No. 1-1183
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1994
PepsiCo, Inc.
Incorporated in North Carolina
Purchase, New York 10577-1444
(914) 253-2000
13-1584302
(I.R.S. Employer Identification No.)
_________________________
Securities registered pursuant to Section 12(b) of the Securities
Exchange Act of 1934:
Title of Each Name of Each Exchange
Class on Which Registered
________________ _____________________
Capital Stock, par value 1-2/3 cents New York and Chicago Stock
per share Exchanges
7-5/8% Notes due 1998 New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of PepsiCo Capital Stock held by
nonaffiliates of PepsiCo as of March 10, 1995 was
$31,315,121,153.
The number of shares of PepsiCo Capital Stock
outstanding as of March 10, 1995 was 787,801,790.
Documents of Which Portions Parts of Form 10-K into
Are Incorporated by Reference Which Portion of Documents
_____________________________ __________________________
Proxy Statement for PepsiCo's
May 3, 1995
Annual Meeting of Shareholders III
1
PART I
Item 1. Business
PepsiCo, Inc. (the "Company") was incorporated in Delaware
in 1919 and was reincorporated in North Carolina in 1986. Unless
the context indicates otherwise, when used herein the term
"PepsiCo" shall mean the Company and its various divisions and
subsidiaries. PepsiCo is engaged in the following domestic and
international businesses: beverages, snack foods and
restaurants.
Beverages
PepsiCo's beverage business consists of Pepsi-Cola North
America ("PCNA") and Pepsi-Cola International ("PCI").
PCNA manufactures and sells beverages, primarily soft drinks
and soft drink concentrates, in the United States and Canada.
PCNA sells its concentrates to licensed independent and company-
owned bottlers ("Pepsi-Cola bottlers") and to joint ventures in
which PepsiCo participates. Under appointments from PepsiCo,
bottlers manufacture, sell and distribute, within defined
territories, carbonated soft drinks and syrups bearing trademarks
owned by PepsiCo, including PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW,
SLICE, MUG and, within Canada, 7UP and DIET 7UP (the foregoing
are sometimes referred to as "Pepsi-Cola beverages"). The
Pepsi/Lipton Tea Partnership, a joint venture of PCNA and Thomas
J. Lipton Co., develops and sells tea concentrate to Pepsi-Cola
bottlers and develops and markets ready-to-drink tea products
under the LIPTON trademark. Such products are distributed by
Pepsi-Cola bottlers throughout the United States. A joint
venture between PCNA and Ocean Spray Cranberries, Inc. develops
new juice products under the OCEAN SPRAY trademark. Pursuant to
a separate distribution agreement, Pepsi-Cola bottlers distribute
single-serve sizes of OCEAN SPRAY juice products throughout the
United States.
Pepsi-Cola beverages are manufactured in approximately 200
plants located throughout the United States and Canada. PCNA
operates approximately 65 plants and manufactures, sells and
distributes beverages throughout approximately 160 licensed
territories, accounting for approximately 56% of the Pepsi-Cola
beverages sold in the United States and Canada. Approximately
135 plants are operated by independent licensees or joint
ventures in which PCNA participates, which manufacture, sell and
distribute approximately 44% of the Pepsi-Cola beverages sold in
the United States and Canada. PCNA has a minority interest in 6
of these licensees, comprising approximately 70 licensed
territories.
PCI manufactures and sells soft drinks and soft drink
concentrates outside the United States and Canada. PCI sells its
concentrates to Pepsi-Cola bottlers and to joint ventures in
which PepsiCo participates. Under appointments from PepsiCo,
bottlers manufacture, sell and distribute, within defined
territories, Pepsi-Cola beverages bearing PEPSI-COLA, DIET PEPSI,
MIRINDA, PEPSI MAX, 7UP, DIET 7UP and other trademarks. There
are approximately 530 plants outside the United States and Canada
bottling PepsiCo's beverage products. These products are
available in 195 foreign countries and territories. Principal
international markets include Mexico, Saudi Arabia, Argentina,
Spain, the United Kingdom, Thailand, Venezuela, Brazil and China.
PCNA and PCI make programs available to assist licensed
bottlers in servicing markets, expanding operations and improving
production methods and facilities. PCNA and PCI also offer
assistance to bottlers in the distribution, advertising and
marketing of their products and offer sales assistance through
special merchandising and promotional programs and by training
bottler personnel. PCNA and PCI maintain control over the
composition and quality of beverages sold under PepsiCo
trademarks.
2
Snack Foods
PepsiCo's snack food business consists of Frito-Lay North
America ("Frito-Lay") and PepsiCo Foods International ("PFI").
Frito-Lay manufactures and sells a varied line of snack
foods throughout the United States and Canada, including FRITOS
brand corn chips, LAY'S (in the United States) and RUFFLES brand
potato chips, DORITOS and TOSTITOS brands tortilla chips,
CHEE.TOS brand cheese flavored snacks, ROLD GOLD brand pretzels,
SMARTFOOD brand cheese flavored popcorn and SUNCHIPS brand
multigrain snacks.
Frito-Lay's products are transported from its manufacturing
plants to major distribution centers throughout the United States
and Canada, principally by company-owned trucks. Frito-Lay
utilizes a "store-door-delivery" system, whereby its 14,600
person sales force delivers the snacks directly to the store
shelf. This system permits Frito-Lay to work closely with
approximately 466,000 retail trade customers weekly and to be
responsive to their needs. Frito-Lay believes this form of
distribution is a valuable marketing tool and is essential for
the proper distribution of products with a short shelf life.
PFI manufactures and markets snack foods outside the United
States and Canada through company-owned facilities and joint
ventures. On most of the European continent, PepsiCo's snack
food business consists of Snack Ventures Europe, a joint venture
between PepsiCo and General Mills, Inc., in which PepsiCo owns a
60% interest. Many of PFI's snack food products, such as
SABRITAS brand potato chips in Mexico, are similar in taste to
Frito-Lay snacks sold in the United States and Canada. PFI also
sells a variety of snack food products which appeal to local
tastes including, for example WALKERS CRISPS, which are sold in
the United Kingdom, and GAMESA cookies and SONRIC'S candies,
which are sold in Mexico. In addition, RUFFLES, CHEE.TOS,
DORITOS, FRITOS and SUNCHIPS brand snack foods have been
introduced to international markets. Principal international
markets include Mexico, the United Kingdom, Spain, Brazil,
Poland, the Netherlands, France, and Australia.
Restaurants
PepsiCo's worldwide restaurant business principally consists
of Pizza Hut, Inc. ("Pizza Hut"), Taco Bell Corp. ("Taco Bell"),
KFC Corporation ("KFC") and PepsiCo Restaurants International
("PRI").
Pizza Hut is engaged principally in the operation,
development and franchising of a system of casual full service
family restaurants, delivery/carryout units and kiosks operating
under the name PIZZA HUT. The full service restaurants serve
several varieties of pizza as well as pasta, salads and
sandwiches. Pizza Hut (through its subsidiaries and affiliates)
operates approximately 5,100 PIZZA HUT restaurants,
delivery/carryout units and other outlets in the United States
and approximately 240 in Canada. Franchisees operate
approximately 2,650 additional domestic restaurants,
delivery/carryout units and other outlets in the United States
and 225 in Canada. Licensees operate approximately 650 kiosk
outlets in the United States. These restaurants and units are
located in all 50 states and throughout Canada.
Taco Bell is engaged principally in the operation,
development and franchising of a system of fast-service
restaurants serving carryout and dine-in moderately priced
Mexican-style food, including tacos, burritos, taco salads and
nachos and operating under the name TACO BELL. Taco Bell
(through its subsidiaries and affiliates) operates approximately
3,200 TACO BELL outlets in the United States and 70 in Canada.
Franchisees operate approximately 1,500 additional restaurants in
the United States. Licensees operate approximately 930 special
concept outlets in the United States and 30 in Canada.
KFC is engaged principally in the operation, development and
franchising of a system of carryout and dine-in restaurants
featuring chicken and operating under the names KENTUCKY FRIED
CHICKEN and/or KFC. KFC (through its subsidiaries and/or
affiliates) operates approximately 2,000 restaurants in the
United States and 250 in Canada. Franchisees operate
approximately 3,000 additional restaurants in the United States
and 600 in Canada. Licensees operate approximately 100 outlets
in the United States. KFC restaurants are located in 48 states
and throughout Canada.
3
PRI is engaged principally in the operation and development
of casual dining and fast-service restaurants, delivery units and
kiosks which sell PIZZA HUT, KFC and, to a lesser extent, TACO
BELL products outside the United States and Canada. PRI operates
approximately 800 PIZZA HUT restaurants, delivery/carryout units
and kiosks, franchisees operate approximately 1,200 units, and
joint ventures in which PRI participates operate approximately
460 units. PIZZA HUT units are located in a total of 83 foreign
countries and territories (exclusive of Canada), and principal
markets include Australia, the United Kingdom, Spain, Brazil,
Mexico and South Korea. PRI also operates approximately 850 KFC
restaurants and kiosks, franchisees operate approximately 2,150
restaurants and kiosks, and joint ventures in which PRI
participates operate approximately 400 restaurants and kiosks.
KFC units are located in 71 foreign countries and territories
(exclusive of Canada), and principal markets include Japan,
Australia, the United Kingdom, South Africa, Mexico and Malaysia.
PRI also operates approximately 20 TACO BELL outlets, and
franchisees operate approximately 35 outlets, in a total of 15
foreign countries and territories (exclusive of Canada).
PepsiCo also owns, operates, or participates as a joint
venturer in a number of other restaurant concepts in the United
States. Pizza Hut operates approximately 150 D'ANGELO SANDWICH
SHOPS, and franchisees operate approximately 50 additional units.
Pizza Hut or franchisees also operate approximately 25 EAST SIDE
MARIO'S restaurants. Taco Bell operates approximately 135 HOT 'N
NOW units, and franchisees operate approximately 40 units. Taco
Bell also operates approximately 50 CHEVYS Mexican restaurants.
PepsiCo participates in a joint venture which operates
approximately 70 CALIFORNIA PIZZA KITCHEN restaurants.
PFS, a division of PepsiCo, is engaged in the distribution
of food, supplies and equipment to company-owned, franchised and
licensed PIZZA HUT, TACO BELL and KFC restaurants in the United States,
Australia, Canada, Mexico, Puerto Rico and Poland.
Competition
All of PepsiCo's businesses are highly competitive.
PepsiCo's beverages and snack foods compete domestically and
internationally with widely distributed products of a number of
major companies that have plants in many of the areas PepsiCo
serves, as well as with private label soft drinks and snack foods
and with the products of local and regional manufacturers.
PepsiCo's restaurants compete domestically and internationally
with other restaurants, restaurant chains, food outlets and home
delivery operations. PFS competes domestically and
internationally with other food distribution companies. For all
of PepsiCo's industry segments, the main areas of competition are
price, quality and variety of products, and customer service.
Employees
At December 31, 1994, PepsiCo employed, subject to seasonal
variations, approximately 471,000 persons (including 282,000 part-
time employees), of whom approximately 340,000 (including 228,000
part-time employees) were employed within the United States.
PepsiCo believes that its relations with employees are generally
good.
Raw Materials and Other Supplies
The principal materials used by PepsiCo in its beverage,
snack food and restaurant businesses are corn sweeteners, sugar,
aspartame, flavorings, vegetable and essential oils, potatoes,
corn, flour, tomato products, pinto beans, lettuce, cheese,
butter, beef, pork and chicken products, seasonings and packaging
materials. Since PepsiCo relies on trucks to move and distribute
many of its products, fuel is also an important commodity.
PepsiCo employs specialists to secure adequate supplies of many
of these items and has not experienced any significant continuous
shortages. Prices paid by PepsiCo for such items are subject to
fluctuation. When prices increase, PepsiCo may or may not pass
on such increases to its customers. Generally, when PepsiCo has
decided to pass along price increases, it has done so
successfully. There is no assurance that PepsiCo will be able to
do so in the future.
Governmental Regulations
The conduct of PepsiCo's businesses, and the production,
distribution and use of many of its products, are subject to
various federal laws, such as the Food, Drug and Cosmetic Act,
the Occupational Safety and Health Act
4
and the Americans with Disabilities Act. The conduct of PepsiCo's
businesses is also subject to local, state and foreign laws.
Patents, Trademarks, Licenses and Franchises
PepsiCo owns numerous valuable trademarks which are
essential to PepsiCo's worldwide businesses, including PEPSI-
COLA, PEPSI, DIET PEPSI, PEPSI MAX, MOUNTAIN DEW, SLICE, MUG, 7UP
and DIET 7UP (outside the United States), MIRINDA, FRITO-LAY,
DORITOS, RUFFLES, LAY'S, FRITOS, CHEE.TOS, SANTITAS, SUNCHIPS,
TOSTITOS, ROLD GOLD, GRANDMA'S, SMARTFOOD, SABRITAS, WALKERS,
PIZZA HUT, TACO BELL, KENTUCKY FRIED CHICKEN and KFC. Trademarks
remain valid so long as they are used properly for identification
purposes, and PepsiCo emphasizes correct use of its trademarks.
PepsiCo has authorized (through licensing or franchise
arrangements) the use of some of its trademarks in such contexts
as Pepsi-Cola bottling appointments, snack food joint ventures
and wholly licensed operations and Pizza Hut, Taco Bell and KFC
franchise agreements. In addition, PepsiCo licenses the use of
its trademarks on collateral products for the primary purpose of
enhancing brand awareness.
PepsiCo either owns or has licenses to use a number of
patents which relate to certain of its products and the processes
for their production and to the design and operation of various
equipment used in its businesses. Some of these patents are
licensed to others.
Research and Development
PepsiCo spent approximately $152 million, $113 million and
$102 million on research and development activities during the
years 1994, 1993 and 1992, respectively.
Environmental Matters
PepsiCo continues to make expenditures in order to comply
with federal, state, local and foreign environmental laws and
regulations, which expenditures have not been material with
respect to PepsiCo's capital expenditures, net income or
competitive position.
Business Segments
Information as to net sales, operating profits and
identifiable assets for each of PepsiCo's industry segments,
restaurant chains and major geographic areas of operations, as
well as capital spending, acquisitions and investments in
affiliates, amortization of intangible assets and depreciation
expense for each industry segment and restaurant chain, for 1994,
1993 and 1992 is contained in Item 8 "Financial Statements and
Supplementary Data" in Note 2 on page F-9.
Item 2. Properties
Beverages
PepsiCo operates approximately 105 plants throughout the
world in which beverage concentrates and syrups are manufactured,
or beverages are bottled, or both, of which approximately 95 are
owned and 10 are leased. Joint ventures in which PepsiCo
participates operate approximately 85 plants and distribution
operations. In addition, PepsiCo operates approximately 370
warehouses or offices for its beverage business in the United
States and Canada, of which approximately 285 are owned and
approximately 85 are leased.
The concentrate or syrup manufacturing facilities owned by
PepsiCo are located in Argentina, Canada, China, India, Ireland,
Japan, Mexico, Pakistan, the Philippines, Puerto Rico, Thailand,
Turkey, the United States, Uruguay and Venezuela. PepsiCo owns
bottling plants in Canada, the Czech Republic, Germany, Greece,
Hungary, India, Japan, Mexico, Spain and the United States and
leases bottling plants in the United States. Company-owned
distribution operations are located in the Czech Republic,
France, Hungary, Poland, Russia and Slovakia. Joint
5
ventures in which PepsiCo participates operate plants located in
Argentina, Australia, The Bahamas, Brazil, Chile, China, Hong
Kong, Indonesia, Japan, Kampuchea, Mexico, Myanmar, Nepal, New Zealand,
the Philippines, Poland, Russia, Slovenia, South Africa,
Thailand, the United Kingdom, Uruguay and Vietnam.
PepsiCo owns a research and technical facility in Valhalla,
New York, for its beverage businesses. PepsiCo also owns the
headquarters facilities for its beverage and international snack
food, businesses in Somers, New York.
Snack Foods
Frito-Lay operates 43 food manufacturing and processing
plants in the United States and Canada, of which 41 are owned and
2 are leased. PepsiCo also operates plants located in Argentina,
Australia, Brazil, Chile, China, the Dominican Republic, Ecuador,
Estonia, India, Japan, Mexico, Poland, Puerto Rico, Turkey, the
United Kingdom, Uruguay and Venezuela while joint ventures in
which PepsiCo participates operate plants located in Belgium,
China, Cyprus, Egypt, France, Greece, Indonesia, Italy, Korea,
the Netherlands, Poland, Portugal, Spain, Taiwan and Thailand.
In addition, Frito-Lay owns approximately 185 warehouses and
distribution centers and leases approximately 30 warehouses and
distribution centers for storage of food products in the United
States and Canada. Approximately 1,600 smaller warehouses and
storage spaces located throughout the United States and Canada
are leased or owned. Frito-Lay owns its headquarters building
and a research facility in Plano, Texas. Frito-Lay also leases
offices in Dallas, Texas and leases or owns sales/regional
offices throughout the United States.
Restaurants
Through Pizza Hut, Taco Bell, KFC and PRI, PepsiCo owns
approximately 3,800 and leases approximately 6,700 restaurants,
delivery/carryout units and other outlets in the United States,
and owns or leases approximately 2,220 additional units outside
the United States. Joint ventures in which PepsiCo participates
operate approximately 860 units outside the United States. Pizza
Hut owns manufacturing facilities in Wichita, Kansas and owns its
corporate headquarters and leases certain additions to the
building in Wichita, Kansas. Taco Bell leases its corporate
headquarters and certain additions to the building in Irvine,
California. KFC owns a research facility and its corporate
headquarters building in Louisville, Kentucky. PFS owns 1 and
leases 22 distribution centers, 2 manufacturing plants and 4
offices in the United States. PFS owns 1 and leases 4
distribution centers outside of the United States.
General
The Company owns its corporate headquarters buildings in
Purchase, New York.
With a few exceptions, leases of plants in the United States
and Canada are on a long-term basis, expiring at various times to
the year 2088, with options to renew for additional periods.
Most international plants are leased for varying and usually
shorter periods, with or without renewal options. PIZZA HUT,
TACO BELL and KFC restaurants which are not owned are generally
leased for initial terms of 15 or 20 years, and generally have
renewal options, while PIZZA HUT delivery/carryout units
generally are leased for significantly shorter initial terms with
shorter renewal options.
The Company believes that its properties and those of its
subsidiaries and divisions are in good operating condition and
are suitable for the purposes for which they are being used.
Item 3. Legal Proceedings
PepsiCo is subject to various claims and contingencies
related to lawsuits, taxes, environmental and other matters
arising out of the normal course of business. Management
believes that the ultimate liability, if any, in excess of
amounts already provided arising from such claims or
contingencies is not likely to have a material adverse effect on
PepsiCo's annual results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Stockholders
Not applicable.
6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Stock Trading Symbol - PEP
Stock Exchange Listings - The New York Stock Exchange is the
principal market for PepsiCo Capital Stock, which is also listed
on the Chicago, Basel, Geneva, Zurich, Amsterdam and Tokyo Stock
Exchanges.
Shareholders - At year-end 1994, there were approximately
168,000 shareholders of record.
Dividend Policy - Quarterly cash dividends are usually
declared in November, February, May and July and paid at the
beginning of January and the end of March, June and September.
The dividend record dates for 1995 will be March 10, June 9, September 8
and December 8. Quarterly cash dividends have been paid since PepsiCo
was formed in 1965, and dividends per share have increased for 22
consecutive years.
Consistent with PepsiCo's current payout target of
approximately one-third of the prior year's income from ongoing
operations, the 1994 dividends declared represented 34% of 1993
income from ongoing operations.
Dividends Declared Per Share (in cents)
Quarter 1994 1993
1 16 13
2 18 16
3 18 16
4 18 16
Total 70 61
Stock Prices - The high, low and closing prices for a share
of PepsiCo Capital Stock on the New York Stock Exchange, as
reported by The Dow Jones News/Retrieval Service, for each fiscal
quarter of 1994 and 1993 were as follows (in dollars):
1994 High Low Close
Fourth Quarter 37 3/8 32 1/4 36 1/4
Third Quarter 34 5/8 29 1/4 33 3/4
Second Quarter 37 5/8 29 7/8 31 1/8
First Quarter 42 1/2 35 3/4 37 5/8
1993 High Low Close
Fourth Quarter 42 1/8 37 5/8 41 7/8
Third Quarter 40 1/8 34 5/8 39
Second Quarter 43 5/8 34 1/2 36 1/2
First Quarter 43 3/8 38 1/2 42
Item 6. Selected Financial Data
Included on pages F-42 through F-48.
7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Analysis - Overview
To enhance understanding of PepsiCo's financial performance,
the various components of Management's Analysis are presented
near the pertinent financial statements. Accordingly, in
addition to this overview, separate analyses of the results of
operations, financial condition and cash flows appear on pages
11, 12 and 14. respectively. Also, the analysis of each industry
segment's net sales and operating profit performance begins on
pages 15, 19 and 22.
Marketplace Actions
PepsiCo's domestic and international businesses operate
in markets that are highly competitive and subject to global and
local economic conditions including inflation, commodity price
and currency fluctuations and governmental actions. In Mexico,
for example, our businesses have benefited in past years from
improving conditions. Conversely, the significant devaluation of
the Mexican peso at the end of 1994 and continuing into 1995 will
not only negatively impact reported earnings from Mexico due to
translation, but is expected to create a much less favorable
economic climate in the country. Other examples include risks
associated with political instability and its related
dislocations in countries where PepsiCo operates and possible
employee benefit or minimum wage legislation in the U.S. and
elsewhere, increasing the cost of providing benefits and
compensation to employees. PepsiCo's operating and investing
strategies are designed, where possible, to mitigate these
factors through aggressive actions on several fronts including:
(a) enhancing the appeal and value of its products through brand
promotion, product innovation, quality improvement and prudent
pricing actions; (b) providing better service to customers; (c)
increasing worldwide availability of its products; (d) acquiring
businesses and forming alliances to increase market presence and
utilize resources more efficiently; and (e) containing costs
through efficient and effective purchasing, manufacturing,
distribution and administrative processes.
Restructurings
Restructuring actions realign resources for more
efficient and effective execution of operating strategies. As a
result, PepsiCo continually considers and executes restructuring
actions that vary in size and impact, for example, from a minor
sales force reorganization at a local facility to a significant
organizational and process redesign affecting an entire operating
division. The resulting cost savings or profits from increased
sales are reinvested in the business to increase PepsiCo's
shareholder value. Major restructuring actions announced in 1992
and now underway or completed in the beverage and international
snack food segments resulted in charges totaling $193.5 million
($128.5 million after-tax or $0.16 per share). In 1994, $28.3
million ($17.4 million after-tax or $0.02 per share) of the 1992
restructuring accruals were reversed into income, primarily
reflecting refinements of the original domestic beverage accrual
estimate and management's decision to reduce the scope of the
domestic beverage restructuring. The majority of the amount
reversed into income was offset by additional charges in 1994 for
new actions. The remaining accruals for the 1992 restructuring
actions of $39 million outstanding at year-end 1994 represent
expected cash payments of which $25 million, $11 million and $3
million are expected to be paid in 1995, 1996 and 1997,
respectively.
Annual cost savings from the 1992 restructuring
actions, when fully implemented, are expected to be approximately
$75 million primarily from reduced employee and facility costs.
In addition, while difficult to measure, the domestic beverage
segment is also expected to benefit by an estimated $90 million
annually from centralization of purchasing activities and
incremental volume and pricing from improvements in
administrative and business processes. The combined gross
benefits realized in 1994 from the 1992 restructuring actions are
estimated to be approximately $50 million. These benefits are
expected to increase annually until fully realized in 1998. See
Notes 2 and 16 for additional detail related to the 1992
restructuring charges. See Management's Analysis of beverage and
snack food performance on pages 15 and 19, respectively, for a
discussion of the 1992 restructuring charges and related
anticipated benefits.
8
Derivatives
PepsiCo uses derivative instruments primarily to reduce
borrowing costs and hedge future purchases of certain
commodities. PepsiCo's policy is to not use derivative
instruments for speculative purposes and has procedures in place
to monitor and control their use. PepsiCo's credit risk related
to derivatives is considered low. Financing-related derivative
contracts are only entered into with strong creditworthy
counterparties and are generally of relatively short duration.
Purchases of commodities are hedged with commodity futures
contracts traded on national exchanges.
Reduce Borrowing Costs: PepsiCo enters into interest
rate and foreign currency swaps to effectively change the
interest rate and currency of specific debt issuances with the
objective of reducing borrowing costs. These swaps are generally
entered into concurrently with the issuance of the debt they are
intended to modify. The notional value, payment and maturity
dates of the swaps match the principal, interest payment dates
and maturity dates of the related debt. Accordingly, any market
impact (risk or opportunity) associated with these swaps is fully
offset by the opposite market impact on the related debt. See
Notes 9 and 10 for additional details regarding interest rate and
currency swaps.
