 | • | Strong oversight by our Board of Directors which includes 11 outside Directors and 2 inside Directors. Each Committee of our Board has a clear public charter and includes only outside directors. The Audit Committee of our Board includes 3 financial experts, and reviews our financial statements, critical accounting policies, earnings releases and our internal controls. | | | | 
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(a) | | • | An internal control environment which is regularly monitored by an extensive program of internal audits. Our General Auditor assesses business and control risks, develops ongoing programs to mitigate identified risks and regularly reports on progress. This risk control process is monitored by our Risk Committee and Audit Committee of our Board. |
| • | A culture which encourages integrity and open communication. We provide continuous training to reinforce our focus on integrity. Last year, I personally encouraged finance associates all around the world to call me directly to discuss anything that makes them uncomfortable and we have telephone “Speak Up” lines accessible from around the world to ensure open lines of communication. |
Items Affecting Comparability The year-over-year comparisons of our financial results are affected by the following items: | | | | | | | | | 2003
| | | 2002
| Operating profit | | | | | | Impairment and restructuring charges | | $(147 | ) | | — | Merger-related costs | | $(59 | ) | | $(224) | Net income | | | | | | Impairment and restructuring charges | | $(100 | ) | | — | Merger-related costs | | $(42 | ) | | $(190) | Net tax benefit | | $109 | | | — | Net income per common share – diluted | | | | | | Impairment and restructuring charges | | $(0.06 | ) | | — | Merger-related costs | | $(0.02 | ) | | $(0.11) | Net tax benefit | | $0.06 | | | — |
For the items and accounting changes affecting our 2001 results, seeNote 1 to our consolidated financial statements and our 2002 Annual Report. Impairment and Restructuring Charges and Merger-Related Costs In the fourth quarter of 2003, we incurred a restructuring charge of $147 million in conjunction with the streamlining of our North American divisions and PepsiCo International. Also, during 2003 and 2002, we incurred costs associated with our merger with The Quaker Oats Company (Quaker). For additional information, seeNote 3 to our consolidated financial statements. Net Tax Benefit At the end of 2003, we entered into agreements with the IRS for open tax years through 1997. As part of these agreements, we also resolved the treatment of certain other issues related to future tax years. These agreements resulted in a tax benefit of $109 million. For additional information, see “Our Critical Accounting Policies” and “Our Liquidity and Capital Resources.” Accounting Changes See “Our Critical Accounting Policies” on the adoption of fair value accounting for stock options. There are no recently issued accounting standards that we have not yet adopted that are expected to have a material impact on our consolidated financial statements. RESULTS OF OPERATIONS Consolidated Review In the discussions of net revenue and operating profit below,effective net pricing reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries. Servings Since our divisions each use different measures of physical unit volume (i.e., kilos, pounds and case sales), a common servings metric is necessary to reflect our consolidated physical unit volume. Our divisions’ physical volume measures are converted into servings based on U.S. Food and Drug Administration guidelines for single-serving sizes of our products. Total servings increased 5% in 2003 compared to 2002 as servings for snacks worldwide and beverages worldwide each grew 5%. PI, PBNA and FLNA contributed to the total servings growth. Total servings increased 4% in 2002 compared to 2001 primarily due to contributions across our divisions, led by beverage growth. Net Revenue and Operating Profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change
| | | | | 2003
| | | 2002
| | | 2001
| | | 2003
| | | 2002
| | Division net revenues | | $ | 26,969 | | | $ | 24,978 | | | $ | 24,045 | | | 8 | % | | 4 | % | Divested businesses | | | 2 | | | | 134 | | | | 173 | | | | | | | | SVE consolidation | | | — | | | | — | | | | (706 | ) | | | | | | | | | |
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| | | | | | | Total net revenue | | $ | 26,971 | | | $ | 25,112 | | | $ | 23,512 | | | 7 | % | | 7 | % | | | |
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| | | | | | | Division operating profit | | $ | 5,813 | | | $ | 5,308 | | | $ | 4,774 | | | 10 | % | | 11 | % | Corporate unallocated | | | (852 | ) | | | (812 | ) | | | (756 | ) | | 5 | % | | 7 | % | Merger-related costs | | | (59 | ) | | | (224 | ) | | | (356 | ) | | | | | | | Impairment and restructuring charges | | | (147 | ) | | | — | | | | (31 | ) | | | | | | | Divested businesses | | | 26 | | | | 23 | | | | 39 | | | | | | | | Other reconciling items | | | — | | | | — | | | | (34 | ) | | | | | | | | | |
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| | | | | | | Total operating profit | | $ | 4,781 | | | $ | 4,295 | | | $ | 3,636 | | | 11 | % | | 18 | % | | | |
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| | | | | | | Division operating profit margin | | | 21.6 | % | | | 21.2 | % | | | 19.9 | % | | 0.4 | | | 1.3 | | Total operating profit margin | | | 17.7 | % | | | 17.1 | % | | | 15.5 | % | | 0.6 | | | 1.6 | |
2003 Net revenue increased 7%. Division net revenue increased 8%, primarily due to the strong volume which contributed 4 percentage points of growth. Favorable product and country mix, as well as North American snack and concentrate price increases, contributed over 2 percentage points to the growth. Favorable foreign currency movements contributed nearly 1 percentage point to the net revenue growth. Total operating profit increased 11% and margin increased 0.6 percentage points. Division operating profit increased 10% and division margin increased 0.4 percentage points. These gains were driven by the strong volume and higher effective net pricing. Cost of sales increased 8%, reflecting increased commodity costs, particularly corn oil and natural gas. Selling, general and administrative expenses increased 6% driven by higher selling costs primarily reflecting the increased volume and increased fuel costs. Unfavorable foreign currency reduced operating profit growth by nearly 1 percentage point. In addition, total operating profit reflects the benefit from lower merger-related costs, offset by the 2003 impairment and restructuring charges of $147 million. 2002 Net revenue increased 7%. Division net revenue increased 4% driven by volume gains across all divisions, higher concentrate pricing and favorable mix. These gains were partially offset by increased promotional spending at PepsiCo Beverages North America and Frito-Lay North America, and net unfavorable foreign currency movement. The consolidation of SVE increased total net revenue growth by 3 percentage points, and net unfavorable foreign currency reduced the growth by 1 percentage point. Total operating profit increased 18% and margin increased 1.6 percentage points. Division operating profit increased 11% and margin increased 1.3 percentage points. These gains were driven by the net revenue growth. In addition, total operating profit benefited from Quaker merger-related synergies of approximately $250 million, lower merger-related costs and productivity. Total operating profit growth improved 6 percentage points from the impact of lower merger-related costs, the absence of other impairment and restructuring costs and the adoption of SFAS 142. Operating profit growth was not materially affected by foreign currency movements. Corporate Unallocated Expenses Corporate unallocated expenses include the costs of our corporate headquarters, centrally managed initiatives, unallocated insurance and benefit programs, foreign exchange transactions gains and losses and certain other items. In the fourth quarter, we voluntarily elected to expense stock options. As a result, corporate unallocated expenses also include stock compensation expense of $407 million in 2003, $435 million in 2002 and $385 million in 2001. For 2003, corporate unallocated expenses increased 5% primarily reflecting our 2003 investment in the Business Process Transformation initiative as discussed in “Our President and CFO Perspective.” Higher employee-related costs, including deferred compensation, and corporate departmental costs also contributed to the increase. The increase in the deferred compensation costs is partially offset in net interest expense as described below. Corporate departmental expenses increased 5% reflecting staffing and other costs related to our health and wellness initiatives. For 2002, corporate unallocated expenses increased 7% due to higher employee-related expenses partially offset by lower net foreign exchange transaction losses. Corporate departmental expenses declined 2%. Other Consolidated Results | | | | | | | | | | | | | | | | | | | | | | | | | | | | % Change
| | | | | 2003
| | | 2002
| | | 2001
| | | 2003
| | | 2002
| | Bottling equity income | | $323 | | | $280 | | | $160 | | | 16 | | | 75 | | Interest expense, net | | $(112 | ) | | $(142 | ) | | $(152 | ) | | (21 | ) | | (6 | ) | Annual tax rate | | 28.5 | % | | 32.3 | % | | 34.1 | % | | | | | | | Net income | | $3,568 | | | $3,000 | | | $2,400 | | | 19 | | | 25 | | Net income per common share – diluted | | $2.05 | | | $1.68 | | | $1.33 | | | 22 | | | 27 | |
Bottling equity income includes our share of the net income or loss of our noncontrolled bottling affiliates as described in “Our Customers.” Our interest in these bottling investments may change from time to time. Any gains or losses from these changes, as well as other transactions related to our bottling investments, are also included on a pre-tax basis. 2003 Bottling equity income increased 16%. This increase primarily reflects a favorable comparison to the impairment charge taken in 2002 on a Latin American bottling investment, and increased earnings from The Pepsi Bottling Group and PepsiAmericas in 2003. Net interest expense declined 21% primarily due to a gain of $22 million on investments used to economically hedge a portion of our deferred compensation liability versus losses of $18 million in the prior year. The offsetting increase in deferred compensation costs is reported in corporate unallocated expenses within selling, general and administrative expenses. This net gain was partially offset by lower investment rates. The annual tax rate decreased 3.8 percentage points compared to the prior year. At the end of 2003, we entered into agreements with the IRS. These agreements resulted in a tax benefit of $109 million, reducing our tax rate by over 2 percentage points. The resolution of certain issues is also expected to lower our future tax rate. Lower taxes on foreign results, including the impact of our new concentrate operations, also reduced our tax rate by nearly 2 percentage points. The impact of lower nondeductible merger-related costs contributed 0.9 percentage points to the decrease. Net income increased 19% and the related net income per common share increased 22%. These increases primarily reflect the solid operating profit growth, our lower annual tax rate and increased bottling equity income. The benefit of lower merger-related costs was largely offset by the impairment and restructuring charges. Net income per common share also reflects the benefit of a reduction in average shares outstanding primarily as a result of share buyback activity. 2002 Bottling equity income increased 75%. This increase primarily reflects the adoption of SFAS 142, improved performance of our international bottling investments, and contributions from our North American anchor bottlers. The impact of impairment charges of $35 million relating to a Latin American bottling investment was more than offset by the settlement of issues upon the sale of our investment in Pepsi-Gemex, our Mexican bottling affiliate, and the absence of 2001 unusual items. Net interest expense declined 6% primarily due to lower average debt levels, partially offset by increased losses of $10 million on investments used to economically hedge a portion of our deferred compensation liability. Decreases in borrowing rates were offset by decreases in investment rates. The annual tax rate decreased 1.8 percentage points compared to prior year. The adoption of SFAS 142 reduced the rate by 0.9 percentage points. The impact of nondeductible merger-related costs decreased from 2.5 percentage points in 2001 to 1.0 percentage point in 2002. Net income increased 25% and the related net income per common share increased 27%. These increases primarily reflect the solid operating profit growth, lower merger-related costs and the adoption of SFAS 142. Net income per common share also reflects the benefit of a reduction in average shares outstanding primarily as a result of increased share buyback activity. Division Review The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. Prior year amounts exclude the results of divested businesses and 2001 reflects the adoption of SFAS 142 and consolidation of SVE. For additional information on these items and our divisions, seeNote 1 to our consolidated financial statements. Frito-Lay North America | | | | | | | | | | | | | | | | | | | | | | | % Change
| | | | 2003
| | 2002
| | 2001
| | 2003
| | 2002
| Net revenue | | $ | 9,091 | | $ | 8,565 | | $ | 8,216 | | 6 | | 4 | Operating profit | | $ | 2,366 | | $ | 2,216 | | $ | 2,056 | | 7 | | 8 |
2003 Net revenue growth of 6% reflects volume growth of 4% and positive effective net pricing. Pound volume grew primarily due to new products, double-digit growth in Cheetos, Munchies snack mix and Quaker Chewy Granola bars, and single-digit growth in branded dips and Doritos. Quaker Toastables, Lay’s Stax and the Natural snack line led the new product growth. These gains were partially offset by double-digit declines in Rold Gold, Lay’s Bistro, and Go Snacks. Collectively, the higher priced better-for-you products, with less fat, fewer calories or lower sodium, generated over 10% of the 2003 and 2002 volume. Modest pricing actions on certain salty snacks and favorable mix led the positive effective net pricing. These gains were partially offset by higher trade spending on product innovation. Operating profit growth of 7% reflects the volume growth and positive effective net pricing. These gains were partially offset by increased commodity costs, particularly corn oil and natural gas. Increased commodity costs reduced operating profit growth by 3 percentage points, more than offsetting the cost leverage generated from productivity initiatives. 2002 Net revenue growth of 4% reflects the increased volume of 4%. Pound volume grew primarily due to new products, strong growth in branded snack mix, single-digit growth in Cheetos cheese flavored snacks, Doritos tortilla chips, branded dips and Quaker Chewy Granola bars, and double-digit growth in Rold Gold pretzels. Go Snacks significantly contributed to the new product growth and Munchies drove the branded snack mix growth. These gains were partially offset by a single-digit decline in Ruffles potato chips. Approximately half of the net revenue growth came from new products. Increased promotional spending more than offset favorable mix and other pricing. Operating profit growth of 8% reflects the increased volume, as well as reduced costs. Lower performance-based compensation and lower commodity prices for vegetable oils and natural gas contributed 4 percentage points of the operating profit growth. PepsiCo Beverages North America | | | | | | | | | | | | | | | | | | | | | | | % Change
| | | | 2003
| | 2002
| | 2001
| | 2003
| | 2002
| Net revenue | | $ | 7,733 | | $ | 7,200 | | $ | 6,888 | | 7 | | 5 | Operating profit | | $ | 1,775 | | $ | 1,577 | | $ | 1,466 | | 13 | | 8 |
2003 Net revenue increased 7% on volume growth of 3%. The volume growth reflects non-carbonated growth of 8% and carbonated beverage growth of 1.5%. Double-digit growth in Gatorade, Aquafina and Propel drove the non-carbonated portfolio. Tropicana chilled products growth was low single-digit. The carbonated beverage performance reflects the national launch of Sierra Mist and high single-digit growth in diet carbonated beverages, primarily Diet Pepsi. Declines in trademark Pepsi, excluding diet, partially offset this carbonated beverage growth. Higher effective net pricing contributed 4 percentage points to the net revenue growth. The higher effective net pricing reflects a favorable product mix shift to the higher priced non-carbonated beverages, and fountain and concentrate price increases, partially offset by increased promotional spending. The price increases contributed 1 percentage point to the net revenue growth. Operating profit increased 13 percentage points reflecting the higher effective net pricing, volume gains and purchasing efficiencies. These gains were partially offset by increased advertising and marketing expenses. The higher effective net pricing contributed 8 percentage points to the operating profit growth with product mix contributing 6 percentage points. 2002 Net revenue increased 5% on volume growth of 3%. The volume growth reflects non-carbonated growth of 10% and flat carbonated beverage performance. Double-digit growth in Gatorade and Aquafina, the national launch of Propel fitness water and the introduction of Lipton Brisk Lemonade drove the non-carbonated portfolio. Tropicana chilled products declined compared to prior year as a result of the loss of the single serve pure premium business at Burger King. The carbonated beverage performance reflects continued growth in Pepsi Twist, Code Red and Sierra Mist and the introduction of Pepsi Blue. Declines in base Pepsi and base Mountain Dew partially offset this carbonated beverage growth. Higher effective net pricing contributed 2 percentage points to the net revenue growth. The higher effective net pricing reflects a favorable product mix shift to the higher priced non-carbonated beverages, and fountain and concentrate price increases, partially offset by increased promotional spending. Operating profit increased 8% reflecting the volume gains, higher concentrate pricing and favorable product mix. These gains were partially offset by increased promotional spending, costs associated with litigation, increased inventory costs and increased advertising and marketing expenses related to our new products. PepsiCo International | | | | | | | | | | | | | | | | | | | | | | | % Change
| | | | 2003
| | 2002
| | 2001
| | 2003
| | 2002
| Net revenue | | $ | 8,678 | | $ | 7,749 | | $ | 7,504 | | 12 | | 3 | Operating profit | | $ | 1,186 | | $ | 1,042 | | | $863 | | 14 | | 21 |
2003 International snacks volume grew 6%, comprised of 3% in our Latin America region, 10% in our Europe, Middle East and Africa region and 16% in our Asia region. These gains were driven by double-digit growth from Walkers in the United Kingdom, India, Turkey and Russia, and low single-digit growth at Sabritas in Mexico. Mid single-digit sweet growth was led by Gamesa in Mexico. Beverage volume grew 8%, comprised of 8% in our Latin America region, 6% in our Europe, Middle East and Africa region and 11% in our Asia region. Broad-based increases were led by double-digit growth in the Middle East, China, Brazil, India, Russia and Thailand and mid single-digit growth in Mexico. Volume gains in India driven by competitive pricing actions were offset by double-digit declines in Germany due to the new one-way bottle deposit requirement imposed by the government. Net revenue grew 12% driven by higher volume across most markets. Acquisitions contributed nearly 2 percentage points of growth and favorable foreign currency contributed 1 percentage point as the favorable euro and British pound substantially offset the unfavorable Mexican peso. These gains were partially offset by the impact of the German one-way beverage deposits and competitive beverage pricing actions in India. Operating profit grew 14% largely due to the drivers of net revenue growth. Acquisitions contributed almost 2 percentage points of growth. Unfavorable foreign currency reduced operating profit by nearly 6 percentage points due to the impact of the peso on our Mexican snack businesses. In addition, operating profits were reduced by over 2 percentage points due to reserve actions taken on potentially unrecoverable beverage assets. 2002 International snacks volume grew 5%, comprised of 5% in our Latin America region, 7% in our Europe, Middle East and Africa region and 6% in our Asia region, led by low single-digit salty growth and strong single-digit sweet growth. Single-digit growth at Walkers and Sabritas contributed over 70% of the salty volume growth. Strong single-digit growth at Gamesa contributed nearly 80% of the sweet growth and the introduction of Chipita croissants in Russia contributed the remainder. Beverage volume grew 5%, comprised of 2% in our Latin America region, 5% in our Europe, Middle East and Africa region and 11% in our Asia region. Broad-based increases were led by strong double-digit growth in China, India, Turkey and Russia. These advances were partially offset by declines in Argentina driven by macroeconomic conditions. Net revenue grew 3% driven by volume and higher effective net pricing in Brazil and Argentina. Walkers and Gamesa together contributed over half of the net revenue growth. Unfavorable foreign currency reduced net revenue growth by 3 percentage points as unfavorable Latin American and Egyptian currencies more than offset the favorable euro and British pound. Operating profit grew 21% driven by volume growth, with Walkers and Gamesa together contributing nearly one-third of the growth. These gains were partially offset by the impact of unfavorable foreign currencies. The franchising of the Gatorade business in certain countries increased operating profit growth by 3 percentage points. Unfavorable foreign currency reduced operating profit growth by 2 percentage points as unfavorable Latin American and Egyptian currencies more than offset the favorable euro and British pound. Quaker Foods North America | | | | | | | | | | | | | | | | | | | | | | | % Change
| | | | 2003
| | 2002
| | 2001
| | 2003
| | 2002
| Net revenue | | $ | 1,467 | | $ | 1,464 | | $ | 1,437 | | — | | 2 | Operating profit | | | $486 | | | $473 | | | $389 | | 3 | | 22 |
2003 Net revenue and volume were flat compared to prior year as the national launch of Breakfast Squares and Canadian Oatmeal to Go growth were offset by declines in Rice and Pasta Roni side dishes and in our hot cereal business. A favorable Canadian exchange rate, which contributed 1 percentage point to net revenue growth, and ready-to-eat price increases, were offset by unfavorable product mix and increased promotional spending related to the Breakfast Squares launch. Operating profit grew 3% compared to prior year. Lower advertising and marketing spending and favorable cost of sales comparisons each contributed 4 percentage points to operating profit growth. These gains were partially offset by an unfavorable product mix, which reduced operating profit growth by 6 percentage points. The unfavorable product mix reflects declines in higher margin products. 2002 Net revenue and volume increased 2%. Hot cereals and ready-to-eat cereals each contributed 1 percentage point of volume growth driven by new product introductions and product news. Operating profit increased 22% reflecting the increased volume. In addition, the benefit of productivity, merger-related synergies and lower advertising and marketing expense, partially offset by higher oat prices, contributed more than 15 percentage points of the operating profit growth. OUR LIQUIDITY AND CAPITAL RESOURCES Our strong cash-generating capability and financial condition give us ready access to capital markets throughout the world. Our principal source of liquidity is operating cash flows, which are derived from net income. This cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating, investing and financing needs. In addition, we have revolving credit facilities that are further discussed inNote 9 to our consolidated financial statements. Operating Activities In 2003, our operations provided $4.3 billion of cash reflecting our solid business results, net of pension plan contributions of $535 million of which $500 million was discretionary, and a $250 million tax payment related to our IRS agreements. In 2002, net cash provided by operating activities of $4.6 billion reflected our business results, pension plan contributions of $820 million of which $750 million was discretionary, and a net tax refund of approximately $250 million related to prior years. The year-over-year decline in cash flows from operations is primarily attributable to the higher net tax payments, partially offset by lower pension contributions in 2003. In the first half of 2004, we will make an additional tax payment of approximately $750 million as a result of the IRS agreements. A portion of this payment represents deductible interest, which will lower our estimated tax payments during the second half 2004 by a total of approximately $150 million. Due to the tax payment and the current market environment, we expect to issue medium-term debt of up to $500 million in the first half of 2004. We estimate our 2004 discretionary pension contributions will be approximately $400 million. Investing Activities In 2003, we used $2.3 billion for investing, primarily reflecting capital spending of $1.3 billion and short-term investments of $1.0 billion. In 2002, we used $0.5 billion for investing, primarily reflecting capital spending of $1.4 billion and the acquisition of the Wotsits brand in the United Kingdom, partially offset by short-term investment maturities and proceeds from the Pepsi-Gemex transaction. We expect capital spending to continue at a rate of approximately 5% to 5.5% of net revenue in 2004. Financing Activities In 2003, we used $2.9 billion for financing, primarily reflecting share repurchases at a cost of $1.9 billion and dividend payments of $1.1 billion. This compares to $3.2 billion used for financing in 2002 for share repurchases of $2.2 billion and dividend payments of $1.0 billion. In 2002, our Board of Directors authorized a share repurchase program of up to $5 billion over a three-year period. Since inception of the program, we have repurchased $4.1 billion of shares, leaving $0.9 billion of remaining authorization. Our current dividend policy is to pay approximately one-third of our previous year’s net income in dividends. Each spring we review our capital structure with our Board. Our discussion covers our dividend policy and share repurchase activity. Management Operating Cash Flow We focus on management operating cash flow as a key element in achieving maximum shareholder value and it is the primary measure we use to monitor cash flow performance. However, it is not a measure provided by accounting principles generally accepted in the United States. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. The table below reconciles the net cash provided by operating activities as reflected in our Consolidated Statement of Cash Flows to our management operating cash flow. | | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Net cash provided by operating activities | | $ | 4,328 | | | $ | 4,627 | | | $ | 3,820 | | Capital spending | | | (1,345 | ) | | | (1,437 | ) | | | (1,324 | ) | Sales of property, plant and equipment | | | 49 | | | | 89 | | | | — | | | | |
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| Management operating cash flow | | $ | 3,032 | | | $ | 3,279 | | | $ | 2,496 | | | | |
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Management operating cash flow was used primarily to repurchase shares and pay dividends. We expect management operating cash flow in 2004 to grow by 10% or more reflecting our underlying business growth. We currently expect to continue to return approximately all our management operating cash flows to our shareholders through dividends and share repurchases. However, see “Cautionary Statements” for certain factors that may impact our operating cash flows. Credit Ratings Our debt ratings of Aa3 from Moody’s and A+ from Standard & Poor’s contribute to our ability to access global capital markets. We have maintained healthy investment grade ratings for over a decade. Standard & Poor’s rating reflects an upgrade from A to A+ during 2003 and Moody’s rating reflects an upgrade from A1 to Aa3 in 2004 due to the strength of our balance sheet and cash flows. Each rating is considered strong investment grade and is in the first quartile of their respective ranking systems. These ratings also reflect the impact of our anchor bottlers’ cash flows and debt. Credit Facilities and Long-Term Contractual Commitments SeeNote 9 to our consolidated financial statements for a description of our credit facilities and long-term contractual commitments. Off-Balance Sheet Arrangements It is not our business practice to enter into off-balance sheet arrangements nor is it our policy to issue guarantees to our bottlers, noncontrolled affiliates or third parties. However, certain guarantees were necessary to facilitate the separation of our bottling and restaurant operations from us. As of year-end 2003, we believe it is remote that these guarantees would require any cash payment. SeeNote 9 to our consolidated financial statements for a description of our off-balance sheet arrangements. OUR FINANCIAL RESULTS Consolidated Statement of Income PepsiCo, Inc. and Subsidiaries Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (in millions except per share amounts) | | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | | Net Revenue | | $ | 26,971 | | | $ | 25,112 | | | $ | 23,512 | | Cost of sales | | | 12,379 | | | | 11,497 | | | | 10,750 | | Selling, general and administrative expenses | | | 9,460 | | | | 8,958 | | | | 8,574 | | Amortization of intangible assets | | | 145 | | | | 138 | | | | 165 | | Merger-related costs | | | 59 | | | | 224 | | | | 356 | | Impairment and restructuring charges | | | 147 | | | | — | | | | 31 | | | | |
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| | Operating Profit | | | 4,781 | | | | 4,295 | | | | 3,636 | | Bottling equity income | | | 323 | | | | 280 | | | | 160 | | Interest expense | | | (163 | ) | | | (178 | ) | | | (219 | ) | Interest income | | | 51 | | | | 36 | | | | 67 | | | | |
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| | Income Before Income Taxes | | | 4,992 | | | | 4,433 | | | | 3,644 | | | Provision for Income Taxes | | | 1,424 | | | | 1,433 | | | | 1,244 | | | | |
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| | Net Income | | $ | 3,568 | | | $ | 3,000 | | | $ | 2,400 | | | | |
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| | Net Income per Common Share | | | | | | | | | | | | | Basic | | | $2.07 | | | | $1.71 | | | | $1.36 | | Diluted | | | $2.05 | | | | $1.68 | | | | $1.33 | |
See accompanyingnotes to consolidated financial statements.  
