.2 million. Deprecia- tion expense should increase at a lower rate in future years than it has in the past three years due to antici- pated lower levels of capital spending. Investment in Partnership The Company’s share of Piedmont’s net income in 2000 was $2.5 million. This compares to the Company’s share of Piedmont’s net loss of $2.6 million in 1999. The increase in income from Piedmont of $5.1 million reflects improved operating results at Piedmont prima- rily due to higher gross margin resulting from increased net selling prices. Interest Expense Interest expense increased by $2.8 million or 5.5% in 2000. The increase was primarily due to higher interest rates on the Company’s floating rate debt. The Compa- ny’s overall weighted average borrowing rate for 2000 was 7.3% compared to 6.8% in 1999. During 2000, the Company repaid approximately $60 million of its long- term debt. This reduction in long-term debt should reduce interest expense in 2001. Management’s Discussion and Analysis Other Income/Expense Other income for 2000 was approximately $1 million, a change of $6.4 million versus other expense of $5.4 mil- lion in 1999. The change in other income (expense) in 2000 is primarily due to a gain on the sale of bottling territory of $8.8 million, before tax, as previously dis- cussed, offset somewhat by a provision for impairment of certain fixed assets of $3.1 million, before tax. Income Taxes The effective tax rate for federal and state income taxes was approximately 36% in 2000 versus approximately 35% in 1999. 1999Comparedto1998 Net Income The Company reported net income of $3.2 million or basic net income per share of $.38 for fiscal year 1999 compared to $14.9 million or $1.78 basic net income per share for fiscal year 1998. Diluted net income per share for 1999 was $.37 compared to $1.75 in 1998. The decline in net income was primarily attributable to lower than anticipated volume growth and higher expenses related to the Company’s investment in the infrastructure considered necessary to support acceler- ated long-term growth. Investments in additional per- sonnel, vehicles and cold drink equipment resulted in cost increases that the Company anticipated would be offset by higher sales volume. Soft drink industry growth levels slowed significantly during 1999 and the Company’s higher cost structure negatively impacted 1999 earnings. The Company reduced its workforce by approximately 5% in the fourth quarter of 1999 to reduce staffing costs. Net Sales Net sales for 1999 grew by approximately 5% to $973 million, compared to $929 million in 1998. The increase was due to volume growth of 2%, an increase in net selling price of 3% and acquisitions of additional bottling territories in South Carolina, North Carolina and Virginia. Also, the Company’s 1998 fiscal year included a 53rd week. Sales growth in noncarbonated beverages, including POWERaDE, Fruitopia and Dasani bottled water remained strong in 1999. Sales to other bottlers decreased by 11% during 1999 over 1998 lev- els, primarily due to lower sales to Piedmont. Cost of Sales and Operating Expenses Cost of sales on a per case basis increased by approxi- mately 1% in 1999. This increase was due to higher raw material costs, including concentrate and packaging costs, as well as increases in manufacturing labor and overhead resulting from wage rate increases and an increase in the number of stockkeeping units. S,G&A expenses increased by approximately $16 million or 6% in 1999 over 1998 levels. Lease expense declined significantly in 1999 as compared to 1998 as a result of the purchase of approximately $155 million of equipment in January 1999 that had been previously leased. Excluding lease expense, S,G&A expenses increased by approximately $31 million or 12% in 1999. Increased S,G&A expenses resulted from higher employment costs for additional personnel to support anticipated volume growth and higher costs in certain of the Company’s labor markets, offset some- what by lower incentive accruals, as well as additional marketing expenses and higher costs for sales develop- ment programs. In addition, S,G&A expenses increased due to remediation and testing of Year 2000 issues of approximately $1 million and an increase in bad debt expense of $.4 million. Increased marketing funding support from The Coca-Cola Company of approxi- mately $2 million mitigated a portion of the increase in S,G&A expenses. Depreciation expense in 1999 increased $23.5 mil- lion or 63% over 1998. The increase was due to signifi- cant capital expenditures over the past several years, including $264.1 million in 1999, of which approxi- mately $155 million related to the purchase of equip- ment that was previously leased. A pre-tax restructuring charge of $2.2 million was recorded in the fourth quarter of 1999 consisting of employee termination benefit costs of $1.8 million and facility lease costs and other related expenses of $.4 million. The objectives of the restructuring were to consolidate and streamline sales divisions and reduce the overall operating expense base. Investment in Partnership The Company’s share of Piedmont’s net loss of $2.6 mil- lion increased from a loss of $.5 million in 1998. The increase in the loss reflected the impact of lower than expected volume growth in 1999 and higher infrastruc- ture costs. Interest Expense Interest expense increased by $10.6 million or 27% in 1999 over 1998. The increase was due to additional debt related to the purchase of approximately $155 mil- lion of equipment that was previously leased, additional borrowings to fund acquisitions and capital expendi- tures. The Company’s overall weighted average borrow- ing rate for 1999 was 6.8% compared to 7.1% in 1998. Other Income/Expense Other expense increased from $4.1 million in 1998 to $5.4 million in 1999. Approximately half of the increase in other expense from 1998 to 1999 related to net losses of Data Ventures LLC, in which the Company held a 31.25% equity interest. Data Ventures LLC provided C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 17 Management’s Discussion and Analysis certain computerized data management products and services to the Company related to inventory control and marketing program support. Income Taxes The effective tax rate for federal and state income taxes was approximately 35% in 1999 versus approximately 36% in 1998. FINANCIAL CONDITION Total assets decreased from $1.11 billion at January 2, 2000 to $1.06 billion at December 31, 2000. The decrease was primarily due to depreciation of property, plant and equipment exceeding capital expenditures and amortization of intangible assets, principally acquired franchise rights. Working capital increased by $21.3 million to $14.3 million at December 31, 2000 from a deficit of $7.0 million at January 2, 2000. The change in working capital was primarily due to decreases in the current portion of long-term debt of $18.7 million, accounts payable and accrued liabilities of $15.0 million and accrued interest of $6.3 million, partially offset by an increase of $13.7 million in amounts due to Piedmont. The increase in amounts due to Piedmont reflected the improved operating results and the timing of cash flows at Piedmont in 2000. Total long-term debt decreased by $60.4 million to $692.2 million at December 31, 2000 compared to $752.6 million at January 2, 2000. Repayment of long- term debt during 2000 resulted from free cash flow from operations of approximately $40 million and approximately $20 million from the sale of bottling ter- ritory, as previously discussed. LIQUIDITY AND CAPITAL RESOURCES Capital Resources Sources of capital for the Company include operating cash flows, bank borrowings, issuance of public or pri- vate debt and the issuance of equity securities. Manage- ment believes that the Company, through these sources, has sufficient financial resources available to maintain its current operations and provide for its current capital expenditure and working capital requirements, sched- uled debt payments, interest and income tax liabilities and dividends for stockholders. Investing Activities Additions to property, plant and equipment during 2000 were $49.2 million. Capital expenditures during 2000 were funded with cash flow from operations. Leasing is used for certain capital additions when considered cost effective related to other sources of capital. The Com- pany currently leases approximately $50 million of its cold drink equipment in addition to two production facilities and certain distribution and administrative facilities. Total lease expense in 2000 was $15.7 million compared to $13.7 million in 1999. At the end of 2000, the Company had no material commitments for the purchase of capital assets other than those related to normal replacement of equipment. The Company considers the acquisition of bottling terri- tories on an ongoing basis. Financing Activities In January 1999, the Company filed an $800 million shelf registration for debt and equity securities. This shelf registration included $200 million of unused avail- 18 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d ability from a $400 million shelf registration filed in October 1994. In April 1999, the Company issued $250 million of 10-year debentures at a fixed rate of 6.375% under its shelf registration. The Company subsequently entered into interest rate swap agreements totaling $100 million related to the newly issued debentures. The net proceeds from the issuance of debentures were used to refinance borrowings related to the purchase of assets previously leased, as discussed above, repay certain maturing Medium-Term Notes and repay other corporate borrowings. The Company borrows from time to time under lines of credit from various banks. On December 31, 2000, the Company had $170 million available under these lines, of which $12.9 million was outstanding. Loans under these lines are made at the sole