Hedge Commodity Costs: PepsiCo hedges future commodity
purchases when we believe it will result in lower net costs. The
futures contracts entered into do not exceed expected usage nor
do they generally extend beyond one year. While PepsiCo expects
to generate lower commodity costs over time by entering into
these futures contracts, it is possible that the commodity costs
will be higher than if futures contracts were not entered into.
we believe it has the ability to raise prices if commodity
prices increase; however, it expects to do so only if the
increase is other than temporary and it would not place PepsiCo
at a competitive disadvantage. Open contracts at year-end 1994
and gains and losses realized in 1994 or deferred at year-end
were not significant.
Currency Exchange Effects
In 1994, 1993 and 1992, international businesses
represented 18.6%, 18.0% and 17.7%, respectively, of PepsiCo's
total segment operating profits. Operating in international
markets sometimes involves volatile movements in currency
exchange rates. The economic impact of currency exchange rate
movements on PepsiCo is complex because such changes are often
linked to variability in real growth, inflation, interest rates,
governmental actions and other factors. In addition, these
changes, if material, can cause PepsiCo to adjust its financing
and operating strategies, for example, pricing, promotion and
product strategies and decisions concerning sourcing of raw
materials and packaging. Because PepsiCo operates in a mix of
businesses and numerous countries, management believes currency
exposures are fairly well diversified. Moreover, management
believes that currency exposures are not a significant factor in
competition at the local market operating level. When
economically appropriate, however, PepsiCo enters into foreign
currency hedges to minimize specific cash flow transaction
exposures. The following paragraphs describe the effects of
currency exchange rate movements on PepsiCo's reported results.
See Other Factors Expected to Impact 1995 Results on page 10.
As currency exchange rates change, translation of the
income statements of international businesses into U.S. dollars
affects year-over-year comparability of operating results. In
1994 and 1993, sales and operating profit growth rates for our
consolidated international businesses were not materially
impacted by the translation effects of changes in currency
exchange rates. The effects on comparability of sales and
operating profits arising from translation of the income
statements of international businesses are identified, where
material, in Management's Analysis of segment operating results.
These translation effects exclude the impact of businesses in
highly inflationary countries, where the functional currency is
the U.S. dollar.
Changes in currency exchange rates also result in
reported foreign exchange gains and losses which are included as
a component of unallocated expenses, net (see pages F-12 and F-
13). PepsiCo reported a net foreign exchange gain of $4.5
million in 1994 compared to net foreign exchange losses of $41.2
million and $17.4
9
million in 1993 and 1992, respectively. These reported amounts include
translation gains and losses arising from remeasurement into U.S.
dollars of the net monetary assets of businesses in highly
inflationary countries as well as transaction gains and losses.
Transaction gains and losses arise from monetary assets such as
receivables and short-term investments as well as payables (including
debt) denominated in currencies other than a business unit's functional
currency. In implementing strategies to minimize after-tax financing
costs, the effects of expected currency exchange rate movements on debt
and short-term investments are considered along with related
interest rates in measuring effective net financing costs.
Beginning in 1993, Mexico was no longer categorized as
highly inflationary. PepsiCo did not calculate the net foreign
exchange gain or loss that would have been reported in 1993 had
businesses in Mexico been accounted for as highly inflationary;
however, translation gains and losses for businesses in Mexico
were not a significant component of the above 1992 amount.
Certain Factors Affecting Comparability
Accounting Changes
PepsiCo's financial statements reflect the noncash
impact of accounting changes adopted in 1994 and 1992. In 1994,
PepsiCo was required to adopt Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (SFAS 112). The cumulative effect of adopting SFAS
112, an $84.6 million charge ($55.3 million after-tax or $0.07
per share), principally represented estimated future severance
costs related to services provided by employees prior to 1994.
As compared to the previous accounting method, the current year
impact of adopting SFAS 112 was immaterial to 1994 operating
profits. See Note 14 for additional details.
Also in 1994, PepsiCo adopted a preferred method for
calculating the market-related value of plan assets used in
determining the return-on-asset component of annual pension
expense and the cumulative net unrecognized gain or loss subject
to amortization. The cumulative effect of adopting this change,
which related to years prior to 1994, was a benefit of $37.8
million ($23.3 million after-tax or $0.03 per share). As
compared to the previous accounting method, the change reduced
1994 pension expense by $35.1 million ($21.6 million after-tax or
$0.03 per share). See Note 13 for additional details.
Effective the beginning of 1992, PepsiCo early adopted
Statements of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (SFAS
106), and No. 109, "Accounting for Income Taxes" (SFAS 109). The
cumulative effect of adopting SFAS 106, a $575.3 million charge
($356.7 million after-tax or $0.44 per share), represented
estimated future retiree health benefit costs related to services
provided by employees prior to 1992. The cumulative effect of
adopting SFAS 109, a $570.7 million tax charge ($0.71 per share),
primarily represented the recognition of additional deferred tax
liabilities related to acquired identifiable intangible assets as
of the beginning of 1992. See Notes 12 and 17 for additional
details regarding the adoption of SFAS 106 and SFAS 109,
respectively.
Other Factors
Comparisons of 1994 to 1993 are affected by an
additional week of results in the 1994 reporting period. Because
PepsiCo's fiscal year ends on the last Saturday in December, a
fifty-third week is added every 5 or 6 years. The fifty-third
week increased 1994 earnings by an estimated $54.0 million ($34.9
million after-tax or $0.04 per share). See Items Affecting
Comparability, Fiscal Year, on page F-9 for the impact on
PepsiCo's business segments.
PepsiCo recorded a one-time, noncash gain of $17.8
million ($16.8 million after-tax or $0.02 per share) resulting
from a public share offering by BAESA, a bottling joint venture
in South America. See Note 4 for additional details.
10
Significant U.S. Tax Changes Affecting Historical and Future
Results
U.S. federal income tax legislation enacted in August
1993 included a provision for a 1% statutory income tax rate
increase effective for the full year. As required under SFAS
109, the increase in the tax rate resulted in a noncash charge of
$29.9 million ($0.04 per share) for the adjustment of net
deferred tax liabilities as of the beginning of 1993.
The 1993 tax legislation also included a provision to
reduce the tax credit associated with beverage concentrate
operations in Puerto Rico. This change limited the tax credit on
income earned in Puerto Rico in the first year to 60% of the
amount allowed under the previous tax law, with the limit further
reduced ratably over the following four years to 40%. The
provision, which became effective for PepsiCo's operations on
December 1, 1994, had an immaterial impact on 1994 earnings. Had
the provision become effective at the beginning of 1994, earnings
for the year would have been reduced by approximately $60 million
or $0.07 per share. Similarly, had the 40% credit limit been
effective in 1994, earnings would have been reduced by an
additional $30 million or $0.04 per share over the 60% credit
limit.
In 1994, the U.S. Department of the Treasury proposed a
change to a current regulation (known as Q&A 12), which would
further reduce the tax incentives associated with the beverage
concentrate operations in Puerto Rico. This proposal applies to
PepsiCo's sales of concentrate from its operations in Puerto Rico
to its related bottlers in the U.S. If it had been adopted as
proposed in 1994, the change would have become effective for
PepsiCo on December 1, 1994 with an immaterial impact on 1994
earnings. However, had the 60% credit limit (discussed above)
and the currently proposed Q&A 12 been in effect at the beginning
of 1994, earnings for the year would have been reduced by an
estimated $112 million or $0.14 per share. Had the 40% credit
limit and proposed Q&A 12 both been effective in 1994, the impact
would have reduced 1994 earnings for the year by an additional
$30 million or $0.04 per share over the 60% credit limit. The
estimated impacts are subject to change depending upon the final
provisions of Q&A 12, if enacted. PepsiCo and others are
vigorously opposing the proposed change.
PepsiCo's full year 1995 tax rate is not expected to
exceed 35%. The expected tax rate reflects PepsiCo's forecasted
1995 mix of U.S. and generally lower taxed foreign earnings, the
reduction in the tax credit on income earned in Puerto Rico
resulting from the 1993 U.S. tax legislation and the assumed
enactment in 1995 of Q&A 12, as currently proposed, partially
offset by significant adjustments reflecting the anticipated
resolution in 1995 of audit issues related to prior years.
The unfavorable effect of Q&A 12 will not be included
in the 1995 effective tax rate unless it is enacted. The
benefits due to the adjustments will be included in the 1995 tax
rate when the audit issues related to prior years have been
resolved. Accordingly, the potential exists for volatility in
PepsiCo's 1995 quarterly effective tax rates depending on the
timing of these events, as well as other factors.
Other Factors Expected to Impact 1995 Results
In late 1994 and early 1995, the Mexican peso devalued
significantly relative to the U.S. dollar. The primary impact of
the devaluation on 1994 financial results was an estimated $275
million unfavorable change in the currency translation adjustment
account in Shareholders' Equity, representing the reduced book
value of PepsiCo's Mexican peso-denominated net assets. The
impact on 1994 earnings was immaterial. Quantifying the adverse
impact of the devaluation on 1995 operating results, financial
condition and cash flows is difficult because, in addition to the
translation impact, the devaluation is likely to result in many
changes to the business environment including government actions,
accelerated inflation and its impact on prices and costs, reduced
consumer demand and the impact of higher interest rates on our
trade customers and bottlers. Although PepsiCo expects to report
lower earnings in 1995 from its operations in Mexico than it
otherwise would have because of the devaluation and its related
effects, PepsiCo has begun to take actions in Mexico and in other
parts of the world to mitigate the effects of the devaluation.
PepsiCo's operations in Mexico, primarily related to snack foods,
constituted about 5% and 7% of PepsiCo's 1994 consolidated net
assets and cash flows from operations, respectively, and
contributed 7% and 8% of PepsiCo's 1994 net sales and segment
operating profits, respectively. See Management's Analysis of
each industry
11
segment for additional discussion regarding the impact of the
devaluation of the Mexican peso. In addition, PepsiCo anticipates that
earnings from its affiliates in Mexico accounted for by the equity
method, primarily related to beverages, will also be unfavorably
impacted. Equity results reported in 1994 from affiliates in Mexico were
not material.
As quantified in Other Factors on page 9, comparisons of
1995 to 1994 will be adversely affected by the additional week's
results in the 1994 fiscal year.
Management's Analysis - Results of Operations
(See Management's Analysis - Overview on page 7 for background
information and Business Segments on page F-9 for detail of segment
results.)
To improve comparability, Management's Analysis includes
analytical data to indicate the impact of beverage and snack food
acquisitions, net of operations sold or contributed to joint
ventures (collectively, "net acquisitions"). Acquisition impacts
represent the results of the acquired businesses for periods in
the current year corresponding to the prior year periods that did
not include the results of the businesses. Restaurant units
acquired, principally from franchisees, and constructed units are
treated the same for purposes of this analysis and are
collectively referred to as "additional restaurant units." Also,
the analysis indicates, as applicable, the impact of the ongoing
effects of the 1994 accounting changes (see Notes 13 and 14), the
1994 BAESA gain (see Note 4), the 1993 deferred tax charge due to
U.S. tax legislation (see Note 17) and the 1992 restructuring
charges (see Note 16), collectively referred to as "the Unusual
Items."
Comparisons of 1994 to 1993 were impacted by an additional
week's results in 1994 which contributed about $433.5 million or
2 points to growth in Net Sales and increased earnings by about
$54.0 million ($34.9 million after-tax or $0.04 per share).
Net Sales rose $3.5 billion or 14% in 1994 of which $215
million or 1 point was contributed by net acquisitions. The
balance of the increase reflected volume gains of $2.2 billion
and $934 million due to additional restaurant units. Sales grew
$3.1 billion or 14% in 1993. Net acquisitions contributed $1.1
billion or 5 points to sales growth. The balance of the increase
reflected $913 million from additional restaurant units, volume
gains that contributed $850 million and higher pricing.
International sales grew 23% in 1994 and 24% in 1993 with net
acquisitions contributing 1 point and 16 points, respectively.
International sales represented 29%, 27% and 25% of total sales
in 1994, 1993 and 1992, respectively. The long-term trend of an
increasing international component of sales may be interrupted in
the near term as a result of the unfavorable impact of the
devaluation of the Mexican peso in late 1994 and early 1995 and
its related effects.
Cost of sales as a percentage of Net Sales was 48.2%, 47.7%
and 48.3% in 1994, 1993 and 1992, respectively. The decline in
the 1994 gross margin reflected a mix shift to lower-margin
businesses in international beverages and worldwide restaurants
and lower net pricing in domestic beverages, partially offset by
a mix shift to higher-margin packages and products in
international snack foods and manufacturing efficiencies in
domestic snack foods. The 1993 gross margin improvement was
driven by lower product costs (packaging and ingredients) in
domestic beverages.
Selling, general and administrative expenses rose 14% in
1994 and 13% in 1993, reflecting base business growth. Excluding
the Unusual Items, Selling, general and administrative expenses
rose 14% in 1994 and 16% in 1993, and as a percentage of Net
Sales were 39.6%, 39.4% and 38.8% in 1994, 1993 and 1992,
respectively. In 1994, Selling, general and administrative
expenses grew at the same rate as sales. In 1993, selling and
distribution expenses grew at a faster rate than sales, but
marketing expenditures grew at a slower rate. These changes
reflect the impact of worldwide bottling acquisitions and flat
marketing expenditures in domestic beverages.
Amortization of intangible assets rose 3% in 1994 and 14% in
1993. This noncash expense reduced Net Income Per Share by
$0.29, $0.28 and $0.24 in 1994, 1993 and 1992, respectively.
12
Operating Profit increased 10% in 1994 and 23% in 1993.
Excluding the Unusual Items, operating profit increased $262
million or 9% in 1994 and $342 million or 13% in 1993, driven by
combined segment operating profit growth of 7% in 1994 and 14% in
1993. The 1994 increase reflected $850 million from higher
volumes and $73 million from additional restaurant units,
partially offset by higher operating expenses. Growth in 1993
reflected $425 million from higher volumes and $89 million from
additional restaurant units, partially offset by increased
operating expenses. International segment profits grew 12% in
1994 and 8% in 1993, reflecting double-digit increases in snack
foods and beverages, partially offset by a double-digit decline
in restaurants. International profits represented 19%, 18% and
19% of combined segment operating profits in 1994, 1993 and 1992,
respectively. This percentage may be affected in the near term
due to the devaluation of the Mexican peso and its related
effects. Small foreign exchange gains in 1994 compared to 1993's
foreign exchange losses, and increased equity in net income of
affiliates, which are not included in segment profits, aided 1994
total operating profit growth.
Gain on Joint Venture Stock Offering of $17.8 million ($16.8
million after-tax or $0.02 per share) related to the public
offering of shares by the BAESA joint venture. See Note 4.
Interest expense, net of Interest income, increased 15% in
1994 and 2% in 1993. The 1994 increase reflected higher average
borrowings partially offset by higher interest rates on
investment balances. The change in 1993 reflected higher average
borrowings and lower average short-term investment balances
partially offset by lower interest rates. Excluding the impact
of net acquisitions, net interest expense increased 10% in 1994
and declined 9% in 1993.
Provision for Income Taxes as a percentage of pretax income
was 33.0%, 34.5% and 31.4% in 1994, 1993 and 1992, respectively.
The 1993 effective tax rate, excluding the Unusual Item, was
33.3%. The slight decline in 1994 reflected reversal of
valuation allowances related to deferred tax assets and an
increase in the proportion of income taxed at lower foreign rates
offset by the absence of 1993's favorable adjustment of certain
prior year foreign accruals. The 1993 increase of 1.9 points
reflected higher U.S. and foreign effective tax rates, an
increase in the proportion of income taxed at the higher U.S. tax
rate and higher state taxes, partially offset by the favorable
adjustment of prior year accruals.
Income and Income Per Share Before Cumulative Effect of
Accounting Changes ("income" and "income per share") in 1994
increased 12% to $1.8 billion and 13% to $2.22, respectively, and
in 1993 increased 22% to $1.6 billion and 22% to $1.96,
respectively. Excluding the Unusual Items, income and income per
share rose 8% and 9%, respectively, in 1994 and 13% and 12%,
respectively, in 1993. Growth in income per share was depressed
by estimated dilution from acquisitions of $0.03 or 1 point in
1994 and $0.05 or 3 points in 1993, primarily due to
international beverage acquisitions in both years.
The Mexican peso devaluation may unfavorably impact Net
Sales and Net Income in 1995; however, due to many uncertainties
in Mexico, we are unable to quantify the impacts. See
Management's Analysis - Overview on page 7 and pages 15 , 19 and
22 for each industry segment for discussion regarding the
impacts.
Management's Analysis - Financial Condition
(See Management's Analysis - Overview on page 7 for background
information.)
Assets increased $1.1 billion or 5% over 1993. Short-term
investments largely represent high-grade marketable securities
portfolios held outside the U.S. The portfolio in Puerto Rico,
which totaled $853 million at year-end 1994 and $1.3 billion at
year-end 1993, arises from the operating cash flows of the
centralized concentrate manufacturing facility that operates
under a tax incentive grant. The grant provides that the
portfolio funds may be remitted to the U.S. without any
additional tax. PepsiCo remitted $380 million of the portfolio
to the U.S. in 1994 and $564 million in 1993. PepsiCo
continually reassesses its alternatives to redeploy its maturing
investments in this and other portfolios held outside the U.S.,
considering other investment opportunities and risks, tax
consequences and overall financing strategies.
13
Liabilities rose $569 million or 3% over 1993. Income taxes
payable decreased $152 million or 18%, reflecting the prepayment
of taxes in 1994 related to a federal tax audit. Other
liabilities increased $510 million or 38%, reflecting a
reclassification of amounts from Other current liabilities,
normal growth in long-term liabilities and recognition of a
liability for postemployment benefits under SFAS 112.
At year-end 1994 and 1993, $4.5 billion and $3.5 billion,
respectively, of short-term borrowings were classified as long-
term, reflecting PepsiCo's intent and ability, through the
existence of its unused revolving credit facilities, to refinance
these borrowings. PepsiCo's unused credit facilities with
lending institutions, which exist largely to support the
issuances of short-term borrowings, were $3.5 billion at year-end
1994 and 1993. Effective January 3, 1995, PepsiCo replaced its
existing credit facilities with new credit facilities aggregating
$4.5 billion, of which $1.0 billion expire in 1996 and $3.5
billion expire in 2000. Annually, these facilities can be
extended an additional year upon the mutual consent of PepsiCo
and the lending institutions.
Financial Leverage is measured by PepsiCo on both a market
value and historical cost basis. PepsiCo believes that the most
meaningful measure of debt is on a net basis, which takes into
account its large investment portfolios held outside the U.S.
These portfolios are managed as part of PepsiCo's overall
financing strategy and are not required to support day-to-day
operations. Net debt reflects the pro forma remittance of the
portfolios (net of related taxes) as a reduction of total debt.
Total debt includes the present value of operating lease
commitments.
PepsiCo believes that market leverage (defined as net debt
as a percent of net debt plus the market value of equity, based
on the year-end stock price) is an appropriate measure of
PepsiCo's financial leverage. Unlike historical cost measures,
the market value of equity primarily reflects the estimated net
present value of expected future cash flows that will both
support debt and provide returns to shareholders. The market net
debt ratio was 26% at year-end 1994 and 22% at year-end 1993.
The increase was due to a 13% decrease in PepsiCo's stock price
as well as an 8% increase in net debt. PepsiCo has established a
long-term target range of 20-25% for its market net debt ratio to
optimize its cost of capital.
As measured on an historical cost basis, the ratio of net
debt to net capital employed (defined as net debt, other
liabilities, deferred income taxes and shareholders' equity) was
49% at year-end 1994 and 50% at year-end 1993. The decline was
due to a 9% increase in net capital employed, partially offset by
the increase in net debt.
Because of PepsiCo's strong cash generating capability and
its strong financial condition, PepsiCo has continued access to
capital markets throughout the world.
At year-end 1994, about 60% of PepsiCo's net debt portfolio
was exposed to variable interest rates, up from about 55% in
1993. In addition to variable rate debt, all net debt with
maturities of less than one year is categorized as variable.
PepsiCo prefers funding its operations with variable rate debt
because it believes that, over the long-term, variable rate debt
provides more cost effective financing than fixed rate debt.
PepsiCo will issue fixed rate debt if advantageous market
opportunities arise. A 1 point change in interest rates on
variable rate net debt would impact annual interest expense, net
of interest income, by approximately $38 million ($21 million
after-tax or $0.03 per share) assuming the level and mix of the
December 31, 1994 net debt portfolio was maintained.
PepsiCo's negative operating working capital position, which
principally reflects the cash sales nature of its restaurant
operations, effectively provides additional capital for
investment. Operating working capital, which excludes short-term
investments and short-term borrowings, was a negative $677
million and $849 million at year-end 1994 and 1993, respectively.
The $172 million decline in negative working capital primarily
reflected reclassification of amounts from Other current
liabilities to Other Liabilities and base business growth in the
more working capital intensive bottling and snack food operations
exceeding the growth in restaurant operations.
Shareholders' Equity increased $517 million or 8% from 1993.
This change reflected an 18% increase in retained earnings due
to $1.8 billion in net income less dividends declared of $555
million. This growth was offset by a $448 million increase in
treasury stock that reflected share repurchases, net of shares
used for stock option exercises and acquisitions, and a $287
million unfavorable change in the currency translation
adjustment account
14
(CTA). The CTA change primarily reflected the impact of the
devaluation of the Mexican peso in late 1994 on the translation of our
peso denominated net assets.
Based on income before cumulative effect of accounting
changes, PepsiCo's return on average shareholders' equity (ROAE)
was 27.0% in 1994 and 27.2% in 1993. The ROAE was 26.5% in 1994
and 25.3% in 1993, excluding from both income and shareholders'
equity the effect of the accounting changes and BAESA gain in
1994 as well as the $29.9 million charge in 1993 due to 1993
U.S. tax legislation.
Management's Analysis - Cash Flows
(See Management's Analysis - Overview on page 7 for background
information.)
Cash flow activity in 1994 reflected strong cash flows from
operations of $3.7 billion and $421 million in net proceeds from
short-term investment activities. These amounts were used to
fund capital spending of $2.3 billion, purchases of treasury
stock totaling $549 million, dividend payments of $540 million,
acquisition activity of $316 million and net debt repayments of
$204 million.
One of PepsiCo's most significant financial strengths is its
internal cash generation capability. In fact, after capital
spending and acquisitions, each industry segment generated
positive cash flows in 1994, with particularly strong results
from beverages and snack foods. Net cash flows from PepsiCo's
domestic businesses were partially offset by international uses
of cash, reflecting strategies to accelerate growth of
international operations.
The significant devaluation of the Mexican peso in late 1994
and early 1995 did not materially impact 1994 consolidated cash
flows. However, because PepsiCo's operations in Mexico
represented approximately 7% of consolidated cash flows from
operations in 1994, the devaluation and its related effects are
expected to have an unfavorable impact on 1995 cash flows from
operations. In addition to the actions taken to mitigate the
unfavorable impact on operating profits, the operations in Mexico
will defer a portion of their capital spending. Nonetheless,
significant uncertainties remain in Mexico and, as a result, it
is not possible to quantify the impact on 1995 cash flows. In
addition, actions are being taken in other parts of the world
intended to mitigate the impact. See Management's Analysis -
Overview on page 7 for additional discussion.
Net Cash Provided by Operating Activities in 1994 rose $582
million or 19% over 1993, and in 1993 grew $423 million or 16%
over 1992. Income before noncash charges and credits rose 6% in
1994 and 24% in 1993. The increases in depreciation and
amortization noncash charges of $132 million in 1994 and $229
million in 1993 reflected capital spending and in 1993,
acquisitions. The 1994 decrease of $150 million in the deferred
income tax provision was primarily due to the effect in 1994 of
converting from premium based casualty insurance to self-
insurance for most of these risks and adopting SFAS 112 for
accounting for postemployment benefits. The 1993 increase of
$135 million in the deferred income tax provision was primarily
due to the lapping of 1992 effects related to restructuring
accruals and prefunded employee benefit expenses and the impact
of 1993 U.S. tax legislation. The cash provided in 1994 from
working capital was $357 million better than 1993, reflecting
normal increases in accrued liabilities across all of our
businesses, lapping the effect of higher income tax payments and
a lower provision in 1993 and improved trade receivable
collections, partially offset by the impact on accounts payable
of the timing of a large year-end payment to prefund employee
benefits. The 1993 over 1992 net increase of $257 million in
cash used for operating working capital reflected slower
collections of domestic accounts receivable, advance domestic
purchases of product ingredients, the higher payments of income
taxes and the lapping of 1992 and 1991 effects related to
restructuring accruals, partially offset by the payment to
prefund employee benefits.