 
Consolidated Statement of Cash Flows PepsiCo, Inc. and Subsidiaries Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 | | | | | | | | | | | | | (in millions)
| | 2003
| | | 2002
| | | 2001
| | Operating Activities | | | | | | | | | | | | | Net income | | $ | 3,568 | | | $ | 3,000 | | | $ | 2,400 | | Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | | Depreciation and amortization | | | 1,221 | | | | 1,112 | | | | 1,082 | | Stock compensation expense | | | 407 | | | | 435 | | | | 385 | | Merger-related costs | | | 59 | | | | 224 | | | | 356 | | Impairment and restructuring charges | | | 147 | | | | — | | | | 31 | | Cash payments for merger-related costs and restructuring charges | | | (109 | ) | | | (123 | ) | | | (273 | ) | Pension plan contributions | | | (535 | ) | | | (820 | ) | | | (446 | ) | Bottling equity income, net of dividends | | | (276 | ) | | | (222 | ) | | | (103 | ) | Deferred income taxes | | | (323 | ) | | | 174 | | | | 45 | | Other noncash charges and credits, net | | | 415 | | | | 263 | | | | 257 | | Changes in operating working capital, excluding effects of acquisitions and dispositions | | | | | | | | | | | | | Accounts and notes receivable | | | (220 | ) | | | (260 | ) | | | 7 | | Inventories | | | (49 | ) | | | (53 | ) | | | (75 | ) | Prepaid expenses and other current assets | | | 23 | | | | (78 | ) | | | (6 | ) | Accounts payable and other current liabilities | | | (11 | ) | | | 426 | | | | (236 | ) | Income taxes payable | | | 182 | | | | 270 | | | | 389 | | | | �� |
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| Net change in operating working capital | | | (75 | ) | | | 305 | | | | 79 | | Other | | | (171 | ) | | | 279 | | | | 7 | | | | |
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| | Net Cash Provided by Operating Activities | | | 4,328 | | | | 4,627 | | | | 3,820 | | | | |
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| | Investing Activities | | | | | | | | | | | | | Capital spending | | | (1,345 | ) | | | (1,437 | ) | | | (1,324 | ) | Sales of property, plant and equipment | | | 49 | | | | 89 | | | | — | | Acquisitions and investments in noncontrolled affiliates | | | (71 | ) | | | (351 | ) | | | (432 | ) | Divestitures | | | 46 | | | | 376 | | | | — | | Short-term investments, by original maturity | | | | | | | | | | | | | More than three months – purchases | | | (981 | ) | | | (62 | ) | | | (2,537 | ) | More than three months – maturities | | | 6 | | | | 833 | | | | 2,078 | | Three months or less, net | | | 25 | | | | (14 | ) | | | (41 | ) | Snack Ventures Europe consolidation | | | — | | | | 39 | | | | — | | | | |
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| | Net Cash Used for Investing Activities | | | (2,271 | ) | | | (527 | ) | | | (2,256 | ) | | | |
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(Continued on following page) Consolidated Statement of Cash Flows (continued) PepsiCo, Inc. and Subsidiaries Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 | | | | | | | | | | | | | (in millions)
| | 2003
| | | 2002
| | | 2001
| | Financing Activities | | | | | | | | | | | | | Proceeds from issuances of long-term debt | | | 52 | | | | 11 | | | | 324 | | Payments of long-term debt | | | (641 | ) | | | (353 | ) | | | (573 | ) | Short-term borrowings, by original maturity | | | | | | | | | | | | | More than three months – proceeds | | | 88 | | | | 707 | | | | 788 | | More than three months – payments | | | (115 | ) | | | (809 | ) | | | (483 | ) | Three months or less, net | | | 40 | | | | 40 | | | | (397 | ) | Cash dividends paid | | | (1,070 | ) | | | (1,041 | ) | | | (994 | ) | Share repurchases – common | | | (1,929 | ) | | | (2,158 | ) | | | (1,716 | ) | Share repurchases – preferred | | | (16 | ) | | | (32 | ) | | | (10 | ) | Quaker share repurchases | | | — | | | | — | | | | (5 | ) | Proceeds from reissuance of shares | | | — | | | | — | | | | 524 | | Proceeds from exercises of stock options | | | 689 | | | | 456 | | | | 623 | | | | |
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| Net Cash Used for Financing Activities | | | (2,902 | ) | | | (3,179 | ) | | | (1,919 | ) | | | |
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| Effect of exchange rate changes on cash and cash equivalents | | | 27 | | | | 34 | | | | — | | | | |
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| Net (Decrease)/Increase in Cash and Cash Equivalents | | | (818 | ) | | | 955 | | | | (355 | ) | Cash and Cash Equivalents, Beginning of Year | | | 1,638 | | | | 683 | | | | 1,038 | | | | |
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| Cash and Cash Equivalents, End of Year | | $ | 820 | | | $ | 1,638 | | | $ | 683 | | | | |
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See accompanyingnotes to consolidated financial statements. Consolidated Balance Sheet PepsiCo, Inc. and Subsidiaries December 27, 2003 and December 28, 2002 | | | | | | | | | (in millions except per share amounts)
| | 2003
| | | 2002
| | ASSETS | | | | | | | | | Current Assets | | | | | | | | | Cash and cash equivalents | | $ | 820 | | | $ | 1,638 | | Short-term investments, at cost | | | 1,181 | | | | 207 | | | | |
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| | | | | 2,001 | | | | 1,845 | | Accounts and notes receivable, net | | | 2,830 | | | | 2,531 | | Inventories | | | 1,412 | | | | 1,342 | | Prepaid expenses and other current assets | | | 687 | | | | 695 | | | | |
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| Total Current Assets | | | 6,930 | | | | 6,413 | | Property, Plant and Equipment, net | | | 7,828 | | | | 7,390 | | Amortizable Intangible Assets, net | | | 718 | | | | 801 | | Goodwill | | | 3,796 | | | | 3,631 | | Other nonamortizable intangible assets | | | 869 | | | | 787 | | | | |
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| Nonamortizable Intangible Assets | | | 4,665 | | | | 4,418 | | Investments in Noncontrolled Affiliates | | | 2,920 | | | | 2,611 | | Other Assets | | | 2,266 | | | | 1,841 | | | | |
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| Total Assets | | $ | 25,327 | | | $ | 23,474 | | | | |
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | Current Liabilities | | | | | | | | | Short-term obligations | | $ | 591 | | | $ | 562 | | Accounts payable and other current liabilities | | | 5,213 | | | | 4,998 | | Income taxes payable | | | 611 | | | | 492 | | | | |
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| Total Current Liabilities | | | 6,415 | | | | 6,052 | | Long-Term Debt Obligations | | | 1,702 | | | | 2,187 | | Other Liabilities | | | 4,075 | | | | 4,226 | | Deferred Income Taxes | | | 1,261 | | | | 1,486 | | | | |
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| Total Liabilities | | | 13,453 | | | | 13,951 | | Preferred Stock, no par value | | | 41 | | | | 41 | | Repurchased Preferred Stock | | | (63 | ) | | | (48 | ) | Common Shareholders’ Equity | | | | | | | | | Common stock, par value 1 2/3¢ per share (issued 1,782 shares) | | | 30 | | | | 30 | | Capital in excess of par value | | | 548 | | | | 207 | | Retained earnings | | | 15,961 | | | | 13,489 | | Accumulated other comprehensive loss | | | (1,267 | ) | | | (1,672 | ) | | | |
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| | | | | 15,272 | | | | 12,054 | | Less: repurchased common stock, at cost (77 and 60 shares, respectively) | | | (3,376 | ) | | | (2,524 | ) | | | |
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| Total Common Shareholders’ Equity | | | 11,896 | | | | 9,530 | | | | |
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| Total Liabilities and Shareholders’ Equity | | $ | 25,327 | | | $ | 23,474 | | | | |
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See accompanyingnotes to consolidated financial statements. Consolidated Statement of Common Shareholders’ Equity PepsiCo, Inc. and Subsidiaries Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (in millions) | | | | | | | | | | | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | | | | Shares
| | | Amount
| | | Shares
| | | Amount
| | | Shares
| | | Amount
| | Common Stock | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | 1,782 | | | $ | 30 | | | 1,782 | | | $ | 30 | | | 2,029 | | | $ | 34 | | Stock option exercises | | — | | | | — | | | — | | | | — | | | 9 | | | | — | | Shares issued to effect merger | | — | | | | — | | | — | | | | — | | | (256 | ) | | | (4 | ) | | | |
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| Balance, end of year | | 1,782 | | | | 30 | | | 1,782 | | | | 30 | | | 1,782 | | | | 30 | | | | |
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| Capital in Excess of Par Value | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | | | | | 207 | | | | | | | 115 | | | | | | | 375 | | Stock compensation expense | | | | | | 407 | | | | | | | 435 | | | | | | | 385 | | Stock option exercises(a) | | | | | | (66 | ) | | | | | | (339 | ) | | | | | | 77 | | Reissued shares | | | | | | — | | | | | | | — | | | | | | | 150 | | Shares issued to effect merger | | | | | | — | | | | | | | — | | | | | | | (873 | ) | Other | | | | | | — | | | | | | | (4 | ) | | | | | | 1 | | | | | | | |
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| Balance, end of year | | | | | | 548 | | | | | | | 207 | | | | | | | 115 | | | | | | | |
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| Deferred Compensation | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | | | | | — | | | | | | | — | | | | | | | (21 | ) | Net activity | | | | | | — | | | | | | | — | | | | | | | 21 | | | | | | | |
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| Balance, end of year | | | | | | — | | | | | | | — | | | | | | | — | | | | | | | |
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| Retained Earnings | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | | | | | 13,489 | | | | | | | 11,535 | | | | | | | 16,510 | | Net income(b) | | | | | | 3,568 | | | | | | | 3,000 | | | | | | | 2,400 | | Shares issued to effect merger | | | | | | — | | | | | | | — | | | | | | | (6,366 | ) | Cash dividends declared – common | | | | | | (1,082 | ) | | | | | | (1,042 | ) | | | | | | (1,005 | ) | Cash dividends declared – preferred | | | | | | (3 | ) | | | | | | (4 | ) | | | | | | (4 | ) | Other | | | | | | (11 | ) | | | | | | — | | | | | | | — | | | | | | | |
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| Balance, end of year | | | | | | 15,961 | | | | | | | 13,489 | | | | | | | 11,535 | | | | | | | |
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| Accumulated Other Comprehensive Loss | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | | | | | (1,672 | ) | | | | | | (1,646 | ) | | | | | | (1,374 | ) | Currency translation adjustment(b) | | | | | | 410 | | | | | | | 56 | | | | | | | (218 | ) | Cash flow hedges, net of tax(b) | | | | | | (12 | ) | | | | | | 18 | | | | | | | (18 | ) | Minimum pension liability adjustment, net of tax(b) | | | | | | 7 | | | | | | | (99 | ) | | | | | | (38 | ) | Other(b) | | | | | | — | | | | | | | (1 | ) | | | | | | 2 | | | | | | | |
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| Balance, end of year | | | | | | (1,267 | ) | | | | | | (1,672 | ) | | | | | | (1,646 | ) | | | | | | |
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| Repurchased Common Stock | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | (60 | ) | | | (2,524 | ) | | (26 | ) | | | (1,268 | ) | | (280 | ) | | | (7,920 | ) | Share repurchases | | (43 | ) | | | (1,946 | ) | | (53 | ) | | | (2,192 | ) | | (35 | ) | | | (1,716 | ) | Stock option exercises | | 26 | | | | 1,096 | | | 19 | | | | 931 | | | 20 | | | | 751 | | Reissued shares | | — | | | | — | | | — | | | | — | | | 13 | | | | 374 | | Shares issued to effect merger | | — | | | | — | | | — | | | | — | | | 256 | | | | 7,243 | | Other | | — | | | | (2 | ) | | — | | | | 5 | | | — | | | | — | | | | |
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| Balance, end of year | | (77 | ) | | | (3,376 | ) | | (60 | ) | | | (2,524 | ) | | (26 | ) | | | (1,268 | ) | | | |
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| Total Common Shareholders’ Equity | | | | | $ | 11,896 | | | | | | $ | 9,530 | | | | | | $ | 8,766 | | | | | | | |
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| (a) | | Includes total tax benefit of $340 million in 2003, $136 million in 2002 and $207 million in 2001. |
| (b) | | Combined, these amounts represent total comprehensive income of $3,973 million in 2003, $2,974 million in 2002 and $2,128 million in 2001. |
See accompanyingnotes to consolidated financial statements. Notes to Consolidated Financial Statements Note 1 — Basis of Presentation and Our Divisions Basis of Presentation Our financial statements include the consolidated accounts of PepsiCo, Inc. and the affiliates that we control. In addition, we include our share of the results of certain other affiliates based on our ownership interest. We do not control these other affiliates, as our ownership in these other affiliates is generally less than fifty percent. Our share of the net income of noncontrolled bottling affiliates is reported in our income statement as bottling equity income. SeeNote 8 for additional information on our noncontrolled bottling affiliates. Our share of other noncontrolled affiliates is included in division operating profit. Intercompany balances and transactions are eliminated. The preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Impairment and restructuring charges and merger-related costs (described inNote 3), the net tax benefit (described inNote 5), the adoption of SFAS 142 (described inNote 4) and the consolidation of Snack Ventures Europe (SVE) affect the comparability of our consolidated results. See “Our Divisions” below and for additional unaudited information on these items, see “Items Affecting Comparability” in Management’s Discussion and Analysis. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts. Certain reclassifications were made to prior year amounts to conform to the 2003 presentation. Our Divisions We manufacture or use contract manufacturers, market and sell a variety of salty, sweet and grain-based snacks, carbonated and non-carbonated beverages, and foods through our North American and international business divisions. Our North American divisions include the United States and Canada. The accounting policies for the divisions are the same as those described inNote 2. Division results are based on how our Chairman and Chief Executive Officer manages our divisions. Beginning in 2003, we combined our North American beverage businesses as PepsiCo Beverages North America and our international snack, beverage and food businesses as PepsiCo International to reflect operating management changes. Prior year results have been restated to reflect this change. In addition, division results exclude significant restructuring and impairment charges, merger-related costs and divested businesses and have been adjusted to reflect the adoption of SFAS 142 and consolidation of SVE. For additional unaudited information on our divisions, see “Our Operations” in Management’s Discussion and Analysis. 
| | | | | | | | | | | | | | | | | | | | | | | | | | 2003
| | 2002
| | 2001
| | | 2003
| | | 2002
| | | 2001
| | | | | Net Revenue
| | | Operating Profit
| | FLNA | | $ | 9,091 | | $ | 8,565 | | $ | 8,216 | | | $ | 2,366 | | | $ | 2,216 | | | $ | 2,056 | | PBNA | | | 7,733 | | | 7,200 | | | 6,888 | | | | 1,775 | | | | 1,577 | | | | 1,466 | | PI | | | 8,678 | | | 7,749 | | | 7,504 | | | | 1,186 | | | | 1,042 | | | | 863 | | QFNA | | | 1,467 | | | 1,464 | | | 1,437 | | | | 486 | | | | 473 | | | | 389 | | | | |
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| Total division | | | 26,969 | | | 24,978 | | | 24,045 | | | | 5,813 | | | | 5,308 | | | | 4,774 | | Divested businesses | | | 2 | | | 134 | | | 173 | | | | 26 | | | | 23 | | | | 39 | | Corporate | | | — | | | — | | | — | | | | (852 | ) | | | (812 | ) | | | (756 | ) | | | |
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| | | | | 26,971 | | | 25,112 | | | 24,218 | | | | 4,987 | | | | 4,519 | | | | 4,057 | | Impairment and restructuring charges | | | — | | | — | | | — | | | | (147 | ) | | | — | | | | (31 | ) | Merger-related costs | | | — | | | — | | | — | | | | (59 | ) | | | (224 | ) | | | (356 | ) | Other | | | — | | | — | | | — | | | | — | | | | — | | | | 2 | | SVE consolidation | | | — | | | — | | | (706 | ) | | | — | | | | — | | | | (13 | ) | SFAS 142 adoption | | | — | | | — | | | — | | | | — | | | | — | | | | (23 | ) | | | |
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| Total | | $ | 26,971 | | $ | 25,112 | | $ | 23,512 | | | $ | 4,781 | | | $ | 4,295 | | | $ | 3,636 | | | | |
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Divested Businesses –During 2003, we sold our Quaker Foods North America Mission pasta business. As a result, net revenue of $27 million in 2002 and $29 million in 2001 and operating profit of $8 million in 2002 and $10 million in 2001 have been reclassified to divested businesses. During 2002, we sold our Quaker Foods North America bagged cereal business and our PepsiCo International food businesses in Colombia and Venezuela. Corporate – Corporate includes costs of our corporate headquarters, centrally managed initiatives, unallocated insurance and benefit programs, foreign exchange transaction gains and losses and certain other charges. We voluntarily elected to expense stock options and, as a result, corporate unallocated expenses also reflect stock compensation expense for all years presented. SeeNote 6, and for additional unaudited information, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. Impairment and Restructuring Charges and Merger-Related Costs – SeeNote 3. The following items are necessary to reconcile division results to consolidated results since, as noted above, division results are presented as managed. SVE Consolidation – As a result of changes in the operations of our European snack joint venture (SVE), we determined that effective in 2002, consolidation was required. SFAS 142 Adoption – In 2002, we adopted SFAS 142,Goodwill and Other Intangible Assets, which eliminated amortization of goodwill and perpetual brands, and resulted in an acceleration of the amortization of certain of our other intangibles. SeeNote 4 for additional information, and the after-tax impact. Other Division Information | | | | | | | | | | | | | | | | | | | | | | | | 2003
| | 2002
| | 2001
| | | 2003
| | 2002
| | 2001
| | | | | Total Assets
| | | Capital Spending
| | FLNA | | $ | 5,332 | | $ | 5,099 | | $ | 4,623 | | | $ | 426 | | $ | 523 | | $ | 514 | | PBNA | | | 5,856 | | | 5,691 | | | 5,403 | | | | 332 | | | 367 | | | 359 | | PI(a) | | | 8,109 | | | 7,275 | | | 6,359 | | | | 521 | | | 473 | | | 385 | | QFNA | | | 995 | | | 1,001 | | | 878 | | | | 32 | | | 50 | | | 55 | | | | |
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| Total division | | | 20,292 | | | 19,066 | | | 17,263 | | | | 1,311 | | | 1,413 | | | 1,313 | | Divested businesses | | | — | | | — | | | 58 | | | | — | | | 1 | | | 3 | | Corporate(b) | | | 2,384 | | | 2,072 | | | 1,927 | | | | 34 | | | 23 | | | 8 | | Investments in bottling affiliates | | | 2,651 | | | 2,336 | | | 2,447 | | | | — | | | — | | | — | | | | |
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| | | | $ | 25,327 | | $ | 23,474 | | $ | 21,695 | | | $ | 1,345 | | $ | 1,437 | | $ | 1,324 | | | | |
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| | | | | | | | | | | | 2003
| | 2002
| | 2001
| | | 2003
| | 2002
| | 2001
| | | | | Amortization of Intangible Assets
| | | Depreciation and Other Amortization
| | FLNA | | $ | 3 | | $ | 3 | | $ | 7 | | | $ | 416 | | $ | 399 | | $ | 377 | | PBNA | | | 75 | | | 70 | | | 69 | | | | 245 | | | 206 | | | 193 | | PI | | | 66 | | | 64 | | | 68 | | | | 350 | | | 300 | | | 310 | | QFNA | | | 1 | | | 1 | | | 1 | | | | 36 | | | 37 | | | 41 | | | | |
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| Total division | | | 145 | | | 138 | | | 145 | | | | 1,047 | | | 942 | | | 921 | | Divested businesses | | | — | | | — | | | — | | | | — | | | 3 | | | 4 | | Corporate | | | — | | | — | | | — | | | | 29 | | | 29 | | | 18 | | SVE consolidation | | | — | | | — | | | (3 | ) | | | — | | | — | | | (26 | ) | SFAS 142 adoption | | | — | | | — | | | 23 | | | | — | | | — | | | — | | | | |
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| | | | $ | 145 | | $ | 138 | | $ | 165 | | | $ | 1,076 | | $ | 974 | | $ | 917 | | | | |
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| | | | | | | | | | | | | | | | | | | | | | 2003
| | 2002
| | 2001
| | 2003
| | 2002
| | 2001
| | | | Net Revenue
| | Long-Lived Assets(c)
| United States | | $ | 17,377 | | $ | 16,588 | | $ | 15,976 | | $ | 9,907 | | $ | 9,767 | | $ | 9,439 | Mexico | | | 2,642 | | | 2,686 | | | 2,609 | | | 869 | | | 764 | | | 1,065 | United Kingdom | | | 1,510 | | | 1,106 | | | 954 | | | 1,724 | | | 1,529 | | | 1,104 | Canada | | | 1,147 | | | 967 | | | 896 | | | 508 | | | 410 | | | 375 | All other countries | | | 4,295 | | | 3,765 | | | 3,077 | | | 3,123 | | | 2,750 | | | 2,605 | | | |
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| | | | $ | 26,971 | | $ | 25,112 | | $ | 23,512 | | $ | 16,131 | | $ | 15,220 | | $ | 14,588 | | | |
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| (a) | | PepsiCo International assets include investments in noncontrolled affiliates, principally Productos SAS, of $153 million in 2003, $145 million in 2002 and $155 million in 2001. |
| (b) | | Corporate assets consist principally of cash and cash equivalents, short-term investments primarily held outside the United States and property, plant and equipment. |
(c) | | Long-lived assets represent net property, plant and equipment, nonamortizable and net amortizable intangible assets and investments in noncontrolled affiliates. |
Note 2 –| (c) | | Long-lived assets represent net property, plant and equipment, nonamortizable and net amortizable intangible assets and investments in noncontrolled affiliates. |
Note 2 — Our Significant Accounting Policies Revenue Recognition We recognize revenue upon delivery to our customers in accordance with written sales terms that do not allow for a right of return. However, our policy for direct-store-delivery and chilled products is to remove and replace out-of-date products from store shelves to ensure that our consumers receive the product quality and freshness that they expect. Similarly, our policy for warehouse distributed products is to replace damaged and out-of-date products. Based on our historical experience with this practice, we have reserved for anticipated damaged and out-of-date product. For additional unaudited information on our revenue recognition and related policies, including our policy on bad debts, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. We are exposed to concentration of credit risk by our customers, PBG and Wal-Mart, as each represent approximately 10% of our net revenue. We have not experienced credit issues with these customers. Sales Incentives and Other Marketplace Spending We offer sales incentives through various programs to our customers and consumers. Sales incentives are accounted for as a reduction to revenue and totaled $6.0 billion in 2003, $5.5 billion in 2002 and $4.7 billion in 2001. Most of these incentive arrangements have terms of no more than one year. However, we have arrangements, such as fountain
pouring rights, which may extend up to 15 years. Costs incurred to obtain these arrangements are expensed over the contract period and the remaining balance of $359 million at December 27, 2003 and $349 million at December 28, 2002 is included in other assets in our Consolidated Balance Sheet. For additional unaudited information on our sales incentives, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. Other marketplace spending includes the costs of advertising and other marketing activities and is reported as selling, general and administrative expenses. Advertising expenses were $1.6 billion in 2003, $1.5 billion in 2002 and $1.7 billion in 2001. Deferred advertising costs are not expensed until the year first used and consist of: media and personal service prepayments, promotional materials in inventory, and production costs of future media advertising. Deferred advertising costs of $137 million at year-end 2003 and $147 million at year-end 2002 are classified as prepaid expenses in the Consolidated Balance Sheet. Distribution Costs Distribution costs, including the costs of shipping and handling activities, are reported as selling, general and administrative expenses for direct-store-delivery distribution systems. For our other distribution systems, these costs are reported in cost of sales. Shipping and handling expenses classified as selling, general and administrative expenses were $3.0 billion in 2003, $2.8 billion in 2002 and $2.6 billion in 2001. Cash Equivalents Cash equivalents are investments with original maturities of three months or less. Commitments and Contingencies We are subject to various claims and contingencies related to lawsuits, taxes and environmental matters, as well as commitments under contractual and other commercial obligations. We recognize liabilities for contingencies and commitments when a loss is probable and estimable. For additional information on our commitments, seeNote 9. Revenue Recognition
We recognize revenue upon delivery to our customers in accordance with written sales terms that do not allow for a right of return. However, our policy for direct-store-delivery and chilled products is to remove and replace out-of-date products from store shelves to ensure that our consumers receive the product quality and freshness that they expect. Based on our historical experience with this practice, we have reserved for anticipated out-of-date product. For additional unaudited information on our revenue recognition and related policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.
