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 28, 1996
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 number of shares of PepsiCo Capital Stock outstanding as of
March 14, 1997 was 1,541,460,586.
Documents of Which Portions Parts of Form 10-K into Which Portion
Are Incorporated by Reference of Documents Are Incorporated
- ----------------------------- -----------------------------
Proxy Statement for PepsiCo's I, III
May 7, 1997
Annual Meeting of Shareholders
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. In January, 1997, the
Company announced that it would pursue a plan to spin off its restaurant
businesses, consisting of Pizza Hut, Taco Bell and KFC, to shareholders as
an independent publicly traded company. In 1996, the Company decided to
dispose of its non-core restaurant businesses.
Beverages
PepsiCo's beverage business, which operates as Pepsi-Cola Company, is
comprised of two business units: Pepsi-Cola North America ("PCNA"), and
Pepsi-Cola Company International ("PCCI").
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 Lipton, 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 175 plants
located throughout the United States and Canada. PCNA operates
approximately 65 plants, and manufactures, sells and distributes beverages
throughout approximately 455 licensed territories, accounting for
approximately 56% of the Pepsi-Cola beverages sold in the United States and
Canada. Approximately 110 plants are operated by independent licensees or
unconsolidated affiliates, 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.
PCCI manufactures and sells beverage products, primarily soft drinks
and soft drink concentrates, outside the United States and Canada. PCCI
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, DIET 7UP and other trademarks. PCCI operates
approximately 30 plants bottling PepsiCo beverage products. There are
approximately 560 plants operated by independent licensees or
unconsolidated affiliates, bottling PepsiCo's beverage products. These
products are available in 191 countries and territories outside the United
States and Canada. Principal international markets include Argentina,
Brazil, China, Mexico, Saudi Arabia, Spain, Thailand and the United Kingdom.
2
PCNA and PCCI make programs available to assist licensed bottlers in
servicing markets, expanding operations and improving production methods and
facilities. PCNA and PCCI 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 PCCI maintain control
over the composition and quality of beverages sold under PepsiCo trademarks.
Snack Foods
PepsiCo's snack food business, which operates as The Frito-Lay Company,
is comprised of Frito-Lay North America ("Frito-Lay") and Frito-Lay
International ("FLI") (formerly known as PepsiCo Foods International).
Frito-Lay manufactures and sells a varied line of salty snack foods
throughout the United States and Canada, including 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 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 17,500
person sales force delivers the snacks directly to the store shelf. This
system permits Frito-Lay to work closely with approximately 500,000 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.
FLI's products are available in 81 countries outside the United States
and Canada through company-owned facilities and unconsolidated affiliates.
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. FLI 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 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 Australia, Brazil, France,
Mexico, the Netherlands, Poland, Spain and the United Kingdom.
3
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, Canada,
Guam and Saipan, 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 4,800 PIZZA HUT restaurants, delivery/carryout units and other
outlets in the United States and approximately 245 in Canada. Franchisees
operate approximately 3,000 additional restaurants, delivery/carryout units
and other outlets in the United States and approximately 165 in Canada, Guam
and Saipan. Licensees operate approximately 1,000 kiosk outlets in the
United States and approximately 155 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 2,900 TACO BELL outlets in the United States and
approximately 75 in Canada. Franchisees operate approximately 2,250
additional units in the United States. Licensees operate approximately
1,750 special concept outlets in the United States and approximately 35 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 245 in Canada. Franchisees operate approximately 3,000
additional restaurants in the United States and approximately 570 in
Canada. Licensees operate approximately 110 outlets in the United States
and approximately 55 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 940 PIZZA HUT
restaurants, delivery/carryout units and kiosks, franchisees operate
approximately 1,550 units, and unconsolidated affiliates operate
approximately 575 units. PIZZA HUT units are located in a total of 82
countries and territories outside of the United States and Canada. PRI also
operates approximately 990 KFC restaurants and kiosks, franchisees operate
approximately 2,500 restaurants and kiosks, and unconsolidated affiliates
operate approximately 430 restaurants and kiosks. KFC units are located in
72 countries and territories outside of the United States and Canada. PRI
also operates approximately 20 TACO BELL outlets, and franchisees and
licensees operate approximately 75 outlets, in a total of 15 countries and
territories outside of the United States and Canada. PRI's principal markets
include Australia, Korea, Mexico, Puerto Rico, Spain, New Zealand and the
United Kingdom.
PepsiCo also owns and operates other restaurant concepts in the United
States. PHNA operates approximately 155 D'ANGELO SANDWICH SHOPS, and
franchisees and licensees operate approximately 55 additional outlets. TBNA
also operates approximately 75 CHEVYS Mexican restaurants and approximately
70 CALIFORNIA PIZZA KITCHEN restaurants.
4
PepsiCo Restaurant Services Group ("PRSG"), a new unit formed in 1996 which
also includes the existing operations of PFS, PepsiCo's restaurant distribution
operation, is responsible for the consolidation of many restaurant activities
and furnishes food, supplies, equipment and services to approximately 16,000
company-operated, franchised and licensed PIZZA HUT, TACO BELL and KFC
restaurants in the United States, Canada, Mexico and Poland. On January 23,
1997, the Company announced that it is exploring the possible sale of PFS.
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. PRSG
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 28, 1996, PepsiCo employed, subject to seasonal variations,
approximately 486,000 persons (including approximately 260,000 part-time
employees), of whom approximately 335,000 (including approximately 200,000
part-time employees) were employed within the United States. PepsiCo believes
that its relations with employees are generally good.
RAW MATERIALS AND OTHER SUPPLIES
The principal materials used by PepsiCo in its beverage, snack food and
restaurant businesses are corn sweeteners, sugar, aspartame, flavorings,
vegetable and essential oils, potatoes, corn, flour, tomato products, pinto
beans, lettuce, cheese, butter, beef, pork and chicken products, seasonings and
packaging materials. Since PepsiCo relies on trucks to move and distribute many
of its products, fuel is also an important commodity. PepsiCo employs
specialists to secure adequate supplies of many of these items and has not
experienced any significant continuous shortages. Prices paid by PepsiCo for
such items are subject to fluctuation. When prices increase, PepsiCo may or may
not pass on such increases to its customers. Generally, when PepsiCo has decided
to pass along price increases, it has done so successfully. There is no
assurance that PepsiCo will be able to do so in the future.
GOVERNMENTAL REGULATIONS
The conduct of PepsiCo's businesses, and the production, distribution and
use of many of its products, are subject to various federal laws, such as the
Food, Drug and Cosmetic Act, the Occupational Safety and Health Act and the
Americans with Disabilities Act. The conduct of PepsiCo's businesses is also
subject to state, local and foreign laws.
5
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, LAY'S, DORITOS, RUFFLES, TOSTITOS,
FRITOS, CHEE.TOS, ROLD GOLD, SUNCHIPS, SANTITAS, 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 $115 million, $96 million and $152 million on research
and development activities in 1996, 1995 and 1994, 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 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 for 1996, 1995 and 1994 is
contained in Item 8 "Financial Statements and Supplementary Data" in Note 19
on page F-30.
6
Item 2. PROPERTIES
BEVERAGES
PepsiCo's beverage segment operates approximately 110 plants throughout the
world, of which approximately 100 are owned and 10 are leased, and
unconsolidated affiliates operate approximately 110 plants. In addition,
PepsiCo's beverage business operates approximately 370 warehouses or offices in
the United States and Canada, of which approximately 260 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 approximately 50 food manufacturing and processing
plants in the United States and Canada, of which approximately 45 are owned and
5 are leased. In addition, Frito-Lay owns approximately 195 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 70 plants and approximately
900 distribution centers, warehouses and offices outside of the United States
and Canada.
RESTAURANTS
Through PHNA, TBNA, KFCNA and PRI, PepsiCo owns approximately 3,400 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.
Unconsolidated affiliates operate approximately 1,000 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 21 distribution centers and 1 manufacturing plant in the
United States. PFS owns 1 and leases 2 distribution centers outside of the
United States.
7
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 for, 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
Roger A. Enrico Chairman of the Board and 52
Chief Executive Officer
Karl M. von der Heyden Vice Chairman of the Board 60
and Chief Financial Officer
Randall C. Barnes Senior Vice President and 45
Treasurer
Robert L. Carleton Senior Vice President and 56
Controller
Edward V. Lahey, Jr. Senior Vice President, 58
General Counsel and
Secretary
Indra K. Nooyi Senior Vice President, 41
Strategic Planning
8
Steven S Reinemund Chairman and Chief 48
Executive Officer of The
Frito-Lay Company
Craig E. Weatherup Chairman and Chief 51
Executive Officer of
Pepsi-Cola Company
Each of the above-named officers has been employed by PepsiCo in an
executive capacity for at least five years except Indra K. Nooyi and Karl M.
von der Heyden. 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. Information regarding Mr. von der Heyden's business experience
during the past five years is set forth in the Proxy Statement for the
Company's 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
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.
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 1996, there were approximately 207,000
shareholders of record.
Dividend Policy - Quarterly cash dividends are usually declared in
November, January, May and July and paid at the beginning of January and the
end of March, June and September. The dividend record dates for 1997 are
expected to be March 14, June 13, September 12 and December 12. Quarterly
cash dividends have been paid since 1965, and dividends paid per share have
increased for 24 consecutive years.
