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 30, 1995
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:
Name of Each Exchange
Title of Each 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
Securities registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934: None
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 8, 1996 was $49,378,249,004.
The number of shares of PepsiCo Capital Stock outstanding as of March 8,
1996 was 788,475,034.
Documents of Which Portions Parts of Form 10-K into
Are Incorporated by Reference Which Portion of Documents Are
Incorporated
- ----------------------------------------- ------------------------------
Proxy Statement for PepsiCo's May 1, 1996 I, III
Annual Meeting of Shareholders
2
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
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 beverage products, primarily soft drinks and
soft drink concentrates, in the United States and Canada. PCNA sells its
concentrates to licensed bottlers ("Pepsi-Cola bottlers"). Under appointments
from PepsiCo, bottlers manufacture, sell and distribute, within defined
territories, soft drinks and syrups bearing trademarks owned by PepsiCo,
including PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, SLICE, MUG, ALL SPORT 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 and Canada. Pepsi-Cola bottlers distribute single-serve sizes of
OCEAN SPRAY juice products throughout the United States pursuant to a
distribution agreement.
Pepsi-Cola beverages are manufactured in approximately 200 plants located
throughout the United States and Canada. PCNA operates approximately 70 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 130 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
7 of these licensees, comprising approximately 70 licensed territories.
PCI manufactures and sells beverage products, primarily soft drinks and
soft drink concentrates outside the United States and Canada. PCI sells its
concentrates to Pepsi-Cola bottlers. Under appointments from PepsiCo, bottlers
manufacture, sell and distribute, within defined territories, beverages bearing
PEPSI-COLA, 7UP, MIRINDA, DIET PEPSI, PEPSI MAX, MOUNTAIN DEW, TEEM, DIET 7UP
and other trademarks. There are approximately 590 plants outside the United
States and Canada bottling PepsiCo's beverage products. These products are
available in 192 countries and territories outside the United States and Canada.
Principal international markets include Mexico, Saudi Arabia, Brazil, Argentina,
Venezuela, Thailand, Spain, the United Kingdom, China and Japan.
3
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 PepsiCo's beverage 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.
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 salty snack foods
throughout the United States and Canada, including LAY'S (in the United States)
and RUFFLES brands potato chips, DORITOS and TOSTITOS brands tortilla chips,
FRITOS brand corn chips, CHEEoTOS brand cheese flavored snacks, ROLD GOLD brand
pretzels and SUNCHIPS brand multigrain snacks.
Frito-Lay's products are transported from its manufacturing plants to
major distribution centers, principally by company-owned trucks. Frito-Lay
utilizes a "store-door-delivery" system, whereby its approximately 16,000 person
sales force delivers the snacks directly to the store shelf. This system permits
Frito-Lay to work closely with approximately 470,000 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 in 38 countries 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. PFI also sells a variety of snack food
products which appeal to local tastes including, for example WALKERS snack
foods, which are sold in the United Kingdom, WEDEL sweet snacks, which are sold
in Poland and GAMESA cookies and ALEGRO (formerly SONRICS) sweet snacks, which
are sold in Mexico. In addition, RUFFLES, CHEEoTOS, DORITOS, FRITOS and SUNCHIPS
salty snack foods have been introduced to international markets. Principal
international markets include Mexico, the United Kingdom, Poland, Brazil, Spain,
France, the Netherlands, and Australia.
4
RESTAURANTS
PepsiCo's restaurant business principally consists of Pizza Hut North
America ("PHNA"), Taco Bell North America ("TBNA"), KFC North America ("KFCNA")
and PepsiCo Restaurants International ("PRI").
PHNA is engaged principally in the operation, development, franchising and
licensing of a system of casual full service family restaurants,
delivery/carryout units and kiosks throughout the United States and Canada,
operating under the name PIZZA HUT. The full service restaurants serve several
varieties of pizza as well as pasta, salads and sandwiches. PHNA (through its
subsidiaries and affiliates) operates approximately 5,100 PIZZA HUT restaurants,
delivery/carryout units and other outlets and approximately 240 in Canada.
Franchisees operate approximately 2,800 additional restaurants,
delivery/carryout units and other outlets in the United States and approximately
160 in Canada. Licensees operate approximately 860 kiosk outlets in the United
States and approximately 115 kiosk outlets in Canada.
TBNA is engaged principally in the operation, development, franchising and
licensing of a system of fast-service restaurants serving carryout and dine-in
moderately priced Mexican-style food, including tacos, burritos, taco salads and
nachos, throughout the United States and Canada, operating under the name TACO
BELL. TBNA (through its subsidiaries and affiliates) operates approximately
3,000 TACO BELL outlets in the United States and approximately 85 in Canada.
Franchisees operate approximately 1,800 additional units in the United States.
Licensees operate approximately 1,600 special concept outlets in the United
States and approximately 25 in Canada.
KFCNA is engaged principally in the operation, development, franchising
and licensing of a system of carryout and dine-in restaurants featuring chicken
throughout the United States and Canada, operating under the names KENTUCKY
FRIED CHICKEN and/or KFC. KFCNA (through its subsidiaries and/or affiliates)
operates approximately 2,000 restaurants in the United States and approximately
250 in Canada. Franchisees operate approximately 3,000 additional restaurants in
the United States and approximately 580 in Canada. Licensees operate
approximately 110 outlets in the United States and approximately 50 in Canada.
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 925 PIZZA HUT restaurants,
delivery/carryout units and kiosks, franchisees operate approximately 1,350
units, and joint ventures in which PRI participates operate approximately 535
units. PIZZA HUT units are located in a total of 81 countries and territories
outside of the United States and Canada, and principal markets include
Australia, the United Kingdom, Brazil, France, Germany, Korea, Spain, Belgium,
Puerto Rico and Poland. PRI also operates approximately 915 KFC restaurants and
kiosks, franchisees operate approximately 2,300 restaurants and kiosks, and
joint ventures in which PRI participates operate approximately 395 restaurants
and kiosks. KFC units are located in 67 countries and territories outside of the
United States and Canada, and principal markets include Japan, Australia, the
United Kingdom, South Africa, New Zealand, China, Singapore, Puerto Rico,
Thailand and Mexico. PRI also operates approximately 25 TACO BELL outlets, and
franchisees and licensees operate approximately 45 outlets, in a total of 16
countries and territories outside of the United States and Canada.
5
PepsiCo also owns, operates, or participates as a joint venturer in other
restaurant concepts in the United States. PHNA operates approximately 100
D'ANGELO SANDWICH SHOPS and franchisees operate approximately 55 additional
outlets. TBNA also operates approximately 70 CHEVYS Mexican restaurants. PepsiCo
participates in a joint venture which operates approximately 80 CALIFORNIA PIZZA
KITCHEN restaurants.
PFS, a division of PepsiCo, is engaged in the distribution of food,
supplies and equipment and in providing services to approximately 17,000
company-operated, franchised and licensed PIZZA HUT, TACO BELL and KFC
restaurants in the United States, Canada, Mexico, Puerto Rico and Poland.
COMPETITION
All of PepsiCo's businesses are highly competitive. PepsiCo's beverages
and snack foods compete in the United States 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 in the United States and internationally with other
restaurants, restaurant chains, food outlets and home delivery operations. PFS
competes in the United States 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 30, 1995, PepsiCo employed, subject to seasonal variations,
approximately 480,000 persons (including approximately 290,000 part-time
employees), of whom approximately 358,409 (including 235,959 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.
6
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 and the
Americans with Disabilities Act. The conduct of PepsiCo's businesses is also
subject to state, local 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, ALL SPORT, 7UP and DIET 7UP (outside the United
States), MIRINDA, FRITO-LAY, DORITOS, RUFFLES, LAY'S, FRITOS, CHEEoTOS,
SANTITAS, SUNCHIPS, TOSTITOS, ROLD GOLD, 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 many of its trademarks in such contexts as
Pepsi-Cola bottling appointments, snack food joint ventures and wholly-owned
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 expensed $96 million, $152 million and $113 million on research
and development activities in 1995, 1994 and 1993, 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, United States restaurant chains and major
geographic areas of operations, as well as capital spending, acquisitions and
investments in unconsolidated affiliates, amortization of intangible assets and
depreciation expense for each industry segment and United States restaurant
chain, for 1995, 1994 and 1993 is contained in Item 8 "Financial Statements and
Supplementary Data" in Note 19 on page F-33.
7
ITEM 2. PROPERTIES
BEVERAGES
PepsiCo's beverage segment operates approximately 110 plants throughout
the world, of which 100 are owned and 10 are leased. Beverage joint ventures, in
which PepsiCo participates, operate approximately 115 plants and distribution
operations. In addition, PepsiCo's beverage business operates approximately 380
warehouses or offices in the United States and Canada, of which approximately
270 are owned and approximately 110 are leased.
PepsiCo owns a research and technical facility in Valhalla, New York, for
its beverage businesses. PepsiCo also owns the headquarters facilities for its
beverage businesses in Somers, New York.
SNACK FOODS
Frito-Lay operates 48 food manufacturing and processing plants in the
United States and Canada, of which 41 are owned and 7 are leased. In addition,
Frito-Lay owns approximately 190 warehouses and distribution centers and leases
approximately 50 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. PepsiCo's snack food
businesses also operate 65 plants and approximately 725 distribution centers,
warehouses and offices outside of the United States and Canada.
RESTAURANTS
Through PHNA, TBNA, KFCNA and PRI, PepsiCo owns approximately 4,000 and
leases approximately 6,900 restaurants, delivery/carryout units and other
outlets in the United States and Canada, and owns approximately 900 and leases
approximately 1,000 additional units outside the United States and Canada. PIZZA
HUT, TACO BELL and KFC restaurants in the United States 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 in the United States generally
are leased for significantly shorter initial terms with shorter renewal options.
Joint ventures, in which PepsiCo participates, operate approximately 925 units
outside the United States and Canada. PHNA owns and leases office facilities in
Wichita, Kansas, Dallas, Texas and other locations, some of which are shared
with PFS. TBNA leases its corporate headquarters in Irvine, California. KFCNA
owns a research facility and its corporate headquarters building in Louisville,
Kentucky. PFS owns 1 and leases 23 distribution centers in the United States and
owns 2 and leases 3 distribution centers outside of the United States.
8
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, with options to renew for
additional periods. Most international plants are leased for varying and usually
shorter periods, with or without 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.
EXECUTIVE OFFICERS OF THE COMPANY
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 60
Chief Executive Officer
Roger A. Enrico Vice Chairman of the Board 51
and Chairman and Chief
Executive Officer, PepsiCo
Worldwide Restaurants
Robert G. Dettmer Executive Vice President 64
and Chief Financial Officer
Randall C. Barnes Senior Vice President and 44
Treasurer
Robert L. Carleton Senior Vice President and 55
Controller
9
Edward V. Lahey, Jr. Senior Vice President, 57
General Counsel and
Secretary
Indra K. Nooyi Senior Vice President, 40
Strategic Planning
Each of the above-named officers has been employed by PepsiCo in an
executive capacity for at least five years except Indra K. Nooyi. Ms. Nooyi
has held her current position at PepsiCo since 1994. Prior to joining
PepsiCo, Ms. Nooyi spent four years as Senior Vice President of Strategy,
Planning and Strategic Marketing for Asea Brown Boveri.
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.
Information regarding directors of the Company other than those provided below
is set forth in the Proxy Statement for the Company's 1996 Annual Meeting of
Shareholders and is incorporated herein by reference.
DIRECTORS OF THE COMPANY RETIRING AS OF MAY 1, 1996
ANDRALL E. PEARSON was elected a director of PepsiCo in 1970. Mr. Pearson was
PepsiCo's President and Chief Operating Officer from 1971 through 1984. He was a
Professor at the Harvard Business School from 1985 until 1993, and is a director
of The May Department Stores Company, Lexmark International, Inc and The
Travelers Group. He is also a general partner of Clayton, Dubilier & Rice, Inc
and Chairman of the Board of Kraft Foodservice Company.
Mr. Pearson is 70 years old.
ROGER B. SMITH, former Chairman and Chief Executive Officer of General Motors
Corp., was elected to PepsiCo's Board in 1989. Mr. Smith joined General
Motors Corp. in 1949 and served as its Chairman and Chief Executive Officer
from 1981 to 1990. He serves on the Board of Directors of Citicorp,
International Paper Co. and Johnson & Johnson. Mr. Smith is 70 years old.
ROBERT H. STEWART, III, a director since 1965 and Chairman of the Board's
Compensation Committee, is Vice Chairman of Bank One, Texas, N.A. In 1987,
Mr. Stewart became Chairman of the Board of First RepublicBank Corporation, a
position he held until joining LaSalle Energy Corp. where he was Vice
Chairman of the Board from August 1987 until its sale in November 1989. Mr.
Stewart then became Vice Chairman of the Board of Team Bank, assuming his
present position in November 1992 upon the acquisition of Team Bancshares
Inc. by BANC ONE CORPORATION. He is also a director of ARCO Chemical Co.
Mr. Stewart is 70 years old.
10
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 Amsterdam,
Chicago, Swiss and Tokyo Stock Exchanges.
Shareholders - At year-end 1995, there were approximately 167,000
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 1996 are
expected to be March 8, June 7, September 6 and December 6. Quarterly cash
dividends have been paid since 1965, and dividends paid per share have increased
for 23 consecutive years.
Cash Dividends Declared Per Share (in cents)
Quarter 1995 1994
------- ---- ---
1 18 16
2 20 18
3 20 18
4 20 18
-- --
Total 78 70
== ==
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 1995 and 1994 were as follows
(in dollars):
1995 High Low Close
- ---- ---- --- -----
First Quarter 41 33 7/8 40 1/4
Second Quarter 49 37 7/8 46 5/8
Third Quarter 47 7/8 43 1/4 45 3/4
Fourth Quarter 58 3/4 45 5/8 55 7/8
1994 High Low Close
- ---- ---- --- -----
First Quarter 42 1/2 35 3/4 37 5/8
Second Quarter 37 3/4 29 7/8 31 1/8
Third Quarter 34 5/8 29 1/4 33 3/4
Fourth Quarter 37 3/8 32 1/4 36 1/4
11
ITEM 6. SELECTED FINANCIAL DATA
Included on pages F-48 through F-54.
ITEM 7. MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOWS AND
FINANCIAL CONDITION
MANAGEMENT'S ANALYSIS
INTRODUCTION
PepsiCo's Management's Analysis is structured in four sections. The first
section provides an overview and focuses on items that either significantly
impact comparability of reported financial information or are anticipated to
significantly impact future operating results. The second section analyzes the
results of operations; first on a consolidated basis and then for each of
PepsiCo's three industry segments. The final sections address PepsiCo's
consolidated cash flows and financial condition. Management's Analysis should be
read in conjunction with PepsiCo's audited consolidated financial statements,
including Notes, on pages F-2 through F-41.
WORLDWIDE MARKETPLACE
PepsiCo's worldwide businesses operate in highly competitive markets that are
subject to both global and local economic conditions, including the effects of
inflation, commodity price and currency fluctuations, governmental actions and
political instability and its related dislocations. In addition to extensive
market and product diversification, PepsiCo's operating and investing strategies
are designed, where possible, to mitigate these factors through focused 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 excellent 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.
In 1995, international businesses represented 29% of PepsiCo's net sales
and 18% of operating profit excluding the initial, noncash charge upon adoption
of Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," (see Accounting Changes below). Management believes that these percentages
will increase in the future as PepsiCo continues to invest internationally to
take advantage of market opportunities. It is therefore important to consider
that movements in currency exchange rates not only result in a related
translation impact on PepsiCo's earnings, but also, and probably more
importantly, can result in significant economic impacts that affect operating
results as well. Changes in exchange rates are often linked to variability in
real growth, inflation, interest rates, governmental actions and other factors.
In addition, material changes generally cause PepsiCo to adjust its financing,
investing and operating strategies; for example, promotions and product
strategies, pricing and decisions concerning capital spending, sourcing of raw
materials and packaging (see discussion on Mexico below). The following
paragraphs describe the effect of currency exchange rate movements on PepsiCo's
reported results.
12
As currency exchange rates change, translation of the income statements of
our international businesses into U.S. dollars affects year-over-year
comparability of operating results. With the exception of Mexico in 1995, sales
and operating profit growth rates for our combined international businesses were
not materially impacted by the translation effects of changes in currency
exchange rates in the last three years. Material effects on comparability of
sales and operating profit arising from translation are identified in
Management's Analysis of operating results. By definition, these translation
effects exclude the impact of businesses in highly inflationary countries, where
the accounting 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 selling, general
and administrative expenses. PepsiCo reported a net foreign exchange loss of $6
million in 1995 compared to a net foreign exchange gain of $4 million in 1994
and a net foreign exchange loss of $41 million in 1993. These reported amounts
include translation gains and losses arising from remeasurement into U.S.
dollars of the monetary assets and liabilities 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
interest-bearing investments as well as payables (including debt) denominated in
currencies other than a business unit's functional currency. In implementing
strategies to minimize net after-tax financing costs, the effects of anticipated
currency exchange rate movements on debt and short-term investments are
considered together with related interest rates.
In 1995, Mexico was an extreme example of how movements in currency
exchange rates impact operating results. In Mexico, PepsiCo's largest
international market in 1994, operations were adversely impacted by the effects
of the approximately 50% devaluation of the Mexican peso which triggered an
extremely high level of inflation. Consumer demand shrank dramatically for most
goods and services in response to declining real incomes and increased
unemployment. Price increases taken to offset rising operating and product costs
further dampened weak consumer demand. Actions taken by PepsiCo to mitigate
these adverse effects, such as introducing various volume building programs to
stimulate demand and reducing costs and capital spending, resulted in only a
modest decline in local currency segment operating profit for Mexico. However,
on a U.S. dollar basis, combined segment operating profit and identifiable
assets in Mexico declined dramatically, reflecting the unfavorable translation
effect of the much weaker peso in 1995.
13
The following estimated decline in net income and net income per share for
PepsiCo's operations in Mexico reflected the decrease in Mexico's combined
segment operating profit (see each industry segment discussion for the impact by
segment) and PepsiCo's equity share of the increased net losses of our
unconsolidated affiliates in Mexico:
($ in millions except
per share amounts) Year-Over-Year Decline
----------------------
1995 1994 Reported Ongoing*
---- ---- -------- -------
Net sales $1,228 $2,023 (39%) (39%)
Operating profit $ 80 $ 261 (69%) (61%)
Operating profit
margin 7% 13% (6 points) (5 points)
% of total
international
segment operating
profit 18% 42% (24 points) (26 points)
% of total segment
operating profit 3% 8% (5 points) (5 points)
Net income $ 55 $ 175 (69%) (57%)
Net income per
share $ 0.07 $ 0.22 (68%) (55%)
Identifiable assets $ 637 $ 995 (36%) (34%)
- --------------------------------------------------------------------------------
* Excluded Mexico's portion of the 1995 initial, noncash charge upon adoption
of SFAS 121 of $21 million ($21 million after-tax or $0.03 per share) (see
below).
All amounts for Mexico presented above and, unless otherwise noted, in
Management's Analysis of Industry Segments included an allocation of the
international divisions' headquarters expenses, but excluded any allocation of
PepsiCo's corporate expenses and financing costs.
CERTAIN FACTORS AFFECTING COMPARABILITY
ACCOUNTING CHANGES
PepsiCo's financial statements reflect the noncash impact of accounting changes
adopted in 1995 and 1994. PepsiCo early adopted SFAS 121 as of the beginning of
the fourth quarter of 1995. The initial, noncash charge upon adoption of SFAS
121 was $520 million ($384 million after-tax or $0.48 per share), which included
$68 million ($49 million after-tax or $0.06 per share) related to restaurants
for which closure decisions were made during the fourth quarter. As a result of
the reduced carrying amount of certain of PepsiCo's long-lived assets to be held
and used in the business, depreciation and amortization expense for the
14
fourth quarter of 1995 was reduced by $21 million ($15 million after-tax or
$0.02 per share) and full-year 1996 depreciation and amortization expense is
expected to be reduced by approximately $58 million ($39 million after-tax or
$0.05 per share). As the initial charge was based upon estimated cash flow
forecasts requiring considerable management judgment, actual results could vary
significantly from these estimates.Therefore, future charges, though not of the
magnitude of the initial charge, are reasonably possible although not currently
estimable. See Note 2. See Management's Analysis - Restaurants on page 33 for a
discussion of other possible future effects related to this change in
accounting.
In 1994, PepsiCoadopted Statement of Financial Accounting Standards No. 112
(SFAS 112), "Employers' Accounting for Postemployment Benefits." The cumulative
effect of adopting SFAS 112, an $84 million charge ($55 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 ongoing impact of adopting SFAS 112 was
immaterial to 1994 operating profit. See Note 14.
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 $38 million ($23 million
after-tax or $0.03 per share). As compared to the previous accounting method,
the change reduced 1994 pension expense by $35 million ($22 million after-tax or
$0.03 per share). See Note 13.
RESTAURANT SEGMENT
In addition to reporting U.S. and international results, PepsiCo has
historically provided detailed information and Management's Analysis of
operating results for each of its three major restaurant concepts (which
included the results of other small U.S. concepts managed by Taco Bell and Pizza
Hut) on a worldwide basis. Beginning with the fourth quarter of 1995, PepsiCo
has changed the presentation of the restaurant information to more closely
reflect how we currently manage the business. Detailed information and
Management's Analysis of operating results are now provided for each of
PepsiCo's three major U.S. concepts (including the results of the other small
U.S. concepts managed by Taco Bell and Pizza Hut) and in total for the
international operations of our restaurant concepts. Prior year amounts in Note
19 and Management's Analysis - Restaurants have been restated to reflect this
change.
As discussed in Management's Analysis - Restaurants on page 33, we began to
take actions in 1995 to improve restaurant returns, in part, by selling
restaurants to franchisees. In addition, we have more aggressively closed stores
that do not meet our performance expectations. As a result, restaurant operating
profit included a net gain of $51 million in 1995 from sales of restaurants to
franchisees in excess of the costs of closing other restaurants. This compares
to $10 million of costs in 1994 to close stores. Management expects these kinds
of actions to continue over the next few years as we implement our strategies to
improve restaurant returns.
OTHER FACTORS
Comparisons of 1995 to 1994 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 net sales by
15
an estimated $434 million and earnings by an estimated $54 million ($35 million
after-tax or $0.04 per share). See Items Affecting Comparability - Fiscal Year
in Note 19 for the impact on each of PepsiCo's industry segments.
In 1994, PepsiCo recorded a onetime, noncash gain of $18 million ($17
million after-tax or $0.02 per share) resulting from a public share offering by
BAESA, an unconsolidated franchised bottling affiliate in South America.
See Note 16.
Although it will not affect comparison of full-year operating results,
international beverages' 1996 quarterly results will not be comparable to 1995's
results because its 1996 quarterly reporting will be changed for all
international countries except Canada. Due to the increase in company-owned
bottling operations, in combination with the requirements that calendar year
results generally need to be maintained internationally for statutory purposes,
international beverages has elected to simplify its administrative processes by
reporting results on a monthly basis. Beginning in 1996, the first through the
fourth quarters will include two, three, three and four months, respectively.
The comparable quarters in 1995 included twelve, twelve, twelve and sixteen
weeks, respectively.
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 Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," the increase in the tax rate resulted in a noncash charge of
$30 million ($0.04 per share) for the adjustment of net deferred tax liabilities
as of the beginning of 1993. The 1993 legislation also included a provision to
reduce the tax credit associated with beverage concentrate operations in Puerto
Rico. In the first year of this change, the tax credit on income earned in
Puerto Rico was limited 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. The provision reduced 1995 earnings
by approximately $58 million or $0.07 per share.
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 beverage concentrate operations in Puerto Rico. 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. Had the
currently proposed Q&A 12 been in effect at the beginning of 1995, earnings for
the year would have been reduced by an estimated $44 million, or $0.05 per
share, and the 1995 full-year effective tax rate would have increased 1.8
points.
Assuming retroactivity to December 1, 1994 and assuming 1996 profitability
levels comparable to 1995, enactment of the proposed change to Q&A 12 in 1996
would increase PepsiCo's 1996 full-year effective tax rate by about 3.7 points.
Slightly more than half of the potential increase is due to the retroactive
application of the change to Q&A 12 to years prior to 1996 with the balance
attributable to 1996 earnings. The estimated impacts and the proposed
retroactive effective date to December 1, 1994 are subject to change depending
upon the final provisions of Q&A 12, if enacted, and the actual level of
profitability in 1996.