Sales Incentives and Other Marketplace Spending
We offer sales incentives through various programs to our customers, consumers and, for PCNA, directly to certain retailers. Sales incentives are accounted for as a reduction to sales and totaled $5.5 billion in 2002, $4.7 billion in 2001 and $4.3 billion in 2000. These sales incentives include the impact of adopting EITF 01-9,Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products, which reduced
our net sales by $3.4 billion in 2001 and $3.1 billion in 2000, with selling, general and administrative expenses reduced by the same amounts. Most of these incentive arrangements have terms of no more than one year. However, we have arrangements, such as fountain pouring rights, which extend up to twelve years. Costs incurred to obtain these rights are expensed over the contract period and the remaining balance of $349 million at December 28, 2002 and $374 million at December 29, 2001 is primarily reported in other assets in the Consolidated Balance Sheet. For additional unaudited information on our sales incentives, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.
Other marketplace spending includes the costs of advertising and other marketing activities and is reported as selling, general and administrative expenses. Advertising expenses were $1.5 billion in 2002 and $1.7 billion in 2001 and 2000. Deferred advertising costs are not expensed until the year first used and consist of:
media and personal service prepayments,
promotional materials in inventory, and
production costs of future media advertising.
Deferred advertising costs of $147 million at year-end 2002 and $111 million at year-end 2001 are classified as prepaid expenses in the Consolidated Balance Sheet.
Distribution Costs
Distribution costs, including the costs of shipping and handling activities, are reported as selling, general and administrative expenses for direct-store-delivery distribution systems. For our other distribution systems, these costs are reported in cost of sales. Shipping and handling expenses classified as selling, general and administrative expenses were $2.8 billion in 2002, $2.6 billion in 2001 and $2.5 billion in 2000.
Cash Equivalents
Cash equivalents are investments with original maturities of three months or less.
Commitments and Contingencies
We are subject to various claims and contingencies related to lawsuits, taxes and environmental matters, as well as commitments under contractual and other commercial obligations. We recognize liabilities for contingencies and commitments when a loss is probable and estimable. For additional information on our commitments and other contractual and commercial obligations, seeNote 9.
Other Significant Accounting Policies Our other significant accounting policies are disclosed as follows: | • | | Income Taxes | • | | Employee Stock Options – Note 7. |
| • | | Risk Management – Note 10 and, for additional unaudited information, see “Our Market Risks” in Management’s Discussion and Analysis. |
| • | | Property, Plant and Equipment and Intangible Assets – Note 4 and, for additional unaudited information on brands and goodwill, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. |
| • | | Pending Accounting ChangesIncome TaxesIn June 2001, the FASB issued SFAS 143,Accounting for Asset Retirement Obligations. SFAS 143 addresses the financial accounting –Note 5 and, reporting for obligations associated with the retirement of tangible long-lived assets. It requires that we recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We currently have no significant asset retirement obligations, and therefore, adoption will have no impact on our consolidated financial statements.
In June 2002, the FASB issued SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities.SFAS 146 addresses the accounting and reporting for costs associated with restructuring activities. This new standard changes the timing of the recognition of restructuring charges. Liabilities for restructuring costs will be required to be recognized when the liability is incurred rather than when we commit to the plan. SFAS 146 is effective for restructuring activity initiated after December 31, 2002.
Note 3 – Our Merger with Quaker
On August 2, 2001, we completed our merger with Quaker. Under the terms of the merger agreement, we issued approximately 306 million shares of our common stock in exchange for all the outstanding common stock of Quaker.
The merger was accounted for as a tax-free transaction and as a pooling-of-interests. As a result, all prior period consolidated financial statements presented have been restated to include the results of operations, financial position and cash flows of both companies as if they had always been combined. Certain reclassifications were made to conform the presentation of the financial statements, and the fiscal calendar and certain interim reporting policies were also conformed. There were no material transactions between pre-merger PepsiCo and Quaker.
We have recognized the following costs associated with our merger with Quaker:
| | | 2002 | | 2001 |
| Transaction costs | | $ – | | $117 | Integration and restructuring costs | | 224 | | 239 | | | |
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| Total merger-related costs | | $224 | | $356 | | | |
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| After-tax | | $190 | | $322 | | | |
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| Per share | | $0.11 | | $0.18 | | | |
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Transaction costs were incurred to complete the merger and consist primarily of fees and expenses for investment bankers, attorneys and accountants, SEC filing fees, stock exchange listing fees and financial printing and other related charges.
Integration and restructuring costs represent incremental one-time merger-related costs. Such costs include consulting fees and expenses, employee-related costs, information system integration costs, asset impairments and other costs related to the integration of Quaker. Employee-related costs include retirement benefit and severance costs and expenses related to change-in-control provisions of pre-merger employment contracts. As of December 28, 2002, an accrual has been recorded for costs associated with the termination of approximately 1,100 corporate, sales, distribution, manufacturing, research, information technology and marketing employees, a majority of which have occurred. We expect to incur additional costs in 2003 to integrate the two companies.
Merger-related integration and restructuring reserves are included within accounts payable and other current liabilities in the Consolidated Balance Sheet.
Merger-related integration and restructuring reserves:
| | | Integration | | | Employee Related | | | Asset Impairment | | | Facility and Other Exit | | | Total | |
| 2001 costs | | $124 | | | $106 | | | $ 1 | | | $ 8 | | | $ | 239 | | Cash payments | | (80 | ) | | (33 | ) | | – | | | (2 | ) | | | (115 | ) | Reclassification to retiree medical/ postemployment liabilities | | – | | | (22 | ) | | – | | | – | | | | (22 | ) | Other noncash utilization | | (22 | ) | | – | | | (1 | ) | | (2 | ) | | | (25 | ) | | | |
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| Reserves, December 29, 2001 | | 22 | | | 51 | | | – | | | 4 | | | | 77 | | 2002 costs | | 90 | | | 53 | | | 56 | | | 25 | | | | 224 | | Cash payments | | (62 | ) | | (43 | ) | | – | | | (13 | ) | | | (118 | ) | Reclassification to retiree medical/ postemployment liabilities | | (7 | ) | | (9 | ) | | – | | | – | | | | (16 | ) | Other noncash utilization | | – | | | (4 | ) | | (56 | ) | | (10 | ) | | | (70 | ) | | | |
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| Reserves, December 28, 2002 | | $ 43 | | | $ 48 | | | $ – | | | $ 6 | | | $ | 97 | | | | |
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Note 4 – Property, Plant and Equipment and Intangible Assets
| | | Useful Life | | 2002 | | | 2001 | | | 2000 |
| Property, plant and equipment, net | | | | | | | | | | | Land and improvements | | | | $ 504 | | | $ 464 | | | | Buildings and improvements | | 20 – 40 | | 3,119 | | | 2,846 | | | | Machinery and equipment, including fleet | | 5 – 15 | | 9,005 | | | 8,135 | | | | Construction in progress | | | | 767 | | | 735 | | | | | | | | |
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| | | | | | | | 13,395 | | | 12,180 | | | | Accumulated depreciation | | | | (6,005 | ) | | (5,304 | ) | | | | | | | |
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| | | | | | | | $ 7,390 | | | $ 6,876 | | | | | | | | |
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| | | Depreciation expense | | | | $929 | | | $843 | | | $840 | | | | | |
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| Amortizable intangible assets, net | | | | | | | | | | | Brands | | 5 – 40 | | $ 938 | | | $ 869 | | | | Other identifiable intangibles | | 3 – 15 | | 203 | | | 207 | | | | | | | | |
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| | | | | | | | 1,141 | | | 1,076 | | | | Accumulated amortization | | | | (340 | ) | | (201 | ) | | | | | | | |
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| | | | | | | | $ 801 | | | $ 875 | | | | | | | | |
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| | | Amortization expense | | | | $138 | | | $165 | | | $147 | | | | | |
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Depreciation and amortization are recognized on a straight-line basis over an asset’s estimated useful life. Land is not depreciated and construction in progress is not depreciated until ready for service. Amortization for each of the next five years, based on existing intangible assets and 2002 foreign exchange rates, is expected to be $138 million in 2003, $129 million in 2004 and 2005 and $19 million thereafter.
No impairment charges resulted from the adoption of SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Depreciable and amortizable assets are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. In these circumstances, if an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows. Useful lives are periodically evaluated to determine whether events or circumstances have occurred which indicate the need to revise the useful lives. For additional unaudited information, on our amortizable brand policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.
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| • | | Nonamortizable Intangible AssetsStock Compensation ExpensePerpetual brands –Note 6 and, goodwill are assessed for impairment at least annually to ensure that future cash flows continue to exceed the related book value. A perpetual brand is impaired if its book value exceeds its fair value. Goodwill is evaluated for impairment if the book value of its reporting unit
exceeds its fair value. A reporting unit can be a division or business. If the fair value of an evaluated asset is less than its book value, the asset is written down based on its discounted future cash flows to fair value. No impairment charges resulted from the required impairment evaluations in 2002. The change in the book value of nonamortizable intangible assets during 2002 is as follows:
| | | Balance, Beginning of Year | | Acquisitions | | Translation and Other | | Balance, End of Year |
| Frito-Lay North America | | | | | | | | | Goodwill | | $ 107 | | $ – | | $ 2 | | $ 109 | | | |
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| Frito-Lay International (a) | | | | | | | | | Goodwill | | 788 | | 39 | | 109 | | 936 | Brands | | 427 | | 248 | | 45 | | 720 | | | |
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| | | | 1,215 | | 287 | | 154 | | 1,656 | | | |
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| Gatorade/Tropicana North America | | | | | | | | | Goodwill | | 2,148 | | – | | 1 | | 2,149 | Brands | | 59 | | – | | – | | 59 | | | |
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| | | | 2,207 | | – | | 1 | | 2,208 | | | |
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| PepsiCo Beverages International | | | | | | | | | Goodwill | | 250 | | – | | – | | 250 | | | |
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| Quaker Foods North America | | | | | | | | | Goodwill | | 187 | | – | | – | | 187 | | | |
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| Corporate | | | | | | | | | Pension intangible | | – | | – | | 8 | | 8 | | | |
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| Total goodwill | | 3,480 | | 39 | | 112 | | 3,631 | Total brands | | 486 | | 248 | | 45 | | 779 | Total pension intangible | | – | | – | | 8 | | 8 | | | |
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| | | | $3,966 | | $287 | | $165 | | $4,418 | | | |
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(a) | | Beginning of year balance includes the impact of consolidating Snack Ventures Europe in 2002 for Frito-Lay International. |
We adopted SFAS 142, Goodwill and Other Intangible Assets, in 2002. Prior to the adoption of SFAS 142, our nonamortizable intangible assets had useful lives ranging from 20 to 40 years. The following table provides pro forma disclosure of the elimination of goodwill and perpetual brands amortization and the acceleration of certain other amortization as if SFAS 142 had been adopted in 2000:
| | | 2001
| | 2000
| Reported net income | | $2,662 | | $2,543 | Cease goodwill amortization | | 112 | | 112 | Adjust brands amortization | | (67) | | (22) | Cease equity investee goodwill amortization | | 57 | | 61 | | | |
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| Adjusted net income | | $2,764 | | $2,694 | | | |
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| Reported earnings per common share – basic | | $ 1.51 | | $ 1.45 | Cease goodwill amortization | | 0.06 | | 0.06 | Adjust brands amortization | | (0.03) | | (0.01) | Cease equity investee goodwill amortization | | 0.03 | | 0.03 | | | |
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| Adjusted earnings per common share – basic | | $ 1.57 | | $ 1.53 | | | |
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| Reported earnings per common share – diluted | | $ 1.47 | | $ 1.42 | Cease goodwill amortization | | 0.06 | | 0.06 | Adjust brands amortization | | (0.03) | | (0.01) | Cease equity investee goodwill amortization | | 0.03 | | 0.03 | | | |
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| Adjusted earnings per common share – diluted | | $ 1.53 | | $ 1.50 | | | |
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For additional unaudited information, on our goodwill and nonamortizable brand policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.
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| • | | Pension, Retiree Medical and Savings Plans –Note 5 – Income Taxes| | | 2002 | | 2001 | | | 2000 | |
| Income before income taxes | | | | | | | | | U.S. | | $3,516 | | $2,922 | | | $2,574 | | Foreign | | 1,352 | | 1,107 | | | 1,187 | | | | |
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| | | | $4,868 | | $4,029 | | | $3,761 | | | | |
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| Provision for income taxes | | | | | | | | | Current: U.S. Federal | | $ 956 | | $ 926 | | | $ 958 | | Foreign | | 256 | | 226 | | | 165 | | State | | 55 | | 53 | | | 62 | | | | |
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| | | | 1,267 | | 1,205 | | | 1,185 | | | | |
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| Deferred: U.S. Federal | | 255 | | 159 | | | 31 | | Foreign | | 11 | | (8 | ) | | (7 | ) | State | | 22 | | 11 | | | 9 | | | | |
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| | | | 288 | | 162 | | | 33 | | | | |
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| | | | $1,555 | | $1,367 | | | $1,218 | | | | |
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| | | 2002 | | | 2001 | | | 2000 | |
| Tax rate reconciliation | | | | | | | | | | U.S. Federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % | State income tax, net of U.S. Federal tax benefit | | 1.0 | | | 1.0 | | | 1.2 | | Lower taxes on foreign results | | (3.9 | ) | | (4.3 | ) | | (2.9 | ) | Merger-related costs and other impairment and restructuring charges | | 0.9 | | | 2.3 | | | (0.2 | ) | Other, net | | (1.1 | ) | | (0.1 | ) | | (0.7 | ) | | | |
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| Effective tax rate | | 31.9 | % | | 33.9 | % | | 32.4 | % | | | |
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| Deferred tax liabilities | | | | | | | | | | Investments in noncontrolled affiliates | | $ 753 | | | $ 702 | | | | | Property, plant and equipment | | 746 | | | 804 | | | | | Safe harbor leases | | 57 | | | 82 | | | | | Zero coupon notes | | 61 | | | 68 | | | | | Intangible assets other than nondeductible goodwill | | 127 | | | 121 | | | | | Other | | 669 | | | 480 | | | | | | | |
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| | | | Gross deferred tax liabilities | | 2,413 | | | 2,257 | | | | | | | |
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| | | | Deferred tax assets | | | | | | | | | | Net carryforwards | | 504 | | | 538 | | | | | Retiree medical benefits | | 315 | | | 320 | | | | | Various current and noncurrent liabilities | | 642 | | | 805 | | | | | | | |
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| | | | Gross deferred tax assets | | 1,461 | | | 1,663 | | | | | Valuation allowances | | (487 | ) | | (511 | ) | | | | | | |
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| | | | Deferred tax assets, net | | 974 | | | 1,152 | | | | | | | |
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| | | | Net deferred tax liabilities | | $1,439 | | | $1,105 | | | | | | | |
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| | | | Included within: | | | | | | | | | | Prepaid expenses and other current assets | | $279 | | | $391 | | | | | Deferred income taxes | | $1,718 | | | $1,496 | | | | |
Operating loss carryforwards totaling $3.3 billion at year-end 2002 are being carried forward in a number of foreign7 and, state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows: $0.1 billion in 2003, $2.9 billion between 2004 and 2018 and $0.3 billion may be carried forward indefinitely. In addition, certain tax credits generated in prior periods of approximately $72 million are available to reduce certain foreign tax liabilities through 2011. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit.
We have not recognized any United States tax expense on undistributed international earnings since we have the intention to reinvest the earnings outside the United States for the foreseeable future. These undistributed earnings are approximately $7.5 billion at December 28, 2002.
Analysis of valuation allowances:
| | | 2002 | | | 2001 | | | 2000 |
| Balance, beginning of year | | $511 | | | $813 | | | $804 | (Benefit)/provision | | (22 | ) | | (300 | ) | | 7 | Other (deductions)/additions | | (2 | ) | | (2 | ) | | 2 | | | |
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| Balance, end of year | | $487 | | | $511 | | | $813 | | | |
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For additional unaudited information, on our income tax policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.
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| • | | Risk Management –Note 6 – Pension10 and, Retiree Medical PlansOur pension plans cover full-time U.S. employees and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. U.S. employees are also eligible for medical and life insurance benefits (retiree medical) if they meet age and service requirements and qualify for retirement benefits. We use a September 30 measurement date. Prior service costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.
For additional unaudited information, on our pension and retiree medical plans and related accounting policies and assumptions, see “Our Critical Accounting PoliciesMarket Risks” in Management’s Discussion and Analysis.