9
Cash Dividends Declared Per Share (in cents): (See Note 1)
Quarter 1996 1995
1 10 9
2 11 1/2 10
3 11 1/2 10
4 11 1/2 10
Total 44 1/2 39
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 1996 and 1995 were as
follows (in dollars): (See Note 1)
1996 High Low Close
First Quarter 33 3/8 27 1/2 31 5/8
Second Quarter 34 1/2 29 11/16 33 1/8
Third Quarter 35 5/8 28 1/4 28 3/8
Fourth Quarter 32 7/8 28 1/8 29 5/8
1995 High Low Close
First Quarter 20 1/2 16 15/16 20 3/16
Second Quarter 24 1/2 19 1/2 23 5/16
Third Quarter 23 5/8 21 13/16 22 7/8
Fourth Quarter 29 23 1/8 27 15/16
Note 1: Cash dividends and stock prices have been adjusted to reflect the
two-for-one stock split effective for shareholders of record at the close of
business on May 10, 1996.
ITEM 6. SELECTED FINANCIAL DATA
Included on pages F-44 through F-50.
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOWS
AND FINANCIAL CONDITION
MANAGEMENT'S ANALYSIS
INTRODUCTION
Management's Analysis is presented in four sections. The first section
provides introductory comments, highlights items that significantly impact
comparability of reported financial information and provides some
perspective of our operations outside of the United States (pages 10-13).
The second section analyzes the results of operations, first on a
consolidated basis and then for each of our three industry segments (pages
13-31). The final two sections address our consolidated cash flows and
financial condition, which also includes our Cautionary Statements (pages
31-36).
10
As described in Note 1 to the Consolidated Financial Statements, we had
a two-for-one stock split in 1996. All share data in Management's Analysis
have been adjusted to reflect the stock split.
CHANGE IN SEGMENT REPORTING
Beginning in the fourth quarter of 1996, we changed the segment reporting
which supports our Management's Analysis to more closely reflect how we
manage the business. As a result, our beverages and snack foods segments
are now reported on a North American basis (U.S. and Canada combined) and an
International basis (all other international) while the restaurants segment
continues to be reported on a U.S. and international basis. Also, the net
sales and operating profit we report externally now generally match the net
sales and operating profit our operating units report to our senior
management. The operating profit reported on this "Management Basis" does
not reflect items the operating units are not held accountable for, such as
the $520 million initial impact of adopting Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in 1995 (see
Note 4). It also does not reflect insignificant allocations for corporate
items directly attributable to the segments or exclude results from
unconsolidated affiliates, both of which are required by Statement of
Financial Accounting Standards No. 14 (SFAS 14), "Financial Reporting for
Segments of a Business Enterprise." The Management Basis operating profit
(page 19) includes a reconciliation to the operating profit disclosure
required by SFAS 14, which is provided in Note 19. Prior year amounts and
related management's analysis have been restated.
CERTAIN FACTORS AFFECTING COMPARABILITY
The following table summarizes items impacting comparability, which are
described in Notes 2, 13 and 15. We believe the items included in the first
section are so unusual and distortive that we do not include them when we
evaluate the ongoing performances of our businesses.
11
($ in millions except Expense/(Income)
per share amounts) 1996 1995 1994
---- ---- -----
Per Per Per
(a) Share (a) Share (a) Share
UNUSUAL ITEMS AND --- ----- --- ------ --- -----
ACCOUNTING CHANGES
- ------------------
International beverages
impairment, disposal
and other charges $ 576 $ 0.33
Disposal of non-core
U.S. restaurant businesses 246 0.12
Gain on stock offering
by an unconsolidated
affiliate $(18) $(0.01)
Accounting changes (b)
SFAS 121 $520 $ 0.24
SFAS 112 84 0.03
Pension assets (38) (0.01)
----- ----- ---- ------ ---- ------
$ 822 $ 0.45 $520 $ 0.24 $ 28 $ 0.01
----- ----- ---- ------ ---- ------
OTHER ITEMS
- -----------
Refranchising gains (c) $(139) $(0.05) $(93) $(0.03)
Store closure costs 40 0.01 38 0.01 $10 $ -
---- ---- ---- ---- --- ------
Net refranchising
(gains)/ losses (99) (0.04) (55) (0.02) 10 -
Reduced depreciation
and amortization (46) (0.02) (21) (0.01)
Recurring restaurant
impairment charges 62 0.03
Fifty-third week (54) (0.02)
---- ------ ----- ------ --- ----
$ (83) $(0.03) $(76) $(0.03) $(44) $(0.02)
==== ====== ==== ====== ==== ======
(a) Pre-tax amounts.
(b) Initial impact of adopting SFAS 121 and cumulative effect of other
accounting changes.
(c) Included initial franchise fees.
12
INTERNATIONAL BUSINESSES
Excluding the $576 million of unusual impairment, disposal and other
charges, ongoing international operating profit (including Canada), as
measured on the Management Basis, represented 10%, 24% and 20% of our
consolidated operating profit in 1996, 1995 and 1994, respectively. The
decline in 1996 reflected an operating loss in International beverages
compared to an operating profit in 1995. The 4% growth in 1995 was slowed
by Mexico, formerly our largest international market, where the Mexican peso
devalued approximately 50% in late 1994 and early 1995. Consumer demand
declined dramatically in response to declining real incomes, increased
unemployment and price increases taken to offset rising costs.
Our efforts to stimulate demand, reduce costs and reduce capital spending
resulted in only a modest decline in peso operating profit. However, on a
U.S. dollar basis, 1995 sales, income and identifiable assets in Mexico
declined dramatically, reflecting the unfavorable translation effect of the
much weaker peso, as summarized below:
($ in millions except
per share amounts)
%
1995 1994 Decline
---- ---- -------
Net sales $1,228 $2,023 39
Net income $ 55 $ 175 69
Net income per
share $ 0.03 $ 0.11 73
Identifiable
assets $ 637 $ 995 36
RESULTS OF OPERATIONS
Volume is defined as the estimated effect on net sales and operating profit
of the year-over-year change in company-owned Bottler Case Sales and
concentrate unit sales in beverages, pound or kilo sales in snack foods and
transaction counts in restaurants.
CONSOLIDATED REVIEW
NET SALES
% Growth Rates
--------------
($ in millions) 1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Net sales $31,645 $30,255 $28,351 5 7
- ------------------------------------------------------------------------------
Worldwide net sales rose $1.4 billion in 1996 reflecting higher effective
net pricing (including the effect of product, package and country mix) in
each of our three business
13
segments and net volume gains of $592 million. The higher effective net pricing
was partially offset by an unfavorable foreign currency exchange impact,
primarily reflecting the weaker peso and the strengthening of the U.S. dollar
compared to the Japanese yen. The volume gains were driven by worldwide snack
foods and North American beverages, partially offset by declines at U.S.
restaurants. The sales growth rate was reduced by 1 point as we reduced our
ownership of the restaurant system through refranchising and closing
underperforming restaurants, as described in Management's Analysis - Restaurants
beginning on page 26.
Worldwide net sales rose $1.9 billion or 7% in 1995. The fifty-third week
in 1994 reduced worldwide net sales growth by approximately 2 points. The growth
benefited from higher effective net pricing in International snack foods, driven
by Mexico, and in North American beverages, primarily to help offset higher
prices for packaging. These benefits were partially offset by the unfavorable
currency translation impact of the weaker peso on International snack foods.
Volume gains in worldwide snack foods and beverages added $934 million to net
sales. Additional restaurant units contributed $623 million to sales growth.
COST OF SALES
($ in millions) 1996 1995 1994
---- ---- ----
Cost of sales $15,383 $14,886 $13,715
As a percent of net sales 48.6% 49.2% 48.4%
- ------------------------------------------------------------------------------
Cost of sales as a percent of net sales decreased .6 of a point in 1996
primarily due to lower raw materials costs in North American beverages coupled
with the leveraging effect of the higher effective net pricing.
The .8 of a point increase in cost of sales as a percent of net sales in
1995 was primarily due to higher packaging prices in North American beverages,
the effect of which was partially mitigated by increased effective net pricing,
and an unfavorable mix shift in International beverages sales from higher-margin
concentrate to lower-margin packaged products. Cost of sales as a percent of net
sales in International snack foods increased due to inflation-driven cost
increases in Mexico, which were partially mitigated by price increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
($ in millions) 1996 1995 1994
---- ---- ----
SG&A $12,593 $11,546 $11,123
As a percent of net
sales 39.8% 38.2% 39.2%
- ------------------------------------------------------------------------------
SG&A comprises 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 or loss from investments in unconsolidated
affiliates. In 1996, A&M,
14
S&D and G&A all grew faster than net sales driving a 9% increase in SG&A, led by
International beverages. Other income and expense included refranchising gains
in excess of the costs of closing other restaurants (net refranchising gains) of
$99 million, compared to $55 million in 1995. In addition, 1996 included
recurring SFAS 121 noncash impairment charges of $62 million related to
restaurants. Losses from our unconsolidated affiliates, compared to earnings a
year ago, primarily reflected our share of operating losses from Buenos Aires
Embotelladora S.A. (BAESA). BAESA is one of our bottling joint ventures in Latin
America.
In 1995, SG&A grew 4% due to A&M, S&D and G&A all growing at a slower rate
than sales. The slower spending was driven by worldwide beverages and U.S.
restaurants. G&A in worldwide beverages benefited from International cost
containment initiatives, savings in North American beverages from a 1994
reorganization and leverage from the increased effective net pricing in North
American beverages. Other income benefited from net refranchising gains of $55
million, compared to store closure costs of $10 million in 1994 and a gain on
the sale of an International bottling plant in 1995.
AMORTIZATION OF INTANGIBLE ASSETS declined 5% in 1996 to $301 million as a
result of the reduced carrying amount of intangible assets in connection with
the 1995 adoption of SFAS 121 (see Note 4), but increased 1% to $316 million in
1995. This noncash expense reduced net income per share by $0.14 in 1996 and
$0.15 in 1995.
