Coca-Cola Consolidated
Annual Report 2001

Plain-text annual report

ANNUAL REPORT 2001 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ COCA-COL A BOTTLING CO. CONSOLIDATED (CCBCC) IS THE SECOND LARGEST COCA-COLA BOTTLER IN THE UNITED STATES. THE COMPANY IS A LEADER IN THE MANUFACTURING, 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. FINANCIAL SUMMARY ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ In Thousands (Except Per Share Data) Fiscal Year ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 2001 2000 1999 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Net sales $1,022,686 $995,134 $972,551 Gross margin 467,116 464,893 429,438 Restructuring expense Income before income taxes 11,696 Net income 9,470 9,835 6,294 2,232 4,986 3,241 Average Common and Class B Common shares outstanding 8,753 8,733 8,588 Basic net income per share $ 1.08 $ .72 $ .38 Basic net income plus amortization expense per share* $ 2.42 $ 2.02 $ 1.63 * 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. FUN, ATTENTION- GETTING DISPLAYS ENTICE SHOPPERS TO STOP AND TAKE NOTICE, ESPECIALLY WHEN THEY ARE THEMED AROUND POPULAR, EXCITING EVENTS SUCH AS THE SUPER BOWL. L E T T E R T O S H A R E H O L D E R S ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ e are pleased to report that 2001 was a good year for Coca-Cola Bottling Co. Consolidated. Despite significant challenges and a very competitive business environment, your Company produced solid financial results, posted healthy volume growth and gained momentum for the future. In last year’s Annual Report, we stated that our primary objectives for 2001 were to continue improving the Company’s financial strength and flexibility while growing the consumer franchise. Managing the price/volume equation, continuing to improve our productivity and reducing debt were the critical elements of achieving this goal. In 2001, your Company accomplished all this and more. The financial results of the Company have improved, with net income for 2001 of $9.5 million or $1.08 per share, a significant improve- ment from the prior year. Our financial results and record free cash flow enabled us to reduce debt and lease liabilities by $67 million. This free cash flow enabled the Company to repay $18 million in debt and purchase $49 million of equipment previously leased. As a result, interest expense declined by $9 million or 17 percent from 2000. Stronger earnings, less debt and lower interest expense are clear signs that the Company’s financial strength and flexibility are continuing to improve. A critical priority for any soft drink bottler is managing the price/volume equation. In 2001, we were able to grow physical case volume by 4 percent while realizing a modest improvement in gross margin. While we are very pleased by the Company’s improved financial performance, we are greatly encouraged by the tangible momentum and the strong sense of winning that is evident throughout our organization. Consolidated has an outstand- ing employee team made up of hard-working, dedicated and motivated individuals. In 2001, Consolidated again was an innova- tive leader in the soft drink industry, introducing a number of exciting new packages and products. Working in partnership with one of our key suppliers and Coca-Cola North America, Con- solidated was the first bottler to introduce the Fridge Pack™, the most significant soft drink packaging innovation since the recyclable plastic contour bottle. Both retailers and consumers instantly embraced the Fridge Pack — a 12-pack carton with a sleek, consumer-friendly design — leading to double-digit growth in multi-pack can sales. Building on our system leadership in the citrus category, Consolidated was also the first bottler to introduce Mello Yello Cherry and Mello Yello Melon, generating renewed energy in a critical flavor category. We also rolled out diet Coke with lemon, which contributed to a very successful year for the total diet Coke trademark. We continued to focus on accelerating our incredibly successful Dasani business by expand- ing our packaging to include 12-ounce and 24-ounce bottles. Since introducing Dasani in 1999, we have experienced outstanding results in this important growth segment of our business. We have exciting plans to increase our package offering on this brand, and we believe we will continue to post strong results. In 2002, we will continue to bring “new news” to the marketplace through package and product innovation. Revitalizing our convenience store single drink business is critical to our success. Already this year, we have introduced ○ ○ ○ ○ 3 ○ ○ ○ ○ CHAIRMAN AND CHIEF EXECUTIVE OFFICER FRANK HARRISON, III AND PRESIDENT AND CHIEF OPERATING OFFICER BILL ELMORE JOIN IN THE CELEBRATION OF THE 2002 WINTER OLYMPIC GAMES. WORKING THE OLYMPIC RINGS INTO A DISPLAY TAKES TIME, BUT IT GENERATES EXCITEMENT AND INCREASES SALES. L E T T E R T O S H A R E H O L D E R S ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ more than two dozen new brand/package combinations. Because of the rapid growth in the flavor category — particularly in immediate consumption locations — CCBCC introduced Fanta flavors at the first of the year and the results are exceeding our expectations. Very shortly we will be leveraging our association with NASCAR with single-drink activity using 16-ounce cans featuring members of the Coca-Cola Racing Family. Just prior to the summer selling period, we will roll out other exciting new packages, brands and promotions to further energize our customers, our consumers and our organization. All the above-mentioned activities help keep Consoli- dated on the offensive in the marketplace. Our priorities for 2002 remain unchanged. We are committed to volume growth but at the same time recognize that we must realize meaningful margin improvement. While our noncarbonated beverage business is growing in its importance, we are first and foremost a carbon- ated soft drink company and will allocate our resources accordingly. We continue to strive for year-over-year improvements in productivity through process improvement and infrastructure rationalization. The Company generated free cash flow of $64 million in 2000 and $67 million in 2001. We remain focused on generating free cash flow to repay debt. This has enabled us to lower interest expense while making material improvements in financial health and flexibility. We believe it is important to note that as a Coca-Cola bottler, our relationships with The Coca-Cola Company, major retail customers, other bottlers and key suppliers are critically important to our success. We feel very good about these strategic partnerships. Consolidated’s sales results improved with each successive quarter of 2001. More impressive is the fact that we posted our strongest sales performance directly on the heels of major changes in the sales organization in September. Thanks to thorough planning and hard work, we continued to build momentum in the face of significant change. We are also very proud of the fact that Consolidated received the 2001 President’s Award for Quality Excellence from The Coca-Cola Company in recognition of the superior achieve- ments in the marketplace and manufacturing. The quality and freshness of our products have never been higher. This is a significant accomplish- ment, particularly given the increased number of products and packages we are now carrying. In 2002, your Company will mark its 100th year of selling the world’s greatest soft drink. We believe this is an outstanding business to be in and are very optimistic about Coca-Cola Consolidated’s long-term future. J. Frank Harrison, III Chairman of the Board of Directors and Chief Executive Officer William B. Elmore President and Chief Operating Officer ○ ○ ○ ○ 5 ○ ○ ○ ○ IF THIS BRIGHT, PATRIOTIC DISPLAY WEREN’T ENOUGH TO CAPTURE CONSUMERS’ INTEREST, RICK THE ROBOT WOULD SURELY ENGAGE THEM. RICK APPEARS AT WAL-MART STORES AND CAN EVEN “TALK!” HE ALWAYS DRAWS AN ADMIRING CROWD ... AND HELPS BOOST DISPLAYS AND SALES! D I S C U S S I O N O F P R I O R I T I E S A N D S T R A T E G I E S ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ n 2001, your Company produced generated more than $120 million in free cash solid financial results, posted flow which has enabled us to significantly reduce healthy volume growth and gained our debt and lease liabilities. This, along with momentum for the future. President and Chief very thoughtful interest rate management, led to Operating Officer Bill Elmore reviews your an interest expense reduction of $9 million, or Company’s priorities and strategies below. 17 percent, in 2001. Beyond the interest savings, Q. What were the major priorities for Coca-Cola Bottling Co. Consolidated in 2001? A. In 2001, Coca-Cola Bottling Co. Consolidated’s most important priorities were to improve the Company’s financial strength by a lower debt level creates shareholder value and increases our financial flexibility to capitalize on future business opportunities as they arise. Q. How was the Company able to improve performance in 2001? reducing debt and to increase the value of our A. The short answer is productivity, but a consumer franchise through volume and share lot of thought and hard work have gone into growth. We have been successful in achieving making that happen. We are now experiencing both of these priorities. many of the benefits of our Value Chain initia- Last year, the Company employed a balanced approach toward managing the price/volume equation. By doing this, we enjoyed solid financial results while leading the Coke system in volume growth. Going forward, our charge is to generate profitable growth that can only come from both volume and price increases. Q. What are the Company’s financial priorities for 2002? tive. We are selling more cases with fewer people from fewer vehicles through fewer sales branches and with lower inventory levels. By improving sales forecasting, supply planning and production scheduling, we have significantly lowered our manufacturing, warehousing and transportation costs. These improvements, coupled with better warehouse management processes, have also allowed us to significantly lower inventory levels while at the same time significantly reducing out- of-stock situations. By doing this, we have freed A. Debt reduction remains our highest up funds for debt repayment while contributing priority. Over the past two years, we have to improvements in product quality. In addition, ○ ○ ○ ○ 7 ○ ○ ○ ○ DASANI HAS PROVEN TO BE A STRONG FORCE IN THE MARKETPLACE SINCE ITS 1999 INTRODUCTION. THIS DISPLAY SENDS A STRONG MESSAGE WHEN SITUATED BY PRODUCE, REMINDING SHOPPERS OF THE IRRESISTIBLY CLEAN TASTE OF THIS PURIFIED WATER. D I S C U S S I O N O F P R I O R I T I E S A N D S T R A T E G I E S ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ we continue to realize increased operating Q. What about new products and packages? efficiencies as we implement process improve- ments developed as part of our Technical Services and Distribution initiatives. We fully expect these two initiatives to yield benefits similar to the Value Chain initiative over the next couple of years. A. Consolidated continued in a leadership role in industry innovation in 2001. Not only did the Company play an upfront role in the intro- duction of several new products, we pioneered the development and introduction of the Fridge Pack, arguably the most significant packaging Q. What steps have we taken to achieve innovation in the soft drink industry since the better asset productivity? Coca-Cola PET contour bottle. A. In 2001, we began to streamline our Working with a key supplier and Coca-Cola sales branch network. We consolidated the North America, Consolidated developed and operations of a number of small sales centers, became the first bottler to introduce the sleek, which enables us to operate larger, more efficient consumer-friendly Fridge Pack. The Fridge Pack facilities. This was done in a thoughtful manner is a reconfigured 12-pack that was designed to to minimize the impact on our employees and better fit in a refrigerator. It is like having a mini- customers. Additional consolidation has taken vending machine in every home. Consumers love place in the first quarter of 2002. it, as evidenced by the accelerated volume and We have also begun a major overhaul of our sales and distribution systems. In place of the traditional conventional route sales system, we are phasing in more pre-sell for both our take-home and cold drink customers. By doing this, we will make our entire system, from manufacturing all the way through to product delivery, more predictable, more cost-effective and better equipped to handle our ever increasing product line-up. margin growth we experienced in the months following the package’s introduction. It took a significant investment in equipment and reconfiguring manufacturing lines to produce the Fridge Pack, but there is no question that it has been a resounding success. Consolidated has plans to bring additional exciting packaging innovations to market over the next few months. ○ ○ ○ ○ 9 ○ ○ ○ ○ GLASS-FRONT VENDERS, LIKE THIS ONE IN A BUSY HOSPITAL, WERE RECENTLY INTRODUCED INTO THE AT-WORK MARKET. THESE INNOVATIVE VENDERS LET THIRSTY CONSUMERS SEE THE PRODUCTS THAT PROVIDE A REFRESHING BREAK. CONSUMERS CAN WATCH