Under generally accepted accounting principles, the unfavorable effect of
the proposed change in Q&A 12 cannot be included in PepsiCo's effective tax rate
until it is enacted. Due to its proposed retroactivity, the amount related to
the periods prior to its
16
enactment date will be recognized in full in the quarter it is enacted. This,
along with PepsiCo's policy to recognize settlement of prior year audit issues
at the time they are resolved, may result in volatility in PepsiCo's 1996
quarterly effective tax rates due to the timing of these events, as well as
other factors.
DERIVATIVES
PepsiCo's policy prohibits the use of derivative instruments for trading
purposes and we have procedures in place to monitor and control their use.
PepsiCo uses 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 amount, interest payment dates 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. PepsiCo's
credit risk related to interest rate and currency swaps is considered low
because they are only entered into with strong creditworthy counterparties, are
generally settled on a net basis and are of relatively short duration. See Notes
7, 8 and 9 for additional details regarding interest rate and currency swaps.
In 1995, PepsiCo issued a seven-year put option in connection with the
formation of a joint venture with the principal shareholder of GEMEX, an
unconsolidated franchised bottling affiliate in Mexico. The put option allows
the principal shareholder to sell up to 150 million GEMEX shares to PepsiCo at
66 2/3 cents per share. PepsiCo accounts for this put option by marking it to
market with gains or losses recognized currently as an adjustment to equity in
net income of unconsolidated affiliates, which is included in selling, general
and administrative expenses in the Consolidated Statement of Income. The put
option liability, which was valued at $26 million at the date of the original
transaction, increased to $30 million by year-end, resulting in a $4 million
charge to earnings. See Notes 7, 9 and 17.
PepsiCo hedges commodity purchases with futures contracts traded on
national exchanges. While such hedging activity has historically been done on a
limited basis, PepsiCo could increase its hedging activity in the future if it
believes it would result in lower total costs. Open contracts at year-end 1995
and 1994 and gains and losses realized in 1995 and 1994 or deferred at the
respective year-ends were not significant.
FORWARD-LOOKING STATEMENTS
Included from time to time in statements by PepsiCo's senior executives and in
Management's Analysis beginning on page 11 are certain forward-looking
statements reflecting management's current expectations. Uncertainties that
could impact those forward-looking statements are described in Management's
Analysis - Worldwide Marketplace on page 11. In addition, forward-looking
statements related to future earnings growth contemplate double-digit combined
segment operating profit growth and the ability, for the next several years, to
generate significant gains from the sale of our restaurants to franchisees in
excess of costs of closing restaurants and impairment charges, but do not
consider the retroactive impact of the proposed change to Q&A 12 discussed
above.
17
RESULTS OF OPERATIONS
CONSOLIDATED REVIEW
To improve comparability, Management's Analysis identifies the impact, where
significant, of beverage and snack food acquisitions, net of operations sold or
contributed to joint ventures (collectively, "net acquisitions"). The impact of
acquisitions represents 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. These units, net of units closed or sold, principally to franchisees,
are collectively referred to as "additional restaurant units."
NET SALES
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
U.S. $21,674 $20,246 $18,309 7 11
International 8,747 8,226 6,712 6 23
------- ------- -------
$30,421 $28,472 $25,021 7 14
======= ======= =======
- -------------------------------------------------------------------------------
Worldwide net sales rose $1.9 billion or 7% in 1995. The fifty-third week in
1994 reduced the worldwide, U.S. and international net sales growth by
approximately 2 points each. The sales growth benefited from higher effective
net pricing, volume gains of $934 million, driven by worldwide snack foods and
beverages, and $623 million due to additional restaurant units. The higher
effective net pricing reflected increases in international snack foods, driven
by Mexico, and U.S. beverages, primarily in response to significantly higher
prices for packaging. These benefits were partially offset by the unfavorable
currency translation impact of the devaluation of the Mexican peso on
international snack foods. Worldwide net sales grew $3.5 billion or 14% in 1994.
The fifty-third week favorably affected worldwide, U.S. and international sales
growth by about 2 points each. The increase reflected volume gains of $2.2
billion, $934 million due to additional restaurant units and $215 million
contributed by net acquisitions.
International net sales grew 6% in 1995 and 23% in 1994 with net
acquisitions contributing 1 point in both years. International net sales
represented 29%, 29% and 27% of total net sales in 1995, 1994 and 1993,
respectively. The unfavorable impact of the devaluation of the Mexican peso
beginning in late 1994 through 1995, and its related effects, slowed PepsiCo's
trend of an increasing international component of net sales.
18
COST OF SALES
($ in millions)
1995 1994 1993
---- ---- ----
Cost of sales $14,886 $13,715 $11,946
As a percent of 48.9% 48.2% 47.7%
net sales
- -------------------------------------------------------------------------------
The .7 point increase in 1995 was primarily due to worldwide beverages and
international snack foods. The increase in worldwide beverages reflected higher
packaging prices in the U.S., the effects of which were partially mitigated by
increased pricing, and an unfavorable mix shift in international sales from
concentrate to packaged products. The international snack foods increase was due
to the effect of increased costs, primarily in Mexico, which were partially
mitigated by price increases. The .5 point increase in 1994 reflected an
unfavorable mix shift in international beverages, from concentrate to packaged
products, and in worldwide restaurants, as well as lower net pricing in U.S.
beverages. These unfavorable effects were partially offset by a favorable
package and product mix shift in international snack foods and manufacturing
efficiencies in U.S. snack foods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (S,G&A)
($ in millions) 1995 1994 1993
---- ---- ----
SG&A $11,712 $11,244 $9,864
As a percent of net sales 38.5% 39.5% 39.4%
- -------------------------------------------------------------------------------
SG&A is comprised of selling and distribution expenses (S&D), advertising and
marketing expenses (A&M), and general and administrative expenses (G&A) which
include gains on sales of assets as well as other income and expense. SG&A grew
4% to $11.7 billion in 1995, slower than sales, and 14% to $11.2 billion in
1994, the same rate as sales. In 1995, A&M grew at a substantially slower rate
than sales reflecting a slower rate of spending in worldwide beverages and U.S.
restaurants. G&A also grew at a substantially slower rate than sales, driven by
worldwide beverages and U.S. restaurants. Worldwide beverages benefited from
international cost containment initiatives, a gain on sale of an international
bottling plant, savings in U.S. beverages from a 1994 reorganization as well as
benefits of increased pricing in U.S. beverages. U.S. restaurants benefited from
a net gain on sales of restaurants in excess of costs of closing other
restaurants. S&D grew at a slightly slower rate than sales, in part reflecting
the benefits of increased pricing in U.S. beverages and a slower rate of
spending in international snack foods.
AMORTIZATION OF INTANGIBLE ASSETS increased 1% to $316 million in 1995 and 3% to
$312 million in 1994. This noncash expense reduced net income per share by
$0.30, $0.29 and $0.28 in 1995, 1994 and 1993, respectively.
19
IMPAIRMENT OF LONG-LIVED ASSETS reflected the initial, noncash charge of $520
million ($384 million after-tax or $0.48 per share) upon adoption of SFAS 121.
See Note 2.
OPERATING PROFIT
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Operating
Profit
Reported $2,987 $3,201 $2,907 (7) 10
Ongoing* $3,507 $3,201 $2,907 10 10
* 1995 excluded the initial, noncash charge upon adoption of SFAS 121. See
Note 2.
- -------------------------------------------------------------------------------
Reported operating profit declined $214 million or 7% in 1995. Ongoing operating
profit increased $306 million or 10% in 1995. The fifty-third week in 1994
reduced the operating profit growth by approximately 2 points. The profit growth
was driven by combined segment ongoing operating profit growth of 11%, which
benefited from volume growth of $283 million ($430 million excluding the impact
of the fifty-third week), driven by U.S. snack foods and worldwide beverages,
and $76 million due to additional restaurant units. These advances were
partially offset by net unfavorable currency translation impacts, primarily from
Mexico. The benefit of higher effective net pricing for all segments combined
was almost entirely offset by increased product and operating costs, primarily
in Mexico, and higher packaging prices in the U.S. The ongoing profit margin
increased slightly to 11.5% in 1995. Operating profit increased $294 million or
10% in 1994. The fifty-third week increased the operating profit growth by
approximately 2 points. The profit growth was driven by combined segment
operating profit growth of 8%, which reflected $850 million from higher volumes
($703 million excluding the impact of the fifty-third week) and $73 million from
additional restaurant units, partially offset by higher operating expenses. The
profit margin decreased almost one-half point to 11.2% in 1994.
International segment ongoing profit grew 4% in 1995, a slower rate than
sales growth, which reflected the adverse effects of the Mexican peso
devaluation, particularly in snack foods, partially offset by very strong
restaurant performance. International segment ongoing profit represented 18%,
19% and 18% of combined segment ongoing operating profit in 1995, 1994 and 1993,
respectively.
GAIN ON STOCK OFFERING BY AN UNCONSOLIDATED AFFILIATE of $18 million ($17
million after-tax or $0.02 per share) in 1994 related to the public share
offering by BAESA, an unconsolidated franchised bottling affiliate in South
America. See Note 16.
20
INTEREST EXPENSE, NET
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Interest expense $(682) $(645) $(573) 6 13
Interest income 127 90 89 41 1
--- --- ---
Interest expense, $(555) $(555) $(484) - 15
net ===== ===== =====
- -------------------------------------------------------------------------------
Interest expense, net in 1995 was even with 1994, reflecting the net impact of
higher average interest rates offset by lower average borrowings. The 15%
increase in 1994 reflected higher average borrowings, partially offset by higher
interest rates on investment balances. Excluding the impact of net acquisitions,
interest expense, net decreased 3% in 1995 and increased 10% in 1994.
PROVISION FOR INCOME TAXES
($ in millions)
1995 1994 1993
---- ---- ----
Reported
Provision for $826 $880 $835
Income Taxes
Effective Tax Rate 34.0% 33.0% 34.5%
Ongoing*
Provision for $962 $880 $809
Income Taxes
Effective Tax Rate 32.6% 33.0% 33.3%
* Excluded the effects of the initial, noncash charge upon adoption of SFAS
121 in 1995 (see Note 2) and the deferred tax charge due to the U.S. tax
legislation in 1993 (see Note 11).
- -------------------------------------------------------------------------------
The 1995 reported effective tax rate increased 1 point to 34.0%. The 1995
ongoing effective tax rate declined slightly, reflecting a reversal of prior
year accruals no longer required and tax refunds, both a result of the current
year resolution of certain prior years' audit issues. These benefits were
partially offset by a higher foreign effective tax rate, primarily due to a
provision in the 1993 U.S. tax legislation that reduced the tax credit
associated with beverage concentrate operations in Puerto Rico and became
effective for PepsiCo on December 1, 1994 (see Management's Analysis Significant
U.S. Tax Changes Affecting Historical and Future Results on page 15), and a
decrease in the proportion of income taxed at lower foreign rates. The 1994
reported effective tax rate declined 1 1/2 points to 33.0%. The slight decline
in the ongoing effective tax rate in 1994 reflected a reversal of certain
valuation allowances related to deferred tax assets and an increase in the
proportion of income taxed at lower
21
foreign rates offset by the absence of a favorable adjustment in 1993 of certain
prior years' foreign accruals.
INCOME AND INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES
($ in millions except
per share amounts) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Reported
Income $1,606 $1,784 $1,588 (10) 12
Income Per Share $ 2.00 $ 2.22 $ 1.96 (10) 13
Ongoing*
Income $1,990 $1,767 $1,618 13 9
Income Per Share $ 2.48 $ 2.20 $ 2.00 13 10
* Excluded the initial, noncash charge upon adoption of SFAS 121 in 1995 (see
Note 2), the 1994 BAESA gain (see Note 16) and the deferred tax charge due
to the U.S. tax legislation in 1993 (see Note 11).
- -------------------------------------------------------------------------------
Growth in ongoing income per share was depressed by estimated dilution from
acquisitions of $0.04 or 2 points in 1995 and $0.03 or 2 points in 1994,
primarily due to international beverage acquisitions and investments in new
unconsolidated affiliates in both years.
22
INDUSTRY SEGMENTS
BEVERAGES
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net Sales
U.S. $ 6,977 $6,541 $5,918 7 11
International 3,571 3,146 2,720 14 16
------- ------ ------
$10,548 $9,687 $8,638 9 12
======= ====== ======
Operating Profit
Reported:
U.S. $ 1,145 $1,022 $ 937 12 9
International 164 195 172 (16) 13
------- ------ ------
$ 1,309 $1,217 $1,109 8 10
======= ====== ======
Ongoing:*
U.S. $ 1,145 $1,022 $ 937 12 9
International 226 195 172 16 13
------- ------ ------
$ 1,371 $1,217 $1,109 13 10
======= ====== ======
* 1995 excluded the initial, noncash charge upon adoption of SFAS 121. See
Notes 2 and 19.
- -------------------------------------------------------------------------------
[Note: Unless otherwise noted, operating profit comparisons within the 1995
vs. 1994 discussion are based on ongoing operating profit. Net sales and
operating profit comparisons within the following discussions include the
impact of the fifty-third week in 1994 (see Note 19). System bottler case
sales of Pepsi Corporate brands (BCS) were not impacted by the fifty-third
week because they are measured on a calendar year basis.]
1995 vs. 1994
Worldwide net sales increased $861 million or 9%. The fifty-third week in 1994
reduced the worldwide net sales growth by approximately 1 point. Comparisons are
also affected by the start-up of international company-owned bottling and
distribution operations within the past twelve months ("start-up operations")
and acquisitions, principally international, as well as the absence of certain
small operations sold or contributed to joint ventures (collectively, "net
acquisitions"). The start-up operations and net acquisitions contributed $93
million and $56 million, respectively, or 2 points on a combined basis to the
sales growth.
Reported worldwide operating profit increased $92 million or 8%. Excluding
the initial charge upon adoption of SFAS 121, which for beverages only affected
our operations in Germany, operating profit increased $154 million or 13%. The
fifty-third week in 1994 reduced ongoing worldwide operating profit growth by
approximately 1 point.
23
Sales in the U.S. rose $436 million or 7%. The fifty-third week in 1994
reduced the sales growth by approximately 2 points. The sales growth reflected
higher pricing on most carbonated soft drink (CSD) packages, primarily in
response to significantly higher prices for packaging. Sales growth also
benefited from increased volume which contributed $107 million.
BCS consists of sales of packaged products to retailers and through vending
machines and fountain syrup by company-owned and franchised bottlers. BCS in the
U.S. increased 4%, reflecting double-digit growth in the Mountain Dew brand and
solid increases in Brand Pepsi. BCS growth also benefited from increased sales
of Mug brand root beer. Total alternative beverages, which include Lipton brand
ready-to-drink tea, All Sport and Ocean Spray Lemonade products, grew at a
strong double-digit rate, reflecting growth in Lipton brand tea and All Sport,
partially offset by significant declines in Ocean Spray Lemonade products,
albeit on a small base. The growth in Lipton, which represents approximately 80%
of our alternative beverages BCS, was due to volume gains from Lipton Brisk and
fountain syrup which more than offset lower volume of the premium-priced Lipton
Original. Excluding the alternative beverages, BCS growth was 3%. Packaged
products BCS grew at a faster rate than fountain syrup.
Profit in the U.S. increased $123 million or 12%. The fifty-third week in
1994 reduced the operating profit growth by approximately 1 point. Profit growth
reflected the higher pricing on CSD packages and concentrate which exceeded the
increased product costs, primarily for packaging. Volume gains, driven by
packaged products, contributed $52 million ($107 million excluding the impact of
the fifty-third week) to the profit growth. Administrative expenses declined,
reflecting savings from a 1994 consolidation of headquarters and field
operations. Selling and distribution expenses grew at a slower rate than sales,
in part reflecting the benefits of increased pricing, partially offset by the
effects of a 6-week strike in California that ended in August. Advertising and
marketing expenses increased modestly. Profit growth was aided by favorable
results from alternative beverages due to higher profit from Lipton. Profit
growth was dampened by the absence of 1994 gains totaling $9 million resulting
from sales of bottling businesses. The profit margin increased nearly 1 point to
16.4%.
In 1995, U.S. beverages continued to execute actions related to the
previously disclosed 1992 restructuring. Benefits in 1995 were offset by
incremental costs associated with the continued development and implementation
of the restructuring actions. The amount and timing of currently projected
benefits are consistent with the revised projections as noted below in the 1994
vs. 1993 discussion.
International sales rose $425 million or 14%. The sales growth was not
affected by the fifty-third week in 1994. Start-up operations, principally in
Eastern Europe, and net acquisitions, consisting primarily of franchised and
independent bottling operations in Asia, contributed $93 million and $44
million, respectively, or 5 points to the sales growth on a combined basis.
Sales growth benefited from volume advances of $194 million, reflecting
increased volume of packaged product sales and concentrate shipments to
franchised bottlers, particularly in markets where we are investing heavily
because we believe they have high growth potential (Growth Markets). Growth
Markets primarily include Brazil, China, Eastern Europe and India. Sales growth
was also aided by higher effective net prices on concentrate and packaged
products due, in part, to product, package and country mix. Unfavorable currency
translation impacts, primarily due to a weaker Mexican peso, were
24
substantially offset by favorable currency translation impacts, primarily
reflecting the strength of the Japanese yen and Western European currencies.
International BCS grew 8%. This advance reflected broad-based growth led by
Growth Markets which, on a combined basis, grew about 50%. Each of the countries
in our Growth Markets had strong double-digit growth, led by near triple-digit
growth in Brazil and strong gains in China and India. The international BCS
growth also reflected double-digit growth in Thailand, Venezuela, Turkey and
Pakistan, as well as advances in Saudi Arabia, Spain and the U.K. These advances
were partially offset by declines in Mexico, our largest international BCS
market, and Argentina, primarily reflecting adverse economic conditions in these
countries.
Reported international profit decreased $31 million or 16%. Ongoing
operating profit increased $31 million or 16%. The fifty-third week in 1994
reduced the ongoing operating profit growth by approximately 2 points. The net
acquisitions and start-up operations reduced profit by $8 million and $3
million, respectively, or 6 points on a combined basis. Profit growth benefited
from the higher effective net prices on concentrate and packaged products and
increased volume, primarily concentrate, of $52 million. These benefits were
partially offset by net unfavorable currency translation impacts, principally
due to the devaluation of the Mexican peso, and higher field operating costs and
headquarters administrative expenses, reflecting normal increases and costs to
support expansion. Profit growth was aided by an $8 million gain on the sale of
a bottling plant in Greece.
Following is a discussion of international results by key geographic
market. Ongoing profit growth reflected a significant net reduction in losses
from the Growth Markets, led by increased profit in Brazil and reduced losses in
India, the Czech Republic and Poland. Profit growth was also aided by increased
volume and higher effective net prices in Saudi Arabia and the U.K. Our largest
international sales markets are Canada, Japan and Spain, which have sizable
company-owned bottling operations. Double-digit profit growth in Canada
benefited from cost reduction initiatives, while strong double-digit profit
growth in Japan was led by increased volume, favorable currency translation
impacts and lower operating costs, partially offset by lower effective net
prices. Profit in Spain was slightly lower, reflecting a higher level of
promotional activity which was only partially offset by increased volume. These
net gains were partially offset by significantly lower profits in Mexico and
Argentina, primarily reflecting the adverse economic conditions in those
countries. The ongoing operating profit margin was essentially unchanged at
6.3%.
As discussed on pages 12 and 13, results in Mexico have been adversely
impacted by economic difficulties resulting from the significant devaluation of
the Mexican peso. Net sales in Mexico declined 37%, while operating profit
declined $32 million or 73% to $12 million. Mexico represented approximately 5%
and 23% of 1995 and 1994 international beverage segment ongoing operating
profit, respectively.
1994 vs. 1993
Worldwide net sales increased $1.0 billion or 12%. The fifty-third week
contributed approximately 1 point to the worldwide net sales growth.
International start-up operations and net acquisitions, principally in the U.S.,
contributed $73 million and $161 million, respectively, or 3 points on a
combined basis to worldwide sales growth.
Worldwide operating profit increased $108 million or 10%. The fifty-third
week enhanced the profit growth by approximately 2 points. International
start-up operations
25
reduced operating profit by $19 million or 2 points, while net acquisitions had
no impact on profit growth.
Sales in the U.S rose $623 million or 11%. The fifty-third week aided the
sales growth by approximately 2 points. Net acquisitions contributed $158
million or 3 points to sales growth. Volume growth contributed $510 million,
driven by 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.
BCS in the U.S. increased 6%, reflecting strong double-digit growth in the
Mountain Dew brand and solid gains in Brand Pepsi. BCS 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 BCS growth. BCS of fountain syrup grew at
a slower rate than packaged products.
Profit in the U.S. increased $85 million or 9%. The fifty-third week
enhanced the profit growth by approximately 1 point. Volume gains, driven by
packaged products, contributed $305 million ($250 million excluding the impact
of the fifty-third week) 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 prices,
partially offset by lower packaging prices. Alternative beverages, driven by
Lipton brand tea, aided the profit growth. The profit margin declined slightly
to 15.6%.
In the third quarter of 1994, U.S. beverages reversed into income $24
million of a $115 million restructuring accrual established in 1992 and, in the
third and fourth quarters, recorded additional charges totaling $22 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 who, in 1994, accepted
offers to relocate. The 1992 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 charge included provisions for costs
associated with redeployed and displaced employees, the redesign of core
processes and office closures.
The $24 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 organizational restructuring was completed in 1992. The
nationwide implementation of several of the
26
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 U.S.
beverages 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 sales rose $426 million or 16%. The fifty-third week
enhanced the sales growth by approximately 1 point. 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 BCS 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 BCS growth.
International profit increased $23 million or 13%. The fifty-third week
enhanced the profit growth by approximately 2 points. Net acquisitions reduced
profit by $9 million or 5 points. The increased profit 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 Growth 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 profit 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
27
contributed to profit growth. Profit increased in Latin America, led by Mexico,
and in Western Europe, reflecting significantly reduced losses in Germany.
Profit 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 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 $20 million in 1995, consistent
with our original projection. These savings will continue to be reinvested in
our businesses to strengthen our competitive position.
The significant devaluation of the Mexican peso in late 1994 and early
1995 did not materially impact 1994 international beverage operating profit.
However, because Mexico, our largest profit country, represented approximately
23% of international beverage operating profit in 1994, the devaluation and its
related effects were expected to have an unfavorable impact on 1995 operating
profit. The operations in Mexico had begun to take actions to increase volume,
enhance net pricing and reduce costs, including evaluating alternative sourcing
of raw materials. Nonetheless, significant uncertainties remained in Mexico and,
as a result, it was not possible to quantify the impact. International beverages
had also begun to take actions in several other countries in 1995 to help
mitigate the impact.
SNACK FOODS
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net Sales
U.S. $5,495 $5,011 $4,365 10 15
International 3,050 3,253 2,662 (6) 22
----- ----- ------
$8,545 $8,264 $7,027 3 18
====== ====== ======
Operating Profit
U.S. $1,132 $1,025 $ 901 10 14
International 300 352 289 (15) 22
------ ------ -----
$1,432 $1,377 $1,190 4 16
====== ====== ======
- -------------------------------------------------------------------------------
[Note: Net sales and operating profit comparisons within the following
discussions include the impact of the fifty-third week in 1994 (see Note 19),
while pound and kilo growth have been adjusted to exclude its impact.]
1995 vs. 1994
Worldwide net sales rose $281 million or 3%. Worldwide operating profit
increased $55 million or 4%. The fifty-third week in 1994 reduced both worldwide
net sales and operating profit growth by approximately 2 points.
Sales in the U.S. grew $484 million or 10%. The fifty-third week in 1994
reduced the sales growth by approximately 2 points. The sales increase reflected
volume growth of $411 million and increased pricing across all major brands. The
volume growth reflected gains in almost all major brands, led by our low-fat and
no-fat snacks, which accounted for
28
over 45% of the total sales growth. Volume growth was further aided by increased
promotional price allowances and merchandising 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.
Pound volume in the U.S. advanced 11%, reflecting exceptional performance
from the low-fat and no-fat categories. These categories contributed over 45% of
the total pound growth, driven by Rold Gold brand pretzels, Baked Tostitos brand
tortilla chips, Tostitos brand salsa and Ruffles Light and Baked Lay's brand
potato chips. Doritos brand tortilla chips, driven by new flavor extensions and
packaging, had solid single-digit pound growth. Lay's brand potato chips and
other Ruffles brand products grew single-digits, benefiting from new flavor
extensions like Hidden Valley Ranch Wavy Lay's brand potato chips, Lay's and
Ruffles KC Masterpiece Barbecue Flavor brand potato chips, French Onion Flavored
Ruffles and Lay's Salsa & Cheese Flavored brand potato chips. Chee.tos brand
cheese flavored snacks, fueled by fried Chee.tos, had single-digit growth, while
Fritos brand corn chips declined slightly reflecting lower promotional spending.