discretion of the banks at rates negotiated at the time of borrowing. In December 1997, the Company extended the matu- rity of a revolving credit facility to December 2002 for borrowings of up to $170 million. There were no amounts outstanding under this facility as of Decem- ber 31, 2000. Interest Rate Hedging The Company periodically uses interest rate hedging products to modify risk from interest rate fluctuations in its underlying debt. The Company has historically altered its fixed/floating rate mix based upon antici- pated cash flows from operations relative to the Compa- ny’s debt level and the potential impact of increases in interest rates on the Company’s overall financial condi- tion. Sensitivity analyses are performed to review the Management’s Discussion and Analysis impact on the Company’s financial position and cover- age of various interest rate movements. The Company does not use derivative financial instruments for trading purposes. The weighted average interest rate of the debt portfo- lio as of December 31, 2000 was 7.1% compared to 7.0% at the end of 1999. The Company’s overall FORWARD-LOOKING STATEMENTS This Annual Report to Stockholders, as well as informa- tion included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company, contains, or may contain several forward-looking management com- ments and other statements that reflect management’s current outlook for future periods. These statements include, among others, statements relating to: our expectations concerning increasing long-term stock- holder value, per capita consumption and operating cash flow; the sufficiency of our financial resources to fund our operations; our expectations concerning mar- keting support payments from The Coca-Cola Company and other beverage companies; our expectations about higher profitability and better returns in our West Vir- ginia territory; our expectations about interest expense; weighted average borrowing rate on its long-term debt in 2000 increased to 7.3% from 6.8% in 1999. Approximately 41% of the Company’s debt portfolio of $692.2 million as of December 31, 2000 was subject to changes in short-term interest rates. our acquisition strategy and our capital expenditure requirements. These statements and expectations are based on the current available competitive, financial and economic data along with the Company’s operating plans, and are subject to future events and uncertainties. Among the events or uncertainties which could adversely affect future periods are: lower than expected net pricing resulting from increased marketplace compe- tition, an inability to meet performance requirements for expected levels of marketing support payments from The Coca-Cola Company, an inability to meet require- ments under bottling contracts, the inability of our alu- minum can or PET bottle suppliers to meet our demand, material changes from expectations in the cost of raw materials, higher than expected fuel prices, an inability to meet projections for performance in acquired bottling territories and unfavorable interest rate fluctuations. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 19 Report of Independent Accountants To the Board of Directors and Stockholders of Coca-Cola Bottling Co. Consolidated In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of opera- tions, of cash flows and of changes in stockholders’ equity present fairly, in all material respects, the financial posi- tion of Coca-Cola Bottling Co. Consolidated and its subsidiaries (the “Company”) at December 31, 2000 and Janu- ary 2, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accor- dance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Charlotte, North Carolina February 14, 2001 20 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Report of Management The management of Coca-Cola Bottling Co. Consolidated is responsible for the preparation and integrity of the consolidated financial statements of the Company. The financial statements and notes have been prepared by the Company in accordance with generally accepted accounting principles and, in the judgment of management, present fairly the Company’s financial position and results of operations. The financial information contained elsewhere in this annual report is consistent with that in the financial statements. The financial statements and other financial information in this annual report include amounts that are based on management’s best estimates and judgments and give due consideration to materiality. The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and recorded prop- erly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The Internal Audit Department of the Company reviews, evaluates, monitors and makes recommendations on both administrative and accounting controls, and acts as an integral, but independent, part of the system of internal controls. The Company’s independent accountants were engaged to perform an audit of the consolidated financial state- ments. This audit provides an objective outside review of management’s responsibility to report operating results and financial condition. Working with the Company’s internal auditors, they review and perform tests, as appropriate, of the data included in the financial statements. The Board of Directors discharges its responsibility for the Company’s financial statements primarily through its Audit Committee. The Audit Committee meets periodically with the independent accountants, internal auditors and management. Both the independent accountants and internal auditors have direct access to the Audit Committee to discuss the scope and results of their work, the adequacy of internal accounting controls and the quality of financial reporting. William B. Elmore President and Chief Operating Officer David V. Singer Executive Vice President and Chief Financial Officer C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 21 Consolidated Balance Sheets (In thousands except share data) ASSETS Current assets: Cash Accounts receivable, trade, less allowance for doubtful accounts of $918 and $850 Accounts receivable from The Coca-Cola Company Accounts receivable, other Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Leased property under capital leases, net Investment in Piedmont Coca-Cola Bottling Partnership Other assets Identifiable intangible assets, net Excess of cost over fair value of net assets of businesses acquired, less accumulated amortization of $35,585 and $33,141 Total Dec. 31, 2000 Jan. 2, 2000 $ 8,425 $ 9,050 62,661 5,380 8,247 40,502 14,026 60,367 6,018 13,938 41,411 13,275 139,241 144,059 429,978 468,110 7,948 62,730 60,846 10,785 60,216 61,312 284,842 305,783 76,512 58,127 $1,062,097 $1,108,392 See Accompanying Notes to Consolidated Financial Statements. 22 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Dec. 31, 2000 Jan. 2, 2000 $ 9,904 3,325 80,999 3,802 16,436 10,483 $ 28,635 4,483 96,008 2,346 2,736 16,830 124,949 151,038 148,655 124,171 76,061 1,774 73,900 4,468 682,246 723,964 1,033,685 1,077,541 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Portion of long-term debt payable within one year Current portion of obligations under capital leases Accounts payable and accrued liabilities Accounts payable to The Coca-Cola Company Due to Piedmont Coca-Cola Bottling Partnership Accrued interest payable Total current liabilities Deferred income taxes Other liabilities Obligations under capital leases Long-term debt Total liabilities Commitments and Contingencies (Note 11) Stockholders’ Equity: Convertible Preferred Stock, $100 par value: Authorized — 50,000 shares; Issued — None Nonconvertible Preferred Stock, $100 par value: Authorized — 50,000 shares; Issued — None Preferred Stock, $.01 par value: Authorized — 20,000,000 shares; Issued — None Common Stock, $1 par value: Authorized — 30,000,000 shares; Issued — 9,454,651 and 9,454,626 shares 9,454 9,454 Class B Common Stock, $1 par value: Authorized — 10,000,000 shares; Issued — 2,969,166 and 2,969,191 shares 2,969 2,969 Class C Common Stock, $1 par value: Authorized — 20,000,000 shares; Issued — None Capital in excess of par value Accumulated deficit Less — Treasury stock, at cost: Common — 3,062,374 shares Class B Common — 628,114 shares Total stockholders’ equity Total 99,020 (21,777) 107,753 (28,071) 89,666 92,105 60,845 409 28,412 60,845 409 30,851 $1,062,097 $1,108,392 See Accompanying Notes to Consolidated Financial Statements. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 23 Consolidated Statements of Operations (In thousands except per share data) Net sales (includes sales to Piedmont of $69,539, $68,046 and $69,552) Cost of sales, excluding depreciation shown below (includes $53,463, $56,439 and $55,800 related to sales to Piedmont) Gross margin Fiscal Year 1999 2000 1998 $995,134 $972,551 $928,502 530,241 543,113 534,919 464,893 429,438 393,583 Selling, general and administrative expenses, excluding depreciation shown below 323,223 291,907 276,245 Depreciation expense Amortization of goodwill and intangibles Restructuring expense Income from operations Interest expense Other income (expense), net Income before income taxes Income taxes Net income Basic net income per share Diluted net income per share Weighted average number of common shares outstanding Weighted average number of common shares outstanding — assuming dilution 64,751 14,712 60,567 13,734 2,232 37,076 12,972 62,207 60,998 67,290 53,346 974 9,835 3,541 50,581 (5,431) 4,986 1,745 39,947 (4,098) 23,245 8,367 $ 6,294 $ 3,241 $ 14,878 $ $ .72 .71 $ $ .38 .37 $ $ 8,733 8,822 8,588 8,708 1.78 1.75 8,365 8,495 See Accompanying Notes to Consolidated Financial Statements. 