AS THE MACHINE GENTLY DELIVERS THEIR BEVERAGE OF CHOICE. D I S C U S S I O N O F P R I O R I T I E S A N D S T R A T E G I E S ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ As for new products, Consolidated worked in 1999. Dasani has grown by more than closely with Coca-Cola North America to create 50 percent for both of the last two years and line extensions for Mello Yello. Already the has established itself as the market share leader system leader in Mello Yello sales, the new Mello in the water category in our territory. Clearly, Yello Cherry and Mello Yello Melon flavors Dasani is the strongest entry in our noncarbon- helped Consolidated achieve solid growth last ated portfolio, but POWERade also posted a year in the key carbonated citrus soft drink strong double-digit gain in volume in 2001. category. In addition, the Company rolled out diet Coke with lemon in 2001 and introduced the 12-ounce POWERade package and 12-ounce and 24-ounce Dasani bottles. Having said this, carbonated soft drinks still represent more than 90 percent of our business. It is absolutely essential that we continue to focus on growing sales of core Already in 2002, we have introduced Fanta brand carbonated soft drinks in the future just flavors, 10-ounce bottles for our key brands, as we did in 2001. Minute Maid Fruit Punch and additional packag- ing for our highly successful Minute Maid Lemonade brand. Just like on the packaging front, there will be more brand introductions in the near future. Q. How important is the water and noncarbonated beverage segment to the soft drink industry? A. There is no question that the fast- growing water and noncarbonated categories are extremely important. Recognizing this, Consoli- dated was the first bottler to introduce Dasani ○ ○ ○ ○ 11 ○ ○ ○ ○ A T R I B U T E ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ him — gardening and bass fishing. Reid reports that he spent 277 days bass fishing in 2001 and plans to spend even more time at this passion in 2002. His love of the environment led to his active involvement and leadership in groups such as the Nags Head Woods Ecological Preserve and Ducks Unlimited, for which he was North Carolina state chair and a national trustee. For his service, Reid was honored with the State Chairman of the Year award from Ducks Unlimited. Reid has three grown children and two stepchildren. He and his wife, Veda, have been married for 24 years. They live near Southern Pines, N.C., where, he proudly points out, they have a trophy bass pond. The University of North Carolina at Chapel Hill alumnus is also a graduate of Sewanee Military Academy. “I want to thank Reid for his many years of service to Coca-Cola Consolidated,” said Frank Harrison, III, chairman and CEO. “We are grateful for his dedication and wise coun- sel. He will be missed. The entire board wishes him well in his retirement.” REID JONES or 31 years, Coca-Cola Bottling Co. Consolidated has benefited from the wisdom, energy and integrity of H. Reid Jones. Reid joined the Board of Directors in 1970 and served until 2001. The Shelby, N.C., native spent most of his career with the Cameron Brown Co. in Raleigh. He served Cameron Brown as vice president and manager of insurance operations for 20 years. He retired from business in 1982 — but continued his service on CCBCC’s board for another 19 years. Since his retirement, Reid has pursued two interests that are dear to ○ ○ ○ ○ 12 ○ ○ ○ ○ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table of Contents Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Report of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Consolidated Statements of Changes in Stockholders’ Equity . . . . . . . . . . . . . . . . . 28 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Summary of Quarterly Stock Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Board of Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 . . . . . . 13 Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTRODUCTION The Company Coca-Cola Bottling Co. Consolidated (the “Company”) produces, markets and distributes carbonated and noncarbonated beverages, primarily 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 second largest bottler of products of The Coca-Cola Company in the United States. The Company also dis- tributes several other beverage brands. The Compa- ny’s product offerings include carbonated soft drinks, teas, juices, isotonics and bottled water. Over the past several years, the Company has expanded its bottling territory primarily throughout the southeast via acquisitions and, combined with internally generated growth, had net sales of over $1 billion in 2001. The Company is also a partner with The Coca-Cola Com- pany in Piedmont Coca-Cola Bottling Partnership (“Piedmont”), a partnership that operates additional bottling territory with net sales of $297 million in 2001. Acquisitions and Divestitures On January 2, 2002, the Company purchased an addi- tional 4.651% interest in Piedmont for $10.0 million from The Coca-Cola Company, increasing the Company’s ownership in Piedmont to 54.651%. As a result of the increase in ownership, the results of oper- ations, financial position and cash flows of Piedmont will be consolidated with those of the Company beginning in the first quarter of 2002. The Company’s investment in Piedmont has been accounted for using the equity method for 2001 and prior years. Summarized financial information for Piedmont is in- cluded in the notes to the Company’s financial state- ments. During 2000, the Company sold most of its bottling territory in Kentucky and Ohio to another Coca-Cola bottler. The territory sold represented approximately 3% of the Company’s annual sales volume. During 1999, the Company expanded its bottling territory by acquiring three Coca-Cola bottlers as follows: (cid:127) Carolina Coca-Cola Bottling Company, Inc., a Coca-Cola bottler with operations in central South Carolina in May 1999; (cid:127) The bottling rights and operating assets of a small Coca-Cola bottler in north central North Caro- lina in May 1999; and (cid:127) Lynchburg Coca-Cola Bottling Co., Inc., a Coca-Cola bottler with operations in central Vir- ginia in October 1999. New Accounting Pronouncements On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”), which requires that all derivative instruments be recognized in the financial statements at fair value. The adoption of SFAS No. 133 did not have a significant impact on the results of operations, financial position or cash flows during 2001. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” (“SFAS No. 141”) and Statement of . . . . . . 14 Management’s Discussion and Analysis Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”). These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives not be amortized but instead be tested for impairment at least annually. These standards provide guidelines for new disclosure requirements and outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all business combinations consummated after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented effective the first day of fiscal year 2002. The Company anticipates the adoption of SFAS No. 142 will reduce amortization expense in 2002 by approximately $12.6 million for the Company and by approximately $8.4 million for Piedmont. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”). SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” but it retains many of the fundamental provisions of that Statement. SFAS No. 144 also extends the reporting requirements to report separately as discontinued operations, components of an entity that have either been disposed of or classified as held for sale. The provisions of SFAS No. 144 are required to be adopted at the beginning of fiscal year 2002. The Company believes that such adoption will not have a material effect on its financial statements. The Year in Review The year was highlighted by an increase in constant territory physical case volume of slightly over 4%, a significant increase in net income and strong free cash flow. Total debt and capital lease obligations decreased from $697.2 million at December 31, 2000 to $679.3 million at December 30, 2001. Strong cash flow from operations enabled the Company to repay approximately $18 million in debt and purchase ap- proximately $49 million of equipment previously leased. New products, new packaging, growth in noncarbonated beverages and an emphasis on our core carbonated brands helped the Company increase volume by 4% in 2001. This increase in volume for 2001 comes after a volume decline of 5% in 2000. Net selling price per case was relatively unchanged for the year. The Company increased its net selling price per case by approximately 6.5% in 2000. The Company reported net income of $9.5 million or $1.08 per share for 2001 compared with net income of $6.3 million or $.72 per share for 2000. Net income for 2001 was favorably impacted by an income tax benefit of approximately $2.9 million, which resulted from the settlement of certain income tax matters with the Internal Revenue Service during the year. Operat- ing results for 2000 included nonrecurring items that increased net income for the year by approximately $3.6 million. The nonrecurring income items in 2000 included a $5.6 million gain, net of tax, on the sale of bottling territory in Kentucky and Ohio offset partially by a provision for impairment of certain fixed assets of $2.0 million, net of tax. The Company benefited from declining interest rates over the course of the year. The combination of lower interest rates and reduced long-term debt balances con- tributed to a decline in interest expense of approx- imately $9 million from 2000. The Company’s operations produced record free cash flow during 2001. Total debt and capital lease obligations de- creased from $697.2 million at December 31, 2000 to $679.3 million at December 30, 2001. Strong cash flow from operations enabled the Company to repay approximately $18 million in debt and purchase ap- proximately $49 million of equipment previously leased. The Company reduced its long-term debt and lease liabilities by approximately $64 million in 2000. The Company continues to focus on its key long-term objectives, including increasing per capita con- sumption, operating cash flow, free cash flow and stockholder value. 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. SAC produces bottle and can product for its members. The Company is a member of the cooperative and receives a fee for managing the day-to-day operations of SAC pursuant to this ten-year management agreement. On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont to distribute and market soft drink products of The Coca-Cola Company and other third party licensors, primarily in certain por- tions of North Carolina and South Carolina. The Company provides a portion of the soft drink prod- ucts to Piedmont and receives a fee for managing the business of Piedmont pursuant to a management agreement. The Company and The Coca-Cola . . . . . . 15 Management’s Discussion and Analysis Company, through their respective subsidiaries, each beneficially owned a 50% interest in Piedmont at De- cember 30, 2001. The Company has historically ac- counted for its investment in Piedmont using the equity method of accounting. As noted above, on Jan- uary 2, 2002, the Company increased its ownership interest in Piedmont to 54.651% and The Coca-Cola Company’s ownership in Piedmont was reduced to 45.349%. The results of operations, financial position and cash flows of Piedmont will be consolidated with those of the Company beginning in the first quarter of 2002. Discussion of Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . shortened, the Company would depreciate the net book value in excess of the estimated salvage value over its revised remaining useful life. Factors such as changes in the planned use of manufacturing equipment, vending equipment, transportation equipment or software could result in shortened useful lives. Long-lived assets are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of future cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the asset, the asset will be written down to its estimated fair value. In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Allowance for Doubtful Accounts The Company evaluates the collectibility of its trade accounts receivable based on a number of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding. Property, Plant and Equipment Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Company’s business model or changes in the Company’s capital strategy could result in the actual useful lives differing from the Company’s estimates. In those cases where the Company determines that the useful life of property, plant and equipment should be . . . 