UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 15, 1996 (12 and 24 Weeks Ended)
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1183
PEPSICO, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-1584302
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
700 Anderson Hill Road
Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
914-253-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
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
Number of shares of Capital Stock outstanding as of July 13, 1996:
1,566,444,477
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Condensed Consolidated Statement of
Income - 12 and 24 weeks ended
June 15, 1996 and June 17, 1995 2
Condensed Consolidated Statement of
Cash Flows - 24 weeks ended
June 15, 1996 and June 17, 1995 3
Condensed Consolidated Balance Sheet -
June 15, 1996 and December 30, 1995 4-5
Notes to Condensed Consolidated 6-8
Financial Statements
Management's Analysis of Operations,
Cash Flows and Financial Condition 9-38
Independent Accountants' Review Report 39
Part II Other Information and Signatures 40-42
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PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended 24 Weeks Ended
6/15/96 6/17/95 6/15/96 6/17/95
Net Sales $7,691 $7,245 $14,245 $13,402
Costs and Expenses, net
Cost of sales 3,696 3,551 6,902 6,573
Selling, general and
administrative expenses 2,939 2,751 5,514 5,188
Amortization of intangible
assets 70 74 137 143
Operating Profit 986 869 1,692 1,498
Interest expense (141) (162) (282) (322)
Interest income 25 29 48 56
Income Before Income Taxes 870 736 1,458 1,232
Provision for Income Taxes 287 249 481 424
Net Income $ 583 $ 487 $ 977 $ 808
Net Income Per Share $ 0.36 $ 0.30 $ 0.60 $ .50
Cash Dividends Declared
Per Share $0.115 $ 0.10 $ 0.215 $ 0.19
Average Shares Outstanding
Used To Calculate Net
Income Per Share 1,613 1,607 1,616 1,603
See accompanying notes.
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PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
24 Weeks Ended _
6/15/96 6/17/95
Cash Flows - Operating Activities
Net income $ 977 $ 808
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 767 802
Deferred income taxes 12 2
Other noncash charges and credits, net 192 225
Changes in operating working capital,
excluding effects of acquisitions
Accounts and notes receivable (421) (629)
Inventories (135) (97)
Prepaid expenses, taxes and other
current assets (132) 6
Accounts payable (142) (30)
Income taxes payable 17 (149)
Other current liabilities (62) (63)
Net change in operating working capital (875) (962)
Net Cash Provided by Operating Activities 1,073 875
Cash Flows - Investing Activities
Acquisitions and investments in unconsolidated
affiliates (28) (113)
Capital spending (960) (868)
Sales of restaurants.......................... 200 21
Sales of property, plant and equipment 32 51
Short-term investments, by original maturity
More than three months - purchases (87) (172)
More than three months - maturities 110 66
Three months or less, net 65 99
Other, net (79) (142)
Net Cash Used for Investing Activities (747) (1,058)
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt 1,286 1,387
Payments of long-term debt (454) (268)
Short-term borrowings, by original maturity
More than three months - proceeds 412 888
More than three months - payments (1,218) (1,725)
Three months or less, net 518 308
Cash dividends paid (315) (283)
Purchases of treasury stock (725) (186)
Proceeds from exercises of stock options 162 88
Other, net (22) (21)
Net Cash (Used for) Provided by Financing Activities (356) 188
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (2) 3
Net (Decrease) Increase in Cash and Cash Equivalents (32) 8
Cash and Cash Equivalents - Beginning of year 382 331
Cash and Cash Equivalents - End of period $ 350 $ 339
See accompanying notes.
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PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
Unaudited
6/15/96 12/30/95
Current Assets
Cash and cash equivalents $ 350 $ 382
Short-term investments, at cost............ 1,028 1,116
1,378 1,498
Accounts and notes receivable, less
allowance: 6/96 - $158, 12/95 - $150 2,855 2,407
Inventories
Raw materials and supplies 605 550
Finished goods 578 501
1,183 1,051
Prepaid expenses, taxes and other
current assets 722 590
Total Current Assets 6,138 5,546
Investments in Unconsolidated Affiliates 1,537 1,635
Property, Plant and Equipment 17,418 16,751
Accumulated Depreciation (7,251) (6,881)
10,167 9,870
Intangible Assets, net 7,481 7,584
Other Assets 811 797
Total Assets $26,134 $25,432
Continued on next page.
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PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amount)
LIABILITIES AND SHAREHOLDERS' EQUITY
Unaudited
6/15/96 12/30/95
Current Liabilities
Accounts payable $ 1,412 $ 1,556
Short-term borrowings 1,228 706
Accrued compensation and benefits 815 815
Income taxes payable 449 387
Accrued marketing 339 469
Other current liabilities 1,439 1,297
Total Current Liabilities 5,682 5,230
Long-Term Debt 8,581 8,509
Other Liabilities 2,513 2,495
Deferred Income Taxes 1,905 1,885
Shareholders' Equity
Capital stock, par value 1 2/3 cents per
share: authorized 3,600 shares, issued
6/96 and 12/95 - 1,726 29 29
Capital in excess of par value 1,140 1,045
Retained earnings 9,369 8,730
Currency translation adjustment (830) (808)
9,708 8,996
Less: Treasury Stock, at Cost
6/96 - 161 shares, 12/95 - 150 shares (2,255) (1,683)
Total Shareholders' Equity 7,453 7,313
Total Liabilities and
Shareholders' Equity $26,134 $25,432
See accompanying notes.
- -5-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The Condensed Consolidated Balance Sheet at June 15, 1996 and the
Condensed Consolidated Statement of Income for the 12 and 24 weeks ended
June 15, 1996 and June 17, 1995 and the Condensed Consolidated Statement of
Cash Flows for the 24 weeks ended June 15, 1996 and June 17, 1995 have not
been audited, but have been prepared in conformity with the accounting
principles applied in the PepsiCo, Inc. and Subsidiaries (PepsiCo) 1995
Annual Report on Form 10-K (1995 Annual Report) for the year ended December
30, 1995, except as disclosed in Note 4 below. In the opinion of management,
this information includes all material adjustments, which are of a normal
and recurring nature, necessary for a fair presentation. The results for
the 12 and 24 weeks are not necessarily indicative of the results expected
for the year.
(2) On May 1, 1996 PepsiCo's Board of Directors authorized a two-for-one
stock split of PepsiCo's capital stock effective for shareholders of record
at the close of business on May 10, 1996. The number of authorized shares
was also increased from 1.8 billion to 3.6 billion. The current and prior
period information in the Condensed Consolidated Financial Statements, as
well as all other share data in this report, have been adjusted to reflect
this stock split and the increase in authorized shares. The par value
remains 1 2/3 cents per share, with capital in excess of par value reduced
to reflect the total par value of the additional shares.
(3) Effective the beginning of the fourth quarter of 1995, PepsiCo 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," which primarily reduced the carrying amount of certain long-
lived assets to be held and used in the business. As a result, depreciation
and amortization expense for the quarter and year-to-date was reduced by $18
million ($12 million after-tax or $0.01 per share) and $33 million ($22
million after-tax or $0.01 per share), respectively. Additionally, during
the second quarter of 1996 PepsiCo performed the impairment evaluation,
recognition and measurement tests required by SFAS 121, covering assets that
in the first half of 1996 initially met the "history of operating losses"
impairment indicator we use to identify potentially impaired assets and
assets previously evaluated for impairment where, due to changes in
circumstances, a current forecast of future cash flows would be expected to
be significantly lower than the forecast used in the prior evaluation. As a
result of the review, a noncash impairment charge of $18 million ($12
million after-tax or $0.01 per share) was recorded in selling, general and
administrative expenses at the end of the second quarter to reduce the
carrying value of certain long-lived assets to be held and used in the
restaurant segment.
(4) Effective beginning fiscal year 1996, PepsiCo changed its
classification of certain U.S. beverage promotional programs. To conform
the 1995 results with those of 1996, a reclassification was made within the
1995 results, decreasing both net sales and selling, general and
administrative expenses by $41 million and $75 million in the second quarter
and year-to-date, respectively. This reclassification did not affect
reported net income or net income per share.
- -6-
(5) Significant debt issuances and repayments (exclusive of commercial
paper), including the related effects of any interest rate and/or foreign
currency swaps entered into concurrently with the debt, are listed below.
As disclosed in PepsiCo's 1995 Annual Report, PepsiCo enters into the swaps
to effectively change the interest rate and currency of specific debt
issuances with the objective of reducing borrowing costs.
Weighted
Average
Principal Maturity Interest
Debt Issued (in millions) Date Rate
12 weeks ended June 15, 1996:
$191 1998 *
150 1999 *
166 2001 *
100 2006 *
75 2011 *
$682
Subsequent to June 15, 1996:
$180 1999 *
25 2011 *
$205
Principal Interest
Debt Repayments (in million) Rate___
12 weeks ended June 15, 1996:
$ 85 *
15 14.4%
175 7.5%
50 6.0%
$325
Subsequent to June 15, 1996:
$200 4.6%
* Variable rate debt indexed to either LIBOR or commercial paper rates.
(6) At June 15, 1996, $3.5 billion of short-term borrowings were included
in the Condensed Consolidated Balance Sheet under the caption "Long-term
Debt", reflecting PepsiCo's intent and ability, through the existence of
unused revolving credit facilities, to refinance these borrowings on a long-
term basis. At June 15, 1996, PepsiCo had unused revolving credit
facilities covering potential borrowings aggregating $3.5 billion which
expire in January 2001.