Profit in the U.S. grew $107 million or 10%. The fifty-third week in 1994
reduced the profit growth by approximately 3 points. The low-fat and no-fat
categories contributed about 40% of the total profit growth. The total profit
increase reflected strong volume growth, which contributed $193 million ($244
million excluding the impact of the fifty-third week) and higher pricing that
exceeded increased promotional price allowances and merchandising support. This
growth was partially offset by increased operating costs, which were driven by
higher selling, distribution and administrative expenses and increased
investment in brand marketing to support and maintain strong volume momentum.
The higher administrative expenses reflected investment spending to maintain
volume growth and a competitive advantage, including new manufacturing and
delivery systems, feasibility studies related to a joint venture arrangement
with Sara Lee Bakery and a reorganization of field operations to improve
customer service. The profit growth was also hampered by higher manufacturing
costs, reflecting increased capacity costs and an unfavorable sales mix shift to
lower-margin value-oriented packages. Increased carton and packaging prices were
partially offset by favorable potato and oil prices. Although difficult to
forecast, 1996 potato and oil prices are expected to remain about even with
1995, while prices of corn and potato flakes, used in Baked Lay's, are expected
to increase. However, due to extreme weather conditions in recent years, potato
prices have been less predictable. Carton and packaging prices in 1996 are
expected to remain even with 1995. The profit margin remained about the same at
20.6%.
As discussed on pages 12 and 13, 1995 results in Mexico have been adversely
impacted by economic difficulties resulting from the significant devaluation of
the Mexican peso. This effect was particularly dramatic on international snack
food results as Mexico represented approximately 64% of international snack food
1994 operating profit. Net sales in Mexico declined 39% in 1995, while operating
profit declined $120 million or 53% to $106 million. As a result, Mexico
represented only 35% of 1995 international snack food profit. Since the change
in results of Mexico had such a distortive effect on international snack food
results, net sales and operating profit discussions that follow exclude the
effects of Mexico where noted. However, Sabritas and Gamesa, our operations in
Mexico, are discussed separately below.
International sales decreased $203 million or 6%. Sweet snacks (primarily
candy and cookies) accounted for approximately 25% of international snack food
sales in 1995,
29
compared to 30% in 1994. Excluding Mexico, international sales grew more than
25%; the fifty-third week in 1994 reduced the sales growth by approximately 2
points. This growth reflected increased volumes of $288 million, led by Brazil
and the U.K. The sales growth also benefited from a favorable mix shift to
higher-priced packages and products and acquisitions, which contributed $43
million.
International kilo growth is reported on a systemwide basis, which includes
both consolidated businesses and joint ventures operating for at least one year.
Salty snack kilos rose 9%, reflecting strong double-digit volume growth in
Brazil, due to a more stable economy; the U.K., the Netherlands and Spain
achieved double-digit growth fueled, in part, by in-bag promotions. These
advances were partially offset by double-digit declines at Sabritas. Sweet snack
kilos grew 12%, reflecting double-digit advances at Gamesa and in France, and
single-digit advances at the Alegro sweet snack division (formerly Sonrics) of
Sabritas.
International operating profit decreased $52 million or 15%. The
fifty-third week in 1994 reduced the operating profit growth by approximately 1
point. Excluding Mexico, international operating profit increased $68 million or
54%; the fifty-third week in 1994 reduced the profit growth by approximately 1
point. This growth reflected the favorable mix shift to higher-priced packages
and products and increased volumes of $48 million, partially offset by higher
operating costs and increased administrative expenses. The increased operating
costs reflected increased manufacturing costs due to higher commodity and
packaging prices. The increased administrative costs reflected broad-based
investment spending on regional business development initiatives and increased
headquarters expenses. Including Mexico, the profit margin decreased 1 point to
9.8%.
The following discussions of profitability by key business exclude any
allocation for division or corporate overhead.
Operating profit declined over 50% at Sabritas, reflecting an increase in
operating costs, an unfavorable currency translation impact and lower volumes,
partially offset by higher pricing. The increased operating costs reflected
significantly higher manufacturing costs due to higher ingredient prices and
wage rates, as well as increased selling and distribution expenses. Lower-margin
sweet snack kilo volume from the Alegro division increased 7% despite lapping of
a successful 1994 promotion. Although Sabritas maintained its high market share,
higher-margin salty snack kilos declined almost 20% due, in part, to reduced
demand, higher pricing and lapping strong volume gains in 1994 as a result of a
successful in-bag promotion.
Gamesa's profit more than doubled, on a small base, despite the effects of
the economic difficulties resulting from the devaluation of the Mexican peso, as
higher pricing and increased volumes more than offset higher operating costs,
the unfavorable currency translation impact and higher administrative costs. The
increased operating costs primarily reflected higher manufacturing costs due to
higher ingredient prices and wage rates, increased selling and distribution
expenses, and higher advertising expenses. Sweet snack kilos grew 15%, driven by
route expansion and successful promotions.
Walkers' profit grew 37%, driven by increased volume reflecting gains in
the Walkers crisps brand as a result of successful in-bag promotions, and
Doritos brand tortilla chips. Higher manufacturing costs, reflecting higher
potato and packaging prices, were more than offset by favorable selling and
distribution, administrative and advertising and marketing expenses. Increased
sales of Doritos, introduced late in the second quarter of
30
1994, represented approximately 25% of the strong kilo growth in the U.K.
Doritos generated a slight profit compared to a loss last year.
Brazil's profit more than doubled, on a small base, as increased volumes
of core brands, reduced selling and distribution expenses and a favorable mix
shift to higher-priced packages were partially offset by higher manufacturing
costs, primarily potato prices. Brazil is operating at maximum capacity and
therefore, investments are currently being made to expand production capacity to
meet the strong consumer demand, due in part to the substantial improvement in
the country's economy. These investments are expected to be completed early in
the second quarter of 1996.
1994 vs. 1993
Worldwide net sales rose $1.2 billion or 18%. The fifty-third week contributed
approximately 2 points to the worldwide net sales growth. Worldwide operating
profits increased $187 million or 16%. The worldwide operating profit growth
benefited from the fifty-third week by approximately 2 points.
Sales in the U.S. grew $646 million or 15%. The fifty-third week
contributed about 2 points to the sales growth. The increase in sales reflected
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. Higher gross pricing was offset by a sales mix shift to larger,
value-oriented packages and products with lower gross prices.
Total U.S. 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 Chee.tos brand cheese flavored snacks reflected low double-digit
growth. Ruffles brand potato chips showed modest growth.
Profit in the U.S. grew $124 million or 14%. The fifty-third week
contributed about 3 points to the profit growth. This performance reflected
strong volume growth, which contributed $340 million ($289 million excluding the
impact of the fifty-third week). 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 prices were substantially offset by lower packaging and
potato prices. Increased promotional price allowances and merchandising support
largely offset higher pricing on certain brands. The profit margin remained
relatively unchanged at 20.5%.
Though difficult to forecast, there were 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 were expected to
decline slightly from the high 1994 levels, while the cost of packaging was
expected to increase.
31
International sales rose $591 million or 22%. The fifty-third week
contributed approximately 1 point to the sales growth. Sweet snacks (primarily
candy and cookies) accounted for approximately 30% of international snack food
sales in both 1994 and 1993. Acquisitions contributed $67 million or 2 points to
sales growth. The balance of the sales growth was driven by higher volume, which
contributed $590 million, led by successful promotions by the Sabritas salty
snack and sweet snack 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 systemwide salty snack kilos rose 16%, led by strong
double-digit growth at Sabritas, in Spain and Brazil and solid gains in the U.K.
Systemwide sweet snack kilos also grew 16%, reflecting double-digit advances at
Gamesa and Sabritas and gains in Egypt and Poland.
International profit increased $63 million or 22%. The fifty-third week
contributed about 1 point to the profit growth. Higher volume contributed $95
million ($87 million excluding the impact of the fifty-third week) 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 oflast year's noncash credit of $6 million
resulting from the decision to retain a small snack chip business in Japan
previously held for sale. The 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 were estimated to result in
annual savings of about $32 million, which continue to be reinvested in the
business to strengthen our competitive position.
Following is a discussion of the results of our key international
businesses.
Strong double-digit profit growth at Sabritas was driven by higher salty
and sweet snack 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' profit 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,
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 profit 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.
32
The significant devaluation of the Mexican peso in late 1994 and early
1995 did not materially impact 1994 international snack food operating profit.
However, because Sabritas and Gamesa combined represented approximately 64% of
international snack food operating profit in 1994, the devaluation and its
related effects were expected to have an unfavorable impact on 1995 operating
profit. Sabritas and Gamesa had begun to increase pricing and reduce costs,
including evaluating alternative sourcing of raw materials. Nonetheless,
significant uncertainties remained in Mexico and, as a result, it was not
possible to quantify the impact. International snack foods had also begun to
take actions in several of its other countries in 1995 to help mitigate the
impact.
Restaurants
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net Sales
U.S. $ 9,202 $ 8,694 $8,026 6 8
International 2,126 1,827 1,330 16 37
------- ------- ------
$11,328 $10,521 $9,356 8 12
======= ======= ======
Operating Profit
Reported
U.S. $ 451 $ 659 $ 685 (32) (4)
International (21) 71 93 NM (24)
----- ------ ------
$ 430 $ 730 $ 778 (41) (6)
===== ====== ======
Ongoing*
U.S. $ 753 $ 659 $ 685 14 (4)
International 114 71 93 61 (24)
------- ------- -----
$ 867 $ 730 $ 778 19 (6)
======= ======= ======
* 1995 excluded the initial, noncash charge upon adoption of SFAS 121. See
Notes 2 and 19.
NM = Not Meaningful.
- -------------------------------------------------------------------------------
[Note: Unless otherwise noted, operating profit comparisons within the 1995 vs.
1994 discussion are based on ongoing operating profit. Net sales and operating
profit comparisons within the following discussions include the impact of the
fifty-third week in 1994 (see Note 19), while same store sales growth has been
adjusted to exclude its impact. For purposes of this discussion, net sales by
PFS, PepsiCo's restaurant distribution operation, to the franchisee and licensee
operations of each restaurant chain and the related estimated operating profit
have been allocated to each restaurant chain.]
33
1995 vs. 1994
Worldwide net sales increased $807 million or 8%. Sales in the U.S. increased
$508 million or 6%, while international sales increased $299 million or 16%. The
fifty-third week in 1994 reduced the worldwide, U.S. and international net sales
growth by approximately 2 points each.
Reported worldwide operating profit declined $300 million or 41%. Ongoing
worldwide operating profit increased $137 million or 19%; U.S. increased $94
million or 14% and international increased $43 million or 61%. The fifty-third
week in 1994 reduced the ongoing worldwide operating profit growth by
approximately 4 points. U.S. and international profit growth were reduced by 4
and 7 points, respectively.
As discussed in Notes 2 and 19, PepsiCo recorded the initial, noncash
charge upon adoption of SFAS 121 in 1995, which had a significant effect on
restaurant results. Historically, PepsiCo had evaluated and measured impairment
on a total division basis. As a result of adopting SFAS 121, PepsiCo now
evaluates each individual restaurant for impairment. This change resulted in a
charge of $437 million to reduce the carrying amount of 1,247 or 10% of
PepsiCo's company-operated restaurants. The charge represented approximately 7%
of the total carrying amount of restaurant long-lived assets. The reduced
carrying amount of restaurant assets is expected to reduce 1996 depreciation and
amortization expense by approximately $45 million. Also, because PepsiCo now
evaluates each restaurant for impairment, future charges, though not of the
magnitude of the initial charge recorded in 1995, are reasonably possible
although not currently estimable. These charges will generally arise as
estimates used in the evaluation and measurement of impairment upon adoption of
SFAS 121 are refined based upon new information or as a result of future events
or changes in circumstances that cause other restaurants to be impaired. Also,
any future expenditures for impaired stores that would normally be capitalized
will have to be immediately evaluated for recoverability. The initial impact of
adopting SFAS 121, as well as its ongoing application, will also generally
result in lower closure costs or increased gains for impaired restaurants that
are closed or sold, respectively.
As disclosed in our 1994 Annual Report and updated in our 1995 reports on
Form 10-Q, we have evaluated and begun to execute actions in 1995 in an effort
to improve total restaurant operating results and returns on our restaurant
investments. Our overall strategy is to leverage the collective strength of our
three restaurant concepts by strengthening our brand leadership, leveraging our
business systems and restaurant development activities, and achieving
operational excellence.
Brand leadership contemplates, in part, the need to be innovative by
providing new products and programs to respond to consumer needs while
maintaining a value orientation. This year, for example, we have introduced
several new products such as Pizza Hut's Stuffed Crust Pizza and Buffalo Wings,
KFC's Tumble Marinated Original Recipe product Colonel's, Crispy Strips and
Chunky Chicken Pot Pies and Taco Bell's Double Decker Taco, Texas Taco and new
line of Sizzlin' Bacon products. In addition, we have also offered new programs
to respond to consumer needs such as "You'd Be Crazy to Cook" promotion,
delivery service and the Mega Meal value offering at KFC and Extreme Value
Meals, Kids' meals and the low-fat Border Lights menu at Taco Bell. We believe
our ability to develop and bring to market new products that attract and
maintain our customer base is an important factor for continued profit growth in
the restaurant segment.
34
With respect to leveraging our business systems, consolidation of international
headquarters administration of our three concepts was completed this year and
consolidation of international regional and country administration is well under
way. The consolidation of administrative operations in the U.S., such as payroll
and accounts payable, has begun and is expected to be completed over the next
few years. Also, consolidation of restaurant procurement on a worldwide basis is
substantially completed with significant annual savings anticipated beginning in
1996. As we move forward, our concepts will share restaurant facilities where
appropriate. For example, early indications are that our combined Taco Bell -
KFC units in the U.S. are performing well, as the Taco Bell lunch business
complements the strong KFC dinner business. In fact, the current plan calls for
us to approximately triple the current number of combined U.S. units to over 300
units during 1996.
In addition, we plan to continue to selectively use franchisees and
licensees in certain markets where their expertise can be leveraged to improve
the overall operational excellence of our concepts systemwide. In 1995, we began
to refranchise (sell company-operated restaurants to franchisees) and license
company-operated restaurants and more aggressively close stores that do not meet
our performance expectations. These unit-related actions aided worldwide
restaurant operating profit growth by $61 million, reflecting a net gain of $51
million in 1995 ($88 million of refranchising gains offset by $37 million of
costs of closing other restaurants) as compared to $10 million of store closure
costs in 1994. Included in the $37 million are costs associated with 185 stores
scheduled to be closed in 1996. Operating profit in 1996 is not expected to be
significantly affected by the estimated net impact of the absence of profits
attributed to those units sold in 1995 and those units currently anticipated to
be sold in 1996 compared to the additional franchise royalty revenues related to
those units and the losses avoided for restaurants closed in 1995 and scheduled
to be closed in 1996. Though difficult to forecast, management anticipates a
favorable impact from these kinds of unit-related actions over the next few
years as we continue the implementation of our strategies to improve restaurant
returns.
We expect that total system units will, on average, continue to expand at
1995's annual rate of approximately 6%, though only about 1% of the net growth
will be company-operated. As a result, although our overall ownership percentage
of total system units declined by about 2 1/2 points in 1995, we continue to
anticipate that our percentage ownership will decline on average by 1 to 2
points annually over the next 3 to 5 years, driven by declines in the U.S.
35
1995 RESTAURANT UNIT ACTIVITY
Company- Joint
Operated Venture Franchised Licensed Total
-------- ------- ---------- -------- -----
Worldwide
Restaurants
Beginning of 12,742 933 11,364 1,830 26,869
Year
New Builds &
Acquisitions 678 96 553 1,016 2,343
Refranchising
& Licensing (308) (6) 269 45 -
Closures (293) (19) (161) (143) (616)
------ ---- ------ ----- ------
End of Year 12,819* 1,004 12,025 2,748 28,596
====== ===== ====== ===== ======
U.S.
Restaurants**
Beginning of
Year 10,520 70 7,238 1,693 19,521
New Builds &
Acquisitions 416 11 217 951 1,595
Refranchising
& Licensing (302) - 257 45 -
Closures (269) (3) (113) (138) (523)
------ ----- ----- ----- ------
End of Year 10,365* 78 7,599 2,551 20,593
====== ===== ===== ===== ======
* As of year-end 1995, closure costs have been recorded for 185 of these
units (141 in the U.S.), which are expected to close in 1996.
** The U.S. joint venture units represent California Pizza Kitchen.
- -------------------------------------------------------------------------------
[Note: A summary of the 1995 restaurant unit activity for each U.S. concept and
for international restaurant operations is included in each of the following
discussions.]
Restaurants generated cash flows of nearly $600 million in 1995 compared to
marginally positive cash flows in 1994. This primarily reflected reduced capital
spending and acquisitions of $322 million and $78 million, respectively, and
proceeds of $165 million from our refranchising efforts. We currently estimate
that our level of capital spending in 1996 will approximate the $750 million
invested in 1995; however, we expect more of the spending to be used for
refurbishing our existing restaurants and less on new store development.
With respect to operational excellence, we have made investments in a
number of initiatives during the past year targeted at consistently providing
our customers with high quality products, courteous and timely service and clean
and attractive restaurants. We believe this is an important factor in
maintaining our current customer base as well as attracting new customers. We
have implemented customer satisfaction measures to evaluate the success of these
initiatives.
36
1994 vs. 1993
Worldwide net sales increased $1.2 billion or 12%. The fifty-third week
contributed approximately 1 point to the sales growth, with U.S. and
international operations benefiting by about 1 point and 2 points, respectively.
Sales in the U.S. increased $668 million or 8% and international sales rose $497
million or 37%.
Worldwide operating profit declined $48 million or 6%. The fifty-third week
mitigated the profit decline by approximately 3 points, with U.S. and
international operations benefiting at the same rate. Profit in the U.S.
declined $26 million or 4% and international profit fell $22 million or 24%,
which included a $7 million charge to consolidate the U.S. headquarters for the
three international restaurant concepts into one.
The significant devaluation of the Mexican peso in late 1994 and early 1995
did not materially impact 1994 international restaurant operating profit.
Results from Mexico constituted an immaterial portion of international
restaurant profit. However, the devaluation and its related effects were
expected to have an unfavorable impact on 1995 results. The operations in Mexico
had begun increasing pricing and reducing costs, including evaluating
alternative sourcing of raw materials. In addition, further expansion of
company-operated units was temporarily halted pending stabilization of the
economy. Nonetheless, significant uncertainties remained in Mexico and, as a
result, it was not possible to quantify the impact.
Late in 1994, Roger Enrico was named Chairman, PepsiCo Worldwide
Restaurants. He began to evaluate several options to improve their operating
results and returns on our total restaurant investments. Examples of options
considered to improve investment returns included a reduced company share of
future new restaurant development and sale of some existing company restaurants
to franchisees. The cash generated from these options would most likely be
reinvested in our nonrestaurant businesses or used to repurchase PepsiCo capital
stock. We expected to begin making decisions on these and other options during
1995 as we continued to refine our restaurant operating strategies.
37
PIZZA HUT - U.S.
The tables of operating results and unit activity presented below include Pizza
Hut as well as D'Angelo Sandwich Shops (D'Angelo) and East Side Mario's
concepts, which are managed by Pizza Hut. As D'Angelo is generally fully
integrated within Pizza Hut units, the elements in the year-over-year discussion
of net sales and operating profit that follows relate to Pizza Hut as well as
D'Angelo and excludes East Side Mario's, unless otherwise indicated.
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net Sales $3,977 $3,712 $3,595 7 3
Operating Profit
Reported $ 308 $ 285 $ 338 8 (16)
Ongoing* $ 376 $ 285 $ 338 32 (16)
* 1995 excluded the initial, noncash charge upon adoption of SFAS 121. See
Notes 2 and 19.
- -------------------------------------------------------------------------------
1995 RESTAURANT UNIT ACTIVITY
Company-
Operated Franchised Licensed Total
-------- ---------- -------- -----
Beginning of 5,249 2,708 661 8,618
Year
New Builds &
Acquisitions 213 89 257 559
Refranchising
& Licensing (88) 88 - -
Closures (173) (66) (55) (294)
----- ----- --- -----
End of Year 5,201* 2,819 863 8,883
===== ===== === =====
* As of year-end 1995, closure costs have been recorded for 104 of these units,
which are expected to be closed in 1996.
- -------------------------------------------------------------------------------
1995 vs. 1994
Net sales increased $265 million or 7%. The fifty-third week in 1994 reduced the
sales growth by approximately 2 points. The sales growth reflected $148 million
from additional units (units constructed and acquired, principally from
franchisees, net of units closed or sold, principally to franchisees) and growth
in same store sales for company-operated units of 4%. The improved same store
sales performance was driven by Stuffed Crust Pizza, introduced nationally early
in the second quarter, and reflected strong growth in carryout and
38
delivery, and modest growth in dine-in. Same store sales increases were also
fueled by a higher average guest check resulting from less promotional pricing
than in 1994 and the early 1995 national introduction of Buffalo Wings.
Reported operating profit grew $23 million or 8%. Ongoing operating profit
increased $91 million or 32%, in part, reflecting a weak profit performance in
1994 combined with the exceptional performance of Stuffed Crust Pizza. The
fifty-third week in 1994 reduced the profit growth by approximately 3 points.
The profit growth reflected additional units that contributed $31 million, a net
gain of $24 million in 1995 ($42 million of refranchising gains offset by $18
million of costs of closing other restaurants) as compared to $4 million of
store closure costs in 1994, lower store operating costs and increased franchise
royalty revenues. The lower store operating costs primarily reflected increased
labor productivity, favorable food prices, led by lower cheese and meat prices,
and reduced advertising expenses, partially offset by increased spending for our
customer satisfaction program. The profit growth was depressed by a net $17
million charge in 1995 composed of a $20 million charge recorded in the second
quarter for the relocation of certain functions of Pizza Hut's U.S. headquarters
from Wichita to Dallas, partially offset by net favorable adjustments of $3
million primarily as a result of better than expected costs. The ongoing profit
margin increased almost 2 points to 9.5%.
1994 vs. 1993
Net sales increased $117 million or 3%. The fifty-third week contributed
approximately 1 point to the sales growth. The increased sales were driven by
additional units that contributed $271 million, including $80 million from the
acquisition of D'Angelo late in 1993. This benefit was partially offset by lower
volumes of $105 million, primarily due to lapping the successful national
roll-out of Bigfoot Pizza in 1993, and lower net pricing.
Same store sales for company-operated 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.
Operating profit decreased $53 million or 16%. The fifty-third week
mitigated the profit decline by approximately 2 points. The profit decline
reflected lower volumes of $49 million ($60 million excluding the impact of the
fifty-third week), lower net pricing and increased overhead costs, due in part
to increased store closure costs, partially offset by additional units that
contributed $17 million. Store operating costs were essentially unchanged
primarily reflecting lower advertising and favorable food costs, as slightly
higher cheese prices were more than offset by favorable meat prices, offset by
increased depreciation attributable to new equipment related to Bigfoot Pizza.
Though difficult to forecast, the prices of these key ingredients were expected
to decrease in 1995. The profit decline was also mitigated by a favorable impact
of $14 million from extending depreciable lives on certain U.S. delivery assets
and the absence of last year's start-up costs associated with Bigfoot Pizza. The
profit margin declined almost 2 points to 7.7%.
39
TACO BELL - U.S.
The tables of operating results and unit activity presented below include Taco
Bell as well as the Hot `n Now (HNN) and Chevys concepts, which are managed by
Taco Bell. The elements in the year-over-year discussion of net sales and
operating profit that follows do not include HNN and Chevys, unless otherwise
indicated.
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net Sales $3,503 $3,340 $2,855 5 17
Operating Profit
Reported $ 105 $ 273 $ 256 (62) 7
Ongoing* $ 274 $ 273 $ 256 - 7
* 1995 excluded the initial, noncash charge upon adoption of SFAS 121. See
Notes 2 and 19.
- -------------------------------------------------------------------------------
1995 RESTAURANT UNIT ACTIVITY
Company-
Operated Franchised Licensed Total
-------- ---------- -------- -----
Beginning of Year 3,232 1,523 929 5,684
New Builds &
Acquisitions 190 98 668 956
Refranchising &
Licensing (214) 169 45 -
Closures (75) (11) (64) (150)
----- ----- ---- -----
End of Year 3,133 1,779 1,578 6,490
===== ===== ===== =====
- -------------------------------------------------------------------------------
1995 vs. 1994
Net sales increased $163 million or 5%. The fifty-third week in 1994 reduced the
sales growth by approximately 2 points. The sales growth was led by additional
units which contributed $228 million. A decline in restaurant volume of $143
million, reflecting a 4% decline in same store sales for company-operated units,
was partially offset by increased PFS sales to franchisees of $50 million. A
decline in sales at HNN, primarily reflecting the absence of sales associated
with company-operated units licensed in 1995 (see below for additional
discussion), was substantially offset by increased sales at Chevys, primarily
reflecting additional units.