Investing Activities over the past three years reflected
strategic spending in all three industry segments through capital
spending, acquisitions and investments in affiliates. PepsiCo
seeks investments that generate cash returns in excess of its
long-term cost of capital, which is estimated to be approximately
11% at year-end 1994. See Note 5 for a discussion of acquisition
activity. About 75% of the total acquisition activity in 1994
represented international transactions, compared to 45% in 1993
and 60% in 1992. PepsiCo continues to seek opportunities to
strengthen its position in its domestic and international
industry segments through such strategic acquisitions.
15
Increased capital spending in 1994 was driven by beverages
reflecting investments in equipment for new packaging and new
products in the U.S. and emerging international markets,
primarily Eastern Europe. Capital spending increases in 1993 and
1992 were driven by restaurants, primarily for new units.
Restaurants represented about half of the total capital spending
in all three years. Restaurants, beverages and snack foods
represent 40%, 30% and 30%, respectively, of the estimated $2.4
billion spending in 1995. This reflects a shift primarily from
restaurants to snack foods. Beverages and snack foods 1995
capital spending reflects production capacity expansion and
equipment replacements, while restaurants is primarily for new
units. Restaurant capital spending in 1995 may be further
reduced depending upon future decisions as described beginning on
page 23. Approximately one-third of the planned 1995 capital
spending relates to international businesses, about the same as
the prior three years. Cash provided by operations is expected
to be sufficient to fund the expected capital spending.
Investment activity in PepsiCo's short-term portfolios,
primarily held outside the U.S., provided $421 million in 1994
and $259 million in 1993, respectively, compared to the increased
net investment of $52 million in 1992.
Financing Activities. The 1994 over 1993 change in cash
flows from net financing activities was a use of $937 million,
primarily reflecting net repayments of short and long-term debt
of $204 million compared to net proceeds of $590 million in 1993.
The 1993 over 1992 change in cash flows from financing activities
was a use of $328 million, primarily due to increased purchases
of treasury stock.
At year-end 1994, PepsiCo had authority to issue $3.4
billion of long-term debt and had facilities in place in the
U.S., Europe and Japan to take advantage of marketplace
opportunities. The principal purposes of these shelf
registrations are for financing growth activities and refinancing
borrowings.
Cash dividends declared were $555 million in 1994 and $486
million in 1993. PepsiCo targets a dividend payout of about one-
third of the prior year's income from ongoing operations, thus
retaining sufficient earnings to provide financial resources for
growth opportunities.
Share repurchase decisions are evaluated considering
management's target capital structure and other investment
opportunities. In 1994, PepsiCo repurchased 15.0 million shares
at a cost of $549 million. Subsequent to year-end, PepsiCo
repurchased 3.4 million shares through February 7, 1995 at a cost
of $121 million. Including these repurchases, 18.8 million
shares have been repurchased under the 50 million share
repurchase authority granted by PepsiCo's Board of Directors on
July 22, 1993.
Beverages
Management's Analysis
See Management's Analysis - Overview on page 7 for background
information and discussion of the fifty-third week in 1994 and
Business Segments on page F-9 for detailed results. Net sales
and operating profits within this discussion include the impact
of the fifty-third week. System bottler case sales of Pepsi
Corporate brands (case sales) were not impacted by the fifty-
third week because they are measured on a calendar year basis.
1994 vs. 1993
Worldwide net sales increased $1.0 billion or 12% to $9.7
billion. The fifty-third week contributed approximately 1 point
to the sales growth with domestic and international operations
benefiting by about 2 points and 1 point, respectively.
Comparisons are affected by acquisitions, consisting primarily of
franchised bottling operations in the U.S. and Asia, as well as
the absence of certain small bottling operations sold or
contributed to joint ventures (collectively, "net acquisitions").
Net acquisitions, principally domestic, contributed $161 million
or 2 points to worldwide sales growth.
16
Domestic sales rose $623 million or 11% to $6.5 billion.
Net acquisitions contributed $158 million or 3 points to sales
growth. Volume growth contributed $510 million, driven by
carbonated soft drink (CSD) packaged products. This benefit,
combined with a mix shift to the higher-priced alternative
beverage packaged products and higher concentrate and fountain
syrup pricing, was partially offset by lower net pricing to
retailers and a mix shift to The Cube, our value-priced 24-pack.
The lower net pricing reflected increased price discounts and
promotional allowances for CSD in response to private label
competition and Lipton brand tea. See Note 1 for discussion
concerning classification of promotional price allowances.
Domestic alternative beverages comprise primarily Lipton brand
tea, All Sport and Ocean Spray Lemonade products. CSD comprises
the balance of the Pepsi Corporate beverage portfolio.
Case sales volume consists of sales of packaged products to
retailers and through vending machines and fountain syrup by
company-owned and franchised bottlers. Previously existing Ocean
Spray products sold to retailers under a distribution agreement
are not included in reported case sales growth. Domestic case
sales increased 6%, reflecting strong double-digit growth in the
Mountain Dew brand and solid gains in Brand Pepsi. Case sales
growth also benefited by strong double-digit growth in Lipton
brand tea and gains in the Diet Pepsi brand. These advances,
combined with the national distribution of All Sport and Ocean
Spray Lemonade in 1994 and gains in the Slice brands, were
partially offset by significant declines in the Crystal Pepsi
brands. Alternative beverages contributed 2 points to the case
sales growth. Case sales of fountain syrup grew at a slower rate
than packaged products.
International sales rose $426 million or 16% to $3.2
billion. This growth reflected higher volume of $300 million,
the start-up of company-owned bottling and distribution
operations, principally in Eastern Europe, and the first year of
sales of Stolichnaya vodka under the 1994 appointment of an
affiliate of Grand Metropolitan as the exclusive U.S. and
Canadian distributor. Higher concentrate pricing was offset by
an unfavorable currency translation impact and lower net pricing
on packaged products. The unfavorable currency translation
impact reflected a weaker Canadian dollar, Spanish peseta and
Mexican peso, partially offset by a stronger Japanese yen.
International case sales increased 9%, reflecting strong
double-digit growth in Asia, led by China and India, and solid
advances in Latin America, as growth in Mexico more than offset
declines in Venezuela. Latin America and Mexico represent our
largest international case sales region and country,
respectively. Double-digit advances in Eastern Europe and the
Middle East, combined with single-digit growth in Western Europe
and Canada, were partially offset by declines in Africa. Pepsi
Max, a new low-calorie cola, aided case sales growth.
Worldwide operating profits increased $108 million or 10% to
$1.2 billion. The fifty-third week enhanced profit growth by
approximately 2 points with domestic and international operations
benefiting by about 1 point and 2 points, respectively.
Domestic profits increased $85 million or 9% to $1.0
billion. Volume gains, driven by packaged products, contributed
$305 million to profit growth. This benefit, combined with the
higher concentrate and fountain syrup pricing, was partially
offset by higher operating expenses, the lower net pricing to
retailers, the mix shift to The Cube and increased product costs.
Selling and distribution expenses grew at a faster rate than
sales, driven by higher volume-driven labor costs. Advertising
and marketing costs grew at a slower rate than sales.
Administrative expenses declined modestly reflecting savings from
a 1994 consolidation of headquarters and field operations and a
reduction in the scope of the 1992 restructuring actions, both
discussed below. These benefits were largely offset by normal
increases in administrative expenses. The increased product
costs reflected the mix shift to the higher cost alternative
beverages and higher ingredient costs, partially offset by lower
packaging costs. Alternative beverages, driven by Lipton brand
tea, aided the profit growth. The domestic profit margin
declined slightly to 15.6%.
In the third quarter of 1994, Pepsi-Cola reversed into
income $24.2 million of the $115.4 million restructuring accrual
established in 1992 and, in the third and fourth quarters,
recorded additional charges totaling $22.3 million, primarily
reflecting management's decision to further consolidate
headquarters and field operations. The 1994 charges cover
severance costs associated with employee terminations and
relocation costs for employees
17
who, in 1994, have accepted offers to relocate. See 1993 vs. 1992
discussion for a description of the 1992 restructuring charge.
The $24.2 million reversal reflects both refinements of the
estimates originally used to establish the accrual, principally
for costs associated with displaced employees, and management's
decision to reduce the scope of the restructuring. The
nationwide implementation of several of the anticipated
administrative and business process redesigns has been completed,
with the balance of the redesigns projected to be completed over
the next three years.
The benefits of the restructuring activities when fully
implemented were originally projected to be approximately $105
million annually, based on reduced employee and facility costs.
The current projection of annual benefits from these sources has
decreased to approximately $40 million reflecting, in part, the
reduced scope of the restructuring. While difficult to measure,
in 1994 Pepsi-Cola estimated other sources of benefits from the
restructuring of approximately $90 million annually, based on
centralization of purchasing activities and incremental volume
and pricing from improvements in administrative and business
processes. These additional sources of benefits, although
identified when the 1992 restructuring accrual was established,
were not included in the projected annual benefits due to
significant uncertainties and difficulties in quantifying the
amounts, if any, of such benefits. Due to delays in implementing
some of the restructuring actions, full realization of the
expected benefits also has been delayed. Benefits in 1994 were
offset by incremental costs associated with the continued
development and implementation of the restructuring actions.
This offset is expected to continue into 1995. Net benefits are
expected to begin in 1996 and to increase annually until fully
realized in 1998. All benefits derived from the restructuring
actions will be reinvested in the business to strengthen our
competitive position.
International profits increased $23 million or 13% to $195
million. Net acquisitions reduced profits by $9 million or 5
points. The increased profits reflected volume growth of $75
million, led by concentrate shipments. This benefit, combined
with a decline in advertising and marketing expenses not
attributed to volume growth, was partially offset by increased
field and headquarters administrative expenses, start-up losses,
principally in Eastern Europe, and an unfavorable currency
translation impact, primarily from the Mexican peso and the
Canadian dollar. The increased administrative expenses reflected
costs to support expansion in developing markets. The higher
concentrate pricing was partially offset by a decline in finished
product sales to franchised bottlers, principally in Japan, and
the lower net pricing on packaged products. Increased profits
from the first year of sales of Stolichnaya, under the 1994
appointment of an affiliate of Grand Metropolitan as the
exclusive U.S. and Canadian distributor, aided profit growth.
The new Pepsi Max product significantly contributed to profit
growth. Profits increased in Latin America, led by Mexico, and
in Western Europe, reflecting significantly reduced losses in
Germany. Profits also grew in Asia, reflecting advances in
Japan. The profit growth was restrained by start-up losses in
Eastern Europe and declines in Canada, reflecting private label
competition. The international profit margin remained relatively
unchanged at 6.2%.
The 1992 restructuring actions to streamline the acquired
Spanish franchised bottling operation were substantially
completed in 1994. These actions have resulted in total savings
approximating $15 million in 1994, with total annual savings
expected to grow to about $20 million in 1995, consistent with
our original projection. These savings will continue to be
reinvested in our businesses to strengthen our competitive
position.
The significant devaluation of the Mexican peso in late 1994
and early 1995 did not materially impact 1994 international
beverage operating profits. However, because Mexico, our largest
profit country, represented approximately 22% of international
beverage operating profits in 1994, the devaluation and its
related effects are expected to have an unfavorable impact on
1995 operating profits. The operations in Mexico have begun to
take actions to increase volume, enhance net pricing and reduce
costs, including evaluating alternative sourcing of raw
materials. Nonetheless, significant uncertainties remain in
Mexico and, as a result, it is not possible to quantify the
impact. International beverages has also begun to take actions
in several other countries in 1995 to help mitigate the impact.
18
1993 vs. 1992
Worldwide net sales increased $1.0 billion or 14% to $8.6
billion. Comparisons are affected by net acquisitions,
consisting primarily of acquisitions of franchised bottling
operations in Spain and the U.S., as well as the absence of
results of certain small international bottling and distribution
operations sold or contributed to a joint venture. Net
acquisitions contributed $697 million or 10 points to worldwide
sales growth.
Domestic sales grew $433 million or 8% to $5.9 billion.
Acquisitions contributed $222 million or 4 points of domestic
sales growth. Volume growth, driven by new products, contributed
approximately $170 million. The balance of the sales growth
reflected a mix shift to new products with higher net prices,
principally the new Lipton Original brand ready-to-drink tea
products and certain Ocean Spray brand juice products.
Domestic case sales increased 3%, reflecting the impact of
the late 1992 introduction of Crystal Pepsi and Diet Crystal
Pepsi brands, the growth in Mountain Dew brands and the expanded
distribution of new Lipton brand tea products. Case sales of
fountain syrup grew at the same rate as packaged products.
Excluding the Lipton products, case sales volume grew 2%, driven
by a double-digit increase in Mountain Dew. Case sales of the
Crystal Pepsi brands offset a decline in brands Pepsi and Diet
Pepsi.
International sales rose $600 million or 28% to $2.7
billion. Net acquisitions contributed $476 million or 22 points
of sales growth. The balance of the sales growth reflected
higher concentrate pricing, led by Latin America as well as the
start-up of company-owned distribution operations in France and
Eastern Europe. Sales growth was depressed by the unfavorable
currency translation impact of a stronger U.S. dollar in both
concentrate and bottling operations. A small decline in existing
bottling operations reflected lower pricing in Germany, largely
offset by higher prices and volumes in Greece.
International case sales rose 7%. Excluding the newly
acquired KAS flavor brands in Spain, international case sales
grew 5%. This performance reflected solid advances in Latin
America as well as double-digit growth in Asia, led by China and
Pakistan, and in Eastern Europe, led by Turkey and Hungary. The
Middle East, particularly Saudi Arabia, also contributed to case
sales growth.
Worldwide operating profits increased $310 million or 39% to
$1.1 billion. Excluding the 1992 restructuring charges totaling
$145 million ($115.4 million for domestic and $29.6 million for
international), profits were up 18%.
The 1992 domestic charge arose from an organizational
restructuring designed to improve customer focus by realigning
resources consistent with Pepsi-Cola's "Right Side Up" operating
philosophy, as well as a redesign of key administrative and
business processes. The organizational restructuring was
completed in 1992. The redesign of core processes is ongoing.
The charge included provisions for costs associated with
redeployed and displaced employees, the redesign of core
processes and office closures.
The international restructuring charge, which related
primarily to displaced employees, included $18.5 million to
streamline the acquired Spanish franchised bottling operation.
This amount represented 30% (PepsiCo's ownership interest prior
to the acquisition of the remaining interest) of the total cost
of the streamlining. The remaining $11.1 million of the charge
represented costs associated with streamlining the worldwide
field management organization which was substantially completed
in 1993.
The costs provided for in these domestic and international
restructuring actions and the related savings are principally of
a cash nature. The benefits of the completed international
worldwide actions resulted in annual savings of $7 million, as
originally projected. The savings will continue to be reinvested
in the business to strengthen our competitive position.
Domestic profits increased $250 million or 37% to $937
million. Excluding the 1992 restructuring charge, profits grew
$135 million or 17%. Volume gains, led by new products,
contributed about $90 million to profits.
19
The combined benefit of lower packaging and ingredient costs and the
favorable product mix shift was largely offset by higher operating
expenses. Profit growth also benefited from a $12 million reduction in
retiree health care expense due to 1993 plan amendments described
in Note 12, as well as a $9 million credit arising from a net
adjustment of accruals related to prior years' acquisitions.
Promotional costs were about even with last year; however,
selling and administrative expenses grew at a faster rate than
sales due to transitional costs to support the organizational and
process redesign initiatives discussed above. This higher level
of selling and administrative costs as a percentage of sales is
expected to continue until the benefits of these initiatives are
realized. Sales of the new higher-margin Lipton Original brand
tea products resulted in a significant contribution to profit
growth. The Crystal Pepsi products particularly aided first
quarter results, but did not significantly impact full year
profits. The domestic profit margin, excluding the 1992
restructuring charge, grew over 1 point to 15.8%.
International profits increased $60 million or 53% to $172
million. Excluding the 1992 restructuring charge, profits grew
$30 million or 21%. The profit advance, led by Latin America,
reflected higher concentrate pricing in excess of increased
operating expenses, and concentrate shipment growth that
contributed about $15 million. These benefits were partially
offset by increased losses in company-owned bottling and
distribution operations, led by Germany. Start-ups of
distribution operations also contributed to the increased losses.
Unfavorable currency translation impacts, principally in
concentrate operations, also negatively affected profit growth.
A profit decline in bottling operations in Japan, due to
increased operating expenses, was offset by growth in Canada,
reflecting administrative cost reductions through consolidation
of support functions in recently acquired operations. The
Canadian improvement was achieved despite a $12.2 million fourth
quarter 1993 charge to further streamline operations and
strengthen its competitive position. Offsetting this effect was
an $11.9 million credit in the second quarter of 1993 related to
a settlement of litigation with a former franchised bottler in
Europe. The international profit margin, excluding the 1992
restructuring charge, declined almost one-half point to 6.3%.
Excluding the impact of the lower margin net acquisitions, the
profit margin grew 1 point.
Snack Foods
Management's Analysis
See Management's Analysis - Overview on page 7 for background
information and discussion of the fifty-third week in 1994 and
Business Segments on page F-9 for detailed results. Net sales
and operating profits within this discussion include the impact
of the fifty-third week while pound and kilo growth have been
adjusted to exclude its impact.
1994 vs. 1993
Worldwide net sales rose $1.2 billion or 18% to $8.3
billion. The fifty-third week contributed approximately 2 points
to the sales growth with domestic and international operations
benefiting by about 2 points and 1 point, respectively.
Domestic sales grew $646 million or 15% to $5.0 billion,
reflecting volume growth of $660 million. Volume gains reflected
growth in most major brands and line extensions of existing
products. Sales growth was further aided by increased
promotional price allowances and marketing programs to retailers,
which are reported as marketing expenses and therefore do not
reduce reported sales. See Note 1 for further discussion
concerning classification of promotional allowances. Higher
gross pricing was offset by a sales mix shift to larger, value-
oriented packages and products with lower gross prices.
Total domestic pound volume advanced 13%. This performance
was led by strong double-digit growth in Lay's brand potato
chips, reflecting the successful promotion of Wavy Lay's brand
potato chips and growth of Lay's KC Masterpiece Barbecue Flavor
brand potato chips, Rold Gold and Rold Gold Fat Free Thins brand
pretzels and Tostitos brand tortilla chips, driven by Restaurant
Style Tostitos brand and the expanded distribution of Baked
Tostitos brand. Doritos brand tortilla chips had solid single-
digit volume growth while Fritos brand corn chips and
20
Chee.tos brand cheese flavored snacks reflected low double-digit
growth. Ruffles brand potato chips showed modest growth.
International sales rose $592 million or 22% to $3.3
billion. Confectioneries (primarily candy and cookies) account
for approximately 30% of international snack food sales.
Acquisitions contributed $67 million or 2 points to sales growth.
The balance of the sales growth was driven by higher volumes,
which contributed $590 million, led by successful promotions by
the Sabritas snack chip and candy business in Mexico. A
favorable brand mix shift to higher-priced products, primarily in
Latin America and the U.K., and higher pricing were largely
offset by the unfavorable currency translation impact of a
stronger U.S. dollar, principally against the Mexican peso.
International kilo growth is reported on a systemwide basis,
which includes both consolidated businesses and joint ventures
operating for at least one year. Systemwide snack chip kilos
rose 16%, led by strong double-digit growth at Sabritas, in Spain
and Brazil and solid gains in the U.K. Systemwide confectionary
kilos also grew 16%, reflecting double-digit advances at Gamesa
and Sabritas and gains in Egypt and Poland.
Worldwide operating profits increased $187 million or 16% to
$1.4 billion. The fifty-third week enhanced profits by
approximately 2 points with domestic and international operations
benefiting by about 3 points and 1 point, respectively.
Domestic profits grew $124 million or 14% to $1.0 billion.
This performance reflected strong volume growth, which
contributed $340 million. This growth was partially offset by
the impact of increased operating and manufacturing costs and an
unfavorable sales mix shift to lower-margin packages and
products. Increased operating costs were driven by higher
selling, distribution and new system costs in addition to
increased investment in marketing costs to maintain strong
momentum in 1995. Increased capacity costs were partially offset
by manufacturing efficiencies. Higher vegetable oil costs were
substantially offset by lower packaging and potato costs.
Increased promotional price allowances and merchandising support
largely offset higher pricing on certain brands. The domestic
profit margin remained relatively unchanged at 20.5%.
Though difficult to forecast, there are no material changes
expected in potato costs for 1995. However, potato prices have
been less predictable in recent years due to weather conditions.
Vegetable oil prices are expected to decline slightly from the
high 1994 levels while the cost of packaging is expected to
increase.
International profits increased $63 million or 22% to $352
million. Higher volumes contributed $95 million to international
profit growth, led by Sabritas. The combined impact of the
favorable product and package mix shifts, primarily in the U.K.
and Latin America, and modestly higher pricing were more than
offset by higher direct and administrative costs and an
unfavorable currency translation impact from the Mexican peso.
Higher direct costs resulted primarily from investment
initiatives to build brand equity and enhance distribution
channels in Mexico. Profit growth was also dampened by the
lapping of last year's noncash credit of $6.1 million resulting
from the decision to retain a small snack chip business in Japan
previously held for sale. The international profit margin
remained relatively unchanged at 10.8%.
The international restructuring charge in 1992 related
primarily to actions to consolidate and streamline the Walkers
business in the U.K. that were substantially completed during
1994. These actions are estimated to result in annual savings of
about $32 million, which continue to be reinvested in the
business to strengthen our competitive position. See 1993 vs.
1992 discussion for a further explanation of the 1992
restructuring charge.
Strong double-digit profit growth at Sabritas was driven by
higher snack chip and candy volumes. This benefit, combined with
a favorable product mix shift to higher-margin snacks and lower
manufacturing overhead and administrative costs, more than offset
increased potato costs, higher promotional spending and an
unfavorable currency translation impact.
Walkers profits advanced at a strong double-digit rate,
driven by a favorable product mix shift, reflecting increased
sales of higher-margin branded products and the elimination of
most lower-margin private label products,
21
increased volumes, lower raw material and packaging costs and lower
manufacturing expenses resulting from the 1992 restructuring actions.
These benefits offset start-up costs related to the launch of Doritos
brand tortilla chips which exceeded incremental profits
generated.
Gamesa posted strong profit growth on a relatively small
base, reflecting a favorable package mix shift to higher-margin
single serve products and lower manufacturing overhead and
administrative costs resulting from cost reduction initiatives.
These benefits were partially offset by higher product costs,
selling and distribution costs associated with the expansion of a
direct delivery system and an unfavorable currency translation
impact.
The significant devaluation of the Mexican peso in late 1994
and early 1995 did not materially impact 1994 international snack
food operating profits. However, because Sabritas and Gamesa
combined represented approximately 63% of international snack
food operating profits in 1994, the devaluation and its related
effects are expected to have an unfavorable impact on 1995
operating profits. Sabritas and Gamesa have begun to increase
pricing and reduce costs, including evaluating alternative
sourcing of raw materials. Nonetheless, significant
uncertainties remain in Mexico and, as a result, it is not
possible to quantify the impact. International snack foods has
also begun to take actions in several of its other countries in
1995 to help mitigate the impact.
1993 vs. 1992
Worldwide net sales rose $895 million or 15% to $7.0
billion. Comparisons are affected by international acquisitions,
consisting principally of the securing of a controlling interest
in the Gamesa (Mexico) cookie business and the buyout of the
joint venture partner at Hostess Frito-Lay (Canada), both in
1992, as well as the 1993 reconsolidation of a small snack chip
business in Japan previously held for sale (collectively,
"acquisition activity"). Acquisition activity added $383 million
or 7 points to the worldwide sales growth.
Domestic sales grew $415 million or 11% to $4.4 billion.
Volume growth contributed $320 million to the domestic increase.
Sales growth also reflected higher effective pricing through
lower package weights, partially offset by a sales mix shift to
larger, value-oriented packages and products with lower gross
prices. The higher effective pricing was mitigated by increased
promotional price allowances to retailers, which are reported as
marketing expenses and therefore do not reduce reported sales.
Total domestic pound sales advanced 8%, reflecting double-
digit growth in Lay's brand potato chips, Doritos and Tostitos
brand tortilla chips and Rold Gold brand pretzels.
International sales rose $480 million or 22% to $2.6
billion. Acquisition activity contributed $383 million or 18
points to the increase. The balance of the sales growth, led by
the Sabritas snack chip and candy business in Mexico, reflected
higher volumes, which contributed $150 million, and higher
pricing. This growth was partially offset by the unfavorable
currency translation impact of a stronger U.S. dollar,
principally against the British pound.