(7) Through the 24 weeks ended June 15, 1996, PepsiCo repurchased 23.4
million shares of its capital stock at a cost of $725 million. From June
16, 1996 through July 18, 1996, PepsiCo repurchased 2.0 million shares at a
cost of $67 million.
- -7-
(8) In the first half of 1996, 29.3 million stock options were granted to
senior management in a biennial grant under PepsiCo's Long-Term Incentive
Plan. Of this amount, an immaterial number of options were subsequently
converted to performance share units. On July 1, 1996, PepsiCo made an
annual grant under its broad-based SharePower Stock Option Plan of 10.8
million options to approximately 130,000 eligible employees. On July 25,
1996, 6.1 million options were awarded under PepsiCo's Stock Option
Incentive Plan for middle management employees.
(9) Supplemental Cash Flow Information
($ in millions) 24 Weeks Ended
6/15/96 6/17/95
Cash Flow Data
Interest paid $315 $368
Income taxes paid 409 447
- -8-
MANAGEMENT'S ANALYSIS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION
As described in Note 2 to the Condensed Consolidated Financial Statements, a
two-for-one stock split was authorized for shareholders of record at the end
of business on May 10, 1996. All share data in Management's Analysis have
been adjusted to reflect the stock split.
Forward-Looking Statements - Safe Harbor
From time to time, in both written reports and oral statements by PepsiCo
senior management, we may express our expectations regarding future
performance of the Company. These "forward-looking statements" are
inherently uncertain and investors must recognize that events could turn out
to be different than what senior management expected. Key factors impacting
current and future performance are described in PepsiCo's 1995 Annual Report
in Management's Analysis - Worldwide Marketplace on page 14.
Analysis of Consolidated Operations
Net Sales
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
U.S. $5,393 $5,167 4 $10,210 $ 9,637 6
International 2,298 2,078 11 4,035 3,765 7
$7,691 $7,245 6 $14,245 $13,402 6
_______________________________________________________________________________
Worldwide net sales rose $446 million in the quarter and $843 million
year-to-date, or 6% for both periods. For both the quarter and year-to-
date, the sales growth benefited from higher effective net pricing in each
of our three business segments and net volume gains of $180 million and $357
million, respectively, partially offset by an unfavorable foreign currency
exchange impact, primarily reflecting the continued devaluation of the
Mexican peso. The volume gains were driven by worldwide snack foods and
beverages partially offset by declines at Pizza Hut in the U.S., due to
lapping the exceptional results from the national roll-out of Stuffed Crust
pizza in 1995. Year-over-year sales growth rates were moderated by the
effect of PepsiCo's restaurant strategy to reduce its ownership of the
restaurant system, as described in PepsiCo's 1995 Annual Report. Also, as
noted in the 1995 Annual Report and on page 17, certain of our international
beverage results are being reported on a different basis in 1996 than in
1995. Although this change will have no impact on full-year results, we are
reporting 8 more days for the quarter and 17 less days on a year-to-date
basis from our international franchise and administrative operations
compared to last year. While not practicable to quantify, this change does
affect the year-over-year interim growth rates.
- -9-
Cost of Sales
($ in millions)
12 Weeks Ended 24 Weeks Ended_
6/15/96 6/17/95 6/15/96 6/17/95
Cost of sales $3,696 $3,551 $6,902 $6,573
As a percent
of net sales 48.1% 49.0% 48.5% 49.0%
_______________________________________________________________________________
Cost of sales as a percent of net sales decreased in 1996 primarily due
to lower raw materials costs and higher effective pricing in U.S. beverages
and higher effective pricing in U.S. restaurants, partially offset by an
unfavorable mix shift in international beverages from higher-margin
concentrate to lower-margin packaged products.
Selling, General and Administrative Expenses (SG&A)
($ in millions)
12 Weeks Ended 24 Weeks Ended__ _
6/15/96 6/17/95 6/15/96 6/17/95
SG&A $2,939 $2,751 $5,514 $5,188
As a percent
of net sales 38.2% 38.0% 38.7% 38.7%
___________________________________________________________________________
SG&A is comprised of selling and distribution expenses (S&D),
advertising and marketing expenses (A&M), general and administrative
expenses (G&A), other income and expense and equity income/(loss) from
investments in unconsolidated affiliates. SG&A grew at a slightly faster
rate than sales in the quarter and at the same rate as sales on a year-to-
date basis. S&D grew at the same rate as sales in the quarter and at a
slightly slower rate than sales year-to-date. Both periods reflected
increased effective pricing and reduced depreciation and amortization
expense as a result of the reduced carrying amount of long-lived assets in
connection with the 1995 adoption of SFAS 121, primarily in U.S.
restaurants. U.S. beverages and snack foods S&D grew at rates faster than
sales reflecting increased labor costs and spending by U.S. snack foods to
capture volume previously sold by Eagle, the snack food division of Anheuser-
Busch, as a result of their first quarter decision to exit the salty snack
market. A&M grew at a faster rate than sales reflecting a faster rate of
spending in U.S. beverages and worldwide snack foods, partially offset by a
slower rate of spending in U.S. restaurants, and year-to-date, international
beverages. G&A expenses grew slightly faster than sales in the quarter and,
to a greater extent, year-to-date. This was primarily due to worldwide
restaurants, reflecting the soft U.S. sales trends and increased spending
partially offset by lapping the $20 million Pizza Hut relocation charge
included in the quarter last year. Other income and expense included
refranchising gains in excess of costs of closing other restaurants of $38
million and $84 million in the quarter and year-to-date, respectively,
compared to $1 million and $4 million for the same periods in 1995. In
addition, the quarter and year-to-date included an $18 million impairment
charge to write-down the carrying value of certain long-lived restaurant
assets, and year-to-date, a $26 million charge for Hot 'n Now. Losses from
PepsiCo's unconsolidated equity investments, compared to earnings a year
ago, primarily reflected losses from Buenos Aires Embotelladora S.A.
(BAESA), a beverage bottling joint venture, partially offset by income from
our 1995 investment in Grupo Embotellador de Mexico (GEMEX) and smaller
losses by our other Mexican beverage bottling
- -10-
joint ventures. Net foreign exchange losses of $5 million and $8 million in
the quarter and year-to-date, respectively, compared to a net foreign
exchange loss of $4 million and a gain of $6 million in the comparable
periods in the prior year.
Amortization of intangible assets declined 5% for the quarter and 4%
year-to-date as a result of the reduced carrying amount of intangible assets
in connection with the 1995 adoption of SFAS 121. This noncash expense
reduced net income per share by $0.04 and $0.07 for the quarter and year-to-
date, respectively, for both 1996 and 1995.
Operating Profit
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Operating Profit $986 $869 13 $1,692 $1,498 13
________________________________________________________________________
Operating profit increased $117 million for the quarter and $194
million year-to-date or 13% for both periods. The growth was driven by
combined segment operating profit growth of 14% for both the quarter and
year-to-date which benefited from the higher effective net pricing which
exceeded increased operating costs, volume growth of $54 million for the
quarter and $97 million year-to-date and a favorable impact from net
restaurant unit activity, as defined on page 22, of $46 million and $99
million in the quarter and year-to-date, respectively. The volume growth
was driven by worldwide snack foods and U.S. beverages, partially offset by
a decline at Pizza Hut U.S. and, year-to-date, international beverages. In
addition, the quarter and year-to-date profit growth benefited from reduced
depreciation and amortization expense of $18 million and $33 million,
respectively, associated with the adoption of SFAS 121, fully offset in the
quarter and partially offset year-to-date by the SFAS 121 non-cash
impairment charge of $18 million. International segment profits increased
15% for the quarter and 14% year-to-date, reflecting double-digit increases
in snack foods and restaurants and, year-to-date, in beverages.
International segment profits in both 1996 and 1995 represented 18% and 17%,
respectively, of segment operating profits for the quarter and year-to-date.
Foreign exchange gains and losses and equity income/(loss) from
unconsolidated equity investments are not included in segment operating
profit. Operating profit growth was hampered by the effect of the net
foreign exchange gains and losses and the losses from unconsolidated equity
investments compared to profits a year ago.
Interest Expense, net
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Interest expense $(141) $(162) (13) $(282) $(322) (12)
Interest income 25 29 (14) 48 56 (14)
Interest expense,
net $(116) $(133) (13) $(234) $(266) (12)
___________________________________________________________________________
Interest expense, net, decreased 13% for the quarter and 12% year-to-
date, reflecting lower interest rates.
- -11-
Provision for Income Taxes
($ in millions)
12 Weeks Ended 24 Weeks Ended
6/15/96 6/17/95 6/15/96 6/17/95
Provision for
Income Taxes $287 $249 $481 $424
Effective tax rate 33.0% 33.8% 33.0%
34.4%
___________________________________________________________________________
The 1996 effective tax rate decreased 0.8 of a point and 1.4 points for
the quarter and year-to-date, respectively. The decline primarily reflected
the reversal of prior year valuation allowances no longer required on state
and foreign deferred tax assets. The reversals are reflected in the full-
year forecast of the 1996 effective tax rate.
As reported in our Form 8-K dated May 13, 1996, the U.S. Treasury
Department promulgated a final regulation on May 9, 1996 which significantly
revised its earlier proposed change in the tax regulation known as Q&A 12.