24 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Consolidated Statements of Cash Flows (In thousands) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Amortization of goodwill and intangibles Deferred income taxes Gain on sale of bottling territory Provision for impairment of property, plant and equipment Losses on sale of property, plant and equipment Amortization of debt costs Amortization of deferred gain related to terminated interest rate swaps Undistributed (earnings) losses of Piedmont Coca-Cola Bottling Partnership (Increase) decrease in current assets less current liabilities Increase in other noncurrent assets Increase in other noncurrent liabilities Other Total adjustments Net cash provided by operating activities Cash Flows from Financing Activities Proceeds from the issuance of long-term debt Repayment of current portion of long-term debt Proceeds from (repayment of) lines of credit, net Cash dividends paid Payments on capital lease obligations Termination of interest rate swap agreements Debt fees paid Other Fiscal Year 1999 2000 1998 $ 6,294 $ 3,241 $ 14,878 64,751 14,712 3,541 (8,829) 3,066 2,284 938 (819) (2,514) (2,554) (506) 3,868 58 77,996 84,290 (26,750) (33,700) (8,733) (4,528) (292) (387) 60,567 13,734 1,745 37,076 12,972 8,367 2,755 836 (563) 2,631 9,639 (8,451) 9,702 334 2,586 595 (563) 479 570 (8,441) 2,180 79 92,929 55,900 96,170 70,778 251,165 (30,115) 10,200 (8,549) (4,938) (3,266) (468) (10,540) 26,100 (8,365) 6,480 (102) (390) Net cash provided by (used in) financing activities (74,390) 214,029 13,183 Cash Flows from Investing Activities Additions to property, plant and equipment Proceeds from the sale of property, plant and equipment Acquisitions of companies, net of cash acquired Proceeds from sale of bottling territory Net cash used in investing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year Significant non-cash investing and financing activities Issuance of Common Stock in connection with acquisition Capital lease obligations incurred (49,168) 16,366 (723) 23,000 (264,139) 753 (44,454) (47,946) 1,255 (35,006) (10,525) (307,840) (81,697) (625) 9,050 2,359 6,691 2,264 4,427 $ 8,425 $ 9,050 $ 6,691 $ 1,313 $ 21,961 14,225 See Accompanying Notes to Consolidated Financial Statements. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 25 Consolidated Statements of Changes in Stockholders’ Equity (In thousands) Common Stock Class B Common Stock Capital in Excess of Par Value Accumulated Deficit Treasury Stock Balance on December 28, 1997 $10,107 $1,948 $103,074 $(46,190) $61,254 Net income Cash dividends paid Exchange of Common Stock for Class B Common Stock Balance on January 3, 1999 Net income Cash dividends paid Issuance of Common Stock in connection with acquisition Balance on January 2, 2000 Net income Cash dividends paid (1,021) 9,086 1,021 2,969 368 9,454 14,878 (8,365) 94,709 (31,312) 61,254 3,241 (8,549) 21,593 2,969 107,753 (28,071) 61,254 6,294 (8,733) Balance on December 31, 2000 $ 9,454 $2,969 $ 99,020 $(21,777) $61,254 See Accompanying Notes to Consolidated Financial Statements. 26 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements 1 SIGNIFICANT ACCOUNTING POLICIES Coca-Cola Bottling Co. Consolidated (the “Company”) is engaged in the production, marketing and distribution of carbonated and noncarbonated beverages, primarily products of The Coca-Cola Company. The Company operates in portions of 11 states, principally in the southeastern region of the United States. The consolidated financial statements include the accounts of the Company and its majority owned sub- sidiaries. All significant intercompany accounts and transactions have been eliminated. Acquisitions recorded as purchases are included in the statement of operations from the date of acquisition. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The fiscal years presented are the 52-week periods ended December 31, 2000, January 2, 2000 and the 53- week period ended January 3, 1999. The Company’s fiscal year ends on the Sunday closest to December 31. Certain prior year amounts have been reclassified to conform to current year classifications. The Company’s more significant accounting policies are as follows: Cash and Cash Equivalents: Cash and cash equiva- lents include cash on hand, cash in banks and cash equivalents, which are highly liquid debt instruments with maturities of less than 90 days. Inventories: Inventories are stated at the lower of cost, determined on the first-in, first-out method (“FIFO”), or market. Property, Plant and Equipment: Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or bet- terments are added to the assets at cost. Maintenance and repair costs and minor replacements are charged to expense when incurred. When assets are replaced or otherwise disposed of, the cost and accumulated depre- ciation are removed from the accounts, and the gains or losses, if any, are reflected in income. Software: The Company adopted the provisions of the American Institute of Certified Public Accountants’ Statement of Position 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use” in the first quarter of 1999. This statement requires capitalization of certain costs incurred in the development of internal-use software. Software is amor- tized using the straight-line method over its estimated useful life. Investment in Piedmont Coca-Cola Bottling Partner- ship: The Company beneficially owns a 50% interest in Piedmont Coca-Cola Bottling Partnership (“Piedmont”). The Company accounts for its interest in Piedmont using the equity method of accounting. With respect to Piedmont, sales of soft drink prod- ucts at cost, management fee revenue and the Compa- ny’s share of Piedmont’s results from operations are included in “Net sales.” See Note 3 and Note 15 for additional information. Revenue Recognition: Revenues are recognized when finished products are delivered to customers and both title and the risks and rewards of ownership are trans- ferred. Appropriate provision is made for uncollectible accounts. IncomeTaxes: The Company provides deferred income taxes for the tax effects of temporary differences between the financial reporting and income tax bases of the Company’s assets and liabilities. Benefit Plans: The Company has a noncontributory pension plan covering substantially all nonunion employees and one noncontributory pension plan cover- ing certain union employees. Costs of the plans are charged to current operations and consist of several components of net periodic pension cost based on vari- ous actuarial assumptions regarding future experience of the plans. In addition, certain other union employees are covered by plans provided by their respective union organizations. The Company expenses amounts as paid in accordance with union agreements. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employ- ees’ periods of active service. Amounts recorded for benefit plans reflect estimates related to future interest rates, investment returns, employee turnover, wage increases and health care costs. The Company reviews all assumptions and estimates on an ongoing basis. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 27 Notes to Consolidated Financial Statements Intangible Assets and Excess of Cost Over Fair Value of Net Assets of Businesses Acquired: Identifiable intangible assets resulting from the acquisition of Coca-Cola bottling franchises are being amortized on a straight-line basis over periods ranging from 17 to 40 years. The excess of cost over fair value of net assets of businesses acquired is being amortized on a straight-line basis over 40 years. Impairment of Long-lived Assets: The Company con- tinually monitors conditions that may affect the carry- ing value of its intangible or other long-lived assets. When conditions indicate potential impairment of an intangible or other long-lived asset, the Company will undertake necessary market studies and reevaluate pro- jected future cash flows associated with the asset. When projected future cash flows, not discounted for the time value of money, are less than the carrying value of the asset, the asset will be written down to its estimated net realizable value. Net Income Per Share: Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income available for common stockholders by the weighted average number of Common and Class B Common shares outstanding. Diluted EPS gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. In the calculation of diluted EPS, the denominator includes the number of additional common shares that would have been outstanding if the Company’s outstanding stock options had been exercised. Derivative Financial Instruments: The Company uses financial instruments to manage its exposure to move- ments in interest rates. The use of these financial instru- ments modifies the exposure of these risks with the intent to reduce the risk to the Company. The Company does not use financial instruments for trading purposes, nor does it use leveraged financial instruments. Amounts receivable or payable under interest rate swap agreements are included in other assets or other liabilities. Amounts paid or received under interest rate swap agreements during their lives are recorded as adjustments to interest expense. Deferred gains or losses on interest rate swap terminations are amortized over the lives of the initial agreements as an adjustment to interest expense. Premiums paid for interest rate cap agreements are amortized to interest expense over the terms of the agreements. Amounts receivable or payable under inter- est rate cap agreements are included in other assets or other liabilities. Insurance Programs: In general, the Company is self- insured for costs of casualty claims and medical claims. The Company uses commercial insurance for casualty claims and medical claims as a risk reduction strategy to minimize catastrophic losses. Casualty losses are pro- vided for using actuarial assumptions and procedures followed in the insurance industry, adjusted for company-specific history and expectations. Marketing Costs and Support Arrangements: The Company directs various advertising and marketing programs supported by The Coca-Cola Company or other franchisers. Under these programs, certain costs incurred by the Company are reimbursed by the appli- cable franchiser. Franchiser funding is recognized when performance measures are met or as funded costs are incurred. 