UNUSUAL IMPAIRMENT, DISPOSAL AND OTHER CHARGES of $822 million ($716 million
after-tax or $0.45 per share) in 1996 were associated with International
beverages ($576 million) and the decision to dispose of our non-core U.S.
restaurant businesses ($246 million). See Note 3.
The 1995 charge of $520 million ($384 million after-tax or $0.24 per share)
was the initial, noncash impairment charge upon adoption of SFAS 121. See Note
4.
15
OPERATING PROFIT
% Growth Rates
--------------
($ in millions) 1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Operating
Profit
Reported $2,546 $2,987 $3,201 (15) (7)
Ongoing* $3,368 $3,507 $3,201 (4) 10
* Excluded the unusual impairment, disposal and other charges in 1996 and
1995 (see Note 3).
- ------------------------------------------------------------------------------
In 1996, reported operating profit declined $441 million. Ongoing operating
profit decreased $139 million, primarily due to a combined segment operating
profit decrease of $95 million or 3%. The decline reflected increased costs in
excess of higher effective net pricing in International beverages and North
American snack foods and unfavorable currency translation impacts, partially
offset by the $177 million of volume gains. Also included in the segment
operating profit results were reduced depreciation and amortization expense of
$46 million as a result of the reduced carrying amount of assets in connection
with the adoption of SFAS 121, and $99 million of net refranchising gains in
1996 compared to $55 million in 1995, partially offset by the recurring SFAS 121
noncash impairment charge of $62 million in 1996. Ongoing operating profit
growth was also hampered by increased net corporate costs.
In 1995, reported operating profit declined $214 million. Ongoing operating
profit increased $306 million or 10%. The fifty-third week in 1994 reduced the
operating profit growth by approximately 2 points. The profit growth was driven
by combined segment operating profit growth of $283 million or 8%, which
reflected volume growth of $283 million ($430 million excluding the impact of
the fifty-third week) and $76 million due to net additional restaurant units.
These advances were partially offset by net unfavorable currency translation
impacts, primarily related to the peso. 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
North American beverages. Ongoing operating profit growth benefited from reduced
net corporate costs.
GAIN ON STOCK OFFERING BY AN UNCONSOLIDATED AFFILIATE of $18 million ($17
million after-tax or $0.01 per share) in 1994 related to the public share
offering by BAESA. See Note 17.
16
INTEREST EXPENSE, NET
% Growth Rates
--------------
($ in millions) 1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Interest expense $(600) $(682) $(645) (12) 6
Interest income 101 127 90 (20) 41
----- --- -----
Interest expense,
net $(499) $(555) $(555) (10) -
===== ===== =====
- -------------------------------------------------------------------------------
Interest expense, net, declined 10% in 1996 reflecting lower international
debt levels and U.S. interest rates.
Interest expense, net in 1995 was even with 1994, reflecting the net
impact of higher average interest rates offset by lower average borrowings.
PROVISION FOR INCOME TAXES
($ in millions) 1996 1995 1994
---- ---- ----
Reported
Provision for
Income Taxes $ 898 $ 826 $ 880
Effective Tax Rate 43.9% 34.0% 33.0%
Ongoing*
Provision for
Income Taxes $1,004 $ 962 $ 880
Effective Tax Rate 35.0% 32.6% 33.0%
* Excluded the unusual impairment, disposal and other charges in 1996 and
1995 (see Note 3).
- ------------------------------------------------------------------------------
Our 1996 reported effective tax rate increased 9.9 points to 43.9%, driven
by the low tax benefits associated with the unusual impairment, disposal and
other charges. Our 1996 ongoing effective tax rate increased 2.4 points to
35.0%, primarily reflecting lower benefits in 1996 from the current year
resolution of certain prior years audit issues and a decline in lower-taxed
foreign income coupled with an increase in foreign losses with low tax
benefits.
Our 1995 reported effective tax rate increased 1 point to 34.0%. Our
1995 ongoing effective tax rate declined slightly, reflecting benefits from
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 1993 U.S. tax legislation and a decrease in
the proportion of income taxed at lower foreign rates. The legislation
limited the U.S. tax
17
credit on income we earned in Puerto Rico to 60% of the amount allowed under the
previous tax law beginning on December 1, 1994. The legislation further reduces
the limit ratably over the following four years to 40%. This provision reduced
our 1995 earnings by $58 million or $0.04 per share.
INCOME AND INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES
($ in millions % Growth Rates
except per share amounts) ---------------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Reported
Income $1,149 $1,606 $1,784 (28) (10)
Income Per
Share $ 0.72 $ 1.00 $ 1.11 (28) (10)
Ongoing*
Income $1,865 $1,990 $1,767 (6) 13
Income Per
Share $ 1.17 $ 1.24 $ 1.10 (6) 13
* Excluded the unusual impairment, disposal and other charges in 1996
and 1995 (see Note 3) and the 1994 BAESA gain (see Note 17).
18
INDUSTRY SEGMENTS - MANAGEMENT BASIS
- --------------------------------------------------------------------------------
($ in millions) Growth Rate
1991-1996(a) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
NET SALES
Beverages
North America(b) 7% $ 7,725 $ 7,400 $ 7,031 $ 6,404 $ 5,932
International 15% 2,799 2,982 2,535 2,148 1,589
------- ------ ------- ------- -------
9% 10,524 10,382 9,566 8,552 7,521
------- ------- ------- ------- -------
Snack Foods
North America(b) 12% 6,618 5,863 5,356 4,674 3,922
International 15% 3,062 2,682 2,908 2,353 2,210
----- ----- ----- ----- -----
13% 9,680 8,545 8,264 7,027 6,132
----- ----- ----- ----- -----
Restaurants
U.S. 8% 9,110 9,206 8,696 8,025 7,112
International 22% 2,331 2,122 1,825 1,331 1,120
----- ----- ----- ----- -----
10% 11,441 11,328 10,521 9,356 8,232
------ ------ ------ ----- -----
Combined Segments 10% $31,645 $30,255 $28,351 $24,935 $21,885
------- ------- ------- ------- -------
OPERATING PROFIT(c)
Beverages
North America(b) 12% $1,428 $1,249 $1,115 $1,019 $ 759
International NM (846) 117 136 97 45
------ ------ ------ ------ -----
6% 582 1,366 1,251 1,116 804
------ ------ ------ ----- -----
Snack Foods
North America(b) 13% 1,286 1,149 1,043 914 762
International 12% 346 301 354 285 221
------ ----- ------- ----- -----
13% 1,632 1,450 1,397 1,199 983
----- ----- ------ ----- -----
Restaurants
U.S. 4% 370 726 637 682 594
International 7% 153 112 86 109 134
------ ----- ------ ----- -----
4% 523 838 723 791 728
------ ------ ------ ----- -----
Combined Segments -
Management Basis 8% 2,737 3,654 3,371 3,106 2,515
Adjustments ------ ------ ------ ------ -----
Equity (income)/loss 266 (14) (38) (30) (40)
Initial impact of impairment
accounting change (SFAS 121) (520)
Gain on stock offering
by unconsolidated affiliate (18)
Other(d) 6 51 9 1 27
------ ------ ------ ------ ------
Total Adjustments 272 (483) (47) (29) (13)
------ ------ ----- ------ ------
Combined Segments -
SFAS 14 Basis(e) 10% $3,009 $3,171 $3,324 $3,077 $2,502
======= ====== ====== ====== ======
19
(a) Five-year compounded annual growth rate. Operating profit growth
rates excluded the impacts of the unusual impairment, disposal
and other charges in 1996 affecting International beverages
($576) and U.S. restaurants ($246) (see Note 3) and the 1991
unusual charges of $170 to streamline operations of North
American snack foods ($91), U.S. restaurants ($43) and
International snack foods ($36).
(b) North America is composed of operations in the U.S. and Canada.
(c) The amounts for the years 1992-1996 represent reported amounts.
See Note 19 - Items Affecting Comparability for 1996, 1995 and
1994. In addition, 1995 segment operating profit on the
Management Basis excluded the $520 charge for the initial,
noncash impact of adopting SFAS 121, 1994 International beverages
included an $18 gain on a stock offering by BAESA and 1992
included $193 of unusual charges to reorganize and streamline
operations of North American beverages ($115), International
beverages ($30) and certain International snack foods operations
($48).
(d) Adjustments directly allocable to industry segments but reported
in Corporate.
(e) Operating profit as defined by SFAS 14 and as disclosed in Note
19.
NM - Not Meaningful.
20
Industry Segments
Beverages
% Growth Rates
--------------
($ in millions) 1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Net Sales
North America $ 7,725 $ 7,400 $7,031 4 5
International 2,799 2,982 2,535 (6) 18
----- ------- -------
$10,524 $10,382 $9,566 1 9
======= ======= =======
Operating Profit
Reported
North America $ 1,428 $ 1,249 $1,115 14 12
International (846) 117 136 NM (14)
------ ------ -----
$ 582 $ 1,366 $1,251 (57) 9
====== ======= ======
Ongoing*
North America $ 1,428 $ 1,249 $1,115 14 12
International (270) 117 118 NM (1)
------- ------ ------
$ 1,158 $ 1,366 $1,233 (15) 11
======= ====== ======
* Excluded unusual International impairment, disposal and other charges of
$576 in 1996 (see Note 3) and a BAESA gain of $18 in 1994 (see Note 17).
NM - Not Meaningful
___________________________________________________________________________
[Note: Unless otherwise noted, net sales and operating profit comparisons
within the following discussions are based on ongoing operating profit and
include the impact of the fifty-third week in 1994 (see Notes 2 and 19).]