40
Reported operating profit declined $168 million or 62%. Ongoing operating
profit increased $1 million. Absent the fifty-third week in 1994, ongoing
operating profit for 1995 would have increased 4 points. The slight increase in
profit reflected a net gain of $40 million in 1995 ($42 million of refranchising
gains offset by $2 million of costs of closing other restaurants). This net gain
was offset by $12 million in 1995 for the write-off of costs associated with
sites that will not be developed (undeveloped sites), compared to $6 million of
undeveloped sites costs in 1994. Profit growth was also aided by additional
units which contributed $23 million and lower store operating costs. The
decrease in store operating costs primarily reflected favorable food costs, as
lower meat and bean prices were partially offset by higher lettuce prices
experienced in the second quarter. Although difficult to forecast, food prices
for the full year 1996 are expected to be favorable as compared to 1995, led by
lower meat prices. Profit growth also reflected increased franchise royalty
revenues, in part reflecting initial franchise fees related to refranchised
restaurants, and increased license fees. These benefits were substantially
offset by net volume declines of $44 million ($34 million excluding the impact
of the fifty-third week) and a net unfavorable product mix shift to lower-margin
products. The net volume declines resulted from the reduced same store sales
partially offset by the lower-margin PFS increases. Operating profit was also
adversely impacted by roll-out costs incurred during the first half of the year
for the low-fat Border Lights products. Increased field training costs were
offset by reduced headquarters administrative expenses.
HNN and Chevys incurred $103 million of the initial charge upon adoption of
SFAS 121, with HNN responsible for almost all of the charge. Excluding the
initial charge, operating losses at Chevys increased, primarily reflecting costs
associated with a curtailment of company-operated restaurant development
activities. Excluding the initial charge, HNN's losses declined, primarily
reflecting the absence of costs associated with undeveloped sites in 1994. As
disclosed in our 1994 Annual Report and updated in our 1995 reports on Form
10-Q, during 1995, Taco Bell initiated a plan to license or franchise all of its
HNN units in an effort to eliminate HNN's operating losses over time. Through
the end of the third quarter, almost 75% of HNN's 200 units had been licensed or
franchised. Late in the fourth quarter, certain of the HNN licensees returned 42
of their units to Taco Bell as a result of poor operating results. Almost all of
these units were closed, de-identified as HNN units and are held for sale.
Subsequent to year-end, our largest licensee closed and returned its 23
remaining units to Taco Bell. In addition, there are some indications that the
current operating performance of the majority of the remaining licensed units is
also below expectations. It is reasonably possible that some or all of these
underperforming units may be returned during 1996 by the licensees. Any costs
associated with units returned in 1996 are expected to be immaterial to Taco
Bell's results. Taco Bell will continue its efforts to license or sell the
remaining company-operated HNN units and undeveloped sites.
The Taco Bell ongoing profit margin declined nearly one-half point to 7.8%.
1994 vs. 1993
Net sales increased $485 million or 17%. The fifty-third week benefited the
sales growth by approximately 2 points. The sales growth was led by additional
units which contributed $267 million and volume gains that provided $121
million, half of which was the result of PFS food and paper sales to additional
franchisees. The sales growth also reflected $84
41
million due to the acquisition of Chevys in the third quarter of 1993 and new
Chevys units. Same store sales for company-operated units grew 2%, though volume
grew at a slower rate.
Operating profit rose $17 million or 7%. The fifty-third week enhanced the
profit growth by approximately 4 points. The profit growth reflected lower food
costs, additional units which contributed $25 million, volume gains of $25
million ($15 million excluding the impact of the fifty-third week), higher soft
drink prices and increased franchise royalty revenues. These benefits were
partially offset by higher store operating costs, driven by increased labor
costs, an unfavorable mix shift to lower-margin products and higher headquarters
administrative expenses. Profit growth was restrained by increased losses posted
by HNN. Taco Bell planned to transition HNN during 1995 from primarily a
company-operated to a licensee/franchisee-operated business. This was expected
to significantly reduce HNN's operating losses in 1995. The profit margin fell
almost 1 point to 8.2%.
KFC - U.S.
% Growth Rates
($ in millions) --------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net Sales $1,722 $1,642 $1,576 5 4
Operating Profit
Reported $ 38 $ 101 $ 91 (62) 11
Ongoing* $ 103 $ 101 $ 91 2 11
* 1995 excluded the initial, noncash charge upon adoption of SFAS 121. See
Notes 2 and 19.
- -------------------------------------------------------------------------------
1995 RESTAURANT UNIT ACTIVITY
Company-
Operated Franchised Licensed Total
-------- ---------- -------- -----
Beginning of Year 2,039 3,007 103 5,149
New Builds &
Acquisitions 13 30 26 69
Refranchising &
Licensing - - - -
Closures (21) (36) (19) (76)
----- ----- ----- -----
End of Year 2,031* 3,001 110 5,142
===== ===== ===== =====
* As of year-end 1995, closure costs have been recorded for 31 of these units,
which are expected to be closed in 1996.
- -------------------------------------------------------------------------------
42
1995 vs. 1994
Net sales rose $80 million or 5%. The fifty-third week in 1994 reduced the sales
growth by approximately 2 points. The increased sales were driven by volume
gains of $61 million and higher effective net pricing. The volume gains
benefited from new product offerings during the year such as Colonel's Crispy
Strips, Chunky Chicken Pot Pies and a Tumble Marinated Original Recipe product
as well as the national introduction of the value-oriented Mega Meal late in
1994, which was complemented by the 1995 high-end "You'd Be Crazy To Cook"
offerings. Same store sales for company-operated units advanced 7%, primarily
reflecting strong volume growth.
Reported operating profit decreased $63 million or 62%. Ongoing operating
profit increased $2 million or 2%. The fifty-third week in 1994 reduced the
ongoing profit growth by approximately 4 points. The profit growth reflected
volume gains of $18 million ($24 million excluding the impact of the fifty-third
week) and the higher effective net pricing. Almost fully offsetting these gains
were increased store operating costs, increased overhead costs, primarily for
new product development, reduced favorable actuarial adjustments for casualty
claims liabilities and losses attributed to expanding delivery service. The
higher store operating costs reflected increased labor costs, primarily as a
result of efforts to improve restaurant quality and service. The profit growth
was also mitigated by $7 million of store closure costs in 1995 compared to $5
million in 1994. The ongoing profit margin decreased slightly to 6.0%.
1994 vs. 1993
Net sales rose $66 million or 4%. The fifty-third week contributed approximately
2 points to the sales growth. The increased sales reflected an increase in
volume of $49 million, as gains from the Colonel's Rotisserie Gold roasted
chicken product and accompanying side items (collectively, "CRG"), and the
value-oriented Mega Meal were partially offset by lower volumes of existing
products, and higher net pricing. Same store sales for company-operated units
advanced 2%, though volumes grew at a slightly slower rate.
Operating profit increased $10 million or 11%. The fifty-third week
contributed approximately 4 points to the profit growth. The increased profit
benefited from the absence of last year's start-up costs associated with CRG.
Higher net pricing and volume gains of $16 million ($10 million excluding the
impact of the fifty-third week) 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 years
workers' compensation claim accruals, were partially offset by increased
administrative costs. Profit growth was depressed by lapping last year's $3
million favorable adjustment to a 1991 reorganization accrual. The profit margin
increased nearly one-half point to 6.2%.
43
INTERNATIONAL
($ in millions) % Growth Rates
--------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net Sales $2,126 $1,827 $1,330 16 37
Operating
Profit
Reported $ (21) $ 71 $ 93 NM (24)
Ongoing* $ 114 $ 71 $ 93 61 (24)
* 1995 excluded the initial, noncash charge upon adoption of SFAS 121. See
Notes 2 and 19.
NM = Not Meaningful.
- -------------------------------------------------------------------------------
1995 RESTAURANT UNIT ACTIVITY
Company- Joint
Operated Venture Franchised Licensed Total
-------- ------- ---------- -------- -----
Beginning of 2,222 863 4,126 137 7,348
Year
New Builds &
Acquisitions 262 85 336 65 748
Refranchising &
Licensing (6) (6) 12 - -
Closures (24) (16) (48) (5) (93)
---- --- --- --- ---
End of Year 2,454* 926 4,426 197 8,003
===== === ===== === =====
* As of year-end 1995, closure costs have been recorded for 44 of these units,
which are expected to be closed in 1996.
- -------------------------------------------------------------------------------
1995 vs. 1994
The KFC, Pizza Hut and Taco Bell concepts represented approximately 55%, 40% and
5%, respectively, of total international restaurant sales in 1995 and 1994.
Net sales increased $299 million or 16%, with Pizza Hut representing
approximately 65% of the increased sales. The fifty-third week in 1994 reduced
the sales growth by approximately 2 points. The sales increase primarily
reflected additional units of $244 million.
Reported operating profit declined $92 million to a loss of $21 million.
Excluding the initial charge upon adoption of SFAS 121, with Spain, Canada and
Mexico accounting for almost three quarters of the charge, operating profit
increased $43 million or 61%. Excluding shared overhead costs, Pizza Hut and KFC
contributed about equally to the increased operating profit. The fifty-third
week in 1994 reduced the ongoing operating profit
44
growth rate by approximately 7 points. The increased profit reflected higher
effective net pricing, additional units that contributed $22 million, increased
franchise royalty revenues and net favorable currency translation impacts. These
gains were partially offset by higher store operating costs, led by increased
food prices, increased administrative and support costs, and a $17 million
reduction in volumes ($14 million excluding the impact of the fifty-third week).
The increased administrative and support costs reflected spending to support
country development strategies, partially offset by lapping a $7 million charge
late in 1994 to consolidate the international headquarters operations in the
U.S. of the three concepts and the related savings in 1995 from this
consolidation as well as savings from a consolidation of regional and country
headquarter operations. The ongoing profit margin increased 1 1/2 points to
5.4%.
Following is a discussion of ongoing operating profit by key international
market. Increased profit in Australia, our largest international sales market,
was primarily driven by the full implementation of its value strategy, the
adoption of store cost control measures and a gain resulting from the sale of
several store properties leased to a franchisee as well as the refranchising of
a few stores. Profit gains in Korea primarily reflected additional units, while
higher profit in New Zealand primarily reflected volume growth and acquired
units. Profit also rose in Canada and the U.K., reflecting higher guest check
averages and acquired units, respectively. Partially offsetting these profit
gains were significantly increased losses in Spain, Mexico and Brazil. Spain
reflected closure costs for a significant number of stores scheduled to be
closed in 1996, poor performance by new units, volume declines and increased
costs. As discussed on pages 12 and 13, results in Mexico have been adversely
impacted by the economic difficulties resulting from the significant devaluation
of the Mexican peso. Net sales in Mexico declined 44%, while operating losses
increased $8 million to $17 million, reflecting lower volumes and higher costs,
which were only partially offset by higher effective pricing and the favorable
currency translation impact on increased local currency operating losses.
Brazil's increased losses were primarily due to higher administrative and
support costs.
1994 vs. 1993
KFC, Pizza Hut and Taco Bell represented approximately 55%, 40% and 5%,
respectively, of total international sales in 1994 and 1993.
Net sales increased $497 million or 37%, with KFC and Pizza Hut each
contributing about equally to the sales increase. The fifty-third week
contributed approximately 2 points to the sales growth. The sales growth
primarily reflected additional units of $398 million and volume growth of $121
million, partially offset by lower net pricing.
Operating profit declined $22 million or 24%. The decline in operating
profit was due to Pizza Hut. The fifty-third week mitigated the rate of profit
decline by approximately 3 points. The decreased profit reflected lower net
pricing, increased administrative and support costs, primarily to support an
extraordinary rate of unit development, higher store operating costs and a $7
million charge to consolidate the headquarters operations in the U.S. for the
three international restaurant concepts into one. These were partially offset by
increased volumes of $52 million ($49 million excluding the impact of the
fifty-third week), additional units that contributed $29 million and higher
franchise royalty revenues.
Following is a discussion of operating profit by key international market.
Australia, our largest international sales market, had slightly lower profit.
Korea's operating profit increased significantly, driven by additional units and
volume gains. Profit declined sharply
45
in Mexico and Canada, due in part to increased administrative costs. Brazil
incurred an operating loss as a result of losses on acquired units. Poland
experienced additional start-up losses from new operations. Profit increases in
New Zealand and the U.K. reflected volume gains and acquired units,
respectively. The profit margin declined more than 3 points to 3.9%.
CONSOLIDATED FINANCIAL CONDITION
ASSETS increased $640 million or 3% to $25.4 billion. The increase reflected the
normal growth of the businesses, partially offset by the impact of the initial
charge of $520 million upon adoption of SFAS 121 (see Note 2) primarily
affecting property, plant and equipment, intangible assets and, to a much lesser
extent, investments in unconsolidated affiliates and other noncurrent assets.
Increased accounts and notes receivable reflected slower collections and volume
advances in worldwide beverages and snack foods. Short-term investments largely
represent high-grade marketable securities portfolios held outside the U.S. Our
portfolio in Puerto Rico, which totaled $816 million at year-end 1995 and $853
million at year-end 1994, arises from the operating cash flows of a 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 $792 million of the portfolio to the U.S.
in 1995 and $380 million in 1994. 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.
LIABILITIES rose $183 million or 1% to $18.1 billion. The $643 million
increase in other long-term liabilities was partially offset by a $304 million
reduction in debt. The increase in other long-term liabilities primarily
reflected normal growth and a reclassification of amounts to current
liabilities.
At year-end 1995 and 1994, $3.5 billion and $4.5 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 1995 and 1994. Effective January 3,
1995, PepsiCo replaced its existing credit facilities with revolving credit
facilities aggregating $4.5 billion, of which $1.0 billion was to expire in 1996
and $3.5 billion was to expire in 2000. Effective December 8, 1995, PepsiCo
terminated the $1.0 billion due to expire in 1996 based upon a current
assessment of the amount of credit facilities required compared to its related
cost. The expiration of the remaining credit facilities of $3.5 billion was
extended to 2001. Annually, these facilities can be extended an additional year
upon the mutual consent of PepsiCo and the lending institutions.
46
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.
1995 1994 1993
----- ----- ----
Graph: MARKET NET DEBT RATIO 18% 26% 22%
1995 1994 1993
----- ----- ----
Graph: HISTORICAL COST NET DEBT 46% 49% 50%
RATIO
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 long-term 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. PepsiCo has established a long-term
target range of 20%-25% for its market net debt ratio to optimize its cost of
capital.
The market net debt ratio declined 8 points to 18% at year-end 1995 due
primarily to a 54% increase in PepsiCo's stock price. The 4 point increase to
26% at year-end 1994 was due to a 13% decline in PepsiCo's stock price as well
as an 8% increase in net debt.
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) declined 3 points to 46%, reflecting a 2% decline in
net debt and a 4% increase in net capital employed. The 1 point decline to 49%
at year-end 1994 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 1995, about 62% of PepsiCo's net debt portfolio, including the
effects of interest rate and currency swaps (see Note 8), was exposed to
variable interest rates, compared to about 60% in 1994. In addition to variable
rate long-term 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 $36 million ($19 million after-tax or
$0.02 per share) assuming the level and mix of the December 30, 1995 net debt
portfolio were 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 $94
million and $677 million at year-end 1995 and 1994, respectively. The $583
million decline in negative working capital primarily reflected the
reclassification of amounts from long-term to current liabilities, base business
growth in the
47
more working capital intensive bottling and snack food operations exceeding the
growth in restaurant operations and an increase in prepaid taxes.
SHAREHOLDERS' EQUITY increased $457 million or 7% to $7.3 billion. This
change reflected a 13% increase in retained earnings due to $1.6 billion in net
income less dividends declared of $615 million. This growth was reduced by a
$337 million unfavorable change in the currency translation adjustment account
(CTA) and a $322 million increase in treasury stock, reflecting repurchases of
12 million shares offset by 10 million shares used for stock option exercises.
The CTA change primarily reflected the effects of the Mexican peso devaluation.
RETURN ON AVERAGE SHAREHOLDERS' EQUITY
Based on income before cumulative effect of accounting changes, PepsiCo's
return on average shareholders' equity was 23% and 27% in 1995 and 1994,
respectively. Excluding the initial charge upon adoption of SFAS 121 in 1995
(see Note 2) and the 1994 BAESA gain (see Note 16), the return on average
shareholders' equity was 27% in 1995 and 1994.
CONSOLIDATED CASH FLOWS
Cash flow activity in 1995 reflected strong cash flows from operations of $3.7
billion which were used to fund capital spending of $2.1 billion, dividend
payments of $599 million, purchases of treasury stock totaling $541 million and
acquisition and investment activity of $466 million.
Graph: Net Cash Provided by Operating Activities vs. Capital Spending,
Dividends Paid, Acquisitions and Purchases of Treasury Stock
($ in millions)
1995 1994 1993
----- ----- -----
Net Cash Provided By $3,742 $3,716 $3,134
====== ====== ======
Operating Activities
Capital spending $2,104 $2,253 $1,982
Dividends paid 599 540 462
Acquisitions 466 316 1,011
Treasury stock 541 549 463
------ ------ ------
$3,710 $3,658 $3,918
====== ====== ======
One of PepsiCo's most significant financial strengths is its internal cash
generation capability. In fact, after capital spending and acquisitions, each of
our three industry segments generated positive cash flows in 1995, led by
restaurants, which generated nearly $600 million in cash flow compared to
marginally positive cash flows in 1994. Net cash flows from PepsiCo's U.S.
businesses were partially offset by international uses of cash, reflecting
strategies to accelerate growth of international operations.
48
CASH FLOWS - SUMMARY OF OPERATING ACTIVITIES
($ in millions)
1995 1994 1993
---- ---- ----
Income before cumulative
effect of accounting $1,606 $1,784 $1,588
changes
Impairment of long-lived 520 - -
assets
Other noncash charges, net 2,027 1,901 1,872
----- ----- -----
Income before noncash
charges and credits 4,153 3,685 3,460
Net change in operating
working capital (411) 31 (326)
---- ---- -----
Net Cash Provided by
Operating Activities $3,742 $3,716 $3,134
====== ====== ======
- -------------------------------------------------------------------------
Net cash provided by operating activities in 1995 rose $26 million or 1% over
1994, and in 1994, grew $582 million or 19% over 1993. Income before noncash
charges and credits rose 13% in 1995 and 7% in 1994. Increased noncash charges
of $646 million in 1995 reflected the $520 million initial, noncash impact of
adopting SFAS 121 and increased depreciation and amortization charges of $163
million, partially offset by increased deferred income tax benefits of $44
million, primarily resulting from the adoption of SFAS 121. The $29 million
increase in 1994 reflected increased depreciation and amortization charges of
$133 million and a decrease of $150 million in the deferred income tax
provision, 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 working capital net cash
outflows of $411 million in 1995 compared to cash inflows of $31 million in 1994
primarily reflected increased growth in accounts and notes receivable, a
decrease in income taxes payable in 1995 compared to an increase in 1994 and
reduced growth in other current liabilities in 1995 compared to 1994, partially
offset by increased growth in accounts payable, led by U.S. beverages, and a
reduction in the amounts prefunded in 1995 for employee benefits. The growth in
accounts and notes receivable was driven by worldwide beverages, which reflected
slower collections and volume growth. The 1994 over 1993 net increase of $357
million reflected normal increases in accrued liabilities across all of our
businesses, lapping the effect of higher income tax payments and a lower
provision in 1993, and improved trade receivable collections, partially offset
by the impact on accounts payable of the timing of a large year-end payment to
prefund employee benefits.
49
CASH FLOWS - SUMMARY OF INVESTING ACTIVITIES
($ in millions)
1995 1994 1993
---- ---- ----
Acquisitions and
investments
in unconsolidated $(466) $ (316) $(1,011)
affiliates
Capital spending (2,104) (2,253) (1,982)
Sales of restaurants 165 - 7
Net short-term 64 421 259
investments
Other investing (109) (213) (44)
activities, net
Net Cash Used for
Investing Activities $(2,450) $(2,361) $(2,771)
======= ======= =======
- -------------------------------------------------------------------------
Investing activities over the past three years reflected strategic investments
in all three industry segments through capital spending, and acquisitions and
investments in unconsolidated affiliates. PepsiCo's investments are expected to
generate cash returns in excess of its long-term cost of capital, which is
estimated to be approximately 10% at year-end 1995. See Note 17 for a discussion
of acquisitions and investments in unconsolidated affiliates. About 85% of the
total acquisition and investment activity in 1995 represented international
transactions compared to 75% in 1994. PepsiCo continues to seek opportunities to
strengthen its position in its industry segments, particularly in beverages and
snack foods, through strategic acquisitions.
Graph: Capital Spending
($ in millions)
Beverages Snack Foods Restaurants Corporate TOTAL
1995 27% 37% 35% 1% $2,104
1994 30 23 47 0 2,253
1993 25 25 50 0 1,982
The $149 million decline in capital spending in 1995 reflected
substantially reduced spending in restaurants, consistent with our restaurant
strategy discussed on page 33. Increased U.S. snack food spending, primarily for
capacity expansion and new products, was partially offset by a decline in
beverages. Increased capital spending of $271 million in 1994 reflected beverage
investments in equipment for new packaging and new products in the U.S. and
emerging international markets, primarily Eastern Europe. International capital
spending represented 29%, 35% and 31% of total segment spending in 1995, 1994
and 1993, respectively. Beverages, snack foods and restaurants represent about
30%, 40% and 30%, respectively, of the $2.5 billion of planned spending in 1996.
This reflects the continued shift from restaurants to snack foods. Snack food
and beverage 1996 capital spending reflects production capacity expansion for
both established and new products, and equipment replacements. Although
restaurant spending in 1996 is expected to be about equal to 1995's level, we
expect more of the spending in 1996 to be used for refurbishing our existing
restaurants and less spent on new store development. Approximately 25% of the
planned 1996 capital spending relates to international businesses.
50
Consistent with management's strategy to improve restaurant returns (see
Management's Analysis - Restaurants on page 33), proceeds from sales of
restaurants in 1995 were $165 million. Although difficult to forecast,
management anticipates continued cash flow from this kind of activity over the
next few years.
As discussed in Financial Leverage on page 46, PepsiCo manages the
investment activity in its short-term portfolios, primarily held outside the
U.S., as part of its overall financing strategy.
CASH FLOWS - SUMMARY OF FINANCING ACTIVITIES
($ in millions)
1995 1994 1993
---- ---- ----
Net short and $ (303) $ (205) $ 590
long-term debt
Cash dividends paid (599) (540) (462)
Purchases of treasury (541) (549) (463)
stock
Proceeds from
exercises of
stock options 252 97 69
Other, net (42) (43) (37)
Net Cash Used for ------- ----- -----
Financing Activities $(1,233) $(1,240) $(303)
======= ====== =====
- -------------------------------------------------------------------------
The net cash flow used for financing activities in 1995 was about even with
1994. In 1995, increased proceeds from exercises of stock options of $155
million were offset by increased net repayments of short and long-term debt of
$98 million and higher cash dividends paid of $59 million. The 1994 over 1993
change in cash flows from financing activities was a use of $937 million,
primarily reflecting net repayment of short and long-term debt of $205 million
compared to net proceeds of $590 million in 1993.
Cash dividends declared were $615 million in 1995 and $555 million in 1994.
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. PepsiCo expects to
repurchase at least 1% to 2% of its outstanding shares each year for the next
several years. During 1995, PepsiCo repurchased 1.6% of its shares outstanding
at the beginning of 1995, or 12.3 million shares, at a cost of $541 million.
Subsequent to year-end, PepsiCo repurchased 1.7 million shares through February
6, 1996 at a cost of $99 million. During 1994, PepsiCo repurchased 1.9% of the
shares outstanding at the beginning of 1994, or 15.0 million shares, at a cost
of $549 million. Through February 6, 1996, 29.4 million shares have been
repurchased under the 50 million share repurchase authority granted by PepsiCo's
Board of Directors in July 1993. In February 1996, PepsiCo's Board of Directors
replaced the 1993 share repurchase authority with a new authority for 50 million
shares.
51
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 1996 Annual Meeting of Shareholders on pages 2
through 4 and are incorporated herein by reference. Pursuant to Item 401(b) of
Regulation S-K, the directors retiring on May 1, 1996 and the executive officers
of the Company are reported in Part I of this report.
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 1996 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 1996 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.
52
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) 1. Financial Statements
See Index to Financial Information on page F-1.