16 Goodwill and Other Intangible Assets In the first quarter of 2002, the Company will adopt the provisions of SFAS No. 142. The Company antici- pates the adoption of SFAS No. 142 will reduce amor- tization expense in 2002 by approximately $12.6 million for the Company and by approximately $8.4 million for Piedmont. During 2002, the Com- pany will perform the first of the annual impairment tests of its goodwill and intangible assets with indef- inite useful lives. The Company has performed a pre- liminary impairment test of its goodwill and intangible assets with indefinite useful lives and anticipates that this test will have no significant impact on the results of operations and financial condition of the Company in 2002. Deferred Tax Assets The Company records a valuation allowance to reduce the carrying value of its deferred tax assets to an amount that is more likely than not to be realized. While the Company has considered future taxable income and prudent and feasible tax planning . . . Management’s Discussion and Analysis strategies in assessing the need for the valuation allow- ance, should the Company determine that it would not be able to realize all or part of its net deferred tax as- sets in the future, an adjustment to the carrying value of the deferred tax assets would be charged to income in the period in which such determination was made. Pension Benefits The Company sponsors pension plans covering sub- stantially all nonunion employees who meet eligibility requirements. Several statistical and other factors which attempt to anticipate future events are used in calculat- ing the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company, within certain guidelines. In addition, the Company’s actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the pro- jected benefit obligation. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic con- ditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension expense recorded by the Company in future periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RESULTS OF OPERATIONS 2001 Compared to 2000 Net Income The Company reported net income of $9.5 million or $1.08 per share for the fiscal year 2001 compared with net income of $6.3 million or $.72 per share for the fiscal year 2000. Diluted net income per share for 2001 was $1.07 compared to $.71 in 2000. Net in- come for 2001 was favorably impacted by an income tax benefit of approximately $2.9 million, which re- sulted from the settlement of certain income tax mat- ters with the Internal Revenue Service during the year. Operating results for 2000 included nonrecurring items that increased net income for the year by approximately $3.6 million. The nonrecurring income items in 2000 included a $5.6 million gain, net of tax, on the sale of bottling territory in Kentucky and Ohio offset partially by a provision for impairment of cer- tain fixed assets of $2.0 million, net of tax. Net Sales and Gross Margin The Company’s net sales for 2001 were $1.02 billion, an increase of 2.8% compared to 2000. On a constant territory basis, net sales increased by approximately 4% in 2001 due to an increase in physical case volume of 4% with net selling price relatively unchanged compared to 2000. The growth in the Company’s con- stant territory physical case volume was attributable to several different items. Sales of carbonated soft drinks were positively impacted by the introduction of new packaging for twelve-pack cans called Fridge Pack™ and line extensions for Mello Yello and diet Coke. Fridge Pack™ has been very popular with both retailers and consumers. The new Mello Yello flavors and diet Coke with lemon have helped these brands to grow at an increased rate. On a constant territory ba- sis, volume for the Company’s three largest selling brands, Coca-Cola classic, Sprite and diet Coke, increased during 2001 after volume declines during 2000. Sales of the Company’s noncarbonated beverages comprised 8.5% of the Company’s total sales volume in 2001 compared to 7% in 2000. The Company con- tinued to experience strong growth in its bottled wa- ter, Dasani. New packaging, including twelve-ounce bottles and multi-packs, contributed to an increase in volume of 52% for Dasani on a constant territory ba- sis over 2000. New packages for POWERade, includ- ing twelve-ounce bottles, helped increase volume by 30% over prior year volume. The Company’s products are sold and distributed di- rectly by its employees to retail stores and other out- lets. During 2001, approximately 78% of the Company’s physical case volume was sold in the take- home channel through supermarkets, convenience stores, drug stores and mass merchandisers. However, no individual customer accounted for as much as 10% of the Company’s total sales volume. While the Company’s gross margin as a percentage of net sales declined in 2001 compared to 2000, it was 1.5% higher in 2001 than in 1999. Gross margin as a percentage of net sales increased from 44.2% in 1999 to 46.7% in 2000 and declined to 45.7% in 2001. The decline in the gross margin percentage in 2001 as compared to 2000 was attributable to an increase in cost of sales as a result of higher raw material costs and brand mix. Cost of Sales and Operating Expenses Cost of sales on a per unit basis increased approximately 0.9% for the year 2001 compared to 2000. Increases in raw material costs were partially offset by a package mix shift from bottles to cans and improvements in productivity. Selling, general and administrative (“S,G&A”) expenses for 2001 increased by approximately 1.4% . . . . . . 17 Management’s Discussion and Analysis over the prior year on a constant territory basis. The increase in S,G&A expenses for 2001 was due primarily to higher employee compensation costs and an increase in sales development costs, offset by a reduction in lease expense resulting from the Company’s purchase of certain assets that were previously leased and increased productivity. S,G&A expenses included an increase in the Company’s allowance for doubtful accounts due to the bankruptcy filing of a large retail customer shortly after the end of the fiscal year. The Company produced, sold and delivered 4% more physical cases with 4% fewer employees than the prior year. Based on the performance of the Company’s pension plan investments and lower interest rates, it is anticipated that pension expense will increase from approximately $2 million in 2001 to approximately $6 million in 2002. The Company anticipates that due to current market conditions, its costs associated with nonhealth-related insurance will increase by approximately $1.5 million in 2002. The Company anticipates that the cost increases related to its pension plan and insurance will be offset partially by increased productivity. 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 advertising expenditures to promote sales in the local territories 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 2002, it is not obligated to do so under the Company’s master bottle contract. Significant decreases in marketing support from The Coca-Cola Company or other beverage companies could adversely impact operating results of the Company. Direct marketing funding and other support from The Coca-Cola Company and other beverage companies were $56.3 million in 2001 compared to $56.8 million in 2000. In 2002, The Coca-Cola Company is providing the Company an opportunity to earn incremental marketing funding as part of a strategic growth initiative. The incremental marketing funding, which could amount to approximately $7 million for the Company and Piedmont on a combined basis, is subject to certain volume performance requirements in 2002. Depreciation expense in 2001 increased $1.4 million or 2.1% on a reported basis and $1.8 million or 2.7% on a constant territory basis from 2000. The increase was due primarily to the purchase during the second quarter of 2001 of approximately $49 million of cold drink equipment that had previously been leased. This purchase was financed with the Company’s lines of credit. Capital expenditures in 2001 totaled $96.7 million, which includes approximately $49 million of previously leased equipment as discussed above. Investment in Piedmont The Company’s share of Piedmont’s net income in 2001 was $.4 million. This compares to the Company’s share of Piedmont’s net income of $2.5 million in 2000. The decrease in income from Piedmont of $2.1 million resulted primarily from an increase in operating expenses. Piedmont’s operating expenses increased by $10.4 million in 2001 due to higher employee compensation costs, an increase in sales development costs and an increase in management fees paid to the Company. Interest Expense Interest expense for 2001 of $44.3 million decreased by $9.0 million or 17% from 2000. The decrease in interest expense was attributable to lower average in- terest rates on the Company’s outstanding debt and lower debt balances. The Company’s overall weighted average interest rate decreased from an average of 7.3% during 2000 to an average of 6.5% during 2001. Total debt and capital lease obligations de- creased from $697.2 million at December 31, 2000 to $679.3 million at December 30, 2001. Strong cash flow from operations enabled the Company to repay approximately $18 million in debt and purchase ap- proximately $49 million of equipment previously leased. Other Income (Expense) Other expense for 2001 was $6.0 million, compared to other income of $1.0 million in 2000 and other ex- pense of $5.4 million in 1999. The change in other income (expense) from 2000 is primarily due to non- recurring items in 2000 that included a gain on the sale of bottling territory of $8.8 million, offset partially by a provision for impairment of certain fixed assets of $3.1 million. The Company recorded a provision for impairment of certain real estate for $.9 million in the fourth quarter of 2001. The impairment charge reflects an adjustment to estimated net realizable value of the real estate which was no longer required for the Com- pany’s ongoing operations. Also in 2001, the Company recorded a gain of $1.1 million on the sale of certain . . . . . . 18 Management’s Discussion and Analysis corporate transportation equipment and a loan loss provision of $1.6 million related to an outstanding loan to its equity investee, Data Ventures LLC. Income Taxes The effective tax rate for federal and state income taxes was approximately 19% in 2001 versus approximately 36% in 2000. The Company’s income tax rate for 2001 was favorably impacted by the settlement of certain income tax issues with the In- ternal Revenue Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 Compared to 1999 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 partially by a provision for impairment of certain fixed assets. costs associated with a strike by employees in certain branches of the Company’s West Virginia territory (primarily security costs to protect Company person- nel and assets) and compensation expense related to a restricted stock award for the Company’s Chairman and Chief Executive Officer. 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. Net Sales and Gross Margin Net sales for 2000 grew by 2.3% to $995 million, compared 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 approximately 6.5% partially offset by a decline in unit volume of approximately 5% for the year. 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 in- creased 13% in 2000 over 1999. Cost of Sales and Operating Expenses Cost of sales on a per unit basis increased by approx- imately 2% in 2000. This increase was due to sig- nificantly higher costs for concentrate and increased packaging costs, offset partially by decreases in manu- facturing labor and overhead expenses. S,G&A expenses increased by $31.3 million or 11% in 2000 over 1999 levels primarily due to a reduction in marketing funding received from The Coca-Cola Company. Direct marketing funding and other support from The Coca-Cola Company and other beverage companies declined from $74.7 million in 1999 to $56.8 million in 2000. The balance of the in- crease in S,G&A expenses was due to enhancements in employee compensation programs, higher fuel costs, Investment in Piedmont The Company’s share of Piedmont’s net income in 2000 was $2.5 million. This compares to the Compa- ny’s share of Piedmont’s net loss of $2.6 million in 1999. The increase in income from Piedmont of $5.1 million was due to improved operating results at Piedmont primarily due to higher gross margin result- ing 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 Company’s overall weighted average borrowing rate for 2000 was 7.3% compared to 6.8% in 1999. Other Income (Expense) Other income for 2000 was approximately $1 million, a change of $6.4 million versus other expense of $5.4 million in 1999. The change in other income (expense) in 2000 was primarily due to a gain on the sale of bottling territory of $8.8 million, before tax, offset partially 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. . . . 19 . . . Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FINANCIAL CONDITION Total assets increased slightly from $1.062 billion at December 31, 2000 to $1.064 billion at December 30, 2001. An increase in property, plant and equipment, including the purchase of $49 million of previously leased equipment, was offset by depreciation of prop- erty, plant and equipment and amortization of intangible assets, principally acquired franchise rights. The adoption of SFAS No. 142, as discussed above, will significantly reduce amortization of intangible assets in 2002. Working capital decreased by $68.5 million to a defi- cit of $54.2 million at December 30, 2001 from $14.3 million at December 31, 2000. The change in working capital was primarily due to increases in the current portion of long-term debt of $46.8 million, in accounts payable, trade of $6.9 million and in amounts due to Piedmont of $8.2 million. Total debt and capital lease obligations decreased from $697.2 million at December 31, 2000 to $679.3 million at December 30, 2001. Strong cash flow from operations enabled the Company to repay approximately $18 million in debt and purchase ap- proximately $49 million of equipment previously leased. The Company recorded a minimum pension liability adjustment of $11.0 million, net of tax, in the fourth quarter of 2001 to reflect the difference between the fair market value of the Company’s pension plan as- sets and the accumulated benefit obligation of the plan. Company and Piedmont on a combined basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIQUIDITY AND CAPITAL RESOURCES Capital Resources Sources of capital for the Company include operating cash flows, bank borrowings, issuance of public or private debt and the issuance of equity securities. Management believes that the Company, through these sources, has sufficient financial resources avail- able to maintain its current operations and provide for its current capital expenditure and working capital requirements, scheduled debt payments, interest and income tax liabilities and dividends for stockholders. 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 Company at such time, and no assurance can be given that dividends will be declared in the future. Financing Activities In January 1999, the Company filed an $800 million shelf registration for debt and equity securities. The Company has used this shelf registration to issue $250 million of long-term debentures in 1999. The Company currently has $550 million available for use under this shelf registration. The Company borrows periodically under its available lines of credit. These lines of credit, in the aggregate amount of $95 million at December 30, 2001, are made available at the discretion of the three participat- ing banks and may be withdrawn at any time by such banks. The Company has a revolving credit facility of $170 million that can be used in the event the lines of credit are not available. There were no amounts out- standing under either the lines of credit or the revolv- ing credit facility as of December 30, 2001. The Company intends to refinance its short-term debt maturities with currently available lines of credit and to negotiate a new revolving credit facility to replace the current facility that matures in December 2002. The Company is a member of two cooperatives and guarantees a portion of these cooperatives’ debt. The total of all debt guarantees on December 30, 2001 was $37.4 million. The Company currently intends to refinance $97.5 million of debt that matures at Piedmont in May 2002 through its available credit facilities, which include its $170 million revolving credit facility and a shelf registration, of which approximately $550 mil- lion is available for use. The Company currently plans to loan $97.5 million to Piedmont to repay the debt which matures in May 2002. It is anticipated that Investing Activities Additions to property, plant and equipment during 2001 were $96.7 million, which included approx- imately $49 million of equipment that had previously been leased. Capital expenditures during 2001 were funded with cash flow from operations and short-term borrowings on the Company’s available lines of credit. Leasing is used for certain capital additions when con- sidered cost effective relative to other sources of capi- tal. The Company currently leases two production facilities and certain distribution and administrative facilities. At the end of 2001, 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 territories on an ongoing basis. The Company anticipates that additions to property, plant and equipment in 2002 will be in the range of $50 to $60 million for the . . . . . . 20 Management’s Discussion and Analysis Piedmont will pay the Company interest based on a spread over the Company’s average cost of funds. With regards to the Company’s $170 million term loan agreement, the Company must maintain its pub- lic debt ratings at investment grade as determined by both Moody’s and Standard & Poor’s. If the Compa- ny’s public debt ratings fall below investment grade within 90 days after the public announcement of cer- tain designated events and such ratings stay below investment grade for an additional 40 days, a trigger event resulting in a default occurs. The Company does not anticipate a trigger event will occur. In October 2001, the Company terminated two inter- est rate swaps with a total notional amount of $100 million. The gain of $6.7 million from the termination of these swaps is being amortized as an adjustment to interest expense over 7.5 years, the remaining term of the initial swap agreements which corresponds to the life of the debt instrument being hedged. In 2002, interest expense will be approx- imately $.7 million lower than in 2001 as a result of this termination. In December 2001, two interest rate swap agreements were entered into with a total no- tional amount of $46 million. These new swap agree- ments allowed the Company to fix the interest rate on certain variable rate lease obligations and will be ac- counted for as cash flow hedges. Interest Rate Hedging The Company periodically uses interest rate hedging products to modify risk from interest rate fluctuations. The Company has historically altered its fixed/floating rate mix 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. Sensitivity analyses are performed to review the impact on the Company’s financial position and coverage of various interest rate movements. The Company does not use derivative financial instruments for trading purposes nor does it use leveraged financial instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FORWARD-LOOKING STATEMENTS The weighted average interest rate of the debt portfo- lio as of December 30, 2001 was 5.7% compared to 7.1% at the end of 2000. The Company’s overall weighted average borrowing rate on its long-term debt in 2001 decreased to 6.5% from 7.3% in 2000. Approximately 34% of the Company’s debt portfolio of $676.9 million as of December 30, 2001 was main- tained on a floating rate basis and is subject to changes in short-term interest rates. An increase in interest rates of 1% would have resulted in an in- crease in interest expense of approximately $2.2 million on a pre-tax basis in 2001. This Annual Report to Stockholders, as well as in- formation included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, press re- leases and oral statements issued by or on behalf of the Company, contains, or may contain, several forward-looking management comments and other statements that reflect management’s current outlook for future periods. These statements include, among others, statements relating to: the consolidation of results of operations, financial position and cash flows of Piedmont with those of the Company, the effects of the adoption of SFAS No. 142 and SFAS No. 144, the Company’s focus on key long-term objectives, includ- ing increasing per capita consumption, operating cash flow, free cash flow and stockholder value, anticipated increases in pension expense, anticipated costs asso- ciated with nonhealth-related insurance, anticipated increased productivity, potential marketing support from The Coca-Cola Company, sufficiency of finan- cial resources, anticipated additions to property, plant and equipment, the amount and frequency of future dividends, refinancing of short-term debt maturities, negotiation of a new revolving credit facility, refinanc- ing of certain debt at Piedmont, Piedmont’s payment of interest to the Company and management’s belief that a trigger event will not occur under the Compa- ny’s $170 million term loan agreement. These state- ments 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 competition, changes in how significant customers market our products, an inability to meet performance require- ments for expected levels of marketing support pay- ments from The Coca-Cola Company, an inability to meet requirements under bottling contracts, the inabil- ity of our aluminum 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 perform- ance in acquired bottling territories and unfavorable interest rate fluctuations. . . . 21 . . . Report of Management The management of Coca-Cola Bottling Co. Consolidated (the “Company”) 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 state- ments 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 properly to permit the preparation of financial statements in accordance with generally accepted accounting princi- ples. 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, the independent accountants 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 Commit- tee 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 . . . . . . 22 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 oper- ations, of cash flows and of changes in stockholders’ equity present fairly, in all material respects, the financial position of Coca-Cola Bottling Co. Consolidated and its subsidiaries (the “Company”) at December 30, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2001 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 accordance 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 mate- rial misstatement. 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 our opinion. Charlotte, North Carolina February 15, 2002 . . . . . . 23 Consolidated Balance Sheets In Thousands (Except Share Data) ASSETS Current assets: Cash Accounts receivable, trade, less allowance for doubtful accounts of $1,863 and $918 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 Investment in Piedmont Coca-Cola Bottling Partnership Other assets Franchise rights and goodwill, net Other identifiable intangible assets, net Total Dec. 30, 2001 Dec. 31, 2000 $ 16,912 $ 8,425 63,974 3,935 5,253 39,916 13,379 143,369 462,689 60,203 52,140 335,662 10,396 62,661 5,380 8,247 40,502 14,026 139,241 437,926 62,730 60,846 347,207 14,147 $1,064,459 $1,062,097 See Accompanying Notes to Consolidated Financial Statements. . . . . . . 24 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Portion of long-term debt payable within one year Current portion of obligations under capital leases Accounts payable, trade Accounts payable to The Coca-Cola Company Other accrued liabilities Due to Piedmont Coca-Cola Bottling Partnership Accrued compensation 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, $100.00 par value: Authorized-50,000 shares; Issued-None Nonconvertible Preferred Stock, $100.00 par value: Authorized-50,000 shares; Issued-None Preferred Stock, $.01 par value: Authorized-20,000,000 shares; Issued-None Common Stock, $1.00 par value: Authorized-30,000,000 shares; Issued-9,454,651 shares Class B Common Stock, $1.00 par value: Dec. 30, 2001 Dec. 31, 2000 $ 56,708 1,489 28,370 7,925 49,169 24,682 17,350 11,878 197,571 133,743 94,973 935 620,156 $ 9,904 3,325 21,477 3,802 45,321 16,436 14,201 10,483 124,949 148,655 76,061 1,774 682,246 1,047,378 1,033,685 9,454 9,454 Authorized-10,000,000 shares; Issued-2,989,166 and 2,969,166 shares 2,989 2,969 Class C Common Stock, $1.00 par value: Authorized-20,000,000 shares; Issued-None Capital in excess of par value Accumulated deficit Accumulated other comprehensive loss Less-Treasury stock, at cost: Common-3,062,374 shares Class B Common-628,114 shares Total stockholders’ equity Total 91,004 (12,307) (12,805) 78,335 60,845 409 17,081 99,020 (21,777) 89,666 60,845 409 28,412 $1,064,459 $1,062,097 See Accompanying Notes to Consolidated Financial Statements. . . . . . . 25 Consolidated Statements of Operations In Thousands (Except Per Share Data) Net sales (includes sales to Piedmont of $71,170, $69,539 and $68,046) Cost of sales, excluding depreciation shown below (includes $53,033, $53,463 and $56,439 related to sales to Piedmont) Gross margin Selling, general and administrative expenses, excluding depreciation shown below 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 2001 Fiscal Year 2000 1999 $1,022,686 $995,134 $972,551 555,570 530,241 543,113 467,116 464,893 429,438 323,668 66,134 15,296 323,223 64,751 14,712 62,018 44,322 (6,000) 11,696 2,226 9,470 1.08 1.07 8,753 8,821 62,207 53,346 974 9,835 3,541 6,294 .72 .71 8,733 8,822 $ $ $ $ $ $ 291,907 60,567 13,734 2,232 60,998 50,581 (5,431) $ $ $ 4,986 1,745 3,241 .38 .37 8,588 8,708 See Accompanying Notes to Consolidated Financial Statements. . . . . . . 26 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 (Increase) decrease in current assets less current liabilities (Increase) decrease in other noncurrent assets Increase (decrease) 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 Net cash provided by (used in) financing activities 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 Capital lease obligations incurred Issuance of Class B Common Stock in connection with stock award Issuance of Common Stock in connection with acquisition Fiscal Year 2000 1999 2001 $ 9,470 $ 6,294 $ 3,241 66,134 15,296 2,226 947 1,297 830 (1,183) (417) 32,770 501 (6,010) 82 112,473 121,943 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 (2,385) (12,900) (8,753) (2,868) 6,704 (26,750) (33,700) (8,733) (4,528) (292) (230) (387) 60,567 13,734 1,745 2,755 836 (563) 2,631 9,639 (8,451) 9,702 334 92,929 96,170 251,165 (30,115) 10,200 (8,549) (4,938) (3,266) (468) (20,432) (74,390) 214,029 (96,684) 3,660 (49,168) 16,366 (723) 23,000 (264,139) 753 (44,454) (93,024) (10,525) (307,840) 8,487 8,425 (625) 9,050 2,359 6,691 $ 16,912 $ 8,425 $ 9,050 $ 456 757 $ 1,313 $ 14,225 21,961 See Accompanying Notes to Consolidated Financial Statements. . . . . . . 