System bottler case sales (BCS) of Pepsi Corporate brands is our standard
volume measure. It represents company-owned brands as well as brands we
have the right to produce, distribute and market nationally, and includes
sales of packaged products and fountain syrup by company-owned and
franchised bottlers. BCS was not impacted by the fifty-third week in 1994
because it is measured on a calendar year basis.
1996 vs. 1995
North America
- -------------
Sales in North America rose $325 million. The gain reflected volume growth
of $215 million, led by carbonated soft drink (CSD) products, and higher
effective net pricing.
North American BCS increased 4%, with solid increases in Brand Pepsi
and the Mountain Dew brand. Alternative beverages, led by Aquafina bottled
water and Hawaiian Punch fountain syrup, grew at a double-digit rate.
21
Profit in North America increased $179 million. The growth reflected volume
gains of $117 million, lower product costs and the higher effective net pricing.
Advertising and marketing expenses grew significantly faster than sales,
primarily due to the Pepsi Stuff promotion. Selling and distribution expense
grew at the same rate as sales and volume. Profit growth was aided by lapping
charges taken in 1995, primarily for losses on supply contracts, take-or-pay
co-packing penalties and a write-down of excess co-packing assets. A 1996 gain
on the sale of an investment in a bottling cooperative and a 1996 settlement
with a supplier for purchases made in prior years also helped profit growth.
Benefits of approximately $130 million related to the 1992 U.S.
restructuring were achieved in 1996 due to the centralization of purchasing and
improved administrative and business processes. Benefits are expected to grow
until fully realized in 1998, when they are expected to be about $145 million
annually. All benefits from the restructuring will continue to be reinvested in
the business to strengthen our competitive position.
International
- -------------
Our new strategy for International beverages is to focus on building our core
business in markets in which we are already strong and in emerging markets where
we believe the competitive playing field is essentially level. As a result, we
took a restructuring charge of $122 million, which is described in Note 3.
Almost all of the charge is expected to be paid by the end of 1997. The
restructuring is expected to generate about $50 million in savings in 1997, and
about $80 million a year thereafter. See Cautionary Statements beginning on page
35. In addition, a largely noncash charge of $454 million was recognized in 1996
related to the impairment of certain investments in unconsolidated affiliates
($216 million), concentrate-related assets ($129 million), assets not related to
the core International beverage business ($69 million) and our share of the
unusual charges recorded by BAESA for restructuring actions and noncash
accounting charges ($40 million).
International sales declined $183 million, primarily due to unfavorable
currency translation impacts and lower volume of $41 million. The volume decline
reflected lower concentrate shipments to franchisees, partially offset by higher
packaged product sales to retailers.
International BCS decreased 2%. Excluding the fourth quarter impact of the
unexpected loss of our Venezuelan bottler in August 1996, BCS declined 1%. A
single-digit decline in Latin America was partially offset by strong
double-digit growth in China and India.
International beverages reported operating losses of $846 million or a
decline of $963 million. Excluding the unusual charges, International beverages
reported an ongoing operating loss of $270 million or a decline of $387 million.
The ongoing operating loss reflected broad-based increases in advertising and
marketing expenses, higher-than-normal expenses from fourth quarter balance
sheet adjustments and actions, increased net losses from our unconsolidated
affiliates and a volume decline of $41 million. The increased net losses from
our unconsolidated affiliates was driven by our 24% equity share of BAESA's
operating losses.
22
1995 vs. 1994
North America
- -------------
Sales in North America rose $369 million or 5%. The fifty-third week in
1994 reduced the sales growth by approximately 2 points. The sales growth
reflected higher effective net pricing on most CSD packages, primarily in
response to significantly higher packaging prices. Sales growth also
benefited from increased volume, which contributed $92 million.
North American BCS increased 4%, reflecting double-digit growth in the
Mountain Dew brand, solid increases in Brand Pepsi and strong double-digit
growth in alternative beverages, led by Lipton brand tea and the All Sport
brand.
North American profit increased $134 million or 12%. The fifty-third
week in 1994 reduced the operating profit growth by approximately 2 points.
Profit growth reflected the higher effective net pricing on CSD packages and
concentrate which exceeded the increased packaging costs. Volume gains,
driven by packaged products, contributed $46 million ($104 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 in the U.S. Selling and distribution
expenses declined as a percentage of sales, in part reflecting higher
pricing. Advertising and marketing expenses decreased, reflecting a
reallocation of funds to support promotional discounts in the fountain
channel, which is classified as a reduction of sales. In the aggregate,
advertising and marketing expenses and fountain discounts was about even
with the prior year.
In 1995, North America continued to execute actions related to the 1992
U.S. restructuring. Benefits in 1995 were offset by incremental costs
associated with the continued development and implementation of the
restructuring. Net benefits of approximately $130 million were expected to
begin to be realized in 1996 and to increase annually until fully realized
in 1998.
International
- -------------
International sales rose $447 million or 18%. The fifty-third week in 1994
reduced the sales growth by approximately 1 point. Start-up operations,
principally in Eastern Europe, and net acquisitions, primarily of bottling
operations in Asia, together contributed 5 points to the sales growth.
Sales growth also benefited from volume advances of $205 million and higher
effective net pricing.
International BCS grew 8%. This advance reflected broad-based growth
partially offset by declines in Mexico, our largest International BCS
market, and Argentina, both of which had adverse economic conditions.
International beverages reported a profit decrease of $19 million or
14%. Ongoing operating profit declined $1 million or 1%. The fifty-third
week in 1994 reduced the ongoing operating profit decline by approximately 2
points. The slight decline in ongoing operating profit primarily reflected
significantly weaker results in Mexico (discussed below). Excluding Mexico,
ongoing operating profit increased $64 million or 44%, reflecting increased
volume, primarily concentrate, of $58 million and the higher effective net
pricing, partially offset by higher field operating costs and increased
headquarters expenses. Profit was also aided by a gain on the sale of a
bottling plant.
23
As discussed in Management's Analysis - International Businesses on page
13, results in Mexico were adversely impacted by economic difficulties resulting
from the significant devaluation of the peso. Net sales in Mexico declined 37%,
while 1995 operating results declined to a $27 million operating loss, including
losses of $12 million from unconsolidated affiliates formed in 1995, compared to
a $38 million operating profit in 1994.
Snack Foods
- -----------
% Growth Rates
--------------
($ in millions) 1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Net Sales
North America $6,618 $5,863 $5,356 13 9
International 3,062 2,682 2,908 14 (8)
------ ----- -----
$9,680 $8,545 $8,264 13 3
====== ====== ======
Operating
Profit
North America $1,286 $1,149 $1,043 12 10
International 346 301 354 15 (15)
------ ------ ------
$1,632 $1,450 $1,397 13 4
====== ====== ======
_______________________________________________________________________________
[Note: Net sales and operating profit comparisons within the 1995 vs. 1994
discussions include the impact of the fifty-third week in 1994 (see Notes 2 and
19), while pound or kilo growth have been adjusted to exclude its impact.]
1996 vs. 1995
North America
- -------------
Sales in North America grew $755 million. The sales increase reflected
strong volume growth of $495 million and higher effective net pricing across all
core brands in late 1995 and late 1996. Volume grew in almost all core brands
with low-fat and no-fat snacks accounting for over 45% of the sales growth.
Pound volume in North America advanced 9%, reflecting exceptional
performance from the low-fat and no-fat categories. These categories contributed
over 45% of the total pound growth, led by Baked Lay's brand potato crisps. Core
brands, excluding their low-fat and no-fat versions, had mid-single-digit growth
led by double-digit growth in Lay's brand potato chips and strong double-digit
growth in Tostitos brand tortilla chips.
Profit in North America grew $137 million. The profit increase reflected
the volume growth, which contributed $224 million, and the higher effective net
pricing, which exceeded increased promotional price allowances and merchandising
support. The growth rate of promotional price allowances moderated in the fourth
quarter. These gains were partially offset by higher operating and manufacturing
costs and increased administrative expenses. The increased operating costs
reflected increased selling and distribution and advertising expenses. Selling
and distribution expenses and manufacturing costs both reflected higher capacity
costs and some inefficiencies incurred to capture the volume opportunities
created when Anheuser-Busch exited the salty snack food business. These
inefficiencies began to moderate in the fourth quarter. Operating expenses grew
faster than sales for the year. The
24
increase in operating expenses coupled with higher administrative expenses,
partially reflected investment spending to sustain strong volume growth. This
increased investment spending, including costs of developing and testing new
products, was partially offset by a gain on the sale of a non-core business.
International
- -------------
International sales increased $380 million. The sales increase reflected
inflation-based pricing increases in Mexico and volume growth of $157 million,
partially offset by an unfavorable currency translation impact, led by the peso.
International kilo growth is reported on a systemwide basis, which includes
both consolidated businesses and unconsolidated affiliates operating for at
least one year. Salty snack kilos rose 8%, reflecting double-digit growth at
Sabritas in Mexico and strong single-digit growth by Walkers in the U.K., our
two largest salty snack businesses. Sweet snack kilos declined 2%, led by a
single-digit decline at Gamesa in Mexico, due to market-wide contraction and a
double-digit decline at Alegro, the sweet snack division of Sabritas.
International operating profit increased $45 million. The increase
reflected higher effective net pricing in advance of inflation-driven product
and operating cost increases, primarily in Mexico, and the increased volumes of
$28 million. These gains were partially offset by increased administrative
expenses and the net unfavorable currency translation impact. Advertising and
marketing expenses increased, partially reflecting investment in global
advertising and design.