28 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements 2 ACQUISITIONS AND DIVESTITURES On May 28, 1999, the Company acquired substantially all of the outstanding capital stock of Carolina Coca-Cola Bottling Company, Inc. (“Carolina”) in exchange for 368,482 shares of the Company’s Com- mon Stock, installment notes and cash. The total pur- chase price was approximately $37 million. Carolina was a Coca-Cola bottler with operations in central South Carolina. On October 29, 1999, the Company acquired substantially all of the outstanding capital stock of Lynchburg Coca-Cola Bottling Company, Inc. (“Lynchburg”) for approximately $24 million. Lynchburg was a Coca-Cola bottler with operations in central Virginia. The Company used its lines of credit for the cash portion of the acquisitions described above. These acquisitions have been accounted for under the purchase method of accounting. On September 29, 2000, the Company sold substan- tially all of its bottling territory in the states of Kentucky and Ohio to Coca-Cola Enterprises Inc. The Company received cash proceeds of $23.0 million related to the sale of this territory and certain other operating assets. The Company recorded a pre-tax gain of $8.8 million as a result of this sale. The bottling terri- tory sold represented approximately 3% of the Compa- ny’s annual sales volume. 3 INVESTMENT IN PIEDMONT COCA-COLA BOTTLING PARTNERSHIP On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont to distribute and market soft drink products primarily in certain portions of North Carolina and South Carolina. The Company and The Coca-Cola Company, through their respective sub- sidiaries, each beneficially own a 50% interest in Pied- (In thousands) Current assets Noncurrent assets Total assets Current liabilities Noncurrent liabilities Total liabilities Partners’ equity Total liabilities and partners’ equity Company’s equity investment (In thousands) Net sales Cost of sales Gross margin Income from operations Net income (loss) Company’s equity in net income (loss) mont. The Company provides a portion of the soft drink products for Piedmont at cost and receives a fee for managing the operations of Piedmont pursuant to a management agreement. Summarized financial information for Piedmont was as follows: Dec. 31, 2000 Jan. 2, 2000 $ 48,068 $ 31,094 319,788 331,979 $367,856 $363,073 $ 17,342 $ 15,370 225,054 227,271 242,396 125,460 242,641 120,432 $367,856 $363,073 $ 62,730 $ 60,216 Fiscal Year 2000 1999 1998 $286,781 $278,202 $269,312 147,671 152,042 151,480 139,110 18,948 126,160 117,832 7,803 11,974 $ 5,028 $ (5,262) $ 2,514 $ (2,631) $ $ (958) (479) C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 29 Notes to Consolidated Financial Statements 4 INVENTORIES Inventories were summarized as follows: (In thousands) Finished products Manufacturing materials Plastic pallets and other Total inventories Dec. 31, 2000 Jan. 2, 2000 $22,907 $26,240 13,330 4,265 10,476 4,695 $40,502 $41,411 5 PROPERTY, PLANT AND EQUIPMENT The principal categories and estimated useful lives of property, plant and equipment were as follows: (In thousands) Land Buildings Machinery and equipment Transportation equipment Furniture and fixtures Vending equipment Leasehold and land improvements Software for internal use Construction in progress Total property, plant and equipment, at cost Less: Accumulated depreciation and amortization Dec. 31, 2000 Jan. 2, 2000 Estimated Useful Lives $ 11,311 $ 12,251 10-50 years 5-20 years 4-10 years 4-10 years 6-13 years 5-20 years 3-7 years 97,012 94,652 122,083 35,206 285,772 39,597 17,207 1,162 704,002 274,024 96,072 89,068 126,562 37,002 291,844 41,379 10,523 3,389 708,090 239,980 Property, plant and equipment, net $429,978 $468,110 On January 15, 1999, the Company purchased approximately $155 million of equipment (principally vehicles and vending equipment) previously leased under various operating lease agreements. The assets purchased will continue to be used in the distribution and sale of the Company’s products and will be depreci- ated over their remaining useful lives, which range from three years to 12.5 years. The Company used a combi- nation of its revolving credit facility and its lines of credit with certain banks to finance this purchase. In the third quarter of 2000, the Company recorded a provision for impairment of certain fixed assets for $3.1 million, which was classified in “Other income (expense), net.” 30 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements 6 LEASED PROPERTY UNDER CAPITAL LEASES The category and terms of the leased property under capital leases were as follows: (In thousands) Transportation and other equipment Less: Accumulated amortization Leased property under capital leases, net Dec. 31, 2000 Jan. 2, 2000 Terms $13,058 $13,434 1-4 years 5,110 2,649 $ 7,948 $10,785 7 IDENTIFIABLE INTANGIBLE ASSETS The principal categories and estimated useful lives of identifiable intangible assets were as follows: (In thousands) Franchise rights Customer lists Other Identifiable intangible assets Less: Accumulated amortization Identifiable intangible assets, net Dec. 31, 2000 Jan. 2, 2000 Estimated Useful Lives $353,036 $361,710 40 years 54,864 16,668 54,864 17-23 years 16,668 17-23 years 424,568 $433,242 139,726 127,459 $284,842 $305,783 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 31 Notes to Consolidated Financial Statements 8 LONG-T ERM DEBT Long-term debt was summarized as follows: (In thousands) Lines of Credit Term Loan Agreement Term Loan Agreement Medium-Term Notes Medium-Term Notes Debentures Debentures Debentures Other notes payable Maturity Interest Rate Fixed(F) or Variable(V) Rate 2002 2004 2005 2000 2002 2007 2009 2009 6.99% 7.14% 7.14% 10.00% 8.56% 6.85% 7.20% 6.38% 2001- 2006 5.75%- 10.00% V V V F F F F F F Interest Paid Varies Varies Varies Semi-annually Semi-annually Semi-annually Semi-annually Semi-annually Dec. 31, 2000 Jan. 2, 2000 $ 12,900 $ 46,600 85,000 85,000 47,000 100,000 100,000 250,000 85,000 85,000 25,500 47,000 100,000 100,000 250,000 Varies 12,250 13,499 Less: Portion of long-term debt payable within one year Long-term debt The principal maturities of long-term debt outstand- ing on December 31, 2000 were as follows: (In thousands) 2001 2002 2003 2004 2005 Thereafter Total long-term debt $ 9,904 62,121 25 85,020 85,000 450,080 $692,150 In December 1997, the Company extended the matu- rity date of the revolving credit facility to December 2002 for borrowings of up to $170 million. The agree- ment contains several covenants which establish ratio requirements related to debt, interest expense and cash flow. A facility fee of 1⁄8% per year on the banks’ com- mitment is payable quarterly. There was no outstanding balance under this facility as of December 31, 2000. The Company borrows from time to time under lines of credit from various banks. On December 31, 2000, the Company had approximately $170 million of credit available under these lines, of which $12.9 million was outstanding. Loans under these lines are made at the sole discretion of the banks at rates negotiated at the time of borrowing. The Company intends to renew such borrowings as they mature. To the extent that these bor- rowings and the borrowings under the revolving credit 32 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 692,150 752,599 9,904 28,635 $682,246 $723,964 facility do not exceed the amount available under the Company’s $170 million revolving credit facility, they are classified as noncurrent liabilities. On January 22, 1999, the Company filed an $800 million shelf registration for debt and equity secu- rities (which included $200 million of unused availabil- ity from a prior shelf registration). On April 26, 1999 the Company issued $250 million of 10-year debentures at a fixed interest rate of 6.375%. The Company subse- quently entered into interest rate swap agreements total- ing $100 million related to the newly issued debentures. The net proceeds from this issuance were used princi- pally for refinancing of short-term debt related to the purchase of leased assets, with the remainder used to repay other bank debt. After taking into account all of the interest rate hedg- ing activities, the Company had a weighted average interest rate of 7.1% for the debt portfolio as of Decem- ber 31, 2000 compared to 7.0% at January 2, 2000. The Company’s overall weighted average borrowing rate on its long-term debt was 7.3%, 6.8% and 7.1% for 2000, 1999 and 1998, respectively. As of December 31, 2000, after taking into account all of the interest rate hedging activities, approximately $284 million or 41% of the total debt portfolio was subject to changes in short-term interest rates. If average interest rates for the Company’s debt port- folio increased by 1%, annual interest expense for the year ended December 31, 2000 would have increased by approximately $3 million and net income would have been reduced by approximately $1.9 million. Notes to Consolidated Financial Statements 9 DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate hedging products to modify risk from interest rate fluctuations in its underly- ing debt. The Company has historically used derivative financial instruments from time to time to achieve a tar- geted fixed/floating rate mix. This target is based upon anticipated cash flows from operations relative to the Company’s debt level and the potential impact of increases in interest rates on the Company’s overall financial condition. The Company does not use derivative financial instruments for trading or other speculative purposes nor does it use leveraged financial instruments. All of the Company’s outstanding interest rate swap agree- ments are LIBOR-based. Derivative financial instruments were summarized as follows: (In thousands) Interest rate swaps-floating Interest rate swaps-fixed Interest rate swaps-fixed Interest rate swaps-floating Interest rate cap December 31, 2000 January 2, 2000 Notional Amount Remaining Term Notional Amount Remaining Term $ 60,000 3.75 years 60,000 3.75 years 50,000 5 years $100,000 8.25 years 100,000 9.25 years 35,000 0.5 years The Company had interest rate swaps with a The counterparties to these contractual arrangements notional amount of $100 million at December 31, 2000, compared to $270 million as of January 2, 2000. In September 2000, the Company terminated three interest rate swaps with a total notional amount of $170 mil- lion. The gains or losses on the termination of these swaps are being amortized over the remaining term of the initial swap agreements. are major financial institutions with which the Com- pany also has other financial relationships. The Com- pany is exposed to credit loss in the event of nonperfor- mance by these counterparties. However, the Company does not anticipate nonperformance by the other parties. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 33 Notes to Consolidated Financial Statements 10 FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating the fair values of its finan- cial instruments: Public Debt: The fair values of the Company’s public debt are based on estimated market prices. Non-Public Variable Rate Long-Term Debt: The car- rying amounts of the Company’s variable rate borrow- ings approximate their fair values. Non-Public Fixed Rate Long-Term Debt: The fair val- ues of the Company’s fixed rate long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Derivative Financial Instruments: Fair values for the Company’s interest rate swaps are based on current settlement values. The carrying amounts and fair values of the Company’s balance sheet and off-balance-sheet instruments were as follows: (In thousands) Balance Sheet Instruments Public debt Non-public variable rate long-term debt Non-public fixed rate long-term debt Off-Balance-Sheet Instruments Interest rate swaps December 31, 2000 Carrying Amount Fair Value January 2, 2000 Carrying Amount Fair Value $497,000 $480,687 $522,500 $484,354 182,900 182,900 216,600 216,600 12,250 12,433 13,499 13,670 (1,669) (12,174) The fair values of the interest rate swaps at December 31, 2000 and January 2, 2000, represent the estimated amounts the Company would have had to pay to terminate these agreements. 34 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements 11 COMMITMENTS AND CONTINGENCIES Operating lease payments are charged to expense as incurred. Such rental expenses included in the consolidated statements of operations were $15.7 million, $13.7 million and $28.9 million for 2000, 1999 and 1998, respectively. The following is a summary of future minimum lease payments for all capital and operating leases as of Decem- ber 31, 2000. (In thousands) 2001 2002 2003 2004 2005 Thereafter Total minimum lease payments Less: Amounts representing interest Present value of minimum lease payments Less: Current portion of obligations under capital leases Long-term portion of obligations under capital leases The Company is a member of South Atlantic Can- ners, Inc. (“SAC”), a manufacturing cooperative, from which it is obligated to purchase a specified number of cases of finished product on an annual basis. The mini- mal annual purchases are approximately $40 million. The Company guarantees a portion of the debt for one cooperative from which the Company purchases plastic bottles. The Company also guarantees a portion of debt for SAC. See Note 15 to the consolidated finan- cial statements for additional information concerning these financial guarantees. The total of all debt guaran- tees on December 31, 2000 was $35.7 million. The Company has entered into a purchase agreement for aluminum cans on an annual basis through 2003. The estimated annual purchases under this agreement are approximately $100 million for 2001, 2002 and 2003. On August 3, 1999, North American Container, Inc. (“NAC”) filed a Complaint For Patent Infringement and Jury Demand (the “Complaint”) against the Company and a number of other defendants in the United States District Court for the Northern District of Texas, Dallas Division, alleging that certain unspecified blow-molded plastic containers used, made, sold, offered for sale and/or used by the Company and other defendants infringe certain patents owned by the plaintiff. NAC seeks an unspecified amount of compensatory damages Capital Leases Operating Leases Total $3,325 1,290 671 208 $16,481 $19,806 11,859 9,954 8,997 8,549 13,149 10,625 9,205 8,549 35,749 35,749 $5,494 $91,589 $97,083 395 5,099 3,325 $1,774 for prior infringement, seeks to have those damages trebled, seeks pre-judgment and post-judgment interest, seeks attorneys fees and seeks an injunction prohibiting future infringement and ordering the destruction of all infringing containers and machinery used in connection with the manufacture of the infringing products. The original Complaint names forty-two other defendants and additional defendants have been added by amend- ment. The Company has obtained partial indemnifica- tion from its suppliers for all damages it may incur in connection with this proceeding. The Company has filed an answer to the Complaint, as amended, and has denied the material allegations of NAC and seeks recov- ery of attorney fees by having the case declared excep- tional. The Company has also filed a counterclaim seek- ing a declaration of invalidity and non-infringement. A claims construction hearing was held in December 2000. The Court-appointed Special Master has advised the Company to expect a ruling in April 2001. The Company is involved in other various claims and legal proceedings which have arisen in the ordinary course of its business. The Company believes that the ultimate disposition of the above noted litigation and its other claims and legal proceedings will not have a mate- rial adverse effect on the financial condition, cash flows or results of operations of the Company. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 35 Notes to Consolidated Financial Statements 12 INCOME TAXES The provision for income taxes consisted of the following: Fiscal Year 2000 1999 1998 $ — $ — $ — — — — 865 2,676 3,541 206 1,539 6,378 1,989 1,745 8,367 $3,541 $1,745 $8,367 Net current deferred tax assets of $9.7 million and $9.6 million were included in prepaid expenses and other current assets on December 31, 2000 and January 2, 2000, respectively. Reported income tax expense is reconciled to the amount computed on the basis of income before income taxes at the statutory rate as follows: Statutory expense $3,442 $1,745 $8,135 Amortization of franchise and goodwill assets State income taxes, net of federal benefit Other 418 373 369 9 (328) (281) (92) 463 (600) Income tax expense $3,541 $1,745 $8,367 On December 31, 2000, the Company had $114 mil- lion and $80 million of federal and state net operating losses, respectively, available to reduce future income taxes. The net operating loss carryforwards expire in varying amounts through 2020. $ 105,746 $ 90,577 (In thousands) Fiscal Year 2000 1999 1998 (In thousands) Current: Federal Total current provision Deferred: Federal State Total deferred provision Income tax expense Deferred income taxes are recorded based upon dif- ferences between the financial statement and tax bases of assets and liabilities and available tax credit carryforwards. Temporary differences and carryforwards that comprised deferred income tax assets and liabilities were as follows: (In thousands) Intangible assets Depreciation Investment in Piedmont Coca-Cola Bottling Partnership Lease obligations Other Dec. 31, 2000 Jan. 2, 2000 83,943 66,257 27,428 19,775 8,666 25,855 19,775 8,340 Gross deferred income tax liabilities 245,558 210,804 Net operating loss carryforwards Leased assets AMT credits Deferred compensation Postretirement benefits Interest rate swap terminations Other (45,399) (32,413) (15,820) (15,820) (12,030) (9,978) (13,822) (12,881) (11,858) (12,071) (2,624) (5,020) (3,196) (9,831) Gross deferred income tax assets (106,573) (96,190) Deferred income tax liability $ 138,985 $114,614 36 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements 13 CAPITAL T RANSACTIONS On March 8, 1989, the Company granted J. Frank Harrison, Jr. an option for the purchase of 100,000 shares of Common Stock exercisable at the closing mar- ket price of the stock on the day of grant. The closing market price of the stock on March 8, 1989 was $27.00 per share. The option is exercisable, in whole or in part, at any time at the election of Mr. Harrison, Jr. over a period of 15 years from the date of grant. This option has not been exercised with respect to any such shares. On August 9, 1989, the Company granted J. Frank Harrison, III an option for the purchase of 150,000 shares of Common Stock exercisable at the closing mar- ket price of the stock on the day of grant. The closing market price of the stock on August 9, 1989 was $29.75 per share. The option may be exercised, in whole or in part, during a period of 15 years beginning on the date of grant. This option has not been exercised with respect to any such shares. Effective November 23, 1998, J. Frank Harrison, Jr. exchanged 792,796 shares of the Company’s Common Stock for 792,796 shares of Class B Common Stock in a transaction previously approved by the Company’s Board of Directors (the “Harrison Exchange”). Mr. Harrison already owned the shares of Common Stock used to make this exchange. This exchange took place in connection with a series of simultaneous trans- actions related to Mr. Harrison Jr.’s personal estate planning, the net effect of which was to transfer the entire ownership interest in the Company previously held by Mr. Harrison and