International systemwide snack chip volume rose 5%,led by
double-digit growth in Canada and Turkey and gains at Sabritas
and in the U.K. Confectioneries (primarily candy and cookies)
account for about 30% of reported international snack food sales.
Systemwide confectionery volume grew 7% reflecting gains at
Gamesa and double-digit advances at Sabritas.
Worldwide operating profits increased $205 million or 21% to
$1.2 billion. Excluding a 1992 international restructuring
charge of $40.3 million, profits increased 16%.
The largest component of the 1992 restructuring charge
related to actions, many of which were completed in 1993, to
consolidate and streamline the Walkers business in the U.K. The
costs provided for in these restructuring actions and related
savings are principally of a cash nature. As originally
projected, these actions, when fully implemented, are currently
expected to result in annual savings of about $35 million,
providing additional resources for reinvestment in the business
to strengthen our competitive position.
22
Domestic profits rose $125 million or 16% to $901 million.
This performance reflected volume growth, which contributed $165
million to domestic profits, and a $24 million reduction in
retiree health care expense due to 1993 plan amendments described
in Note 12. These benefits were partially offset by increased
manufacturing costs and other operating expenses that exceeded
the higher effective pricing. The unfavorable sales mix shift
also depressed profit growth. The higher manufacturing costs
reflected a temporary increase in potato costs of approximately
$25 million resulting from the effects of extreme weather
conditions in March on the potato crop in the Southern U.S. The
domestic profit margin rose 1 point to 20.6%.
Though difficult to forecast, higher prices in 1994 for
vegetable oil, resulting from the past summer's flooding in the
Midwestern U.S., were expected to be partially offset by a
decline in potato prices from 1993 levels.
International profits grew $80 million or 38% to $289
million. Excluding the 1992 restructuring charge, profits rose
$39 million or 16%. The profit performance was driven by
Sabritas and reflected higher volumes, which contributed $85
million to profit growth, and a $6.1 million credit resulting
from the decision to retain the business in Japan. This growth
was partially offset by operating cost increases, net of savings
from the restructuring actions announced in 1992, that exceeded
higher pricing, and unfavorable currency translation impacts.
The international profit margin, excluding the 1992 restructuring
charge, declined one-half point to 10.9%. Excluding the impact
of lower margin acquisitions, the profit margin increased over 1
point.
Double-digit profit growth at Sabritas was driven by higher
snack chip and candy volumes. Increased manufacturing and other
operating expenses were partially offset by higher pricing.
Profits in the U.K. declined due to an unfavorable currency
translation impact. Double-digit profit growth on a local
currency basis reflected the cost savings from the 1992
restructuring actions, volume gains and a sales mix shift to
higher margin products, partially offset by increased
manufacturing costs. Profit growth was also depressed by the
effect of a 1992 credit arising from the final settlement of
pension assets related to the 1989 acquisition of the U.K.
operations. A decline in profits for Poland reflected increased
manufacturing costs and lower pricing.
Gamesa and Hostess Frito-Lay, both acquired midyear 1992,
posted volume-driven profit growth for the comparable period
since acquisition; i.e., the second half of 1993 vs. 1992.
Acquisition activity, which includes only the results for the
first half of 1993 for Gamesa and Hostess Frito-Lay, did not,
however, significantly affect the full year international profit
comparison, as losses at Gamesa offset profits contributed by
Hostess Frito-Lay and other smaller acquisitions. Gamesa posted
a profit for the full year despite the first half loss.
Restaurants
Management's Analysis
See Management's Analysis - Overview on page 7 for background
information and discussion of the fifty-third week in 1994 and
Business Segments on page F-9 for detailed results. Net sales
and operating profits within this discussion include the impact
of the fifty-third week while same store sales growth has been
adjusted to exclude its impact. Also, for purposes of this
analysis, the net sales and operating profits of the franchisee
operations of PFS, PepsiCo's restaurant distribution operation,
have been allocated to each restaurant chain.
1994 vs. 1993
Worldwide net sales increased $1.2 billion or 12% to $10.5
billion. The fifty-third week contributed approximately 1 point
to the sales growth with domestic and international operations
benefiting by about 1 point and 2 points, respectively. The
sales growth was primarily due to $934 million from additional
units (units constructed and acquired, principally from
franchisees, net of units closed and sold) and volume growth of
$185 million. Domestic sales increased $668 million or 8% to
$8.7 billion and international sales rose $497 million or 37% to
$1.8 billion.
23
Worldwide operating profits declined $48 million or 6% to
$730 million. The fifty-third week mitigated the profit decline
by approximately 3 points with domestic and international
operations benefiting at the same rate. The decline reflected
increased administrative and support costs, including spending
for strategic initiatives and aggressive international unit
development, higher store operating costs and a sales mix shift
to lower-margin products. These were partially offset by
additional units that contributed $73 million, lower raw material
costs and higher franchise royalty revenues. Volume growth of
$30 million was offset by lower net prices. Domestic profits
declined $26 million or 4% to $659 million. International
profits fell $22 million or 23% to $71 million, which included a
$7 million charge to consolidate the headquarters operations for
the three international restaurant businesses into one.
The significant devaluation of the Mexican peso in late 1994
and early 1995 did not materially impact 1994 international
restaurant operating profits. Results from Mexico constitute an
immaterial portion of international restaurant profits. However,
the devaluation and its related effects are expected to have an
unfavorable impact on 1995 results. The operations in Mexico
have begun to increase pricing and reduce costs, including
evaluating alternative sourcing of raw materials. In addition,
further expansion of company-owned units has been temporarily
halted pending stabilization of the economy. Nonetheless,
significant uncertainties remain in Mexico and, as a result, it
is not possible to quantify the impact.
Late in 1994, Roger Enrico was named Chairman, PepsiCo
Worldwide Restaurants. He is currently evaluating several
options to improve their operating results and returns on our
total restaurant investments. Examples of options under
consideration to improve investment returns include a reduced
company share of future new restaurant development and sale of
some existing company restaurants to franchisees. The cash
generated from these options would most likely be reinvested in
our nonrestaurant businesses or used to repurchase PepsiCo stock.
We expect to begin making decisions on these and other
options during 1995 as we continue to refine our restaurant
operating strategies.
Pizza Hut
Worldwide sales increased $346 million or 8% to $4.5 billion
driven by international operations. However, the domestic
operations continue to represent the major portion of worldwide
Pizza Hut. The worldwide sales increase was driven by additional
units that contributed $460 million, including $80 million from
the domestic acquisition of D'Angelo Sandwich Shops late in 1993.
This benefit was partially offset by lower volumes of $60
million, reflecting domestic volume declines that exceeded
international volume gains, and lower net pricing. The domestic
volume declines primarily reflected lapping the successful
national roll-out of Bigfoot Pizza in 1993.
Same store sales for domestic company-owned units declined
6%, though volume decreased at a slightly slower rate. The
decline was primarily in the delivery and carryout channels,
reflecting the lapping of the national roll-out of Bigfoot Pizza
in 1993.
Worldwide profits decreased $77 million or 21% to $295
million. This decline reflected the lower net pricing due to
value-oriented promotions, increased administrative and support
spending, primarily to develop international markets, lower
volumes of $35 million, reflecting the domestic volume declines
partially offset by the international volume advances, and higher
store operating costs. These were partially offset by additional
units that contributed $27 million, increased franchise royalty
revenues and favorable food costs, as slightly higher cheese
prices were more than offset by favorable meat costs. Though
difficult to forecast, these food costs are expected to decrease
in 1995. The profit decline was also mitigated by a favorable
impact of $14 million from extending depreciable lives on certain
domestic delivery assets and the absence of last year's start-up
costs associated with Bigfoot Pizza. The worldwide profit margin
declined more than 2 points to 6.6%.
International sales posted strong double-digit growth driven
by additional units, particularly in Korea, Brazil, Canada,
Mexico and Spain. Volume gains were partially offset by lower
net pricing. International profits declined sharply, reflecting
increased start-up and administrative costs to support aggressive
development strategies,
24
partially offset by additional units and increased franchise royalty
revenues. International profits also reflected Pizza Hut's share of
the international restaurants'consolidation charge.
Strong gains in Korea, the largest profit market, primarily
reflected additional units and strong volume growth. Profits
declined in the largest sales markets, Australia and Canada.
Additionally, significant start-up losses were experienced in the
new Poland operations.
Taco Bell
Worldwide sales increased $500 million or 17% to $3.4
billion. The domestic operations represent substantially all of
worldwide Taco Bell. The worldwide sales growth was led by
additional Taco Bell units which contributed $281 million and
volume gains that provided $125 million, half of which was the
result of food and paper sales to additional franchisees. The
sales growth also reflected $84 million due to the acquisition of
Chevys in the third quarter of 1993 and new Chevys units. Same
store sales for domestic company-owned Taco Bell units grew 2%,
though volume grew at a slower rate.
Worldwide profits rose $17 million or 7% to $270 million.
The profit growth reflected lower food costs, additional units
which contributed $24 million, volume gains of $20 million,
higher soft drink prices and increased franchise royalty
revenues. These benefits were partially offset by higher store
operating costs, driven by increased labor costs, an unfavorable
mix shift to lower-margin products and higher headquarters
administrative expenses. Profit growth was restrained by
increased losses posted by Hot 'n Now. Taco Bell plans to
transition Hot 'n Now during 1995 from primarily a company-
operated to a licensee/franchisee-operated business. This is
expected to significantly reduce Hot 'n Now's operating losses in
1995. Taco Bell worldwide profit margin fell almost 1 point to
7.9%.
International operations posted strong double-digit sales
growth, principally due to additional units. Volume gains were
largely offset by an unfavorable currency translation impact of a
weaker Canadian dollar. International operating results improved
slightly, although still resulting in a modest loss in 1994, as
volume gains were partially offset by start-up losses of new
units.
KFC
Worldwide sales rose $319 million or 14% to $2.6 billion.
The sales growth reflected additional units that contributed $193
million and volume gains of $120 million.
Worldwide profits increased $12 million or 8% to $165
million, reflecting the absence of last year's start-up costs
associated with the Colonel's Rotisserie Gold roasted chicken
product and accompanying side items (collectively, "CRG").
Higher volumes of $40 million, additional units that contributed
$22 million and increased franchise royalty revenues were largely
offset by a sales mix shift to lower-margin products, higher
field and headquarters administrative and support costs and lower
net pricing. The worldwide profit margin declined almost one-
half point to 6.2% due to international operations.
The improvement in KFC's domestic sales reflected an
increase in volume, as gains from CRG and the value-oriented Mega
Meal were partially offset by lower volumes of existing products,
and higher net pricing. Same store sales advanced 2% from last
year, though volumes grew at a slightly slower rate.
Domestic profits grew at a double-digit rate in 1994.
Operating profit benefited from the absence of last year's start-
up costs associated with CRG. Higher net pricing and volume
gains were offset by a mix shift to the lower-margin CRG and Mega
Meal offerings. Reduced store operating costs, including lower
product costs, primarily due to reformulation of side items late
in the second quarter, and the 1994 impact of favorable actuarial
adjustments to prior year workers' compensation claim accruals,
were partially offset by increased administrative costs. Profit
growth was depressed by lapping last year's $3.3 million
favorable adjustment to a 1991 reorganization accrual.
25
Double-digit international sales growth was led by the
combined impact of acquired units in the U.K. and new units in
Mexico, Australia and Canada. The balance of the sales growth
reflected volume gains due, in part, to new value-priced
offerings, partially offset by the related lower net pricing.
International profit growth was modest. Excluding KFC's
share of the international restaurants' consolidation charge,
strong single-digit international operating profit growth
reflected gains from additional units and higher franchise
royalty revenues, partially offset by increased store operating
costs and higher field administrative and support costs. The
volume gains were offset by the lower net pricing.
Profits increased in Australia, the largest market, and New
Zealand. Mexico's profits declined sharply and Canada reported
significantly lower results.
International sales represented about 40% of worldwide sales
in 1994 and 30% in 1993. International profits represented about
40% of worldwide profits in 1994 and 1993.
1993 vs. 1992
Worldwide net sales rose $1.1 billion or 14% to $9.4
billion. This advance was driven by additional units, which
contributed $913 million. Volume growth, led by domestic Pizza
Hut, provided $175 million of the sales advance. Domestic sales
grew $910 million or 13% to $8.0 billion and international sales
rose $213 million or 19% to $1.4 billion. The unfavorable
currency translation impact of a stronger U.S. dollar depressed
international sales growth.
Worldwide operating profits grew $60 million or 8% to $778
million. Additional units provided $89 million and volume growth
contributed $75 million to the profit increase. Increased
operating costs were partially offset by modestly higher net
pricing (principally at domestic KFC) and increased franchise
royalty revenues. Domestic profits rose $87 million or 15% to
$685 million, while international profits declined $27 million or
23% to $93 million reflecting weakness in Australia.
Pizza Hut
Worldwide sales increased $525 million or 15% to $4.2
billion. The domestic operations represent the major portion of
worldwide Pizza Hut. Additional units contributed $392 million
to the worldwide sales increase. Volume growth provided $140
million, driven by strong domestic gains resulting from the
national roll-out of the new value-priced Bigfoot Pizza in the
second quarter.
Same store sales advanced 5% though volume growth was
slightly higher. This performance reflected growth in all three
distribution channels: delivery, carryout and dine-in. Improved
sales in both delivery and carryout were driven by the success of
Bigfoot. The growth in dine-in reflected the impact of the third
quarter 1992 roll-out of the all-you-can-eat pizza and salad
lunch buffet. Results late in 1993 indicated a softening of same
store sales trends in dine-in due primarily to lapping last
year's roll-out of the lunch buffet.
Worldwide profits advanced $37 million or 11% to $372
million. This profit performance reflected $55 million from
volume growth, $41 million from additional units, increased
franchise royalty revenues and higher international net pricing.
These benefits were partially offset by increased store operating
costs as well as administrative and support expenses, which
included the start-up costs associated with Bigfoot. Bigfoot
contributed significantly to U.S. profit growth as incremental
volume, net of estimated cannibalization of other products, more
than offset the effect of the product's lower margin and the
start-up costs. Prices for cheese have fluctuated significantly
in recent years. Lower cheese costs in 1993 were offset by
higher meat and produce costs. The effect of these increasing
costs was exacerbated by a sales mix shift to more heavily-topped
pizzas and the lunch buffet. Though difficult to forecast,
commodity costs (led by cheese) were expected to increase. The
worldwide profit margin declined almost one-half point to 9.0%
due to lower international profits.
26
International sales posted double-digit growth driven by
additional units in several markets, including Canada, Belgium,
Australia, Spain and Puerto Rico. This benefit, combined with
higher net pricing and increased franchise royalty revenues, was
partially offset by an unfavorable currency translation impact,
principally in Australia and Canada. International profits
declined slightly, primarily reflecting an unfavorable currency
translation impact. The contributions of the additional units,
higher net pricing and increased franchise royalty revenues were
largely offset by higher operating expenses, principally
development and support costs.
In the largest sales markets, profits declined in Australia,
but rose in Canada. Australia's performance reflected lower
volumes, despite introduction of Bigfoot Pizza in the third
quarter, and intense competitive pricing activity. To provide
even greater value and stimulate volume growth in 1994, a more
heavily-topped Bigfoot was relaunched late in 1993 and a new
value-oriented menu was introduced. Canada's profit growth
reflected higher net pricing, additional units and volume growth.
A product similar to Bigfoot, launched in the third quarter,
contributed to improved results.
Taco Bell
Worldwide sales grew $441 million or 18% to $2.9 billion.
The domestic operations represent substantially all of worldwide
Taco Bell. The worldwide sales increase was driven by additional
units, which contributed $364 million, including $78 million from
additional Hot 'n Now units and the acquired Chevys units. The
balance of the sales growth reflected the impact of higher store
volumes, partially offset by lower distribution sales by PFS
caused by the late 1992/early 1993 switch to another supplier by
certain franchisees. Same store sales for Taco Bell units rose
6% due to volume growth.
Worldwide profits increased $39 million or 18% to $253
million. Additional units contributed $35 million and volume
growth provided $25 million. These benefits, combined with
higher franchise royalty revenues and a small decline in food and
promotional costs, were partially offset by increased
headquarters administrative and support expenses. Profit growth
was depressed by increased losses at Hot 'n Now, reflecting costs
associated with a decision to not develop certain sites as well
as losses at new units. The worldwide profit margin was even at
8.7%. Profits in 1994 were expected to be aided by a late 1993
price increase for certain soft drink sizes.
International operations posted double-digit sales growth
and a small loss compared to a small profit in 1992, reflecting
increased development and support costs, as well as costs
associated with a store closure in the U.K.
KFC
Worldwide sales rose $157 million or 7% to $2.3 billion.
Additional units, principally in international markets,
contributed $158 million to sales growth. Higher domestic net
pricing and increased franchise royalty revenues also aided sales
growth. Sales growth was depressed by an unfavorable currency
translation impact as well as lower store volumes.
Worldwide profits decreased $16 million or 9% to $153
million as lower international profits were partially offset by
an increase domestically. The worldwide profit decline reflected
higher store operating costs, which included start-up costs
associated with the roll-out of the new roasted chicken products
in the U.S. and Australia, and increased international
administrative and support expenses, partially offset by the
higher net pricing and increased franchise royalty revenues. The
contribution from additional units of $13 million was partially
offset by the impact of lower volumes. The worldwide profit
margin fell over 1 point to 6.6% due to lower international
profits.
Improvement in domestic sales reflected additional units and
higher net pricing, principally from a lower level of price
discounting, partially offset by lower store volumes. Same store
sales were about even with last year. The introduction of CRG
late in the year contributed significantly to strong same store
sales growth in the fourth quarter of 1993.
27
Domestic profits grew at a high single-digit rate reflecting
the higher net pricing that exceeded increased store operating
costs. This benefit, combined with the impact of additional units
and higher franchise royalty revenues, was partially offset by
the effect of lower volumes. The profit performance also
reflected a favorable adjustment of the 1991 restructuring
accrual. For the year, the benefits from incremental volume of
CRG, net of estimated cannibalization of other products, were
more than offset by the effect of CRG's lower margin and the
start-up expenses for the roll-out. However, CRG contributed
significantly to profit growth in the fourth quarter of 1993.
International sales posted double-digit growth, driven by
additional units in Singapore, Canada and Mexico, partially
offset by an unfavorable currency translation impact. A double-
digit decline in profits was caused principally by Australia, the
largest sales market. Increased administrative and support costs
also contributed to the profit decline.
Australia's performance was depressed by the start-up
expenses associated with its new value-priced TenderRoast chicken
product, the combined impact of the product's lower margin and
its greater than expected cannibalization of other higher-margin
products and an overall decline in volumes. Initiatives were
underway to drive incremental sales of TenderRoast. Canada, the
next largest sales market, posted a relatively modest decline in
profits reflecting lower volumes and competitive pricing
activity. To improve results in 1994 for both Australia and
Canada, KFC introduced new value-oriented menus and rolled out
delivery in certain markets.
International sales represented about 30% of worldwide sales
in 1993 and 1992. International profits represented about 40% of
worldwide profits in 1993 and 50% in 1992.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Information on page F-1.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The name, age and background of each of the Company's
directors nominated for reelection are contained under the
caption "Election of Directors" in the Company's Proxy Statement
for its 1995 Annual Meeting of Shareholders and are incorporated
herein by reference.
The executive officers of the Company and their current
positions and ages are as follows:
NAME POSITION AGE
D. Wayne Calloway Chairman of the Board and Chief 59
Executive Officer
Roger A. Enrico Vice Chairman of the Board and
Chairman and Chief Executive 50
Officer, PepsiCo Worldwide
Restaurants
Robert G. Dettmer Executive Vice President and Chief 63
Financial Officer
Randall C. Barnes Senior Vice President and Treasurer 43
Robert L. Carleton Senior Vice President and 54
Controller
28
Edward V. Lahey, Senior Vice President, General 56
Jr. Counsel and Secretary
Indra K. Nooyi Senior Vice President, Strategic 39
Planning
Executive officers are elected by the Company's Board of
Directors, and their terms of office continue until the next
annual meeting of the Board or until their successors are elected
and have qualified. There are no family relationships among the
Company's executive officers.
Item 11. Executive Compensation
Information on compensation of the Company's directors and
executive officers is contained in the Company's Proxy Statement
for its 1995 Annual Meeting of Shareholders under the caption
"Executive Compensation" and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information on the number of shares of PepsiCo Capital Stock
beneficially owned by each director and by all directors and
officers as a group is contained under the caption "Ownership of
Capital Stock by Directors and Officers" in the Company's Proxy
Statement for its 1995 Annual Meeting of Shareholders and is
incorporated herein by reference. As far as is known to the
Company, no person owns beneficially more than 5% of the
outstanding shares of PepsiCo Capital Stock.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) 1. Financial Statements
See Index to Financial Information on page F-1.
2. Financial Statement Schedules
See Index to Financial Information on page F-1.
3. Exhibits
See Index to Exhibits on page E-1.
(b) Reports on Form 8-K
None.
S-1
SIGNATURES
Pursuant to the requirements of Section 13 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 28, 1995
PEPSICO, INC.
By: /s/ EDWARD V. LAHEY, JR.
Edward V. Lahey, Jr.
Attorney-in-Fact
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/ D. WAYNE CALLOWAY Chairman of the Board and March 28, 1995
D. Wayne Calloway Chief Executive Officer
/s/ ROBERT G. DETTMER Executive Vice President March 28, 1995
Robert G. Dettmer and Chief Financial
Officer
/s/ ROBERT L. CARLETON Senior Vice President and March 28, 1995
Robert L. Carleton Controller (Chief
Accounting Officer)
/s/ ROGER A. ENRICO Vice Chairman of the March 28, 1995
Roger A. Enrico Board, Chairman and Chief
Executive Officer, PepsiCo
Worldwide Restaurants, and
Director
/s/ JOHN F. AKERS Director March 28, 1995
John F. Akers
/s/ ROBERT E. ALLEN Director March 28, 1995
Robert E. Allen
/s/ JOHN J. MURPHY Director March 28, 1995
John J. Murphy
/s/ ANDRALL E. PEARSON Director March 28, 1995
Andrall E. Pearson
S-2
/s/ SHARON PERCY Director March 28, 1995
ROCKEFELLER
Sharon Percy Rockefeller
/s/ ROGER B. SMITH Director March 28, 1995
Roger B. Smith
/s/ ROBERT H. STEWART, III Director March 28, 1995
Robert H. Stewart, III
/s/ FRANKLIN A. THOMAS Director March 28, 1995
Franklin A. Thomas
/s/ P. ROY VAGELOS Director March 28, 1995
P. Roy Vagelos
/s/ ARNOLD WEBER Director March 28, 1995
Arnold R. Weber
PepsiCo, Inc. and Subsidiaries
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1994
F-1
PEPSICO, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
Item 14(a)(1)-(2)
Page
Reference
Item 14(a)(1) Financial Statements
Consolidated Statement of Income for
the fiscal years December 31, 1994,
December 25, 1993 and December 26, 1992 F-2
Consolidated Balance Sheet at December 31, 1994
and December 25, 1993 F-3
Consolidated Statement of Cash Flows for
the fiscal years ended December 31, 1994,
December 25, 1993 and December 26, 1992 F-4
Consolidated Statement of Shareholders' Equity
for the fiscal years ended December 31, 1994,
December 25, 1993 and December 26, 1992 F-6
Notes to Consolidated Financial
Statements F-8
Management's Responsibility for Financial Statements F-37
Report of Independent Auditors, KPMG Peat Marwick LLP F-38
Selected Quarterly Financial Data F-39
Selected Financial Data F-42
Item 14(a)(2) Financial Statement Schedules
II Valuation and Qualifying Accounts and Reserves
for the fiscal years ended December 31, 1994,
December 25, 1993 and December 26, 1992 F-49
All other financial statements and schedules have been omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the above listed financial statements or the notes thereto.