Beginning in 1997, we will categorize Mexico as highly inflationary and,
therefore, the U.S. dollar will be the functional currency. Although difficult
to estimate, we expect the 1997 reported results of our Sabritas and Gamesa
operations to be slightly lower than what they would have been had we retained
the peso as our functional currency. See Cautionary Statements beginning on page
35.
1995 vs. 1994
North America
- -------------
Sales in North America grew $507 million or 9%. The fifty-third week in 1994
reduced the sales growth by approximately 2 points. The increase reflected
volume growth of $427 million and higher pricing across all core brands. Volume
grew in almost all core brands, with low-fat and no-fat snacks accounting for
almost 45% of the total sales growth.
Pound volume in North America advanced 11%, reflecting exceptional
performance from the low-fat and no-fat categories. These categories contributed
almost 45% of the total pound growth, led by Rold Gold brand pretzels and Baked
Tostitos brand tortilla chips. Core brands, excluding their low-fat and no-fat
versions, had solid single-digit growth, led by Doritos brand tortilla chips and
Lay's brand potato chips.
Profit in North America grew $106 million or 10%. The fifty-third week in
1994 reduced the profit growth by approximately 3 points. The profit increase
reflected strong volume growth, which contributed $196 million ($247 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, driven by higher selling,
distribution and administrative expenses and increased marketing investment to
promote strong volume momentum. Selling and distribution expenses grew at about
the same rate as sales, while advertising and marketing costs grew slower than
sales. The higher administrative expenses reflected investment spending to
maintain volume
25
growth, including new manufacturing and delivery systems. 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.
International
- -------------
As discussed in Management's Analysis - International Businesses on page 13,
1995 results in Mexico were adversely impacted by economic difficulties
resulting from the significant devaluation of the peso. This effect was
particularly dramatic on International snack foods results as Mexico represented
almost 75% of its 1994 operating profit. Net sales in Mexico declined 39% in
1995, while operating profit declined $113 million or 44% to $142 million. As a
result, Mexico represented about half of 1995 International snack foods profit.
Since the change in results of Mexico had such a distortive effect on
International results, the following net sales and operating profit discussions
exclude the effects of Mexico where noted.
International sales decreased $226 million or 8%. Excluding Mexico, sales
grew more than 35%; the fifty-third week in 1994 reduced the sales growth by
approximately 3 points. This growth reflected increased volumes of $272 million,
a favorable mix shift to higher-priced packages and products and acquisitions,
which contributed $43 million.
Salty snack kilos rose 10%, reflecting strong double-digit volume growth in
Brazil, the U.K. and our joint ventures in the Netherlands and Spain. Sweet
snack kilos grew 12%, led by a double-digit advance at Gamesa.
International operating profit decreased $53 million. The fifty-third week
in 1994 had no effect on operating profit. The principal cause of the decrease
in operating profit was the economic difficulties in Mexico. Excluding Mexico,
operating profit increased $58 million or 58%. The fifty-third week in 1994
reduced this profit growth by approximately 2 points. Profit growth reflected
the favorable mix shift to higher-priced packages and products and increased
volumes of $45 million, partially offset by higher manufacturing costs and
increased administrative expenses.
RESTAURANTS
- -----------
An update to our restaurant strategy is provided to set the context of the
operating results discussion beginning on page 29.
STRATEGY UPDATE
- ---------------
In January 1997, we announced that we would pursue a plan to spin off our core
restaurant businesses to our shareholders as an independent publicly-traded
company. The new company will include both the U.S. and international operations
of Pizza Hut, Taco Bell and KFC. We are exploring the possibility of selling
PepsiCo Food Systems (PFS), our restaurant distribution operation. In the first
quarter of 1996, we recorded a $26 million charge related to a decision to
dispose of Hot 'n Now (HNN). In the fourth quarter, we recognized an impairment
loss of $220 million as a result of our decision to sell our remaining non-core
U.S. restaurant businesses which include California Pizza Kitchen (CPK), Chevys,
D'Angelo Sandwich Shops (D'Angelo) and East Side Mario's (ESM). We reduced our
investments in these businesses to estimated fair market value, less costs to
sell. Estimated fair market value was based primarily upon the opinion of an
investment banking firm. See Notes 3 and 4 and Cautionary Statements beginning
on page 35.
26
In addition, we will continue to execute the strategy we initiated two
years ago to reduce our percentage ownership in our restaurant businesses by
selling company-operated restaurants to franchisees (refranchising) and
closing underperforming units. Although this refranchising strategy reduces
reported sales, it improves restaurants returns and profit by eliminating
capital investment in stores while generating a franchise royalty revenue
stream which, in some cases, exceeds the profit we had earned from the
stores prior to refranchising. In addition, margins benefit from the
closing of underperforming stores in the company-operated portfolio.
Operating profit and cash flows benefit from the one-time refranchising
gains (including initial franchise fees). Our restaurant companies have
usually remained contingently liable for restaurant leases assigned as part
of the refranchising activity; however, we believe any risk of loss under
these assignments would not be material.
Restaurant Unit Activity
Company-Operated and Joint Venture
----------------------------------
U.S. International Worldwide
---- ------------- ---------
December 31, 1994 10,500 3,119 13,619
New Builds &
Acquisitions 427 347 774
Refranchising &
Licensing (302) (12) (314)
Closures (272) (40) (312)
----- ---- -----
December 30, 1995* 10,353 3,414 13,767
New Builds &
Acquisitions 213 241 454
Refranchising &
Licensing (605) (50) (655)
Transfers (5) - (5)
Closures (294) (85) (379)
----- ----- ------
December 28, 1996** 9,662 3,520 13,182
===== ===== ======
Units as a percent of
the total system
December 31, 1994 54% 42% 51%
December 30, 1995 51% 42% 49%
December 28, 1996 46% 41% 45%
- --------------------------------------------------------------------------------
* As of year-end 1995, closure costs had been recorded for 185 units
(141-U.S., 44-international) which were expected to be closed in the future.
** As of year-end 1996, closure costs had been recorded for 270 units
(249-U.S., 21-international) which were expected to be closed in the future.
- --------------------------------------------------------------------------------
27
As a result of the unit activity, coupled with net new points of
distribution added by our franchisees and licensees, our overall ownership
percentage of total system units declined 4 points to 45% at year-end 1996
and 2 points to 49% at year-end 1995, driven by declines in the U.S. Total
system units grew 4% and 6% in 1996 and 1995, respectively.
Refranchising and closures affected worldwide restaurants operating
profit as follows:
($ in millions) 1996 1995 1994
---- ---- ----
U.S.
- ----
Refranchising gains $134 $ 89 $ -
Store closure costs (45) (26) (10)
--- --- ---
Net refranchising
gains/(losses) $ 89 $ 63 $(10)
International
- -------------
Refranchising gains $ 5 $ 4
Store closure costs 5 (12)
---- ---
Net refranchising
gains/(losses) $ 10 $ (8)
Worldwide
- ---------
Refranchising gains $139 $ 93 $ -
Store closure costs (40) (38) (10)
---- ---- ----
Net refranchising
gains/(losses) $ 99 $ 55 $(10)
==== ==== ====
In 1997, the refranchising program will be expanded at Pizza Hut U.S.,
Taco Bell U.S. and international restaurants and will also be extended to
include KFC U.S. restaurants. See Cautionary Statements beginning on page 35.
28
OPERATING RESULTS
- -----------------
The operating results presented below include Pizza Hut, Taco Bell and
KFC in both the U.S. and international results. In addition, U.S. results
include PFS as well as CPK, Chevys, D'Angelo, ESM and HNN.
% Growth Rates
--------------
($ in millions) 1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Net Sales
U.S. $ 9,110 $ 9,206 $ 8,696 (1) 6
International 2,331 2,122 1,825 10 16
------- ------- -------
$11,441 $11,328 $10,521 1 8
======= ======= =======
Operating Profit
Reported
U.S. $ 370 $ 726 $ 637 (49) 14
International 153 112 86 37 30
------- ------- -------
$ 523 $ 838 $ 723 (38) 16
======= ======= =======
Ongoing*
U.S. $ 616 $ 726 $ 637 (15) 14
International 153 112 86 37 30
------- ------- ----
$ 769 $ 838 $ 723 (8) 16
======= ====== =====
*Excluded $246 of charges related to the disposal of our non-core U.S.
restaurant businesses (see Note 3).
- --------------------------------------------------------------------------------
[Note: Net sales and operating profit comparisons within the following
discussions include the impact of the fifty-third week in 1994 (see Notes 2
and 19), while same store sales growth has been adjusted to exclude its
impact.]
1996 vs. 1995
U.S.
- ----
Net sales decreased $96 million. The decrease was driven by volume declines
of $286 million, partially due to lapping the second quarter 1995
introduction of Stuffed Crust pizza, and the unfavorable impact of fewer
company units of $272 million. These declines were partially offset by
higher effective net pricing and the consolidation of CPK at the end of the
second quarter of 1996. Same store sales decreased 4% and 2% at Pizza Hut
and Taco Bell, respectively, reflecting fewer transaction counts. KFC's same
store sales increased 6% due primarily to the impact of new products such as
Tender Roast Chicken, Colonel's Crispy Strips and Chunky Chicken Pot Pies.
Reported operating profit declined $356 million. Ongoing operating
profit decreased $110 million because of higher store operating costs, a
volume decrease of $166 million and recurring noncash SFAS 121 impairment
charges of $54 million. The higher store operating costs reflected
increased labor and food costs, partially offset by reduced depreciation and
amortization expense of $30 million in connection with the adoption of SFAS
121. The above effects were partially offset by the higher effective net
pricing which exceeded the
29
increased store operating costs, and by a net refranchising gain of $89 million
in 1996 compared to $63 million in 1995.