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Recent Accounting Changes As further discussed inNote 6, we voluntarily adopted the fair value method of accounting for stock options at the end of 2003. We selected the retroactive method as described in SFAS 148,Accounting for Stock-Based Compensation– Transition and Disclosure, to adopt this accounting and restated our results. The Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities. This interpretation requires consolidation of existing noncontrolled affiliates if the affiliate is unable to finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. We do not expect our significant noncontrolled affiliates to require consolidation under FIN 46. The Emerging Issues Task Force (EITF) issued EITF 01-8,Determining Whether an Arrangement Contains a Lease. EITF 01-8 did not have a significant impact on our financial statements. Note 3 — Impairment and Restructuring Charges and Merger-Related Costs Impairment and Restructuring Charges In the fourth quarter of 2003, we incurred a charge of $147 million ($100 million after-tax or $0.06 per share) in conjunction with actions taken to streamline our North American divisions and PepsiCo International. These actions are intended to increase focus and eliminate redundancies at PBNA and PI, and improve the efficiency of the supply chain at FLNA. Of this charge, $81 million related to impairment, reflecting $57 million for the closure of a snack plant in Kentucky, the retirement of snack manufacturing lines in Maryland and Arkansas and $24 million for the closure of a PBNA office building in Florida. The remaining $66 million includes employee-related costs of $54 million and facility and other exit costs of $12 million. Employee-related costs primarily reflect the termination costs for approximately 850 sales, distribution, manufacturing, research and marketing employees. As of December 27, 2003, approximately 140 terminations have occurred. The majority of the remaining terminations are expected to occur in the first quarter of 2004. Through December 27, 2003, we have paid $9 million leaving a remaining accrual of $57 million. This accrual is included in other current liabilities. In 2001, we incurred other impairment and restructuring costs for Quaker’s supply chain reconfiguration and manufacturing and distribution optimization project initiated in 1999. Merger-Related Costs On August 2, 2001, we completed our merger with Quaker and accounted for it as a pooling-of-interests. We recognized the following costs associated with our merger with Quaker: | | | | | | | | | | | | | 2003
| | 2002
| | 2001
| Transaction costs | | $ | — | | $ | — | | $ | 117 | Integration and restructuring costs | | | 59 | | | 224 | | | 239 | | | |
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| Total merger-related costs | | $ | 59 | | $ | 224 | | $ | 356 | | | |
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| After-tax | | $ | 42 | | $ | 190 | | $ | 322 | | | |
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| Per share | | $ | 0.02 | | $ | 0.11 | | $ | 0.18 | | | |
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Transaction costs were incurred to complete the merger. Integration and restructuring costs represent incremental one-time merger-related costs. Such costs include consulting fees and expenses, employee-related costs, information system integration costs, asset impairments and other costs related to the integration of Quaker. Employee-related costs include retirement and other benefits, severance costs and expenses related to change-in-control provisions of pre-merger employment contracts. Merger-related integration and restructuring reserves are as follows: | | | | | | | | | | | | | | | | | | | Integration
| | | Employee Related
| | | Asset Impairment
| | | Facility and
Other Exit
| | | Total
| | Reserves, December 29, 2001 | | $ 22 | | | $ 51 | | | $— | | | $ 4 | | | $ 77 | | 2002 costs | | 90 | | | 53 | | | 56 | | | 25 | | | 224 | | Cash payments | | (62 | ) | | (43 | ) | | — | | | (13 | ) | | (118 | ) | Reclassification to retiree medical/postemployment liabilities | | (7 | ) | | (9 | ) | | — | | | — | | | (16 | ) | Other noncash utilization | | — | | | (4 | ) | | (56 | ) | | (10 | ) | | (70 | ) | | | |
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| Reserves, December 28, 2002 | | 43 | | | 48 | | | — | | | 6 | | | 97 | | 2003 costs | | 46 | | | 10 | | | — | | | 3 | | | 59 | | Cash payments | | (63 | ) | | (33 | ) | | — | | | (4 | ) | | (100 | ) | Reclassification to retiree medical/postemployment liabilities | | — | | | (3 | ) | | — | | | — | | | (3 | ) | Other noncash utilization | | 4 | | | — | | | — | | | (2 | ) | | 2 | | | | |
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| Reserves, December 27, 2003 | | $ 30 | | | $ 22 | | | $— | | | $ 3 | | | $ 55 | | | | |
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The remaining integration and severance accruals at December 27, 2003 are included within other current liabilities in the Consolidated Balance Sheet. Note 4 — Property, Plant and Equipment and Intangible Assets | | | | | | | | | | | | | | | | | Useful Life
| | 2003
| | | 2002
| | | 2001
| Property, plant and equipment, net | | | | | | | | | | | | | | Land and improvements | | | | $ | 557 | | | $ | 504 | | | | | Buildings and improvements | | 20 – 40 yrs. | | | 3,449 | | | | 3,119 | | | | | Machinery and equipment, including fleet | | 5 – 15 | | | 10,170 | | | | 9,005 | | | | | Construction in progress | | | | | 579 | | | | 767 | | | | | | | | | |
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| | | | | | | | | | 14,755 | | | | 13,395 | | | | | Accumulated depreciation | | | | | (6,927 | ) | | | (6,005 | ) | | | | | | | | |
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| | | | | | | | | $ | 7,828 | | | $ | 7,390 | | | | | | | | | |
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| | | | Depreciation expense | | | | $ | 1,020 | | | $ | 929 | | | $ | 843 | | | | | |
|
|
| |
|
|
| |
|
| Amortizable intangible assets, net | | | | | | | | | | | | | | Brands | | 5 – 40 | | $ | 985 | | | $ | 938 | | | | | Other identifiable intangibles | | 3 – 15 | | | 212 | | | | 203 | | | | | | | | | |
|
|
| |
|
|
| | | | | | | | | | 1,197 | | | | 1,141 | | | | | Accumulated amortization | | | | | (479 | ) | | | (340 | ) | | | | | | | | |
|
|
| |
|
|
| | | | | | | | | $ | 718 | | | $ | 801 | | | | | | | | | |
|
|
| |
|
|
| | | | Amortization expense | | | | $ | 145 | | | $ | 138 | | | $ | 165 | | | | | |
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|
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|
Depreciation and amortization are recognized on a straight-line basis over an asset’s estimated useful life. Land is not depreciated and construction in progress is not depreciated until ready for service. Amortization for each of the next five years, based on existing intangible assets and 2003 foreign exchange rates, is expected to be $147 million in 2004, $139 million in 2005, $138 million in 2006, and $22 million in 2007 and thereafter. Depreciable and amortizable assets are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. In these circumstances, if an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows. Useful lives are periodically evaluated to determine whether events or circumstances have occurred which indicate the need for revision. No impairment charges resulted from the adoption of SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assetsin 2002. For additional unaudited information on our amortizable brand policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. Nonamortizable Intangible Assets Perpetual brands and goodwill are assessed for impairment at least annually to ensure that future cash flows continue to exceed the related book value. A perpetual brand is impaired if its book value exceeds its fair value. Goodwill is evaluated for impairment if the book value of its reporting unit exceeds its fair value. A reporting unit can be a division or business within a division. If the fair value of an evaluated asset is less than its book value, the asset is written down based on its discounted future cash flows to fair value. No impairment charges resulted from the required impairment evaluations. The change in the book value of nonamortizable intangible assets during 2003 is as follows: | | | | | | | | | | | | | Balance,
Beginning
of Year
| | Acquisitions
| | Translation
and Other
| | | Balance,
End of
Year
| Frito-Lay North America | | | | | | | | | | Goodwill | | $ 109 | | $— | | $ 21 | | | $ 130 | | | |
| |
| |
|
| |
| PepsiCo Beverages North America | | | | | | | | | | Goodwill | | 2,149 | | — | | 8 | | | 2,157 | Brands | | 59 | | — | | — | | | 59 | | | |
| |
| |
|
| |
| | | | 2,208 | | — | | 8 | | | 2,216 | | | |
| |
| |
|
| |
| PepsiCo International | | | | | | | | | | Goodwill | | 1,186 | | 24 | | 124 | | | 1,334 | Brands | | 720 | | — | | 88 | | | 808 | | | |
| |
| |
|
| |
| | | | 1,906 | | 24 | | 212 | | | 2,142 | | | |
| |
| |
|
| |
| Quaker Foods North America | | | | | | | | | | Goodwill(a) | | 187 | | — | | (12 | ) | | 175 | | | |
| |
| |
|
| |
| Corporate | | | | | | | | | | Pension intangible | | 8 | | — | | (6 | ) | | 2 | | | |
| |
| |
|
| |
| Total goodwill | | 3,631 | | 24 | | 141 | | | 3,796 | Total brands | | 779 | | — | | 88 | | | 867 | Total pension intangible | | 8 | | — | | (6 | ) | | 2 | | | |
| |
| |
|
| |
| | | | $4,418 | | $24 | | $223 | | | $4,665 | | | |
| |
| |
|
| |
|
| | | 2002 | | | 2001 | | | 2000 | |
| Weighted average pension assumptions | | | | | | | | | | Liability discount rate | | 6.7% | | | 7.4% | | | 7.7% | | Expected return on plan assets | | 9.1% | | | 9.8% | | | 9.9% | | Rate of salary increases | | 4.4% | | | 4.6% | | | 4.5% | | Components of pension expense | | | | | | | | | | Service cost | | $ 156 | | | $ 127 | | | $ 120 | | Interest cost | | 265 | | | 233 | | | 221 | | Expected return on plan assets | | (329 | ) | | (301 | ) | | (277 | ) | Amortization of transition asset | | (1 | ) | | (2 | ) | | (3 | ) | Amortization of prior service costs | | 6 | | | 8 | | | 13 | | Amortization of experience loss/(gain) | | 5 | | | (9 | ) | | (18 | ) | | | |
|
| |
|
| |
|
| Pension expense | | 102 | | | 56 | | | 56 | | Curtailment/settlement loss | | – | | | 1 | | | 6 | | Special termination benefits | | 9 | | | 26 | | | – | | | | |
|
| |
|
| |
|
| Total | | $ 111 | | | $ 83 | | | $ 62 | | | | |
|
| |
|
| |
|
|
| | | 2002 | | | 2001 | | | 2000 | |
| Liability discount rate | | 6.7% | | | 7.5% | | | 7.8% | | Components of retiree medical expense | | | | | | | | | | Service cost | | $25 | | | $ 20 | | | $ 22 | | Interest cost | | 66 | | | 63 | | | 58 | | Amortization of prior service costs | | (7 | ) | | (12 | ) | | (12 | ) | Amortization of experience loss/(gain) | | 3 | | | – | | | (1 | ) | | | |
|
| |
|
| |
|
| Retiree medical expense | | 87 | | | 71 | | | 67 | | Curtailment loss | | – | | | – | | | 2 | | Special termination benefits | | 1 | | | 1 | | | – | | | | |
|
| |
|
| |
|
| Total | | $88 | | | $ 72 | | | $ 69 | | | | |
|
| |
|
| |
|
|
| | | 2002 | | | 2001 | | | 2002 | | | 2001 | |
| | | | Pension
| | | Retiree Medical
| | Change in benefit liability | | | | | | | | | | | | | Liability at beginning of year | | $3,556 | | | $3,170 | | | $ 911 | | | $834 | | Service cost | | 156 | | | 127 | | | 25 | | | 20 | | Interest cost | | 265 | | | 233 | | | 66 | | | 63 | | Plan amendments | | 12 | | | 10 | | | (25 | ) | | 1 | | Participant contributions | | 6 | | | 5 | | | – | | | – | | Experience loss | | 514 | | | 170 | | | 205 | | | 50 | | Benefit payments | | (234 | ) | | (170 | ) | | (63 | ) | | (58 | ) | Curtailment loss | | – | | | 2 | | | – | | | – | | Special termination benefits | | 9 | | | 26 | | | 1 | | | 1 | | Foreign currency adjustment | | 40 | | | (17 | ) | | – | | | – | | | | |
|
| |
|
| |
|
| |
|
| Liability at end of year | | $4,324 | | | $3,556 | | | $1,120 | | | $911 | | | | |
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| |
|
| |
|
| |
|
| Change in fair value of plan assets | | | | | | | | | | | | | Fair value at beginning of year | | $3,129 | | | $3,251 | | | $ – | | | $ – | | Actual loss on plan assets | | (221 | ) | | (382 | ) | | – | | | – | | Employer contributions | | 820 | | | 446 | | | 63 | | | 58 | | Participant contributions | | 6 | | | 5 | | | – | | | – | | Benefit payments | | (234 | ) | | (170 | ) | | (63 | ) | | (58 | ) | Foreign currency adjustment | | 37 | | | (21 | ) | | – | | | – | | | | |
|
| |
|
| |
|
| |
|
| Fair value at end of year | | $3,537 | | | $3,129 | | | $ – | | | $ – | | | | |
|
| |
|
| |
|
| |
|
| Funded status as recognized in the Consolidated Balance Sheet | | | | | | | | | | | | | Funded status at end of year | | $ (787 | ) | | $ (427 | ) | | $(1,120 | ) | | $(911 | ) | Unrecognized prior service cost | | 44 | | | 38 | | | (23 | ) | | (5 | ) | Unrecognized experience loss | | 1,631 | | | 548 | | | 294 | | | 91 | | Unrecognized transition asset | | (1 | ) | | (2 | ) | | – | | | – | | | | |
|
| |
|
| |
|
| |
|
| Net amounts recognized | | $ 887 | | | $ 157 | | | $ (849 | ) | | $(825 | ) | | | |
|
| |
|
| |
|
| |
|
|
| | | 2002 | | | 2001 | | | 2002 | | | 2001 | |
| | | | Pension
| | | Retiree Medical
| | Net amounts as recognized in the Consolidated Balance Sheet | | | | | | | | | | | | | Other assets | | $1,097 | | | $ 396 | | | $ – | | | $ – | | Intangible assets | | 8 | | | – | | | – | | | – | | Accrued benefit liability | | (283 | ) | | (261 | ) | | (849 | ) | | (825 | ) | Accumulated other comprehensive income | | 65 | | | 22 | | | – | | | – | | | | |
|
| |
|
| |
|
| |
|
| Net amounts recognized | | $ 887 | | | $ 157 | | | $(849 | ) | | $(825 | ) | | | |
|
| |
|
| |
|
| |
|
| Selected information for plans with liability to date in excess of plan assets | | | | | | | | | | | | | Liability for service to date | | $(419 | ) | | $(252 | ) | | $(1,120 | ) | | $(911 | ) | Projected benefit liability | | $(656 | ) | | $(419 | ) | | $(1,120 | ) | | $(911 | ) | Fair value of plan assets | | $182 | | | $ 51 | | | – | | | – | |
Of
| (a) | | Activity reflects the total projected pension benefit liability at year-end 2002, $416 million relates to plans that we do not fund because of unfavorable tax treatment.Pension Assets
Pension assets include approximately 5.5 million shares of PepsiCo common stock with a market value of $202 million in 2002, and 4.7 million shares with a market value of $227 million in 2001. Our investment policy limits the investment in PepsiCo stock to 10% of the fair value of plan assets.
Retiree Medical Cost Trend Rates
An average increase of 10% in the cost of covered retiree medical benefits is assumed for 2003. This average increase is then projected to decline gradually to 4.5% in 2007 and thereafter. Generally, our costs are capped at a specified dollar amount, with retirees contributing the remainder. These assumed health care cost trend rates have a significant impact on the retiree medical plan expense and liability. A 1 percentage point change in the assumed health care trend rate would have the following effects:
| | | 1% Increase | | 1% Decrease |
| 2002 service and interest cost components | | $7 | | $(6) | 2002 benefit liability | | $37 | | $(34) |
Note 7 – Employee Stock Options
Our stock option program is a broad-based program designed to attract and retain talent while creating alignment with the interestssale of our shareholders. Employees at all levels participate in our stock option program. In addition, members of our Board of Directors receive stock options for their service on our Board. Stock options are granted to employees under the following active plans.Mission pasta business.
|
We adopted SFAS 142,Goodwill and Other Intangible Assets, in 2002. Prior to the adoption of SFAS 142, our nonamortizable intangible assets had useful lives ranging from 20 to 40 years. The following table provides pro forma disclosure for 2001 of the elimination of goodwill and perpetual brands amortization and the acceleration of certain other amortization as if SFAS 142 had been adopted in 2001: | | | | | | | | | | | | Earnings per common share
| | | | Net
Income
| | Basic
| | Diluted
| Reported | | $2,400 | | $1.36 | | $1.33 | Cease goodwill amortization | | 112 | | 0.06 | | 0.06 | Adjust brands amortization | | (67) | | (0.03) | | (0.03) | Cease equity investee goodwill amortization | | 57 | | 0.03 | | 0.03 | | | |
| |
| |
| Adjusted | | $2,502 | | $1.42 | | $1.39 | | | |
| |
| |
|
For additional unaudited information on our goodwill and nonamortizable brand policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. Note 5 — Income Taxes | | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Income before income taxes | | | | | | | | | | | | | U.S. | | $ | 3,267 | | | $ | 3,178 | | | $ | 2,580 | | Foreign | | | 1,725 | | | | 1,255 | | | | 1,064 | | | | |
|
|
| |
|
|
| |
|
|
| | | | $ | 4,992 | | | $ | 4,433 | | | $ | 3,644 | | | | |
|
|
| |
|
|
| |
|
|
| Provision for income taxes | | | | | | | | | | | | | Current: U.S. Federal | | $ | 1,326 | | | $ | 948 | | | $ | 921 | | Foreign | | | 341 | | | | 256 | | | | 226 | | State | | | 80 | | | | 55 | | | | 53 | | | | |
|
|
| |
|
|
| |
|
|
| | | | | 1,747 | | | | 1,259 | | | | 1,200 | | | | |
|
|
| |
|
|
| |
|
|
| Deferred: U.S. Federal | | | (274 | ) | | | 146 | | | | 46 | | Foreign | | | (47 | ) | | | 11 | | | | (8 | ) | State | | | (2 | ) | | | 17 | | | | 6 | | | | |
|
|
| |
|
|
| |
|
|
| | | | | (323 | ) | | | 174 | | | | 44 | | | | |
|
|
| |
|
|
| |
|
|
| | | | $ | 1,424 | | | $ | 1,433 | | | $ | 1,244 | | | | |
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|
| |
|
|
| |
|
|
| Tax rate reconciliation | | | | | | | | | | | | | U.S. Federal statutory tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State income tax, net of U.S. Federal tax benefit | | | 1.0 | | | | 1.0 | | | | 1.0 | | Lower taxes on foreign results | | | (5.5 | ) | | | (3.5 | ) | | | (4.3 | ) | Settlement of prior years audit | | | (2.2 | ) | | | — | | | | — | | Merger-related costs and impairment and restructuring charges | | | 0.1 | | | | 1.0 | | | | 2.5 | | Other, net | | | 0.1 | | | | (1.2 | ) | | | (0.1 | ) | | | |
|
|
| |
|
|
| |
|
|
| Annual tax rate | | | 28.5 | % | | | 32.3 | % | | | 34.1 | % | | | |
|
|
| |
|
|
| |
|
|
| Deferred tax liabilities | | | | | | | | | | | | | Investments in noncontrolled affiliates | | $ | 792 | | | $ | 753 | | | | | | Property, plant and equipment | | | 806 | | | | 746 | | | | | | Pension benefits | | | 512 | | | | 327 | | | | | | Intangible assets other than nondeductible goodwill | | | 146 | | | | 127 | | | | | | Safe harbor leases | | | 33 | | | | 57 | | | | | | Zero coupon notes | | | 53 | | | | 61 | | | | | | Other | | | 199 | | | | 342 | | | | | | | | |
|
|
| |
|
|
| | | | | Gross deferred tax liabilities | | | 2,541 | | | | 2,413 | | | | | | | | |
|
|
| |
|
|
| | | | | Deferred tax assets | | | | | | | | | | | | | Net carryforwards | | | 535 | | | | 504 | | | | | | Stock compensation | | | 332 | | | | 232 | | | | | | Retiree medical benefits | | | 343 | | | | 315 | | | | | | Other employee-related benefits | | | 333 | | | | 228 | | | | | | Various current and noncurrent liabilities | | | 482 | | | | 414 | | | | | | | | |
|
|
| |
|
|
| | | | | Gross deferred tax assets | | | 2,025 | | | | 1,693 | | | | | | Valuation allowances | | | (438 | ) | | | (487 | ) | | | | | | | |
|
|
| |
|
|
| | | | | Deferred tax assets, net | | | 1,587 | | | | 1,206 | | | | | | | | |
|
|
| |
|
|
| | | | | Net deferred tax liabilities | | $ | 954 | | | $ | 1,207 | | | | | | | | |
|
|
| |
|
|
| | | | |
| | | | | | | | | | 2003
| | 2002
| Included within: | | | | | | | Prepaid expenses and other current assets | | | $307 | | | $279 | Deferred income taxes | | $ | 1,261 | | $ | 1,486 |
Operating loss carryforwards totaling $3.5 billion at year-end 2003 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows: $0.2 billion in 2004, $2.8 billion between 2005 and 2023 and $0.5 billion may be carried forward indefinitely. In addition, certain tax credits generated in prior periods of approximately $74 million are available to reduce certain foreign tax liabilities through 2011. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. We have not recognized any United States tax expense on undistributed international earnings since we have the intention to reinvest the earnings outside the United States for the foreseeable future. These undistributed earnings are approximately $8.8 billion at December 27, 2003. Analysis of valuation allowances: | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Balance, beginning of year | | $487 | | | $511 | | | $813 | | (Benefit)/provision | | (52 | ) | | (22 | ) | | (300 | ) | Other additions/(deductions) | | 3 | | | (2 | ) | | (2 | ) | | | |
|
| |
|
| |
|
| Balance, end of year | | $438 | | | $487 | | | $511 | | | | |
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|
For additional unaudited information on our income tax policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. Note 6 — Stock Compensation Our stock option program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. Employees at all levels participate in our stock option program. In addition, members of our Board of Directors receive stock options and restricted stock units for their service on our Board. Stock options are granted to employees under the 2003 Long-Term Incentive Plan (LTIP), our only active plan. At year-end 2003, 72 million shares were available for future executive and SharePower grants. For additional unaudited information on our stock option program, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. SharePower Grants SharePower options are awarded under our 2003 LTIP to all eligible employees. Options become exercisable after three years, have a 10-year term, and through 2003, were based on annual earnings and tenure. In 2003, SharePower grants represented approximately 23% of our annual employee option grants. Executive Grants All senior management and certain middle management are awarded 2003 LTIP executive grants which, through 2003, were generally based on a multiple of base salary. LTIP executive grants generally become exercisable at the end of three years and have a 10-year term. Fair Value Method of Accounting Historically, we have accounted for our employee stock options using the intrinsic value method. This method measures stock compensation expense as the amount by which the market price of the stock exceeds the exercise price on the date of grant. We did not recognize any stock compensation expense under this method because we grant our stock options at the current stock price. At the end of 2003, we voluntarily adopted the fair value method of accounting for stock options. We selected the retroactive restatement method as described in SFAS 148,Accounting for Stock-Based Compensation—Transition and Disclosure, to adopt this accounting. Under this method, we have restated our 2003, 2002 and 2001 results to recognize stock compensation expense as if we had always applied the fair value method to account for our unvested stock options in the years presented. The impact of the restatement is as follows: | | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Income before income taxes | | | | | | | | | | | | | Income before income taxes, before restatement | | $ | 5,399 | | | $ | 4,868 | | | $ | 4,029 | | Stock compensation expense | | | (407 | ) | | | (435 | ) | | | (385 | ) | | | |
|
|
| |
|
|
| |
|
|
| Restated income before income taxes | | $ | 4,992 | | | $ | 4,433 | | | $ | 3,644 | | | | |
|
|
| |
|
|
| |
|
|
| Net income | | | | | | | | | | | | | Net income, before restatement | | $ | 3,861 | | | $ | 3,313 | | | $ | 2,662 | | Stock compensation expense | | | (293 | ) | | | (313 | ) | | | (262 | ) | | | |
|
|
| |
|
|
| |
|
|
| Restated net income | | $ | 3,568 | | | $ | 3,000 | | | $ | 2,400 | | | | |
|
|
| |
|
|
| |
|
|
| Net income per common share – basic | | | | | | | | | | | | | Net income per common share, before restatement | | $ | 2.25 | | | $ | 1.89 | | | $ | 1.51 | | Stock compensation expense | | | (0.18 | ) | | | (0.18 | ) | | | (0.15 | ) | | | |
|
|
| |
|
|
| |
|
|
| Restated net income per common share | | $ | 2.07 | | | $ | 1.71 | | | $ | 1.36 | | | | |
|
|
| |
|
|
| |
|
|
| Net income per common share – diluted | | | | | | | | | | | | | Net income per common share, before restatement | | $ | 2.21 | | | $ | 1.85 | | | $ | 1.47 | | Stock compensation expense | | | (0.16 | ) | | | (0.17 | ) | | | (0.14 | ) | | | |
|
|
| |
|
|
| |
|
|
| Restated net income per common share | | $ | 2.05 | | | $ | 1.68 | | | $ | 1.33 | | | | |
|
|
| |
|
|
| |
|
|
|
Our Assumptions Under the fair value method of accounting, we measure stock compensation expense at the date of grant using a Black-Scholes valuation model. Our weighted-average Black-Scholes fair value assumptions include: | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Expected life | | 6 yrs. | | | 6 yrs. | | | 5 yrs. | | Risk free interest rate | | 3.1 | % | | 4.4 | % | | 4.8 | % | Expected volatility | | 27 | % | | 27 | % | | 29 | % | Expected dividend yield | | 1.15 | % | | 1.14 | % | | 0.98 | % |
Our Stock Option Activity(a): | | | | | | | | | | | | | | | | | | | | | | 2003
| | 2002
| | 2001
| | | | Options
| | | Average
Price(b)
| | Options
| | | Average
Price(b)
| | Options
| | | Average
Price(b)
| Outstanding at beginning of year | | 190,432 | | | $ | 36.45 | | 176,922 | | | $ | 32.35 | | 170,640 | | | $ | 28.08 | Granted | | 41,630 | | | | 39.89 | | 37,376 | | | | 48.75 | | 40,432 | | | | 43.53 | Exercised | | (25,833 | ) | | | 26.74 | | (19,558 | ) | | | 23.32 | | (29,064 | ) | | | 21.59 | Forfeited/expired | | (8,056 | ) | | | 43.56 | | (4,308 | ) | | | 39.01 | | (5,086 | ) | | | 34.83 | | | |
|
| | | | |
|
| | | | |
|
| | | | Outstanding at end of year | | 198,173 | | | | 38.12 | | 190,432 | | | | 36.45 | | 176,922 | | | | 32.35 | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| Exercisable at end of year | | 97,663 | | | $ | 32.56 | | 82,620 | | | $ | 30.14 | | 83,521 | | | $ | 26.32 | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| Weighted average fair value of options granted | | | | | $ | 11.21 | | | | | $ | 15.20 | | | | | $ | 13.53 | | | | | | |
|
| | | | |
|
| | | | |
|
|
Stock options outstanding and exercisable at December 27, 2003(a): | | | | | | | | | | | | | | | | Options Outstanding
| | Options
Exercisable
| Range of Exercise Price
| | Options
| | Average
Life(c)
| | Average
Price(b)
| | Options
| | Average
Price(b)
| $13.72 to $21.31 | | 6,688 | | 1.20 yrs. | | $ | 16.42 | | 6,365 | | $ | 16.31 | $21.36 to $38.25 | | 72,455 | | 4.52 | | | 31.57 | | 71,035 | | | 31.62 | $38.50 to $51.50 | | 119,030 | | 8.00 | | | 43.42 | | 20,263 | | | 41.51 | | | |
| | | | | | |
| | | | | | | 198,173 | | 6.41 | | | 38.12 | | 97,663 | | | 32.56 | | | |
| | | | | | |
| | | |
SharePower Stock Option Plan (SharePower)
SharePower options are awarded to all eligible employees based on annual earnings and tenure, become exercisable after three years and have a 10-year term. SharePower options represent approximately 20% of our annual employee option grants. At year-end 2002, 35.1 million shares were available for future awards under SharePower.
Long-Term Incentive Plan (LTIP)
All senior management and certain middle management are awarded LTIP grants, generally based on a multiple of base salary. LTIP options generally become exercisable at the end of three years and have a 10-year term. Beginning in 2001, the entire award was made in stock options. Prior to 2001, two-thirds of the award consisted of stock options with the balance in stock options or paid in cash based on the employee’s selection. Amounts expensed for expected cash payments were $18 million in 2002 and $37 million in 2001 and 2000. At year-end 2002, 36.6 million shares were available for future awards under the LTIP.