F-2
_______________________________________________________________________________
Consolidated Statement of Income
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fifty-three weeks ended December 31, 1994 and fifty-two weeks ended
December 25, 1993 and December 26, 1992
1994 1993 1992
_______________________________________________________________________________
Net Sales $28,472.4 $25,020.7 $21,970.0
Costs and Expenses, net
Cost of sales 13,715.4 11,946.1 10,611.7
Selling, general and
administrative expenses 11,243.6 9,864.4 8,721.2
Amortization of intangible assets 312.2 303.7 265.9
Operating Profit 3,201.2 2,906.5 2,371.2
Gain on joint venture stock offering 17.8 - -
Interest expense (645.0) (572.7) (586.1)
Interest income 90.4 88.7 113.7
Income Before Income Taxes and Cumulative
Effect of Accounting Changes 2,664.4 2,422.5 1,898.8
Provision for Income Taxes 880.4 834.6 597.1
Income Before Cumulative Effect of
Accounting Changes 1,784.0 1,587.9 1,301.7
Cumulative Effect of Accounting Changes
Postemployment benefits (net of income
tax benefit of $29.3) (55.3) - -
Pension assets (net of income tax
expense of $14.5) 23.3 - -
Postretirement benefits other than
pensions (net of income tax benefit
of $218.6) - - (356.7)
Income taxes - - (570.7)
Net Income $ 1,752.0 $ 1,587.9 $ 374.3
Income (Charge) Per Share
Before cumulative effect of accounting
changes $ 2.22 $ 1.96 $ 1.61
Cumulative effect of accounting changes
Postemployment benefits (0.07) - -
Pension assets 0.03 - -
Postretirement benefits other
than pensions - - (0.44)
Income taxes - - (0.71)
Net Income Per Share $ 2.18 $ 1.96 $ 0.46
Average shares outstanding used to calculate
income (charge) per share 803.6 810.1 806.7
_______________________________________________________________________________
See accompanying Notes to Consolidated Financial Statements.
_______________________________________________________________________________
F-3
_____________________________________________________________________________
Consolidated Balance Sheet
(in millions except per share amount)
PepsiCo, Inc. and Subsidiaries
December 31, 1994 and December 25, 1993
1994 1993
_____________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents $ 330.7 $ 226.9
Short-term investments, at cost 1,157.4 1,573.8
1,488.1 1,800.7
Accounts and notes receivable, less allowance:
$150.6 in 1994 and $128.3 in 1993 2,050.9 1,883.4
Inventories 970.0 924.7
Prepaid expenses, taxes and
other current assets 563.2 499.8
Total Current Assets 5,072.2 5,108.6
Investments in Affiliates 1,295.2 1,090.5
Property, Plant and Equipment, net 9,882.8 8,855.6
Intangible Assets, net 7,842.1 7,929.5
Other Assets 699.7 721.6
Total Assets $24,792.0 $23,705.8
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,451.6 $ 1,390.0
Accrued compensation and benefits 753.5 726.0
Short-term borrowings 678.5 2,191.2
Income taxes payable 671.7 823.7
Accrued marketing 546.2 400.9
Other current liabilities 1,168.9 1,043.1
Total Current Liabilities 5,270.4 6,574.9
Long-term Debt 8,840.5 7,442.6
Other Liabilities 1,852.1 1,342.0
Deferred Income Taxes 1,972.9 2,007.6
Shareholders' Equity
Capital stock, par value 1 2/3 cents per share:
authorized 1,800.0 shares, issued 863.1 shares 14.4 14.4
Capital in excess of par value 934.4 879.5
Retained earnings 7,739.1 6,541.9
Currency translation adjustment and other (470.6) (183.9)
8,217.3 7,251.9
Less: Treasury stock, at cost:
73.2 shares and 64.3 shares in 1994 and
1993, respectively (1,361.2) (913.2)
Total Shareholders' Equity 6,856.1 6,338.7
Total Liabilities and
Shareholders' Equity $24,792.0 $23,705.8
____________________________________________________________________________
See accompanying Notes to Consolidated Financial Statements.
_____________________________________________________________________________
F-4
___________________________________________________________________________
Consolidated Statement of Cash Flows (page 1 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fifty-three weeks ended December 31, 1994 and fifty-two weeks
ended December 25, 1993 and December 26, 1992
1994 1993 1992
___________________________________________________________________________
Cash Flows - Operating Activities
Income before cumulative effect of
accounting changes $ 1,784.0 $ 1,587.9 $ 1,301.7
Adjustments to reconcile income
before cumulative effect of
accounting changes to net cash
provided by operating activities:
Depreciation and amortization 1,576.5 1,444.2 1,214.9
Deferred income taxes (66.9) 83.3 (52.0)
Other noncash charges and
credits, net 391.1 344.8 315.6
Changes in operating working capital,
excluding effects of acquisitions:
Accounts and notes receivable (111.8) (161.0) (45.7)
Inventories (101.6) (89.5) (11.8)
Prepaid expenses, taxes and other
current assets 1.2 3.3 (27.4)
Accounts payable 30.4 143.2 (102.0)
Income taxes payable 54.4 (125.1) (16.9)
Other current liabilities 158.7 (96.7) 135.2
Net change in operating
working capital 31.3 (325.8) (68.6)
Net Cash Provided by Operating
Activities 3,716.0 3,134.4 2,711.6
Cash Flows - Investing Activities
Acquisitions and investments
in affiliates (315.8) (1,011.2) (1,209.7)
Capital spending (2,253.2) (1,981.6) (1,549.6)
Proceeds from sales of property,
plant and equipment 55.3 72.5 89.0
Short-term investments, by original
maturity:
More than three months-purchases (218.6) (578.7) (1,174.8)
More than three months-maturities 649.5 846.0 1,371.8
Three months or less, net (9.9) (8.3) (249.4)
Other, net (268.3) (109.4) (30.8)
Net Cash Used for Investing
Activities $(2,361.0) $(2,770.7) $(2,753.5)
____________________________________________________________________________
(Continued on following page)
F-5
___________________________________________________________________________
Consolidated Statement of Cash Flows (page 2 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fifty-three weeks ended December 31, 1994 and fifty-two weeks
ended December 25, 1993 and December 26, 1992
1994 1993 1992
___________________________________________________________________________
Cash Flows - Financing Activities
Proceeds from issuances of
long-term debt $ 1,285.2 $ 710.8 $ 1,092.7
Payments of long-term debt (1,179.5) (1,201.9) (616.3)
Short-term borrowings, by original
maturity:
More than three months-proceeds 1,303.8 3,033.6 911.2
More than three months-payments (1,727.7) (2,791.6) (2,062.6)
Three months or less, net 113.8 839.0 1,075.3
Cash dividends paid (540.2) (461.6) (395.5)
Purchases of treasury stock (549.1) (463.5) (32.0)
Proceeds from exercises of
stock options 97.4 68.6 82.8
Other, net (43.5) (36.7) (30.9)
Net Cash (Used for) Provided by
Financing Activities (1,239.8) (303.3) 24.7
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (11.4) (3.4) 0.4
Net Increase (Decrease) in Cash
and Cash Equivalents 103.8 57.0 (16.8)
Cash and Cash Equivalents
- Beginning of Year 226.9 169.9 186.7
Cash and Cash Equivalents
- End of Year $ 330.7 $ 226.9 $ 169.9
___________________________________________________________________________
Supplemental Cash Flow Information
Cash Flow Data
Interest paid $ 591.1 549.5 574.7
Income taxes paid $ 663.1 675.6 519.7
Schedule of Noncash Investing
and Financing Activities
Liabilities assumed in
connection with acquisitions $ 223.5 897.0 383.8
Issuance of treasury stock and
debt for acquisitions $ 38.8 364.5 189.5
Book value of net assets exchanged
for investment in affiliates $ - 60.8 86.7
___________________________________________________________________________
See accompanying Notes to Consolidated Financial Statements.
F-6
___________________________________________________________________________
Consolidated Statement of Shareholders' Equity (page 1 of 2)
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fifty-three weeks ended December 31, 1994 and fifty-two weeks ended
December 25, 1993 and December 26, 1992
Capital Stock
Issued Treasury
Shares Amount Shares Amount
Shareholders' Equity,
December 28, 1991 863.1 $14.4 (74.0) $ (745.9)
1992 Net income - - - -
Cash dividends declared
(per share-$0.51) - - - -
Currency translation adjustment - - - -
Shares issued in connection with
acquisitions - - 4.3 44.2
Stock option exercises, including
tax benefits of $57.5 - - 6.3 65.3
Purchases of treasury stock - - (1.0) (32.0)
Other - - 0.1 1.4
Shareholders' Equity,
December 26, 1992 863.1 $14.4 (64.3) $ (667.0)
1993 Net income - - - -
Cash dividends declared
(per share-$0.61) - - - -
Currency translation adjustment - - - -
Purchases of treasury stock - - (12.4) (463.5)
Shares issued in connection with
acquisitions - - 8.9 170.2
Stock option exercises, including
tax benefits of $23.4 - - 3.4 46.0
Pension liability adjustment, net
of deferred taxes of $5.1 - - - -
Other - - 0.1 1.1
Shareholders' Equity,
December 25, 1993 863.1 $14.4 (64.3) $ (913.2)
1994 Net income - - - -
Cash dividends declared
(per share-$0.70) - - - -
Currency translation adjustment - - - -
Purchases of treasury stock - - (15.0) (549.1)
Stock option exercises, including
tax benefits of $27.1 - - 4.9 80.8
Shares issued in connection with
acquisitions - - 0.9 15.1
Pension liability adjustment, net
of deferred taxes of $5.1 - - - -
Other - - 0.3 5.2
Shareholders' Equity,
December 31, 1994 863.1 $14.4 (73.2) $(1,361.2)
(Continued on following page)
F-7
Consolidated Statement of Shareholders' Equity (page 2 of 2)
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fifty-three weeks ended December 31, 1994 and fifty-two weeks ended
December 25, 1993 and December 26, 1992
Capital Currency
in Translation
Excess of Retained Adjustment
Par Value Earnings and Other Total
Shareholders' Equity,
December 28, 1991 $476.6 $5,470.0 $ 330.3 $5,545.4
1992 Net income - 374.3 - 374.3
Cash dividends declared
(per share-$0.51) - (404.6) - (404.6)
Currency translation adjustment - - (429.3) (429.3)
Shares issued in connection with
acquisitions 115.3 - - 159.5
Stock option exercises, including
tax benefits of $57.5 74.9 - - 140.2
Purchases of treasury stock - - - (32.0)
Other 0.8 - - 2.2
Shareholders' Equity,
December 26, 1992 $667.6 $5,439.7 $ (99.0) $5,355.7
1993 Net income - 1,587.9 - 1,587.9
Cash dividends declared
(per share-$0.61) - (485.7) - (485.7)
Currency translation adjustment - - (77.0) (77.0)
Purchases of treasury stock - - - (463.5)
Shares issued in connection with
acquisitions 164.6 - - 334.8
Stock option exercises, including
tax benefits of $23.4 46.1 - - 92.1
Pension liability adjustment, net
of deferred taxes of $5.1 - - (7.9) (7.9)
Other 1.2 - - 2.3
Shareholders' Equity,
December 25, 1993 $879.5 $6,541.9 $(183.9) $6,338.7
1994 Net income - 1,752.0 - 1,752.0
Cash dividends declared
(per share-$0.70) - (554.8) - (554.8)
Currency translation adjustment - - (294.6) (294.6)
Purchases of treasury stock - - - (549.1)
Stock option exercises, including
tax benefits of $27.1 44.5 - - 125.3
Shares issued in connection with
acquisitions 13.7 - - 28.8
Pension liability adjustment, net
of deferred taxes of $5.1 - - 7.9 7.9
Other (3.3) - - 1.9
Shareholders' Equity,
December 31, 1994 $934.4 $7,739.1 $(470.6) $6,856.1
See accompanying Notes to Consolidated Financial Statements.
F-8
Notes to Consolidated Financial Statements
(tabular dollars in millions except per share amounts)
Note 1 - Summary of Significant Accounting Policies
The preparation of the Consolidated Financial Statements requires estimates
and assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from those
estimates. Certain reclassifications were made to prior year amounts to
conform with the 1994 presentation. Significant accounting policies are
discussed below, or where applicable, in the Notes that follow.
Principles of Consolidation. The financial statements reflect the
consolidated accounts of PepsiCo, Inc. and its controlled affiliates.
Intercompany accounts and transactions have been eliminated. Investments
in affiliates in which PepsiCo exercises significant influence but not
control are accounted for by the equity method and the equity in net income
is included in Selling, general and administrative expenses.
Marketing Costs. Marketing costs are reported in Selling, general and
administrative expenses and include costs of advertising, marketing and
promotional programs. Promotional discounts are expensed as incurred and
other marketing costs not deferred at year-end are charged to expense
ratably in relation to sales over the year in which incurred. Marketing
costs deferred at year-end consist of media and personal service
advertising prepayments, promotional materials in inventory and production
costs of future media advertising; these assets are expensed in the year
first used.
Promotional discounts to retailers in the beverage segment are
classified as a reduction of sales; in the snack food segment, such
discounts are generally classified as marketing costs. The difference in
classification reflects our historical view that promotional discounts had
become so pervasive in the beverage industry, compared to the snack food
industry, that they were effectively price discounts and should be
classified accordingly. This differing accounting classification was also
supported by a survey of the accounting practice of others in the beverage
and snack foods industries. PepsiCo plans to review its accounting policy
in 1995 to determine whether the different accounting classification for
beverages and snack foods still reflects the substance of the activity and
whether it continues to be consistent with others in our industries.
Depending on the outcome of the review, PepsiCo may change its accounting
classification of beverage or snack food promotional discounts. Any change
will not impact reported earnings as it would only result in a
reclassification of the cost of promotional discounts between Net Sales and
Selling, general and administrative expenses.
Cash Equivalents. Cash equivalents represent funds temporarily
invested (with original maturities not exceeding three months) as part of
PepsiCo's management of day-to-day operating cash receipts and
disbursements. All other investment portfolios, largely held outside the
U.S., are primarily classified as short-term investments.
Net Income Per Share. Net income per share is computed by dividing
net income by the weighted average number of shares and share equivalents
outstanding during each year.
Research and Development Expenses. Research and development expenses,
which are expensed as incurred, were $152 million, $113 million and $102
million in 1994, 1993 and 1992, respectively.
Fiscal Year. PepsiCo's fiscal year ends on the last Saturday in
December and, as a result, a fifty-third week is added every 5 or 6 years.
The fiscal year ending December 31, 1994 consisted of 53 weeks.
F-9
Note 2 - Business Segments
Business Segments
PepsiCo operates on a worldwide basis within three industry segments:
beverages, snack foods and restaurants. The beverage segment primarily
markets its Pepsi, Diet Pepsi, Mountain Dew and other brands worldwide and
7UP internationally, and manufactures concentrates for its brands for sale
to franchised bottlers worldwide. The segment also operates bottling
plants and distribution facilities located in the U.S. and in various
international markets, and manufactures and distributes ready-to-drink
Lipton tea products in North America. In addition, under separate
distribution and joint venture agreements, the segment distributes certain
previously existing, as well as manufactures and distributes new jointly-
developed, Ocean Spray juice products in the U.S. and Canada. The snack
food segment manufactures, distributes and markets chips and other snacks
worldwide, with Frito-Lay representing the domestic business. The
international snack food business includes major operations in Mexico, the
U.K. and Canada. The restaurant segment consists primarily of the
operations of the worldwide Pizza Hut, Taco Bell and KFC chains. PFS,
PepsiCo's restaurant distribution operation, supplies company-owned and
franchised restaurants, principally in the U.S. Net sales and operating
profits of PFS' franchisee operations have been allocated to each
restaurant chain.
Unallocated Expenses, net includes corporate headquarters expenses,
minority interests, primarily in the Gamesa (Mexico) and Wedel (Poland)
snack food businesses, foreign exchange translation and transaction gains
and losses and other corporate items not allocated to the business
segments. Corporate Identifiable Assets consist principally of short-term
investments held outside the U.S. and investments in affiliates.
PepsiCo has invested in about 75 joint ventures, principally
international and all within PepsiCo's three industry segments, in which it
exercises significant influence but not control. Equity in net income of
these affiliates was $37.8, $30.1, and $40.1 in 1994, 1993 and 1992,
respectively. The increase in 1994 primarily reflected increased profits
at Snack Ventures Europe (SVE). The decline in 1993 primarily reflected
the expansion costs in a beverage affiliate in India and lower profits at
SVE. International snack food affiliates, which represented the largest
component of equity in net income of affiliates, contributed $34.3, $24.1
and $23.2 in 1994, 1993 and 1992, respectively. Dividends received from
affiliates totaled $33.1, $16.4 and $29.6 in 1994, 1993 and 1992,
respectively.
PepsiCo's year-end investments in affiliates totaled $1.3 billion in
1994, $1.1 billion in 1993 and $904.9 in 1992. The increase in 1994
reflected advances to California Pizza Kitchen (CPK), a domestic casual
dining restaurant chain, and investments in international franchised
bottling operations in Thailand and China, partially offset by the
translation impact of the late 1994 devaluation of the Mexican peso.
Significant investments in affiliates at year-end 1994 included $234.3 in
General Bottlers, a U.S. franchised bottler, $162.9 in CPK, $160.2 in a KFC
Japan joint venture, $123.2 in BAESA, a franchised bottler with operations
in South America, and $80.9 in SVE.
Items Affecting Comparability
Fiscal Year
1994 consisted of 53 weeks and the years 1989 through 1993 consisted of 52
weeks. The estimated favorable impact on net sales of the fifty-third week
F-10
was $433.5, increasing beverage, snack food and restaurant net sales by
$118.9, $142.6 and $172.0, respectively. The estimated favorable impact on
operating profits of the fifty-third week was $64.5, increasing beverage,
snack food and restaurant operating profits by $16.8, $26.0 and $22.9,
respectively, and increasing unallocated expenses, net by $1.2.
Unusual Items
Unusual charges totaled $193.5 in 1992, $170.0 in 1991 and $83.0 in 1990.
These unusual items were as follows:
Beverages - 1992 included $145.0 in charges consisting of $115.4 and
$29.6 to reorganize and streamline domestic and international operations,
respectively. 1990 included a $10.5 domestic charge for trade receivables
exposures.
Snack Foods - 1992 included a $40.3 charge principally to consolidate
the Walkers businesses in the U.K. 1991 included $127.0 in charges
consisting of $91.4 and $23.6 to streamline domestic and U.K. operations,
respectively, and $12.0 to dispose of all or part of a small unprofitable
business in Japan. 1990 included a $10.6 domestic charge for trade
receivables exposures.
Restaurants - 1991 included $43.0 in charges at KFC consisting of
$34.0 to streamline operations and $9.0 related to a delay in the U.S. roll-
out of a new product. 1990 included $28.0 in charges consisting of $17.6
for closure of certain underperforming restaurants (Pizza Hut - $9.0, Taco
Bell - $4.0 and KFC - $4.6) and $10.4 for reorganization charges for Pizza
Hut.
Unallocated Expenses, net - 1992 included an $8.2 charge to streamline
operations of the SVE joint venture. 1990 included $33.9 in charges
consisting of $18.0 for accelerated contributions to the PepsiCo Foundation
and $15.9 to reduce the carrying amount of an international Pizza Hut
affiliate.
See Note 16 and Management's Analysis of beverage and snack food
performance on pages 15 and 19, respectively, for additional information on
restructurings.
Accounting Changes
In 1994, PepsiCo adopted a preferred method for calculating the market-
related value of plan assets used in determining annual pension expense
(see Note 13) and extended the depreciable lives on certain domestic Pizza
Hut delivery assets. As compared to the previous accounting methods, these
changes increased 1994 operating profit by $49.1, increasing beverage,
snack food and restaurant profits by $12.4, $15.5 and $19.6 (almost all
domestic), respectively, and decreasing 1994 unallocated expenses, net by
$1.6.
In 1992, PepsiCo adopted Statements of Financial Accounting Standards
No. 106 and 109, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" and "Accounting for Income Taxes," respectively. As
compared to the previous accounting methods, these changes reduced 1992
operating profit by $72.8, decreasing beverage, snack food and restaurant
profits by $22.4, $30.8 and $15.4, respectively, and increasing 1992
unallocated expenses, net by $4.2. See Notes 12 and 17, respectively.
F-11
_______________________________________________________________________
INDUSTRY SEGMENTS - NET SALES (page 1 of 7)
(dollars in millions)
_______________________________________________________________________
5-Year Compounded
Growth Rate
1989 - 1994 1994 1993 1992
_______________________________________________________________________
Beverages:
Domestic 7.2% $ 6,541.2 $ 5,918.1 $ 5,485.2
International 22.2% 3,146.3 2,720.1 2,120.4
10.9% 9,687.5 8,638.2 7,605.6
Snack Foods:
Domestic 9.3% 5,011.3 4,365.3 3,950.4
International 32.0% 3,253.1 2,661.5 2,181.7
15.5% 8,264.4 7,026.8 6,132.1
Restaurants:
Domestic 13.2% 8,693.9 8,025.7 7,115.4
International 26.4% 1,826.6 1,330.0 1,116.9
14.9% 10,520.5 9,355.7 8,232.3
Combined Segments:
Domestic 10.1% 20,246.4 18,309.1 16,551.0
International 26.6% 8,226.0 6,711.6 5,419.0
13.6% $28,472.4 $25,020.7 $21,970.0
_______________________________________________________________________
1991 1990
_______________________________________________________________________
Beverages:
Domestic $ 5,171.5 $ 5,034.5
International 1,743.7 1,488.5
6,915.2 6,523.0
Snack Foods:
Domestic 3,737.9 3,471.5
International 1,512.2 1,295.3
5,250.1 4,766.8
Restaurants:
Domestic 6,258.4 5,540.9
International 868.5 684.8
7,126.9 6,225.7
Combined Segments:
Domestic 15,167.8 14,046.9
International 4,124.4 3,468.6
$19,292.2 $17,515.5
_______________________________________________________________________
F-12
______________________________________________________________________
INDUSTRY SEGMENTS - OPERATING PROFITS (page 2 of 7)
(dollars in millions)
_______________________________________________________________________
5-Year Compounded
Growth Rate
1989 - 1994(a) 1994 1993 1992
_______________________________________________________________________
Beverages:
Domestic 12.1% $ 1,022.3 $ 936.9 $ 686.3
International 20.0% 194.7 172.1 112.3
13.2% 1,217.0 1,109.0 798.6
Snack Foods:
Domestic 8.9% 1,025.1 900.7 775.5
International 27.1% 351.8 288.9 209.2
12.2% 1,376.9 1,189.6 984.7
Restaurants:
Domestic 12.2% 658.8 685.1 597.8
International 4.3% 71.5 92.9 120.7
11.3% 730.3 778.0 718.5
Combined Segments:
Domestic 11.1% 2,706.2 2,522.7 2,059.6
International 20.6% 618.0 553.9 442.2
12.3% 3,324.2 3,076.6 2,501.8
Equity Income 37.8 30.1 40.1
Unallocated Expenses,
net (160.8) (200.2) (170.7)
Operating Profit 12.6% $ 3,201.2 $ 2,906.5 $ 2,371.2
_______________________________________________________________________
(a) Growth rates exclude the impact of previously disclosed 1989
unusual items affecting international beverages and domestic
Taco Bell and KFC. There were no unusual items in 1994.
F-13
_______________________________________________________________________
INDUSTRY SEGMENTS - OPERATING PROFITS (page 3 of 7)
(dollars in millions)
_______________________________________________________________________
1991 1990
_______________________________________________________________________
Beverages:
Domestic $ 746.2 $ 673.8
International 117.1 93.8
863.3 767.6
Snack Foods:
Domestic 616.6 732.3
International 140.1 160.3
756.7 892.6
Restaurants:
Domestic 479.4 447.2
International 96.2 75.2
575.6 522.4
Combined Segments:
Domestic 1,842.2 1,853.3
International 353.4 329.3
2,195.6 2,182.6
Equity Income 32.2 30.1
Unallocated Expenses,
net (116.0) (170.6)
Operating Profit $ 2,111.8 $ 2,042.1
_______________________________________________________________________
F-14
_______________________________________________________________________
NET SALES BY RESTAURANT CHAIN (page 4 of 7)
(dollars in millions)
_______________________________________________________________________
5-Year Compounded
Growth Rate
1989 - 1994 1994 1993 1992
_______________________________________________________________________
Pizza Hut 12.8% $ 4,474.4 $4,128.7 $3,603.5
Taco Bell 18.3% 3,401.4 2,901.3 2,460.0
KFC 14.7% 2,644.7 2,325.7 2,168.8
14.9% $10,520.5 $9,355.7 $8,232.3
_______________________________________________________________________
1991 1990
_______________________________________________________________________
Pizza Hut $3,258.3 $2,949.9
Taco Bell 2,038.1 1,745.5
KFC 1,830.5 1,530.3
$7,126.9 $6,225.7
_______________________________________________________________________
OPERATING PROFITS BY RESTAURANT CHAIN
_______________________________________________________________________
5 Year Compounded
Growth Rate
1989 - 1994(a) 1994 1993 1992
_______________________________________________________________________
Pizza Hut 7.5% $ 294.8 $ 372.1 $ 335.4
Taco Bell 18.7% 270.3 253.1 214.3
KFC 9.0% 165.2 152.8 168.8
11.3% $ 730.3 $ 778.0 $ 718.5
_______________________________________________________________________
1991 1990
_______________________________________________________________________
Pizza Hut $ 314.5 $ 245.9
Taco Bell 180.6 149.6
KFC 80.5 126.9
$ 575.6 $ 522.4
_______________________________________________________________________
(a) Growth rates exclude the impact of previously disclosed 1989
unusual items affecting international beverages and domestic
Taco Bell and KFC. There were no unusual items in 1994.