As described in PepsiCo's 1995 Annual Report, the original proposal, if
enacted, was expected to significantly reduce the tax incentives associated
with our beverage concentrate operations in Puerto Rico and, therefore, have
a significant negative impact on PepsiCo's effective tax rate in 1996, as
well as in future years. The final regulation, which is effective for
PepsiCo retroactive to December 1, 1994, will not significantly impact
PepsiCo.
Net Income
(in millions except per
share and percent amounts)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Income $ 583 $ 487 20 $ 977 $ 808 21
Net Income Per Share $0.36 $0.30 20 $0.60 $0.50 20
Average Shares Outstanding
Used to Calculate Net
Income Per Share 1,613 1,607 - 1,616 1,603 1
________________________________________________________________________
BAESA
Under PepsiCo's partnership agreement with the principal shareholders
of BAESA, PepsiCo's beverage bottling joint venture with operations
currently in Argentina, Brazil, Chile, Costa Rica and Uruguay, voting
control was transferred to PepsiCo on July 1, 1996, subject to certain veto
rights retained by Mr. Charles Beach, BAESA's former Chief Executive
Officer. In its July 2, 1996 press release, BAESA announced the election of
a new Board of Directors and the appointment of a new management team. Mr.
Beach remains as Chairman of the Board. The press release also indicated
that BAESA's fiscal third quarter losses would be significantly greater than
those reported for the fiscal second quarter and that no improvement in
operating results should be expected for the balance of its fiscal year
ending September 30, 1996. The expected losses, which were not quantified,
reflect anticipated operating losses, restructuring charges, facility
- -12-
closures and adjustments to the carrying amount of certain assets and
liabilities. BAESA said its operating results and ensuing financing
position could place it in technical breach of certain financial convenants
in its loan agreements and other financing arrangements. BAESA said it is
currently working on a new financing plan. Because of Mr. Beach's veto
rights, PepsiCo will not consolidate the results of BAESA but will continue
to include its 24% economic share of the results of BAESA in equity
earnings. To facilitate the financial reporting process, PepsiCo reports
its share of all of its international beverage joint ventures' earnings on a
one month lag. Accordingly, PepsiCo includes BAESA's results in its
quarterly earnings as follows:
PepsiCo BAESA*
First quarter December and January
Second quarter February, March and April
Third quarter May, June and July
Fourth quarter August, September, October and
November
*BAESA's fiscal year ends September 30.
It is anticipated that PepsiCo's share of BAESA's expected fiscal third and
fourth quarter losses will not have a material adverse effect on PepsiCo's
financial condition or cash flow, but will adversely affect year-over-year
earnings comparisons. The extent of PepsiCo's role, if any, in BAESA's new
financing plan has not yet been determined. Reliable information is not
currently available for PepsiCo to determine whether its $152 million
investment (including advances) in BAESA as of May 31, 1996 has been
impaired requiring a write-down in its carrying amount.
Impairment
As disclosed in PepsiCo's 1996 first quarter Form 10-Q and as discussed in
more detail in Note 3 to the Condensed Consolidated Financial Statements,
during the second quarter PepsiCo performed the impairment evalution,
recognition and measurement tests required by SFAS 121. As a result of that
review, an $18 million ($12 million after-tax or $0.01 per share) noncash
impairment charge was recorded at the end of the second quarter to reduce
the carrying value of certain long-lived restaurant assets. Absent
circumstances that would require an immediate evaluation for impairment,
PepsiCo intends to perform its next impairment evaluation, recognition and
measurement tests in the fourth quarter of 1996. Management believes that
impairment charges, primarily related to the restaurant segment, are
reasonably possible in the fourth quarter of 1996 but anticipates that, for
the full-year, impairment charges for that segment will be more than offset
by refranchising gains net of costs of closing other stores. Refer also to
the discussion above regarding a potential impairment of our investment in
BAESA.
- -13-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
12 Weeks Ended 12 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Beverages
- -U.S. $1,772 $1,649 7 $ 365 $321 14
- -International 967 909 6 75 75 -
2,739 2,558 7 440 396 11
Snack Foods
- -U.S. 1,504 1,302 16 288 264 9
- -International 801 696 15 82 64 28
2,305 1,998 15 370 328 13
Restaurants
- -U.S. 2,117 2,216 (4) 194 162 20
- -International 530 473 12 26 20 30
2,647 2,689 (2) 220 182 21
Total
- -U.S. 5,393 5,167 4 847 747 13
- -International 2,298 2,078 11 183 159 15
$7,691 $7,245 6 1,030 906 14
Equity/(Loss) Income (1) 9 NM
Other Unallocated Expenses, net (b) (43) (46) (7)
Operating Profit $ 986 $869 13
By U.S. Restaurant Chain: (c)
Pizza Hut $ 871 $1,017 (14) $ 103 $ 96 7
Taco Bell 811 810 - 59 45 31
KFC 435 389 12 32 21 52
$2,117 $2,216 (4) $ 194 162 20
NOTES:
(a) This schedule should be read in conjunction with Management's Analysis
beginning on page 16.
(b) Includes corporate headquarters expenses, minority interests, foreign
exchange translation and transaction gains and losses and other items
not allocated to the business segments. Net foreign exchange losses of
$5 and $4 were included in 1996 and 1995, respectively.
(c) PepsiCo has historically provided results for each of its three major
restaurant concepts (which included the results of other U.S. concepts
managed by Taco Bell and Pizza Hut) on a worldwide basis. Beginning
with the fourth quarter of 1995, PepsiCo changed the presentation of
the restaurant results to more closely reflect how we currently manage
the business. Net sales and operating profit are now provided for each
of PepsiCo's three major U.S. concepts (including the results of the
other concepts managed by Taco Bell and Pizza Hut) and in total for the
international restaurant operations. Previously reported amounts have
been restated to conform to the current presentation.
- -14-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a)
($ in millions, unaudited)
Net Sales Operating Profit
24 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Beverages
- -U.S. $ 3,211 $ 3,012 7 $ 609 $ 530 15
- -International 1,491 1,479 1 87 77 13
4,702 4,491 5 696 607 15
Snack Foods
- -U.S. 2,849 2,478 15 535 496 8
- -International 1,512 1,344 13 155 135 15
4,361 3,822 14 690 631 9
Restaurants
- -U.S. 4,150 4,147 - 342 274 25
- -International 1,032 942 10 57 50 14
5,182 5,089 2 399 324 23
Total
- -U.S. 10,210 9,637 6 1,486 1,300 14
- -International 4,035 3,765 7 299 262 14
$14,245 $13,402 6 1,785 1,562 14
Equity/(Loss) Income (3) 7 NM
Other Unallocated Expenses, net (b) (90) (71) 27
Operating Profit $1,692 $1,498 13
By U.S. Restaurant Chain:(c)
Pizza Hut $ 1,776 $ 1,862 (5) $ 209 $ 161 30
Taco Bell 1,553 1,538 1 81 78 4
KFC 821 747 10 52 35 49
$ 4,150 $ 4,147 - $ 342 $ 274 25
NOTES:
(a) This schedule should be read in conjunction with Management's Analysis
beginning on page 16.
(b) Includes corporate headquarters expenses, minority interests, foreign
exchange translation and transaction gains and losses and other items
not allocated to the business segments. A net foreign exchange loss
of $8 and gain of $6 were included in 1996 and 1995, respectively.
(c) PepsiCo has historically provided results for each of its three major
restaurant concepts (which included the results of other U.S. concepts
managed by Taco Bell and Pizza Hut) on a worldwide basis. Beginning
with the fourth quarter of 1995, PepsiCo changed the presentation of
the restaurant results to more closely reflect how we currently manage
the business. Net sales and operating profit are now provided for
each of PepsiCo's three major U.S. concepts (including the results of
the other concepts managed by Taco Bell and Pizza Hut) and in total
for the international restaurant operations. Previously reported
amounts have been restated to conform to the current presentation.
- -15-
Segments of The Business
Beverages
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Sales
U.S. $1,772 $1,649 7 $3,211 $3,012 7
International 967 909 6 1,491 1,479 1
$2,739 $2,558 7 $4,702 $4,491 5
Operating Profit
U.S. $ 365 $ 321 14 $ 609 $ 530 15
International 75 75 - 87 77 13
$ 440 $ 396 11 $ 696 $ 607 15
_________________________________________________________________________
Sales in the U.S. rose 7% for both the quarter and year-to-date or $123
million and $199 million, respectively. Volume growth contributed $65
million for the quarter and $93 million year-to-date driven by carbonated
soft drink (CSD) products. The sales growth for both the quarter and year-
to-date also benefited from higher pricing on most CSD packages, primarily
single-serve, and fountain syrup.
System bottler case sales of Pepsi Corporate brands (BCS), which is
comprised of company-owned brands as well as brands we have the right to
produce, distribute and market nationally, consist of sales of packaged
products to retailers and through vending machines and fountain syrup by
company-owned and franchised bottlers. Second quarter U.S. and
international BCS include the calendar months of April and May, consistent
with prior years. BCS in the U.S. increased 4% for the quarter and year-to-
date, reflecting solid increases in Brand Pepsi and the Mountain Dew brand
as well as growth of more than 50% in Mug brand root beer. Total
alternative beverages, which primarily include Lipton brand ready-to-drink
tea and All Sport, grew at a double-digit rate. The growth in Lipton,
which represents approximately 70% of the alternative beverages BCS, was
due to strong double-digit volume gains from fountain syrup and strong
gains from Lipton Brisk which more than offset single-digit volume declines
of Lipton Brew. Alternative beverages contributed 0.8 of a point to the
BCS growth for the quarter and year-to-date. Fountain syrup grew at a
significantly faster rate than packaged products for both the quarter and
year-to-date, primarily a result of several new customers added at the end
of 1995.