27 Consolidated Statements of Changes in Stockholders’ Equity In Thousands Common Stock Class B Common Stock Capital in Excess of Par Value Accum. Deficit Accumulated Other Comprehensive Loss Treasury Stock Total Balance on January 3, 1999 $9,086 $2,969 $ 94,709 $(31,312) $ — $(61,254) $14,198 Net income Cash dividends paid Issuance of Common Stock in connection with acquisition 368 3,241 (8,549) 21,593 3,241 (8,549) 21,961 Balance on January 2, 2000 Net income Cash dividends paid Balance on December 31, 2000 Comprehensive income (loss): Net income Change in fair market value of cash flow hedges, net of tax Proportionate share of Piedmont’s accum. other comprehensive loss at adoption of SFAS No. 133, net of tax Change in proportionate share of Piedmont’s accum. other comprehensive loss, net of tax Minimum pension liability adjustment, net of tax Total comprehensive income (loss) Cash dividends paid Issuance of Class B Common Stock $9,454 $2,969 $107,753 $(28,071) 6,294 $ — $(61,254) $30,851 6,294 (8,733) (8,733) $9,454 $2,969 $ 99,020 $(21,777) $ — $(61,254) $28,412 9,470 4 (947) (878) (10,984) 9,470 4 (947) (878) (10,984) (3,335) (8,753) 757 (8,753) 737 20 Balance on December 30, 2001 $9,454 $2,989 $ 91,004 $(12,307) $(12,805) $(61,254) $17,081 See Accompanying Notes to Consolidated Financial Statements. . . . . . . 28 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 ac- counts of the Company and its majority owned sub- sidiaries. All significant intercompany accounts and transactions have been eliminated. Acquisitions re- corded 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 report- ing period. Actual results could differ from those estimates. The fiscal years presented are the 52-week periods ended December 30, 2001, December 31, 2000 and January 2, 2000. 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 significant accounting policies are as follows: Cash and Cash Equivalents Cash and cash equivalents include cash on hand, cash in banks and cash equivalents, which are highly liquid debt instruments with maturities of less than 90 days. Credit Risk of Trade Accounts Receivable The Company sells its products to large chain stores and other customers and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company monitors its ex- posure to losses on trade accounts receivable and maintains an allowance for potential losses or adjust- ments. The Company’s trade accounts receivable are typically collected within approximately 30 days from the date of sale. 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 betterments 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 depreciation are removed from the accounts and the gains or losses, if any, are re- flected 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 capi- talization of certain costs incurred in the development of internal-use software. Software is amortized using the straight-line method over its estimated useful life. Investment in Piedmont Coca-Cola Bottling Partnership Prior to January 2, 2002, the Company beneficially owned a 50% interest in Piedmont Coca-Cola Bottling Partnership (“Piedmont”). The Company accounted for its interest in Piedmont using the equity method of accounting. With respect to Piedmont, sales of soft drink products at cost, management fee revenue and the Company’s share of Piedmont’s results from oper- ations are included in “Net sales” for all periods pre- sented. See Note 3 and Note 15 for additional information. On January 2, 2002, the Company purchased an addi- tional 4.651% interest in Piedmont from The Coca-Cola Company, increasing the Company’s own- ership to 54.651%. As a result of the increase in own- ership, the results of operations, financial position and cash flows of Piedmont will be consolidated with those of the Company beginning in the first quarter of 2002. See Note 3 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 transferred. Appropriate provision is made for uncollectible accounts. . . . . . . 29 Notes to Consolidated Financial Statements Income Taxes The Company provides deferred income taxes for the tax effects of temporary differences between the finan- cial 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 covering certain union employees. Costs of the plans are charged to current operations and consist of several components of net periodic pension cost based on various actuarial assumptions regarding future experience of the plans. In addition, certain other union employees are covered by plans provided by their respective union organ- izations. 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. Intangible Assets and Goodwill Identifiable intangible assets resulting from the acquis- ition of Coca-Cola bottling franchises accounted for by the purchase method are recorded based upon fair market value at the date of acquisition and are being amortized on a straight-line basis over periods ranging from 17 to 40 years. Goodwill is being amortized on a straight-line basis over 40 years. Impairment of Long-lived Assets The Company continually monitors conditions that may affect the carrying 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 projected 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 num- ber of Common and Class B Common shares out- standing. Diluted EPS gives effect to all securities representing potential common shares that were dilu- tive and outstanding during the period. Derivative Financial Instruments On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”), which requires that all derivative instruments be recognized in the financial statements at fair value. The adoption of SFAS No. 133 did not have a significant impact on the results of operations, financial position or cash flows during 2001. The Company uses derivative financial instruments to manage its exposure to movements in interest rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk to the Company. The Company does not use fi- nancial instruments for trading purposes, nor does it use leveraged financial instruments. The Company has determined that its derivative financial instruments qualify as either fair value or cash flow hedges, having values that highly correlate with the underlying hedged exposures and have designated such instru- ments as hedging transactions. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit standards for its counterparties and periodic settlements. Changes in fair value of derivative financial instru- ments are recorded as adjustments to the assets or li- abilities being hedged in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the effectiveness of the hedge. 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 provided for using actuarial assumptions and procedures followed in the insurance industry, adjusted for company- specific history and expectations. . . . . . . 30 Notes to Consolidated Financial Statements Marketing Costs and Support Arrangements The Company directs various advertising and market- ing programs supported by The Coca-Cola Company or other franchisers. Under these programs, certain costs incurred by the Company are reimbursed by the applicable franchiser. Franchiser funding is recognized when performance measures are met or as funded costs are incurred. 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACQUISITIONS AND DIVESTITURES On May 28, 1999, the Company acquired all of the outstanding capital stock of Carolina Coca-Cola Bot- tling Company, Inc. (“Carolina”) in exchange for 368,482 shares of the Company’s Common Stock, in- stallment notes and cash. The total purchase price was approximately $37 million. Carolina was a Coca-Cola bottler with operations in central South Carolina. On October 29, 1999, the Company acquired sub- stantially all of the outstanding capital stock of Lynch- burg Coca-Cola Bottling Company, Inc. (“Lynchburg”) for approximately $24 million, in cash. Lynchburg was a Coca-Cola bottler with operations in central Virginia. The Company used its lines of credit for the cash por- tion of the acquisitions described above. These acquis- itions have been accounted for under the purchase method of accounting. On September 29, 2000, the Company sold sub- stantially 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 bot- tling territory sold represented approximately 3% of the Company’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 carbonated and noncarbonated beverages primarily in certain portions of North Carolina and South Caro- lina. Prior to January 2, 2002, the Company and The Coca-Cola Company, through their respective sub- sidiaries, each beneficially owned a 50% interest in Piedmont. 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: In Thousands Current assets Noncurrent assets Total assets Current liabilities Noncurrent liabilities Total liabilities Partners’ equity Accumulated other comprehensive loss Total liabilities and partners’ equity Company’s equity investment . . . . . . 31 Dec. 30, 2001 Dec. 31, 2000 $ 55,848 $ 48,068 309,664 319,788 $365,512 $367,856 $114,132 $ 17,342 130,974 225,054 245,106 126,294 (5,888) 242,396 125,460 $365,512 $367,856 $ 60,203 $ 62,730 Notes to Consolidated Financial Statements 3 INVESTMENT IN PIEDMONT COCA-COLA BOTTLING PARTNERSHIP (continued) In Thousands Net sales Cost of sales Gross margin Income from operations Net income (loss) Company’s equity in net income (loss) The Company currently intends to refinance $97.5 million of debt that matures at Piedmont in May 2002 through its available credit facilities, which include its $170 million revolving credit facility and a shelf regis- tration, of which approximately $550 million is avail- able for use. The Company currently plans to loan $97.5 million to Piedmont to repay the debt which matures in May 2002. It is anticipated that Piedmont will pay the Company interest based on a spread over the Company’s average cost of funds. 2001 $296,900 153,643 143,257 13,330 $ $ 834 417 Fiscal Year 2000 $286,781 147,671 139,110 18,948 $ $ 5,028 2,514 1999 $278,202 152,042 126,160 7,803 $ (5,262) $ (2,631) On January 2, 2002, the Company purchased an additional 4.651% interest in Piedmont from The Coca-Cola Company, increasing the Company’s ownership in Piedmont to 54.651%. As a result of the increase in ownership, the results of operations, financial position and cash flows of Piedmont will be consolidated with those of the Company beginning in the first quarter of 2002. The following unaudited proforma condensed financial information reflects the consolidation of Piedmont’s finan- cial position and results of operations with those of the Company as if the additional purchase had occurred at the beginning of 2001. In Thousands Current assets Noncurrent assets Total assets Current liabilities Noncurrent liabilities Total liabilities Minority interest Stockholders’ equity Total liabilities, minority interest and stockholders’ equity In Thousands Net sales Cost of sales Gross margin Income from operations Minority interest Net income . . . . . . 32 Dec. 30, 2001 $ 174,535 1,172,271 $1,346,806 $ 287,671 988,057 1,275,728 54,603 16,475 $1,346,806 Fiscal Year 2001 $1,237,018 656,180 580,838 74,827 378 9,034 $ Notes to Consolidated Financial Statements Piedmont has several interest rate swap agreements that have been designated as cash flow hedges. The Company’s proportionate share of Piedmont’s accumulated other comprehensive loss, net of tax, resulting from the effect of adoption of SFAS No. 133 and the impact during 2001 related to Piedmont were as follows: In Thousands Impact of adoption, net of tax Change in fair market value of cash flow hedges during 2001, net of tax Company’s proportionate share of Piedmont’s accumulated other comprehensive loss, net of tax Fiscal Year 2001 $ 947 878 $1,825 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INVENTORIES Inventories were summarized as follows: In Thousands Finished products Manufacturing materials Plastic pallets and other Total inventories Dec. 30, 2001 Dec. 31, 2000 $23,637 $22,907 11,893 4,386 13,330 4,265 $39,916 $40,502 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 Property, plant and equipment, net Estimated Useful Lives 10-50 years 5-20 years 4-13 years 4-10 years 6-13 years 5-20 years 3-7 years Dec. 30, 2001 Dec. 31, 2000 $ 11,158 $ 11,311 95,338 93,658 140,512 38,119 334,975 40,969 21,850 1,908 778,487 315,798 97,012 94,652 133,886 36,519 285,714 39,597 17,207 1,162 717,060 279,134 $462,689 $437,926 In the fourth quarter of 2001, the Company recorded a provision for impairment of certain real estate for $.9 million, which was classified in “Other income (expense), net.” The impairment charge reflects an adjustment to estimated net realizable value of the real estate which was no longer required for the Company’s ongoing operations. 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.” . . . . . . 