F-15
_______________________________________________________________________
GEOGRAPHIC AREAS(b) (page 5 of 7)
(dollars in millions)
_______________________________________________________________________
Net Sales
1994 1993 1992
_______________________________________________________________________
United States $20,246.4 $18,309.1 $16,551.0
Europe 2,177.1 1,819.0 1,349.0
Mexico 2,022.8 1,613.4 1,234.6
Canada 1,244.3 1,206.1 979.6
Other 2,781.8 2,073.1 1,855.8
$28,472.4 $25,020.7 $21,970.0
_______________________________________________________________________
Segment Operating Profits
1994 1993 1992
_______________________________________________________________________
United States $ 2,706.2 $ 2,522.7 $ 2,059.6
Europe 16.7 47.4 52.6
Mexico 261.4 223.1 172.1
Canada 81.6 101.7 78.9
Other 258.3 181.7 138.6
$ 3,324.2 $ 3,076.6 $ 2,501.8
_______________________________________________________________________
Identifiable Assets
1994 1993 1992
_______________________________________________________________________
United States $14,218.4 $13,589.5 $11,957.0
Europe 3,062.0 2,666.1 1,948.4
Mexico 994.7 1,217.1 1,054.6
Canada 1,342.1 1,364.0 1,340.6
Other 2,195.6 1,675.1 1,282.0
Combined Segments 21,812.8 20,511.8 17,582.6
Corporate 2,979.2 3,194.0 3,368.6
$24,792.0 $23,705.8 $20,951.2
______________________________________________________________________
(b) The results of centralized concentrate manufacturing
operations in Puerto Rico and Ireland have been allocated
based upon sales to the respective areas.
F-16
_______________________________________________________________________
INDUSTRY SEGMENTS (page 6 of 7)
(dollars in millions)
_______________________________________________________________________
5-Year Compounded
Growth Rate Amortization of Intangible Assets
1989 - 1994 1994 1993 1992
_______________________________________________________________________
Beverages 7.6% $ 164.8 $ 157.4 $ 137.6
Snack Foods 17.8% 42.0 40.9 40.5
Restaurants 28.9% 105.4 105.4 87.8
14.0% $ 312.2 $ 303.7 $ 265.9
By Restaurant Chain:
Pizza Hut 31.6% $ 41.5 $ 44.7 $ 33.3
Taco Bell 22.9% 26.9 23.0 16.4
KFC 31.2% 37.0 37.7 38.1
28.9% $ 105.4 $ 105.4 $ 87.8
_______________________________________________________________________
_______________________________________________________________________
5 Year Compounded
Growth Rate Depreciation Expense
1989 - 1994 1994 1993 1992
_______________________________________________________________________
Beverages 14.9% $ 385.4 $ 358.5 $ 290.6
Snack Foods 11.7% 297.0 279.2 251.2
Restaurants 17.5% 538.8 457.2 374.3
Corporate 7.0 6.6 6.9
15.0% $1,228.2 $1,101.5 $ 923.0
By Restaurant Chain:
Pizza Hut 17.8% $ 218.6 $ 193.4 $ 150.5
Taco Bell 18.1% 156.0 124.6 101.5
KFC 16.7% 164.2 139.2 122.3
17.5% $ 538.8 $ 457.2 $ 374.3
_______________________________________________________________________
5 Year Compounded
Growth Rate Identifiable Assets
1989 - 1994 1994 1993 1992
_______________________________________________________________________
Beverages 9.1% $ 9,566.0 $ 9,105.2 $ 7,857.5
Snack Foods 8.8% 5,043.9 4,994.5 4,628.0
Restaurants 18.6% 7,202.9 6,412.1 5,097.1
Corporate 2,979.2 3,194.0 3,368.6
10.4% $24,792.0 $23,705.8 $20,951.2
By Restaurant Chain:
Pizza Hut 20.9% $ 2,536.4 $ 2,232.9 $ 1,676.8
Taco Bell 21.1% 2,390.7 2,075.9 1,523.7
KFC 14.2% 2,275.8 2,103.3 1,896.6
18.6% $ 7,202.9 $ 6,412.1 $ 5,097.1
_______________________________________________________________________
F-17
_______________________________________________________________________
INDUSTRY SEGMENTS (page 7 of 7)
(dollars in millions)
_______________________________________________________________________
5-Year Compounded
Growth Rate Capital Spending (c)
1989 - 1994 1994 1993 1992
_______________________________________________________________________
Beverages 20.4% $ 677.1 $ 491.3 $ 343.7
Snack Foods 15.6% 532.1 491.4 446.2
Restaurants 20.3% 1,072.0 1,004.4 757.2
Corporate 7.2 20.8 18.0
19.0% $2,288.4 $2,007.9 $1,565.1
Domestic 13.7% $1,492.6 $1,388.0 $1,069.0
International 35.7% 795.8 619.9 496.1
19.0% $2,288.4 $2,007.9 $1,565.1
By Restaurant Chain:
Pizza Hut 19.3% $ 389.0 $ 295.0 $ 212.8
Taco Bell 35.4% 473.4 459.4 339.0
KFC 5.6% 209.6 250.0 205.4
20.3% $1,072.0 $1,004.4 $ 757.2
_______________________________________________________________________
Acquisitions and
Investments in Affiliates (d)
1994 1993 1992
_______________________________________________________________________
Beverages $ 195.0 $ 711.5 $ 717.5
Snack Foods 11.8 75.5 201.3
Restaurants 147.8 588.7 480.4
$ 354.6 $1,375.7 $1,399.2
Domestic $ 87.8 $ 757.3 $ 549.5
International 266.8 618.4 849.7
$ 354.6 $1,375.7 $1,399.2
By Restaurant Chain:
Pizza Hut $ 94.6 $ 312.9 $ 247.7
Taco Bell 32.3 186.8 72.4
KFC 20.9 89.0 160.3
$ 147.8 $ 588.7 $ 480.4
______________________________________________________________________
(c) Included noncash amounts related to capital leases, largely in
the restaurant segment, of $35.2 in 1994, $26.3 in 1993 and
$15.5 in 1992.
(d) Included noncash amounts related to treasury stock and debt
issued in domestic transactions of $38.8 in 1994, $364.5 in
1993 and $189.5 in 1992. Of these noncash amounts, 14%, 65%
and 58%, respectively, related to the beverage segment and the
balance related to the restaurant segment.
F-18
Note 3 - Items Affecting Comparability
The fifty-third week, as described in Note 1, increased earnings in 1994 by
approximately $54.0 million ($34.9 million after-tax or $0.04 per share).
See Items Affecting Comparability on page F-9 for the estimated impact of
the fifty-third week on comparability of net sales and operating profits.
The effects of unusual items, primarily restructuring charges, and
accounting changes on comparability of operating profits are provided in
Items Affecting Comparability on page F-10.
Information regarding the 1994 gain from a public share offering by
PepsiCo's BAESA joint venture and a 1993 charge to increase net deferred
tax liabilities as of the beginning of 1993 for a 1% statutory income tax
rate increase due to 1993 U.S. tax legislation are provided in Notes 4 and
17, respectively.
Note 4 - Joint Venture Stock Offering
In 1993, PepsiCo entered into an arrangement with the principal
shareholders of Buenos Aires Embotelladora S.A. (BAESA), a franchised
bottler with operations in Argentina and Costa Rica. PepsiCo contributed
certain assets, primarily bottling operations in Chile and Uruguay, while
the shareholders contributed all of their outstanding shares in BAESA,
representing 72.8% of the voting control and 42.5% of the ownership
interest. Through this arrangement, PepsiCo's ownership in BAESA, which is
accounted for by the equity method, was 25.9%.
On March 24, 1994, BAESA completed a public offering of 2.9 million
American Depositary Shares (ADS) at $34.50 per ADS, which are traded on the
New York Stock Exchange. In conjunction with the offering, PepsiCo and
certain other shareholders exercised options for the equivalent of 1.6
million ADS. As a result of these transactions, PepsiCo's ownership in
BAESA declined to 23.8%. The transactions generated cash proceeds for
BAESA of $136.4 million. The resulting one-time, noncash gain to PepsiCo
was $17.8 million ($16.8 million after-tax or $0.02 per share).
Note 5 - Acquisitions and Investments in Affiliates
During 1994, PepsiCo completed acquisitions and affiliate investments
aggregating $355 million, principally for cash. In addition, approximately
$41 million of debt was assumed in these transactions, most of which was
subsequently retired. This activity included equity investments in
international franchised bottling operations, primarily in Thailand and
China, and acquisitions of international and domestic franchised restaurant
operations and franchised and independent bottling operations, primarily in
India and Mexico.
During 1993, PepsiCo completed acquisitions and affiliate investments
aggregating $1.4 billion, principally comprised of $1.0 billion in cash and
$335 million in PepsiCo Capital Stock. Approximately $307 million of debt
was assumed in these transactions, more than half of which was subsequently
retired. This activity included acquisitions of domestic and international
franchised restaurant operations, the buyout of PepsiCo's joint venture
partners in a franchised bottling operation in Spain and the related
acquisition of their fruit-flavored beverage concentrate operation, the
acquisition of the remaining 85% interest in a large franchised bottling
operation in the Northwestern U.S., the acquisition of a regional Mexican-
style casual dining restaurant chain in the U.S. and equity investments in
certain franchised bottling operations in Argentina and Mexico.
F-19
During 1992, acquisitions and affiliate investment activity aggregated
$1.4 billion, principally for cash. In addition, approximately $218
million of debt was assumed in these transactions, most of which was
subsequently retired. This activity included acquisitions of international
(primarily Canada) and domestic franchised bottling operations and a number
of domestic and international franchised restaurant operations, the buyout
of PepsiCo's joint venture partner in a Canadian snack food business and an
equity investment in a domestic casual dining restaurant chain featuring
gourmet pizza. In addition, PepsiCo exchanged certain previously
consolidated snack food operations in Europe with a net book value of $87
million for a 60% equity interest in an international snack food joint
venture with General Mills, Inc. PepsiCo secured a controlling interest in
its Mexican cookie affiliate, Gamesa, through an exchange of certain non-
cookie operations of Gamesa for its joint venture partner's interest.
The acquisitions have been accounted for by the purchase method;
accordingly, their results are included in the Consolidated Financial
Statements from their respective dates of acquisition. The aggregate
impact of acquisitions was not material to PepsiCo's net sales, net income
or net income per share; accordingly, no related pro forma information is
provided.
Note 6 - Inventories
Inventories are valued at the lower of cost (computed on the average, first-
in, first-out or last-in, first-out [LIFO] method) or net realizable value.
The cost of 38% of 1994 inventories and 41% of 1993 inventories was
computed using the LIFO method. Use of the LIFO method increased the total
1994 and 1993 year-end inventory amounts below by $5.5 million and $8.9
million, respectively.
1994 1993
Raw materials and supplies $454.8 $463.9
Finished goods 515.2 460.8
$970.0 $924.7
See page 8 of Management's Analysis - Overview, for a discussion of
PepsiCo's use of futures contracts to hedge its exposure to market price
fluctuations for certain raw materials. Gains and losses on these
contracts are deferred and included in the related cost of raw materials
when purchased. Gains and losses realized in 1994 or deferred at year-end
were not significant. As of December 31, 1994, PepsiCo had various open
contracts, generally expiring by December 1995, which were not material.
Note 7 - Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated principally on a straight-line basis over the estimated useful
lives of the assets. Depreciation expense in 1994, 1993 and 1992 was $1.2
billion, $1.1 billion and $923 million, respectively.
F-20
1994 1993
Land $ 1,321.6 $ 1,186.4
Buildings and improvements 5,664.1 5,017.6
Capital leases, primarily
buildings 451.2 402.6
Machinery and equipment 8,208.1 7,175.0
Construction in progress 485.1 468.4
16,130.1 14,250.0
Accumulated depreciation (6,247.3) (5,394.4)
$ 9,882.8 $ 8,855.6
Note 8 - Intangible Assets
Identifiable intangible assets arose from the allocation of purchase prices
of businesses acquired and consist principally of reacquired franchise
rights and trademarks. Reacquired franchise rights relate to acquisitions
of franchised bottling and restaurant operations and trademarks principally
relate to acquisitions of international snack food and beverage
trademarks. Amounts assigned to such identifiable intangibles were based
on independent appraisals or internal estimates. Goodwill represents the
residual purchase price after allocation to all identifiable net assets.
Intangible assets are amortized on a straight-line basis over
appropriate periods generally ranging from 20 to 40 years. Accumulated
amortization, included in the amounts below, was $1.6 billion and $1.3
billion at year-end 1994 and 1993, respectively.
1994 1993
Reacquired franchise rights $3,974.0 $3,959.7
Trademarks 768.5 849.1
Other identifiable
intangibles 249.7 204.1
Goodwill 2,849.9 2,916.6
$7,842.1 $7,929.5
The recoverability of carrying amounts of intangible assets is
evaluated on a recurring basis. The primary indicators of recoverability
are current or forecasted profitability over the estimated remaining life
of the intangible assets, measured as the combined operating profit of the
acquired business (including amortization of the intangible assets) and
existing businesses that are directly related to the acquired business.
Consideration is also given to the estimated disposal values of certain
identifiable intangible assets compared to their carrying amounts. If
recoverability of an intangible asset is unlikely based on the evaluation,
the carrying amount is reduced by the amount it exceeds the forecasted
operating profits and any disposal value. For the three-year period ended
December 31, 1994, there were no significant adjustments to the carrying
amounts of the intangible assets resulting from these evaluations.
F-21
Note 9 - Short-term Borrowings and Long-term Debt
______________________________________________________________________________
1994 1993
______________________________________________________________________________
Short-term Borrowings
Commercial paper (5.4% and 3.3%) (A) $ 2,254.4 $ 3,535.0
Current maturities of long-term
debt issuances (A) 987.5 1,183.1
Notes (5.4% and 3.5%) (A) 1,492.4 394.0
Other borrowings (6.5% and 6.3%) 444.2 529.1
Amount reclassified
to long-term debt (B) (4,500.0) (3,450.0)
$ 678.5 $ 2,191.2
Long-term Debt
Short-term borrowings, reclassified (B) $ 4,500.0 $ 3,450.0
Notes due 1995 through 2008 (6.6% and
6.5%) (A) 3,724.7 3,873.8
Euro notes, 8% due 1997 250.0 -
Zero coupon notes, $795 million due 1995-2012
(14.6% and 14.4% annual yield to
maturity) 219.2 327.2
Japanese yen 3.3% bonds due 1997 (D) 200.8 -
Swiss franc perpetual Foreign Interest
Payment bonds (C) 213.0 212.2
Swiss franc 5 1/4% bearer bonds
due 1995 (D) 99.7 90.1
Swiss franc 7 1/8% notes due 1994 (D) - 69.8
Capital lease obligations
(See Note 11) 298.2 291.4
Other, due 1995-2015 (8.1% and 6.6%) 322.4 311.2
9,828.0 8,625.7
Less current maturities of long-term
debt issuances (987.5) (1,183.1)
$ 8,840.5 $ 7,442.6
______________________________________________________________________________
The interest rates in the above table indicate, where applicable, the
weighted average rates at year-end 1994 and 1993, respectively.
The carrying amount of long-term debt includes any related discount or
premium and unamortized debt issuance costs. The debt agreements include
various restrictions, none of which are presently significant to PepsiCo.
Subsequent to year-end 1994, PepsiCo issued $150 million of Notes through
February 7, 1995.
The annual maturities of long-term debt through 1999, excluding
capital lease obligations and the reclassified short-term borrowings, are:
1995-$1.0 billion, 1996-$1.1 billion, 1997-$1.0 billion, 1998-$1.2 billion
and 1999-$280 million.
See Management's Analysis - Overview on page 8 for a discussion of
PepsiCo's use of interest rate swaps and currency exchange agreements and
its management of the inherent credit risk and Note 10.
F-22
(A) The following table indicates the notional amount and weighted
average interest rates, by category, of interest rate swaps outstanding at
year-end 1994 and 1993, respectively. The weighted average variable
interest rates that PepsiCo pays, which are indexed primarily to either
commercial paper or LIBOR rates, are based on rates as of the respective
balance sheet date and are subject to change. Terms of interest rate swap
agreements match the debt they modify and terminate in 1995 through 2008.
The differential to be paid or received on interest rate swaps is accrued
as interest rates change and is charged or credited to interest expense
over the life of the agreements. The carrying amount of each interest rate
swap is reflected in the Consolidated Balance Sheet as a receivable or
payable under the appropriate current asset or liability caption.
______________________________________________________________________________
1994 1993
______________________________________________________________________________
Receive fixed-pay variable:
Notional amount $1,557.0 $570.0
Weighted average receive rate 5.89% 5.96%
Weighted average pay rate 6.12% 3.28%
Receive variable-pay variable:
Notional amount $1,008.5 $465.0
Weighted average receive rate 4.90% 3.81%
Weighted average pay rate 5.99% 3.17%
Receive variable-pay fixed:
Notional amount $ 215.0 $265.0
Weighted average receive rate 6.56% 3.84%
Weighted average pay rate 8.22% 7.46%
______________________________________________________________________________
The following table identifies the composition of total debt
(excluding capital lease obligations and the effect of the reclassified
amounts from short-term borrowings) after giving effect to the impact of
interest rate swaps. All short-term borrowings are considered variable
interest rate debt for purposes of this table.
______________________________________________________________________________
1994 1993
Weighted Weighted
Average Average
Carrying Interest Carrying Interest
Amount Rate Amount Rate
Variable interest
rate debt:
Short-term
borrowings $5,178.5 6.19% $5,641.2 4.11%
Long-term debt 1,102.5 6.25% 567.6 4.75%
6,281.0 6.20% 6,208.8 4.17%
Fixed interest rate
debt 2,939.8 6.96% 3,133.6 6.95%
$9,220.8 6.44% $9,342.4 5.10%
______________________________________________________________________________
F-23
(B) At year-end 1994 and 1993, PepsiCo had unused revolving credit
facilities covering potential borrowings aggregating $3.5 billion.
Effective January 3, 1995, PepsiCo replaced its existing credit facilities
with new revolving credit facilities aggregating $4.5 billion, of which
$1.0 billion expire in 1996 and $3.5 billion expire in 2000. At year-end
1994 and 1993, $4.5 billion and $3.5 billion, respectively, of short-term
borrowings were classified as long-term debt, reflecting PepsiCo's intent
and ability, through the existence of the unused credit facilities, to
refinance these borrowings. These credit facilities exist largely to
support the issuances of short-term borrowings and are available for
acquisitions and other general corporate purposes.
(C) The coupon rate of the Swiss franc 400 million perpetual Foreign
Interest Payment bonds issued in 1986 is 7 1/2% through 1996. The bonds
have no stated maturity date. At the end of each 10-year period after the
issuance of the bonds, PepsiCo and the bondholders each have the right to
cause redemption of the bonds. If not redeemed, the coupon rate will be
adjusted based on the prevailing yield of 10-year U.S. Treasury Securities.
The principal of the bonds is denominated in Swiss francs. PepsiCo can,
and intends to, limit the ultimate redemption amount to the U.S. dollar
proceeds at issuance, which is the basis of the carrying amount. Interest
payments are made in U.S. dollars and are calculated by applying the coupon
rate to the original U.S. dollar principal proceeds of $214 million.
(D) PepsiCo has entered into currency exchange agreements to hedge
its foreign currency exposure on these issues of non-U.S. dollar
denominated debt. At year-end 1994, the carrying amount of this debt
aggregated $301 million and the receivables and payables under related
currency exchange agreements aggregated $50 million and $2 million,
respectively, resulting in a net effective U.S. dollar liability of $253
million with a weighted average interest rate of 6.6%. At year-end 1993,
the aggregate carrying amount of the debt and the receivables under related
currency exchange agreements were $160 million and $41 million,
respectively, resulting in a net effective U.S. dollar liability of $119
million with a weighted average fixed interest rate of 6.5%. The carrying
amount of each currency exchange agreement is reflected in the Consolidated
Balance Sheet as a receivable or payable under the appropriate current and
noncurrent asset and liability captions. Changes in the carrying amount of
a currency exchange agreement resulting from exchange rate movements are
offset by changes in the carrying amount of the related non-U.S. dollar
denominated debt, as both amounts are based on current exchange rates.
Note 10 - Fair Value of Financial Instruments
The carrying amounts in the following table are included in the
Consolidated Balance Sheet under the indicated captions, except for debt-
related derivative instruments (interest rate swaps and currency exchange
agreements), which are included in the appropriate current or noncurrent
asset or liability caption. Investments consist primarily of debt
securities and have been classified as held-to-maturity. Noncurrent
investments mature at various dates through 2000.
Because of the short maturity of cash equivalents and short-term
investments, the carrying amount approximates fair value. The fair value
of noncurrent investments is based upon market quotes. The fair value of
debt, debt-related derivative instruments and guarantees is estimated using
market quotes, valuation models and calculations based on market rates.
See Management's Analysis - Overview on page 8 and Note 9 for more
information regarding PepsiCo's use of interest rate swaps and currency
exchange agreements and its management of the inherent credit risk.
F-24
______________________________________________________________________________
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets
Cash and
cash equivalents $ 330.7 $ 330.7 $ 226.9 $ 226.9
Short-term
investments $1,157.4 $1,157.4 $1,573.8 $1,573.8
Other assets (noncurrent
investments) $ 48.0 $ 47.5 $ 55.5 $ 55.4
Liabilities
Debt:
Short-term borrowings
and long-term debt,
net of capital
leases $9,220.8 $9,265.4 $9,342.4 $9,626.0
Debt-related derivative
instruments:
Open contracts in asset
position (51.3) (51.4) (42.4) (72.7)
Open contracts in liability
position 7.9 54.1 1.2 32.8
Net debt $9,177.4 $9,268.1 $9,301.2 $9,586.1
Guarantees - $ 2.7 - $ 1.7
______________________________________________________________________________
Note 11 - Leases
PepsiCo has noncancelable commitments under both capital and long-term
operating leases, primarily for restaurant units. Certain of these units
have been subleased to restaurant franchisees. In addition, PepsiCo is
lessee under noncancelable leases covering vehicles, equipment and
nonrestaurant real estate. Capital and operating lease commitments expire
at various dates through 2088 and, in many cases, provide for rent
escalations and renewal options. Most leases require payment of related
executory costs which include property taxes, maintenance and insurance.
Future minimum commitments and sublease receivables under
noncancelable leases are as follows:
______________________________________________________________________________
Commitments Sublease Receivables
Direct
Capital Operating Financing Operating
______________________________________________________________________________
1995 $ 58.9 $ 313.0 $ 3.2 $ 9.6
1996 53.9 276.4 3.0 8.8
1997 46.7 247.3 2.7 7.7
1998 65.2 228.7 2.3 6.7
1999 34.4 203.3 2.0 6.0
Later years 279.0 1,072.1 7.1 24.2
$538.1 $2,340.8 $20.3 $63.0
______________________________________________________________________________
F-25
At year-end 1994, the present value of minimum payments under capital
leases was $298 million, after deducting $1 million for estimated executory
costs and $239 million representing imputed interest. The present value of
minimum receivables under direct financing subleases was $13 million after
deducting $7 million of unearned interest income.
Rental expense and income were as follows:
______________________________________________________________________________
1994 1993 1992
Rental expense
Minimum $433.5 $392.3 $351.5
Contingent 31.7 27.5 27.5
$465.2 $419.8 $379.0
Rental income
Minimum $ 11.7 $ 12.2 $ 10.2
Contingent 3.5 4.4 4.5
$ 15.2 $ 16.6 $ 14.7
___________________________________________________________________________
Contingent rentals are based on sales by restaurants in excess of
levels stipulated in the lease agreements.
Note 12 - Postretirement Benefits Other Than Pensions
PepsiCo provides postretirement health care benefits to eligible retired
employees and their dependents, principally in the U.S. Retirees who have
10 years of service and attain age 55 while in service with PepsiCo are
eligible to participate in the postretirement benefit plans. The plans are
not funded and were largely noncontributory through 1993.
In 1992, PepsiCo adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The cumulative effect of this change in accounting for years
prior to 1992 resulted in a noncash charge of $575.3 million pretax ($356.7
million after-tax or $0.44 per share).
Effective in 1993 and 1994, PepsiCo implemented programs intended to
stem rising costs and introduced retiree cost-sharing, including adopting a
provision which limits its future obligation to absorb health care cost
inflation. These amendments resulted in an unrecognized prior service gain
of $191 million, which is being amortized on a straight-line basis over the
average remaining employee service period of 10 years as a reduction in
postretirement benefit expense beginning in 1993.