2. Financial Statement Schedule
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 26, 1996
PEPSICO, INC.
By: /s/ D. WAYNE CALLOWAY
D. Wayne Calloway
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of PepsiCo and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ D. WAYNE CALLOWAY Chairman of the Board and
- --------------------- Chief Executive Officer March 26, 1996
D. Wayne Calloway (Principal Executive
Officer)
Executive Vice President
/s/ ROBERT G. DETTMER and Chief Financial March 26, 1996
- --------------------- Officer (Principal
Robert G. Dettmer Financial Officer)
/s/ ROBERT L. CARLETON Senior Vice President and March 26, 1996
Robert L. Carleton Controller (Principal
Accounting Officer)
Vice Chairman of the
/s/ ROGER A. ENRICO Board,Chairman and Chief March 26, 1996
- ------------------- Executive Officer, PepsiCo
Roger A. Enrico Worldwide Restaurants
/s/ JOHN F. AKERS Director March 26, 1996
- -----------------
John F. Akers
S-2
/s/ ROBERT E. ALLEN Director March 26, 1996
- -------------------
Robert E. Allen
/s/ JOHN J. MURPHY Director March 26, 1996
- ------------------
John J. Murphy
/s/ ANDRALL E. PEARSON Director March 26, 1996
- ----------------------
Andrall E. Pearson
/s/ SHARON PERCY ROCKEFELLER Director March 26, 1996
---------------------------
Sharon Percy Rockefeller
/s/ ROGER B. SMITH Director March 26, 1996
- ------------------
Roger B. Smith
/s/ ROBERT H. STEWART, III Director March 26, 1996
- --------------------------
Robert H. Stewart, III
/s/ FRANKLIN A. THOMAS Director March 26, 1996
- ----------------------
Franklin A. Thomas
/s/ P. ROY VAGELOS Director March 26, 1996
- ------------------
P. Roy Vagelos
/s/ ARNOLD R. WEBER Director March 26, 1996
- -------------------
Arnold R. Weber
E-1
INDEX TO EXHIBITS
ITEM 14(a)(3)
EXHIBIT
3.1 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).
3.2 Copy of By-Laws of PepsiCo, Inc., as amended to February 22, 1996.
4 PepsiCo, Inc. agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any instrument defining the
rights of holders of long-term debt of PepsiCo, Inc. and all of its
subsidiaries for which consolidated or unconsolidated financial
statements are required to be filed with the Securities and
Exchange Commission.
10.1 Description of PepsiCo, Inc. 1988 Director Stock Plan, which is
incorporated herein by reference from Post-Effective Amendment No.
2 to PepsiCo's Registration Statement on Form S-8 (Registration No.
33-22970).
10.2 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.
10.3 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.
10.4 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.
10.5 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).
10.6 Amended and Restated PepsiCo Long Term Savings Program, dated June
29, 1994, which is incorporated herein by reference from Exhibit
10(f) to PepsiCo's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
10.7 Amendment to Amended and Restated PepsiCo Long Term Savings Program,
dated September 14, 1994 which is incorporated herein by reference
from Exhibit 10(g) to PepsiCo's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
E-1
10.8 Amendment to Amended and Restated PepsiCo Long Term Savings
Program, dated November 9, 1995.
10.9 Amendment to Amended and Restated PepsiCo Long Term Savings
Program, dated December 21, 1995.
10.10 Copy of PepsiCo, Inc. 1995 Stock Option Incentive Plan, which is
incorporated herein by reference from PepsiCo's Registration
Statement on Form S-8 (Registration No. 33-61731).
10.11 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.
10.12 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.
10.13 Copy of PepsiCo, Inc. Restaurant Deferred Compensation Plan, which
is incorporated herein by reference from PepsiCo's Registration
Statement on Form S-8 (Registration No. 333-01377).
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.
PepsiCo, Inc. and Subsidiaries
------------------------------
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 30, 1995
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 ended December 30, 1995,
December 31, 1994 and December 25, 1993............... F-2
Consolidated Balance Sheet at December 30, 1995
and December 31, 1994................................. F-3
Consolidated Statement of Cash Flows for
the fiscal years ended December 30, 1995,
December 31, 1994 and December 25, 1993............... F-4
Consolidated Statement of Shareholders' Equity
for the fiscal years ended December 30, 1995,
December 31, 1994 and December 25, 1993............... F-6
Notes to Consolidated Financial Statements............... F-8
Management's Responsibility for Financial Statements..... F-42
Report of Independent Auditors, KPMG Peat Marwick LLP.... F-43
Selected Quarterly Financial Data........................ F-44
Selected Financial Data.................................. F-48
Item 14(a)(2) Financial Statement Schedule
II Valuation and Qualifying Accounts and Reserves
for the fiscal years ended December 30, 1995,
December 31, 1994 and December 25, 1993....... F-55
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
Fiscal years ended December 30, 1995, December 31, 1994
and December 25, 1993
1995 1994 1993
(52 Weeks) (53 Weeks) (52 Weeks)
- -----------------------------------------------------------------------------
NET SALES............................. $30,421 $28,472 $25,021
COSTS AND EXPENSES, NET
Cost of sales......................... 14,886 13,715 11,946
Selling, general and
administrative expenses.............. 11,712 11,244 9,864
Amortization of intangible assets..... 316 312 304
Impairment of long-lived assets....... 520 - -
------- ------- -------
OPERATING PROFIT 2,987 3,201 2,907
Gain on stock offering by an
unconsolidated affiliate............. - 18 -
Interest expense...................... (682) (645) (573)
Interest income....................... 127 90 89
------- ------- -------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES........ 2,432 2,664 2,423
PROVISION FOR INCOME TAXES............ 826 880 835
------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES.................. 1,606 1,784 1,588
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Postemployment benefits (net of income
tax benefit of $29).................. - (55) -
Pension assets (net of income tax
expense of $15)...................... - 23 -
------- ------- -------
NET INCOME............................ $ 1,606 $ 1,752 $ 1,588
======= ======= =======
INCOME (CHARGE) PER SHARE
Before cumulative effect of accounting
changes.............................. $ 2.00 $ 2.22 $ 1.96
Cumulative effect of accounting changes
Postemployment benefits.............. - (0.07) -
Pension assets....................... - 0.03 -
------- ------- -------
NET INCOME PER SHARE.................. $ 2.00 $ 2.18 $ 1.96
======= ======= =======
Average shares outstanding............ 804 804 810
- -----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- -----------------------------------------------------------------------------
F-3
- ---------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
(in millions except per share amount)
PepsiCo, Inc. and Subsidiaries
December 30, 1995 and December 31, 1994
1995 1994
- ---------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................... $ 382 $ 331
Short-term investments, at cost................ 1,116 1,157
------- -------
1,498 1,488
Accounts and notes receivable, less allowance:
$150 in 1995 and $151 in 1994................ 2,407 2,051
Inventories.................................... 1,051 970
Prepaid expenses, taxes and
other current assets.......................... 590 563
------- -------
TOTAL CURRENT ASSETS...................... 5,546 5,072
INVESTMENTS IN UNCONSOLIDATED AFFILIATES....... 1,635 1,295
PROPERTY, PLANT AND EQUIPMENT, NET............. 9,870 9,883
INTANGIBLE ASSETS, NET......................... 7,584 7,842
OTHER ASSETS................................... 797 700
------- -------
TOTAL ASSETS............................ $25,432 $24,792
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................... $ 1,556 $ 1,452
Accrued compensation and benefits.............. 815 753
Short-term borrowings.......................... 706 678
Accrued marketing.............................. 469 546
Income taxes payable........................... 387 672
Other current liabilities...................... 1,297 1,169
------- -------
TOTAL CURRENT LIABILITIES................. 5,230 5,270
LONG-TERM DEBT................................. 8,509 8,841
OTHER LIABILITIES.............................. 2,495 1,852
DEFERRED INCOME TAXES.......................... 1,885 1,973
SHAREHOLDERS' EQUITY
Capital stock, par value 1 2/3 cents per share:
authorized 1,800 shares, issued 863 shares.... 14 14
Capital in excess of par value................. 1,060 935
Retained earnings.............................. 8,730 7,739
Currency translation adjustment and other...... (808) (471)
------- -------
8,996 8,217
Less: Treasury stock, at cost:
75 shares and 73 shares in 1995 and
1994, respectively.......................... (1,683) (1,361)
------- -------
TOTAL SHAREHOLDERS' EQUITY................ 7,313 6,856
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY................... $25,432 $24,792
======= =======
- ---------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- ---------------------------------------------------------------------------
F-4
- ---------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (PAGE 1 OF 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 1995, December 31, 1994
and December 25, 1993
1995 1994 1993
(52 Weeks) (53 Weeks) (52 Weeks)
- -----------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES
Income before cumulative effect of
accounting changes................. $ 1,606 $ 1,784 $ 1,588
Adjustments to reconcile income
before cumulative effect of
accounting changes to net cash
provided by operating activities
Depreciation and amortization..... 1,740 1,577 1,444
Impairment of long-lived
assets.......................... 520 - -
Deferred income taxes............. (111) (67) 83
Other noncash charges and
credits, net.................... 398 391 345
Changes in operating working capital,
excluding effects of acquisitions
Accounts and notes receivable... (434) (112) (161)
Inventories..................... (129) (102) (90)
Prepaid expenses, taxes and other
current assets................. 76 1 3
Accounts payable................ 133 30 143
Income taxes payable............ (97) 55 (125)
Other current liabilities....... 40 159 (96)
------- ------- -------
Net change in operating
working capital.................. (411) 31 (326)
------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................... 3,742 3,716 3,134
------- ------- -------
CASH FLOWS - INVESTING ACTIVITIES
Acquisitions and investments
in unconsolidated affiliates....... (466) (316) (1,011)
Capital spending.................... (2,104) (2,253) (1,982)
Sales of property, plant
and equipment...................... 138 55 73
Sales of restaurants................ 165 - 7
Short-term investments, by original
maturity
More than three months-purchases.. (289) (219) (579)
More than three months-maturities. 335 650 846
Three months or less, net......... 18 (10) (8)
Other, net.......................... (247) (268) (117)
------- ------- -------
NET CASH USED FOR INVESTING
ACTIVITIES......................... (2,450) (2,361) (2,771)
------- ------- -------
- ---------------------------------------------------------------------------
(Continued on following page)
- ---------------------------------------------------------------------------
F-5
- ---------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (PAGE 2 OF 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 1995, December 31, 1994
and December 25, 1993
1995 1994 1993
(52 Weeks) (53 Weeks) (52 Weeks)
- ---------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from issuances of
long-term debt..................... 2,030 1,285 711
Payments of long-term debt.......... (928) (1,180) (1,202)
Short-term borrowings, by original
maturity
More than three months-proceeds.. 2,053 1,304 3,034
More than three months-payments.. (2,711) (1,728) (2,792)
Three months or less, net........ (747) 114 839
Cash dividends paid................. (599) (540) (462)
Purchases of treasury stock......... (541) (549) (463)
Proceeds from exercises of
stock options...................... 252 97 69
Other, net.......................... (42) (43) (37)
------- ------- -------
NET CASH USED FOR
FINANCING ACTIVITIES............... (1,233) (1,240) (303)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS.......... (8) (11) (3)
------- ------- -------
NET INCREASE IN CASH
AND CASH EQUIVALENTS............... 51 104 57
CASH AND CASH EQUIVALENTS
- BEGINNING OF YEAR................ 331 227 170
------- ------- -------
CASH AND CASH EQUIVALENTS
- END OF YEAR...................... $ 382 $ 331 $ 227
======= ======= =======
- ---------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH FLOW DATA
Interest paid....................... $ 671 591 550
Income taxes paid................... $ 790 663 676
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Liabilities assumed in
connection with acquisitions....... $ 66 224 897
Issuance of treasury stock and
debt for acquisitions.............. $ 9 39 365
Book value of net assets exchanged
for investments in unconsolidated
affiliates........................ $ 39 - 61
- ---------------------------------------------------------------------------
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
Fiscal years ended December 30, 1995, December 31, 1994
and December 25, 1993
Capital Stock
-------------------------------------
Issued Treasury
---------------- ------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------
Shareholders' Equity,
December 26, 1992.................. 863 $14 (64) $ (667)
------------------------------------
1993 Net income.................... - - - -
Cash dividends declared
(per share-$0.61)................. - - - -
Currency translation adjustment.... - - - -
Purchases of treasury stock........ - - (12) (463)
Shares issued in connection with
acquisitions...................... - - 9 170
Stock option exercises, including
tax benefits of $23............... - - 3 46
Pension liability adjustment, net
of deferred taxes of $5........... - - - -
Other.............................. - - - 1
------------------------------------
Shareholders' Equity,
December 25, 1993.................. 863 $14 (64) $ (913)
------------------------------------
1994 Net income.................... - - - -
Cash dividends declared
(per share-$0.70)................. - - - -
Currency translation adjustment.... - - - -
Purchases of treasury stock........ - - (15) (549)
Stock option exercises, including
tax benefits of $27............... - - 5 81
Shares issued in connection with
acquisitions...................... - - 1 15
Pension liability adjustment, net
of deferred taxes of $5........... - - - -
Other.............................. - - - 5
------------------------------------
Shareholders' Equity,
December 31, 1994.................. 863 $14 (73) $(1,361)
------------------------------------
1995 Net income.................... - - - -
Cash dividends declared
(per share-$0.78)................. - - - -
Currency translation adjustment.... - - - -
Purchases of treasury stock........ - - (12) (541)
Stock option exercises, including
tax benefits of $91.............. - - 10 218
Other.............................. - - - 1
------------------------------------
Shareholders' Equity,
December 30, 1995.................. 863 $14 (75) $(1,683)
====================================
- ---------------------------------------------------------------------------
(Continued on next page)
- ---------------------------------------------------------------------------
F-7
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (PAGE 2 OF 2)
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 1995, December 31, 1994
and December 25, 1993
Capital Currency
in Translation
Excess of Retained Adjustment
Par Value Earnings and Other Total
Shareholders' Equity,
December 26, 1992.................. $ 668 $5,440 $ (99) $5,356
-----------------------------------
1993 Net income.................... - 1,588 - 1,588
Cash dividends declared
(per share-$0.61)................. - (486) - (486)
Currency translation adjustment.... - - (77) (77)
Purchases of treasury stock........ - - - (463)
Shares issued in connection with
acquisitions...................... 165 - - 335
Stock option exercises, including
tax benefits of $23............... 46 - - 92
Pension liability adjustment, net
of deferred taxes of $5........... - - (8) (8)
Other.............................. 1 - - 2
-----------------------------------
Shareholders' Equity,
December 25, 1993.................. $ 880 $6,542 $(184) $6,339
-----------------------------------
1994 Net income.................... - 1,752 - 1,752
Cash dividends declared
(per share-$0.70)................. - (555) - (555)
Currency translation adjustment.... - - (295) (295)
Purchases of treasury stock........ - - - (549)
Stock option exercises, including
tax benefits of $27............... 44 - - 125
Shares issued in connection with
acquisitions...................... 14 - - 29
Pension liability adjustment, net
of deferred taxes of $5........... - - 8 8
Other.............................. (3) - - 2
-----------------------------------
Shareholders' Equity,
December 31, 1994.................. $ 935 $7,739 $(471) $6,856
-----------------------------------
1995 Net income.................... - 1,606 - 1,606
Cash dividends declared
(per share-$0.78)................. - (615) - (615)
Currency translation adjustment.... - - (337) (337)
Purchases of treasury stock........ - - - (541)
Stock option exercises, including
tax benefits of $91.............. 125 - - 343
Other.............................. - - - 1
-----------------------------------
Shareholders' Equity,
December 30, 1995.................. $1,060 $8,730 $(808) $7,313
===================================
- ---------------------------------------------------------------------------
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 in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
To facilitate the closing process, certain of PepsiCo's international
operations close their fiscal year up to one month earlier than PepsiCo's fiscal
year.
Certain reclassifications were made to prior year amounts to conform with
the 1995 presentation.
ACCOUNTING CHANGES. As discussed below and in Note 2, in 1995 PepsiCo early
adopted Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." In 1994, PepsiCo adopted Statement of Financial Accounting
Standards No. 112, "Accounting for Postemployment Benefits," (see Note 14) and a
preferred method of calculating the market-related value of plan assets used in
determining pension expense (see Note 13).
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation," permits stock compensation cost to be measured
using either the intrinsic value-based method or the fair value-based method.
When adopted in 1996, PepsiCo intends to continue to use the intrinsic
value-based method and will provide the expanded disclosures required by SFAS
123.
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
unconsolidated affiliates in which PepsiCo exercises significant influence but
not control are accounted for by the equity method and PepsiCo's share of the
net income or loss of its affiliates is included in selling, general and
administrative expenses.
FISCAL YEAR. PepsiCo's fiscal year ends on the last Saturday in December
and, as a result, a fifty-third week is added every five or six years. The
fiscal year ending December 31, 1994 consisted of 53 weeks.
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, which are classified in prepaid expenses in the Consolidated Balance
Sheet, 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
view that promotional discounts are so pervasive in the beverage industry,
compared to the snack food industry, that they are effectively price discounts
and should be classified accordingly. A current survey of the accounting
practice of others in the
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beverage and snack food industries confirmed that our beverage classification is
consistent with others in that industry while practice in the snack food
industry is mixed.
Advertising expense was $1.8 billion, $1.7 billion and $1.6 billion in
1995, 1994 and 1993, respectively. Prepaid advertising as of year-end 1995 and
1994 was $78 million and $70 million, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which
are expensed as incurred, were $96 million, $152 million and $113 million in
1995, 1994 and 1993, respectively.
STOCK-BASED COMPENSATION. PepsiCo uses the intrinsic value-based method for
measuring stock-based compensation cost which measures compensation cost as the
excess, if any, of the quoted market price of PepsiCo's capital stock at the
grant date over the amount the employee must pay for the stock. PepsiCo's policy
is to grant stock options at fair market value at the date of grant.
NET INCOME PER SHARE. Net income per share is computed by dividing net
income by the weighted average number of shares and dilutive share equivalents
(primarily stock options) outstanding during each year ("average shares
outstanding").
DERIVATIVE INSTRUMENTS. PepsiCo's policy prohibits the use of derivative
instruments for trading purposes and PepsiCo has procedures in place to monitor
and control their use.
PepsiCo enters into interest rate and currency swaps with the objective of
reducing borrowing costs. Interest rate and currency swaps are used to
effectively change the interest rate and currency of specific debt issuances. In
general, the terms of these swaps match the terms of the related debt and the
swaps are entered into concurrently with the issuance of the debt they are
intended to modify. The interest differential to be paid or received on an
interest rate swap is recognized as an adjustment to interest expense as the
differential occurs. The interest differential not yet settled in cash is
reflected in the Consolidated Balance Sheet as a receivable or payable under the
appropriate current asset or liability caption. If an interest rate swap
position was to be terminated, the gain or loss realized upon termination would
be deferred and amortized to interest expense over the remaining term of the
underlying debt instrument it was intended to modify or would be recognized
immediately if the underlying debt instrument was settled prior to maturity. The
differential to be paid or received on a currency swap is charged or credited to
income as the differential occurs. This is fully offset by the corresponding
gain or loss recognized in income on the currency translation of the related
non-U.S. dollar denominated debt, as both amounts are based upon the same
exchange rates. The currency differential not yet settled in cash is reflected
in the Consolidated Balance Sheet under the appropriate current or noncurrent
receivable or payable caption. If a currency swap position was to be terminated
prior to maturity, the gain or loss realized upon termination would be
immediately recognized in income.
A seven-year put option, issued in connection with the formation of a joint
venture with the principal shareholder of GEMEX, an unconsolidated franchised
bottling affiliate in Mexico (see Note 17), is marked-to-market with gains or
losses recognized currently as an adjustment to PepsiCo's share of the net
income of unconsolidated affiliates. The offsetting amount adjusts the carrying
amount of the put obligation, classified in other liabilities in the
Consolidated Balance Sheet.
Gains and losses on futures contracts designated as hedges of future
commodity purchases are deferred and included in the cost of the related raw
materials when purchased. Changes in the value of futures contracts that PepsiCo
uses to hedge commodity purchases are highly correlated to the
F-10
changes in the value of the purchased commodity. If the degree of correlation
between the futures contracts and the purchase contracts were to diminish such
that the two were no longer considered highly correlated, subsequent changes in
the value of the futures contracts would be recognized in income.
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.
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.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment (PP&E) are
stated at cost except for PP&E that have been impaired, for which the carrying
amount is reduced to estimated fair value. Depreciation is calculated
principally on a straight-line basis over the estimated useful lives of the
assets.
INTANGIBLE ASSETS. Intangible assets are amortized on a straight-line basis
over appropriate periods, generally ranging from 20 to 40 years.
RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS. As
noted above, PepsiCo early adopted SFAS 121 in 1995 for purposes of determining
and measuring impairment of certain long-lived assets to be held and used in the
business. See Note 2.
PepsiCo reviews most long-lived assets, certain identifiable intangibles
and goodwill related to those assets to be held and used in the business for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset or a group of assets may not be recoverable. PepsiCo
considers a history of operating losses to be its primary indicator of potential
impairment. Assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets ("Assets"). PepsiCo has identified the
appropriate grouping of Assets to be individual restaurants for the restaurant
segment and, for each of the snack food and beverage segments, Assets are
generally grouped at the country level. PepsiCo deems an Asset to be impaired if
a forecast of undiscounted future operating cash flows directly related to the
Asset, including disposal value if any, is less than its carrying amount. If an
Asset is determined to be impaired, the loss is measured as the amount by which
the carrying amount of the Asset exceeds its fair value. Fair value is based on
quoted market prices in active markets, if available. If quoted market prices
are not available, an estimate of fair value is based on the best information
available, including prices for similar assets or the results of valuation
techniques such as discounting estimated future cash flows as if the decision to
continue to use the impaired Asset was a new investment decision. PepsiCo
generally measures fair value by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future cash
flows. Accordingly, actual results could vary significantly from such estimates.
Recoverability of other long-lived assets, primarily investments in
unconsolidated affiliates and identifiable intangibles and goodwill not
identified with impaired Assets covered by the above paragraph, will continue to
be evaluated on a recurring basis. The primary indicators of recoverability are
current or forecasted profitability over the estimated remaining life of these
assets, based on the operating profit of the businesses directly related to
these assets. If recoverability is unlikely based on the evaluation, the
carrying amount is reduced by the amount it exceeds the forecasted operating
profit and any estimated disposal value.
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NOTE 2 -IMPAIRMENT OF LONG-LIVED ASSETS
PepsiCo early adopted Statement of Financial Accounting Standards No. 121 (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," as of the beginning of the fourth quarter of 1995.
This date was chosen to allow adequate time to collect and analyze data related
to the long-lived assets of each of our worldwide operations for purposes of
identifying, measuring and reporting any impairment in 1995.
The initial, noncash charge upon adoption of SFAS 121 was $520 million
($384 million after-tax or $0.48 per share), which included $68 million ($49
million after-tax or $0.06 per share) related to restaurants for which closure
decisions were made during the fourth quarter. This initial charge resulted from
PepsiCo grouping assets at a lower level than under its previous accounting
policy for evaluating and measuring impairment. Under PepsiCo's previous
accounting policy, each of PepsiCo's operating divisions' ("Division")
long-lived assets to be held and used by the Division, other than intangible
assets, were evaluated as a group for impairment if the Division was incurring
operating losses or was expected to incur operating losses in the future.
Because of the strong operating profit history and prospects of each Division,
no impairment evaluation had been required for 1994 or 1993 under PepsiCo's
previous accounting policy. The initial charge represented a reduction of the
carrying amounts of the impaired Assets (as defined in Note 1) to their
estimated fair value, as determined by using discounted estimated future cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates. This charge affected worldwide restaurants, international
beverages and, to a much lesser extent, international snack foods and certain
unconsolidated affiliates. See Note 19.
As a result of the reduced carrying amount of the impaired Assets,
depreciation and amortization expense for the fourth quarter of 1995 was reduced
by $21 million ($15 million after-tax or $0.02 per share) and full-year 1996
depreciation and amortization expense is expected to be reduced by approximately
$58 million ($39 million after-tax or $0.05 per share). See Management's
Analysis - Restaurants on page 33 for a discussion of other possible future
effects related to this change in accounting.
SFAS 121 also requires, among other provisions, that long-lived assets and
certain identifiable intangibles to be disposed of that are not covered by APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," be reported at the lower of the asset's
carrying amount or its fair value less cost to sell. Under PepsiCo's previous
accounting policy, PepsiCo reported an asset to be disposed of at the lower of
its carrying amount or its estimated net realizable value. There were no
material adjustments to the carrying amounts of assets to be disposed of in
1995, 1994 or 1993 under PepsiCo's previous accounting policy. The impact of
adopting SFAS 121 on assets held for disposal during 1995 was immaterial.