Profit in the U.S. increased $44 million or 14% for the quarter and
$79 million or 15% year-to-date. The quarter and year-to-date profit
growth reflected the higher pricing on most CSD packages and fountain syrup
and volume gains of $34 million and $51 million, respectively, as well as
lower product costs. Advertising and marketing expenses grew at a double-
digit rate for both the quarter and year-to-date, primarily due to the
Pepsi Stuff promotion. For the quarter and year-to-date, selling and
distribution expenses grew at a slower rate than sales, but at a faster
rate than volume, reflecting increased salaries and wages. Increased
administrative expenses for both periods primarily reflected costs incurred
in connection with national initiatives to upgrade operating and
administrative systems. Profit growth for the quarter and year-to-date was
- -16-
aided by higher profit in alternative beverages, primarily caused by
lapping a second quarter 1995 charge for estimated probable future take-or-
pay co-packing penalties. Year-to-date profit growth was favorably
impacted by a litigation settlement with a supplier for purchases made in
prior years. The profit margin grew more than 1 point to 20.6% for the
quarter and nearly 1 1/2 points to 19.0% year-to-date.
As previously disclosed in PepsiCo's 1995 Annual Report and 1996 first
quarter report on Form 10-Q, 1996 quarterly results for international
beverages will not be comparable to 1995's because its results, except for
Canada, are now reported on a monthly basis. For 1995, generally only the
company-owned bottling operations reported results on a monthly basis. As
a result, the franchise and administrative operations are reporting 3 and 5
months of results in the 1996 second quarter and year-to-date, compared to
12 and 24 weeks, respectively, last year. Therefore, 1996 second quarter
results include 8 more days, while the year-to-date results have 17 less
days. The 17 days will reverse over the remaining two quarters in 1996 and
accordingly, full-year results will be comparable. Although not reasonably
quantifiable, the quarter and year-to-date comparisons discussed below are
affected by the noncomparable reporting periods.
International sales rose $58 million or 6% in the quarter and $12
million or 1% year-to-date. Sales growth for the quarter reflected $71
million of higher volume of both packaged product sales and concentrate
shipments to franchised bottlers and $38 million of volume growth year-to-
date, primarily from packaged products, partially offset by lower
concentrate volume. Sales growth was also aided by higher effective net
prices, due in part to country and product mix, on packaged products and
concentrate for the quarter and concentrate year-to-date. These gains were
dampened by unfavorable currency translation impacts, primarily due to the
strength of the U.S. dollar against most other currencies, with the most
significant impact in Japan and Mexico.
International case sales increased 5% for the quarter and 4% year-to-
date, led by Growth Markets (primarily Brazil, China, Eastern Europe and
India, where we are investing heavily because we believe they have high
growth potential) which, on a combined basis, grew at a low double-digit
rate for both periods. The quarter and year-to-date BCS increases in our
Growth Markets reflected double-digit growth in India, the Czech and Slovak
Republics, Hungary and China, partially offset by a single-digit decline in
Brazil for the quarter. Although the quarter and year-to-date increases in
Growth Markets were partially offset by single-digit declines in Mexico,
our largest international BCS market, reflecting adverse economic
conditions and increased competition in that country, Mexico's volume
trends improved from the first quarter.
International profit was flat for the quarter and increased $10
million or 13% year-to-date. The quarter profit comparison reflected
increased volumes of $16 million and the higher effective net pricing on
concentrate which was fully offset by the unfavorable currency translation
impacts and increased field administrative costs. The year-to-date profit
growth was also favorably impacted by the higher effective net pricing on
concentrate as well as packaged products and lower field administrative
costs, partially offset by $20 million of reduced volumes, driven by
concentrate, and by the unfavorable currency translation impacts. The
profit margin declined one-half point to 7.8% for the quarter and more than
one-half point to 5.8% year-to-date.
- -17-
Following is a discussion of international results by key geographic
market. Growth Markets, for both the quarter and year-to-date, incurred
significantly lower losses, led by significantly improved results in India
and Hungary and reduced losses in Poland, partially offset by significantly
deteriorating results in Brazil. Our largest international sales markets
are Canada, Spain and Japan, which have sizable company-owned bottling
operations. Canada's profit declined slightly for the quarter as a result
of higher field administrative costs, while profit grew year-to-date,
reflecting higher volume and increased effective net pricing, due in part
to product mix. Profit for both periods in Spain was significantly lower,
reflecting reduced effective net pricing, due in part to product mix, and a
higher rate of promotional activity. Japan's profit for both periods
declined significantly, driven by an unfavorable mix shift to lower-margin
channels. Saudi Arabia, our most profitable franchised country, reported
lower profit for both periods, primarily reflecting an increased rate of
advertising and marketing spending, due to increased competition, and lower
concentrate shipments year-to-date, although BCS increased.
As described on page 12, BAESA issued a press release describing
significantly increased losses due to weak operating results, restructuring
actions and substantial noncash accounting charges. PepsiCo will reflect
its 24% economic share in these losses in equity earnings. In addition,
due to BAESA's operating difficulties, international beverages' results
will likely be negatively impacted by reduced concentrate sales and
profitability in Brazil and, to a lesser degree, Argentina.
- -18-
Snack Foods
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Sales
U.S. $1,504 $1,302 16 $2,849 $2,478 15
Int'l 801 696 15 1,512 1,344 13
$2,305 $1,998 15 $4,361 $3,822 14
Operating
Profit
U.S. $ 288 $ 264 9 $ 535 $ 496 8
Int'l 82 64 28 155 135 15
$ 370 $ 328 13 $ 690 $ 631 9
___________________________________________________________________________
Sales in the U.S. grew $202 million or 16% for the quarter and $371 million
or 15% year-to-date. The sales increase reflected strong volume growth of
$145 million for the quarter and $261 million year-to-date and the effects
of increased pricing taken in the latter half of 1995 across all major
brands. The volume growth reflected gains in almost all major brands, led
by low-fat and no-fat snacks, which accounted for about 45% of the sales
growth for both the quarter and year-to-date.
Pound volume in the U.S. advanced 11% for both the quarter and year-to-
date, reflecting exceptional performance from the low-fat and no-fat
categories. These categories contributed 40% of the total pound growth for
both the quarter and year-to-date, driven by Baked Lay's brand potato
chips, Tostitos brand salsa, Baked Tostitos brand tortilla chips and for
the year-to-date Ruffles Light brand potato chips. Rold Gold brand
pretzels volume declined slightly in both periods. Core brands, excluding
the low-fat and no-fat products, had solid single-digit growth for both the
quarter and year-to-date as follows: the quarter and year-to-date growth
was aided by strong single-digit growth in Lay's brand potato chips;
double-digit growth in Fritos brand corn chips fueled by both the
introduction of new flavor extensions and the core brand; strong double-
digit growth of Tostitos brand tortilla chips; strong single-digit growth
in Ruffles brand potato chips, benefiting from new flavor extensions; and
double-digit growth in Chee.tos brand cheese flavored snacks aided by a
national advertising campaign supporting the introduction of Chee.tos
Checkers. Doritos brand tortilla chips remained flat for the quarter and
had solid single-digit pound growth year-to-date, driven by new flavor
extensions.
Profit in the U.S. grew $24 million or 9% for the quarter and $39
million or 8% year-to-date. The profit increase reflected the volume
growth, which contributed $66 million and $120 million for the quarter and
year-to-date, respectively, the higher pricing that exceeded increased
promotional price allowances and merchandising support, and a favorable
sales mix shift to higher-margin low-fat and no-fat products, partially
offset by an unfavorable sales mix shift to larger value-oriented packages.
This profit growth was partially offset by higher operating costs and
administrative expenses. The increase in operating costs reflected
increased selling and distribution expenses, higher manufacturing costs,
reflecting increased capacity and commodity costs, and higher advertising
- -19-
expenses. These increases were due in part to an effort to capture volume
that has become available as a result of a first quarter decision by
Anheuser-Busch to exit the salty snack food business. The higher
administrative expenses reflected investment spending to sustain strong
volume growth including improved delivery systems, costs related to new
single-serve sweet snack products produced under a joint venture
arrangement with Sara Lee Bakery and costs associated with development and
tests of new products using the recently approved fat-replacer, Olean. For
both the quarter and year-to-date, unfavorable potato and corn prices were
partially offset by favorable oil and packaging prices. Although difficult
to forecast, our 1996 commodity costs are expected to increase modestly
over 1995 through the third quarter and for the fourth quarter, will be
dependent upon the fall crops. The profit margin decreased over 1 point
for both the quarter and year-to-date to 19.1% and 18.8%, respectively.
International sales increased $105 million or 15% for the quarter and
$168 million or 13% year-to-date. The sales increase reflected higher
pricing, primarily the effect of 1995 pricing actions in Mexico, and
increased volume growth of $59 million and $109 million for the quarter and
year-to-date, respectively, partially offset by a net unfavorable currency
translation impact, primarily due to the Mexican peso and, for the quarter,
the British pound.