Stock Option Incentive Plan (SOIP)
SOIP options are available to middle management employees based on a multiple of base salary. SOIP options generally become exercisable at the end of three years and have a 10-year term. At year-end 2002, 29.3 million shares were available for future awards under the SOIP.
Accounting Policy
We account for employee stock options using the intrinsic value method rather than the fair value method. Under the intrinsic value method, compensation expense is measured as the excess, if any, of the market value of PepsiCo common stock at the award date over the amount the employee must pay for the stock (exercise price). Our policy is to award stock options with an exercise price equal to the market value at the date of award, and accordingly, no compensation expense is recognized. If the fair value method of accounting had been used, compensation expense would have been recognized over the vesting period of the awards resulting in lower net income and net income per common share as shown below. We have no current plans to change our intrinsic value accounting.
We believe there are a number of valuation issues with the fair value method that still need to be resolved as well as potential changes necessary to reconcile international and United States standards. Upon resolution of these matters, we will be better able to consider implementation of the fair value method.
| | | 2002 | | | 2001 | | | 2000 | |
| Pro forma impact of fair value method | | | | | | | | | | Reported net income | | $3,313 | | | $2,662 | | | $2,543 | | Less: fair value impact of employee stock compensation | | (360 | ) | | (306 | ) | | (200 | ) | | | |
|
| |
|
| |
|
| Pro forma net income | | $2,953 | | | $2,356 | | | $2,343 | | | | |
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| |
|
| |
|
| Earnings per common share | | | | | | | | | | Basic – as reported | | $1.89 | | | $1.51 | | | $1.45 | | Diluted – as reported | | $1.85 | | | $1.47 | | | $1.42 | | Basic – pro forma | | $1.68 | | | $1.33 | | | $1.34 | | Diluted – pro forma | | $1.65 | | | $1.30 | | | $1.31 | | Weighted average Black-Scholes fair value assumptions | | | | | | | | | | Risk free interest rate | | 4.4% | | | 4.8% | | | 6.7% | | Expected life | | 6 yrs. | | | 5 yrs. | | | 5 yrs. | | Expected volatility | | 27% | | | 29% | | | 29% | | Expected dividend yield | | 1.14% | | | 0.98% | | | 1.08% | |
| Stock option activity(a): | | 2002 | | 2001 | | 2000 |
| | | | | | | Average Price(b)
| | | | | Average Price(b)
| | | | | Average Price(b)
| | | | Options
| | | | Options
| | | | Options
| | | Outstanding at beginning of year | | 176,922 | | | $32.35 | | 170,640 | | | $28.08 | | 188,661 | | | $25.82 | Granted | | 37,376 | | | 48.75 | | 40,432 | | | 43.53 | | 28,660 | | | 31.92 | Exercised | | (19,558 | ) | | 23.32 | | (29,064 | ) | | 21.59 | | (37,039 | ) | | 18.40 | Forfeited/expired | | (4,308 | ) | | 39.01 | | (5,086 | ) | | 34.83 | | (9,642 | ) | | 33.93 | | | |
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| | | |
|
| | | |
|
| | | Outstanding at end of year | | 190,432 | | | 36.45 | | 176,922 | | | 32.35 | | 170,640 | | | 28.08 | | | |
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| |
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| |
| |
|
| |
| Exercisable at end of year | | 82,620 | | | $30.14 | | 83,521 | | | $26.32 | | 75,129 | | | $21.27 | | | |
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| |
| |
|
| |
| Weighted average fair value of options granted | | | | | $15.20 | | | | | $13.53 | | | | | $12.04 | | | | | | |
| | | | |
| | | | |
|
Stock options outstanding and exercisable at December 28, 2002 (a):
| | | Options Outstanding
| | Options Exercisable
| Range of Exercise Price
| | Options
| | Average Life (c)
| | Average Price (b)
| | Options
| | Average Price (b)
| $ 5.95 to $18.37 | | 8,867 | | 1.39 yrs. | | $14.78 | | 8,867 | | $14.78 | $18.58 to $35.53 | | 77,856 | | 5.30 | | 29.32 | | 38,278 | | 25.55 | $36.50 to $51.50 | | 103,709 | | 7.84 | | 43.69 | | 35,475 | | 39.04 | | | |
| | | | | |
| | | | | | 190,432 | | 6.46 | | 36.45 | | 82,620 | | 30.14 | | | |
| | | | | |
| | |
| (a) | | Options are in thousands and include options granted under Quaker plans. |
| (b) | | Weighted average exercise price. |
| (c) | | Weighted average contractual life remaining in years. |
Note 7 — Pension, Retiree Medical and Savings Plans Our pension plans cover full-time employees in the United States and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. U.S. retirees are also eligible for medical and life insurance benefits (retiree medical) if they meet age and service requirements. Generally, our retiree medical costs are capped at a specified dollar amount, with retirees contributing the remainder. We use a September 30 measurement date. The cost or benefit of plan changes which increase or decrease benefits for prior employee service (prior service cost) is included in expense on a straight-line basis over the average remaining service period of employees expected to receive benefits. Our 2003 disclosures do not reflect any impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) signed into law in December 2003, as it occurred after the measurement date for our plans. For 2004, we will account for the effect of the Act. We expect our 2004 retiree medical costs to be between $5 million and $10 million lower as a result of the Act and expect our liability to be reduced by approximately $50 million. These amounts are based on preliminary estimates that are dependent on interpretative regulations not yet available, and therefore, subject to change. For additional unaudited information on our pension and retiree medical plans and related accounting policies and assumptions, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis. | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Weighted average pension assumptions | | | | | | | | | | Liability discount rate | | 6.1 | % | | 6.7 | % | | 7.4 | % | Expense discount rate | | 6.7 | % | | 7.4 | % | | 7.7 | % | Expected return on plan assets | | 8.2 | % | | 9.1 | % | | 9.8 | % | Rate of salary increases | | 4.4 | % | | 4.4 | % | | 4.6 | % | Components of pension expense | | | | | | | | | | Service cost | | $178 | | | $156 | | | $127 | | Interest cost | | 284 | | | 265 | | | 233 | | Expected return on plan assets | | (359 | ) | | (329 | ) | | (301 | ) | Amortization of prior service cost | | 6 | | | 6 | | | 8 | | Amortization of experience loss/(gain) | | 48 | | | 4 | | | (11 | ) | | | |
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| |
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| |
|
| Pension expense | | 157 | | | 102 | | | 56 | | Special termination benefits | | 4 | | | 9 | | | 27 | | | | |
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| |
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| |
|
| Total | | $161 | | | $111 | | | $83 | | | | |
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| |
|
| Weighted average retiree medical assumptions | | | | | | | | | | Liability discount rate | | 6.1 | % | | 6.7 | % | | 7.5 | % | Expense discount rate | | 6.7 | % | | 7.5 | % | | 7.8 | % | Components of retiree medical expense | | | | | | | | | | Service cost | | $33 | | | $25 | | | $20 | | Interest cost | | 73 | | | 66 | | | 63 | | Amortization of prior service benefit | | (3 | ) | | (7 | ) | | (12 | ) | Amortization of experience loss | | 13 | | | 3 | | | — | | | | |
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| |
|
| Retiree medical expense | | 116 | | | 87 | | | 71 | | Special termination benefits | | — | | | 1 | | | 1 | | | | |
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| |
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| |
|
| Total | | $116 | | | $88 | | | $72 | | | | |
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| |
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|
| | | | | | | | | | | | | 2003
| | | 2002
| | 2003
| | 2002
| | | | Pension
| | Retiree Medical
| Change in projected benefit liability | | | | | | | | | | Liability at beginning of year | | $4,324 | | | $3,556 | | $1,120 | | $911 | Service cost | | 178 | | | 156 | | 33 | | 25 | Interest cost | | 284 | | | 265 | | 73 | | 66 | Plan amendments | | 5 | | | 12 | | (63) | | (25) | Participant contributions | | 6 | | | 6 | | — | | — | Experience loss | | 541 | | | 514 | | 171 | | 205 | Benefit payments | | (208 | ) | | (234) | | (70) | | (63) | Special termination benefits | | 4 | | | 9 | | — | | 1 | Foreign currency adjustment | | 80 | | | 40 | | — | | — | | | |
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| |
| |
| Liability at end of year | | $5,214 | | | $4,324 | | $1,264 | | $1,120 | | | |
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| |
| |
| |
| Liability at end of year for service to date | | $4,350 | | | $3,678 | | | | | | | |
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| | | | |
| | | | | | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2003
| | | 2002
| | | | | Pension
| | | Retiree Medical
| | Change in fair value of plan assets | | | | | | | | | | | | | | | | | Fair value at beginning of year | | $ | 3,537 | | | $ | 3,129 | | | $ | — | | | $ | — | | Actual return on plan assets | | | 281 | | | | (221 | ) | | | — | | | | — | | Employer contributions/funding | | | 552 | | | | 820 | | | | 70 | | | | 63 | | Participant contributions | | | 6 | | | | 6 | | | | — | | | | — | | Benefit payments | | | (208 | ) | | | (234 | ) | | | (70 | ) | | | (63 | ) | Foreign currency adjustment | | | 77 | | | | 37 | | | | — | | | | — | | | | |
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| |
|
|
| Fair value at end of year | | $ | 4,245 | | | $ | 3,537 | | | $ | — | | | $ | — | | | | |
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|
| Funded status as recognized in the Consolidated Balance Sheet | | | | | | | | | | | | | | | | | Funded status at end of year | | $ | (969 | ) | | $ | (787 | ) | | $ | (1,264 | ) | | $ | (1,120 | ) | Unrecognized prior service cost/(benefit) | | | 44 | | | | 44 | | | | (83 | ) | | | (23 | ) | Unrecognized experience loss | | | 2,207 | | | | 1,607 | | | | 434 | | | | 275 | | Fourth quarter benefit payments | | | 6 | | | | 23 | | | | 19 | | | | 19 | | | | |
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|
| Net amounts recognized | | $ | 1,288 | | | $ | 887 | | | $ | (894 | ) | | $ | (849 | ) | | | |
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|
|
| Net amounts as recognized in the Consolidated Balance Sheet | | | | | | | | | | | | | | | | | Other assets | | $ | 1,581 | | | $ | 1,097 | | | $ | — | | | $ | — | | Intangible assets | | | 2 | | | | 8 | | | | — | | | | — | | Accrued benefit liability | | | (334 | ) | | | (283 | ) | | | (894 | ) | | | (849 | ) | Accumulated other comprehensive income | | | 39 | | | | 65 | | | | — | | | | — | | | | |
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| |
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| |
|
|
| Net amounts recognized | | $ | 1,288 | | | $ | 887 | | | $ | (894 | ) | | $ | (849 | ) | | | |
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| Components of increase in unrecognized experience loss | | | | | | | | | | | | | | | | | Decrease in discount rate | | $ | 446 | | | $ | 369 | | | $ | 60 | | | $ | 79 | | Employee-related assumption changes | | | (6 | ) | | | 53 | | | | 80 | | | | 76 | | Liability-related experience different from assumptions | | | 100 | | | | 89 | | | | 32 | | | | 50 | | Actual asset return different from expected return | | | 78 | | | | 550 | | | | — | | | | — | | Amortization of losses | | | (48 | ) | | | (4 | ) | | | (13 | ) | | | (3 | ) | Other, including foreign currency adjustments | | | 30 | | | | 16 | | | | — | | | | — | | | | |
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| Total | | $ | 600 | | | $ | 1,073 | | | $ | 159 | | | $ | 202 | | | | |
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| Selected information for plans with liability for service to date in excess of plan assets | | | | | | | | | | | | | | | | | Liability for service to date | | $ | (383 | ) | | $ | (419 | ) | | $ | (1,264 | ) | | $ | (1,120 | ) | Projected benefit liability | | $ | (727 | ) | | $ | (656 | ) | | $ | (1,264 | ) | | $ | (1,120 | ) | Fair value of plan assets | | $ | 123 | | | $ | 182 | | | | — | | | | — | |
Of the total projected pension benefit liability at year-end 2003, $535 million relates to plans that we do not fund because of unfavorable tax treatment. Our estimated future benefit payments are as follows: | | | | | | | | | | | | | | | | 2004
| | 2005
| | 2006
| | 2007
| | 2008
| | 2009-13
| Pension | | $190 | | $190 | | $200 | | $215 | | $225 | | $1,385 | Retiree medical | | $75 | | $80 | | $85 | | $90 | | $95 | | $515 |
These benefit payments include payments made from both funded and unfunded pension plans. The above payments exclude any discretionary contributions we may make. We expect such contributions to be approximately $400 million in 2004. Pension Assets The expected return on pension plan assets is based on our historical experience, our pension plan investment guidelines, and our expectations for long-term rates of return. Our pension plan investment guidelines are established based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. Our target allocation for 2004 and actual pension plan asset allocation at year-end 2003 and 2002 are as follows: | | | | | | | | | | Target
Allocation
| | Actual
Allocation
| Asset Category
| | 2004
| | 2003
| | 2002
| Equity securities | | 60% | | 57% | | 48% | Debt securities | | 40% | | 34% | | 29% | Other, primarily cash | | — | | 9% | | 23% | | | |
| |
| |
| Total | | 100% | | 100% | | 100% | | | |
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| |
|
Pension assets include approximately 5.5 million shares of PepsiCo common stock with a market value of $251 million in 2003, and 5.5 million shares with a market value of $202 million in 2002. Our investment policy limits the investment in PepsiCo stock at the time of investment to 10% of the fair value of plan assets. Retiree Medical Cost Trend Rates An average increase of 12% in the cost of covered retiree medical benefits is assumed for 2004. This average increase is then projected to decline gradually to 5% in 2010 and thereafter. These assumed health care cost trend rates have an impact on the retiree medical plan expense and liability. However, the cap on our share of retiree medical costs limits the impact. A 1 percentage point change in the assumed health care trend rate would have the following effects: | | | | | | | | 1%
Increase
| | 1% Decrease
| 2003 service and interest cost components | | $4 | | $(4) | 2003 benefit liability | | $45 | | $(35) |
Savings Plan Our U.S. employees are eligible to participate in 401(k) savings plans, which are voluntary defined contribution plans. The plans are designed to provide employees with retirement savings and strengthen their incentive to build shareholder value. Beginning in 2004, we will make matching contributions with PepsiCo stock for a portion of eligible pay based on years of service. Note 8 — Noncontrolled Bottling Affiliates Our most significant noncontrolled bottling affiliates are The Pepsi Bottling Group (PBG) and PepsiAmericas (PAS). Approximately 10% of our net revenue reflects sales to PBG. The Pepsi Bottling Group In addition to approximately 41% of PBG’s outstanding common stock that we own at year-end 2003, we own 100% of PBG’s class B common stock and approximately 7% of the equity of Bottling Group, LLC, PBG’s principal operating subsidiary. This gives us economic ownership of approximately 45% of PBG’s combined operations. PBG’s summarized financial information is as follows: | | | | | | | | | | 2003
| | 2002
| Current assets | | $ | 3,039 | | $ | 1,737 | Noncurrent assets | | | 8,505 | | | 8,306 | | | |
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|
| Total assets | | $ | 11,544 | | $ | 10,043 | | | |
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|
| Current liabilities | | $ | 2,478 | | $ | 1,248 | Noncurrent liabilities | | | 6,789 | | | 6,623 | Minority interest | | | 396 | | | 348 | | | |
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| Total liabilities | | $ | 9,663 | | $ | 8,219 | | | |
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|
| Our investment | | $ | 1,353 | | $ | 1,107 | | | |
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| | | | | | | | | | 2003
| | 2002
| | 2001
| Net revenue | | $10,265 | | $9,216 | | $8,443 | Gross profit | | $5,050 | | $4,215 | | $3,863 | Operating profit | | $956 | | $898 | | $676 | Net income | | $416 | | $428 | | $305 |
In December 2002, PBG acquired Pepsi-Gemex, a franchise bottler in Mexico, in which we previously held a 34% ownership interest. The table above includes the results of Pepsi-Gemex from the transaction date forward. Our investment in PBG was $240 million higher than our ownership interest in their net assets at year-end 2003. Based upon the quoted closing price of PBG shares at year-end 2003, the calculated market value of our shares in PBG, excluding our investment in Bottling Group, LLC, exceeded our investment balance by approximately $1.6 billion. PepsiAmericas At year-end 2003, we owned approximately 40% of PepsiAmericas and their summarized financial information is as follows: | | | | | | | | | | 2003
| | 2002
| Current assets | | $ | 560 | | $ | 550 | Noncurrent assets | | | 3,022 | | | 3,013 | | | |
|
| |
|
| Total assets | | $ | 3,582 | | $ | 3,563 | | | |
|
| |
|
| Current liabilities | | $ | 599 | | $ | 698 | Noncurrent liabilities | | | 1,418 | | | 1,416 | | | |
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|
| Total liabilities | | $ | 2,017 | | $ | 2,114 | | | |
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|
| Our investment | | $ | 847 | | $ | 782 | | | |
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| | | | | | | | | | 2003
| | 2002
| | 2001
| Net revenue | | $3,237 | | $3,240 | | $3,144 | Gross profit | | $1,360 | | $1,272 | | $1,232 | Operating profit | | $316 | | $301 | | $268 | Income from continuing operations | | $158 | | $136 | | $90 | Net income | | $158 | | $130 | | $19 |
Our investment in PAS was $230 million higher than our ownership interest in their net assets at year-end 2003. Based upon the quoted closing price of PAS shares at year-end 2003, the calculated market value of our shares in PepsiAmericas exceeded our investment balance by approximately $136 million. Related Party Transactions Our significant related party transactions involve our noncontrolled bottling affiliates. We sell concentrate to these affiliates that is used in the production of carbonated soft drinks and non-carbonated beverages. The sale of concentrate is reported net of bottler funding. We also sell certain finished goods to these affiliates and we receive royalties for the use of our trademarks for certain products. For further unaudited information on these bottlers, see “Our Customers” in Management’s Discussion and Analysis. These transactions with our bottling affiliates are reflected in our consolidated financial statements as follows: | | | | | | | | | | 2003
| | 2002
| | 2001
| Net revenue | | $3,699 | | $3,455 | | $2,262 | Selling, general and administrative expenses | | $128 | | $105 | | $75 | Accounts and notes receivable | | $158 | | $126 | | | Accounts payable and other current liabilities | | $138 | | $122 | | |
Such amounts are settled on terms consistent with other trade receivables and payables. SeeNote 9 regarding our guarantee of certain PBG debt. In addition, we coordinate, on an aggregate basis, the negotiation and purchase of sweeteners and other raw materials requirements for certain of our bottlers with suppliers. Once we have negotiated the contracts, the bottlers order and take delivery directly from the supplier and pay the suppliers directly. Consequently, these transactions are not reflected in our consolidated financial statements. As the contracting party, we could be liable to these suppliers in the event of any nonpayment by our anchor bottlers, but we consider this exposure to be remote. Note 9 — Debt Obligations and Commitments | | | | | | | | 2003
| | 2002
| Short-term debt obligations | | | | | Current maturities of long-term debt | | $ 446 | | $ 485 | Other borrowings (5.1% and 5.7%) | | 520 | | 452 | Amounts reclassified to long-term debt | | (375) | | (375) | | | |
| |
| | | | $ 591 | | $ 562 | | | |
| |
| Long-term debt obligations | | | | | Short-term borrowings, reclassified | | $ 375 | | $ 375 | Notes due 2004-2026 (5.7% and 4.0%) | | 1,186 | | 1,716 | Zero coupon notes, $575 million due 2004-2012 (13.5%) | | 330 | | 338 | Other, due 2004-2015 (6.4% and 7.6%) | | 257 | | 243 | | | |
| |
| | | | 2,148 | | 2,672 | Less: current maturities of long-term debt obligations | | (446) | | (485) | | | |
| |
| | | | $1,702 | | $2,187 | | | |
| |
|
The interest rates in the above table reflect weighted average rates. Short-term borrowings are reclassified to long-term when we have the intent and ability, through the existence of the unused lines of credit, to refinance these borrowings on a long-term basis. At year-end 2003, we maintained $750 million in corporate lines of credit subject to normal banking terms and conditions. These credit facilities support short-term debt issuances and remained unused at year-end 2003. Of the $750 million, $375 million expires in June 2004 with the remaining $375 million expiring in June 2008. Upon consent of PepsiCo and the lenders, these facilities can be extended an additional year. In addition, $395 million of our debt was outstanding on various lines of credit maintained for our international divisions. These lines of credit are subject to normal banking terms and conditions and are committed to the extent of our borrowings. Long-Term Contractual Commitments and Off-Balance Sheet Arrangements | | | | | | | | | | | | | | | | | | | Payments Due by Year
| | | | Total
| | Less
Than 1
Year
| | 1-3
Years
| | 3-5
Years
| | More
Than 5
Years
| Long-term contractual commitments(a) | | | | | | | | | | | | | | | | Long-term debt obligations(b) | | $ | 1,702 | | $ | — | | $ | 274 | | $ | 902 | | $ | 526 | Non-cancelable operating leases | | | 610 | | | 154 | | | 209 | | | 99 | | | 148 | Purchasing commitments(c) | | | 3,363 | | | 844 | | | 1,070 | | | 565 | | | 884 | Marketing commitments | | | 584 | | | 218 | | | 290 | | | 63 | | | 13 | Other commitments | | | 44 | | | 27 | | | 13 | | | 2 | | | 2 | | | |
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| |
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| |
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| |
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| |
|
| | | | $ | 6,303 | | $ | 1,243 | | $ | 1,856 | | $ | 1,631 | | $ | 1,573 | | | |
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| (a) | | Reflects non-cancelable commitments as of December 27, 2003 based on year-end foreign exchange rates. |
Note 8 – Noncontrolled Bottling Affiliates
Our most significant noncontrolled bottling affiliates are The Pepsi Bottling Group (PBG) and PepsiAmericas (PAS). These affiliates account for over 40%
| (b) | | Excludes current maturities of our worldwide bottler case sales.The Pepsi Bottling Group
In addition to approximately 38%long-term debt of PBG’s outstanding common stock that we own at year-end 2002, we own 100% of PBG’s class B common stock and approximately 7% of the equity of Bottling Group, LLC, PBG’s principal operating subsidiary. This gives us economic ownership of approximately 42% of PBG’s combined operations. PBG’s summarized financial information is as follows:
| | | 2002 | | 2001 | | |
| Current assets | | $ 1,737 | | $1,548 | | | Noncurrent assets | | 8,290 | | 6,309 | | | | | |
| |
| | | Total assets | | $10,027 | | $7,857 | | | | | |
| |
| | | Current liabilities | | $1,248 | | $1,081 | | | Noncurrent liabilities | | 6,607 | | 4,856 | | | Minority interest | | 348 | | 319 | | | | | |
| |
| | | Total liabilities | | $8,203 | | $6,256 | | | | | |
| |
| | | Our investment | | $1,107 | | $962 | | | | | |
| |
| | |
| | | | 2002 | | 2001 | | 2000 |
| Net sales | | $9,216 | | $8,443 | | $7,982 | Gross profit | | $4,215 | | $3,863 | | $3,577 | Operating profit | | $898 | | $676 | | $590 | Net income | | $428 | | $305 | | $229 |
In December 2002, PBG acquired Pepsi-Gemex, a franchise bottler in Mexico, in which we previously held a 34% ownership interest. Under the terms of the agreement, we received the cash tender price for our Pepsi-Gemex shares, net of a payment of $17 million to PBG. Including the gain from our net investment hedge, the transaction resulted in an after-tax loss of approximately $8 million. The table above includes the results of Pepsi-Gemex from the transaction date forward.
Our investment in PBG was $118 million higher than our ownership interest in their net assets at year-end 2002. Based upon the quoted closing price of PBG shares at year-end 2002, the calculated market value of our shares in PBG, excluding our investment in Bottling Group, LLC, exceeded our investment balance by approximately $1.9 billion.