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NOTE 3 - ITEMS AFFECTING COMPARABILITY
The effect on comparability of 1995 net gains from sales of restaurants to
franchisees in excess of the cost of closing other restaurants is provided under
Net Refranchising Gains in Note 19.
The fifty-third week in 1994, as described under Fiscal Year in Note 1,
increased 1994 net sales by an estimated $434 million and earnings by
approximately $54 million ($35 million after-tax or $0.04 per share). See Fiscal
Year in Note 19 for the estimated impact of the fifty-third week on
comparability of segment net sales and operating profit.
The effects of unusual items on comparability of operating profit,
primarily restructuring charges and accounting changes, are provided under
Unusual Items and Accounting Changes, respectively, in Note 19.
Information regarding the 1994 gain from a public share offering by BAESA,
an unconsolidated franchised bottling affiliate in South America, and a 1993
charge to increase net deferred tax liabilities as of the beginning of 1993 for
a 1% statutory income tax rate increase due to 1993 U.S. Federal tax legislation
is provided in Notes 16 and 11, respectively.
NOTE 4 - INVENTORIES
1995 1994
- ---------------------------------------------------------
Raw materials and supplies.............$ 550 $455
Finished goods......................... 501 515
------ ----
$1,051 $970
====== ====
- ---------------------------------------------------------
The cost of 32% of 1995 inventories and 38% of 1994 inventories was computed
using the LIFO method. The carrying amount of total LIFO inventories was lower
than the approximate current cost of those inventories by $11 million at
year-end 1995, but higher by $6 million at year-end 1994.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
1995 1994
- --------------------------------------------------------
Land........................... $ 1,327 $ 1,322
Buildings and improvements..... 5,668 5,664
Capital leases, primarily
buildings..................... 531 451
Machinery and equipment........ 8,598 8,208
Construction in progress....... 627 485
------- -------
16,751 16,130
Accumulated depreciation....... (6,881) (6,247)
------- -------
$ 9,870 $ 9,883
======= =======
- -----------------------------------------------------------
Depreciation expense in 1995, 1994 and 1993 was $1.3 billion, $1.2 billion and
$1.1 billion, respectively. The adoption of SFAS 121 reduced the carrying amount
of property, plant and equipment, net by $399 million. See Note 2.
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NOTE 6 - INTANGIBLE ASSETS, NET
1995 1994
- ------------------------------------------------------------------------
Reacquired franchise rights.... $3,826 $3,974
Trademarks..................... 711 768
Other identifiable
intangibles................... 286 250
Goodwill....................... 2,761 2,850
------ ------
$7,584 $7,842
====== ======
- ------------------------------------------------------------------------
Identifiable intangible assets primarily 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 businesses. 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.
Accumulated amortization, included in the amounts above, was $1.8 billion
and $1.6 billion at year-end 1995 and 1994, respectively. The adoption of SFAS
121 reduced the carrying amount of intangible assets, net by $86 million. See
Note 2.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
PepsiCo's policy prohibits the use of derivative instruments for trading
purposes and PepsiCo has procedures in place to monitor and control their use.
PepsiCo's use of derivative instruments is primarily limited to interest
rate and currency swaps, which are entered into with the objective of reducing
borrowing costs. PepsiCo enters into interest rate and foreign currency swaps to
effectively change the interest rate and currency of specific debt issuances.
These swaps are generally entered into concurrently with the issuance of the
debt they are intended to modify. The notional amount, interest payment dates
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. PepsiCo's credit risk related to interest rate and
currency swaps is considered low because they are only entered into with strong
creditworthy counterparties, are generally settled on a net basis and are of
relatively short duration. See Note 8 for the notional amounts, related interest
rates and maturities of the interest rate and currency swaps along with the
original terms of the related debt and Note 9 for the fair value of these
instruments.
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In 1995, PepsiCo issued a seven-year put option in connection with the formation
of a joint venture with the principal shareholder of GEMEX, an unconsolidated
franchised bottling affiliate in Mexico. The put option allows the principal
shareholder to sell up to 150 million GEMEX shares to PepsiCo at 66 2/3 cents
per share. PepsiCo accounts for this put option by marking it to market with
gains or losses recognized currently. The put option liability, which was valued
at $26 million at the date of the original transaction, increased to $30 million
by year-end, resulting in a $4 million charge to earnings.
NOTE 8 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
1995 1994
- -------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
Commercial paper (5.7% and 5.4%)(A)............ $ 2,006 $ 2,254
Current maturities of long-term
debt issuances (A)(B)......................... 1,405 988
Notes (6.9% and 5.4%) (A)...................... 252 1,492
Other borrowings (7.9% and 6.5%) (C)........... 543 444
Amount reclassified
to long-term debt (D)......................... (3,500) (4,500)
------- -------
$ 706 $ 678
======= =======
LONG-TERM DEBT
Short-term borrowings, reclassified (D)........ $ 3,500 $ 4,500
Notes due 1996 through 2010 (6.3% and
6.6%) (A)..................................... 3,886 3,725
Euro notes due 1997 through 1998
(7.5% and 8.0%) (A)........................... 550 250
Zero coupon notes, $780 million due 1996
through 2012 (14.4% annual yield to
maturity) (A)................................. 234 219
Swiss franc perpetual Foreign Interest
Payment bonds (E)............................. 214 213
Australian dollar 6.3% bonds due 1997
through 1998 with interest payable in
Japanese yen (A)(C)........................... 212 -
Japanese yen 3.3% bonds due 1997 (C)........... 194 201
Zero coupon notes, $200 million due 1999
(6.4% annual yield to maturity) (A)........... 161 -
Swiss franc 5.0% notes due 1999 (A)(C)......... 108 -
Italian lira 11.4% notes due 1998 (A)(C)....... 95 -
Luxembourg franc 6.6% notes due 1998 (A)(C).... 68 -
Swiss franc 5 1/4% bearer bonds
due 1995 (C).................................. - 100
Capital lease obligations
(See Note 10)................................. 294 298
Other, due 1996-2020 (6.8% and 8.1%)........... 398 323
------- -------
9,914 9,829
Less current maturities of long-term
debt issuances (B)............................ (1,405) (988)
------- -------
$ 8,509 $ 8,841
======= =======
- -------------------------------------------------------------------------------
The interest rates in the above table indicate, where applicable, the weighted
average of the stated rates at year-end 1995 and 1994,
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respectively, prior to the effects of any interest rate swaps. See (A) below for
PepsiCo's weighted average interest rates after giving effect to the impact of
the interest rate swaps.
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 currently significant to PepsiCo.
The annual maturities of long-term debt through 2000, excluding capital
lease obligations and the reclassified short-term borrowings, are: 1996-$1.4
billion, 1997-$1.5 billion, 1998-$1.5 billion, 1999-$572 million and 2000-$651
million.
See Note 7 for a discussion of PepsiCo's use of interest rate and currency
swaps and its management of the inherent credit risk and Note 9 for fair value
information related to debt and interest rate and currency swaps.
(A) The following table indicates the notional amount and weighted average
interest rates, by category, of interest rate swaps outstanding at year-end 1995
and 1994, respectively. The weighted average variable interest rates that
PepsiCo pays, which are primarily indexed 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 swaps generally match the terms of the
debt they modify and the swaps terminate in 1996 through 2010.
1995 1994
-------- ------
Receive fixed-pay variable
Notional amount....................... $2,657 $1,557
Weighted average receive rate......... 6.8% 5.9%
Weighted average pay rate............. 5.7% 6.1%
Receive variable-pay variable
Notional amount....................... $ 577 $1,009
Weighted average receive rate......... 5.7% 4.9%
Weighted average pay rate............. 5.8% 6.0%
Receive variable-pay fixed
Notional amount....................... $ 215 $ 215
Weighted average receive rate......... 5.8% 6.6%
Weighted average pay rate............. 8.2% 8.2%
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The following table identifies the composition of total debt (excluding
capital lease obligations and before the reclassification of 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.
1995 1994
------------------- -------------------
Weighted Weighted
Average Average
Carrying Interest Carrying Interest
Amount Rate Amount Rate
--------- -------- -------- --------
Variable interest
rate debt
Short-term
borrowings.......... $4,177 6.4% $5,149 6.2%
Long-term debt....... 2,103 5.8% 937 6.1%
------ ------
6,280 6.2% 6,086 6.2%
Fixed interest rate
debt................... 2,641 7.4% 3,135 7.4%
------ ------
$8,921 6.6% $9,221 6.6%
====== ======
(B) Included certain long-term notes aggregating $248 million which are
reasonably expected to be called, without penalty, by PepsiCo in 1996. The
expectation is based upon the belief of PepsiCo management that, based upon
projected yield curves, our counterparties to interest rate swaps, which were
entered into to modify these notes, will exercise their option to early
terminate the swaps without penalty. Also included the $214 million carrying
amount of the Swiss franc perpetual Foreign Interest Payment bonds (see (E)
below).
(C) PepsiCo has entered into currency swaps to hedge its foreign currency
exposure on non-U.S. dollar denominated debt. At year-end 1995, the aggregate
carrying amount of the debt was $696 million and the receivables and payables
under related currency swaps were $5 million and $12 million, respectively,
resulting in a net effective U.S. dollar liability of $703 million with a
weighted average interest rate of 5.8%, including the effects of related
interest rate swaps. At year-end 1994, the carrying amount of this debt
aggregated $301 million and the receivables and payables under related currency
swaps 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 7.9%, including the effects of related interest rate swaps.
(D) At year-end 1995 and 1994, 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 was
to expire in 1996 and $3.5 billion was to expire in 2000. Effective December 8,
1995, PepsiCo terminated the $1.0 billion due to expire in 1996 based upon a
current assessment of the amount of credit facilities required compared to its
related cost. The expiration of the remaining credit facilities of $3.5 billion
was extended to 2001. At year-end 1995 and 1994, $3.5 billion and $4.5 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.
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(E) 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. Although PepsiCo does not currently intend to cause
redemption of this debt, this debt has been included in current maturities of
long-term debt (see (B) above) at year-end 1995 because the bondholders may
exercise their right to cause PepsiCo to redeem the debt in 1996 on its 10-year
anniversary date. Since the redemption feature is only available on each 10-year
anniversary date, the bonds will be reclassified to long-term if redemption does
not occur in 1996.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
1995 1994
--------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Assets
Cash and
cash equivalents............. $ 382 $ 382 $ 331 $ 331
Short-term
investments.................. $1,116 $1,116 $1,157 $1,157
Other assets (noncurrent
investments)................. $ 23 $ 23 $ 48 $ 48
Liabilities
Debt
Short-term borrowings
and long-term debt,
net of capital
leases.................... $8,921 $9,217 $9,221 $9,266
Debt-related derivative
instruments
Open contracts in asset
position.................. (25) (96) (52) (52)
Open contracts in liability
position.................. 13 26 8 54
------ ------ ------ ------
Net debt................ $8,909 $9,147 $9,177 $9,268
------ ------ ------ ------
Other liabilities
(GEMEX put option).......... $ 30 $ 30 - -
Guarantees.................... - $ 4 - $ 3
- ------------------------------------------------------------------------------
The carrying amounts in the above table are included in the Consolidated Balance
Sheet under the indicated captions, except for debt-related derivative
instruments (interest rate and currency swaps), which are included in the
appropriate current or noncurrent asset or liability caption. Short-term
investments consist primarily of debt securities and
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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. The fair value
of the GEMEX put option is based upon a valuation model.
See Note 7 for more information regarding PepsiCo's use of derivative
instruments and its management of the inherent credit risk related to those
instruments.
NOTE 10 - LEASES
PepsiCo has noncancelable commitments under both capital and long-term operating
leases, primarily for restaurant units. 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. Sublease income and sublease receivables are
insignificant.
Future minimum commitments under noncancelable leases are set forth below:
Later
1996 1997 1998 1999 2000 Years Total
---- ---- ---- ---- ---- ----- -----
Capital $ 57 49 68 37 38 299 $ 548
Operating $350 297 269 240 218 1,170 $2,544
- --------------------------------------------------------------------------------
At year-end 1995, the present value of minimum payments under capital
leases was $294 million, after deducting $1 million for estimated executory
costs and $253 million representing imputed interest.
The details of rental expense are set forth below:
1995 1994 1993
---- ---- ----
Minimum................................... $439 $433 $392
Contingent................................ 40 32 28
---- ---- ----
$479 $465 $420
==== ==== ====
- -------------------------------------------------------------------------------
Contingent rentals are based on sales by restaurants in excess of levels
stipulated in the lease agreements.
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NOTE 11 - INCOME TAXES
The details of the provision for income taxes on income before cumulative effect
of accounting changes are set forth below:
1995 1994 1993
- ---------------------------------------------------------------
Current: Federal........... $ 706 $642 $467
Foreign........... 154 174 196
State............. 77 131 89
------ ---- ----
937 947 752
------ ---- ----
Deferred: Federal........... (92) (64) 78
Foreign........... (18) (2) (13)
State............. (1) (1) 18
------ ---- ----
(111) (67) 83
------ ---- ----
$ 826 $880 $835
====== ==== ====
- ---------------------------------------------------------------
In 1993, a charge of $30 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. Federal tax legislation.
U.S. and foreign income before income taxes and cumulative effect of
accounting changes are set forth below:
1995 1994 1993
- ------------------------------------------------------------
U.S............................ $1,792 $1,762 $1,633
Foreign........................ 640 902 790
------ ------ ------
$2,432 $2,664 $2,423
====== ====== ======
- ------------------------------------------------------------
PepsiCo operates centralized concentrate manufacturing facilities in Puerto
Rico and Ireland under long-term tax incentives. The U.S. amount in the above
table included approximately 70% in 1995 and 50% in 1994 and 1993 (consistent
with the income subject to U.S. tax) of the income from sales of concentrate
manufactured in Puerto Rico. The increase in 1995 reflected the effects of the
1993 Federal income tax legislation, which limited the U.S. Federal tax credit
on income earned in Puerto Rico. See Management's Analysis - Significant U.S.
Tax Changes Affecting Historical and Future Results on page 15 for a discussion
of the reduction of the U.S. Federal tax credit associated with beverage
concentrate operations in Puerto Rico.
F-20
A reconciliation of the U.S. Federal statutory tax rate to PepsiCo's
effective tax rate is set forth below:
1995 1994 1993
- ----------------------------------------------------------------------
U.S. Federal statutory tax rate.... 35.0% 35.0% 35.0%
State income tax, net of Federal
tax benefit..................... 2.0 3.2 2.9
Effect of lower taxes on foreign
income (including Puerto Rico
and Ireland)..................... (3.0) (5.4) (3.3)
Adjustment to the beginning-of-
the-year deferred tax assets
valuation allowance.............. - (1.3) -
Reduction of prior years'
foreign accruals.................. - - (2.0)
Settlement of prior years'
audit issues...................... (4.1) - -
Effect of 1993 tax legislation on
deferred income taxes............. - - 1.1
Effect of adopting SFAS 121........ 1.4 - -
Nondeductible amortization of
U.S. goodwill..................... 1.0 0.8 0.8
Other, net......................... 1.7 0.7 -
---- ---- ----
Effective tax rate................. 34.0% 33.0% 34.5%
==== ==== ====
- ----------------------------------------------------------------------
F-21
The details of the 1995 and 1994 deferred tax liabilities (assets) are set
forth below:
1995 1994
- ------------------------------------------------------------------------
Intangible assets other than
nondeductible goodwill........... $ 1,631 $ 1,628
Property, plant and equipment....... 496 506
Safe harbor leases.................. 165 171
Zero coupon notes................... 100 111
Other............................... 257 337
------- -------
Gross deferred tax liabilities...... 2,649 2,753
------- -------
Net operating loss carryforwards.... (418) (306)
Postretirement benefits............. (248) (248)
Casualty claims..................... (119) (71)
Various accrued liabilities
and other.......................... (790) (637)
------- -------
Gross deferred tax assets........... (1,575) (1,262)
------- -------
Deferred tax assets
valuation allowance................ 498 319
------- -------
Net deferred tax liability.......... $ 1,572 $ 1,810
======= =======
Included in
Prepaid expenses, taxes and
other current assets............ $ (313) $ (167)
Other current liabilities........ - 4
Deferred income taxes............ 1,885 1,973
------- -------
$ 1,572 $ 1,810
======= =======
- ------------------------------------------------------------------------
The valuation allowance related to deferred tax assets increased by $179
million in 1995, primarily resulting from additions related to current year
operating losses in a number of state and foreign jurisdictions and the adoption
of SFAS 121.
F-22
In accordance with generally accepted accounting principles, deferred tax
liabilities have not been recognized for bases differences that are essentially
permanent in duration related to investments in foreign subsidiaries and joint
ventures. These differences, which consist primarily of unremitted earnings
intended to be indefinitely reinvested, aggregated approximately $4.5 billion at
year-end 1995 and $3.8 billion at year-end 1994, 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.
Net operating loss carryforwards totaling $2.3 billion at year-end 1995 are
available to reduce future tax of certain subsidiaries and are related to a
number of state and foreign jurisdictions. Of these carryforwards, $16 million
expire in 1996, $2.1 billion expire at various times between 1997 and 2010 and
$173 million may be carried forward indefinitely.
Tax benefits associated with exercises of stock options of $91 million in
1995, $27 million in 1994 and $23 million in 1993 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 million decrease in the
net deferred foreign tax liability that was credited to shareholders' equity.
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.
Effective in 1993 and 1994, PepsiCo implemented programs intended to stem
rising costs and introduced retiree cost-sharing, including adopting a provision
that 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 approximately 10 years as a reduction in postretirement
benefit expense beginning in 1993.
The components of postretirement benefit expense for 1995, 1994 and 1993
are set forth below:
1995 1994 1993
- ------------------------------------------------------------------------
Service cost of benefits earned........... $ 13 $ 19 $ 15
Interest cost on accumulated
postretirement benefit obligation........ 46 41 41
Amortization of prior service
cost (gain).............................. (20) (20) (20)
Amortization of net (gain) loss........... (1) 6 -
---- ---- ----
$ 38 $ 46 $ 36
==== ==== ====
- ------------------------------------------------------------------------
F-23
The components of the 1995 and 1994 postretirement benefit liability recognized
in the Consolidated Balance Sheet are set forth below:
1995 1994
- ------------------------------------------------------------------------
Actuarial present value of postretirement benefit
obligation:
Retirees.......................................... $(344) $(289)
Fully eligible active plan participants........... (96) (88)
Other active plan participants.................... (171) (148)
----- -----
Accumulated postretirement benefit obligation....... (611) (525)
Unrecognized prior service cost (gain).............. (132) (152)
Unrecognized net loss............................... 68 12
----- -----
$(675) $(665)
===== =====
- ------------------------------------------------------------------------
The discount rate assumptions used in computing the information above are
set forth below:
1995 1994 1993
- ------------------------------------------------------------------------
Postretirement benefit expense.... 9.1% 6.8 8.2
Accumulated postretirement
benefit obligation............... 7.7% 9.1 6.8
- ------------------------------------------------------------------------
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 9.0% for 1996, declining
gradually to 5.5% in 2005 and thereafter. For employees retiring after the
effective date, the trend rate is 7.5% for 1996, declining gradually to 0% in
2001 and thereafter. A 1 point increase in the assumed health care cost trend
rate would have increased the 1995 postretirement benefit expense by $2 million
and would have increased the 1995 accumulated postretirement benefit obligation
by $24 million.
NOTE 13 - PENSION PLANS
PepsiCo sponsors noncontributory defined benefit pension plans covering
substantially all full-time U.S. 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 U.S. plans in amounts
not less than minimum statutory funding requirements nor more than the maximum
amount that can be deducted for U.S.
F-24
income tax purposes. International plans are funded in amounts 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. The U.S. plans' assets included 6.9 million shares of
PepsiCo capital stock for 1995 and 1994, with a market value of $350 million and
$227 million, respectively. Dividends on PepsiCo capital stock of $5 million
were received by the U.S. plans in both 1995 and 1994.
F-25
The components of net pension expense for U.S. company-sponsored plans
are set forth below:
1995 1994 1993
- ------------------------------------------------------------------------
Service cost of benefits earned........... $ 60 $ 70 $ 57
Interest cost on projected benefit
obligation............................... 92 84 76
Return on plan assets
Actual (gain) loss...................... (338) 20 (162)
Deferred gain (loss).................... 221 (131) 71
----- ----- -----
(117) (111) (91)
Amortization of net transition gain....... (19) (19) (19)
Net other amortization.................... 5 9 9
----- ----- -----
$ 21 $ 33 $ 32
===== ===== =====
- ------------------------------------------------------------------------
Reconciliations of the funded status of the U.S. plans to the
pension liability recognized in the Consolidated Balance Sheet
are set forth below:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
==================== ====================
1995 1994 1995 1994
- ------------------------------------------------------------------------
Actuarial present value of
benefit obligation
Vested benefits............. $ (824) $ (774) $(270) $(22)
Nonvested benefits.......... (110) (98) (30) (1)
------ ------ ----- ----
Accumulated benefit
obligation................... (934) (872) (300) (23)
Effect of projected
compensation increases....... (155) (111) (78) (48)
------ ------ ----- ----
Projected benefit obligation.. (1,089) (983) (378) (71)
Plan assets at fair value..... 1,152 1,134 267 3
------ ------ ----- ----
Plan assets in excess of
(less than) projected
benefit obligation.......... 63 151 (111) (68)
Unrecognized prior
service cost................. 37 31 51 30
Unrecognized net
(gain) loss ................. (20) (72) 34 4
Unrecognized net
transition (gain) loss....... (51) (73) (3) -
Adjustment required to
recognize minimum liability. - - (26) -
------ ------ ------ -----
Prepaid (accrued) pension
liability.................... $ 29 $ 37 $ (55) $(34)
====== ====== ===== ====
- ------------------------------------------------------------------------
F-26
The assumptions used to compute the U.S. information above are set
forth below:
1995 1994 1993
- ------------------------------------------------------------------------
Discount rate - pension expense........... 9.0% 7.0 8.2
Expected long-term rate of return
on plan assets........................... 10.0% 10.0 10.0
Discount rate - projected benefit
obligation............................... 7.7% 9.0 7.0
Future compensation growth rate........... 3.3%-6.6% 3.3-7.0 3.3-7.0
- ------------------------------------------------------------------------
The components of net pension expense for international company-sponsored
plans are set forth below:
1995 1994 1993
- ------------------------------------------------------------------------
Service cost of benefits earned........... $ 11 $ 15 $ 12
Interest cost on projected benefit
obligation............................... 16 15 15
Return on plan assets
Actual (gain) loss...................... (31) 8 (41)
Deferred gain (loss).................... 6 (32) 21
---- ---- ----
(25) (24) (20)
Net other amortization.................... - 2 2
---- ---- ----
$ 2 $ 8 $ 9
==== ==== ====
- ------------------------------------------------------------------------
F-27
Reconciliations of the funded status of the international plans to the
pension liability recognized in the Consolidated Balance Sheet are set forth
below:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1995 1994 1995 1994
- --------------------------------------------------------------------------
Actuarial present value of
benefit obligation
Vested benefits............. $(144) $(125) $(34) $(23)
Nonvested benefits.......... (2) (2) (1) (7)
----- ----- ---- ----
Accumulated benefit
obligation................... (146) (127) (35) (30)
Effect of projected
compensation increases....... (23) (24) (12) (10)
----- ----- ---- ----
Projected benefit obligation.. (169) (151) (47) (40)
Plan assets at fair value..... 235 213 18 15
----- ----- ---- ----
Plan assets in excess of
(less than) projected
benefit obligation.......... 66 62 (29) (25)
Unrecognized prior
service cost................. 3 4 - -
Unrecognized net
loss (gain).................. 16 14 4 (3)
Unrecognized net
transition (gain) loss....... (1) (2) 4 5
Adjustment required to
recognize minimum
liability................... - - (2) -
----- ----- ---- ----
Prepaid (accrued) pension
liability.................... $ 84 $ 78 $(23) $(23)
===== ===== ==== ====
- ------------------------------------------------------------------------
F-28
The assumptions used to compute the international information above are set
forth below:
1995 1994 1993
- ------------------------------------------------------------------------
Discount rate - pension expense........... 9.2% 7.3 9.0
Expected long-term rate of return
on plan assets........................... 11.3% 11.3 10.8
Discount rate - projected benefit
obligation............................... 8.8% 9.3 7.4
Future compensation growth rate........... 3.0%-11.8% 3.0-8.5 3.5-8.5
- ------------------------------------------------------------------------
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 lower assumed discount rates used to measure the
1995 projected benefit obligation compared to the assumed discount rates used to
measure the 1994 projected benefit obligation changed the funded status of
certain plans from overfunded to underfunded.