The postretirement benefit expense for 1994, 1993 and 1992 included
the following components:
______________________________________________________________________________
1994 1993 1992
______________________________________________________________________________
Service cost of benefits earned $ 18.6 $ 14.7 $25.5
Interest cost on accumulated
postretirement benefit obligation 41.4 40.6 50.8
Amortization of prior service (gain) cost (19.6) (19.6) 0.1
Amortization of net loss 5.6 0.5 -
$ 46.0 $ 36.2 $76.4
______________________________________________________________________________
F-26
The decline in the 1993 expense was primarily due to the plan
amendments, reflecting reductions in service and interest costs as well as
the amortization of the unrecognized prior service gain.
The 1994 and 1993 postretirement benefit liability included the
following components:
______________________________________________________________________________
1994 1993
______________________________________________________________________________
Actuarial present value of postretirement
benefit obligation:
Retirees $(288.6) $(313.8)
Fully eligible active plan participants (88.1) (107.3)
Other active plan participants (148.0) (206.9)
Accumulated postretirement benefit obligation (524.7) (628.0)
Unrecognized prior service gain (151.9) (171.5)
Unrecognized net loss 11.5 148.6
$(665.1) $(650.9)
______________________________________________________________________________
The discount rate assumptions used in computing the information above
were as follows:
1994 1993 1992
Postretirement benefit expense 6.8% 8.2 8.9
Accumulated postretirement
benefit obligation 9.1% 6.8 8.2
The year-to-year fluctuations in the discount rate assumptions
primarily reflect changes in U.S. interest rates. The discount rate
represents the expected yield on a portfolio of high-grade (AA rated or
equivalent) fixed-income investments with cash flow streams sufficient to
satisfy benefit obligations under the plans when due.
As a result of the plan amendments discussed above, separate assumed
health care cost trend rates are used for employees who retire before and
after the effective date of the amendments. The assumed health care cost
trend rate for employees who retired before the effective date is 9.5% for
1995, declining gradually to 5.5% in 2005 and thereafter. For employees
retiring after the effective date, the trend rate is 8.0% for 1995,
declining gradually to 0% in 2005 and thereafter. A 1 point increase in
the assumed health care cost trend rate would have increased the 1994
postretirement benefit expense by $2.0 million and would have increased the
1994 accumulated postretirement benefit obligation by $20.6 million.
Note 13 - Pension Plans
PepsiCo sponsors noncontributory defined benefit pension plans covering
substantially all full-time domestic employees as well as contributory and
noncontributory defined benefit pension plans covering certain
international employees. Benefits generally are based on years of service
and compensation or stated amounts for each year of service. PepsiCo funds
the domestic plans in amounts not less than minimum statutory funding
requirements nor more than the maximum amount that can be deducted for
federal income tax purposes. International plans are funded in amounts
F-27
sufficient to comply with local statutory requirements. The plans' assets
consist principally of equity securities, government and corporate debt
securities and other fixed income obligations. For 1994 and 1993, the
domestic plan assets included 6.9 million shares of PepsiCo Capital Stock,
with a market value of $227.2 million and $265.7 million, respectively.
Dividends on PepsiCo Capital Stock of $4.7 million and $4.0 million were
received by the domestic plans in 1994 and 1993, respectively.
The international plans presented below are primarily comprised of
those in the U.K. and Canada for all three years as well as those in Mexico
and Japan for 1994 and 1993. Information for 1992 has not been restated,
since complete information for plans in Mexico and Japan was not available.
The net pension expense for domestic company-sponsored plans included
the following components:
______________________________________________________________________________
1994 1993 1992
______________________________________________________________________________
Service cost of benefits earned $ 69.8 $ 57.1 $ 52.3
Interest cost on projected benefit
obligation 84.0 75.6 72.0
Return on plan assets:
Actual loss (gain) 19.7 (161.5) (61.3)
Deferred (loss) gain (130.5) 70.9 (26.2)
(110.8) (90.6) (87.5)
Amortization of net transition gain (19.0) (19.0) (19.0)
Net other amortization 9.1 8.8 8.2
$ 33.1 $ 31.9 $ 26.0
_____________________________________________________________________
The net pension expense (income) for international company-sponsored
plans included the following components:
______________________________________________________________________________
1994 1993 1992
______________________________________________________________________________
Service cost of benefits earned $ 15.0 $ 12.4 $ 8.6
Interest cost on projected benefit
obligation 15.4 15.0 10.9
Return on plan assets:
Actual loss (gain) 8.1 (40.8) (36.0)
Deferred (loss) gain (32.5) 20.4 18.6
(24.4) (20.4) (17.4)
Amortization of net transition (gain)
loss (0.2) 0.3 -
Net other amortization 1.7 1.7 (6.5)
$ 7.5 $ 9.0 $ (4.4)
______________________________________________________________________________
Inclusion of the plans in Mexico and Japan increased the 1994 and 1993
pension expense by $7.9 million and $5.5 million, respectively.
F-28
Reconciliations of the funded status of the domestic plans to the
pension liability are as follows:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1994 1993 1994 1993
______________________________________________________________________________
Actuarial present value of
benefit obligation:
Vested benefits $ (774.0) $ (726.0) $(21.6) $(192.8)
Nonvested benefits (97.4) (99.0) (1.6) (28.3)
Accumulated benefit
obligation (871.4) (825.0) (23.2) (221.1)
Effect of projected
compensation increases (111.1) (131.6) (47.6) (41.7)
Projected benefit obligation (982.5) (956.6) (70.8) (262.8)
Plan assets at fair value 1,133.0 1,018.7 2.8 185.2
Plan assets in excess of
(less than) projected
benefit obligation 150.5 62.1 (68.0) (77.6)
Unrecognized prior
service cost 30.6 11.7 30.0 49.9
Unrecognized net
(gain) loss (71.3) 16.0 3.7 26.1
Unrecognized net
transition (gain) loss (73.1) (89.0) 0.3 (2.8)
Adjustment required to
recognize minimum liability - - - (33.0)
Prepaid (accrued) pension
liability $ 36.7 $ 0.8 $(34.0) $ (37.4)
_____________________________________________________________________________
F-29
Reconciliations of the funded status of the international plans to the
pension liability are as follows:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1994 1993 1994 1993
___________________________________________________________________________
Actuarial present value of
benefit obligation:
Vested benefits $(124.4) $(138.8) $(22.8) $(28.0)
Nonvested benefits (2.3) (3.4) (7.4) (5.4)
Accumulated benefit
obligation (126.7) (142.2) (30.2) (33.4)
Effect of projected
compensation increases (24.1) (22.9) (10.1) (18.4)
Projected benefit obligation (150.8) (165.1) (40.3) (51.8)
Plan assets at fair value 213.4 221.7 15.5 17.3
Plan assets in excess of
(less than) projected
benefit obligation 62.6 56.6 (24.8) (34.5)
Unrecognized prior
service cost 3.5 3.2 0.3 0.5
Unrecognized net
loss (gain) 14.0 11.9 (3.1) 7.7
Unrecognized net
transition (gain) loss (1.8) (2.6) 4.9 8.1
Adjustment required to
recognize minimum liability - - - (4.3)
Prepaid (accrued) pension
liability $ 78.3 $ 69.1 $(22.7) $(22.5)
___________________________________________________________________________
The assumptions used to compute the domestic information above were as
follows:
1994 1993 1992
______________________________________________________________________________
Discount rate - pension expense 7.0% 8.2 8.4
Expected long-term rate of return
on plan assets 10.0% 10.0 10.0
Discount rate - projected benefit
obligation 9.0% 7.0 8.2
Future compensation growth rate 3.3%-7.0% 3.3-7.0 3.3-7.0
______________________________________________________________________________
F-30
The assumptions used to compute the international information above
were as follows:
1994 1993 1992
______________________________________________________________________________
Discount rate - pension expense 7.3% 9.0 9.5
Expected long-term rate of return
on plan assets 11.3% 10.8 10.8
Discount rate - projected benefit
obligation 9.3% 7.4 9.0
Future compensation growth rate 3.0%-8.5% 3.5-8.5 5.0-7.0
______________________________________________________________________________
The discount rates and rates of return for the international plans
represent weighted averages.
The year-to-year fluctuations in the discount rate assumptions
primarily reflect changes in interest rates. The discount rates represent
the expected yield on a portfolio of high-grade (AA rated or equivalent)
fixed-income investments with cash flow streams sufficient to satisfy
benefit obligations under the plans when due. The higher assumed discount
rates used to measure the 1994 projected benefit obligation compared to the
assumed discount rate used to measure the 1993 projected benefit obligation
changed the funded status of certain plans from underfunded to overfunded.
In 1994, PepsiCo changed the method for calculating the market-related
value of plan assets used in determining the return-on-asset component of
annual pension expense and the cumulative net unrecognized gain or loss
subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of
the actual capital return on assets on a straight-line basis over a five-
year period. Under the new method, the calculation of the market-related
value of assets reflects the long-term rate of return expected by PepsiCo
and amortization of the difference between the actual return (including
capital, dividends and interest) and the expected return over a five-year
period. PepsiCo believes the new method is widely used in practice and
preferable because it results in calculated plan asset values that more
closely approximate fair value, while still mitigating the effect of annual
market-value fluctuations. Under both methods, only the cumulative net
unrecognized gain or loss which exceeds 10% of the greater of the projected
benefit obligation or the market-related value of plan assets is subject to
amortization. This change resulted in a noncash benefit in 1994 of $37.8
million ($23.3 million after-tax or $0.03 per share) representing the
cumulative effect of the change related to years prior to 1994 and $35.1
million in lower pension expense ($21.6 million after-tax or $0.03 per
share) related to 1994 as compared to the previous accounting method. Had
this change been applied retroactively, pension expense would have been
reduced by $16.4 million ($10.7 million after-tax or $0.01 per share) and
$9.5 million ($6.5 million after-tax or $0.01 per share) in 1993 and 1992,
respectively.
F-31
Note 14 - Postemployment Benefits Other Than to Retirees
Effective the beginning of 1994, PepsiCo adopted Statement of Financial
Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits." SFAS 112 requires PepsiCo to accrue the cost of
certain postemployment benefits to be paid to terminated or inactive
employees other than retirees. The principal effect to PepsiCo results
from accruing severance benefits to be provided to employees of certain
business units who are terminated in the ordinary course of business over
the expected service lives of the employees. Previously, these benefits
were accrued upon the occurrence of an event. Severance benefits resulting
from actions not in the ordinary course of business will continue to be
accrued when those actions occur. The cumulative effect charge upon
adoption of SFAS 112, which relates to years prior to 1994, was $84.6
million ($55.3 million after-tax or $0.07 per share). As compared to the
previous accounting method, the current year impact of adopting SFAS 112
was immaterial to 1994 operating profits. PepsiCo's cash flows have been
unaffected by this accounting change as PepsiCo continues to largely fund
postemployment benefit costs as incurred.
Note 15 - Franchise Arrangements
Franchise arrangements with restaurant franchisees generally provide for
initial fees and continuing royalty payments to PepsiCo based upon a
percentage of sales. The arrangements are intended to assist franchisees
through, among other things, product development and marketing programs
initiated by PepsiCo for both its company-owned and franchised operations.
On a limited basis, franchisees have also entered into leases of restaurant
properties leased or owned by PepsiCo (see Note 11). Royalty revenues,
initial fees and rental payments from franchisees, which are included in
Net Sales, aggregated $407 million, $357 million and $344 million in 1994,
1993 and 1992, respectively. Franchise royalty revenues, which represent
the majority of these amounts, are recognized when earned. PepsiCo also
has franchise arrangements with beverage bottlers, which do not provide for
royalty payments.
Note 16 - Restructurings
PepsiCo recorded restructuring charges of $193.5 million in 1992 ($128.5
million after-tax or $0.16 per share) and $149.0 million in 1991 ($102.3
million after-tax or $0.13 per share). The 1992 charge related principally
to streamlining and reorganizing the domestic beverage business,
consolidating the snack food businesses in the U.K. and streamlining an
acquired beverage bottling business in Spain. The 1991 charge related to
streamlining snack food operations in the U.S. and U.K. and operations at
KFC. These charges were classified in Selling, general and administrative
expenses and were primarily for costs requiring future cash outlays. The
annual accrual activity, including asset valuation allowances, and the
related components were as follows:
F-32
______________________________________________________________________________
1994 1993 1992
______________________________________________________________________________
Annual Accrual Activity
Balance - Beginning of year $121.7 $ 253.2 $112.6
New restructuring charges - - 193.5
New restructuring accruals -
purchase price adjustments (A) - - 41.5
Accretion of interest on net
present value of severance 2.8 6.9 -
Cash payments (50.6) (122.8) (83.5)
Asset write-offs (4.0) (9.1) (10.3)
Change in estimates (28.7) (6.5) (0.6)
Balance - End of year $ 41.2 $ 121.7 $253.2
Accrual Components
Facility closings/fixed asset
disposals $ 3.0 $ 13.9 $ 35.3
Employee terminations (A) 36.1 103.2 153.9
Relocation of employees
and equipment 0.7 2.2 29.1
Nonrecurring costs of
redesigning core business
processes (B) - 0.7 25.3
Other 1.4 1.7 9.6
Balance - End of year (C) $ 41.2 $ 121.7 $253.2
______________________________________________________________________________
(A) Included amounts for termination of employees of an acquired
beverage bottling business in Spain accounted for as a purchase. The
acquired business was formerly accounted for as a 30% owned equity
investment. Upon acquisition of the remaining 70%, 30% of the
restructuring charge was included in income and 70% was a purchase price
adjustment.
(B) Included only specific nonrecurring incremental and direct costs
for activities clearly identifiable with the redesign of the domestic
beverages' core business processes.
(C) The 1994 year-end balance of $41 million, which was primarily
included in Other current liabilities, represented estimated future cash
payments of $26 million, $12 million and $3 million in 1995, 1996 and 1997,
respectively.
F-33
Note 17 - Income Taxes
In 1992, PepsiCo adopted Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes." PepsiCo elected to adopt
SFAS 109 on a prospective basis, resulting in a noncash tax charge in 1992
of $570.7 million ($0.71 per share) for the cumulative effect of the change
related to years prior to 1992. The cumulative effect primarily
represented the recording of additional deferred tax liabilities related to
identifiable intangible assets, principally acquired trademarks and
reacquired franchise rights, that have no tax bases. These deferred tax
liabilities would be paid only in the unlikely event the related intangible
assets were sold in taxable transactions.
Detail of the provision for income taxes on income before cumulative
effect of accounting changes was as follows:
______________________________________________________________________________
1994 1993 1992
______________________________________________________________________________
Current- Federal $642.0 $466.8 $413.0
Foreign 174.1 195.5 170.4
State 131.2 89.0 65.7
947.3 751.3 649.1
Deferred- Federal (63.9) 78.2 (18.8)
Foreign (1.8) (12.5) (33.5)
State (1.2) 17.6 0.3
(66.9) 83.3 (52.0)
$880.4 $834.6 $597.1
____________________________________________________________________________
In 1993, a charge of $29.9 million ($0.04 per share) was recorded to
increase net deferred tax liabilities as of the beginning of 1993 for a 1%
statutory income tax rate increase under 1993 U.S. tax legislation. The
effect of the higher rate on the 1993 increase in net deferred tax
liabilities through the enactment date of the legislation was immaterial.
U.S. and foreign income before income taxes and cumulative effect of
accounting changes were as follows:
______________________________________________________________________________
1994 1993 1992
______________________________________________________________________________
U.S. $1,762.4 $1,633.0 $1,196.8
Foreign 902.0 789.5 702.0
$2,664.4 $2,422.5 $1,898.8
______________________________________________________________________________
PepsiCo operates centralized concentrate manufacturing facilities in
Puerto Rico and Ireland under long-term tax incentives. The foreign amount
in the above table includes approximately 50% (consistent with the
allocation for tax purposes) of the income from U.S. sales of concentrate
manufactured in Puerto Rico. See Management's Analysis - Overview on page
10 for a discussion of the reduction of the U.S. tax credit associated with
beverage concentrate operations in Puerto Rico.
F-34
Reconciliation of the U.S. federal statutory tax rate to PepsiCo's
effective tax rate on pretax income, based on the dollar impact of these
major components on the provision for income taxes, was as follows:
_______________________________________________________________________________
1994 1993 1992
_______________________________________________________________________________
U.S. federal statutory tax rate 35.0% 35.0% 34.0%
State income tax, net of federal
tax benefit 3.2 2.9 2.3
Effect of lower taxes on foreign
income (including Puerto Rico
and Ireland) (5.4) (3.3) (5.0)
Adjustment to the beginning-of-
the-year deferred tax assets
valuation allowance (1.3) - -
Reduction of prior year
foreign accruals - (2.0) -
Effect of 1993 tax legislation on
deferred income taxes - 1.1 -
Nondeductible amortization of
domestic goodwill 0.8 0.8 0.9
Other, net 0.7 - (0.8)
Effective tax rate 33.0% 34.5% 31.4%
_____________________________________________________________________________
Detail of the 1994 and 1993 deferred tax liabilities (assets) was as
follows:
______________________________________________________________________________
1994 1993
______________________________________________________________________________
Intangible assets other than
nondeductible goodwill $ 1,627.8 $ 1,551.0
Property, plant and equipment 506.4 552.3
Safe harbor leases 171.2 177.5
Zero coupon notes 110.6 103.5
Other 336.7 549.0
Gross deferred tax liabilities 2,752.7 2,933.3
Net operating loss carryforwards (306.0) (241.5)
Postretirement benefits (248.3) (268.0)
Self-insurance reserves (71.2) (10.8)
Deferred state income taxes (69.1) (39.9)
Restructuring accruals (15.8) (42.0)
Various accrued liabilities
and other (551.2) (686.8)
Gross deferred tax assets (1,261.6) (1,289.0)
Deferred tax assets
valuation allowance 319.3 249.0
Net deferred tax liability $ 1,810.4 $ 1,893.3
Included in:
Prepaid expenses, taxes and
other current assets $ (166.9) $ (138.2)
Other current liabilities 4.4 23.9
Deferred income taxes 1,972.9 2,007.6
$ 1,810.4 $ 1,893.3
F-35
______________________________________________________________________________
The valuation allowance related to deferred tax assets increased by
$70.3 million in 1994 primarily resulting from additions related to current
year net operating losses, partially offset by reversals related to prior
year net operating losses. The net operating loss carryforwards largely
related to a number of state and foreign jurisdictions and generally expire
over a range of dates.
Deferred tax liabilities have not been recognized for bases
differences related to investments in foreign subsidiaries and joint
ventures. These differences, which consist primarily of unremitted
earnings intended to be indefinitely reinvested, aggregated approximately
$3.8 billion at year-end 1994 and $3.2 billion at year-end 1993, exclusive
of amounts that if remitted in the future would result in little or no tax
under current tax laws and the Puerto Rico tax incentive grant.
Determination of the amount of unrecognized deferred tax liabilities is not
practicable.
Tax benefits associated with exercises of stock options of $27.1
million in 1994, $23.4 million in 1993 and $57.5 million in 1992 were
credited to shareholders' equity. A change in the functional currency of
operations in Mexico from the U.S. dollar to local currency in 1993
resulted in a $19.3 million decrease in the net deferred foreign tax
liability that was credited to shareholders' equity.
Note 18 - Employee Incentive Plans
PepsiCo has established certain employee incentive plans under which
stock options are granted. A stock option allows an employee to
purchase a share of PepsiCo Capital Stock (Stock) in the future at a
price equal to the fair market value on the date of the grant.
Under the PepsiCo SharePower Stock Option Plan, approved by the
Board of Directors and effective in 1989, essentially all employees
other than executive officers, part-time and short-service employees
may be granted stock options annually. The number of options granted
is based on each employee's annual earnings. The options generally
become exercisable ratably over five years from the grant date and must
be exercised within 10 years of the grant date. SharePower options
were granted to approximately 128,000 employees in 1994, 118,000
employees in 1993 and 114,000 employees in 1992.
The shareholder-approved 1987 Long-Term Incentive Plan (the 1987
Plan), which has provisions similar to prior plans, provides incentives
to eligible senior and middle management employees. In addition to
grants of stock options, which are generally exercisable between 1 and
15 years from the grant date, the 1987 Plan allows for grants of
performance share units (PSUs) to eligible senior management employees.
A PSU is equivalent in value to a share of Stock at the grant date and
vests for payment four years from the grant date, contingent upon
attainment of prescribed Corporate performance goals. PSUs are not
directly granted, as certain stock options granted may be surrendered
by employees for a specified number of PSUs within 60 days of the
option grant date. During 1994, 1,541,187 stock options were
surrendered for 513,729 PSUs. At year-end 1994, 1993 and 1992, there
were 629,202, 491,200 and 484,698 outstanding PSUs, respectively.
Grants under the 1987 Plan are approved by the Compensation
Committee of the Board of Directors (the Committee), which is composed
of outside directors. Payment of awards other than stock options is
made in cash and/or Stock as approved by the Committee, and amounts
expensed for such awards were $7 million, $5 million and $11 million in
1994, 1993 and 1992, respectively. Under the 1987 Plan, a maximum of
54 million shares of Stock can be purchased or paid pursuant to grants.
F-36
There were 7 million, 20 million, 22 million and 32 million shares
available for future grants at year-end 1994, 1993, 1992 and 1991,
respectively. The Committee does not intend to grant future awards
under the 1987 Plan.
On May 4, 1994, PepsiCo's shareholders approved the 1994 Long-Term
Incentive Plan (the 1994 Plan). The 1994 Plan continues the principal
features of the 1987 Plan and authorizes a maximum of 75 million shares
of Stock which may be purchased or paid pursuant to grants by the
Committee. The first awards under the 1994 Plan were made as of
January 1, 1995.
1994, 1993 and 1992 activity for the stock option plans included:
______________________________________________________________________________
(options in thousands) Long-Term
______________________________________________________________________________
Outstanding at December 28, 1991 23,801 27,834
Granted 8,477 12,653
Exercised (1,155) (5,155)
Surrendered for PSUs - (503)
Canceled (2,327) (1,839)
Outstanding at December 26, 1992 28,796 32,990
Granted 9,121 2,834
Exercised (1,958) (1,412)
Surrendered for PSUs - (96)
Canceled (2,524) (966)
Outstanding at December 25, 1993 33,435 33,350
Granted 11,633 16,237
Exercised (1,820) (3,052)
Surrendered for PSUs - (1,541)
Canceled (3,443) (2,218)
Outstanding at December 31, 1994 39,805 42,776
Exercisable at December 31, 1994 16,115 18,439
Option prices per share:
Exercised during 1994 $17.58 to $36.75 $4.11 to $38.75
Exercised during 1993 $17.58 to $36.75 $4.11 to $36.31
Exercised during 1992 $17.58 to $35.25 $4.11 to $29.88
Outstanding at
year-end 1994 $17.58 to $36.75 $7.69 to $42.81
______________________________________________________________________________
Note 19 - Contingencies
PepsiCo is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, in
excess of amounts already provided arising from such claims or
contingencies is not likely to have a material adverse effect on PepsiCo's
annual results of operations or financial condition. At year-end 1994 and
1993, PepsiCo was contingently liable under guarantees aggregating $187
million and $276 million, respectively. The guarantees are primarily
issued to support financial arrangements of certain PepsiCo joint ventures,
and bottling and restaurant franchisees. PepsiCo manages the risk
associated with these guarantees by performing appropriate credit reviews
in addition to retaining certain rights as a joint venture partner or
franchisor. See Note 10 for information related to the fair value of the
guarantees.
F-37
Management's Responsibility for Financial Statements
To Our Shareholders:
Management is responsible for the reliability of the consolidated financial
statements and related notes, which have been prepared in conformity with
generally accepted accounting principles and include amounts based upon our
estimates and judgments, as required. The financial statements have been
audited and reported on by our independent auditors, KPMG Peat Marwick 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 the representations made to the independent
auditors were valid and appropriate.
PepsiCo maintains a system of internal control over financial
reporting designed to provide reasonable assurance as to the reliability of
the financial statements. 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. PepsiCo's 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, which is composed solely of
outside directors, provides oversight to the financial reporting process
through periodic meetings with our independent auditors, internal auditors
and management. Both our independent auditors and internal auditors have
free access to the Audit Committee.
Although no cost effective internal control system will preclude all
errors and irregularities, we believe our controls as of December 31, 1994
provide reasonable assurance that the financial statements are reliable.
/s/ WAYNE CALLOWAY
Wayne Calloway
Chairman of the Board
and Chief Executive Officer
/s/ ROBERT G. DETTMER
Robert G. Dettmer
Executive Vice President
and Chief Financial Officer
/s/ ROBERT L. CARLETON
Robert L. Carleton
Senior Vice President
and Controller
February 7, 1995
F-38
Report of Independent Auditors
Board of Directors and Shareholders
PepsiCo, Inc.