PepsiAmericas
PepsiAmericas was formed in December 2000 when two of our bottling affiliates, Whitman and PepsiAmericas, merged. At year-end 2002, we owned approximately 39% of the combined company. PepsiAmericas’ summarized financial information is as follows:
| | | 2002 | | 2001 | | |
| Current assets | | $ 550 | | $ 481 | | | Noncurrent assets | | 3,013 | | 2,938 | | | | | |
| |
| | | Total assets | | $3,563 | | $3,419 | | | | | |
| |
| | | Current liabilities | | $ 698 | | $ 643 | | | Noncurrent liabilities | | 1,416 | | 1,346 | | | | | |
| |
| | | Total liabilities | | $2,114 | | $1,989 | | | | | |
| |
| | | Our investment | | $782 | | $746 | | | | | |
| |
| | | | | | | 2002 | | 2001 | | 2000 |
| Net sales | | $3,240 | | $3,144 | | $2,511 | Gross profit | | $1,272 | | $1,232 | | $1,017 | Operating profit | | $301 | | $268 | | $223 | Income from continuing operations | | $136 | | $90 | | $72 | Net income | | $130 | | $19 | | $80 |
The above financial information for 2000 includes the results of the former PepsiAmericas after the date of the merger with Whitman.
Our investment in PAS was $215 million higher than our ownership interest in their net assets at year-end 2002. Based upon the quoted closing price of PAS shares at year-end 2002, the calculated market value of our shares in PepsiAmericas was less than our investment balance by approximately $27 million.
Related Party Transactions
Our significant related party transactions involve our noncontrolled bottling affiliates. We sell concentrate to these affiliates that is used in the production of carbonated soft drinks and noncarbonated beverages. The sale of concentrate is reported net of bottler funding. We also sell certain finished goods to these affiliates and we receive royalties for the use of our trademark for certain products. For further unaudited information on these bottlers, see “Our Customers” in Management’s Discussion and Analysis. These transactions with our bottling affiliates are reflected in the Consolidated Statement of Income as follows:
| | | 2002 | | 2001 | | 2000 |
| Net sales | | $3,455 | | $2,262 | | $1,978 | Selling, general and administrative expenses | | $83 | | $57 | | $5 |
As of December 28, 2002, the receivables from these bottling affiliates were $126 million and payables to these affiliates were $122 million. As of December 29, 2001, the receivables from these bottling affiliates were $119 million and payables to these affiliates were $108 million. Such amounts are settled on terms consistent with other trade receivables and payables. SeeNote 9 regarding our guarantee of certain PBG debt.
In addition, we coordinate, on an aggregate basis, the negotiation and purchase of sweeteners and other raw materials requirements for certain of our bottlers with suppliers. Once we have negotiated the contracts, the bottlers order and take delivery directly from the supplier and pay the suppliers directly. Consequently, these transactions are not reflected in our consolidated financial statements. As the contracting party, we could be liable to these suppliers in the event of any nonpayment by our anchor bottlers, but we consider this exposure to be remote.
Note 9 – Debt Obligations and Commitments
| | | | | 2002 | | | | | 2001 | |
| Short-term debt obligations | | | | | | | | | | | Current maturities of long-term debt | | | | $ 485 | | | | | $ 319 | | Other borrowings (5.7% and 6.4%) | | | | 452 | | | | | 410 | | Amounts reclassified to long-term debt | | | | (375 | ) | | | | (375 | ) | | | | | |
|
| | | |
|
| | | | | | $ 562 | | | | | $ 354 | | | | | | |
|
| | | |
|
|
Long-term debt obligations | | | | | | | | | | | Short-term borrowings, reclassified | | | | $ 375 | | | | | $ 375 | | Notes due 2003-2026 (4.0% and 4.1%) | | | | 1,716 | | | | | 1,986 | | Zero coupon notes, $625 million due 2003-2012 (12.6%) | | | | 338 | | | | | 356 | | Other, due 2003-2015 (7.6% and 6.9%) | | | | 243 | | | | | 253 | | | | | | |
|
| | | |
|
| | | | | | 2,672 | | | | | 2,970 | | Less: current maturities of long-term debt obligations | | | | (485 | ) | | | | (319 | ) | | | | | |
|
| | | |
|
| | | | | | $2,187 | | | | | $2,651 | | | | | | |
|
| | | |
|
|
Short-term borrowings are reclassified to long-term when we have the intent and ability, through the existence of the unused lines of credit, to refinance these borrowings on a long-term basis. The weighted average interest rates in the above table include the impact of outstanding interest rate swaps at year-end. SeeNote 10 for additional information on our interest rate swaps.
At year-end 2002, we maintained $750 million in corporate lines of credit subject to normal banking terms and conditions. These credit facilities support short-term debt issuances and remained unused at year-end 2002. Of the $750 million, $375 million expires in June 2003 with the remaining $375 million expiring in June 2007. Upon consent of PepsiCo and the lenders, these facilities can be extended an additional year. In addition, $270 million of our debt was outstanding on various lines of credit maintained for our international divisions. These lines of credit are subject to normal banking terms and conditions and are committed to the extent of our borrowings.
Long-Term Contractual Commitments and Off-Balance Sheet Arrangements
| | | Payments Due by Year
| | | | Total
| | Less than 1 Year
| | 1-3 Years
| | 3-5 Years
| | | More than 5 Years
| Long-term contractual commitments(a) | | | | | | | | | | | | | Long-term debt obligations(b) | | $2,187 | | $ | – | | $ 603 | | $ 699 | | | $ 885 | Non-cancelable operating leases | | 526 | | | 129 | | 169 | | 91 | | | 137 | Purchasing commitments | | 3,307 | | | 773 | | 1,006 | | 569 | | | 959 | Capital equipment commitments | | 34 | | | 34 | | – | | – | | | – | Marketing commitments | | 251 | | | 75 | | 115 | | 52 | | | 9 | Other commitments | | 31 | | | 23 | | 8 | | – | | | – | | | |
| |
|
| |
| |
|
| |
| | | | $6,336 | | $ | 1,034 | | $1,901 | | $1,411 | | | $1,990 | | | |
| |
|
| |
| |
|
| |
|
(a) | | Reflects non-cancelable commitments as of December 28, 2002 based on year-end foreign exchange rates |
(b) | | Excludes current maturities of long-term debt of $485$446 million which are classified within current liabilities. |
Long-term contractual| (c) | | Includes approximately $50 million of long-term commitments except for our long-term debt obligations,which are not recordedreflected in other liabilities in our Consolidated Balance Sheet. Non-cancelable purchasing, capital equipment and marketing commitments are in the normal course of our business for our projected needs. Our non-cancelable capital equipment commitments primarily relate to our new concentrate plant in Ireland. As bottler funding is negotiated on an annual basis, these commitments are not reflected in our long-term contractual commitments. SeeNote 8 regarding our commitments to noncontrolled bottling affiliates. |
Most long-term contractual commitments, except for our long-term debt obligations, are not recorded in our Consolidated Balance Sheet. Non-cancelable purchasing and marketing commitments are in the normal course of our business for our projected needs. As bottler funding is negotiated on an annual basis, these commitments are not reflected in our long-term contractual commitments. SeeNote 7 regarding our pension and retiree medical obligations and discussion below regarding our commitments to noncontrolled bottling affiliates and former restaurant operations. Off-Balance Sheet Arrangements It is not our business practice to enter into off-balance sheet arrangements nor is it our policy to issue guarantees to our bottlers, noncontrolled affiliates or third parties. However, certain guarantees were necessary to facilitate the separation of our bottling and restaurant operations from us. In connection with these transactions, we have guaranteed $2.3 billion of Bottling Group, LLC’s long-term debt through 2012 and $57 million of YUM! Brands, Inc. (YUM) outstanding obligations, primarily property leases. The terms of our Bottling Group, LLC debt guarantee are intended to preserve the structure of PBG’s separation from us and our payment obligation would be triggered if Bottling Group, LLC failed to perform under these debt obligations or the structure significantly changed. Our guarantees of certain obligations ensured YUM’s continued use of certain properties. These guarantees would require our cash payment if YUM failed to perform under these lease obligations.
Note 10 — Risk Management We are exposed to the risk of loss arising from adverse changes in: commodity prices, affecting the cost of our raw materials and fuel; foreign exchange risks; stock prices; and discount rates, affecting the measurement of our pension and retiree medical liabilities. In the normal course of business, we manage these risks through a variety of strategies, including the use of derivative instruments designated as cash flow and fair value hedges. See “Our Market Risks” in Management’s Discussion and Analysis for further unaudited information on our risks. For cash flow hedges, changes in fair value are generally deferred in accumulated other comprehensive loss within shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. We do not use derivative instruments for trading or speculative purposes and we limit our exposure to individual counterparties to manage credit risk. Commodity Prices We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price purchase orders, pricing agreements, geographic diversity and cash flow hedges. We use cash flow hedges, with terms of no more than two years, to hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for corn, natural gas and oats. Any ineffectiveness is recorded immediately. However, our commodity hedges have not had any significant ineffectiveness. We classify both the earnings and cash flow impact from these hedges consistent with the underlying hedged item. During the next 12 months, we expect to reclassify gains of approximately $1 million from accumulated other comprehensive loss into net income. Foreign Exchange Our operations outside of the United States generated approximately 35% of our net revenue of which Mexico, the United Kingdom and Canada contributed nearly 20%. As a result, we are exposed to foreign currency risks from unforeseen economic changes and political unrest. On occasion, we enter into hedges, primarily forward contracts with terms of no more than two years, to reduce the effect of foreign exchange rates. Ineffectiveness on these hedges was not material to our results of operations. In 2002, we hedged 2.1 billion Mexican pesos related to our net investment in Pepsi-Gemex which resulted in a $5 million gain upon our disposal of Pepsi-Gemex described inNote 8. Stock Prices The portion of our deferred compensation liability that is based on certain market indexes and on our stock price is subject to market risk. We hold mutual fund investments and prepaid forward contracts to manage this risk. Changes in the fair value of these investments and contracts are recognized immediately in earnings and are offset by changes in the related compensation liability. Fair Value All derivative instruments are recognized in our Consolidated Balance Sheet at fair value. The fair value of our derivative instruments is generally based on quoted market prices. Book and fair values of our derivative and financial instruments are as follows: | | | | | | | | | | | | 2003
| | 2002
| | | | Book
Value
| | Fair
Value
| | Book
Value
| | Fair
Value
| Assets | | | | | | | | | Cash and cash equivalents | | $820 | | $820 | | $1,638 | | $1,638 | Short-term investments(a) | | $1,181 | | $1,181 | | $207 | | $207 | Forward exchange contracts(b) | | $3 | | $3 | | $2 | | $2 | Commodity contracts(b) | | $4 | | $4 | | $6 | | $6 | Prepaid forward contracts(b) | | $107 | | $107 | | $96 | | $96 | Liabilities | | | | | | | | | Forward exchange contracts(c) | | $33 | | $33 | | $3 | | $3 | Commodity contracts(c) | | — | | — | | $2 | | $2 | Debt obligations | | $2,293 | | $2,569 | | $2,749 | | $3,134 |
Off-Balance Sheet Arrangements
It is not our business practice to enter into off-balance sheet arrangements nor is it our policy to issue guarantees to our bottlers, noncontrolled affiliates or third parties. However, certain guarantees were necessary to facilitate the separation of our bottling and restaurant operations from us. In connection with these transactions, we have guaranteed $2.3 billion of Bottling Group, LLC’s long-term debt through 2012 and $68 million of YUM! Brand’s, Inc. (YUM) outstanding obligations, primarily property leases. The terms of our Bottling Group, LLC debt guarantee are intended to preserve the structure of PBG’s separation from us and our payment obligation would be triggered if Bottling Group, LLC failed to perform under these debt obligations or the structure significantly changed. Our guarantees of certain obligations ensured YUM’s continued use of these properties. These guarantees would require our cash payment if YUM failed to perform under these lease obligations.
Note 10 – Risk Management
We are exposed to the risk of loss arising from adverse changes in:
commodity prices, affecting the cost of our raw materials and fuel;
foreign exchange risks;
interest rates on our debt and short-term investment portfolios; and
stock prices.
In the normal course of business, we manage these risks through a variety of strategies, including the use of derivative instruments designated as cash flow and fair value hedges. See “Our Market Risks” in Management’s Discussion and Analysis for further unaudited information on our hedges.
For cash flow hedges, changes in fair value are generally deferred in accumulated other comprehensive loss within shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. We do not use derivative instruments for trading or speculative purposes and, to manage credit risk, we limit our exposure to individual counterparties.
Commodity Prices
We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price purchase orders, pricing agreements, geographic diversity and cash flow hedges. We use cash flow hedges, with terms of no more than two years, to hedge price fluctuations in a portion of our anticipated commodity purchases, primarily for corn, natural gas, oats, packaging materials and wheat. Any ineffectiveness is recorded immediately. However, our commodity hedges have not had any material ineffectiveness. We classify both the earnings and cash flow impact from these hedges consistent with the underlying hedged item.
During the next 12 months, we expect to reclassify gains of approximately $4 million from accumulated other comprehensive loss into net income.
Foreign Exchange
Our operations outside of the United States generated 34% of our net sales of which Mexico, the United Kingdom and Canada contributed 19%. As a result, we are exposed to foreign currency risks from unforeseen economic changes and political unrest. On occasion, we enter into fair value hedges, primarily forward contracts, to reduce the effect of foreign exchange rates. Ineffectiveness resulting from our fair value hedges was not material to our results of operations.
In 2002, we hedged 2.1 billion Mexican pesos related to our net investment in Pepsi-Gemex which resulted in a $5 million gain upon our disposal of Pepsi-Gemex described inNote 8.
Interest Rates
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We have used interest rate swaps to effectively change the interest rate of specific debt issuances, with the objective of reducing our overall borrowing costs.
Late in 2002, we terminated the majority of our interest rate swaps resulting in a gain of approximately $23 million which will be amortized over the remaining term of the related debt. As a result, 12% of our debt at year-end 2002 is exposed to variable interest rates compared to approximately 45% at year-end 2001.
Stock Prices
The portion of our deferred compensation liability that is based on our stock price is subject to market risk. We hold prepaid forward contracts to manage this risk. Changes in the fair value of these contracts are recognized immediately in earnings and are offset by changes in the related compensation liability.
Fair Value
All derivative instruments are recognized in our Consolidated Balance Sheet at fair value. The fair value of our derivative instruments is generally based on quoted market prices. Book and fair values of our derivative and financial instruments are as follows:
| | | 2002 | | 2001 |
| | | | Book Value
| | Fair Value
| | Book Value
| | Fair Value
| Assets | | | | | | | | | Cash and cash equivalents | | $1,638 | | $1,638 | | $683 | | $683 | Short-term investments(a) | | $207 | | $207 | | $966 | | $966 | Forward exchange contracts(b) | | $2 | | $2 | | $6 | | $6 | Commodity contracts(b) | | $6 | | $6 | | $1 | | $1 | Prepaid forward contracts(b) | | $96 | | $96 | | $65 | | $65 | Interest rate swaps(b) | | $1 | | $1 | | $32 | | $32 | Liabilities | | | | | | | | | Forward exchange contracts(c) | | $3 | | $3 | | $2 | | $2 | Commodity contracts(c) | | $2 | | $2 | | $17 | | $17 | Debt obligations | | $2,749 | | $3,134 | | $3,005 | | $3,270 |
Included in the Consolidated Balance Sheet under the captions noted above or as indicated below. | (a) | | Includes $103 million at December 27, 2003 and $82 million at December 28, 2002 and $89 million at December 29, 2001 of mutual fund investments used to manage a portion of market risk arising from our deferred compensation liability. |
| (b) | | Included within prepaid expenses and other current assets. |
(c) | | Included within accounts payable and other current liabilities. |
| (c) | | Included within accounts payable and other current liabilities. |
This table excludes guarantees, including our guarantee of $2.3 billion of Bottling Group, LLC’s long-term debt. The guarantee had a fair value of $35 million at December 27, 2003 and December 28, 2002 based on an external estimate of the cost to us of transferring the liability to an independent financial institution. SeeNote 9 for additional information on our guarantees. Note 11 — Net Income per Common Share Basic net income per common share is net income available to common shareholders divided by the weighted average of common shares outstanding during the period. Diluted net income per common share is calculated using the weighted average of common shares outstanding adjusted to include the effect that would occur if in-the-money employee stock options were exercised and preferred shares were converted into common shares. Options to purchase 49.0 million shares in 2003, 37.9 million shares in 2002 and 0.3 million shares in 2001 were not included in the calculation of diluted earnings per common share because these options were out-of-the-money. The computations of basic and diluted net income per common share are as follows: | | | | | | | | | | | | | | | | | | | 2003
| | 2002
| | 2001
| | | | Income
| | | Shares(a)
| | Income
| | | Shares(a)
| | Income
| | | Shares(a)
| Net income | | $3,568 | | | | | $3,000 | | | | | $2,400 | | | | Preferred shares: | | | | | | | | | | | | | | | | Dividends | | (3 | ) | | | | (4 | ) | | | | (4 | ) | | | Redemption | | — | | | | | — | | | | | (1 | ) | | | | | |
|
| | | |
|
| | | |
|
| | | Net income available for common shareholders | | $3,565 | | | 1,718 | | $2,996 | | | 1,753 | | $2,395 | | | 1,763 | | | |
|
| |
| |
|
| |
| |
|
| |
| Basic net income per common share | | $2.07 | | | | | $1.71 | | | | | $1.36 | | | | | | |
|
| | | |
|
| | | |
|
| | | Net income available for common shareholders | | $3,565 | | | 1,718 | | $2,996 | | | 1,753 | | $2,395 | | | 1,763 | Dilutive securities: | | | | | | | | | | | | | | | | Stock options | | — | | | 17 | | — | | | 25 | | — | | | 37 | ESOP convertible preferred stock | | 3 | | | 3 | | 3 | | | 3 | | 3 | | | 4 | Unvested stock awards | | — | | | 1 | | — | | | 1 | | — | | | 1 | | | |
|
| |
| |
|
| |
| |
|
| |
| Diluted | | $3,568 | | | 1,739 | | $2,999 | | | 1,782 | | $2,398 | | | 1,805 | | | |
|
| |
| |
|
| |
| |
|
| |
| Diluted net income per common share | | $2.05 | | | | | $1.68 | | | | | $1.33 | | | | | | |
|
| | | |
|
| | | |
|
| | |
| (a) | | Weighted average common shares outstanding. |
Note 12 — Preferred and Common Stock As of December 27, 2003, there were 3.6 billion shares of common stock and 3 million shares of convertible preferred stock authorized. The preferred stock was issued only for an employee stock ownership plan (ESOP) established by Quaker and these shares are redeemable by the ESOP participants. The preferred stock accrues dividends at an annual rate of $5.46 per share. At year-end 2003, there were 803,953 preferred shares issued and 531,453 shares outstanding. Each share is convertible at the option of the holder into 4.9625 shares of common stock. The preferred shares may be called by us upon written notice at $78 per share plus accrued and unpaid dividends. As of December 27, 2003, 0.5 million outstanding shares of preferred stock with a fair value of $123 million and 21 million shares of common stock were held in the accounts of ESOP participants. Quaker made the final award to its ESOP plan in June 2001. | | | | | | | | | | | | | | | | | | | | | 2003
| | 2002
| | 2001
| | | | | Shares
| | Amount
| | Shares
| | Amount
| | Shares
| | | Amount
| | Preferred stock | | | | | | | | | | | | | | | | | | Balance, beginning of year | | 0.8 | | $ | 41 | | 0.8 | | $ | 41 | | 1.3 | | | $ | 100 | | Adjustment to effect merger | | — | | | — | | — | | | — | | (0.5 | ) | | | (59 | ) | | | |
| |
|
| |
| |
|
| |
|
| |
|
|
| Balance, end of year | | 0.8 | | $ | 41 | | 0.8 | | $ | 41 | | 0.8 | | | $ | 41 | | | | |
| |
|
| |
| |
|
| |
|
| |
|
|
| Repurchased preferred stock | | | | | | | | | | | | | | | | | | Balance, beginning of year | | 0.2 | | $ | 48 | | 0.1 | | $ | 15 | | 0.5 | | | $ | 51 | | Redemptions | | 0.1 | | | 15 | | 0.1 | | | 33 | | 0.1 | | | | 23 | | Adjustment to effect merger | | — | | | — | | — | | | — | | (0.5 | ) | | | (59 | ) | | | |
| |
|
| |
| |
|
| |
|
| |
|
|
| Balance, end of year | | 0.3 | | $ | 63 | | 0.2 | | $ | 48 | | 0.1 | | | $ | 15 | | | | |
| |
|
| |
| |
|
| |
|
| |
|
|
|
Note 13 — Accumulated Other Comprehensive Loss Comprehensive income is a measure of income which includes both net income and other comprehensive income or loss. Other comprehensive loss results from items deferred on the balance sheet in shareholders’ equity. Other comprehensive income was $405 million in 2003 and other comprehensive loss was $26 million in 2002 and $272 million in 2001. The accumulated balances for each component of other comprehensive loss were as follows: | | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Currency translation adjustment | | $ | (1,121 | ) | | $ | (1,531 | ) | | $ | (1,587 | ) | Cash flow hedges, net of tax(a) | | | (12 | ) | | | — | | | | (18 | ) | Minimum pension liability adjustment(b) | | | (135 | ) | | | (142 | ) | | | (43 | ) | Other | | | 1 | | | | 1 | | | | 2 | | | | |
|
|
| |
|
|
| |
|
|
| Accumulated other comprehensive loss | | $ | (1,267 | ) | | $ | (1,672 | ) | | $ | (1,646 | ) | | | |
|
|
| |
|
|
| |
|
|
|
| (a) | | Includes $8 million at December 28,gain in 2003, $4 million loss in 2002 and $59$7 million at December 29, 2001 based on an external estimate of the cost to us of transferring the liability to an independent financial institution. SeeNote 9 for additional information on our guarantees.Note 11 – Net Income per Common Share
Basic net income per common share is net income available to common shareholders divided by the weighted average of common shares outstanding during the period. Diluted net income per common share is calculated using the weighted average of common shares outstanding adjusted to include the effect that would occur if in-the-money employee stock options were exercised and preferred shares were converted into common shares. Options to purchase 69.4 million shares in 2002, 0.4 million sharesloss in 2001 and 0.1for our share of our equity investees’ accumulated derivative activity. In addition, 2001 includes a $3 million shares in 2000 were not included in the calculation of diluted earnings per common share because these options were out-of-the-money.
The computations of basic and diluted net income per common share are as follows:
| | | 2002 | | 2001 | | 2000 |
| | | | Income
| | | Shares (a)
| | Income
| | | Shares (a)
| | Income
| | | Shares (a)
| Net income | | $3,313 | | | | | $2,662 | | | | | $2,543 | | | | Preferred shares: | | | | | | | | | | | | | | | | Dividends | | (4 | ) | | | | (4 | ) | | | | (4 | ) | | | Redemption | | – | | | | | (1 | ) | | | | – | | | | | | |
|
| | | |
|
| | | |
|
| | | Net income available for common shareholders | | $3,309 | | | 1,753 | | $2,657 | | | 1,763 | | $2,539 | | | 1,748 | | | |
|
| |
| |
|
| |
| |
|
| |
| Basic net income per common share | | $1.89 | | | | | $1.51 | | | | | $1.45 | | | | | | |
|
| | | |
|
| | | |
|
| | | Net income available for common shareholders | | $3,309 | | | 1,753 | | $2,657 | | | 1,763 | | $2,539 | | | 1,748 | Dilutive securities: | | | | | | | | | | | | | | | | Stock options | | – | | | 32 | | – | | | 39 | | – | | | 38 | ESOP convertible preferred stock | | 3 | | | 3 | | 3 | | | 4 | | 2 | | | 4 | Unvested stock awards | | – | | | 1 | | – | | | 1 | | – | | | 1 | | | |
|
| |
| |
|
| |
| |
|
| |
| Diluted | | $3,312 | | | 1,789 | | $2,660 | | | 1,807 | | $2,541 | | | 1,791 | | | |
|
| |
| |
|
| |
| |
|
| |
| Diluted net income per common share | | $1.85 | | | | | $1.47 | | | | | $1.42 | | | | | | |
|
| | | |
|
| | | |
|
| | |
(a) | | Weighted average common shares outstanding. |
Note 12 – Preferred and Common Stock
As of December 28, 2002, there were 3.6 billion shares of common stock and 3 million shares of convertible preferred stock authorized. The preferred stock was issued only for an employee stock ownership plan (ESOP) established by Quaker and these shares are redeemable by the ESOP participants. The preferred stock accrues dividends at an annual rate of $5.46 per share. At year-end 2002, there are 803,953 preferred shares issued and 602,353 shares outstanding. Each share is
convertible at the option of the holder into 4.9625 shares of common stock. The preferred shares may be called by us upon written notice at $78 per share plus accrued and unpaid dividends.