International kilo growth is reported on a systemwide basis, which
includes both consolidated businesses and joint ventures (JV) operating for
at least one year. Salty snack kilos rose 6% for the quarter and 7% year-
to-date, reflecting double-digit volume growth in the U.K., fueled by in-
bag promotions beginning late in the first quarter, and Brazil as well as
strong single-digit growth in Canada. In addition, our Korea JV achieved
solid double-digit growth fueled, in part, by an in-bag promotion. These
gains were partially offset by a double-digit decline in our Spain JV and,
for the quarter, in the Netherlands JV reflecting the lapping of successful
1995 in-bag promotions. Sweet snack kilos grew 2% for the quarter and 3%
year-to-date reflecting strong double-digit advances in Poland and in our
France JV as well as a triple-digit advance in Brazil, partially offset by
a single-digit decline at Gamesa and at Alegro, the sweet snack division of
Sabritas, due to market-wide contraction, in part, reflecting the impact of
price increases primarily taken last year. Additionally, both Gamesa and
Sabritas lapped strong 1995 volume growth.
International operating profit increased $18 million or 28% for the
quarter and $20 million or 15% year-to-date. The operating profit growth
reflected the higher pricing and the increased volumes of $8 million and
$18 million for the quarter and year-to-date, respectively, which were
partially offset by higher operating costs, increased administrative
expenses and the net unfavorable currency translation impact, primarily in
Mexico and, for the quarter, in the U.K. The growth in operating costs,
driven by Mexico, reflected increased manufacturing costs primarily due to
higher commodity prices, selling and distribution and advertising expenses.
The increased administrative costs reflected general business growth and a
$4 million charge for the relocation of its headquarters from New York to
Dallas. The profit margin increased 1 point in the quarter to 10.2% and
improved slightly year-to-date to 10.3%.
The following are discussions by key business. Operating profit
increased about 30% at Sabritas during the quarter and over 5% year-to-
- -20-
date, reflecting higher pricing resulting primarily from the 1995
increases, partially offset by an increase in operating costs and an
unfavorable currency translation impact. The increased operating costs
reflected significantly higher manufacturing costs due to higher ingredient
prices as well as increased selling and distribution expenses. The
operating profit growth was also aided by a reversal of an employee bonus
accrual that, in the quarter, was determined to be excess. Lower-margin
sweet snack kilo volume from the Alegro division decreased 3% in the
quarter and 7% year-to-date. Higher-margin salty snack kilos were about
even with 1995 for both the quarter and year-to-date.
Gamesa's profit grew over 20% for the quarter and nearly 50% year-to-
date as higher pricing more than offset higher operating costs and the
unfavorable currency translation impact year-to-date and, to a lesser
extent, in the quarter. The increased operating costs primarily reflected
higher manufacturing costs due to higher ingredient prices and increased
selling and distribution expenses, reflecting route expansion. Sweet snack
kilos declined 6% in the quarter and 1% year-to-date.
Walkers' profit increased over 70% and almost 40% during the quarter
and year-to-date, respectively. Higher pricing, due to a 1995 fourth
quarter price increase, and increased volumes, fueled by in-bag promotions
beginning late in the first quarter, as well as favorable operating costs
due to lower labor costs and favorable potato prices were partially offset
by an unfavorable mix shift to lower-margin multi-packs, higher advertising
expenses and the unfavorable currency translation impact. The profit
growth was also aided by a gain on the sale of a nut business in the second
quarter. Salty snacks kilos increased 13% for both the quarter and year-to-
date.
Brazil's profit increased about 10% during the quarter and year-to-
date. Increased volume of core brands, lower selling and distribution
expenses and a favorable sales mix shift in the quarter were partially
offset by an increase in administrative expenses and year-to-date, an
unfavorable sales mix shift to larger lower-margin packages. Brazil had
been operating at maximum capacity and during the second quarter expanded
production capacity to respond to the strong consumer demand. Salty snack
kilos increased 16% for both the quarter and year-to-date. Sweet snack
kilos doubled over the prior year off a small base.
- -21-
Restaurants
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Sales
U.S $2,117 $2,216 (4) $4,150 $4,147 -
International 530 473 12 1,032 942 10
$2,647 $2,689 (2) $5,182 $5,089 2
Operating Profit
U.S. $ 194 $ 162 20 $ 342 $ 274 25
International 26 20 30 57 50 14
$ 220 $ 182 21 $ 399 $ 324 23
___________________________________________________________________________
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.
Also, where significant, the estimated effects of net unit activity on net
sales and operating profit are provided in the following discussions for
each chain to facilitate an understanding of their impact on year-over-year
comparisons. Net unit activity includes the effects of:
- - Closed stores and refranchised stores (company-operated stores sold to
existing or new franchisees)
- - New stores - company-operated stores that are constructed or acquired,
principally from franchisees
- - Ongoing franchise fees and PFS sales and related profit to refranchised
stores
- - Initial franchise fees related to refranchised stores
- - Net refranchising gains - gains on sales of stores in excess of costs of
closing other stores
PepsiCo refranchised, licensed or closed 178 and 480 company-operated
stores and opened or acquired 82 and 174 company-operated units in the
quarter and the year-to-date, respectively. As summarized below, the
effect of this net unit activity decreased worldwide restaurant sales by $3
million in the quarter and increased worldwide restaurant sales by $34
million year-to-date. Net unit activity increased operating profit by $46
million and $99 million in the quarter and year-to-date, respectively. In
addition, 1996 year-to-date operating profit included a $26 million charge
primarily for the disposal of underperforming units at Hot `n Now.
- -22-
June 15, 1996
($ in millions) 12 Weeks 24 Weeks
Ended Ended
Net Sales:
Closed and refranchised stores $(103) $(175)
New store and ongoing franchise
fees and PFS sales related to
refranchised stores 98 202
Initial franchise fees related to
refranchised stores 2 7
Net unit activity $ (3) $ 34
Operating Profit:
Closed and refranchised stores $ (6) $ (10)
New store and ongoing franchise
fees and PFS profit related to
refranchised stores 15 29
Initial franchise fees related to
refranchised stores 2 7
Net refranchising gains* 35 73
Net unit activity $ 46 $ 99
* The quarter reflected $38 of refranchising gains less $3 of store closure
costs in 1996 compared to $6 of refranchising gains less $6 of store
closure costs in 1995. Year-to-date reflected $78 of refranchising
gains less $2 of store closure costs in 1996 compared to $13 of
refranchising gains less $10 of store closure costs in 1995.
- -23-
1996 Restaurant Unit Activity
Company- Joint
Operated Venture Franchised Licensed Total
12 Weeks Ended:
Worldwide Restaurants
Beginning Balance 12,553 1,016 12,277 2,947 28,793
New Builds &
Acquisitions 82 20 159 251 512
Refranchising &
Licensing (86) - 75 11 -
Closures (92) (7) (42) (98) (239)
June 15, 1996 12,457 1,029 12,469 3,111 29,066
U.S. Restaurants*
Beginning Balance 10,095 77 7,776 2,737 20,685
New Builds &
Acquisitions 45 1 54 218 318
Refranchising &
Licensing (78) - 75 3 -
Closures (55) (2) (26) (92) (175)
June 15, 1996 10,007 76 7,879 2,866 20,828
24 Weeks Ended:
Worldwide Restaurants
Beginning of Year 12,763 1,004 12,025 2,748 28,540
New Builds &
Acquisitions 174 34 288 525 1,021
Refranchising &
Licensing (268) - 257 11 -
Closures (212) (9) (101) (173) (495)
June 15, 1996 12,457 1,029 12,469 3,111 29,066
U.S. Restaurants*
Beginning of Year 10,309 78 7,599 2,551 20,537
New Builds &
Acquisitions 93 1 93 475 662
Refranchising &
Licensing (231) - 228 3 -
Closures (164) (3) (41) (163) (371)
June 15, 1996 10,007 76 7,879 2,866 20,828
* The U.S. joint venture units represent California Pizza Kitchen which
was consolidated at the end of the second quarter and will be
reflected with the company-operated units beginning in the third
quarter.
_______________________________________________________________________________
[Note: A summary of the 1996 restaurant unit activity for each U.S.
concept and for international restaurant operations is included in each of
the following discussions.]
PepsiCo's overall ownership percentage, which includes joint venture
units, of total system units declined almost 2 points to 46.4% since the
end of 1995, driven by the U.S. Total system units grew almost 2% since
the end of 1995.
- -24-
As disclosed in PepsiCo's 1996 first quarter Form 10-Q and as
discussed in Note 3 to the Condensed Consolidated Financial Statements, in
the second quarter PepsiCo performed the impairment evaluation, recognition
and measurement tests required by SFAS 121 for company-operated
restaurants. The evaluation covered restaurants that in the first half of
1996 initially met the "history of operating losses" impairment indicator
we use to identify potentially impaired assets and restaurants previously
evaluated for impairment where, due to changes in circumstances, a current
forecast of future cash flows would be expected to be significantly lower
than the forecast used in the prior evaluation. As a result of the review,
an $18 million noncash impairment charge was recorded at the end of the
second quarter to reduce the carrying value of certain long-lived
restaurant assets. Absent circumstances that would require an immediate
evaluation for impairment, PepsiCo intends to perform its next impairment
evaluation, recognition and measurement tests in the fourth quarter of
1996. Management believes that restaurant impairment charges are
reasonably possible in the fourth quarter, but anticipates that on a full-
year basis impairment charges will be more than offset by refranchising
gains net of costs of closing other stores.