33 Notes to Consolidated Financial Statements 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FRANCHISE RIGHTS AND GOODWILL In Thousands Franchise rights Goodwill Franchise rights and goodwill Less: Accumulated amortization Franchise rights and goodwill, net Estimated Useful Lives 40 years 40 years Dec. 30, 2001 $353,388 112,097 465,485 129,823 Dec. 31, 2000 $353,388 112,097 465,485 118,278 $335,662 $347,207 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER IDENTIFIABLE INTANGIBLE ASSETS In Thousands Customer lists Other Other identifiable intangible assets Less: Accumulated amortization Other identifiable intangible assets, net Dec. 30, 2001 Dec. 31, 2000 Estimated Useful Life $54,864 $54,864 20 years 16,316 16,316 17-23 years 71,180 60,784 71,180 57,033 $10,396 $14,147 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LONG-TERM DEBT Long-term debt was summarized as follows: In Thousands Lines of Credit Term Loan Agreement Term Loan Agreement Medium-Term Notes Debentures Debentures Debentures Other notes payable Less: Portion of long-term debt payable within one year Long-term debt Maturity Interest Rate 2002 2004 2005 2002 2007 2009 2009 2002- 2006 2.64% 2.64% 8.56% 6.85% 7.20% 6.38% 5.75%- 10.00% Interest Paid Varies Varies Varies Semi-annually Semi-annually Semi-annually Semi-annually Varies Dec. 30, 2001 Dec. 31, 2000 $ — $ 12,900 85,000 85,000 47,000 100,000 100,000 250,000 9,864 85,000 85,000 47,000 100,000 100,000 250,000 12,250 676,864 56,708 692,150 9,904 $620,156 $682,246 . . . . . . 34 Notes to Consolidated Financial Statements The principal maturities of long-term debt outstanding on December 30, 2001 were as follows: In Thousands 2002 2003 2004 2005 2006 Thereafter Total long-term debt $ 56,708 31 85,025 85,020 80 450,000 $676,864 The Company has a revolving credit facility for bor- rowings of up to $170 million that matures in December 2002. The Company intends to negotiate a new revolving credit facility to replace the current fa- cility. The agreement contains covenants which estab- lish ratio requirements related to debt, interest expense and cash flow. A facility fee of 1⁄ 8% per year on the banks’ commitment is payable quarterly. There was no outstanding balance under this facility as of December 30, 2001. The Company borrows periodically under its available lines of credit. These lines of credit, in the aggregate amount of $95 million at December 30, 2001, are made available at the discretion of the three participat- ing banks and may be withdrawn at any time by such banks. There were no borrowings outstanding under the lines of credit as of December 30, 2001. The Company intends to refinance short-term maturities with currently available lines of credit. In January 1999, the Company filed an $800 million shelf registration for debt and equity securities. The Company used this shelf registration to issue $250 million of long-term debentures in 1999. The Company currently has $550 million available for use under this shelf registration. After taking into account all of the interest rate hedg- ing activities, the Company had a weighted average interest rate of 5.7% for the debt portfolio as of December 30, 2001 compared to 7.1% at December 31, 2000. The Company’s overall weighted average borrowing rate on its long-term debt was 6.5%, 7.3% and 6.8% for 2001, 2000 and 1999, respectively. As of December 30, 2001, approximately $230 mil- lion or 34% of the total debt portfolio was subject to changes in short-term interest rates. The Company considers all floating rate debt and fixed rate debt with a maturity of less than one year to be subject to changes in short-term interest rates. If average interest rates for the floating rate compo- nent of the Company’s debt portfolio increased by 1%, annual interest expense for the year ended De- cember 30, 2001 would have increased by approx- imately $2.2 million and net income would have been reduced by approximately $1.4 million. With regards to the Company’s $170 million term loan agreement, the Company must maintain its pub- lic debt ratings at investment grade as determined by both Moody’s and Standard & Poor’s. If the Compa- ny’s public debt ratings fall below investment grade within 90 days after the public announcement of cer- tain designated events and such ratings stay below investment grade for an additional 40 days, a trigger event resulting in a default occurs. The Company does not anticipate a trigger event will occur. 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate hedging products to modify risk from interest rate fluctuations. The Com- pany has historically used derivative financial instru- ments from time to time to achieve a targeted fixed/ floating interest rate mix. This target is based upon anticipated cash flows from operations relative to the Company’s debt level and the potential impact of in- creases in interest rates on the Company’s overall fi- nancial condition. The Company does not use derivative financial instru- ments for trading or other speculative purposes nor does it use leveraged financial instruments. All of the Company’s outstanding interest rate swap agreements are LIBOR-based. Derivative financial instruments were summarized as follows: In Thousands Interest rate swap-fixed Interest rate swap-fixed Interest rate swaps-floating December 30, 2001 December 31, 2000 Notional Amount Remaining Term Notional Amount Remaining Term $27,000 19,000 .95 years .95 years $100,000 8.25 years . . . . . . 35 Notes to Consolidated Financial Statements In October 2001, the Company terminated two inter- est rate swaps with a total notional amount of $100 million. The gain of $6.7 million from the termination of these swaps is being amortized as an adjustment to interest expense over 7.5 years, the remaining term of the initial swap agreements which corresponds to the life of the debt instrument being hedged. In December 2001, interest rate swap agreements were entered into with a total notional amount of $46 mil- lion. These new swap agreements are accounted for as cash flow hedges. These agreements allowed the Company to fix the interest rate on certain variable rate lease obligations. The counterparties to these contractual arrangements 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 nonperformance by these counterparties. However, the Company does not anticipate nonperformance by the other parties. 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: Cash, Accounts Receivable and Accounts Pay- able: The fair values of cash, accounts receivable and accounts payable approximate carrying values due to the short maturity of these financial 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 carrying amounts of the Company’s variable rate bor- rowings approximate their fair values. Non-Public Fixed Rate Long-Term Debt: The fair values of the Company’s fixed rate long-term borrow- ings are estimated using discounted cash flow analyses based on the Company’s current incremental borrow- ing rates for similar types of borrowing arrangements. Derivative Financial Instruments: Fair values for the Company’s interest rate swaps are based on cur- rent settlement values. The carrying amounts and fair values of the Company’s long-term debt and derivative financial instruments were as follows: In Thousands Public debt Non-public variable rate long-term debt Non-public fixed rate long-term debt Interest rate swaps December 30, 2001 Carrying Amount Fair Value December 31, 2000 Fair Value Carrying Amount $497,000 $493,993 $497,000 $480,687 170,000 170,000 9,864 (7) 9,868 (7) 182,900 12,250 182,900 12,433 1,669 The fair values of the interest rate swaps at December 30, 2001 represent the estimated amount the Company would have received upon termination of these agreements. The fair values of the interest rate swaps at December 31, 2000 represent the estimated amount the Company would have had to pay to terminate these agreements. . . . . . . 36 Notes to Consolidated Financial Statements 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMMITMENTS AND CONTINGENCIES Operating lease payments are charged to expense as incurred. Such rental expenses included in the con- solidated statements of operations were $12.4 million, $15.7 million and $13.7 million for 2001, 2000 and 1999, respectively. The following is a summary of future minimum lease payments for all capital leases and operating leases as of December 30, 2001. In Thousands 2002 2003 2004 2005 2006 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 Canners, 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 con- tractual minimum annual purchases required from SAC are approximately $40 million. See Note 15 to the consolidated financial statements for additional information concerning SAC. The Company guarantees a portion of the debt for one cooperative from which the Company purchases plas- tic 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 guarantees on December 30, 2001 was $37.4 million. The Company 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 2002 and 2003. On August 3, 1999, North American Container, Inc. filed a complaint in the United States District Court for the Northern District of Texas against the Com- Operating Leases $ 9,905 9,144 8,818 8,149 7,980 24,493 $68,489 Total $11,394 9,942 9,131 8,149 7,980 24,493 $71,089 Capital Leases $1,489 798 313 $2,600 176 2,424 1,489 $ 935 pany and 44 other defendants. By its First Amended Complaint filed in April 2000, the plaintiff seeks to enforce United States Reissue Patent No. RIE 36,639 and alleges that the plastic containers used by the Company in connection with the distribution of soft drinks and other products infringe the patent. The Company has notified its suppliers of the lawsuit and has asserted indemnification claims against them. The Company’s suppliers have assumed the defense of the claim pursuant to a written agreement providing for indemnification. The Company’s suppliers are vigo- rously defending the claim and the Company believes it has meritorious defenses against the imposition of any liability in this action. 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 material adverse effect on the financial condition, cash flows or results of operations of the Company. . . . . . . 37 Notes to Consolidated Financial Statements 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME TAXES The provision for income taxes consisted of the following: In Thousands Current: Federal Total current provision Deferred: Federal State Total deferred provision Income tax expense Fiscal Year 2001 2000 1999 $ — $ — $ — — — — 891 1,335 2,226 865 2,676 3,541 206 1,539 1,745 $2,226 $3,541 $1,745 Deferred income taxes are recorded based upon differences 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 Lease obligations Other Gross deferred income tax liabilities Net operating loss carryforwards Leased assets AMT credits Deferred compensation Postretirement benefits Interest rate swap terminations Gross deferred income tax assets Valuation allowance for deferred tax assets Net deferred income tax liabilities Tax benefit of minimum pension liability adjustment Tax benefit related to Piedmont’s accumulated other comprehensive loss Current deferred tax assets Deferred income tax liability Dec. 30, 2001 Dec. 31, 2000 $ 80,506 $ 105,746 94,955 25,202 18,543 219,206 (60,334) (17,562) (7,082) (12,101) (4,748) 83,943 27,428 19,775 13,315 250,207 (80,446) (15,820) (12,030) (4,152) (11,858) (2,624) (101,827) (126,930) 34,526 151,905 (6,732) (1,119) (10,311) 35,048 158,325 (9,670) $ 133,743 $ 148,655 Except for amounts for which a valuation allowance has been provided, the Company believes the other deferred tax assets will be realized primarily through the reversal of existing temporary differences. The valuation allowance of $34.5 million and $35.0 million as of December 30, 2001 and December 31, 2000, respectively, relates primarily to state net operating loss carryforwards. . . . . . . 38 Notes to Consolidated Financial Statements Reported income tax expense is reconciled to the amount computed on the basis of income before income taxes at the statutory rate as follows: In Thousands Statutory expense Amortization of franchise and goodwill assets State income taxes, net of federal benefit Valuation allowance change Favorable tax settlement Other Income tax expense Fiscal Year 2000 2001 1999 $ 4,094 $3,442 $1,745 486 307 418 548 (522) (539) 373 257 (538) (2,850) 711 (328) (92) $ 2,226 $3,541 $1,745 On December 30, 2001, the Company had $58 million and $87 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 2021. 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CAPITAL TRANSACTIONS 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 market 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 market 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 begin- ning 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, Jr. already owned the shares of Common Stock used to make this exchange. This exchange took place in connection with a series of simultaneous transactions related to Mr. Harrison, Jr.’s personal estate planning. Pursuant to a Stock Rights and Restriction Agreement 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 outstanding 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 outstanding shares of all classes of the Company. Under the Stock Rights and Restrictions Agreement, The Coca-Cola Company also has a preemptive right to purchase 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 partnership transactions, The Coca-Cola Company, in the exercise of its rights under the Stock Rights and Restrictions 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 Harri- son, III, the Company’s Chairman of the Board of . . . . . . 