As of December 28, 2002, 0.6 million outstanding shares of preferred stock with a fair value of $127 million and 20 million shares of common stock were held in the accounts of ESOP participants. Quaker made the final award to its ESOP plan in June 2001.
Preferred stock activity:
| | | 2002 | | 2001 | | 2000 |
| | | | Shares
| | Amount
| | Shares
| | | Amount
| | | Shares
| | Amount
| Preferred stock | | | | | | | | | | | | | | | Balance, beginning of year | | 0.8 | | $41 | | 1.3 | | | $100 | | | 1.3 | | $100 | Adjustment to effect merger | | – | | – | | (0.5 | ) | | (59 | ) | | – | | – | | | |
| |
| |
|
| |
|
| |
| |
| Balance, end of year | | 0.8 | | $41 | | 0.8 | | | $ 41 | | | 1.3 | | $100 | | | |
| |
| |
|
| |
|
| |
| |
| Repurchased preferred stock | | | | | | | | | | | | | | | Balance, beginning of year | | 0.1 | | $15 | | 0.5 | | | $ 51 | | | 0.4 | | $39 | Redemptions | | 0.1 | | 33 | | 0.1 | | | 23 | | | 0.1 | | 12 | Adjustment to effect merger | | – | | – | | (0.5 | ) | | (59 | ) | | – | | – | | | |
| |
| |
|
| |
|
| |
| |
| Balance, end of year | | 0.2 | | $48 | | 0.1 | | | $ 15 | | | 0.5 | | $51 | | | |
| |
| |
|
| |
|
| |
| |
|
Note 13 – Accumulated Other Comprehensive Loss
Comprehensive income is a measure of income which includes both net income and other comprehensive loss. Other comprehensive loss results from items deferred on the balance sheet in shareholders’ equity. Other comprehensive loss was $26 million in 2002, $272 million in 2001 and $289 million in 2000. The accumulated balances for each component of other comprehensive loss were as follows:
| | | | 2002 | | | | 2001 | | | | 2000 | |
| Currency translation adjustment | | $ | (1,531 | ) | | $ | (1,587 | ) | | $ | (1,369 | ) | Cash flow hedges, net of tax(a) | | | – | | | | (18 | ) | | | – | | Minimum pension liability adjustment(b) | | | (142 | ) | | | (43 | ) | | | (5 | ) | Other | | | 1 | | | | 2 | | | | – | | | | |
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| |
|
|
| |
|
|
| Accumulated other comprehensive loss | | $ | (1,672 | ) | | $ | (1,646 | ) | | $ | (1,374 | ) | | | |
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| |
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| |
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(a) | | Includes $4 million in 2002 and $7 million in 2001 for our share of our equity investees’ accumulated derivative losses. In addition, 2001 includes $3 milliongain related to the cumulative effect of adopting SFAS 133. |
(b) | | Net of taxes of $72 million in 2002, $22 million in 2001 and $3 million in 2000. Also, includes $99 million in 2002 and $29 million in 2001 for our share of our equity investees’ minimum pension liability adjustments. |
Note 14 – Supplemental Financial Information
| | | 2002 | | | 2001 | | | 2000 | |
| Accounts receivable | | | | | | | | | | Trade receivables | | $1,924 | | | $1,663 | | | | | Other receivables | | 723 | | | 600 | | | | | | | |
|
| |
|
| | | | | | | 2,647 | | | 2,263 | | | | | | | |
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| |
|
| | | | Allowance, beginning of year | | 121 | | | 126 | | | $109 | | Charged to expense | | 38 | | | 41 | | | 42 | | Other additions(a) | | 3 | | | 2 | | | 8 | | Deductions(b) | | (46 | ) | | (48 | ) | | (33 | ) | | | |
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| |
|
| |
|
| Allowance, end of year | | 116 | | | 121 | | | $126 | | | | |
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| |
|
| |
|
| Net receivables | | $2,531 | | | $2,142 | | | | | | | |
|
| |
|
| | | | Inventory (c) | | | | | | | | | | Raw materials | | $ 525 | | | $ 535 | | | | | Work-in-process | | 214 | | | 205 | | | | | Finished goods | | 603 | | | 570 | | | | | | | |
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| |
|
| | | | | | | $1,342 | | | $1,310 | | | | | | | |
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| |
|
| | | | Accounts payable and other liabilities | | | | | | | | | | Accounts payable | | $1,543 | | | $1,238 | | | | | Accrued selling, advertising and marketing | | 716 | | | 861 | | | | | Accrued compensation and benefits | | 806 | | | 789 | | | | | Dividends payable | | 259 | | | 255 | | | | | Insurance accruals | | 168 | | | 158 | | | | | Other current liabilities | | 1,506 | | | 1,160 | | | | | | | |
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| |
|
| | | | | | | $4,998 | | | $4,461 | | | | | | | |
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| |
|
| | | | Other liabilities(d) | | $4,226 | | | $3,876 | | | | | | | |
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| |
|
| | | | Other supplemental information | | | | | | | | | | Rent expense | | $194 | | | $165 | | | $171 | | Interest paid | | $119 | | | $159 | | | $226 | | Income taxes paid | | $1,056 | | | $857 | | | $876 | | Acquisitions (e) | | | | | | | | | | Fair value of assets acquired | | $ 626 | | | $ 604 | | | $ 80 | | Cash paid and debt issued | | (351 | ) | | (432) | | | (98 | ) | | | |
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| |
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| |
|
| Liabilities assumed | | $ 275 | | | $ 172 | | | $ (18 | ) | | | |
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| (b) | | Net of taxes of $67 million in 2003, $72 million in 2002 and $22 million in 2001. Also, includes $110 million in 2003, $99 million in 2002 and $29 million in 2001 for our share of our equity investees’ minimum pension liability adjustments. |
Note 14 — Supplemental Financial Information | | | | | | | | | | | | | | | 2003
| | | 2002
| | | 2001
| | Accounts receivable | | | | | | | | | | | | Trade receivables | | $ | 2,309 | | | $ | 1,924 | | | | | Other receivables | | | 626 | | | | 723 | | | | | | | |
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| |
|
|
| | | | | | | | 2,935 | | | | 2,647 | | | | | | | |
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| |
|
|
| | | | Allowance, beginning of year | | | 116 | | | | 121 | | | $ 126 | | Charged to expense | | | 32 | | | | 38 | | | 41 | | Other additions(a) | | | — | | | | 3 | | | 2 | | Deductions(b) | | | (43 | ) | | | (46 | ) | | (48 | ) | | | |
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| |
|
| Allowance, end of year | | | 105 | | | | 116 | | | $ 121 | | | | |
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|
| Net receivables | | $ | 2,830 | | | $ | 2,531 | | | | | | | |
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|
| | | | Inventory(c) | | | | | | | | | | | | Raw materials | | $ | 618 | | | $ | 525 | | | | | Work-in-process | | | 160 | | | | 214 | | | | | Finished goods | | | 634 | | | | 603 | | | | | | | |
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| |
|
|
| | | | | | | $ | 1,412 | | | $ | 1,342 | | | | | | | |
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|
| | | | Accounts payable and other liabilities | | | | | | | | | | | | Accounts payable | | $ | 1,638 | | | $ | 1,543 | | | | | Accrued marketplace spending | | | 1,243 | | | | 1,240 | | | | | Accrued compensation and benefits | | | 851 | | | | 806 | | | | | Dividends payable | | | 274 | | | | 259 | | | | | Insurance accruals | | | 151 | | | | 168 | | | | | Other current liabilities | | | 1,056 | | | | 982 | | | | | | | |
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|
| | | | | | | $ | 5,213 | | | $ | 4,998 | | | | | | | |
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| | | | Other liabilities(d) | | $ | 4,075 | | | $ | 4,226 | | | | | | | |
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| | | | Other supplemental information | | | | | | | | | | | | Rent expense | | $ | 231 | | | $ | 194 | | | $ 165 | | Interest paid | | $ | 175 | | | $ | 119 | | | $ 159 | | Income taxes paid | | $ | 1,580 | | | $ | 1,056 | | | $ 857 | | Acquisitions(e) | | | | | | | | | | | | Fair value of assets acquired | | $ | 178 | | | $ | 626 | | | $ 604 | | Cash paid and debt issued | | | (71 | ) | | | (351 | ) | | (432 | ) | | | |
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|
| Liabilities assumed | | $ | 107 | | | $ | 275 | | | $ 172 | | | | |
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| (a) | | Includes acquisitions and currency translation effects. |
| (b) | | Includes accounts written off and currency translation effects. |
| (c) | | Inventories are valued at the lower of cost or market. Cost is determined using the average, first-in, first-out (FIFO) or last-in, first-out (LIFO) methods. Approximately 10% in 2003 and 19% in 2002 and 20% in 2001 of the inventory cost was computed using the LIFO method. The differences between LIFO and FIFO methods of valuing these inventories are not material. |
| (d) | | Includes reserves for tax positions when, despite our belief that our position is fully supportable, we believe that our position is likely to be challenged and that we may not succeed. |
| (e) | | Includes our acquisition of the Wotsits brand in the United Kingdom for $228 million in 2002 and the SoBe brand in the United States for $337 million in 2001. |
Management’s Responsibility for Financial Statements
To Our Shareholders:
Management is responsible for the reliability of the consolidated financial statements and related notes. The financial statements were prepared in conformity with generally accepted accounting principles and include amounts based upon our estimates and assumptions, as required. The financial statements have been audited by our independent auditors, KPMG LLP, who were given free access to all financial records and related data, including minutes of the meetings of the Board of Directors and Committees of the Board. We believe that our representations to the independent auditors are valid and appropriate.
Management maintains a system of internal controls designed to provide reasonable assurance as to the reliability of the financial statements, as well as to safeguard assets from unauthorized use or disposition. The system is supported by formal policies and procedures, including an active Code of Conduct program intended to ensure employees adhere to the highest standards of personal and professional integrity. Our internal audit function monitors and reports on the adequacy of and compliance with the internal control system, and appropriate actions are taken to address significant control deficiencies and other opportunities for improving the system as they are identified. The Audit Committee of the Board of Directors consists solely of directors who are not salaried employees and who are,Wotsits brand in the opinion of the Board of Directors, free from any relationship that would interfere with the exercise of independent judgment as a committee member. The Committee meets during the year with representatives of management, including internal auditorsUnited Kingdom for $228 million in 2002 and the independent auditors to review our financial reporting process and our controls to safeguard assets. Both our independent auditors and internal auditors have free access toSoBe brand in the Audit Committee.United States for $337 million in 2001.
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Management’s Responsibility for Financial Reporting To Our Shareholders: At PepsiCo, our actions – the actions of all our associates – are governed by our Worldwide Code of Conduct. This code is clearly aligned with our stated values – a commitment to sustained growth, through empowered people, operating with responsibility and building trust. Both the code and our core values enable us to operate with integrity – both within the letter and the spirit of the law. Our code of conduct is reinforced consistently at all levels and in all countries. We have maintained strong governance policies and practices for many years. The management of PepsiCo is responsible for the objectivity and integrity of our consolidated financial statements. The Audit Committee of the Board of Directors has engaged independent auditors, KPMG LLP, to audit our consolidated financial statements and they have expressed an unqualified opinion. We are committed to providing timely, accurate and understandable information to investors. This encompasses: Maintaining a strong internal control environment with a focus on financial stewardship. Our system of internal controls includes written policies and procedures, segregation of duties and the careful selection and development of employees. The system is designed to provide reasonable assurance that transactions are executed as authorized and accurately recorded; that assets are safeguarded; and that accounting records are sufficiently reliable to permit the preparation of financial statements that conform in all material respects with accounting principles generally accepted in the United States of America. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the specified time periods. We monitor these internal controls through self-assessments and an ongoing program of internal audits. Our internal controls are reinforced through our Worldwide Code of Conduct, which sets forth our commitment to conduct business with integrity, and within both the letter and the spirit of the law. Exerting rigorous oversight of the business. We continuously review our business results and strategies. This encompasses financial discipline in our strategic and daily business decisions. Our Executive Committee is actively involved – from understanding strategies and alternatives to reviewing key initiatives and financial performance. The intent is to ensure we remain objective in our assessments, constructively challenge our approach to potential business opportunities and issues, and monitor results and controls. Engaging strong and effective Corporate Governance from our Board of Directors. We have an active, capable and diligent Board that meets the required standards for independence, and we welcome the Board’s oversight as a representative of our shareholders. Our Audit Committee comprises independent directors with the financial knowledge and experience to provide appropriate oversight. We review our critical accounting policies, financial reporting and internal control matters with them and encourage their direct communication with KPMG LLP, our independent auditors and with our General Auditor. Providing investors with financial results that are complete, transparent and understandable. The consolidated financial statements and financial information included in this report are the responsibility of management. This includes preparing the financial statements in accordance with accounting principles generally accepted in the United States of America, which require estimates based on management’s best judgment. PepsiCo has a strong history of doing what’s right. We realize that great companies are built on trust, strong ethical standards and principles. Our financial results are delivered from that culture of accountability, and we take responsibility for the quality and accuracy of our financial reporting. | | Although no cost-effective internal control system will preclude all errors and irregularities, we believe our controls as of December 28, 2002 provide reasonable assurance that the financial statements are reliable and that our assets are reasonably safeguarded.
/S/ PETER A. BRIDGMAN |
| Peter A. Bridgman Senior Vice President and Controller | | /S/ INDRA K. NOOYI |
| Indra K. Nooyi President and Chief Financial Officer | | /S/ STEVEN S REINEMUND |
| Steven S Reinemund Chairman of the Board and Chief
Executive Officer
|
Independent Auditors’ Report Board of Directors and Shareholders PepsiCo, Inc.: We have audited the accompanying Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of December 27, 2003 and December 28, 2002 and the related Consolidated Statements of Income, Cash Flows and Common Shareholders’ Equity for each of the years in the three-year period ended December 27, 2003. These consolidated financial statements are the responsibility of PepsiCo, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PepsiCo, Inc. and Subsidiaries as of December 27, 2003 and December 28, 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 27, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 6 to the consolidated financial statements, in 2003 PepsiCo, Inc. adopted the fair value method of accounting for employee stock options by retroactively restating all periods presented as described in the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure.” Furthermore, as discussed in Note 4 to the consolidated financial statements, in 2002 PepsiCo, Inc. adopted the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” KPMG LLP New York, New York February 9, 2004 Selected Financial Data (in millions except per share amounts, unaudited) | | | | | | | | | | | | Quarterly
| | First Quarter
| | | Second
Quarter
| | | Third
Quarter
| | | Fourth
Quarter
| Net revenue | | | | | | | | | | | | 2003 | | $5,530 | | | $6,538 | | | $6,830 | | | $8,073 | 2002 | | $5,311 | | | $6,119 | | | $6,300 | | | $7,382 | Gross profit | | | | | | | | | | | | 2003 | | $2,996 | | | $3,546 | | | $3,714 | | | $4,336 | 2002 | | $2,881 | | | $3,343 | | | $3,427 | | | $3,964 | Merger-related costs(a) | | | | | | | | | | | | 2003 | | $11 | | | $11 | | | $9 | | | $28 | 2002 | | $36 | | | $65 | | | $33 | | | $90 | Net income(b) | | | | | | | | | | | | 2003, as reported | | $777 | | | $1,009 | | | $1,077 | | | | Stock compensation expense | | (79 | ) | | (65 | ) | | (65 | ) | | | | | |
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| | | 2003, as restated | | $698 | | | $944 | | | $1,012 | | | $914 | | | |
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| | | 2002, as reported | | $689 | | | $875 | | | $953 | | | | Stock compensation expense | | (87 | ) | | (67 | ) | | (69 | ) | | | | | |
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| | | 2002, as restated | | $602 | | | $808 | | | $884 | | | $706 | | | |
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| | | Net income per common share – basic(b) | | | | | | | | | | | | 2003, as reported | | $0.45 | | | $0.59 | | | $0.63 | | | | Stock compensation expense | | (0.04 | ) | | (0.04 | ) | | (0.04 | ) | | | | | |
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| | | 2003, as restated | | $0.41 | | | $0.55 | | | $0.59 | | | $0.53 | | | |
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| | | 2002, as reported | | $0.39 | | | $0.49 | | | $0.54 | | | | Stock compensation expense | | (0.05 | ) | | (0.03 | ) | | (0.04 | ) | | | | | |
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| | | 2002, as restated | | $0.34 | | | $0.46 | | | $0.50 | | | $0.41 | | | |
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| | | Net income per common share – diluted(b) | | | | | | | | | | | | 2003, as reported | | $0.45 | | | $0.58 | | | $0.62 | | | | Stock compensation expense | | (0.05 | ) | | (0.04 | ) | | (0.04 | ) | | | | | |
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| | | 2003, as restated | | $0.40 | | | $0.54 | | | $0.58 | | | $0.52 | | | |
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| | | 2002, as reported | | $0.38 | | | $0.48 | | | $0.53 | | | | Stock compensation expense | | (0.05 | ) | | (0.03 | ) | | (0.03 | ) | | | | | |
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| | | 2002, as restated | | $0.33 | | | $0.45 | | | $0.50 | | | $0.40 | | | |
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| | | Cash dividends declared per common share | | | | | | | | | | | | 2003 | | $0.15 | | | $0.16 | | | $0.16 | | | $0.16 | 2002 | | $0.145 | | | $0.15 | | | $0.15 | | | $0.15 | 2003 Stock price per share(c) | | | | | | | | | | | | High | | $44.06 | | | $45.11 | | | $47.98 | | | $48.88 | Low | | $36.24 | | | $38.06 | | | $43.10 | | | $44.11 | Close | | $41.50 | | | $44.74 | | | $44.33 | | | $46.47 | 2002 Stock price per share(c) | | | | | | | | | | | | High | | $51.48 | | | $53.50 | | | $52.00 | | | $45.30 | Low | | $47.43 | | | $49.88 | | | $35.01 | | | $34.00 | Close | | $50.90 | | | $50.90 | | | $37.99 | | | $41.67 |
| (a) | | Merger-related costs (seeNote 3 to our consolidated financial statements): |
| | | | | | | | | | | | First Quarter
| | Second
Quarter
| | Third
Quarter
| | Fourth Quarter
| 2003 | | | | | | | | | Pre-tax | | $11 | | $11 | | $9 | | $28 | After-tax | | $10 | | $9 | | $6 | | $17 | Per share | | — | | — | | — | | $0.01 | | | | | | 2002 | | | | | | | | | Pre-tax | | $36 | | $65 | | $33 | | $90 | After-tax | | $30 | | $52 | | $27 | | $81 | Per share | | $0.02 | | $0.03 | | $0.02 | | $0.05 |
| (b) | | As described inNote 6Independent Auditors’ ReportBoard of Directors and Shareholders
PepsiCo, Inc.:
We have audited the accompanying Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of December 28, 2002 and December 29, 2001 and the related Consolidated Statements of Income, Cash Flows and Common Shareholders’ Equity for each of the years in the three-year period ended December 28, 2002 appearing on pages 20, 32, 33 and 37 through 66. Theseto our consolidated financial statements, arewe have restated our results to adopt the responsibilityfair value method of accounting for stock options.
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| (c) | | Represents the composite high and low sales price and quarterly closing prices for one share of PepsiCo Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting thecommon stock. Pre-merger amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PepsiCo, Inc. and Subsidiaries as of December 28, 2002 and December 29, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 4 to the consolidated financial statements, PepsiCo, Inc. in 2002 adopted the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”
KPMG LLP
New York, New York
February 6, 2003
Selected Financial Data
(in millions except per share amounts, unaudited)
Quarterly | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Net sales | | | | | | | | | 2002 | | $5,101 | | $6,178 | | $6,376 | | $7,457 | 2001(a) | | $4,700 | | $5,865 | | $5,981 | | $6,966 | Gross profit | | | | | | | | | 2002 | | $2,783 | | $3,366 | | $3,469 | | $3,997 | 2001 | | $2,556 | | $3,197 | | $3,254 | | $3,755 | Merger-related costs(b) | | | | | | | | | 2002 | | $36 | | $65 | | $33 | | $90 | 2001 | | – | | – | | $235 | | $121 | Net income | | | | | | | | | 2002 | | $651 | | $888 | | $969 | | $805 | 2001 | | $570 | | $798 | | $627 | | $667 | Net income per common share – basic | | | | | | | | | 2002 | | $0.37 | | $0.50 | | $0.55 | | $0.46 | 2001(c) | | $0.33 | | $0.45 | | $0.35 | | $0.38 | Net income per common share – diluted | | | | | | | | | 2002 | | $0.36 | | $0.49 | | $0.54 | | $0.46 | 2001(c) | | $0.32 | | $0.44 | | $0.34 | | $0.37 | Cash dividends declared per common share | | | | | | | | | 2002 | | $0.145 | | $0.15 | | $0.15 | | $0.15 | 2001(d) | | $0.14 | | $0.145 | | $0.145 | | $0.145 | 2002 Stock price per share(e) | | | | | | | | | High | | $51.48 | | $53.50 | | $52.00 | | $45.30 | Low | | $47.43 | | $49.88 | | $35.01 | | $34.00 | Close | | $50.90 | | $50.90 | | $37.99 | | $41.67 | 2001 Stock price per share(e) | | | | | | | | | High | | $49.50 | | $46.61 | | $47.99 | | $50.46 | Low | | $40.25 | | $40.90 | | $43.12 | | $45.76 | Close | | $43.85 | | $43.26 | | $47.40 | | $49.05 |
As a result of the adoption of SFAS 142 and the consolidation of SVE in 2002, the data provided above is not comparable.