Restaurant operating profit also included reduced depreciation and
amortization expense of $16 million and $29 million in the quarter and year-
to-date, respectively. This resulted from the reduced carrying amount of
certain long-lived assets in connection with the adoption of SFAS 121 as of
the beginning of the fourth quarter of 1995.
- -25-
Pizza Hut-U.S
($ in millions)
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 Pizza Hut and
D'Angelo are generally integrated, the elements in the year-over-year
discussion of net sales and operating profit that follows include both
Pizza Hut and D'Angelo but exclude East Side Mario's, unless otherwise
indicated.
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Sales $871 $1,017 (14) $1,776 $1,862 (5)
Operating Profit $103 $ 96 7 $ 209 $ 161
30
___________________________________________________________________________
1996 Restaurant Unit Activity
Company-
Operated Franchised Licensed Total
12 Weeks Ended:
Beginning Balance 5,008 2,901 901 8,810
New Builds &
Acquisitions 17 18 58 93
Refranchising &
Licensing (56) 56 - -
Closures (29) (13) (16) (58)
June 15, 1996 4,940 2,962 943 8,845
24 Weeks Ended:
Beginning of Year 5,145 2,819 863 8,827
New Builds &
Acquisitions 39 33 104 176
Refranchising &
Licensing (131) 131 - -
Closures (113) (21) (24) (158)
June 15, 1996 4,940 2,962 943 8,845
___________________________________________________________________________
Net sales decreased $146 million or 14% for the quarter and $86
million or 5% year-to-date. The sales decline was driven by a decrease in
same store sales for company-operated units of 13% for the quarter and 2%
year-to-date and the unfavorable impact of net unit activity of $29 million
for the quarter and $38 million year-to-date as summarized below. Same
store sales reflected quarterly and year-to-date declines in delivery,
carryout and dine-in. The decline in same store sales reflected lower
volumes of $180 million for the quarter and $166 million year-to-date
primarily resulting from the difficult comparison to 1995 when same store
sales increased 14% in the quarter due to the successful introduction of
Stuffed Crust pizza. These declines were partially offset by a higher
average guest check primarily resulting from reduced promotional
activities.
- -26-
The summary of the impact of net unit activity on year-over-year net sales
comparisons is as follows:
($ in millions) June 15, 1996_____
12 Weeks 24 Weeks
Ended__ Ended_
Closed and refranchised stores $(47) $(81)
New stores and ongoing franchise
fees and PFS sales related to
refranchised stores 18 41
Initial franchise fees related
to refranchised stores - 2
Net unit activity $(29) $(38)
Operating profit grew $7 million or 7% for the quarter and $48 million
or 30% year-to-date. The profit growth reflected the higher average guest
check and the favorable impact of net unit activity of $33 million for the
quarter and $61 million year-to-date as summarized below. These benefits
were partially offset by lower volumes of $68 million and $64 million for
the quarter and year-to-date, respectively, and higher operating costs
partially offset by lower administrative expenses. The higher operating
costs reflected a $9 million SFAS 121 noncash impairment charge and
increased labor and cheese costs, partially offset by reduced depreciation
and amortization expense of $5 million and $8 million for the quarter and
year-to-date, respectively, as a result of the reduced carrying amount of
restaurant assets in connection with the 1995 adoption of SFAS 121. See
Note 3 to the Condensed Consolidated Financial Statements and page 25 for
further details on the 1996 impairment charge. The decline in
administrative expenses reflected the absence of a $20 million headquarters
relocation accrual recorded in the second quarter of last year, partially
offset by increased field and headquarters administrative expenses, in part
related to costs associated with its new headquarters facility in Dallas.
The summary of the impact of net unit activity on year-over-year operating
profit comparisons is as follows:
($ in millions) June 15, 1996______
12 Weeks 24 Weeks
Ended__ Ended_
Closed and refranchised stores $(4) $(5)
New stores and ongoing franchise
fees and PFS profit related
to refranchised stores 3 8
Initial franchise fees related
to refranchised stores - 2
Net refranchising gains* 34 56
Net unit activity $33 $ 61
* The quarter reflected refranchising gains of $36 less $1 of store closure
costs in 1996 compared to $6 of refranchising gains less $5 of store
closure costs in 1995. Year-to-date reflected $62 of refranchising
gains less $1 of store closure costs in 1996 compared to $13 of
refranchising gains less $8 of store closure costs in 1995.
The operating profit margin increased over 2 points for the quarter and
over 3 points year-to-date to 11.8% for both periods, primarily reflecting
the benefits of the net refranchising gains.
- -27-
Taco Bell-U.S
($ in millions)
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 discussions of
net sales and operating profit that follow do not include HNN and Chevys,
unless otherwise indicated.
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Sales $811 $810 - $1,553 $1,538 1
Operating Profit $ 59 $ 45 31 $ 81 $ 78
4
___________________________________________________________________________
1996 Restaurant Unit Activity
Company-
Operated Franchised Licensed Total
12 Weeks Ended:
Beginning Balance 3,070 1,874 1,727 6,671
New Builds &
Acquisitions 20 25 154 199
Refranchising &
Licensing (22) 19 3 -
Closures (14) (2) (74) (90)
June 15, 1996 3,054 1,916 1,810 6,780
24 Weeks Ended:
Beginning of Year 3,133 1,779 1,578 6,490
New Builds &
Acquisitions 42 44 360 446
Refranchising &
Licensing (100) 97 3 -
Closures (21) (4) (131) (156)
June 15, 1996 3,054 1,916 1,810 6,780
___________________________________________________________________________
Net sales increased $1 million for the quarter and $15 million or 1%
year-to-date. The sales growth for both periods was led by higher
effective net pricing, reflecting increased pricing and lower promotional
activity led by the absence of second quarter 1995 promotional costs
related to the introduction of Border Lights, and, for the year-to-date, an
$8 million favorable impact of net unit activity as summarized below.
These gains were partially offset by a decline in restaurant volumes of $26
million for the quarter and $45 million year-to-date, mitigated by
increased lower-margin PFS volumes to franchisees of $11 million for the
quarter and $21 million year-to-date and, for the quarter, a $3 million
unfavorable impact of net unit activity as summarized below. Same store
sales for company-operated units declined 1% for the quarter and year-to-
date, though volume decreased at a faster rate. Increased sales at Chevys
for the quarter and year-to-date, driven by additional units, were
substantially offset by a decline in sales at HNN for both periods,
primarily reflecting the absence of 1995 sales associated with company-
operated units licensed or closed after the second quarter of 1995.
- -28-
The summary of the impact of net unit activity on year-over-year net sales
comparisons is as follows:
June 15, 1996
($ in millions) 12 Weeks 24 Weeks
Ended Ended
Closed and refranchised stores $(46) $(76)
New stores and ongoing franchise
fees and PFS sales related to
refranchised stores 41 79
Initial franchise fees related
to refranchised stores 2 5
Net unit activity $ (3) $ 8
Operating profit increased $14 million or 31% for the quarter and $3
million or 4% year-to-date. The modest growth year-to-date was driven by
significantly increased losses from HNN, primarily reflecting a $26 million
charge discussed below. Taco Bell's quarter and year-to-date core
operating profit growth benefited from the higher net pricing and the
impact of the net unit activity of $9 million for the quarter and $26
million year-to-date as summarized below. These benefits were partially
offset by volume declines of $11 million for the quarter and $19 million
year-to-date, a net unfavorable product mix shift to lower-margin products,
increased administrative costs, led by spending for initiatives to improve
efficiencies and speed of service in our restaurants, and increased
operating costs. The increased operating costs reflected an increase in
labor costs as a result of an initiative to increase management in the
restaurants, increased marketing costs, led by the "Nothing Ordinary About
It" campaign, a $4 million SFAS 121 noncash impairment charge and higher
repairs and maintenance expenses. See Note 3 to the Condensed Consolidated
Financial Statements and page 25 for further details on the 1996 impairment
charge. These were partially offset by favorable food costs, led by lower
lettuce prices and, for the year-to-date, reduced beef prices, and reduced
depreciation and amortization expense of $3 million and $5 million for the
quarter and year-to date, respectively, as a result of the reduced carrying
amount of restaurant assets in connection with the 1995 adoption of SFAS
121. The quarter and year-to-date results were also favorably impacted
from the lapping of roll-out costs for Border Lights incurred during the
first half of 1995.
- -29-
The summary of the impact of net unit activity on year-over-year operating
profit comparisons is as follows:
June 15, 1996
($ in millions) 12 Weeks 24 Weeks
Ended Ended
Closed and refranchised stores $(1) $(3)
New stores and ongoing franchise
fees and PFS profit related to
refranchised stores 7 11
Initial franchise fees related
to refranchised stores 2 5
Net refranchising gains* 1 13
Net unit activity $ 9 $26
* The quarter reflected $2 of refranchising gains less $1 of store closure
costs in 1996. Year-to-date reflected $14 of refranchising gains less $2
of store closure costs in 1996 compared to $1 of store closure costs in
1995.
Chevys reported modest operating profits for the quarter and year-to-
date compared to operating losses for the same respective periods in 1995.