We have audited the accompanying consolidated balance sheet of PepsiCo,
Inc. and Subsidiaries as of December 31, 1994 and December 25, 1993, and
the related consolidated statements of income, cash flows and shareholders'
equity for each of the years in the three-year period ended December 31,
1994. 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 generally accepted auditing
standards. 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 31, 1994 and December 25,
1993, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Notes 14 and 13 to the consolidated financial
statements, PepsiCo, Inc. in 1994 adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits," and changed
its method for calculating the market-related value of pension plan assets
used in the determination of pension expense, respectively. As discussed
in Notes 12 and 17 to the consolidated financial statements, PepsiCo, Inc.
in 1992 adopted the provisions of the Financial Accounting Standards
Board's Statements of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and No. 109,
"Accounting for Income Taxes," respectively.
KPMG Peat Marwick LLP
New York, New York
February 7, 1995
F-39
______________________________________________________________________________
Selected Quarterly Financial Data (page 1 of 3)
(in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries First Quarter
(12 Weeks)
1994 (a) 1993
______________________________________________________________________________
Net sales $5,728.9 5,091.6
Gross profit $2,944.4 2,641.4
Operating profit $ 550.5 506.0
Income before income taxes and cumulative
effect of accounting changes $ 438.4 391.6
Provision for income taxes $ 155.6 131.2
Income before cumulative effect of
accounting changes $ 282.8 260.4
Cumulative effect of accounting changes (b) $ (32.0) -
Net income $ 250.8 260.4
Income (charge) per share:
Income before cumulative effect of
accounting changes $ 0.35 0.32
Cumulative effect of accounting
changes (b) $ (0.04) -
Net income per share $ 0.31 0.32
______________________________________________________________________________
Second Quarter
(12 Weeks)
1994 (a)(c) 1993
______________________________________________________________________________
Net sales $6,557.0 5,890.3
Gross profit $3,419.5 3,102.8
Operating profit $ 785.0 750.4
Income before income taxes $ 672.2 635.7
Provision for income taxes $ 225.7 208.9
Net income $ 446.5 426.8
Net income per share $ 0.55 0.53
______________________________________________________________________________
(a) Included the current year benefit of changing the method for
calculating the market-related value of plan assets used in
determining the return-on-asset component of annual pension expense
and the cumulative net unrecognized gain or loss subject to
amortization, which reduced full-year pension expense by $35.1 ($21.6
after-tax or $0.03 per share). This benefit was prorated over each of
the four quarters. See Note 13.
(b) Represented the cumulative net effect related to years prior to 1994
of adopting SFAS 112, "Employers' Accounting for Postemployment
Benefits," and the change in the method for calculating the market-
related value of pension plan assets. See Notes 14 and 13,
respectively.
(c) Included a $17.8 gain ($16.8 after-tax or $0.02 per share) arising
from a public share offering by PepsiCo's BAESA joint venture in South
America. See Note 4.
F-40
______________________________________________________________________________
Selected Quarterly Financial Data (page 2 of 3)
(in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries Third Quarter
(12 Weeks)
1994 (a) 1993 (d)
______________________________________________________________________________
Net sales $ 7,064.0 6,316.4
Gross profit $ 3,684.0 3,322.1
Operating profit $ 961.7 851.6
Income before income taxes $ 830.3 736.5
Provision for income taxes $ 288.9 278.3
Net income $ 541.4 458.2
Net income per share $ 0.68 0.56
______________________________________________________________________________
Fourth Quarter
(17/16 Weeks) (e)
1994 (a) 1993
______________________________________________________________________________
Net sales $ 9,122.5 7,722.4
Gross profit $ 4,709.1 4,008.3
Operating profit $ 904.0 798.5
Income before income taxes $ 723.5 658.7
Provision for income taxes $ 210.2 216.2
Net income $ 513.3 442.5
Net income per share $ 0.64 0.55
______________________________________________________________________________
(a) Included the current year benefit of changing the method for
calculating the market-related value of plan assets used in
determining the return-on-asset component of annual pension expense
and the cumulative net unrecognized gain or loss subject to
amortization, which reduced full-year pension expense by $35.1 ($21.6
after-tax or $0.03 per share). This benefit was prorated over each of
the four quarters. See Note 13.
(d) Included a $29.9 charge ($0.04 per share) to increase net deferred tax
liabilities as of the beginning of 1993 for a 1% statutory income tax
rate increase due to 1993 U.S. tax legislation. See Note 17.
(e) Fiscal years 1994 and 1993 consisted of 53 and 52 weeks, respectively.
The estimated favorable impact of the 53rd week on 1994 fourth quarter
and full-year earnings was $54.0 ($34.9 after-tax or $0.04 per share).
F-41
______________________________________________________________________________
Selected Quarterly Financial Data (page 3 of 3)
(in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries Full Year
(53/52 Weeks) (e)
1994 (a)(c) 1993 (d)
______________________________________________________________________________
Net sales $28,472.4 25,020.7
Gross profit $14,757.0 13,074.6
Operating profit $ 3,201.2 2,906.5
Income before income taxes and cumulative
effect of accounting changes $ 2,664.4 2,422.5
Provision for income taxes $ 880.4 834.6
Income before cumulative effect of
accounting changes $ 1,784.0 1,587.9
Cumulative effect of accounting changes (b) $ (32.0) -
Net income $ 1,752.0 1,587.9
Income (charge) per share:
Income before cumulative effect of
accounting changes $ 2.22 1.96
Cumulative effect of accounting
changes (b) $ (0.04) -
Net income per share $ 2.18 1.96
______________________________________________________________________________
(a) Included the current year benefit of changing the method for
calculating the market-related value of plan assets used in
determining the return-on-asset component of annual pension expense
and the cumulative net unrecognized gain or loss subject to
amortization, which reduced full-year pension expense by $35.1 ($21.6
after-tax or $0.03 per share). This benefit was prorated over each of
the four quarters. See Note 13.
(b) Represented the cumulative net effect related to years prior to 1994
of adopting SFAS 112, "Employers' Accounting for Postemployment
Benefits," and the change in the method for calculating the market-
related value of pension plan assets. See Notes 14 and 13,
respectively.
(c) Included a $17.8 gain ($16.8 after-tax or $0.02 per share) arising
from a public share offering by PepsiCo's BAESA joint venture in South
America. See Note 4.
(d) Included a $29.9 charge ($0.04 per share) to increase net deferred tax
liabilities as of the beginning of 1993 for a 1% statutory income tax
rate increase due to 1993 U.S. tax legislation. See Note 17.
(e) Fiscal years 1994 and 1993 consisted of 53 and 52 weeks, respectively.
The estimated favorable impact of the 53rd week on 1994 fourth quarter
and full-year earnings was $54.0 ($34.9 after-tax or $0.04 per share).
F-42
____________________________________________________________________________
Selected Financial Data (Page 1 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
____________________________________________________________________________
Growth Rates
Compounded Annual
10-Year 5-Year 1-Year
1984-94 1989-94 1993-94
Summary of Operations
Net sales 15.0% 13.6% 13.8%
Cost of sales and operating expenses - - -
Operating profit 18.6% 12.5% 10.1%
Gain on joint venture stock offering(h) - - -
Interest expense - - -
Interest income - - -
Income from continuing operations before
income taxes and cumulative effect of
accounting changes 19.2% 14.7% 10.0%
Provision for income taxes - - -
Income from continuing operations before
cumulative effect of accounting changes 20.3% 14.6% 12.3%
Cumulative effect of accounting
changes (i) - - -
Net income (j) 23.5% 14.2% 10.3%
Per Share Data
Income from continuing operations before
cumulative effect of accounting
changes 21.0% 14.5% 13.3%
Cumulative effect of accounting
changes (i) - - -
Net income (j) 24.2% 14.0% 11.2%
Cash dividends declared 14.2% 16.9% 14.8%
Average shares and equivalents
outstanding - - -
Cash Flow Data (k)
Net cash provided by continuing
operations 14.2% 14.5% 18.6%
Cash acquisitions and investments in
affiliates - - -
Cash capital spending 15.0% 19.0% 13.7%
Cash dividends paid 13.3% 17.4% 17.0%
Year-End Position
Total assets 17.7% 10.4% 4.6%
Long-term debt 29.5% 7.8% 18.8%
Total debt (l) 25.9% 6.5% (1.2)%
Shareholders' equity - - -
Per share 14.8% 12.0% 9.3%
Market price per share 22.9% 11.1% (13.4)%
Shares outstanding - - -
Employees 12.1% 12.1% 11.3%
Statistics
Return on average shareholders'
equity (m)
Market net debt ratio (n)
Historical cost net debt ratio (o)
F-43
____________________________________________________________________________
Selected Financial Data (Page 2 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
____________________________________________________________________________
1994(a)(b) 1993(c) 1992(d)
____________________________________________________________________________
Summary of Operations
Net sales $28,472.4 25,020.7 21,970.0
Cost of sales and operating expenses 25,271.2 22,114.2 19,598.8
Operating profit 3,201.2 2,906.5 2,371.2
Gain on joint venture stock offering(h) 17.8 - -
Interest expense (645.0) (572.7) (586.1)
Interest income 90.4 88.7 113.7
Income from continuing operations before
income taxes and cumulative effect of
accounting changes 2,664.4 2,422.5 1,898.8
Provision for income taxes 880.4 834.6 597.1
Income from continuing operations before
cumulative effect of accounting changes $ 1,784.0 1,587.9 1,301.7
Cumulative effect of accounting
changes (i) $ (32.0) - (927.4)
Net income (j) $ 1,752.0 1,587.9 374.3
Per Share Data
Income from continuing operations before
cumulative effect of accounting
changes $ 2.22 1.96 1.61
Cumulative effect of accounting
changes (i) $ (0.04) - (1.15)
Net income (j) $ 2.18 1.96 0.46
Cash dividends declared $ 0.700 0.610 0.510
Average shares and equivalents
outstanding 803.6 810.1 806.7
Cash Flow Data (k)
Net cash provided by continuing
operations $ 3,716.0 3,134.4 2,711.6
Cash acquisitions and investments in
affiliates $ 315.8 1,011.2 1,209.7
Cash capital spending $ 2,253.2 1,981.6 1,549.6
Cash dividends paid $ 540.2 461.6 395.5
Year-End Position
Total assets $24,792.0 23,705.8 20,951.2
Long-term debt $ 8,840.5 7,442.6 7,964.8
Total debt (l) $ 9,519.0 9,633.8 8,671.6
Shareholders' equity $ 6,856.1 6,338.7 5,355.7
Per share $ 8.68 7.94 6.70
Market price per share $ 36 1/4 41 7/8 42 1/4
Shares outstanding 789.9 798.8 798.8
Employees 471,000 423,000 372,000
Statistics
Return on average shareholders'
equity (m) 27.0% 27.2 23.9
Market net debt ratio (n) 26% 22 19
Historical cost net debt ratio (o) 49% 50 49
F-44
_____________________________________________________________________________
Selected Financial Data (Page 3 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
_____________________________________________________________________________
1991(e) 1990(f) 1989
_____________________________________________________________________________
Summary of Operations
Net sales $19,292.2 17,515.5 15,049.2
Cost of sales and operating expenses 17,180.4 15,473.4 13,276.6
Operating profit 2,111.8 2,042.1 1,772.6
Gain on joint venture stock offering(h) - 118.2 -
Interest expense (613.7) (686.0) (607.9)
Interest income 161.6 179.5 175.3
Income from continuing operations before
income taxes and cumulative effect of
accounting changes 1,659.7 1,653.8 1,340.0
Provision for income taxes 579.5 563.2 438.6
Income from continuing operations before
cumulative effect of accounting
changes $ 1,080.2 1,090.6 901.4
Cumulative effect of accounting
changes (i) $ - - -
Net income (j) $ 1,080.2 1,076.9 901.4
Per Share Data
Income from continuing operations before
cumulative effect of accounting
changes $ 1.35 1.37 1.13
Cumulative effect of accounting
changes (i) $ - - -
Net income (j) $ 1.35 1.35 1.13
Cash dividends declared $ 0.460 0.383 0.320
Average shares and equivalents
outstanding 802.5 798.7 796.0
Cash Flow Data (k)
Net cash provided by continuing
operations $ 2,430.3 2,110.0 1,885.9
Cash acquisitions and investments in
affiliates $ 640.9 630.6 3,296.6
Cash capital spending $ 1,457.8 1,180.1 943.8
Cash dividends paid $ 343.2 293.9 241.9
Year-End Position
Total assets $18,775.1 17,143.4 15,126.7
Long-term debt $ 7,806.2 5,899.6 6,076.5
Total debt (l) $ 8,034.4 7,526.1 6,942.8
Shareholders' equity $ 5,545.4 4,904.2 3,891.1
Per share $ 7.03 6.22 4.92
Market price per share $ 33 3/4 25 3/4 21 3/8
Shares outstanding 789.1 788.4 791.1
Employees 338,000 308,000 266,000
Statistics
Return on average shareholders'
equity (m) 20.7% 24.8 25.6
Market net debt ratio (n) 21% 24 26
Historical cost net debt ratio (o) 51% 51 54
F-45
____________________________________________________________________________
Selected Financial Data (Page 4 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
____________________________________________________________________________
1988(b) 1987 1986
____________________________________________________________________________
Summary of Operations
Net sales $12,381.4 11,018.1 9,017.1
Cost of sales and operating expenses 11,039.6 9,890.5 8,187.9
Operating profit 1,341.8 1,127.6 829.2
Gain on joint venture stock offering(h) - - -
Interest expense (342.4) (294.6) (261.4)
Interest income 120.5 112.6 122.7
Income from continuing operations before
income taxes and cumulative effect of
accounting changes 1,119.9 945.6 690.5
Provision for income taxes 357.7 340.5 226.7
Income from continuing operations before
cumulative effect of accounting
changes $ 762.2 605.1 463.8
Cumulative effect of accounting
changes (i) $ - - -
Net income (j) $ 762.2 594.8 457.8
Per Share Data
Income from continuing operations before
cumulative effect of accounting
changes $ 0.97 0.77 0.59
Cumulative effect of accounting
changes (i) $ - - -
Net income (j) $ 0.97 0.76 0.58
Cash dividends declared $ 0.267 0.223 0.209
Average shares and equivalents
outstanding 790.4 789.3 786.5
Cash Flow Data (k)
Net cash provided by continuing
operations $ 1,894.5 1,334.5 1,212.2
Cash acquisitions and investments in
affiliates $ 1,415.5 371.5 1,679.9
Cash capital spending $ 725.8 770.5 858.5
Cash dividends paid $ 199.0 172.0 160.4
Year-End Position
Total assets $11,135.3 9,022.7 8,027.1
Long-term debt $ 2,656.0 2,579.2 2,632.6
Total debt (l) $ 4,107.0 3,225.1 2,865.3
Shareholders' equity $ 3,161.0 2,508.6 2,059.1
Per share $ 4.01 3.21 2.64
Market price per share $ 13 1/8 11 1/4 8 3/4
Shares outstanding 788.4 781.2 781.0
Employees 235,000 225,000 214,000
Statistics
Return on average shareholders'
equity(m) 26.9% 26.5 23.8
Market net debt ratio (n) 24% 22 28
Historical cost net debt ratio (o) 43% 41 46
F-46
____________________________________________________________________________
Selected Financial Data (Page 5 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
____________________________________________________________________________
1985 1984(g)
____________________________________________________________________________
Summary of Operations
Net sales $7,584.5 7,058.6
Cost of sales and operating expenses 6,802.4 6,479.3
Operating profit 782.1 579.3
Gain on joint venture stock offering(h) - -
Interest expense (195.2) (204.9)
Interest income 96.4 86.1
Income from continuing operations before
income taxes and cumulative effect of
accounting changes 683.3 460.5
Provision for income taxes 256.7 180.5
Income from continuing operations before
cumulative effect of accounting
changes $ 426.6 280.0
Cumulative effect of accounting
changes (i) $ - -
Net income (j) $ 543.7 212.5
Per Share Data
Income from continuing operations before
cumulative effect of accounting
changes $ 0.51 0.33
Cumulative effect of accounting
changes (i) $ - -
Net income (j) $ 0.65 0.25
Cash dividends declared $ 0.195 0.185
Average shares and equivalents
outstanding 842.1 862.4
Cash Flow Data (k)
Net cash provided by continuing
operations $ 817.3 981.5
Cash acquisitions and investments in
affiliates $ 160.0 -
Cash capital spending $ 770.3 555.8
Cash dividends paid $ 161.1 154.6
Year-End Position
Total assets $5,889.3 4,876.9
Long-term debt $1,162.0 668.1
Total debt (l) $1,506.1 948.9
Shareholders' equity $1,837.7 1,853.4
Per share $ 2.33 2.19
Market price per share $ 7 7/8 4 5/8
Shares outstanding 789.4 845.2
Employees 150,000 150,000
Statistics
Return on average shareholders'
equity(m) 23.1% 15.4
Market net net debt ratio (n) 15% 12
Historical cost net debt ratio (o) 30% 17
F-47
___________________________________________________________________________
Selected Financial Data (Page 6 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
___________________________________________________________________________
All share and per share amounts reflect three-for-one stock splits in 1990
and 1986. Additionally, PepsiCo made numerous acquisitions in most years
presented and a few divestitures in certain years. Such transactions did
not materially affect the comparability of PepsiCo's operating results for
the periods presented, except for certain large acquisitions made in 1986,
1988 and 1989, and the divestitures discussed in Notes (g) and (j).
(a) Included the current year benefit of changing the method for
calculating the market-related value of plan assets, which reduced
full-year pension expense by $35.1 ($21.6 after-tax or $0.03 per
share). See Note 13.
(b) Fiscal years 1994 and 1988 each consisted of 53 weeks. Normally,
fiscal years consist of 52 weeks; however, because the fiscal year
ends on the last Saturday in December, a week is added every 5 or 6
years. The 53rd week increased 1994 earnings by approximately $54.0
($34.9 after-tax or $0.04 per share) and 1988 earnings by
approximately $23.2 ($15.7 after-tax or $0.02 per share).
(c) Included a $29.9 charge ($0.04 per share) to increase net deferred tax
liabilities as of the beginning of 1993 for a 1% statutory income tax
rate increase due to 1993 U.S. tax legislation. See Note 17.
(d) Included $193.5 in unusual charges for restructuring ($128.5 after-tax
or $0.16 per share). See Note 2 on page F-9 and Note 16.
(e) Included $170.0 in unusual charges ($119.8 after-tax or $0.15 per
share). See Note 2 on page F-9.
(f) Included $83.0 in unusual charges ($48.8 after-tax or $0.06 per
share). See Note 2 on page F-9.
(g) Included a $156.0 unusual charge ($62.0 after-tax or $0.07 per share)
related to a program to sell several international bottling
operations.
(h) The $17.8 gain ($16.8 after-tax or $0.02 per share) in 1994 arose from
a public share offering by PepsiCo's BAESA joint venture in South
America. See Note 4. The $118.2 gain ($53.0 after-tax or $0.07 per
share) in 1990 arose from an initial public offering of new shares by
a KFC joint venture in Japan and a sale by PepsiCo of a portion of its
shares.
(i) Represents the cumulative effect of adopting in 1994 SFAS 112,
"Employers' Accounting for Postemployment Benefits," and changing the
method for calculating the market-related value of plan assets used in
determining the return-on-asset component of annual pension expense
and the cumulative net unrecognized gain or loss subject to
amortization (see Notes 14 and 13, respectively) and adopting in 1992
SFAS 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and SFAS 109, "Accounting for Income Taxes" (see Notes
12 and 17, respectively). Prior years were not restated for these
changes in accounting.
(j) Included impacts of discontinued operations, the most significant of
which were in 1985 and 1984. 1985 included income of $123.6 after-tax
($0.15 per share) and 1984 included charges of $62.5 after-tax ($0.07
per share) resulting from PepsiCo disposing of its sporting goods and
transportation segments.
F-48
____________________________________________________________________________
Selected Financial Data (Page 7 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
_____________________________________________________________________________
(k) Cash flows from other investing and financing activities, which are
not presented, are an integral part of total cash flow activity.
(l) Total debt includes short-term borrowings and long-term debt, which
for 1987 through 1990 included a nonrecourse obligation.
(m) The return on average shareholders' equity is calculated using income
from continuing operations before cumulative effect of accounting
changes.
(n) The market net debt ratio represents net debt as a percent of net debt
plus the market value of equity, based on the year-end stock price.
Net debt is total debt, which for this purpose includes the present
value of long-term operating lease commitments, reduced by the pro
forma remittance of investment portfolios held outside the U.S. For
1987 through 1990, total debt was also reduced by the nonrecourse
obligation in the calculation of net debt.
(o) The historical cost net debt ratio represents net debt (see Note n) as
a percent of capital employed (net debt, other liabilities, deferred
income taxes and shareholders' equity).
F-49
PEPSICO, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1994, December 25, 1993 and December 26, 1992
(in millions)
Additions
Balance Charged Deduct- Balance
at to ions at
beginning costs and Other from end
of year expenses additions reserves of year
(1) (2)
Deductions from assets:
1994
Allowance for
doubtful accounts $128.3 $ 59.4 $ 7.6 $ 44.7 $150.6
Valuation allowance for
deferred tax assets $249.0 $ 69.4 $ 0.9 $ - $319.3
1993
Allowance for
doubtful accounts $112.0 $ 43.9 $ 16.7 $ 44.3 $128.3
Valuation allowance for
deferred tax assets $181.3 $ 67.7 $ - $ - $249.0
1992
Allowance for
doubtful accounts $ 97.5 $ 46.3 $ 14.1 $ 45.9 $112.0
Valuation allowance for
deferred tax assets $142.8 $ 38.5 $ - $ - $181.3
(1) Other additions to the allowance for doubtful accounts principally
related to acquisitions and reclassifications.
(2) Principally accounts written off.
E-1
INDEX TO EXHIBITS
ITEM 14(a)(3)
EXHIBIT
(3)(a) Restated Articles of Incorporation of PepsiCo, Inc., which is
incorporated herein by reference from Exhibit 4(a) to PepsiCo's
Registration Statement on Form S-3 (Registration No. 33-57181).
(3)(b) Copy of By-Laws of PepsiCo, Inc., as amended, which is
incorporated by reference from Exhibit 3(ii) to PepsiCo's Annual
Report on Form 10-K for the fiscal year ended December 26, 1992.
(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)(a) Description of PepsiCo, Inc. 1988 Director Stock Plan, which is
incorporated herein by reference from Post-Effective Amendment
No. 2 to PepsiCo's Registration Statement on Form S-8
(Registration No. 33-22970).
(10)(b) Copy of PepsiCo, Inc. 1987 Incentive Plan (the "1987 Plan"),
which is incorporated by reference from Exhibit 10(b) to
PepsiCo's Annual Form 10-K for the Fiscal Year ended December 26,
1992.
(10)(c) Copy of PepsiCo, Inc. 1979 Incentive Plan (the "Plan"), which is
incorporated by reference from Exhibit 10(c) to PepsiCo's Annual
Report on Form 10-K for the Fiscal year ended December 28, 1991.
(10)(d) Copy of Operating Guideline No. 1 under the 1987 Plan, as amended
through July 25, 1991, which is incorporated by reference from
Exhibit 10(d) to PepsiCo's Annual Report on Form 10-K for the
fiscal year ended December 28, 1991.
(10)(e) Copy of Operating Guideline No. 2 under the 1987 Plan and the
Plan, as amended through January 22, 1987, which is incorporated
herein by reference from Exhibit 28(b) to PepsiCo's Registration
Statement on Form S-8 (Registration No. 33-19539).
(10)(f) Amended and Restated PepsiCo Long Term Savings Program, dated
June 29, 1994
(10)(g) Amendment to Amended and Restated PepsiCo Long Term Savings
Program, dated September 14, 1994.
(10)(h) Copy of PepsiCo, Inc. 1994 Long-Term Incentive Plan, which is
incorporated herein by reference from Exhibit A to PepsiCo's
Proxy Statement for its 1994 Annual Meeting of Shareholders.
(10)(i) Copy of PepsiCo, Inc. Executive Incentive Compensation Plan,
which is incorporated herein by reference from Exhibit B to
PepsiCo's Proxy Statement for its 1994 Annual Meeting of
Shareholders.
(11) Computation of Net Income Per Share of Capital Stock ---- Primary
and Fully Diluted.
(12) Computation of Ratio of Earnings to Fixed Charges.
(21) Active Subsidiaries of PepsiCo, Inc.
(23) Report and Consent of KPMG Peat Marwick LLP.
(24) Copy of Power of Attorney.
(27) Financial Data Schedule