certain Harrison family trusts into three Harrison family limited partnerships. J. Frank Harrison, Jr., in his capacity of Manager for J. Frank Harrison Family, LLC (the general partner of the three family limited partnerships), exercises sole voting and investment power with respect to the shares of the Company’s Common Stock and Class B Common Stock held by the family limited partnerships. Pursuant to a Stock Rights and Restriction Agree- ment dated January 27, 1989, between the Company and The Coca-Cola Company, in the event that the Company issues new shares of Class B Common Stock upon the exchange or exercise of any security, warrant or option of the Company which results in The Coca-Cola Company owning less than 20% of the out- standing shares of Class B Common Stock and less than 20% of the total votes of all outstanding shares of all classes of the Company, The Coca-Cola Company has the right to exchange shares of Common Stock for shares of Class B Common Stock in order to maintain its ownership of 20% of the outstanding shares of Class B Common Stock and 20% of the total votes of all out- standing shares of all classes of the Company. Under the Stock Rights and Restrictions Agreement, The Coca-Cola Company also has a preemptive right to pur- chase a percentage of any newly issued shares of any class as necessary to allow it to maintain ownership of both 29.67% of the outstanding shares of Common Stock of all classes and 22.59% of the total votes of all outstanding shares of all classes. Effective November 23, 1998, in connection with the Harrison Exchange and the related Harrison family limited part- nership transactions, The Coca-Cola Company, in the exercise of its rights under the Stock Rights and Restric- tions Agreement, exchanged 228,512 shares of the Company’s Common Stock which it held for 228,512 shares of the Company’s Class B Common Stock. On May 12, 1999, the stockholders of the Company approved a restricted stock award for J. Frank Harrison, III, the Company’s Chairman of the Board of Directors and Chief Executive Officer, consisting of 200,000 shares of the Company’s Class B Common Stock. The award provides that the shares of restricted stock would vest at the rate of 20,000 shares per year over a ten-year period. The vesting of each annual installment is contingent upon the Company achieving at least 80% of the Overall Goal Achievement Factor for the six selected performance indicators used in deter- mining bonuses for all officers under the Company’s Annual Bonus Plan. In 2000, the Company achieved more than 80% of the Overall Goal Achievement Factor which resulted in the vesting of 20,000 shares, effective as of January 1, 2001. Compensation expense in 2000 related to the restricted stock award was $1.4 million. In 1999, the Company did not achieve at least 80% of the Overall Goal Achievement Factor and thus, the 20,000 shares of restricted stock for 1999 did not vest. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 37 Notes to Consolidated Financial Statements 14 BENEFIT PLANS Retirement benefits under the Company’s principal pen- sion plan are based on the employee’s length of service, average compensation over the five consecutive years which gives the highest average compensation and the average of the Social Security taxable wage base during the 35-year period before a participant reaches Social Security retirement age. Contributions to the plan are based on the projected unit credit actuarial funding method and are limited to the amounts that are cur- rently deductible for tax purposes. The following tables set forth a reconciliation of the beginning and ending balances of the projected benefit obligation, a reconciliation of beginning and ending bal- ances of the fair value of plan assets and funded status of the two Company-sponsored pension plans: (In thousands) Projected benefit obligation at beginning of year Service cost Interest cost Actuarial gain Acquisition Benefits paid Other Fiscal Year 2000 1999 $81,121 $82,898 3,606 6,180 3,375 5,508 (1,732) (9,499) 1,500 Net periodic pension cost for the Company- sponsored pension plans included the following: (In thousands) Service cost Interest cost Fiscal Year 2000 1999 1998 $ 3,606 $ 3,375 $ 2,586 6,180 5,508 4,934 Estimated return on plan assets (7,963) (6,659) (6,303) Amortization of unrecognized transitional assets Amortization of prior service cost (133) Recognized net actuarial loss (70) (150) 7 (135) 965 Net periodic pension cost $ 1,690 $ 3,054 $ 1,004 The weighted average rate assumptions used in deter- mining pension costs and the projected benefit obliga- tion were: Weighted average discount rate used in determining the actuarial present value of the projected benefit obligation Weighted average expected long-term rate of (2,855) (2,661) return on plan assets 33 Weighted average rate of compensation increase 2000 1999 7.75% 7.75% 9.00% 9.00% 4.00% 4.00% Projected benefit obligation at end of year $86,353 $81,121 Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Acquisition Benefits paid $88,609 $74,624 (1,100) 12,489 3,069 2,222 1,935 (2,855) (2,661) Fair value of plan assets at end of year $87,723 $88,609 (In thousands) Funded status of the plans Unrecognized prior service cost Unrecognized net loss Prepaid pension cost Dec. 31, 2000 Jan. 2, 2000 $1,370 $7,489 (324) 8,012 (491) 680 $9,058 $7,678 Prepaid pension costs are included in other assets. 38 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d The Company provides a 401(k) Savings Plan for substantially all of its employees who are not part of collective bargaining agreements. Under provisions of the Savings Plan, an employee is vested with respect to Company contributions upon the completion of two years of service with the Company. The total cost for this benefit in 2000, 1999 and 1998 was $3.1 million, $3.2 million and $2.0 million, respectively. The Company currently provides employee leasing and management services to employees of Piedmont and SAC. Piedmont and SAC employees participate in the Company’s employee benefit plans. The Company provides postretirement benefits for substantially all of its employees. The Company recog- nizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ peri- ods of active service. The Company does not pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future. Notes to Consolidated Financial Statements The following tables set forth a reconciliation of the beginning and ending balances of the benefit obligation, a reconciliation of the beginning and ending balances of fair value of plan assets and funded status of the Com- pany’s postretirement plan: (In thousands) Fiscal Year 2000 1999 Benefit obligation at beginning of year $36,501 $39,779 Service cost Interest cost Plan participants’ contributions Actuarial (gain) loss Benefits paid 852 2,816 607 10,251 (3,067) 954 2,608 614 (4,994) (2,460) Benefit obligation at end of year $47,960 $36,501 Fair value of plan assets at beginning of year $ — $ — Employer contributions Plan participants’ contributions Benefits paid 2,460 607 1,846 614 (3,067) (2,460) Fair value of plan assets at end of year $ — $ — The components of net periodic postretirement ben- efit cost were as follows: (In thousands) Service cost Interest cost Amortization of unrecognized transitional assets Recognized net actuarial loss Fiscal Year 2000 1999 1998 $ 852 $ 954 $ 604 2,816 2,608 2,350 (25) 493 (25) 745 (25) 422 Net periodic postretirement benefit cost $4,136 $4,282 $3,351 The weighted average discount rate used to estimate the postretirement benefit obligation was 7.75% as of December 31, 2000 and January 2, 2000. The weighted average health care cost trend used in measuring the postretirement benefit expense was 5.25% in 2000 and is projected to remain at that level thereafter. A 1% increase or decrease in this annual cost trend would have impacted the postretirement benefit obligation and net periodic postretirement benefit cost as follows: In Thousands Impact on 1% Increase 1% Decrease (In thousands) Funded status of the plan Unrecognized net loss Unrecognized prior service cost Contributions between measurement date and fiscal year-end Accrued liability Dec. 31, 2000 Jan. 2, 2000 Postretirement benefit obligation at December 31, 2000 Net periodic postretirement benefit cost in 2000 $(47,960) $(36,501) 21,414 11,656 (271) (295) 864 483 $(25,953) $(24,657) $5,213 $(4,280) 663 (525) C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 39 Notes to Consolidated Financial Statements 15 RELATED PARTY T RANSACTIONS The Company’s business consists primarily of the pro- duction, marketing and distribution of soft drink prod- ucts of The Coca-Cola Company, which is the sole owner of the secret formulas under which the primary components (either concentrates or syrups) of its soft drink products are manufactured. Accordingly, the Company purchases a substantial majority of its requirements of concentrates and syrups from The Coca-Cola Company in the ordinary course of its busi- ness. The Company paid The Coca-Cola Company approximately $237 million, $258 million and $225 million in 2000, 1999 and 1998, respectively, for sweetener, syrup, concentrate and other miscellaneous purchases. Additionally, the Company engages in a vari- ety of marketing programs, local media advertising and similar arrangements to promote the sale of products of The Coca-Cola Company in bottling territories operated by the Company. Direct marketing funding support pro- vided to the Company by The Coca-Cola Company was approximately $51 million, $55 million and $52 million in 2000, 1999 and 1998, respectively. Additionally, the Company earned approximately $1 million, $15 million and $16 million in 2000, 1999 and 1998, respectively, related to cold drink infrastructure support. The mar- keting funding related to cold drink infrastructure sup- port is covered under a multi-year agreement which includes