The improvement reflected the benefit of a margin improvement program and
additional units. HNN's losses were reduced in the quarter, but increased
significantly year-to-date. Both periods were favorably impacted by
reduced depreciation and amortization expense of $2 million and $4 million
for the quarter and year-to-date, respectively, as a result of the reduced
carrying amount of restaurant assets in connection with the 1995 adoption
of SFAS 121 and the absence of 1995 operating losses associated with
licensed or closed units. For the year-to-date, a $26 million charge
related to the write-down of HNN assets held for disposal and additional
store closure costs more than offset these benefits. During 1995, Taco
Bell initiated a plan to license or franchise all of its HNN units. Almost
75% of HNN's 200 units had been licensed or franchised during 1995.
However, all but 9 of the licensed units have been closed and returned,
including 23 returned shortly following the end of the second quarter. All
of the returned units have been de-identified as HNN units and are held for
sale. Taco Bell is also continuing its efforts to sell the remaining
company-operated HNN units, other closed units and undeveloped sites.
The Taco Bell operating profit margin increased more than 1 1/2 points
to 7.3% for the quarter and was essentially unchanged at 5.2% year-to-date.
- -30-
KFC-U.S.
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Sales $435 $389 12 $821 $747 10
Operating Profit $ 32 $ 21 52 $ 52 $ 35 49
___________________________________________________________________________
Company-
Operated Franchised Licensed Total
12 Weeks Ended:
Beginning Balance 2,017 3,001 109 5,127
New Builds &
Acquisitions 8 11 6 25
Refranchising &
Licensing - - - -
Closures (12) (11) (2) (25)
June 15, 1996 2,013 3,001 113 5,127
24 Weeks Ended:
Beginning of Year 2,031 3,001 110 5,142
New Builds &
Acquisitions 12 16 11 39
Refranchising &
Licensing - - - -
Closures (30) (16) (8) (54)
June 15, 1996 2,013 3,001 113 5,127
___________________________________________________________________________
Net sales rose $46 million or 12% for the quarter and $74 million or 10%
year-to-date driven by an increase in same store sales for company-operated
units of 11% and 9% for the quarter and year-to-date, respectively. This
growth primarily reflected higher volumes of $21 million for the quarter
and $32 million year-to-date and a higher average guest check due to the
incremental impact of Colonel's Crispy Strips and higher-priced fountain
drinks and increased pricing and lower promotional activity. The volume
gains were driven by the introduction of TenderRoast in the quarter, new
product offerings introduced in the latter half of 1995, such as Colonel's
Crispy Strips and Chunky Chicken Pot Pies, increases attributable to
combined KFC and Taco Bell stores and home delivery stores.
Operating profit increased $11 million or 52% for the quarter and $17
million or 49% year-to-date. The profit growth primarily reflected the
higher average quest check, increased volumes of $4 million for the quarter
and $7 million year-to-date and higher franchise royalty revenues. These
gains were partially offset by increased store operating costs and higher
administrative costs. The higher store operating costs reflected increased
food costs, primarily higher chicken prices, and a $3 million SFAS 121
noncash impairment charge, partially offset by reduced depreciation and
amortization expense of $3 million and $5 million for the quarter and year-
to-date, respectively, as a result of the reduced carrying amount of
restaurant assets in connection with the 1995 adoption of SFAS 121. See
- -31-
Note 3 to the Condensed Consolidated Financial Statements and page 25 for
further details on the 1996 impairment charge. The increase in
administrative costs is primarily due to a national conference KFC held to
focus and develop its restaurant general managers. In addition, the profit
growth was also depressed by a $4 million charge related to estimated costs
expected to be incurred in connection with an acquisition made several
years ago. The profit margin increased 2 points to 7.4% for the quarter
and over 1 1/2 points to 6.3% year-to-date.
- -32-
International
($ in millions)
12 Weeks Ended 24 Weeks Ended
% %
6/15/96 6/17/95 Change 6/15/96 6/17/95 Change
Net Sales $530 $473 12 $1,032 $942 10
Operating Profit $ 26 $ 20 30 $ 57 $ 50 14
___________________________________________________________________________
1996 Restaurant Unit Activity
Company- Joint
Operated Venture Franchised Licensed Total
12 Weeks Ended:
Beginning Balance 2,458 939 4,501 210 8,108
New Builds &
Acquisitions 37 19 105 33 194
Refranchising &
Licensing (8) - - 8 -
Closures (37) (5) (16) (6) (64)
June 15, 1996 2,450 953 4,590 245 8,238
24 Weeks Ended:
Beginning of Year 2,454 926 4,426 197 8,003
New Builds &
Acquisitions 81 33 195 50 359
Refranchising &
Licensing (37) - 29 8 -
Closures (48) (6) (60) (10) (124)
June 15, 1996 2,450 953 4,590 245 8,238
___________________________________________________________________________
The KFC, Pizza Hut and Taco Bell concepts represented approximately 54%,
43% and 3%, respectively, for both the quarter and year-to-date of total
international restaurant sales in 1996, which approximates prior year
percentages.
Net sales increased $57 million or 12% for the quarter and $90 million
or 10% year-to-date with Pizza Hut contributing approximately 52% and 57%
of the quarter and year-to-date increase, respectively. The sales growth
was driven by the favorable impact of net unit activity of $28 million in
the quarter and $63 million year-to-date as summarized below, higher
effective net pricing, increased volumes which contributed $14 million for
both the quarter and year-to-date and increased franchise royalty revenue.
These gains were partially offset by lower equipment sales and for the year-
to-date, a net unfavorable currency translation impact, primarily due to
the continuing devaluation of the Mexican peso.
- -33-
The summary of the impact of net unit activity on year-over-year net sales
comparisons is as follows:
June 15, 1996
($ in millions) 12 Weeks 24 Weeks
Ended Ended
Closed and refranchised stores $(6) $(12)
New stores and ongoing franchise
fees and PFS sales related to
refranchised stores 34 75
Initial franchise fees related
to refranchised stores - -
Net unit activity $28 $ 63
Operating profit increased $6 million or 30% for the quarter and $7
million or 14% year-to-date. Growth in concept contribution, as measured
by store level contribution and franchise royalty revenues, was primarily
led by Pizza Hut and, to a lesser extent, KFC year-to-date. The profit
growth reflected the higher effective net pricing, the increased franchise
royalty revenues, the favorable impact of net unit activity of $3 million
for the quarter and $9 million year-to-date as summarized below and
increased volumes of $5 million for the quarter and $4 million year-to-
date. These gains were partially offset by higher store operating costs
and increased administrative and support costs. The higher store operating
costs primarily reflected increased food prices and labor costs and a $2
million SFAS 121 noncash impairment charge, partially offset by reduced
depreciation and amortization expense of $3 million and $7 million for the
quarter and year-to-date, respectively, as a result of the reduced carrying
amount of restaurant assets in connection with the 1995 adoption of SFAS
121. See Note 3 to the Condensed Consolidated Financial Statements and
page 25 for further details on the 1996 impairment charge. The increase in
administrative and support costs is primarily due to the "PRI Way" (i.e.,
initiatives to standardize processes) and other project spending and
additional costs in certain regional offices to support growth, partially
offset by savings from the 1995 consolidation of the separate regional and
country offices supporting KFC and Pizza Hut operations. Increased year-to-
date administrative and support costs were primarily driven by lapping the
effect of one less reporting period for KFC headquarters expenses in 1995.
The operating profit margin increased more than one-half point to 4.9% for
the quarter and increased modestly to 5.5% year-to-date.
The summary of the impact of net unit activity on year-over-year operating
profit comparisons is as follows:
($ in millions) June 15, 1996
12 Weeks 24 Weeks
Ended Ended
Closed and refranchised stores $(1) $(2)
New stores and ongoing franchise
fees and PFS profit related to
refranchised stores 4 9
Initial franchise fees related
to refranchised stores - -
Net refranchising gains* - 2
Net unit activity $ 3 $ 9
* Year-to-date reflected $2 of refranchising gains in 1996.
- -34-
The increase in operating profit was principally driven by
improvements in Mexico and Spain for both the quarter and year-to-date.
The quarterly and year-to-date profit in Mexico, compared to losses in
1995, primarily resulted from higher effective net pricing and gains in
volume, partially offset by increases in chicken prices and labor costs.
The reduced losses in Spain were driven by reduced depreciation and
amortization expense as a result of the reduced carrying amount of
restaurant assets in connection with the 1995 adoption of SFAS 121 and
volume gains, reflecting the introduction of Stuffed Crust pizza.
Following is a discussion of operating profit by key international
market. A double-digit profit decline in Australia, our largest
international sales market, was driven by increased food costs, primarily
chicken and cheese, in excess of volume and price gains and lower
administrative costs. Strong single-digit profit growth in the quarter and
a double-digit profit gain year-to-date in Canada, our second largest
international sales market, reflected increased effective net pricing,
partially offset by escalating food prices and labor costs. A single-digit
profit gain in the quarter and a double-digit gain year-to-date in Korea,
our largest international profit market, primarily reflected additional
units and higher effective net pricing, partially offset by volume declines
and increased labor costs.
- -35-
Cash Flows and Financial Condition
Summary of Cash Flows
In the first half of 1996, net cash flow provided by operating activities,
debt activities, sales of restaurants and exercises of stock options of
$1.1 billion, $544 million, $200 million and $162 million, respectively,
substantially funded capital spending of $960 million, share repurchases of
$725 million and dividend payments of $315 million.