In 1994, PepsiCo changed the method for calculating the market-related
value of plan assets used in determining the return-on-assets 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 preferred 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 that 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
$38 million ($23 million after-tax or $0.03 per share) representing the
cumulative effect of the change related to years prior to 1994 and $35 million
in lower pension expense ($22 million after-tax or $0.03 per share) related to
1994 as compared to the previous accounting method. Had this change been applied
retroactively, 1993 pension expense would have been reduced by $16 million ($11
million after-tax or $0.01 per share).
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
F-29
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 million ($55 million after-tax or $0.07 per share).
As compared to the previous accounting method, the ongoing 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 - EMPLOYEE STOCK OPTIONS
PepsiCo grants stock options to employees pursuant to three different incentive
plans -- the SharePower Stock Option Plan (SharePower), the Long-Term Incentive
Plan (LTIP) and the Stock Option Incentive Plan (SOIP). All stock option grants
are authorized by the Compensation Committee of PepsiCo's Board of Directors
(the Committee), which is comprised of outside directors. In each case, a stock
option represents the right to purchase a share of PepsiCo capital stock (Stock)
in the future at a price equal to the fair market value of the Stock on the date
of the grant.
Under SharePower, approved by the Board of Directors and effective in 1989,
essentially all employees, other than executive officers 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 5 years from the grant date and must be exercised
within 10 years of the grant date. SharePower options of 8 million were granted
to approximately 134,000 employees in 1995; 12 million to 128,000 employees in
1994; and 9 million to 118,000 employees in 1993.
The shareholder-approved 1994 Long-Term Incentive Plan succeeds and
continues the principal features of the shareholder approved 1987 Long-Term
Incentive Plan (the 1987 Plan). PepsiCo ceased making grants under the 1987 Plan
at the end of 1994. Together, these plans comprise the LTIP. At year-end 1995
and 1994, there were 74 million and 75 million shares, respectively, available
for future grants under the LTIP.
Most LTIP stock options are granted every other year to senior management
employees. Most of these options become exercisable after 4 years and must be
exercised within 10 years from their grant date. In 1995, 1994 and 1993, 1
million, 16 million and 3 million stock options, respectively, were granted
under the LTIP. In addition, the LTIP allows for grants of performance share
units (PSUs). The value of a PSU is fixed at the value of a share of Stock at
the grant date and vests for payment 4 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. At year-end
1995, 1994 and 1993, there were 599,100, 629,200 and 491,200 PSUs outstanding,
respectively. Payment of PSUs are made in cash and/or Stock as approved by the
Committee. Amounts expensed for PSUs were $5 million, $7 million and $3 million
in 1995, 1994 and 1993, respectively.
In 1995, the Committee approved the 1995 Stock Option Incentive Plan for
middle management employees, under which a maximum of 25 million stock options
may be granted. SOIP stock options are expected to be granted
F-30
annually and are exercisable after 1 year and must be exercised within 10 years
after their grant date. In 1995, 4 million stock options were granted resulting
in 21 million shares available for future grants at year-end. In 1994 and 1993,
grants similar to those under the SOIP were made under the LTIP to a more
limited number of middle management employees.
Stock option activity for 1993, 1994 and 1995 is set forth below:
(options in thousands) SharePower LTIP/SOIP
- --------------------------------------------------------------------------------
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
Granted................................... 8,218 4,977
Exercised................................. (5,722) (4,868)
Surrendered for PSUs...................... - (101)
Canceled.................................. (2,939) (1,815)
------ ------
Outstanding at
December 30, 1995........................ 39,362 40,969
====== ======
Exercisable at
December 30, 1995........................ 16,932 15,804
====== ======
Option prices per share
Exercised during 1993................... $17.58 to $36.75 $4.11 to $36.31
Exercised during 1994................... $17.58 to $36.75 $4.11 to $38.75
Exercised during 1995................... $17.58 to $46.00 $7.69 to $41.81
Outstanding at
year-end 1995.......................... $17.58 to $46.00 $7.69 to $51.19
F-31
NOTE 16 - STOCK OFFERING BY AN UNCONSOLIDATED AFFILIATE
In 1993, PepsiCo entered into an arrangement with the principal shareholders of
Buenos Aires Embotelladora S.A. (BAESA), a franchised bottler which currently
has operations in Brazil, Argentina, Chile, Uruguay and Costa Rica, to form a
joint venture. PepsiCo contributed certain assets, primarily bottling operations
in Chile and Uruguay, while the principal shareholders contributed all of their
shares in BAESA, representing 73% of the voting control and 43% of the ownership
interest. Through this arrangement, PepsiCo's beneficial ownership in BAESA,
which is accounted for by the equity method, was 26%. Under PepsiCo's
partnership agreement with the principal shareholders of BAESA, voting control
of BAESA will be transferred to PepsiCo no later than December 31, 1999.
On March 24, 1994, BAESA completed a public offering of 3 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 2 million ADS. As a result
of these transactions, PepsiCo's ownership in BAESA declined to 24%. The
transactions generated cash proceeds for BAESA of $136 million. The resulting
onetime, noncash gain to PepsiCo was $18 million ($17 million after-tax or $0.02
per share).
NOTE 17 - ACQUISITIONS AND INVESTMENTS IN UNCONSOLIDATED AFFILIATES
During 1995, PepsiCo completed acquisitions and investments in unconsolidated
affiliates aggregating $475 million, principally for cash. In addition,
approximately $15 million of debt was assumed in these transactions. This
activity included equity investments in international franchised bottling
operations, primarily Grupo Embotellador de Mexico, S.A. (GEMEX) in Mexico, and
in Simba, a snack food operation in South Africa. In addition, acquisitions
included worldwide restaurant operations, primarily in New Zealand and the
buyout of a joint venture partner in Singapore, and worldwide bottling
operations.
PepsiCo formed a joint venture with the principal shareholder of GEMEX, an
unconsolidated franchised bottling affiliate in Mexico. PepsiCo acquired a 27%
interest for $207 million in cash and the contribution of a small company-owned
bottling operation and our interest in an existing small franchised bottling
joint venture with GEMEX. In addition, PepsiCo provided the principal
shareholder of GEMEX a seven-year put option which allows the shareholder to
sell up to 150 million GEMEX shares (which represented about 11% of GEMEX's
outstanding shares at the date of the transaction) to PepsiCo at 66 2/3 cents
per share, which approximated the market value at the date of the transaction.
This is equivalent to 8.3 million of GEMEX American Depository Receipts (ADRs)
at $12 per ADR. This option was valued at $26 million at the date of the
transaction. Under PepsiCo's agreement with the principal shareholder of GEMEX,
voting control of GEMEX will be transferred to PepsiCo no later than December
31, 2002.
During 1994, PepsiCo completed acquisitions and investments in
unconsolidated affiliates 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 U.S. franchised
restaurant operations and franchised and independent bottling operations,
primarily in India and Mexico.
During 1993, PepsiCo completed acquisitions and investments in
unconsolidated affiliates aggregating $1.4 billion, principally comprised of
$1.0 billion in cash and $335 million in PepsiCo capital stock.
F-32
Approximately $307 million of debt was assumed in these transactions, more than
half of which was subsequently retired. This activity included acquisitions of
U.S. 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 Chevys, a regional
Mexican-style casual dining restaurant chain in the U.S., and equity investments
in certain franchised bottling operations in Argentina and Mexico.
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 18 - 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 recognized 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 1995 and 1994, PepsiCo was
contingently liable under guarantees aggregating $283 million and $187 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 9 for information related to the
fair value of the guarantees.
F-33
NOTE 19 - BUSINESS SEGMENTS
PepsiCo operates on a worldwide basis within three industry segments: beverages,
snack foods and restaurants.
Beverages
- ---------
The beverage segment ("Beverages") markets and distributes its Pepsi-Cola, Diet
Pepsi, Mountain Dew and other brands worldwide, and 7UP, Diet 7UP, Mirinda,
Pepsi Max and other brands internationally. Beverages manufactures concentrates
of its brands for sale to franchised bottlers worldwide. Beverages operates
bottling plants and distribution facilities located in the U.S. and in various
international markets for the production of company-owned and non-company-owned
brands. Beverages also manufactures and distributes ready-to-drink Lipton tea
products in the U.S. and Canada.
Beverages products are available in 193 countries outside the U.S.,
including emerging markets such as China, Hungary, India, Poland and Russia.
Principal international markets include Argentina, Brazil, Canada, China, Japan,
Mexico, Saudi Arabia, Spain, Thailand, the U.K. and Venezuela. Beverages' joint
venture ("JV") investments are primarily in franchised bottling and distribution
operations. Internationally, the largest JVs are GEMEX (Mexico), BAESA (South
America) and Serm Suk (Thailand), as well as the aggregate of several JVs in
China. The primary JV in the U.S. is General Bottlers.
Snack Foods
- -----------
The snack food segment ("Snack Foods") manufactures, distributes and markets
salty and sweet snacks worldwide, with Frito-Lay representing the U.S. business.
Products manufactured and distributed in the U.S. (primarily salty snacks)
include Lay's and Ruffles brand potato chips, Doritos and Tostitos brand
tortilla chips, Fritos brand corn chips, Chee.tos brand cheese flavored snacks,
Rold Gold brand pretzels, a variety of dips and salsas and other brands. Snack
Foods products are available in 39 countries outside the U.S. Principal
international markets include Australia, Brazil, Canada, France, Mexico, the
Netherlands, Poland, Spain and the U.K. International snack foods manufactures
and distributes salty snacks in all countries and sweet snacks in certain
countries, primarily in France, Mexico and Poland. Snack Foods has investments
in several JVs outside the U.S., the largest of which are Snack Ventures Europe
(SVE), a JV with General Mills, Inc., which has operations on most of the
European continent, and a recent investment in Simba, a snack food operation in
South Africa.
Restaurants
- -----------
The restaurant segment ("Restaurants") is engaged principally in the operation,
development, franchising and licensing of the worldwide Pizza Hut, Taco Bell and
KFC concepts. Restaurants also operates other smaller U.S. concepts which are
managed by Taco Bell (Hot `n Now and Chevys) and Pizza Hut (East Side Mario's).
PFS, PepsiCo's restaurant distribution operation, provides food, supplies and
equipment to company-operated, franchised and licensed units, principally in the
U.S. Net sales and the related estimated operating profit of PFS' franchisee and
licensee operations have been allocated to each restaurant chain.
F-34
Pizza Hut, Taco Bell and KFC operate throughout the U.S. Pizza Hut, KFC
and, to a lesser extent, Taco Bell operate in 93 countries outside the U.S.
Principal international markets include Australia, Canada, Japan, Korea, Mexico,
New Zealand, Spain and the U.K. Restaurants has investments in several JVs
outside the U.S., the most significant of which are located in Japan and the
U.K. PepsiCo also participates in a JV which operates California Pizza Kitchen
(CPK), a U.S. casual dining restaurant chain.
In 1995, PepsiCo changed the presentation of its restaurant segment to
provide information by each of PepsiCo's major U.S. concepts, which include the
smaller concepts managed by Pizza Hut and Taco Bell, and in total for the
international operations, to more closely reflect how we currently manage the
business. Prior year amounts have been restated.
Unallocated expenses, net included 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 items not allocated to the business segments. Corporate identifiable
assets consist principally of cash and cash equivalents and short-term
investments, primarily held outside the U.S.
PepsiCo has invested in about 80 joint ventures in which it exercises
significant influence but not control. As noted above, the JVs are primarily
international and principally within PepsiCo's three industry segments. Equity
in net (loss) income of these unconsolidated affiliates was ($3) million, $38
million, and $30 million in 1995, 1994 and 1993, respectively. Excluding the
initial charge upon adoption of SFAS 121 (see Accounting Changes below), 1995
equity in net income was $14 million. The $24 million decline in 1995 primarily
reflected increased losses in our international beverages affiliates in Mexico,
reflecting the devaluation of the Mexican peso, costs related to the formation
of the GEMEX JV and an unrealized loss on a put option issued in connection with
the formation of the GEMEX JV (see Notes 7 and 17). This decline was partially
offset by increased equity in net income from our Pepsi-Lipton Tea partnership
and SVE. The increase in 1994 primarily reflected increased profit at SVE.
Dividends received from these unconsolidated affiliates totaled $29 million, $33
million and $16 million in 1995, 1994 and 1993, respectively.
PepsiCo's year-end investments in unconsolidated affiliates totaled $1.6
billion in 1995 and $1.3 billion in 1994. The increase in 1995 reflected the
acquisition of a 27% interest in GEMEX and the investment in Simba (see Note
17), advances to BAESA and investments in international franchised bottling
operations in China, partially offset by dividends received and equity in net
loss that are discussed above. Significant investments in unconsolidated
affiliates at year-end 1995 included $244 million in General Bottlers, $201
million in GEMEX, $168 million in BAESA, $157 million in a KFC Japan JV, $147
million in CPK and $107 million in SVE.
ITEMS AFFECTING COMPARABILITY
NET REFRANCHISING GAINS
Restaurant operating profit in 1995 included net gains of $51 million from sales
of restaurants to franchisees by Pizza Hut, Taco Bell and International in
excess of the cost of closing other restaurants in all of our concepts (net
gains at Pizza Hut-$24 million and Taco Bell-$38 million; net losses at KFC-($7)
million and International-($4) million).
F-35
FISCAL YEAR
Fiscal year 1994 consisted of 53 weeks and the years 1990 through 1993 and 1995
consisted of 52 weeks. The fifty-third week increased 1994 net sales by an
estimated $434 million, increasing beverage, snack food and restaurant net sales
by $119 million, $143 million and $172 million, respectively. The estimated
impact of the fifty-third week on 1994 operating profit was $65 million,
increasing beverage, snack food and restaurant operating profit by $17 million,
$26 million and $23 million, respectively, and increasing unallocated expenses,
net by $1 million.
UNUSUAL ITEMS
Unusual charges totaled $193 million in 1992 and $170 million in 1991. These
unusual items were as follows:
Beverages - 1992 included $145 million in charges consisting of $115
million and $30 million to reorganize and streamline U.S. and international
operations, respectively.
Snack Foods - 1992 included a $40 million charge, principally to
consolidate the Walkers businesses in the U.K. 1991 included $127 million in
charges consisting of $91 million and $24 million to streamline U.S. and U.K.
operations, respectively, and $12 million to dispose of all or part of a small
unprofitable business in Japan.
Restaurants - 1991 included $43 million in charges at KFC primarily to
streamline operations.
Unallocated expenses, net - 1992 included an $8 million charge to
streamline operations of the SVE joint venture.
See Management's Analysis - Beverages performance on pages 22 through 27
for additional information on the 1992 beverage restructurings.
ACCOUNTING CHANGES
PepsiCo adopted SFAS 121 as of the beginning of the fourth quarter of 1995. See
Note 2. The initial, noncash charge upon adoption reduced operating profit as
follows:
International Beverages ................ $ 62
International Snack Foods ............. 4
Restaurants
Pizza Hut U.S. ........................ 68
Taco Bell U.S. (a) .................... 169
KFC U.S. .............................. 65
----
Total U.S. Restaurants................ 302
International Restaurants.............. 135
----
Combined Segments ...................... 503
Equity (Loss) Income (b) ............... 17
----
$520
====
(a) Hot `n Now and Chevys incurred $103 of this charge, with Hot `n Now
responsible for almost all of the charge.
(b) Primarily related to CPK.
Included in the initial charge above was $68 million related to restaurants
for which closure decisions were made during the fourth quarter (Pizza Hut-$21
million, Taco Bell-$16 million, KFC-$6 million, International-$21 million and
equity (loss) income-$4 million). As a result of the reduced carrying amount of
certain of PepsiCo's assets used in the business, depreciation and amortization
expense for the fourth quarter of 1995 was reduced by $21 million, affecting
international
F-36
beverages by $4 million, restaurants by $16 million and equity (loss) income by
$1 million.
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 Pizza Hut U.S.
delivery assets. As compared to the previous accounting methods, these changes
increased 1994 operating profit by $49 million, increasing beverage, snack food
and restaurant segment operating profit by $12 million, $15 million and $20
million, respectively, and decreasing 1994 unallocated expenses, net by $2
million.
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 $73
million, decreasing beverage, snack food and restaurant segment operating profit
by $22 million, $31 million and $16 million, respectively, and increasing 1992
unallocated expenses, net by $4 million.
F-37
- ------------------------------------------------------------------------------
INDUSTRY SEGMENTS - NET SALES (page 1 of 5)
- ------------------------------------------------------------------------------
Growth Rate
1990-1995(a) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------
Beverages:
U.S. 7% $ 6,977 $ 6,541 $ 5,918 $ 5,485 $ 5,171
International 19% 3,571 3,146 2,720 2,121 1,744
------- ------- ------- ------- -------
10% 10,548 9,687 8,638 7,606 6,915
------- ------- ------- ------- -------
Snack Foods:
U.S. 10% 5,495 5,011 4,365 3,950 3,738
International 19% 3,050 3,253 2,662 2,182 1,512
------- ------- ------- ------- -------
12% 8,545 8,264 7,027 6,132 5,250
------- ------- ------- ------- -------
Restaurants:
U.S. 11% 9,202 8,694 8,026 7,115 6,258
International 25% 2,126 1,827 1,330 1,117 869
------- ------- ------- ------- -------
13% 11,328 10,521 9,356 8,232 7,127
------- ------- ------- ------- -------
COMBINED SEGMENTS
U.S. 9% 21,674 20,246 18,309 16,550 15,167
International 20% 8,747 8,226 6,712 5,420 4,125
------- ------- ------- ------- -------
12% $30,421 $28,472 $25,021 $21,970 $19,292
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------
BY U.S. RESTAURANT CHAIN
Pizza Hut 8% $ 3,977 $ 3,712 $ 3,595 $ 3,183 $ 2,937
Taco Bell 15% 3,503 3,340 2,855 2,426 2,017
KFC 9% 1,722 1,642 1,576 1,506 1,304
------- ------- ------- ------- -------
11% $ 9,202 $ 8,694 $ 8,026 $ 7,115 $ 6,258
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------
(a) Five-year compounded annual growth rate.
F-38
- ------------------------------------------------------------------------------
INDUSTRY SEGMENTS - OPERATING PROFIT (b) (page 2 of 5)
- ------------------------------------------------------------------------------
Growth Rate
1990-1995(a) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------
Beverages:
U.S. 11% $1,145 $1,022 $ 937 $ 686 $ 746
International 19% 164 195 172 113 117
------ ------ ------ ------ ------
12% 1,309 1,217 1,109 799 863
------ ------ ------ ------ ------
Snack Foods:
U.S. 9% 1,132 1,025 901 776 617
International 14% 300 352 289 209 140
------ ------ ------ ------ ------
10% 1,432 1,377 1,190 985 757
------ ------ ------ ------ ------
Restaurants:
U.S. 10% 451 659 685 598 480
International 8% (21) 71 93 120 96
------ ------ ------ ------ ------
9% 430 730 778 718 576
------ ------ ------ ------ ------
Combined Segments
U.S. 10% 2,728 2,706 2,523 2,060 1,843
International 14% 443 618 554 442 353
------ ------ ------ ------ ------
10% 3,171 3,324 3,077 2,502 2,196
Equity (Loss) Income (3) 38 30 40 32
Unallocated
Expenses, net (181) (161) (200) (171) (116)
------ ------ ------ ------ ------
Operating Profit 11% $2,987 $3,201 $2,907 $2,371 $2,112
====== ====== ====== ====== ======
- ------------------------------------------------------------------------------
BY U.S. RESTAURANT CHAIN
Pizza Hut 9% $ 308 $ 285 $ 338 $ 300 $ 286
Taco Bell 12% 105 273 256 214 183
KFC 7% 38 101 91 84 11
------ ------ ------ ------ ------
10% $ 451 $ 659 $ 685 $ 598 $ 480
====== ====== ====== ====== ======
- ------------------------------------------------------------------------------
(a) Five-year compounded annual growth rate. Growth rates exclude the impacts
of the initial, noncash charge upon adoption of SFAS 121 in 1995 (see
Accounting Changes on page F-35) and the previously disclosed 1990 unusual
items affecting U.S. beverages and snack foods, worldwide restaurants and
unallocated expenses, net.
(b) The amounts for the years 1991-1995 represent reported amounts. See page
F-34 for Items Affecting Comparability.
F-39
- -----------------------------------------------------------------------
GEOGRAPHIC AREAS (c) (page 3 of 5)
- -----------------------------------------------------------------------
NET SALES
-----------------------------
1995 1994 1993
- -----------------------------------------------------------------------
United States $21,674 $20,246 $18,309
Europe 2,783 2,177 1,819
Mexico 1,228 2,023 1,614
Canada 1,299 1,244 1,206
Other 3,437 2,782 2,073
------- ------- -------
COMBINED SEGMENTS $30,421 $28,472 $25,021
======= ======= =======
- -----------------------------------------------------------------------
SEGMENT OPERATING PROFIT (LOSS)
-------------------------------
1995(d) 1994 1993
- -----------------------------------------------------------------------
United States $ 2,728 $ 2,706 $ 2,523
Europe (65) 17 47
Mexico 80 261 223
Canada 86 82 102
Other 342 258 182
------- ------- -------
COMBINED SEGMENTS $ 3,171 $ 3,324 $ 3,077
======= ======= =======
- -----------------------------------------------------------------------
IDENTIFIABLE ASSETS
------------------------------
1995 1994 1993
- -----------------------------------------------------------------------
United States $14,505 $14,218 $13,590
Europe 3,127 3,062 2,666
Mexico 637 995 1,217
Canada 1,344 1,342 1,364
Other 2,629 2,196 1,675
------- ------- -------
COMBINED SEGMENTS 22,242 21,813 20,512
Investments in Unconsolidated
Affiliates 1,635 1,295 1,091
Corporate 1,555 1,684 2,103
------- ------- -------
$25,432 $24,792 $23,706
======= ======= =======
- ----------------------------------------------------------------------
(c) The results of centralized concentrate manufacturing operations in Puerto
Rico and Ireland have been allocated based upon sales to the respective
geographic areas.
(d) The initial charge upon adoption of SFAS 121 (see Accounting Changes on
page F-35) reduced combined segment operating profit by $503 (United States
- $302, Europe - $119, Mexico - $21, Canada - $30, Other - $31).
F-40
- -----------------------------------------------------------------------
INDUSTRY SEGMENTS (page 4 of 5)
- -----------------------------------------------------------------------
AMORTIZATION OF INTANGIBLE ASSETS
Growth Rate ----------------------------------
1990-1995 (a) 1995 1994 1993
- -----------------------------------------------------------------------
Beverages 7% $ 166 $ 165 $ 157
Snack Foods 2% 41 42 41
Restaurants 23% 109 105 106
------- ------- -------
10% $ 316 $ 312 $ 304
======= ======= =======
By U.S. Restaurant Chain
Pizza Hut 14% $ 36 $ 38 $ 35
Taco Bell 24% 23 27 23
KFC 18% 18 22 23
------- ------- -------
Total U.S. 16% 77 87 81
International 61% 32 18 25
------- ------- -------
23% $ 109 $ 105 $ 106
======= ======= =======
- -----------------------------------------------------------------------
DEPRECIATION EXPENSE
Growth Rate ----------------------------------
1990-1995 (a) 1995 1994 1993
- -----------------------------------------------------------------------
Beverages 15% $ 445 $ 385 $ 359
Snack Foods 9% 304 297 279
Restaurants 17% 579 539 457
Corporate 7 7 7
------- ------- -------
14% $ 1,335 $ 1,228 $ 1,102
======= ======= =======
By U.S. Restaurant Chain
Pizza Hut 13% $ 189 $ 178 $ 159
Taco Bell 21% 179 153 122
KFC 11% 101 107 101
------- ------- -------
Total U.S. 15% 469 438 382
International 27% 110 101 75
------- ------- -------
17% $ 579 $ 539 $ 457
======= ======= =======
- -----------------------------------------------------------------------
IDENTIFIABLE ASSETS
Growth Rate ------------------------------
1990-1995 (a) 1995 1994 1993
- -----------------------------------------------------------------------
Beverages 9% $10,032 $ 9,566 $ 9,105
Snack Foods 7% 5,451 5,044 4,995
Restaurants 14% 6,759 7,203 6,412
Investments in
Unconsolidated
Affiliates 9% 1,635 1,295 1,091
Corporate 1,555 1,684 2,103
------- ------- -------
8% $25,432 $24,792 $23,706
======= ======= =======
By U.S. Restaurant Chain
Pizza Hut 8% $ 1,700 $ 1,832 $ 1,733
Taco Bell 19% 2,276 2,327 2,060
KFC 7% 1,111 1,253 1,265
------- ------- -------
Total U.S. 12% 5,087 5,412 5,058
International 27% 1,672 1,791 1,354
------- ------- -------
14% $ 6,759 $ 7,203 $ 6,412
======= ======= =======
- -----------------------------------------------------------------------
(a) Five-year compounded annual growth rate.