certain annual performance requirements. The Company is in compliance with all such performance requirements, as amended. In addition, the Company paid approximately $26 million, $29 million and $28 million in 2000, 1999 and 1998, respectively, for local media and marketing program expense pursuant to cooperative advertising and cooperative marketing arrangements with The Coca-Cola Company. The Company has a production arrangement with Coca-Cola Enterprises Inc. (“CCE”) to buy and sell fin- ished products at cost. The Coca-Cola Company has significant equity interests in the Company and CCE. As of December 31, 2000, CCE has a 7.0% equity interest in the Company’s total outstanding stock. Sales to CCE under this agreement were $20.0 million, $21.0 million and $24.0 million in 2000, 1999 and 1998, respectively. Purchases from CCE under this arrangement were $15.0 million, $15.3 million and $15.3 million in 2000, 1999 and 1998, respectively. In December 1996, the Board of Directors awarded a retirement benefit to J. Frank Harrison, Jr., Chairman- Emeritus of the Board of Directors of the Company, for, among other things, his past service to the Company. The Company recorded a non-cash, after-tax charge of $2.7 million in the fourth quarter of 1996 related to this agreement. Additionally, the Company entered into an agreement for consulting services with J. Frank Harrison, Jr. beginning in 1997. Payments in 2000, 1999 and 1998 related to the consulting services agree- ment totaled $200,000 each year. On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont. The Company and The Coca-Cola Company, through their respective subsidiar- ies, each beneficially own a 50% interest in Piedmont. The Company provides a portion of the soft drink prod- ucts for Piedmont at cost and receives a fee for manag- ing the operations of Piedmont pursuant to a manage- ment agreement. The Company sold product at cost to Piedmont during 2000, 1999 and 1998 totaling $53.5 million, $56.4 million and $55.8 million, respectively. The Company received $13.6 million, $14.2 million and $14.2 million for management services pursuant to its management agreement with Piedmont for 2000, 1999 and 1998, respectively. The Company also subleases various fleet and vend- ing equipment to Piedmont at cost. These sublease rent- als amounted to $11.0 million, $10.0 million and $7.1 million in 2000, 1999 and 1998, respectively. In addition, Piedmont subleases various fleet and vending equipment to the Company at cost. These sublease rent- als amounted to $.2 million, $.2 million and $1.6 mil- lion in 2000, 1999 and 1998, respectively. 40 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements On November 30, 1992, the Company and the previ- ous owner of the Company’s Snyder Production Center in Charlotte, North Carolina agreed to the early termi- nation of the Company’s lease. Harrison Limited Part- nership One (“HLP”) purchased the property contem- poraneously with the termination of the lease, and the Company leased its Snyder Production Center from HLP pursuant to a ten-year lease that was to expire on November 30, 2002. HLP’s sole general partner is a cor- poration of which J. Frank Harrison, Jr. is the sole shareholder. HLP’s sole limited partner is a trust of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, and Reid M. Henson, Director of the Company are co- trustees. On August 9, 2000, a Special Committee of the Board of Directors approved the sale of property and improvements adjacent to the Snyder Production Center to HLP and a new lease of both the conveyed property and the Snyder Production Center from HLP, which expires on December 31, 2010. The sale closed on December 15, 2000 at a price of $10.5 million. The annual base rent the Company is obligated to pay for its lease of this property is subject to adjustment for an inflation factor and for increases or decreases in interest rates, using LIBOR as the measurement device. Rent expense for this property totaled $2.9 million, $2.6 mil- lion and $2.7 million in 2000, 1999 and 1998, respectively. In May 2000, the Company entered into a five-year consulting agreement with Reid M. Henson. Mr. Henson served as a Vice Chairman of the Board of Directors from 1983 to May 2000. Payments in 2000 related to the consulting agreement totaled $204,000. On June 1, 1993, the Company entered into a lease agreement with Beacon Investment Corporation related to the Company’s headquarters office building. Beacon Investment Corporation’s sole shareholder is J. Frank Harrison, III. On January 5, 1999, the Company entered into a new 10-year lease agreement with Beacon Investment Corporation which includes the Company’s headquarters office building and an adjacent office facil- ity. The annual base rent the Company is obligated to pay under this lease is subject to adjustment for increases in the Consumer Price Index and for increases or decreases in interest rates using the Adjusted Euro- dollar Rate as the measurement device. Rent expense under this lease totaled $3.6 million and $3.1 million in 2000 and 1999, respectively. Rent expense under the previous lease totaled $2.1 million in 1998. The Company is a shareholder in two cooperatives from which it purchases substantially all its require- ments for plastic bottles. Net purchases from these enti- ties were approximately $49 million, $45 million and $50 million in 2000, 1999 and 1998, respectively. In connection with its participation in one of these coop- eratives, the Company has guaranteed a portion of the cooperative’s debt. Such guarantee amounted to $20.4 million as of December 31, 2000. The Company is a member of SAC, a manufacturing cooperative. SAC sells finished products to the Com- pany and Piedmont at cost. The Company also manages the operations of SAC pursuant to a management agree- ment. Management fees from SAC were $1.0 million, $1.3 million and $1.2 million in 2000, 1999 and 1998, respectively. Also, the Company has guaranteed a por- tion of debt for SAC. Such guarantee was $15.0 million as of December 31, 2000. The Company purchases certain computerized data management products and services related to inventory control and marketing program support from Data Ven- tures LLC (“Data Ventures”), a Delaware limited liabil- ity company in which the Company holds a 31.25% equity interest. Also, J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, holds a 32.5% equity interest in Data Ventures. On September 30, 1997, Data Ventures obtained a $1.9 million unsecured line of credit from the Company. In December 1999, this line of credit was increased to $3.0 million. Data Ventures was indebted to the Company for $2.8 million and $2.1 million as of December 31, 2000 and January 2, 2000, respectively. The Company purchased products and services from Data Ventures for $414,000, $154,000 and $237,000 in 2000, 1999 and 1998, respectively. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 41 Notes to Consolidated Financial Statements 16 RESTRUCTURING In November 1999, the Company announced a plan to restructure its operations by consolidating sales divi- sions and reducing its workforce. Approximately 300 positions were eliminated as a result of the restructur- ing. The Company recorded a pre-tax restructuring charge of $2.2 million in the fourth quarter of 1999, which was funded by cash flow from operations. The restructuring has been completed and substantially all amounts have been paid. 17 EARNINGS PER SHARE The following table sets forth the computation of basic net income per share and diluted net income per share: (In thousands except per share data) Numerator: 2000 1999 1998 Numerator for basic net income and diluted net income $6,294 $3,241 $14,878 Denominator: Denominator for basic net income per share — weighted average common shares Effect of dilutive securities — Stock options 8,733 89 8,588 120 Denominator for diluted net income per share — adjusted weighted average common shares 8,822 8,708 8,365 130 8,495 Basic net income per share Diluted net income per share $ .72 $ .38 $ 1.78 $ .71 $ .37 $ 1.75 42 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements 18 RISKS AND UNCERTAINTIES Approximately 90% of the Company’s sales are prod- ucts of The Coca-Cola Company, which is the sole sup- plier of the concentrate required to manufacture these products. The remaining 10% of the Company’s sales are products of various other beverage companies. The Company has bottling contracts under which it has vari- ous requirements to meet. Failure to meet the require- ments of these bottling contracts could result in the loss of distribution rights for the respective product. The Company currently obtains all of its aluminum cans from one domestic supplier. The Company cur- rently obtains all of its PET bottles from two domestic cooperatives. The inability of either of these aluminum can or PET bottle suppliers to meet the Company’s requirement for containers could result in short-term shortages until alternative sources of supply could be located. The Company attempts to mitigate these risks by working closely with key suppliers and by purchas- ing business interruption insurance where appropriate. The Company makes significant expenditures each year on fuel for product delivery. Material increases in the cost of fuel may result in a reduction in earnings to the extent the Company is not able to increase its selling prices to offset the increase in fuel costs. Certain liabilities of the Company are subject to risk of changes in both long-term and short-term interest rates. These liabilities include floating rate debt, leases with payments determined on floating interest rates, postretirement benefit obligations and the Company’s nonunion pension liability. Less than 10% of the Company’s labor force is cur- rently covered by collective bargaining agreements. Three collective bargaining contracts covering approxi- mately 1% of the Company’s employees expire during 2001. In March 2000, at the end of a collective bargaining agreement in Huntington, West Virginia, the Company and Teamsters Local Union 505 were unable to reach agreement on wages and benefits. The union elected to strike and other Teamster-represented sales centers in West Virginia joined in a sympathy strike. As of August 7, 2000, the Company and the respective local unions settled all outstanding issues. Material changes in the performance requirements or decreases in levels of marketing funding historically pro- vided under marketing programs with The Coca-Cola Company and other franchisers, or the Company’s inability to meet the performance requirements for the anticipated levels of such marketing funding support payments, would adversely affect future earnings. The Coca-Cola Company is under no obligation to continue marketing funding at past levels. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 43 Notes to Consolidated Financial Statements 19 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Changes in current assets and current liabilities affecting cash, net of effects of acquisitions and divestitures, were as follows: (In thousands) Accounts receivable, trade, net Accounts receivable from The Coca-Cola Company Accounts receivable, other Inventories Prepaid expenses and other assets Accounts payable and accrued liabilities Accounts payable to The Coca-Cola Company Accrued interest payable Due to (from) Piedmont Coca-Cola Bottling Partnership Fiscal Year 2000 1999 1998 $ (2,294) $ (1,017) $ (1,304) 638 5,691 712 (757) (15,353) 1,456 (6,347) 13,700 4,073 (5,419) (2,487) 2,542 10,989 (2,848) 1,505 2,301 (5,401) 862 (1,612) (2,778) 5,986 1,086 1,287 2,444 (Increase) decrease in current assets less current liabilities $ (2,554) $ 9,639 $ 570 Cash payments for interest and income taxes were as follows: (In thousands) Interest Income taxes (net of refunds) 20 NEW ACCOUNTING PRONOUNCEMENTS Fiscal Year 1999 2000 1998 $ 58,736 $ 48,221 $ 38,046 2,830 1,939 1,925 The Financial Accounting Standards Board (“FASB”) has issued Statement No. 133, “Accounting for Deriva- tive Instruments and Hedging Activities.” As subse- quently amended by FASB Statement No. 138, State- ment No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Statement No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Deriva- tives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commit- ments through earnings or recognized in other compre- hensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The Company will adopt the provisions of Statement No. 133 in the first quarter of 2001. The adoption of Statement No. 133 will not have a material impact on the earnings and financial position of the Company. 44 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Notes to Consolidated Financial Statements 21 QUARTERLY FINANCIAL DATA (UNAUDITED) Set forth below are unaudited quarterly financial data for the fiscal years ended December 31, 2000 and January 2, 2000. (In thousands except per share data) Year Ended December 31, 2000 Net sales Gross margin Net income (loss) Basic net income (loss) per share Diluted net income (loss) per share (In thousands except per share data) Year Ended January 2, 2000 Net sales Gross margin Restructuring expense Net income (loss) Basic net income (loss) per share Diluted net income (loss) per share 1 Quarter 2 3 4 $228,184 $270,933 $258,565 $237,452 105,941 127,931 121,006 110,015 (1,957) 6,317 6,398 (4,464) (.22) (.22) 1 .72 .71 .73 .73 (.51) (.51) Quarter 2 3 4 $220,263 $261,037 $260,284 $230,967 92,152 115,646 117,356 104,284 (4,480) 6,166 5,827 (.54) (.54) .72 .71 .67 .66 2,232 (4,272) (.49) (.49) C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 45 Selected Financial Data* (In thousands except per share data) Summary of Operations Net sales Cost of sales Selling, general and administrative expenses Depreciation expense Amortization of goodwill and intangibles Restructuring expense Total costs and expenses Income from operations Interest expense Other income (expense), net Income before income taxes Income taxes Net income Basic net income per share Diluted net income per share Cash dividends per share: Common Class B Common Other Information Weighted average number of common shares outstanding Weighted average number of common shares outstanding — assuming dilution Year-End Financial Position Total assets Long-term debt Stockholders’ equity 2000 1999 Fiscal Year** 1998 1997 1996 $ 995,134 $ 972,551 $ 928,502 $ 802,141 $ 773,763 530,241 323,223 64,751 14,712 543,113 291,907 60,567 13,734 2,232 534,919 276,245 37,076 12,972 452,893 239,901 33,783 12,221 435,959 236,527 28,608 12,158 932,927 911,553 861,212 738,798 713,252 62,207 53,346 974 9,835 3,541 6,294 .72 .71 1.00 1.00 8,733 8,822 $ $ $ $ $ 60,998 50,581 (5,431) 4,986 1,745 3,241 .38 .37 1.00 1.00 67,290 39,947 (4,098) 23,245 8,367 14,878 1.78 1.75 1.00 1.00 $ $ $ $ $ 63,343 37,479 (1,594) 24,270 9,004 15,266 1.82 1.79 1.00 1.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 8,588 8,365 8,407 8,708 8,495 8,509 60,511 30,379 (4,433) 25,699 9,535 16,164 1.74 1.73 1.00 1.00 9,280 9,330 $1,062,097 $1,108,392 $ 822,702 $ 775,507 $ 699,870 682,246 723,964 491,234 493,789 439,453 28,412 30,851 14,198 7,685 20,681 See Management’s Discussion and Analysis for additional information. * ** All years presented are 52-week years except 1998 which is a 53-week year. See Note 3 and Note 15 to the consolidated financial state- ments for additional information about Piedmont Coca-Cola Bottling Partnership. 46 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Summary of Quarterly Stock Prices Fiscal Year 2000 Sales Price 1999 Sales Price High Low Period End High Low Period End $53.00 $46.50 $52.94 $59.50 $54.50 $56.00 52.75 47.75 45.00 41.38 36.50 32.05 45.50 41.94 37.88 57.63 60.00 56.94 52.88 55.75 45.00 56.13 56.13 47.38 The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Com- pany at such time, and no assurance can be given that dividends will be declared in the future. The number of stockholders of record of the Com- mon Stock and Class B Common Stock, as of February 15, 2001, was 3,225 and 12, respectively. First quarter Second quarter Third quarter Fourth quarter The Company’s Common Stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market® under the symbol COKE. The table above sets forth for the periods indicated the high, low and period end reported sales prices per share of Common Stock. There is no trading market for the Company’s Class B Com- mon Stock. Shares of Class B Common Stock are con- vertible on a share-for-share basis into shares of Com- mon Stock. The quarterly dividend rate of $.25 per share on both Common Stock and Class B Common Stock shares was maintained throughout 1998, 1999 and 2000. C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d 47 Board of Directors J. Frank Harrison, III Chairman of the Board of Directors and Chief Executive Officer Coca-Cola Bottling Co. Consolidated J. Frank Harrison, Jr. Chairman — Emeritus Coca-Cola Bottling Co. Consolidated William B. Elmore President and Chief Operating Officer Coca-Cola Bottling Co. Consolidated James L. Moore, Jr. Vice Chairman of the Board of Directors Coca-Cola Bottling Co. Consolidated Reid M. Henson Retired Vice Chairman of the Board of Directors Coca-Cola Bottling Co. Consolidated John W. Murrey, III Member Witt, Gaither & Whitaker, P.C. Attorneys at Law H. W. McKay Belk President, Merchandising and Marketing Belk, Inc. H. Reid Jones Private Investor John M. Belk Chairman and Chief Executive Officer Belk, Inc. and Belk Stores Services, Inc. Executive Officers J. Frank Harrison, III Chairman of the Board of Directors and Chief Executive Officer William B. Elmore President and Chief Operating Officer James L. Moore, Jr. Vice Chairman of the Board of Directors Robert D. Pettus, Jr. Executive Vice President and Assistant to the Chairman David V. Singer Executive Vice President, Chief Financial Officer Ned R. McWherter Former Governor of the State of Tennessee M. Craig Akins Vice President, Field Sales Clifford M. Deal, III Vice President, Treasurer Norman C. George Vice President, Marketing and National Sales Ronald J. Hammond Vice President, Value Chain Kevin A. Henry Vice President, Human Resources Carl Ware Executive Vice President Global Public Affairs and Administration The Coca-Cola Company Umesh M. Kasbekar Vice President, Planning and Administration C. Ray Mayhall, Jr. Vice President, Distribution and Technical Services Lauren C. Steele Vice President, Corporate Affairs Steven D. Westphal Vice President, Controller Jolanta T. Zwirek Vice President, Chief Information Officer 48 C o c a - C o l a B o t t l i n g C o . C o n s o l i d a t e d Corporate Information Transfer Agent and Dividend Disbursing Agent First Union National Bank Corporate Trust Client Services NC-1153 1525 West W.T. Harris Blvd. 3C3 Charlotte, North Carolina 28288-1153 Stock Listing Nasdaq National Market System Nasdaq Symbol - COKE Form 10-K A copy of the Company’s annual report to the Securi- ties and Exchange Commission (Form 10-K) is avail- able to stockholders without charge upon written request to David V. Singer, Executive Vice President, Chief Financial Officer, Coca-Cola Bottling Co. Consolidated, P.O. Box 31487, Charlotte, North Caro- lina 28231. Annual Meeting The Annual Meeting of Stockholders of Coca-Cola Bottling Co. Consolidated will be held at Snyder Pro- duction Center, 4901 Chesapeake Drive, Charlotte, North Carolina 28216, at 10:00 a.m., on May 9, 2001. Photography on inside pages by Donna Bise • Photography of contour bottle by Mitchell Kearney • Printing by Classic Graphics Produced by Crown Communications • Art Direction by Johnston Design 4100 Coca-Cola Plaza Charlotte, NC 28211 Mailing Address: Post Office Box 31487 Charlotte, NC 28231 704/557-4400 

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