INTERNATIONAL
- -------------
International sales increased $209 million, driven by the favorable impact of
net additional company units of $112 million, higher effective net pricing and
increased volumes, which contributed $52 million.
Operating profit increased $41 million, reflecting the higher effective net
pricing, a net refranchising gain in 1996 of $10 million compared to a net
refranchising loss in 1995 of $8 million, $18 million due to net additional
company units and increased volumes of $15 million. These benefits were
partially offset by higher store operating costs, increased administrative and
support costs and an $8 million recurring noncash SFAS 121 impairment charge.
The higher store operating costs, which exceeded the higher effective net
pricing, primarily reflected increased food prices and higher labor costs and
advertising expenses. These increased store operating costs were partially
offset by reduced depreciation and amortization expense of $10 million in
connection with the adoption of SFAS 121. The profit growth also benefited from
increased equity income.
1995 vs. 1994
U.S.
- ----
Net sales increased $510 million or 6%. The fifty-third week in 1994
reduced the sales growth by approximately 1 point. The sales growth reflected
$378 million from net additional company units and higher effective net pricing,
partially offset by $52 million of volume declines. Same store sales increased
4% and 7% at Pizza Hut and KFC, respectively, driven by new products. Taco
Bell's same store sales declined 4% due to fewer transaction counts.
Operating profit grew $89 million or 14%. The fifty-third week in 1994
reduced the profit growth by approximately 5 points. The growth included a net
refranchising gain of $63 million in 1995 as well as $12 million for the
write-off of costs associated with sites that will not be developed (undeveloped
sites). This compared to $10 million of store closure costs and $6 million of
undeveloped site costs in 1994. Profit growth was also aided by the net
additional company units, which contributed $54 million, and lower depreciation
and amortization expense of $11 million in connection with the adoption of SFAS
121. These benefits were partially offset by the lower volumes of $27 million
($24 million excluding the impact of the fifty-third week) and increased
overhead costs, primarily due to a $17 million charge in 1995 to move Pizza
Hut's U.S. headquarters from Wichita to Dallas.
INTERNATIONAL
- -------------
International net sales increased $297 million or 16%. The fifty-third week in
1994 reduced the sales growth by approximately 2 points. The sales increase
primarily reflected additional units of $244 million. International operating
profit increased $26 million or 30%. The fifty-third week in 1994 reduced the
operating profit growth rate by approximately 5 points. The increased profit
reflected higher effective net pricing and net additional company units that
contributed
30
$22 million. It also reflected reduced depreciation and amortization expense of
$6 million as a result of the 1995 adoption of SFAS 121. These gains were
partially offset by higher store operating costs, increased administrative and
support costs and a $17 million reduction in volume ($14 million excluding the
impact of the fifty-third week). Profit growth was also hampered by $8 million
of net refranchising losses in 1995 and equity losses in 1995 compared to equity
earnings in 1994.
CONSOLIDATED CASH FLOWS
- -----------------------
Consolidated cash flows in 1996 reflected strong cash flows from operating
activities of $4.2 billion, cash from restaurant refranchising of $355 million
and cash from stock option exercises of $323 million. The cash funded capital
spending of $2.3 billion, share repurchases of $1.7 billion and dividend
payments of $675 million. Debt payments of $801 million were substantially
funded by short-term investment proceeds of $775 million.
Graph: Net Cash Provided by Operating Activities, Refranchising of Restaurants
and Exercises of Stock Options vs. Capital Spending, Share Repurchases, Cash
Dividends Paid and Acquisitions
($ in millions) 1996 1995 1994
---- ---- ----
Sources:
Operating activities $4,194 $3,742 $3,716
Refranchising of
restaurants 355 165 -
Exercises of stock
options 323 252 98
------ ------ ------
$4,872 $4,159 $3,814
====== ====== ======
Uses:
Capital spending $2,287 $2,104 $2,253
Share repurchases 1,651 541 549
Dividends paid 675 599 540
Acquisitions 75 466 316
------ ------ ------
$4,688 $3,710 $3,658
====== ====== ======
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES increased $452 million or 12% to $4.2
billion in 1996 due primarily to operating working capital cash inflows of $179
million in 1996 compared to net cash outflows of $411 million in 1995. The
change in operating working capital cash flows primarily reflected slower growth
in accounts and notes receivable in 1996 compared to 1995, higher growth in
accounts payable and other current liabilities and slower growth in inventories.
The slower growth in accounts and notes receivable reflected lower sales by
International beverages and a sale of $134 million of U.S. trade accounts
receivable in 1996 to take advantage of favorable effective financing rates. The
growth in accounts payable and other current liabilities was driven primarily by
accruals related to the 1996 unusual charges and timing of payments, partially
offset by the impact of our accounts payable amount remaining about the same as
1995. These cash flow favorabilities were
31
partially offset by the tax-related decision to stop prefunding certain employee
benefits at the end of 1995.
Net cash provided by operating activities in 1995 rose $26 million or 1%
over 1994 to $3.7 billion, primarily reflecting improved income before noncash
charges and credits largely offset by the effect of operating working capital
cash outflows of $411 million in 1995 compared to cash inflows of $31 million in
1994.
NET CASH USED FOR INVESTING ACTIVITIES in 1996 decreased $1.2 billion or 48% to
$1.3 billion compared to an $89 million or 4% increase in 1995 to $2.5 billion.
The 1996 decline was principally due to the repatriation of funds we had held in
Puerto Rico. We manage the investment activity in our short-term portfolios,
which are primarily held outside the U.S., as part of our overall financing
strategy. We continually reassess our alternatives to redeploy them considering
investment opportunities and risks, tax consequences and current financing
activity. As a result of the Small Business Job Protection Act of 1996, our
exemption from U.S. Federal income tax on investment income generated in Puerto
Rico was completely eliminated effective as of December 1, 1996. Accordingly, as
our investments in Puerto Rico mature, we are repatriating the proceeds and
using them to reduce outstanding commercial paper debt. We repatriated $690
million in 1996.
Capital spending increased $183 million, reflecting higher North American
snack foods investments of $195 million, primarily for capacity expansion.
Increased spending in worldwide beverages of $85 million was offset by decreased
spending in worldwide restaurants, primarily in the U.S., of $82 million. In
1995, capital spending declined $149 million reflecting substantially reduced
spending in restaurants. Increased 1995 North American snack foods spending,
primarily for capacity expansion and new products, was partially offset by a
decline in beverages. Capital spending outside of the U.S. represented 30%, 29%
and 35% of total capital spending in 1996, 1995 and 1994, respectively.
Graph: Capital Spending by Segment
($ in millions)
Beverages Snack Foods Restaurants Corporate TOTAL
--------- ----------- ----------- --------- -----
1996 $648 $973 $ 657 $ 9 $2,287
1995 563 768 739 34 2,104
1994 664 527 1,059 3 2,253
Graph: Capital Spending: U.S. versus International
($ in millions)
1996 1995 1994
---- ---- ----
U.S. 70% 71% 65%
International 30 29 35
32
NET CASH USED FOR FINANCING ACTIVITIES more than doubled in 1996 to $2.9
billion, primarily reflecting a $1.1 billion increase in our share
repurchases and increased debt payments of $498 million. Net cash used for
financing activities in 1995 of $1.2 billion was unchanged from the prior
year.
Our share repurchase activity was as follows:
(in millions) 1996 1995 1994
---- ---- ----
Cost $1,651 $ 541 $ 549
Shares repurchased
Number of shares 54.2 24.6 30.0
% of shares
outstanding at
beginning of year 3.4% 1.6% 1.9%
At December 28, 1996, 51.4 million shares are available under the
current repurchase authority granted by our Board of Directors.
FREE CASH FLOW is the measure we use internally to evaluate our cash flow
performance.
($ in millions) 1996 1995 1994
---- ---- ----
Net cash provided by
operating activities $ 4,194 $ 3,742 $ 3,716
Cash dividends paid (675) (599) (540)
Investing activities
Capital spending (2,287) (2,104) (2,253)
Refranchising of
restaurants 355 165 -
Sales of property,
plant and equipment 57 138 55
Other, net (100) (247) (268)
---- ---- ----
Free cash flow $ 1,544 $ 1,095 $ 710
======= ======= ======
In 1996, free cash flow increased $449 million or 41%, reflecting the
strong increase in net cash provided by operating activities. Higher
proceeds from restaurant refranchising were offset by higher capital
spending. In 1995, free cash flow advanced $385 million or 35% due
primarily to refranchising of restaurants and the lower capital spending.
CONSOLIDATED FINANCIAL CONDITION
ASSETS decreased $920 million or 4% to $24.5 billion. The decline reflected
the repatriation of funds from our investment portfolio in Puerto Rico, the
impact of the unusual impairment,
33
disposal and other charges of $822 million (see Note 3) and the effects of the
restaurant program to refranchise stores and close underperforming stores,
partially offset by normal business growth. Short-term investments largely
represent high-grade marketable securities portfolios held outside the U.S. As
discussed, we are repatriating the funds from our portfolio in Puerto Rico as
our investments mature and we are using them to reduce our short-term debt. Our
Puerto Rico portfolio totaled $126 million at year-end 1996 and $816 million at
year-end 1995. We expect to repatriate most of the year-end 1996 balance in
1997. The increase in prepaid expenses, deferred income taxes and other current
assets principally reflected a reclassification of the carrying amount of our
non-core U.S. restaurant long-lived assets, partially offset by a significant
decline in current deferred income taxes. These non-core restaurants assets are
now being held for disposal and carried at estimated fair market value.