(a) | | Restated to reflect the adoption of EITF 01-9 in 2002 which reduced net sales and selling, general and administrative expenses by $630 million in the first quarter, $848 million in the second quarter, $925 million in the third quarter and $1 billion in the fourth quarter. |
(b) | | Merger-related costs (Note 3): |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2002 | | | | | | | | | Pre-tax | | $36 | | $65 | | $33 | | $90 | After-tax | | $30 | | $52 | | $27 | | $81 | Per share | | $0.02 | | $0.02 | | $0.02 | | $0.05 | 2001 | | | | | | | | | Pre-tax | | – | | – | | $235 | | $121 | After-tax | | – | | – | | $231 | | $91 | Per share | | – | | – | | $0.13 | | $0.05 |
(c) | | In 2001, the net income per common share amounts prior to the effective date of the merger are calculated by (1) combining the weighted average of pre-merger PepsiCo and Quaker common stock after adjusting the number of shares of Quaker common stock, to reflect the exchange ratio of 2.3 shares of PepsiCo common stock for each share of Quaker common; and (2) dividing the combined net income by the result in (1) above. |
(d) | | Cash dividends declared per common share are those of PepsiCo prior to the effective date of the merger. |
(e) | | Represents the composite high and low sales price and quarterly closing prices for one share of PepsiCo common stock. Pre-merger amounts are those of PepsiCo prior to the effective date of the merger. |
5-Year
Five – Year Summary | | | | | | | | | | 2003
| | 2002
| | 2001
| Net revenue | | $26,971 | | $25,112 | | $23,512 | Net income | | $3,568 | | $3,000 | | $2,400 | Income per common share – basic | | $2.07 | | $1.71 | | $1.36 | Income per common share – diluted | | $2.05 | | $1.68 | | $1.33 | Cash dividends declared per common share | | $0.63 | | $0.595 | | $0.575 | Total assets | | $25,327 | | $23,474 | | $21,695 | Long-term debt | | $1,702 | | $2,187 | | $2,651 | | | | | | | | 2000
| | 1999
| | | Net revenue | | $22,337 | | $22,183 | | | Net income | | $2,543 | | $2,505 | | | Income per common share – basic | | $1.45 | | $1.41 | | | Income per common share – diluted | | $1.42 | | $1.38 | | | Cash dividends declared per common share | | $0.555 | | $0.535 | | | Total assets | | $20,757 | | $19,948 | | | Long-term debt | | $3,009 | | $3,527 | | |
As a result of the adoption of SFAS 142 and the consolidation of SVE in 2002, the bottling deconsolidation in 1999 and items identified below, the data provided above is not comparable. Includes Quaker merger-related costs of: | | | | | | | | | | 2003
| | 2002
| | 2001
| Pre-tax | | $59 | | $224 | | $356 | After-tax | | $42 | | $190 | | $322 | Per share | | $0.02 | | $0.11 | | $0.18 |
Includes restructuring and impairment charges of: | | | | | | | | | | | | 2003
| | 2001
| | 2000
| | 1999
| Pre-tax | | $147 | | $31 | | $184 | | $73 | After-tax | | $100 | | $19 | | $111 | | $45 | Per share | | $0.06 | | $0.01 | | $0.06 | | $0.02 |
| • | In 2003, we voluntarily adopted the fair value method of accounting for stock options. We selected the retroactive restatement method as described in SFAS 148,Accounting for Stock-Based Compensation – Transition and Disclosure, to adopt this accounting. Under this method we have restated our 2003, 2002 and 2001 results to recognize stock compensation expense as follows: |
| | | | | | | | | | 2003
| | 2002
| | 2001
| Pre-tax | | $407 | | $435 | | $385 | After-tax | | $293 | | $313 | | $262 | Per share | | $0.16 | | $0.17 | | $0.14 |
Fiscal years 2000 and 1999 have not been restated for this adoption. | | | 2002 | | 2001 | | 2000 |
| Net sales | | $25,112 | | $23,512 | | $22,337 | Net income | | $3,313 | | $2,662 | | $2,543 | Income per common share – basic | | $1.89 | | $1.51 | | $1.45 | Income per common share – diluted | | $1.85 | | $1.47 | | $1.42 | Cash dividends declared per common share | | $0.595 | | $0.575 | | $0.555 | Total assets | | $23,474 | | $21,695 | | $20,757 | Long-term debt | | $2,187 | | $2,651 | | $3,009 | | | | | 1999 | | 1998 | | |
| | | Net sales | | $22,183 | | $24,605 | | | Net income | | $2,505 | | $2,278 | | | Income per common share – basic | | $1.41 | | $1.27 | | | Income per common share – diluted | | $1.38 | | $1.23 | | | Cash dividends declared per common share | | $0.535 | | $0.515 | | | Total assets | | $19,948 | | $25,170 | | | Long-term debt | | $3,527 | | $4,823 | | |
As a result
| • | The 2000 fiscal year consisted of the adoption of SFAS 142 and the consolidation of SVEfifty-three weeks compared to fifty-two weeks in 2002, the bottling deconsolidation in 1999, the Tropicana acquisition late in 1998 and items identified below, the data provided above is not comparable.Net sales have been restated to reflect the adoption of EITF 01-9 in 2002 which reducedour normal fiscal year. The 53rd week increased 2000 net sales and selling, general and administrative expenses by $3.4 billion in 2001, $3.1 billion in 2000, $2.9 billion in 1999 and $2.6 billion in 1998.
Includes merger-related costs of:
| | | 2002 | | 2001 |
| Pre-tax | | $224 | | $356 | After-tax | | $190 | | $322 | Per share | | $0.11 | | $0.18 |
Includes other impairment and restructuring charges of:
| | | 2001 | | 2000 | | 1999 | | 1998 |
| Pre-tax | | $31 | | $184 | | $73 | | $482 | After-tax | | $19 | | $111 | | $45 | | $379 | Per share | | $0.01 | | $0.06 | | $0.02 | | $0.21 |
• | | The 2000 fiscal year consisted of fifty-three weeks compared to fifty-two weeks in our normal fiscal year. The 53rd week increased 2000 net salesrevenue by an estimated $294 million and net income by an estimated $44 million (or $0.02 per share). |
In 1999, includes a net gain on bottling transactions of $1.0 billion ($270 million after-tax or $0.15 per share) and a tax provision related to the PepCom transaction of $25 million ($0.01 per share), and a Quaker favorable tax adjustment of $59 million (or $0.03$0.02 per share).
In 1998, includes a tax benefit of $494 million (or $0.27 per share) related to final agreement with the IRS to settle a case related to concentrate operations in Puerto Rico.
Cash dividends per common share are those of pre-merger PepsiCo prior to the effective date of the merger.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Included in Item 7. Management’s Discussion and Analysis – Market Risk beginning on page 13.
|
In 1999, includes a net gain on bottling transactions of $1.0 billion ($245 million after-tax or $0.14 per share) and a Quaker favorable tax adjustment of $59 million (or $0.03 per share). Cash dividends per common share are those of pre-merger PepsiCo prior to the effective date of the merger. Item 7a. Quantitative and Qualitative Disclosures About Market Risk Included inItem 7. Management’s Discussion and Analysis - Our Market Risks. Item 8. Financial Statements and Supplementary Data SeeItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. Item 9.
| | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Disclosure
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Not applicable. Item 9A. Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be included in our periodic filings with the SEC. In addition, there were no significant changes in our internal controls over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect these internal controls over financial reporting during our fourth fiscal quarter of 2003. PART III Item 10. Directors and Executive Officers of the Registrant The name, age and background of each of our directors nominated for election are contained under the caption “Election of Directors” in our Proxy Statement for our 2003 Annual Meeting of Shareholders and are incorporated herein by reference. Pursuant to Item 401(b) of Regulation S-K, our executive officers are reported under the caption “Executive Officers of the Registrant” in Part I of this report. Information on the beneficial ownership reporting for our directors and executive officers is contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2003 Annual Meeting of Shareholders and is incorporated herein by reference.
Information on our audit committee financial experts is contained in our Proxy Statement for our 2003 Annual Meeting of Shareholders under the caption “Corporate Governance at PepsiCo” and is incorporated herein by reference.
We have a written code of conduct that applies to all of our employees, including our directors, chief executive officer, chief financial officer and controller. Our Worldwide Code of Conduct was distributed to all employees, is available free of charge on our website athttp://www.pepsico.com and is included as Exhibit 14 to this report.
Item 11. Executive Compensation
Information on compensation of our directors and executive officers is contained in our Proxy Statement for our 2003 Annual Meeting of Shareholders under the captions “Directors’ Compensation” and “Executive Compensation”, respectively, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Information on PepsiCo Common Stock authorized for issuance under equity compensation plans is contained in our Proxy Statement for our 2003 Annual Meeting of Shareholders under the captions “Equity Compensation Plan Information” and is incorporated herein by reference. SeeNote 7 to our consolidated financial statements for a description of our employee stock option plans.
Information on the number of shares of PepsiCo Common Stock beneficially owned by each director and by all directors and officers as a group is contained under the caption “Ownership of Common Stock by Directors and Executive Officers” in our Proxy Statement for our 2004 Annual Meeting of Shareholders and are incorporated herein by reference. Pursuant to Item 401(b) of Regulation S-K, our executive officers are reported under the caption “Our Executive Officers” in Part I of this report.
Information on the beneficial ownership reporting for our directors and executive officers is contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. Information on our audit committee financial experts is contained in our Proxy Statement for our 2004 Annual Meeting of Shareholders under the caption “Corporate Governance at PepsiCo” and is incorporated herein by reference. We have a written code of conduct that applies to all of our employees, including our directors, chief executive officer, chief financial officer and controller. Our Worldwide Code of Conduct was distributed to all employees, is available free of charge on our website athttp://www.pepsico.com and is included as Exhibit 14 to this report. Our business and affairs are overseen by our Board of Directors pursuant to the North Carolina Business Corporation Act and our By-Laws. The Board of Directors has three standing committees: Audit, Compensation and Nominating and Corporate Governance. The charters of these committees are available free of charge on our website athttp://www.pepsico.com. In 2002, the Board of Directors adopted Corporate Governance Guidelines, which were amended in 2003 in accordance with the revised New York Stock Exchange Listing Standards and rules adopted by the Securities and Exchange Commission, and are available free of charge on our website athttp://www.pepsico.com. Item 11. Executive Compensation Information on compensation of our directors and executive officers is contained in our Proxy Statement for our 2004 Annual Meeting of Shareholders under the captions “Directors’ Compensation” and “Executive Compensation,” respectively, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on PepsiCo Common Stock authorized for issuance under equity compensation plans is contained in our Proxy Statement for our 2004 Annual Meeting of Shareholders under the caption “Equity Compensation Plan Information” and is incorporated herein by reference. Information on the number of shares of PepsiCo Common Stock beneficially owned by each director and by all directors and officers as a group is contained under the caption “Ownership of Common Stock by Directors and Executive Officers” in our Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. As far as we know, no person beneficially owns more than 5% of the outstanding shares of PepsiCo Common or Convertible Preferred Stock. Item 13. Certain Relationships and Related Transactions Not applicable. Item 14. Principal Accountant Fees and Services Information on our audit committee’s pre-approval policy for audit services, and information on our principal accountant fees and services is contained in our Proxy Statement for our 2004 Annual Meeting of Shareholders under the captions “Audit Committee Report” and “Audit and Non-Audit Fees,” and is incorporated herein by reference. PART IV Item 14. Control Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. The system is supported by formal policies and procedures, including an active Code of Conduct program intended to ensure employees adhere to the highest standards of personal and professional integrity. Our internal audit function monitors and reports on the adequacy of and compliance with the internal control system, and appropriate actions are taken to address significant control deficiencies and other opportunities for improving the system as they are identified. However, no cost-effective internal control system will preclude all errors and irregularities, and management is necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities that we do not control or manage. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our chief executive officer and chief financial officer, within 90 days prior to the filing date of this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly effect these controls subsequent to the date of their evaluation.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K | (a) | | 1. Financial Statements |
The following consolidated financial statements of PepsiCo, Inc. and its affiliates are included hereherein by reference to Management’s Discussions and Analysis for the year ended December 28, 2002, included asItem 7, at the pages indicated on theindex appearing on page 9:in Item 7. Management’s Discussion and Analysis: Consolidated Statement of Income –- Fiscal years ended December 28, 2002, December 29, 2001, and December 30, 2000, Consolidated Statement of Cash Flows – Fiscal years ended December 28, 2002, December 29, 2001, and December 30, 2000,
Consolidated Balance Sheet –27, 2003, December 28, 2002 and December 29, 2001,
Consolidated Statement of Changes in Shareholders’ EquityCash Flows –- Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001, Consolidated Balance Sheet - December 27, 2003 and December 30, 2000,28, 2002, Consolidated Statement of Common Shareholders’ Equity - Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001, Notes to the Consolidated Financial Statements, and Independent Auditors’ Report 2. Exhibits
SeeIndex to Exhibits on page E-1. | | 1. | | On October 8, 2002,7, 2003, we filedfurnished a Current Report on Form 8-K pursuant toItem 12 Results of Operations and Financial Condition attaching a press release announcing our earnings for the 12 and 36 weeks ended September 7, 2002.6, 2003. |
| | 2. | | On October 15, 2002,20, 2003, we filed a Current Report on Form 8-K attachingpursuant toItem 5.Other Events and Required FD Disclosure incorporating by reference the Certificationfinancial statements of Chief Executive Officer pursuantBottling Group, LLC (“Bottling Group”) for the 12 and 36 week periods ended September 6, 2003 and September 7, 2002, which are included in Bottling Group’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (“SEC”) on July 28, 2003 and any amendments to Section 906 ofsuch statements filed with the Sarbanes-Oxley Act of 2002, and the Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.SEC. |
| | 3. | | On October 16, 2002,27, 2003, we filed a Current Report on Form 8-K/A to amend Item 9 – Regulation FD DisclosureExhibit 15 - Accountants’ Acknowledgment of our Current Report on Form 8-K filed October 15, 2002.20, 2003. |
| 4. | | On November 5, 2003, we furnished a Current Report on Form 8-K pursuant toItem 9 Regulation FD Disclosure attaching a press release confirming earlier guidance. |
| | 4.5. | | On December 3, 2002,November 6, 2003, we filed a Current Report on Form 8-K pursuant toItem 5 Other Events and Required FD Disclosureattaching a press release reaffirming fourth quarterregarding a Securities and Exchange Commission notification received by Frito-Lay, Inc. |
| 6. | | On November 21, 2003, we filed a Current Report on Form 8-K pursuant toItem 5 Other Events and Required FD Disclosure announcing the resignation of Peter Foy, an independent director of PepsiCo. |
| 7. | | On December 2, 2003, we furnished a Current Report on Form 8-K pursuant toItem 9 Regulation FD Disclosureattaching a press release providing a year-end 2002 earnings per share targetsassessment, the 2004 outlook and announcing the sale of Quaker’s bagged cereal business.strategic steps to continue PepsiCo’s growth record. |
Item 16. Principal Accountant Fees and Services
Information on our principal accountant fees and services is contained in our Proxy Statement for our 2003 Annual Meeting of Shareholders under the captions “Audit Committee Report,” and is incorporated herein by reference.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, PepsiCo has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 6, 20033, 2004 PEPSICO, INC.
| | | | | PepsiCo, Inc. | | | By: | | /s/ STEVENSteven S REINEMUNDReinemund | | |
| | | | Steven S Reinemund | | | Chairman of the Board and | | | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of PepsiCo and in the capacities and on the date indicated. | | | | | SIGNATURE
| | TITLE
| | DATE
| | | | /s/ STEVEN S REINEMUND
Steven S Reinemund | | Chairman of the Board and Chief Executive Officer | | March 6, 20033, 2004 |
| | | | Steven S Reinemund | | | | | | | /s/ INDRA K. NOOYI
Indra K. Nooyi | | President and Chief Financial Officer | | March 6, 20033, 2004 |
| | | | Indra K. Nooyi | | | | | | | /s/ PETER A. BRIDGMAN
Peter A. Bridgman | | Senior Vice President and Controller (Principal (Principal Accounting Officer) | | March 6, 20033, 2004 |
| | | | Peter A. Bridgman | | | | | | | /s/ JOHN F. AKERS
John F. Akers | | Director | | March 6, 20033, 2004 |
| | | | | John F. Akers | | | | | | | | /s/ ROBERT E. ALLEN
Robert E. Allen | | Director | | March 6, 20033, 2004 |
| | | | | /s/ ROGER A. ENRICO
Roger A. EnricoRobert E. Allen
| | Director
| | March 6, 2003
|
SIGNATURE
| | TITLE
| | DATE
| | | | /s/ PETER FOY
Peter Foy
| | Director
| | March 6, 2003
| | /s/ RAY L. HUNT
Ray L. Hunt | | Director | | March 6, 20033, 2004 |
| | | | | Ray L. Hunt | | | | | | | | /s/ ARTHUR C. MARTINEZ
Arthur C. Martinez | | Director | | March 6, 20033, 2004 |
| | | | | Arthur C. Martinez | | | | | | | | /s/ FRANKLIN D. RAINES
Franklin D. Raines | | Director | | March 6, 20033, 2004 |
| | | | | Franklin D. Raines | | | | | | | | /s/ SHARON PERCY ROCKEFELLER
Sharon Percy Rockefeller | | Director | | March 6, 20033, 2004 |
| | | | | Sharon Percy Rockefeller | | | | | | | | /s/ FRANKLIN A. THOMAS James J. Schiro | | Director | | March 3, 2004 |
| | | | | James J. Schiro | | | | | | | | /s/ Franklin A. Thomas | | Director | | March 6, 20033, 2004 |
| | | | | Franklin A. Thomas | | | | | | | | /s/ CYNTHIA M. TRUDELL
Cynthia M. Trudell | | Director | | March 6, 20033, 2004 |
| | | | | Cynthia M. Trudell | | | | | | | | /s/ SOLOMON D. TRUJILLO
Solomon D. Trujillo | | Director | | March 6, 20033, 2004 |
| | | | | Solomon D. Trujillo | | | | | | | | /s/ DANIEL VASELLA
Daniel Vasella | | Director | | March 6, 20033, 2004 |
CERTIFICATION
I,Steven S Reinemund certify that:
1. | | I have reviewed this annual report on Form 10-K of PepsiCo, Inc. (PepsiCo); |
2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
3. | | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of PepsiCo as of, and for, the periods presented in this annual report; |
4. | | PepsiCo’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for PepsiCo and have: |
| a) | | Designed such disclosure controls and procedures to ensure that material information relating to PepsiCo, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | | Evaluated the effectiveness of PepsiCo’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | | PepsiCo’s other certifying officer and I have disclosed, based on our most recent evaluation, to PepsiCo’s auditors and audit committee of PepsiCo’s Board of Directors (or persons performing equivalent functions): |
| a) | | All significant deficiencies in the design or operation of internal controls which could adversely affect PepsiCo’s ability to record, process, summarize and report financial data and have identified for PepsiCo’s auditors any material weaknesses in internal controls; and |
| b) | | Any fraud, whether or not material, that involves management or other employees who have a significant role in PepsiCo’s internal controls; and |
6. | | PepsiCo’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 6, 2003
| | | | /s/ Steven S Reinemund
|
| | | | | | Steven S Reinemund
Chairman and Chief Executive Officer
|
CERTIFICATION
I,Indra K. Nooyicertify that:
1. | | I have reviewed this annual report on Form 10-K of PepsiCo, Inc. (PepsiCo); |
2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
3. | | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of PepsiCo as of, and for, the periods presented in this annual report; |
4. | | PepsiCo’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for PepsiCo and have: |
| a) | | Designed such disclosure controls and procedures to ensure that material information relating to PepsiCo, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | | Evaluated the effectiveness of PepsiCo’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | | PepsiCo’s other certifying officer and I have disclosed, based on our most recent evaluation, to PepsiCo’s auditors and audit committee of PepsiCo’s Board of Directors (or persons performing equivalent functions): |
| a) | | All significant deficiencies in the design or operation of internal controls which could adversely affect PepsiCo’s ability to record, process, summarize and report financial data and have identified for PepsiCo’s auditors any material weaknesses in internal controls; and |
| b) | | Any fraud, whether or not material, that involves management or other employees who have a significant role in PepsiCo’s internal controls; and |
6. | | PepsiCo’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 6, 2003Daniel Vasella
| | | | /s/ Indra K. Nooyi
| | | | | | | Indra K. Nooyi
President and Chief Financial Officer
|
INDEX TO EXHIBITS ITEM 14(a)(3) | | | EXHIBIT
| | | | 3.1 | | Amended and Restated Articles of Incorporation of PepsiCo, Inc., which are incorporated herein by reference to Exhibit 4.1 to PepsiCo, Inc.’s Registration Statement on Form S-8 (Registration No. 333-66632) | | | 3.2 | | By-laws of PepsiCo, Inc., as amended on August 2, 2001, which are incorporated herein by reference to Exhibit 4.2 to PepsiCo, Inc.’s Registration Statement on Form S-8 (Registration No. 333-66632). January 29, 2004. | | | 4 | | PepsiCo, Inc. agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any instrument defining the rights of holders of long-term debt of PepsiCo, Inc. and all of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed with the Securities and Exchange Commission. | | | 10.1 | | Description of PepsiCo, Inc. 1988 Director Stock Plan, which is incorporated herein by reference to Post-Effective Amendment No. 6 to PepsiCo’s Registration Statement on Form S-8 (Registration No. 33-22970). | | | 10.2 | | PepsiCo, Inc. 1987 Incentive Plan (the “1987 Plan”), as amended and restated, effective as of October 1, 1999, which is incorporated herein by reference to Exhibit 10.2 to PepsiCo’s Annual Report on Form 10-K for the fiscal year ended December 25, 1999. | | | 10.3
10.6 | | Operating Guideline No. 1 under the 1987 Plan, as amended through July 25, 1991, which is incorporated by reference to Exhibit 10(d) to PepsiCo’s Annual Report on Form 10-K for the fiscal year ended December 28, 1991.
| | 10.4
| | Operating Guideline No. 2 under the 1987 Plan and the Plan, as amended through January 22, 1987, which is incorporated herein by reference to Exhibit 28(b) to PepsiCo’s Registration Statement on Form S-8 (Registration No. 33-19539).
| | 10.6
| | PepsiCo, Inc. 1994 Long-Term Incentive Plan, as amended and restated, effective as of October 1, 1999, which is incorporated herein by reference to Exhibit 10.6 to PepsiCo’s Annual Report on Form 10-K for the fiscal year ended December 25, 1999. | | | 10.7 | | PepsiCo, Inc. Executive Incentive Compensation Plan, which is incorporated herein by reference to Exhibit B to PepsiCo’s Proxy Statement for its 1994 Annual Meeting of Shareholders. | | | 10.8 | | Amended and Restated PepsiCo Executive Income Deferral Program which is incorporated herein by reference to PepsiCo’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997. | | | 10.9 | | Restated PepsiCo Pension Equalization Plan, which is incorporated herein by reference to PepsiCo’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997. |
EXHIBIT
| | | 10.10 | | | | 10.10
| | Agreement and Plan of Merger dated as of December 2, 2000 among PepsiCo, Inc., BeverageCo, Inc., a wholly owned subsidiary of PepsiCo, and The Quaker Oats Company (Schedules and Exhibits omitted), which is incorporated herein by reference to PepsiCo’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 7, 2000.
| | 10.11
| | Stock Option Agreement dated as of December 2, 2000 between PepsiCo, Inc. and The Quaker Oats Company, which is incorporated herein by reference to PepsiCo’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 7, 2000.
| | 10.12
| | Employment Agreement dated as of December 2, 2000 between The Quaker Oats Company, PepsiCo, Inc. and Robert S. Morrison, which is incorporated herein by reference to PepsiCo’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2002. | | | 10.13
10.11 | | PepsiCo SharePower Stock Option Plan (as amended and restated, effective August 3, 2001) which is incorporated by reference to PepsiCo’s Registration Statement on Form S-8 (Registration No. 333-109513). | | | 10.14
10.12 | | PepsiCo, Inc. 1995 Stock Option Incentive Plan (as amended and restated, effective August 2, 2003)2001) which is incorporated by reference to PepsiCo’s Registration Statement on Form S-8 (Registration No. 333-109514). |
| | | | | 10.15
10.13 | | The Quaker Long Term Incentive of 1990 which is incorporated by reference to PepsiCo’s Registration Statement on Form S-8 (Registration No. 333-66632). | | | | 10.14 | | The Quaker Long Term Incentive of 1999 which is incorporated by reference to PepsiCo’s Registration Statement on Form S-8 (Registration No. 333-66632). | | | | 10.15 | | PepsiCo, Share AwardInc. 2003 Long-Term Incentive Plan (effective May 1, 2002) which is incorporated herein by reference to PepsiCo’s Form S-8 (Registration No. 333-87526)333-109509) filed with the Securities and Exchange Commission on May 3, 2002.October 6, 2003. | | | 10.16
12 | | The Quaker Long Term Incentive of 1990.
| | 10.17
| | The Quaker Long Term Incentive of 1999.
| | 12
| | Computation of Ratio of Earnings to Fixed Charges. | | | 14 | | Worldwide Code of Conduct | | | 21 | | Subsidiaries of PepsiCo, Inc. | | | 23 | | Report and Consent of KPMG LLP.
| | | 24 | | Power of Attorney executed by Steven S Reinemund, Indra K. Nooyi, Peter A. Bridgman, John F. Akers, Robert E. Allen, Peter Foy, Ray L. Hunt, Arthur C. Martinez, Franklin D. Raines, Sharon Percy Rockefeller, James J. Shiro,Schiro, Franklin A. Thomas, Cynthia M. Trudell, Solomon D. Trujillo and Daniel Vasella. | | | | 31 | | Certification of our Chief Executive Officer and our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 32 | | Certification of our Chief Executive Officer and our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
E-2 |
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