Summary of Operating Activities
($ in millions) 24 Weeks Ended
6/15/96 6/17/95
Net income $ 977 $ 808
Noncash charges and credits, net 971 1,029
Income before noncash charges and credits 1,948 1,837
Net change in operating working capital (875) (962)
Net Cash Provided by Operating Activities $1,073 $ 875
_________________________________________________________________________
Net cash provided by operating activities increased $198 million or
23% from 1995 to $1.1 billion due to a $111 million or 6% increase in
income before noncash charges and credits and a $87 million or a 9%
decrease in operating working capital net cash outflows. The reduction in
operating working capital net cash outflows primarily reflected a decrease
in accounts and notes receivable cash outflows and an increase in accrued
income taxes in 1996 compared to a decrease in 1995, primarily reflecting
tax payments in excess of the current provision in 1995. The decrease in
cash outflows from accounts and notes receivable reflected a sale of $110
million of trade accounts receivable in 1996 to take advantage of favorable
effective financing rates implicit in the transaction, as compared to
commercial paper financing. These sources of funds were partially offset
by increased growth in prepaid expenses and inventories, and a greater
decline in accounts payable due to timing of payments.
Summary of Investing Activities
($ in millions) 24 Weeks Ended
6/15/96 6/17/95
Acquisitions and investments
in unconsolidated affiliates $ (28) $ (113)
Capital spending (960) (868)
Sales of restaurants 200 21
Net short-term investments 88 (7)
Other investing activities, net (47) (91)
Net Cash Used for Investing Activities $(747) $(1,058)
_________________________________________________________________________
Net cash used for investing activities decreased $311 million
principally reflecting increased proceeds from sales of restaurants of $179
million, $95 million due to $88 million of proceeds from short-term
investment portfolios in 1996 compared to a $7 million investment in 1995,
and reduced acquisition and investment activity of $85 million, partially
offset by increased capital spending of $92 million. The proceeds from the
sales of restaurants are part of management's strategy to improve
restaurant operating results and investment returns as outlined in our 1995
- -36-
Annual Report. With respect to short-term investment portfolios, which are
primarily held outside the U.S., PepsiCo manages the investment activity in
its short-term portfolios as part of its overall financing strategy.
PepsiCo continually reassesses its alternatives to redeploy them
considering investment opportunities and risks, tax consequences and
current financing activity. The increase in capital spending primarily
reflected increased U.S. snack food spending of $173 million, primarily for
capacity expansion for both established and new products, including
acquisition of plants previously owned by Eagle, and improved delivery
systems, partially offset by decreased spending in worldwide restaurants,
primarily in the U.S., of $105 million. For the full year, acquisition and
investment activity is expected to be substantially lower than in 1995.
Summary of Financing Activities
($ in millions) 24 Weeks Ended
6/15/96 6/17/95
Net short and long-term debt $ 544 $ 590
Cash dividends paid (315) (283)
Purchases of treasury stock (725) (186)
Proceeds from exercises of stock options 162 88
Other, net (22) (21)
Net Cash (Used for) Provided by
Financing Activities $(356) $ 188
_________________________________________________________________________
The $544 million decline in cash flow from financing activities
principally reflected increased share repurchases of $539 million, reduced
proceeds from net debt activity of $46 million and increased dividend
payments of $32 million, partially offset by increased proceeds of $74
million from exercises of stock options.
See Note 5 to Condensed Consolidated Financial Statements for details
of debt issuances and repayments during the quarter.
Through July 18, 1996, PepsiCo repurchased 25.4 million treasury
shares or 1.6% of the shares outstanding at the beginning of the year, at a
cost of $792 million. At July 19, 1996, 80.2 million shares are available
under the current repurchase authority granted by PepsiCo's Board of
Directors.
Financial Condition
At June 15, 1996 and December 30, 1995, $3.5 billion 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 on a long-term basis. PepsiCo's unused credit
facilities with lending institutions, which exist largely to support the
issuances of short-term borrowings, were $3.5 billion at June 15, 1996 and
December 30, 1995.
As described in PepsiCo's 1995 Annual Report, PepsiCo measures
financial leverage on a market value basis as well as on a historical cost
basis. PepsiCo's market value ratio was 17% at June 15, 1996 and 18% at
December 30, 1995. The decrease was due to a 19% increase in PepsiCo's
stock price partially offset by an 8% increase in net debt. PepsiCo's
- -37-
historical cost ratio of net debt to net capital employed was 48% at June
15, 1996 and 46% at December 30, 1995. The increase reflected the growth
in net debt partially offset by a 5% increase in net capital.
PepsiCo's operating working capital position, which excludes short-
term investments and short-term borrowings, was a positive $656 million at
June 15, 1996 as compared to a negative $94 million at December 30, 1995.
PepsiCo has historically had a negative operating working capital position,
which principally reflected the cash sales nature of its restaurant
operations. This condition effectively provided additional capital for
investment. The positive working capital position at the end of the second
quarter reflects PepsiCo's continued trend of increased investment in its
more working capital intensive bottling and snack food businesses combined
with a decline in the number of company-operated restaurants. This decline
is consistent with the strategy to improve restaurant returns. The $750
million increase in working capital reflected an increase in receivables,
led by worldwide beverages and snack foods, reflecting seasonality, volume
growth and timing of collections, partially offset by the sale of $110
million of trade accounts receivable in 1996. Additionally, the increase
in working capital also reflected lower accounts payable, increased
inventories, primarily due to higher-priced, seasonal wheat purchases in
Gamesa, higher prepaid expenses, taxes and other current assets and reduced
advertising accruals, partially offset by increased other current
liabilities.
Investments in unconsolidated affiliates declined $98 million
primarily due to the consolidation of California Pizza Kitchen (CPK),
previously an unconsolidated equity investment, at the end of the second
quarter. This reflected our gaining majority control of CPK's Board of
Directors as a result of PepsiCo receiving 100% of CPK's newly issued
voting preferred shares in settlement of a $119 million outstanding note to
PepsiCo.
Shareholders' equity increased $140 million as net income of $977
million and a $95 million increase in capital in excess of par value was
partially offset by a $572 million increase in treasury stock, driven by
the share repurchases, and $338 million of dividends declared.
- -38-
<audit-report>
Independent Accountants' Review Report
The Board of Directors
PepsiCo, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
PepsiCo, Inc. and Subsidiaries as of June 17, 1996 and the related
condensed consolidated statement of income for the twelve and twenty-four
weeks ended June 15, 1996 and June 17, 1995, and the condensed consolidated
statement of cash flows for the twenty-four weeks ended June 15, 1996 and
June 17, 1995. These financial statements are the responsibility of
PepsiCo, Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PepsiCo, Inc. and Subsidiaries
as of December 30, 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended not presented
herein; and in our report dated February 6, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 30, 1995, is fairly presented, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Our report, referred to above, contains an explanatory paragraph that
states that 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," and in 1994 adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" and
changed its method for calculating the market-related value of pension plan
assets used in the determination of pension expense.
KPMG Peat Marwick LLP
New York, New York
July 23, 1996
- -39-
</audit-report>
PART II. OTHER INFORMATION AND SIGNATURES
Item 4. Submission of Matters to a Vote of Security Holders
(a) PepsiCo's Annual Meeting of Shareholders was held on
May 1, 1996.
(c) Certain proposals voted upon at the Annual Meeting, and
the number of votes cast for, against and abstentions with
respect to each, were as follows:
Description of Proposals Number of Shares (in millions)
For Against Abstain
Shareholders' proposal of 60 1,041 72
political non-partisanship.
Shareholders' proposal 314 838 20
concerning cumulative
voting for election of
directors.
Shareholders' proposal 74 1,024 75
concerning smokefree
restaurants.
Shareholders' proposal 43 1,019 111
concerning code of conduct.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 42.
(b) Reports on Form 8-K
PepsiCo filed a current report on Form 8-K dated May 2, 1996
attaching the PepsiCo, Inc. press release of May 1, 1996
which announced a two-for-one split of PepsiCo's capital
stock for shareholders of record at the close of business on
May 10, 1996.
PepsiCo filed a current report on Form 8-K dated May 13, 1996
describing a final U.S. income tax regulation promulgated by
the U.S. Treasury Department. The final regulation will not
significantly impact PepsiCo although the regulation, as
originally proposed, was expected to have significantly
reduced the tax incentives associated with our beverage
concentrate operations in Puerto Rico and therefore, have a
negative impact on PepsiCo's effective tax rate.
- -40-
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned.
PEPSICO, INC.
(Registrant)
Date: July 30, 1996 Robert L. Carleton
Senior Vice President and
Controller
Date: July 30, 1996 Lawrence F. Dickie
Vice President, Associate General
Counsel and Assistant Secretary
- -41-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
Exhibit 3 (i) Restated Articles of Incorporation
Exhibit 3 (ii) Copy of By-Laws of PepsiCo, Inc.
amended to July 25, 1996
Exhibit 11 Computation of Net Income Per Share of
Capital Stock - Primary and Fully
Diluted
Exhibit 12 Computation of Ratio of Earnings to
Fixed Charges
Exhibit 15 Letter from KPMG Peat Marwick LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment)
Exhibit 27 Financial Data Schedule
- -42-