LIABILITIES decreased $230 million or 1% to $17.9 billion. The decline
reflected the pay-down of short-term debt with the funds repatriated from Puerto
Rico, partially offset by increased accounts payable and other current
liabilities, due in part to the International beverages restructuring charge.
At year-end 1996 and 1995, $3.5 billion of short-term borrowings were
reclassified as long-term, reflecting our intent and ability, through the
existence of our unused revolving credit facilities, to refinance these
borrowings. Our unused credit facilities, which exist largely to support the
issuances of short-term borrowings, were $3.5 billion at year-end 1996 and 1995.
Effective January 10, 1997, we extended to 2002 $3.3 billion of these credit
facilities. Annually, these facilities can be extended an additional year upon
the mutual consent of PepsiCo and the lending institutions.
Our strong cash-generating capability and our strong financial condition
give us ready access to capital markets throughout the world.
We measure FINANCIAL LEVERAGE on both a market value and historical cost
basis. We believe that the most meaningful measure of debt is on a net basis,
which takes into account our investment portfolios held outside the U.S. These
portfolios are managed as part of our 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.
We also use market leverage to measure our long-term financial leverage. We
define market leverage as net debt as a percent of net debt plus the market
value of equity, based on the year-end stock price. Unlike historical cost
measures, the market value of equity primarily reflects the estimated net
present value of expected future cash flows that will both support debt and
provide returns to shareholders.
The market net debt ratio was unchanged in 1996, largely because the 6%
increase in our year-end stock price was offset by a 2% decline in our shares
outstanding. In 1995, the market net debt ratio declined 8 points to 18% due
primarily to a 54% increase in our stock price.
Measured on a historical cost basis, the ratio of net debt to net capital
employed (defined as net debt, other liabilities, deferred income taxes and
shareholders' equity) increased 2 points to 48% in 1996, reflecting a 3% decline
in net capital employed. The 3-point decline to 46% in 1995 reflected a 2%
decline in net debt and a 4% increase in net capital employed.
34
1996 1995 1994
---- ---- ----
Graph: MARKET NET DEBT RATIO 18% 18% 26%
1996 1995 1994
---- ---- ----
Graph: HISTORICAL NET DEBT RATIO 48% 46% 49%
Our negative operating working capital position, which reflects the
cash sales nature of our restaurant operations partially offset by our more
working capital intensive packaged goods businesses, effectively provides
additional capital for investment. Operating working capital, which
excludes short-term investments and short-term borrowings, was a negative
$313 million and negative $94 million at year-end 1996 and 1995,
respectively. The $219 million increase in negative working capital in 1996
primarily reflected reclassifications of a portion of other liabilities and
deferred income taxes to income taxes payable and accounts payable and other
current liabilities, respectively, and a decline in operating working
capital in our International beverages business. The increase was partially
offset by the reclassification of our non-core U.S. restaurant long-lived
assets held for disposal to prepaid expenses, deferred income taxes and
other current assets in the Consolidated Balance Sheet. The decline in
International beverages reflected higher accrued liabilities due to the
restructuring charge, coupled with lower receivables from a decline in sales.
SHAREHOLDERS' EQUITY decreased $690 million or 9% to $6.6 billion.
This change was the result of a $1.3 billion increase in treasury stock,
reflecting repurchases of 54.2 million shares offset by 22.7 million shares
used for stock option exercises. This decrease was mitigated by a 5%
increase in retained earnings due to $1.1 billion in net income less
dividends declared of $695 million.
Cautionary Statements
- ---------------------
From time to time, in written reports and oral statements, we discuss our
expectations regarding future performance of the Company. These
"forward-looking statements" are based on currently available competitive,
financial and economic data and our operating plans. They are also
inherently uncertain, and investors must recognize that events could turn
out to be significantly different from what we had expected. In addition, as
discussed in the Management's Analysis:
- - The forecasted annual savings of $50 million in 1997, and about $80
million a year thereafter related to the International beverages
restructuring charge (page 22) assumes that facilities are vacated and
employees are terminated within the time frames used to develop the
estimate.
35
- - The expectation that our reported results in Mexico will be slightly
lower than what they would have been had we not changed our functional
currency from the peso to the U.S. dollar (page 25) assumes that the peso
will not devalue significantly in 1997.
- - The spin-off of our core restaurant businesses (page 26) is subject to
receipt of a tax ruling by the Internal Revenue Service that would allow
it to be tax free to our shareholders, various regulatory approvals,
appropriate stock market conditions for distribution and final approval
by our Board of Directors.
- - The impairment charge recorded to reduce our investment in our non-core
U.S. restaurant businesses to estimated fair market value assumed certain
sales prices based primarily upon the opinion of an investment banking
firm. These estimates could vary significantly from the final sales
prices (page 26).
- - Our ability to execute our restaurant refranchising program (page 28)
depends on our ability to find investors to purchase our restaurants at
prices we consider appropriate.
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 1997 Annual Meeting of
Shareholders on pages 2 and 3 and are incorporated herein by reference.
Pursuant to Item 401(b) of Regulation S-K, 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 1997 Annual
Meeting of Shareholders under the captions "Directors Compensation" and
"Executive Compensation", respectively, and is incorporated herein by
reference.
36
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 1997 Annual
Meeting of Shareholders and is incorporated herein by reference. As far as
is known to the Company, no person owns beneficially more than 5% of the
outstanding shares of PepsiCo Capital Stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT 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
PepsiCo filed a Current Report on Form 8-K dated September
30, 1996, attaching a press release dated September 26,
1996, regarding a series of long-term strategic actions
intended to strengthen its competitiveness in the
marketplace, improve the consistency of its financial
performance and significantly improve shareholder returns,
including a one-time charge of $125 million dollars due to
the restructuring of the international beverage business and
a $400 million dollar write-down of the carrying value of
certain international beverage assets.
37
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 25, 1997
PepsiCo, Inc.
By: /s/ ROGER A. ENRICO
-------------------
Roger A. Enrico
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
- --------- ----- ----
Chairman of the
/s/ ROGER A. ENRICO Board and
Roger A. Enrico Chief Executive March 25, 1997
Officer (Principal
Executive Officer)
/s/ KARL M. VON DER HEYDEN Vice Chairman of the
Karl M. von der Heyden Board and Chief March 25, 1997
Financial Officer
(Principal Financial
Officer)
/s/ ROBERT L. CARLETON Senior Vice
Robert L. Carleton President and March 10, 1997
Controller
(Principal
Accounting Officer)
/s/ JOHN F. AKERS Director March 25, 1997
John F. Akers
/s/ ROBERT E. ALLEN Director
Robert E. Allen March 10, 1997
/s/ D. WAYNE CALLOWAY Director
D. Wayne Calloway March 25, 1997
/s/ RAY L. HUNT Director March 25, 1997
Ray L. Hunt
/s/ JOHN J. MURPHY Director March 25, 1997
John J. Murphy
S-1
Chairman and Chief
/s/ STEVEN S REINEMUND Executive Officer of March 25, 1997
Steven S Reinemund The Frito-Lay
Company and Director
/s/ SHARON PERCY ROCKEFELLER Director
Sharon Percy Rockefeller March 11, 1997
/s/ FRANKLIN A. THOMAS Director
Franklin A. Thomas March 25, 1997
/s/ P. ROY VAGELOS Director
P. Roy Vagelos March 10, 1997
Chairman and Chief
/s/ CRAIG E. WEATHERUP Executive Officer of
Craig E. Weatherup Pepsi-Cola Company March 25, 1997
and Director
/s/ ARNOLD R. WEBER Director March 17, 1997
Arnold R. Weber
S-2
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 3(i) to PepsiCo's
Quarterly Report on Form 10-Q for the quarterly period ended June
15, 1996.
3.2 By-Laws of PepsiCo, Inc., as amended to July 25, 1996, which are
incorporated herein by reference from Exhibit 3(ii) to PepsiCo's
Quarterly Report on Form 10-Q for the quarterly period ended June
15, 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 21, 1996.
10.7 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).
10.8 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.
E-1
10.9 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.
10.10 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.