39 Notes to Consolidated Financial Statements 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 vest at the rate of 20,000 shares per year over a ten-year period. The vesting of each annual install- ment is contingent upon the Company achieving at least 80% of the Overall Goal Achievement Factor for the six selected performance indicators used in de- termining bonuses for all officers under the Compa- ny’s Annual Bonus Plan. In 2001, 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, 2002. Com- pensation expense in 2001 related to the restricted stock award was $1.4 million. 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. Com- pensation 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. Shares of Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock. There is no trading market for the Company’s Class B Common Stock. 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BENEFIT PLANS Retirement benefits under the Company’s principal pension plan are based on the employee’s length of service, average compensation over the five consec- utive years which gives the highest average compensa- tion and the average of the Social Security taxable wage base during the 35-year period before a partic- ipant reaches Social Security retirement age. Con- tributions to the plan are based on the projected unit credit actuarial funding method and are limited to the amounts that are currently deductible for income 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 balances 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) loss Benefits paid Other Fiscal Year 2001 2000 $ 86,353 3,290 6,578 8,894 (2,999) 211 $81,121 3,606 6,180 (1,732) (2,855) 33 Projected benefit obligation at end of year $102,327 $86,353 Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid $ 87,723 (4,461) 309 (2,999) $88,609 (1,100) 3,069 (2,855) Fair value of plan assets at end of year $ 80,572 $87,723 In Thousands Dec. 30, 2001 Dec. 31, 2000 Funded status of the plans Unrecognized prior service cost Unrecognized net loss Net amount recognized Accrued benefit liability Prepaid pension cost Accumulated other comprehensive income Net amount recognized in the balance sheet $1,370 (324) 8,012 $9,058 $9,058 $(21,755) 21 29,116 $ 7,382 $(10,334) 17,716 $ 7,382 $9,058 Net periodic pension cost for the Company-sponsored pension plans included the following: In Thousands Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized net actuarial loss 2001 $ 3,290 6,578 (7,763) (135) 15 Fiscal Year 2000 $ 3,606 6,180 (7,963) (133) 1999 $ 3,375 5,508 (6,659) (135) 965 Net periodic pension cost $ 1,985 $ 1,690 $ 3,054 The weighted average rate assumptions used in determining net periodic pension cost and the projected benefit obligation were: Weighted average discount rate used in determining the actuarial present value of the projected benefit obligation Weighted average expected long-term rate 2001 2000 7.75% 7.75% of return on plan assets 9.00% 9.00% Weighted average rate of compensation increase 4.00% 4.00% . . . . . . 40 Notes to Consolidated Financial Statements 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. 30, 2001 Dec. 31, 2000 $(46,060) $(47,960) 21,414 (271) 20,559 (2,962) 738 864 $(27,725) $(25,953) The components of net periodic postretirement benefit cost were as follows: In Thousands Service cost Interest cost Amortization of unrecognized transitional assets Recognized net actuarial loss Amortization of prior service cost Net periodic postretirement benefit 2001 $ 331 3,253 (25) 1,106 (271) Fiscal Year 2000 $ 852 2,816 1999 $ 954 2,608 (25) 493 (25) 745 cost $4,394 $4,136 $4,282 The weighted average discount rate used to estimate the postretirement benefit obligation was 7.75% as of December 30, 2001 and December 31, 2000, respectively. The weighted average health care cost trend used in measuring the postretirement benefit expense was 12% in 2001 graded down 1% per year to an ultimate rate of 5%. 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% Decrease 1% Increase Postretirement benefit obligation at December 30, 2001 $9,719 $(8,104) Net periodic postretirement benefit cost in 2001 790 (658) The Company also participates in various multi- employer pension plans covering certain employees who are part of collective bargaining agreements. Total pension expense for multi-employer plans was $1.2 million, $1.1 million and $1.2 million in 2001, 2000 and 1999, respectively. The Company provides a 401(k) Savings Plan for sub- stantially all of its employees who are not part of col- lective 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 2001, 2000 and 1999 was $2.8 million, $3.1 million and $3.2 million, respectively. The Company currently provides employee leasing and management services to 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 recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employ- ees’ periods 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. The Company amended certain provisions of this post- retirement benefit plan in 2001. Under the amended plan, qualifying active employees will be eligible for coverage upon retirement until they become eligible for Medicare (normally age 65), at which time cover- age under the plan will cease. The following tables set forth a reconciliation of the beginning and ending balances of the benefit obliga- tion, a reconciliation of the beginning and ending bal- ances of fair value of plan assets and funded status of the Company’s postretirement plan: In Thousands Benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Actuarial loss Benefits paid Change in plan provisions Fiscal Year 2001 2000 $47,960 331 3,253 675 252 (3,423) (2,988) $36,501 852 2,816 607 10,251 (3,067) Benefit obligation at end of year $46,060 $47,960 Fair value of plan assets at beginning of year Employer contributions Plan participants’ contributions Benefits paid $ — $ — 2,460 607 (3,067) 2,748 675 (3,423) Fair value of plan assets at end of year $ — $ — . . . . . . 41 Notes to Consolidated Financial Statements 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RELATED PARTY TRANSACTIONS The Company’s business consists primarily of the pro- duction, marketing and distribution of soft drink products 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 business. The Company paid The Coca-Cola Com- pany approximately $241 million, $237 million and $258 million in 2001, 2000 and 1999, respectively, for sweetener, syrup, concentrate and other miscella- neous purchases. The Company engages in a variety of marketing programs, local media advertising and sim- ilar arrangements to promote the sale of products of The Coca-Cola Company in bottling territories oper- ated by the Company. Direct marketing funding and other support provided to the Company by The Coca-Cola Company was approximately $52 million, $52 million and $70 million in 2001, 2000 and 1999, respectively. The Company paid approximately $27 million, $26 million and $29 million in 2001, 2000 and 1999, 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 finished products at cost. Sales to CCE under this agreement were $21.0 million, $20.0 million and $21.0 million in 2001, 2000 and 1999, respectively. Purchases from CCE under this arrangement were $21.0 million, $15.0 million and $15.3 million in 2001, 2000 and 1999, respectively. The Coca-Cola Company has significant equity interests in the Com- pany and CCE. As of December 30, 2001, CCE had a 7.95% equity interest in the Company’s total out- standing Common Stock and Class B Common Stock. The Company entered into an agreement for consult- ing services with J. Frank Harrison, Jr. beginning in 1997. Payments in 2001, 2000 and 1999 related to the consulting services agreement totaled $200,000 each year. On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont. Prior to January 2, 2002, the Company and The Coca-Cola Company, through their respective subsidiaries, each beneficially owned a 50% interest in Piedmont. On January 2, 2002, the Company purchased an additional 4.651% interest in Piedmont from The Coca-Cola Company, increasing the Company’s ownership in Piedmont to 54.651%. 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. The Company sold product at cost to Piedmont during 2001, 2000 and 1999 totaling $53.0 million, $53.5 million and $56.4 mil- lion, respectively. The Company received $17.8 mil- lion, $13.6 million and $14.2 million for management services pursuant to its management agreement with Piedmont for 2001, 2000 and 1999, respectively. The Company also subleases various fleet and vending equipment to Piedmont at cost. These sublease rentals amounted to $11.2 million, $11.0 million and $10.0 million in 2001, 2000 and 1999, respectively. In addition, Piedmont subleases various fleet and vending equipment to the Company at cost. These sublease rentals amounted to $.2 million, each year for all periods presented. On November 30, 1992, the Company and the pre- vious owner of the Company’s Snyder Production Center in Charlotte, North Carolina, who was un- affiliated with the Company, agreed to the early termination of the Company’s lease. Harrison Limited Partnership One (“HLP”) purchased the property con- temporaneously 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 corporation 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 Spe- cial Committee of the Board of Directors approved the sale by the Company 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 these properties totaled $3.3 million, $2.9 million and $2.6 million in 2001, 2000 and 1999, respectively. . . . . . . 42 Notes to Consolidated Financial Statements 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 2001 and 2000 related to the consulting agreement totaled $350,000 and $204,000, respectively. On June 1, 1993, the Company entered into a lease agreement with Beacon Investment Corporation re- lated to the Company’s headquarters office building. Beacon Investment Corporation’s sole shareholder is J. Frank Harrison, III. On January 5, 1999, the Com- pany entered into a new ten-year lease agreement with Beacon Investment Corporation which includes the Company’s headquarters office building and an ad- jacent office facility. The annual base rent the Com- pany 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 Eurodollar Rate as the measurement de- vice. Rent expense under this lease totaled $3.3 mil- lion, $3.6 million and $3.1 million in 2001, 2000 and 1999, respectively. The Company is a shareholder in two cooperatives from which it purchases substantially all its require- ments for plastic bottles. Net purchases from these entities were approximately $50 million, $49 million and $45 million in 2001, 2000 and 1999, respectively. In connection with its participation in one of these cooperatives, the Company has guaranteed a portion of the cooperative’s debt. Such guarantee amounted to $20.4 million as of December 30, 2001. The Company is a member of SAC, a manufacturing cooperative. SAC sells finished products to the Com- pany and Piedmont at cost. Purchases from SAC by the Company and Piedmont for finished products were $110 million, $110 million and $109 million in 2001, 2000 and 1999, respectively. The Company also manages the operations of SAC pursuant to a management agreement. Management fees from SAC were $1.2 million, $1.0 million and $1.3 million in 2001, 2000 and 1999, respectively. Also, the Company has guaranteed a portion of debt for SAC. Such guarantee was $16.8 million as of December 30, 2001. The Company purchases certain computerized data management products and services related to in- ventory control and marketing program support from Data Ventures LLC (“Data Ventures”), a Delaware limited liability company in which the Company holds a 31.25% equity interest. J. Frank Harrison, III, Chairman of the Board of Directors and Chief Execu- tive 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. In July 2001, this line of credit was increased to $4.5 million. Data Ventures was indebted to the Company for $3.9 million and $2.8 million as of December 30, 2001 and December 31, 2000, respectively. The Com- pany recorded a loan loss provision of $1.6 million, $.2 million and $.6 million in 2001, 2000 and 1999, respectively, related to its outstanding loan to Data Ventures. The Company purchased products and serv- ices from Data Ventures for $435,000, $414,000 and $154,000 in 2001, 2000 and 1999, respectively. . . . . . . 43 Notes to Consolidated Financial Statements 16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RESTRUCTURING In November 1999, the Company announced a plan to restructure its operations by consolidating sales divisions and reducing its workforce. Approximately 300 positions were eliminated as a result of the re- structuring. The Company recorded a pre-tax re- structuring charge of $2.2 million in the fourth quar- ter 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: Fiscal Year 2000 1999 2001 Numerator for basic net income and diluted net income $9,470 $6,294 $3,241 Denominator: Denominator for basic net income per share—weighted average common shares Effect of dilutive securities—Stock options Denominator for diluted net income per share—adjusted weighted average common shares Basic net income per share Diluted net income per share 8,753 8,733 68 89 8,588 120 8,821 8,822 8,708 $ 1.08 $ 1.07 $ $ .72 .71 $ $ .38 .37 . . . . . . 