F-41
- -----------------------------------------------------------------------
INDUSTRY SEGMENTS (page 5 of 5)
- -----------------------------------------------------------------------
CAPITAL SPENDING (e)
Growth Rate -----------------------------
1990-1995 (a) 1995 1994 1993
- -----------------------------------------------------------------------
Beverages 11% $ 566 $ 677 $ 491
Snack Foods 15% 769 532 491
Restaurants 10% 750 1,072 1,005
Corporate 34 7 21
------ ------ ------
12% $2,119 $2,288 $2,008
====== ====== ======
U.S. 12% $1,496 $1,492 $1,388
International 13% 623 796 620
------ ------ ------
12% $2,119 $2,288 $2,008
====== ====== ======
By U.S. Restaurant Chain:
Pizza Hut 1% $ 168 $ 225 $ 209
Taco Bell 17% 305 442 442
KFC -% 93 69 106
------ ------ ------
Total U.S. 8% 566 736 757
International 20% 184 336 248
------ ------ ------
10% $ 750 $1,072 $1,005
====== ====== ======
- -----------------------------------------------------------------------
ACQUISITIONS AND INVESTMENTS
IN UNCONSOLIDATED AFFILIATES (f)
--------------------------------
1995 1994 1993
- -----------------------------------------------------------------------
Beverages $ 323 $ 195 $ 711
Snack Foods 82 12 76
Restaurants 70 148 589
------ ------ ------
$ 475 $ 355 $1,376
====== ====== ======
U.S. $ 73 $ 88 $ 757
International 402 267 619
------ ------ ------
$ 475 $ 355 $1,376
====== ====== ======
By U.S. Restaurant Chain
Pizza Hut $ 3 $ 52 $ 219
Taco Bell 34 32 187
KFC - - 30
------ ------ ------
Total U.S. 37 84 436
International 33 64 153
------ ------ ------
$ 70 $ 148 $ 589
====== ====== ======
- ----------------------------------------------------------------------
(a) Five-year compounded annual growth rate.
(e) Included immaterial, noncash amounts related to capital leases, largely in
the restaurant segment.
(f) Included noncash amounts related to treasury stock and debt issued of $9 in
1995, $39 in 1994 and $365 in 1993. Of these noncash amounts, 100%, 86% and
35%, respectively, related to the restaurant segment and the balance
related to the beverage segment.
F-42
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 assumptions, 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 management 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, as well as to safeguard assets from unauthorized use or disposition.
The system is supported by formal policies and procedures, including an active
Code of Conduct program intended to ensure employees adhere to the highest
standards of personal and professional integrity. 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 our
financial reporting process and our controls to safeguard assets 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 30, 1995 provide
reasonable assurance that the financial statements are reliable and that our
assets are reasonably safeguarded.
Wayne Calloway Robert L. Carleton
Chairman of the Board Senior Vice President
and Chief Executive Officer and Controller
Robert G. Dettmer
Executive Vice President
and Chief Financial Officer
February 6, 1996
F-43
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 30, 1995 and December 31, 1994, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the years in the three-year period ended December 30, 1995. 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 30, 1995 and December 31, 1994, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, PepsiCo,
Inc. in 1995 adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As
discussed in Notes 13 and 14 to the consolidated financial statements, PepsiCo,
Inc. in 1994 changed its method for calculating the market-related value of
pension plan assets used in the determination of pension expense and adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," respectively.
KPMG Peat Marwick LLP
New York, New York
February 6, 1996
F-44
- -----------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (page 1 of 4)
($ in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- -----------------------------------------------------------------------
First Quarter
(12 Weeks)
1995 1994
- -----------------------------------------------------------------------
Net sales...................................... $ 6,191 5,729
Gross profit................................... $ 3,169 2,944
Operating profit............................... $ 629 550
Income before income taxes and cumulative
effect of accounting changes.................. $ 496 438
Provision for income taxes..................... $ 175 155
Income before cumulative effect of
accounting changes............................ $ 321 283
Cumulative effect of accounting changes (e).... $ - (32)
Net income..................................... $ 321 251
Income (charge) per share
Income before cumulative effect of
accounting changes.......................... $ 0.40 0.35
Cumulative effect of accounting
changes (e)................................. $ - (0.04)
Net income per share........................... $ 0.40 0.31
Cash dividends declared per share.............. $ 0.18 0.16
Stock price per share (f)
High......................................... $ 41 42 1/2
Low.......................................... $33 7/8 35 3/4
Close........................................ $40 1/4 37 5/8
- --------------------------------------------------------------------------------
(e) Represented the cumulative net effect related to years prior to 1994 of
adopting SFAS 112, "Employers' Accounting for Postemployment Benefits," and
the change to a preferred method for calculating the market-related value
of pension plan assets. See Notes 14 and 13, respectively.
(f) Represented the high, low and closing prices for a share of PepsiCo capital
stock on the New York Stock Exchange, as reported by The Dow Jones
News/Retrieval Service, for each respective period.
F-45
- --------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (page 2 of 4)
($ in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- --------------------------------------------------------------------------
Second Quarter
(12 Weeks)
1995 1994(a)
- --------------------------------------------------------------------------
Net sales...................................... $ 7,286 6,557
Gross profit................................... $ 3,735 3,420
Operating profit............................... $ 869 785
Income before income taxes..................... $ 735 672
Provision for income taxes..................... $ 248 225
Net income .................................... $ 487 447
Net income per share........................... $ 0.61 0.55
Cash dividends declared per share.............. $ 0.20 0.18
Stock price per share (f)
High......................................... $ 49 37 3/4
Low.......................................... $37 7/8 29 7/8
Close........................................ $46 5/8 31 1/8
- --------------------------------------------------------------------------------
(a) Included an $18 gain ($17 after-tax or $0.02 per share) arising from a
public share offering by BAESA, an unconsolidated franchised bottling
affiliate in South America. See Note 16.
(f) Represented the high, low and closing prices for a share of PepsiCo capital
stock on the New York Stock Exchange, as reported by The Dow Jones
News/Retrieval Service, for each respective period.
F-46
- ----------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (page 3 of 4)
($ in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- -----------------------------------------------------------------------
Third Quarter
(12 Weeks)
1995 1994
- -----------------------------------------------------------------------
Net sales...................................... $ 7,693 7,064
Gross profit................................... $ 3,942 3,684
Operating profit............................... $ 1,031 962
Income before income taxes..................... $ 901 830
Provision for income taxes..................... $ 284 289
Net income .................................... $ 617 541
Net income per share........................... $ 0.77 0.68
Cash dividends declared per share.............. $ 0.20 0.18
Stock price per share (f)
High......................................... $47 7/8 34 5/8
Low.......................................... $43 1/4 29 1/4
Close........................................ $45 3/4 33 3/4
- -----------------------------------------------------------------------
Fourth Quarter
(16/17 Weeks) (d)
1995(b)(c) 1994
- -----------------------------------------------------------------------
Net sales...................................... $ 9,251 9,122
Gross profit................................... $ 4,689 4,709
Operating profit............................... $ 458 904
Income before income taxes..................... $ 300 724
Provision for income taxes..................... $ 119 211
Net income .................................... $ 181 513
Net income per share........................... $ 0.22 0.64
Cash dividends declared per share.............. $ 0.20 0.18
Stock price per share (f)
High......................................... $58 3/4 37 3/8
Low.......................................... $45 5/8 32 1/4
Close........................................ $55 7/8 36 1/4
- -----------------------------------------------------------------------
(b) Included the initial, noncash charge of $520 ($384 after-tax or $0.48 per
share) upon adoption of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," at the
beginning of the fourth quarter. As a result of the reduced carrying amount
of certain long-lived assets to be held and used in the business,
depreciation and amortization expense for the fourth quarter was reduced by
$21 ($15 after-tax or $0.02 per share). See Note 2.
(c) Included a net gain of $51 ($27 after-tax or $0.03 per share), primarily in
the fourth quarter, from sales of restaurants to franchisees in excess of
the cost of closing other restaurants.
(d) Fiscal years 1995 and 1994 consisted of 52 and 53 weeks, respectively. The
fifty-third week increased 1994 fourth quarter and full-year earnings by an
estimated $54 ($35 after-tax or $0.04 per share).
(f) Represented the high, low and closing prices for a share of PepsiCo capital
stock on the New York Stock Exchange, as reported by The Dow Jones
News/Retrieval Service, for each respective period.
F-47
- -------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (page 4 of 4)
($ in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- -------------------------------------------------------------------------
Full Year
(52/53 Weeks)(d)
1995(b)(c) 1994(a)
- -------------------------------------------------------------------------
Net sales...................................... $30,421 28,472
Gross profit................................... $15,535 14,757
Operating profit............................... $ 2,987 3,201
Income before income taxes and cumulative
effect of accounting changes.................. $ 2,432 2,664
Provision for income taxes..................... $ 826 880
Income before cumulative effect of
accounting changes............................ $ 1,606 1,784
Cumulative effect of accounting changes (e).... $ - (32)
Net income..................................... $ 1,606 1,752
Income (charge) per share
Income before cumulative effect of
accounting changes.......................... $ 2.00 2.22
Cumulative effect of accounting
changes (e)................................. $ - (0.04)
Net income per share........................... $ 2.00 2.18
Cash dividends declared per share.............. $ 0.78 0.70
Stock price per share (f)
High......................................... $58 3/4 42 1/2
Low.......................................... $33 7/8 29 1/4
Close........................................ $55 7/8 36 1/4
- -----------------------------------------------------------------------
(a) Included an $18 gain ($17 after-tax or $0.02 per share) arising from a
public share offering by BAESA, an unconsolidated franchised bottling
affiliate in South America. See Note 16.
(b) Included the initial, noncash charge of $520 ($384 after-tax or $0.48 per
share) upon adoption of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," at the
beginning of the fourth quarter. As a result of the reduced carrying amount
of certain long-lived assets to be held and used in the business,
depreciation and amortization expense for the fourth quarter was reduced by
$21 ($15 after-tax or $0.02 per share). See Note 2.
(c) Included a net gain of $51 ($27 after-tax or $0.03 per share), primarily in
the fourth quarter, from sales of restaurants to franchisees in excess of
the cost of closing other restaurants.
(d) Fiscal years 1995 and 1994 consisted of 52 and 53 weeks, respectively. The
fifty-third week increased 1994 fourth quarter and full-year earnings by an
estimated $54 ($35 after-tax or $0.04 per share).
(e) Represented the cumulative net effect related to years prior to 1994 of
adopting SFAS 112, "Employers' Accounting for Postemployment Benefits," and
the change to a preferred method for calculating the market-related value
of pension plan assets. See Notes 14 and 13, respectively.
(f) Represented 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 respective period.
F-48
- ------------------------------------------------------------------------------
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
1985-95 1990-95 1994-95
------- ------- -------
SUMMARY OF OPERATIONS
Net sales................................. 15% 12% 7%
Operating profit.......................... 14% 8% (7)%
Gain on stock offering by an
unconsolidated affiliate (j).............
Interest expense, net.....................
Income from continuing operations
before income taxes and cumulative
effect of accounting changes 14% 8% (9)%
Income from continuing operations
before cumulative effect of
accounting changes....................... 14% 8% (10)%
Cumulative effect of accounting
changes (k)..............................
Net income (l)............................ 11% 8% (8)%
CASH FLOW DATA (m)
Provided by operating activities.......... 16% 12% 1%
Capital spending.......................... 11% 12% (7)%
Operating free cash flow.................. 43% 12% 12%
Dividends paid............................ 14% 15% 11%
Purchases of treasury stock...............
Acquisitions and investments in
unconsolidated affiliates................
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................... 15% 8% (10)%
Cumulative effect of accounting
changes (k)..............................
Net income (l)............................ 12% 8% (8)%
Cash dividends declared................... 15% 15% 11%
Book value per share at year-end.......... 15% 8% 7%
Market price per share at year-end........ 22% 17% 54%
Number of shares repurchased..............
Shares outstanding at year-end............
Average shares outstanding used to
calculate income (charge) per
share (n)................................
BALANCE SHEET
Total assets.............................. 16% 8% 1%
Long-term debt............................ 22% 8% (4)%
Total debt (o)............................ 20% 4% (3)%
Shareholders' equity......................
STATISTICS
Return on average shareholders'
equity (p)...............................
Market net debt ratio (q).................
Historical cost net debt ratio (r)........
Employees................................. 12% 9% 2%
F-49
- ------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 2 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
1995(a)(b) 1994(c)(d) 1993(e)
- ------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................. $30,421 28,472 25,021
Operating profit.......................... $ 2,987 3,201 2,907
Gain on stock offering by an
unconsolidated affiliate (j)............. - 18 -
Interest expense, net..................... (555) (555) (484)
------- ------- -------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............. $ 2,432 2,664 2,423
======= ======= =======
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 1,606 1,784 1,588
Cumulative effect of accounting
changes (k).............................. $ - (32) -
Net income (l)............................ $ 1,606 1,752 1,588
CASH FLOW DATA (m)
Provided by operating activities.......... $ 3,742 3,716 3,134
Capital spending.......................... 2,104 2,253 1,982
------- ------- -------
Operating free cash flow.................. $ 1,638 1,463 1,152
======= ======= =======
Dividends paid............................ $ 599 540 462
Purchases of treasury stock............... $ 541 549 463
Acquisitions and investments in
unconsolidated affiliates................ $ 466 316 1,011
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 2.00 2.22 1.96
Cumulative effect of accounting
changes (k).............................. $ - (0.04) -
Net income (l)............................ $ 2.00 2.18 1.96
Cash dividends declared................... $ 0.780 0.700 0.610
Book value per share at year-end.......... $ 9.28 8.68 7.93
Market price per share at year-end........ $55 7/8 36 1/4 41 7/8
Number of shares repurchased.............. 12.3 15.0 12.4
Shares outstanding at year-end............ 788 790 799
Average shares outstanding used to
calculate income (charge) per
share (n)................................ 804 804 810
BALANCE SHEET
Total assets.............................. $25,432 24,792 23,706
Long-term debt............................ $ 8,509 8,841 7,443
Total debt (o) ........................... $ 9,215 9,519 9,634
Shareholders' equity...................... $ 7,313 6,856 6,339
STATISTICS
Return on average shareholders'
equity (p)............................... 23% 27 27
Market net debt ratio (q)................. 18% 26 22
Historical cost net debt ratio (r)........ 46% 49 50
Employees................................. 480,000 471,000 423,000
F-50
- --------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 3 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- --------------------------------------------------------------------------
1992(f)(g) 1991(h) 1990(i)
- --------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................. $21,970 19,292 17,516
Operating profit.......................... 2,371 2,112 2,042
Gain on stock offering by an
unconsolidated affiliate (j)............. - - 118
Interest expense, net..................... (472) (452) (506)
------- ------- -------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............. $ 1,899 1,660 1,654
======= ======= =======
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 1,302 1,080 1,091
Cumulative effect of accounting
changes (k).............................. $ (928) - -
Net income (l) ........................... $ 374 1,080 1,077
CASH FLOW DATA (m)
Provided by operating activities.......... $ 2,712 2,430 2,110
Capital spending.......................... 1,550 1,458 1,180
------- ------- -------
Operating free cash flow.................. $ 1,162 972 930
======= ======= =======
Dividends paid............................ $ 396 343 294
Purchases of treasury stock............... $ 32 195 148
Acquisitions and investments in
unconsolidated affiliates................ $ 1,210 641 631
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 1.61 1.35 1.37
Cumulative effect of accounting
changes (k) ............................. $ (1.15) - -
Net income (l) ........................... $ 0.46 1.35 1.35
Cash dividends declared................... $ 0.510 0.460 0.383
Book value per share at year-end.......... $ 6.70 7.03 6.22
Market price per share at year-end........ $42 1/4 33 3/4 25 3/4
Number of shares repurchased.............. 1.0 6.4 6.3
Shares outstanding at year-end............ 799 789 788
Average shares outstanding used to
calculate income (charge) per
share (n)................................ 807 803 799
BALANCE SHEET
Total assets.............................. $20,951 18,775 17,143
Long-term debt............................ $ 7,965 7,806 5,900
Total debt (o) ........................... $ 8,672 8,034 7,526
Shareholders' equity...................... $ 5,356 5,545 4,904
STATISTICS
Return on average shareholders'
equity (p) .............................. 24% 21 25
Market net debt ratio (q) ................ 19% 21 24
Historical cost net debt ratio (r) ....... 49% 51 51
Employees................................. 372,000 338,000 308,000
F-51
- -----------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 4 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- --------------------------------------------------------------------------
1989 1988(d) 1987
- --------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................. $15,049 12,381 11,018
Operating profit.......................... $ 1,773 1,342 1,128
Gain on stock offering by an
unconsolidated affiliate (j) ............ - - -
Interest expense, net..................... (433) (222) (182)
------- ------- -------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............. $ 1,340 1,120 946
======= ======= =======
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 901 762 605
Cumulative effect of accounting
changes (k) ............................. $ - - -
Net income (l) ........................... $ 901 762 595
CASH FLOW DATA (m)
Provided by operating activities.......... $ 1,886 1,895 1,335
Capital spending.......................... 944 726 771
------- ------- -------
Operating free cash flow.................. $ 942 1,169 564
======= ======= =======
Dividends paid............................ $ 242 199 172
Purchases of treasury stock............... $ - 72 19
Acquisitions and investments in
unconsolidated affiliates................ $ 3,297 1,416 372
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 1.13 0.97 0.77
Cumulative effect of accounting
changes (k) ............................. $ - - -
Net income (l) ........................... $ 1.13 0.97 0.76
Cash dividends declared................... $ 0.320 0.267 0.223
Book value per share at year-end.......... $ 4.92 4.01 3.21
Market price per share at year-end........ $21 3/8 13 1/8 11 1/4
Number of shares repurchased.............. - 6.2 1.9
Shares outstanding at year-end............ 791 788 781
Average shares outstanding used to
calculate income (charge) per
share (n)................................ 796 790 789
BALANCE SHEET
Total assets.............................. $15,127 11,135 9,023
Long-term debt............................ $ 6,077 2,656 2,579
Total debt (o) ........................... $ 6,943 4,107 3,225
Shareholders' equity...................... $ 3,891 3,161 2,509
STATISTICS
Return on average shareholders'
equity (p) .............................. 26% 27 27
Market net debt ratio (q) ................ 26% 24 22
Historical cost net debt ratio (r) ....... 54% 43 41
Employees................................. 266,000 235,000 225,000
F-52
- -----------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 5 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- -----------------------------------------------------------------------
1986 1985
- -----------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................. $ 9,017 7,585
Operating profit.......................... 829 782
Gain on stock offering by an
unconsolidated affiliate (j)............. - -
Interest expense, net..................... (139) (99)
------- -------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............. $ 690 683
======= =======
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 464 427
Cumulative effect of accounting
changes (k).............................. $ - -
Net income (l)............................ $ 458 544
CASH FLOW DATA (m)
Provided by operating activities.......... $ 1,212 817
Capital spending.......................... 859 770
------- -------
Operating free cash flow.................. $ 353 47
======= =======
Dividends paid............................ $ 160 161
Purchases of treasury stock............... $ 158 458
Acquisitions and investments in
unconsolidated affiliates................ $ 1,680 160
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................... $ 0.59 0.51
Cumulative effect of accounting
changes (k).............................. $ - -
Net income (l)............................ $ 0.58 0.65
Cash dividends declared................... $ 0.209 0.195
Book value per share at year-end.......... $ 2.64 2.33
Market price per share at year-end........ $ 8 3/4 7 7/8
Number of shares repurchased.............. 20.2 66.0
Shares outstanding at year-end............ 781 789
Average shares outstanding used to
calculate income (charge) per
share (n)................................ 787 842
BALANCE SHEET
Total assets.............................. $ 8,027 5,889
Long-term debt............................ $ 2,633 1,162
Total debt (o) ........................... $ 2,865 1,506
Shareholders' equity...................... $ 2,059 1,838
STATISTICS
Return on average shareholders'
equity (p) .............................. 24% 23
Market net debt ratio (q) ................ 28% 15
Historical cost net debt ratio (r)........ 46% 30
Employees................................. 241,000 150,000
F-53
- --------------------------------------------------------------------------------
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 divestiture discussed in (l) below.
(a) Included the initial, noncash charge of $520 ($384 after-tax or $0.48 per
share) upon adoption of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," at the
beginning of the fourth quarter. As a result of the reduced carrying amount
of certain long-lived assets to be held and used in the business,
depreciation and amortization expense for the fourth quarter was reduced by
$21 ($15 after-tax or $0.02 per share). See Note 2.
(b) Included a net gain of $51 ($27 after-tax or $0.03 per share) from sales of
restaurants to franchisees in excess of the cost of closing other
restaurants.
(c) Included a benefit of changing to a preferred method for calculating the
market-related value of plan assets in 1994, which reduced full-year
pension expense by $35 ($22 after-tax or $0.03 per share). See Note 13.
(d) 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
fifty-third week increased 1994 earnings by approximately $54 ($35
after-tax or $0.04 per share) and 1988 earnings by approximately $23 ($16
after-tax or $0.02 per share).
(e) Included a $30 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. Federal tax legislation. See Note 11.
(f) Included $193 in unusual charges for restructuring ($129 after-tax or $0.16
per share). See Note 19.
(g) Included increased postretirement benefits expense of $52 ($32 after-tax or
$0.04 per share) as a result of adopting SFAS 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." Included the impact of
adopting SFAS 109, "Accounting for Income Taxes," which reduced pretax
income by $21 and the provision for income taxes by $34.
(h) Included $170 in unusual charges ($120 after-tax or $0.15 per share). See
Note 19.
(i) Included $83 in unusual charges ($49 after-tax or $0.06 per share) for
costs of closing restaurants, U.S. trade receivables exposures, accelerated
contributions to the PepsiCo Foundation and a reduction in the carrying
amount of an unconsolidated international Pizza Hut affiliate.
(j) The $18 gain ($17 after-tax or $0.02 per share) in 1994 arose from a public
share offering by BAESA, an unconsolidated franchised bottling affiliate in
South America. See Note 16. The $118 gain ($53 after-tax or $0.07 per
share) in 1990 arose from an initial public offering of new shares by an
unconsolidated KFC joint venture in Japan and a sale by PepsiCo of a
portion of its shares.
F-54
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 7 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(k) Represented the cumulative effect of adopting in 1994 SFAS 112, "Employers'
Accounting for Postemployment Benefits," and changing to 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 (see Notes 14 and 13,
respectively) and adopting in 1992 SFAS 106 ($575 ($357 after-tax or $0.44
per share)) and SFAS 109 ($571 tax charge ($0.71 per share)). Prior years
were not restated for these changes in accounting.
(l) Included impacts of discontinued operations, the most significant of which
were in 1985, which included income of $124 after-tax ($0.15 per share)
resulting from PepsiCo disposing of its sporting goods and transportation
segments.
(m) Cash flows from other investing and financing activities, which are not
presented, are an integral part of total cash flow activity.
(n) See Net Income Per Share in Note 1.
(o) Total debt includes short-term borrowings and long-term debt, which for
1987 through 1990 included a nonrecourse obligation.
(p) The return on average shareholders' equity is calculated using income from
continuing operations before cumulative effect of accounting changes.
(q) 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.
(r) The historical cost net debt ratio represents net debt (see (q) above) as a
percent of capital employed (net debt, other liabilities, deferred income
taxes and shareholders' equity).
F-55
PEPSICO, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND DECEMBER 25, 1993
(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:
1995 (52 weeks)
- ---------------
Allowance for
doubtful accounts $151 $ 49 $ 6 $ 56 $150
==== ==== === ==== ====
Deferred tax assets
valuation allowance
$319 $150 $ 29 $ - $498
==== ==== ==== ==== ====
1994 (53 weeks)
- ---------------
Allowance for
doubtful accounts $128 $ 59 $ 8 $ 44 $151
==== ==== ==== ==== ====
Deferred tax assets
valuation allowance $249 $ 69 $ 1 $ - $319
==== ==== ==== ==== ====
1993 (52 weeks)
- ---------------
Allowance for
doubtful accounts $112 $ 44 $ 17 $ 45 $128
==== ==== ==== ==== ====
Deferred tax asstes
valuation allowance $181 $ 68 $ - $ - $249
==== ==== ==== ==== ====
(1) Other additions principally related to acquisitions and
reclassifications.
(2) Principally accounts written-off.