44 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 supplier of the concentrate required to manufacture these products. The remaining 10% of the Company’s sales are products of various other beverage compa- nies. The Company has bottling contracts under which it has various requirements to meet. Failure to meet the requirements of these bottling contracts could re- sult 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’s products are sold and distributed di- rectly by its employees to retail stores and other out- lets. During 2001, approximately 78% of the Company’s physical case volume was sold in the take- home channel through supermarkets, convenience stores, drug stores and mass merchandisers. However, no individual customer accounted for as much as 10% of the Company’s total sales volume. 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 sell- ing 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. Two collective bargaining contracts covering approx- imately 6% of the Company’s employees expire dur- ing 2002. In March 2000, at the end of a collective bargaining agreement in Huntington, West Virginia, the Com- pany 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. In August 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 provided under marketing programs with The Coca-Cola Company and other franchisers, or the Company’s inability to meet the performance require- ments for the anticipated levels of such marketing funding support payments, would adversely affect fu- ture earnings. The Coca-Cola Company is under no obligation to continue marketing funding at past levels. Changes in the market value of assets in the Compa- ny’s pension plan as well as material changes in inter- est rates, may result in significant changes in net peri- odic pension cost and Company contributions to the plan. Changes in the insurance markets may significantly impact insurance premiums, or in certain situations, may impact the Company’s ability to secure insurance coverages. . . . 45 . . . 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, trade Accounts payable to The Coca-Cola Company Other accrued liabilities Accrued compensation Accrued interest payable Due to Piedmont 2001 Fiscal Year 2000 1999 $ (1,313) $ (2,294) $ (1,017) 1,445 2,994 586 647 6,893 4,123 3,848 3,906 1,395 8,246 638 5,691 712 (757) (249) 1,456 (22,145) 7,041 (6,347) 13,700 4,073 (5,419) (2,487) 2,542 22 (2,848) 14,046 (3,079) 1,505 2,301 (Increase) decrease in current assets less current liabilities $32,770 $ (2,554) $ 9,639 Cash payments for interest and income taxes were as follows: In Thousands Interest Income taxes (net of refunds) 2001 Fiscal Year 2000 1999 $42,084 $58,736 $48,221 2,673 2,830 1,939 . . . . . . 46 Notes to Consolidated Financial Statements 20. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Account- ing Standards No. 141, “Business Combinations,” (“SFAS No. 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”). These standards require that all business combinations be accounted for using the purchase method and that goodwill and in- tangible assets with indefinite useful lives not be amor- tized but instead be tested for impairment at least annually. These standards provide guidelines for new disclosure requirements and outline the criteria for ini- tial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all business combinations consummated after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented effective the first day of fiscal year 2002. The Company anticipates the adoption of SFAS No. 142 will reduce amortization expense in 2002 by ap- proximately $12.6 million for the Company and by approximately $8.4 million for Piedmont. In October 2001, the FASB issued Statement of Finan- cial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”). SFAS No. 144 supersedes State- ment of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” but it retains many of the fundamental provisions of that Statement. SFAS No. 144 also extends the reporting requirements to report separately as discontinued operations, components of an entity that have either been disposed of or classified as held for sale. The provisions of SFAS No. 144 are required to be adopted at the beginning of fiscal year 2002. The Company believes that such adoption will not have a material effect on its financial statements. EITF No. 01-09 “Accounting for Consideration Given by a Vendor to a Customer or Reseller of Vendor’s Products” is effective for the Company at the begin- ning of fiscal year 2002 and will require certain ex- penses currently classified as selling, general and administrative expenses to be reclassified as de- ductions from net sales. This change will occur begin- ning in the first quarter of 2002 and all comparable periods will be reclassified. The Company estimates that approximately $28.6 million of net expense asso- ciated with payments to customers in 2001 which were previously classified as selling, general and administrative expenses will be reclassified as a reduc- tion in net sales in accordance with the EITF consensus. . . . . . . 47 Notes to Consolidated Financial Statements 21. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QUARTERLY FINANCIAL DATA (UNAUDITED) Set forth below are unaudited quarterly financial data for the fiscal years ended December 30, 2001 and December 31, 2000. In Thousands (Except Per Share Data) Year Ended December 30, 2001 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 December 31, 2000 Net sales Gross margin Net income (loss) Basic net income (loss) per share Diluted net income (loss) per share Quarter 1 2 3 4 $230,057 106,467 $271,678 124,708 $266,604 121,108 $254,347 114,833 (1,782) (.20) (.20) 5,009 .57 .57 7,915 .90 .90 (1,672) (.19) (.19) Quarter 1 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) .72 .71 .73 .73 (.51) (.51) . . . . . . 48 Selected Financial Data * Selected Financial Data * In Thousands (Except Per Share Data) 2001 2000*** Fiscal Year ** 1999 1998 1997 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 $1,022,686 $ 995,134 $ 972,551 $928,502 $802,141 555,570 323,668 66,134 15,296 530,241 323,223 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 12,221 960,668 932,927 911,553 861,212 738,798 62,018 44,322 (6,000) 11,696 2,226 9,470 1.08 1.07 1.00 1.00 $ $ $ $ $ 62,207 53,346 974 9,835 3,541 6,294 .72 .71 1.00 1.00 $ $ $ $ $ 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 63,343 37,479 (1,594) 24,270 9,004 $ 14,878 $ 15,266 $ $ $ $ 1.78 1.75 1.00 1.00 $ $ $ $ 1.82 1.79 1.00 1.00 Weighted average number of common shares outstanding Weighted average number of common shares outstanding—assuming dilution Year-End Financial Position Total assets 8,753 8,733 8,588 8,365 8,407 8,821 8,822 8,708 8,495 8,509 $1,064,459 $1,062,097 $1,108,392 $822,702 $775,507 Portion of long-term debt payable within one year Current portion of obligations under capital leases 56,708 1,489 9,904 3,325 28,635 4,483 30,115 12,000 Long-term debt Obligations under capital leases Stockholders’ equity 620,156 682,246 723,964 491,234 493,789 935 17,081 1,774 28,412 4,468 30,851 14,198 7,685 * 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 statements for additional information about Piedmont Coca-Cola Bottling Partnership. *** In September 2000, the Company sold bottling territory which represented approximately 3% of the Company’s annual sales volume. . . . . . . . . . . . . . . . . . . 49 49 49 Summary of Quarterly Stock Prices Fiscal Year 2001 Sales Price 2000 Sales Price High Low Period End High Low Period End $45.13 $36.50 $40.44 $53.00 $46.50 $52.94 41.00 42.24 40.95 38.06 36.17 36.09 39.35 37.75 38.41 52.75 47.75 45.00 41.38 36.50 32.05 45.50 41.94 37.88 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 Company at such time, and no assurance can be given that dividends will be declared in the future. The number of stockholders of record of Common Stock and Class B Common Stock, as of February 15, 2002, was 3,311 and 13, 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 Common Stock. Shares of Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock. The quarterly dividend rate of $.25 per share on both Common Stock and Class B Common Stock shares was maintained throughout 1999, 2000 and 2001. . . . . . . . . . . . . 50 50 Board of Directors J. Frank Harrison, III Chairman of the Board of Directors and Chief Executive Officer Coca-Cola Bottling Co. Consolidated Sharon A. Decker President Doncaster, a division of the Tanner Companies 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 John W. Murrey, III Of Counsel Witt, Gaither & Whitaker, P.C. Attorneys at Law H. W. McKay Belk President, Merchandising and Marketing Belk, Inc. John M. Belk Chairman and Chief Executive Officer Belk, Inc. and Belk Stores Services, Inc. Reid M. Henson Retired Vice Chairman of the Board of Directors Coca-Cola Bottling Co. Consolidated Carl Ware Executive Vice President Public Affairs and Administration The Coca-Cola Company Ned R. McWherter Chairman of the Board of Directors Volunteer Distributing Company, Inc. and Eagle Distributors, Inc. Former Governor of the State of Tennessee Dennis A. Wicker Partner Helms Mulliss and Wicker, PLLC Attorneys at Law Former Lieutenant Governor of the State of North Carolina Executive Officers J. Frank Harrison, III Chairman of the Board of Directors and Clifford M. Deal, III Vice President, Treasurer C. Ray Mayhall, Jr. Senior Vice President, Sales Chief Executive Officer William B. Elmore President and Chief Operating Officer Norman C. George Senior Vice President, Chief Marketing Lauren C. Steele Vice President, Corporate Affairs and Customer Officer James L. Moore, Jr. Vice Chairman of the Board of Directors Ronald J. Hammond Vice President, Value Chain Robert D. Pettus, Jr. Executive Vice President and Assistant to the Chairman David V. Singer Executive Vice President and Chief Financial Officer Kevin A. Henry Vice President, Human Resources Umesh M. Kasbekar Vice President, Planning and Administration Steven D. Westphal Vice President, Controller Jolanta T. Zwirek Vice President, Chief Information Officer . . . . . . . . . . . . . . . . . . 51 51 51 Corporate Information Transfer Agent and Dividend Disbursing Agent The Company’s transfer agent is responsible for stockholder records, issuance of stock certificates and distribution of dividend payments and IRS Form 1099s. The transfer agent also administers plans for dividend reinvestment and direct deposit. Stockholder requests and inquiries concerning these matters are most efficiently answered by corresponding directly with First Union National Bank, Attention: Corporate Trust Client Services NC-1153, 1525 West W.T. Harris Blvd. 3C3, Charlotte, North Carolina 28288- 1153. Communication may also be made by calling Toll Free (800) 829-8432, Local (704) 590-7375 or Fax (704) 590-7598. Stock Listing Nasdaq National Market System Nasdaq Symbol—COKE Corporate Office The corporate office is located at 4100 Coca-Cola Plaza, Charlotte, North Carolina 28211. The mailing address is Coca-Cola Bottling Co. Consolidated, P.O. Box 31487, Charlotte, North Carolina 28231. Form 10-K A copy of the Company’s annual report to the Securities and Exchange Commission (Form 10-K) is available to stockholders without charge upon written request to David V. Singer, Executive Vice President and Chief Financial Officer, Coca-Cola Bottling Co. Consolidated, P.O. Box 31487, Charlotte, North Carolina 28231. Annual Meeting The Annual Meeting of Stockholders of Coca-Cola Bot- tling Co. Consolidated will be held at Snyder Pro- duction Center, 4901 Chesapeake Drive, Charlotte, North Carolina 28216, at 10:00 a.m., on May 8, 2002. . . . . . . 52 B O A R D O F D I R E C T O R S ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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 J. Frank Harrison, III, Chairman of the Board, CEO, CCBCC; (from front right, moving right to left around table); J. Frank Harrison, Jr., Chairman Emeritus of the Board, CCBCC; Dennis A. Wicker, Partner, Helms Mulliss & Wicker, PLLC and former Lieutenant Governor of the state of North Carolina; Carl Ware, Executive Vice President, Public Affairs and Administration, The Coca-Cola Company; Ned R. McWherter, Chairman, Board of Directors, Volunteer Distributing Company, Inc. and former Governor of the state of Tennessee; H.W. McKay Belk, President, Merchandising and Marketing, Belk, Inc.; John W. Murrey, III, Of counsel, Witt, Gaither & Whitaker, P.C.; James L. Moore, Jr., Vice Chairman, Board of Directors, CCBCC; Sharon A. Decker, President, Doncaster, a division of the Tanner Companies; John M. Belk, Chairman and CEO, Belk, Inc.; William B. Elmore, President and COO, CCBCC; and Reid M. Henson, Past President, JTL Corporation; Past Vice Chairman of the Board of Directors, CCBCC. Produced by Crown Communications • Art Direction by Johnston Design Photography by Donna Bise • Printing by Classic Graphics 4100 Coca-Cola Plaza • Charlotte, North Carolina 28211 Mailing Address: Post Office Box 31487 • Charlotte, NC 28231 • 704.557.4400 

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