E-2
PepsiCo, Inc. and Subsidiaries
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 28, 1996
PEPSICO, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
Item 14(a)(1)-(2)
Item 14(a)(1) Financial Statements
Page
Reference
Consolidated Statement of Income for
the fiscal years ended December 28, 1996
December 30, 1995 and December 31, 1994...................................... F-2
Consolidated Statement of Cash Flows for
the fiscal years ended December 28, 1996,
December 30, 1995 and December 31, 1994...................................... F-3
Consolidated Balance Sheet at December 28, 1996
and December 30, 1995........................................................ F-5
Consolidated Statement of Shareholders' Equity
for the fiscal years ended December 28, 1996,
December 30, 1995 and December 31, 1994...................................... 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 Financial Data......................................................... F-44
Item 14(a)(2) Financial Statement Schedule
II Valuation and Qualifying Accounts and Reserves
for the fiscal years ended December 28, 1996,
December 30, 1995 and December 31, 1994.......................... F-51
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-1
Consolidated Statement of Income
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994
1996 1995 1994
(52 Weeks) (52 Weeks) (53 Weeks)
- ---------------------------------------------------------------------------------------------------------
Net Sales............................................ $31,645 $30,255 $28,351
Costs and Expenses, net
Cost of sales........................................ 15,383 14,886 13,715
Selling, general and
administrative expenses............................. 12,593 11,546 11,123
Amortization of intangible assets.................... 301 316 312
Unusual impairment, disposal and
other charges....................................... 822 520 -
------- ------- -------
Operating Profit..................................... 2,546 2,987 3,201
Gain on stock offering by an
unconsolidated affiliate............................ - - 18
Interest expense..................................... (600) (682) (645)
Interest income...................................... 101 127 90
------- ------- -------
Income Before Income Taxes and Cumulative
Effect of Accounting Changes....................... 2,047 2,432 2,664
Provision for Income Taxes........................... 898 826 880
------- ------- -------
Income Before Cumulative Effect of
Accounting Changes................................. 1,149 1,606 1,784
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........................................... $ 1,149 $ 1,606 $ 1,752
======= ======= =======
Income (Charge) Per Share
Before cumulative effect of accounting
changes............................................. $ 0.72 $ 1.00 $ 1.11
Cumulative effect of accounting changes
Postemployment benefits............................ - - (0.03)
Pension assets..................................... - - 0.01
------- ------- -------
Net Income Per Share................................. $ 0.72 $ 1.00 $ 1.09
======= ======= =======
Average shares outstanding........................... 1,606 1,608 1,608
- -------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-2
Consolidated Statement of Cash Flows (page 1 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994
1996 1995 1994
(52 Weeks) (52 Weeks) (53 Weeks)
- ---------------------------------------------------------------------------------------------------------
Cash Flows - Operating Activities
Income before cumulative effect of
accounting changes................................ $ 1,149 $ 1,606 $ 1,784
Adjustments to reconcile income
before cumulative effect of
accounting changes to net cash
provided by operating activities
Depreciation and amortization.................... 1,719 1,740 1,577
Noncash portion of unusual
impairment, disposal and
other charges................................... 601 520 -
Deferred income taxes............................ 11 (111) (67)
Other noncash charges and
credits, net.................................... 535 398 391
Changes in operating working capital,
excluding effects of acquisitions
Accounts and notes receivable.................. (70) (434) (112)
Inventories.................................... (28) (129) (102)
Prepaid expenses, deferred income
taxes and other current assets............... (30) 76 1
Accounts payable and other
current liabilities.......................... 427 173 189
Income taxes payable........................... (120) (97) 55
------- ------- --------
Net change in operating
working capital................................. 179 (411) 31
------- ------- --------
Net Cash Provided by Operating
Activities........................................ 4,194 3,742 3,716
------- ------- --------
Cash Flows - Investing Activities
Capital spending................................... (2,287) (2,104) (2,253)
Acquisitions and investments
in unconsolidated affiliates...................... (75) (466) (316)
Refranchising of restaurants....................... 355 165 -
Sales of property, plant
and equipment..................................... 57 138 55
Short-term investments, by original
maturity
More than three months-purchases................. (160) (289) (219)
More than three months-maturities................ 195 335 650
Three months or less, net........................ 740 18 (10)
Other, net......................................... (100) (247) (268)
------- ------- --------
Net Cash Used for Investing
Activities........................................ (1,275) (2,450) (2,361)
------- ------- --------
- -----------------------------------------------------------------------------------------------------
(Continued on following page)
F-3
Consolidated Statement of Cash Flows (page 2 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994
1996 1995 1994
(52 Weeks) (52 Weeks) (53 Weeks)
- ------------------------------------------------------------------------------------------------------
Cash Flows - Financing Activities
Proceeds from issuances of
long-term debt.................................... 1,773 2,030 1,285
Payments of long-term debt......................... (1,424) (928) (1,180)
Short-term borrowings, by original
maturity
More than three months-proceeds.................. 747 2,053 1,304
More than three months-payments.................. (1,873) (2,711) (1,728)
Three months or less, net........................ (24) (747) 114
Cash dividends paid................................ (675) (599) (540)
Share repurchases.................................. (1,651) (541) (549)
Proceeds from exercises of
stock options..................................... 323 252 98
Other, net......................................... (46) (42) (44)
------- ------- -------
Net Cash Used for
Financing Activities.............................. (2,850) (1,233) (1,240)
------- ------- -------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents......................... (4) (8) (11)
------- ------- -------
Net Increase in Cash
and Cash Equivalents.............................. 65 51 104
Cash and Cash Equivalents
- Beginning of Year............................... 382 331 227
------- ------- -------
Cash and Cash Equivalents
- End of Year..................................... $ 447 $ 382 $ 331
======= ======= =======
- ---------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid....................................... $ 573 671 591
Income taxes paid................................... $ 679 790 663
- ---------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-4
Consolidated Balance Sheet
(in millions except per share amount)
PepsiCo, Inc. and Subsidiaries
December 28, 1996 and December 30, 1995
1996 1995
- ---------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents........................................ $ 447 $ 382
Short-term investments, at cost.................................. 339 1,116
------- -------
786 1,498
Accounts and notes receivable, less allowance:
$183 in 1996 and $150 in 1995................................... 2,516 2,407
Inventories...................................................... 1,038 1,051
Prepaid expenses, deferred income taxes and
other current assets............................................ 799 590
------- -------
Total Current Assets........................................ 5,139 5,546
Property, Plant and Equipment, net............................... 10,191 9,870
Intangible Assets, net........................................... 7,136 7,584
Investments in Unconsolidated Affiliates......................... 1,375 1,635
Other Assets..................................................... 671 797
------- -------
Total Assets.............................................. $24,512 $25,432
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current
liabilities .................................................... $ 4,626 $ 4,137
Income taxes payable............................................. 487 387
Short-term borrowings............................................ 26 706
------- -------
Total Current Liabilities................................... 5,139 5,230
Long-term Debt................................................... 8,439 8,509
Other Liabilities................................................ 2,533 2,495
Deferred Income Taxes............................................ 1,778 1,885
Shareholders' Equity
Capital stock, par value 1 2/3(cent) per share:
authorized 3,600 shares, issued 1,726 shares.................... 29 29
Capital in excess of par value................................... 1,201 1,045
Retained earnings................................................ 9,184 8,730
Currency translation adjustment and other........................ (768) (808)
------- -------
9,646 8,996
Less: Treasury stock, at cost:
181 shares and 150 shares in 1996 and
1995, respectively............................................. (3,023) (1,683)
------- -------
Total Shareholders' Equity.................................. 6,623 7,313
------- -------
Total Liabilities and
Shareholders' Equity..................................... $24,512 $25,432
======= =======
- -------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-5
Consolidated Statement of Shareholders' Equity (page 1 of 2)
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994
Capital Stock
-------------------------------------------------
Issued Treasury
------------------- ----------------------
Shares Amount Shares Amount
Shareholders' Equity,
December 25, 1993................................. 1,726 $29 (128) $ (913)
------------------------------------------------
1994 Net income.................................. - - - -
Cash dividends declared
(per share-$0.35)............................... - - - -
Currency translation adjustment.................. - - - -
Share repurchases................................ - - (30) (549)
Stock option exercises, including
tax benefits of $27............................. - - 10 81
Shares issued in connection with
acquisitions.................................... - - 2 15
Pension liability adjustment, net
of deferred taxes of $5......................... - - - -
Other............................................ - - - 5
------------------------------------------------
Shareholders' Equity,
December 31, 1994................................. 1,726 $29 (146) $(1,361)
------------------------------------------------
1995 Net income.................................. - - - -
Cash dividends declared
(per share-$0.39).............................. - - - -
Currency translation adjustment.................. - - - -
Share repurchases................................ - - (24) (541)
Stock option exercises, including
tax benefits of $91............................. - - 20 218
Other............................................ - - - 1
------------------------------------------------
Shareholders' Equity,
December 30, 1995................................. 1,726 $29 (150) $(1,683)
------------------------------------------------
1996 Net income.................................. - - - -
Cash dividends declared
(per share-$0.445).............................. - - - -
Currency translation adjustment.................. - - - -
Share repurchases................................ - - (54) (1,651)
Stock option exercises, including
tax benefits of $145............................ - - 23 310
Other............................................ - - - 1
------------------------------------------------
Shareholders' Equity,
December 28, 1996................................. 1,726 $29 (181) $(3,023)
=================================================
- ------------------------------------------------------------------------------------------------------
(Continued on next page)
F-6
Consolidated Statement of Shareholders' Equity (page 2 of 2)
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994
Capital Currency
in Translation
Excess of Retained Adjustment
Par Value Earnings and Other Total
- ---------------------------------------------------------------------------------------------------
Shareholders' Equity,
December 25, 1993................................. $ 865 $6,542 $(184) $6,339
-----------------------------------------------
1994 Net income.................................. - 1,752 - 1,752
Cash dividends declared
(per share-$0.35)............................... - (555) - (555)
Currency translation adjustment.................. - - (295) (295)
Share repurchases................................ - - - (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................................. $ 920 $7,739 $(471) $6,856
-----------------------------------------------
1995 Net income.................................. - 1,606 - 1,606
Cash dividends declared
(per share-$0.39)............................... - (615) - (615)
Currency translation adjustment.................. - - (337) (337)
Share repurchases................................ - - - (541)
Stock option exercises, including
tax benefits of $91............................. 125 - - 343
Other............................................ - - - 1
-----------------------------------------------
Shareholders' Equity,
December 30, 1995................................. $1,045 $8,730 $(808) $7,313
-----------------------------------------------
1996 Net income.................................. - 1,149 - 1,149
Cash dividends declared
(per share-$0.445).............................. - (695) - (695)
Currency translation adjustment.................. - - 40 40
Share repurchases................................ - - - (1,651)
Stock option exercises, including
tax benefits of $145............................ 158 - - 468
Other............................................ (2) - - (1)
-----------------------------------------------
Shareholders' Equity,
December 28, 1996................................. $1,201 $9,184 $(768) $6,623
===============================================
See accompanying Notes to Consolidated Financial Statements.
F-7
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.
Certain reclassifications were made to prior year amounts to conform
with the 1996 presentation.
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 unconsolidated 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 and other marketing
activities. Marketing costs not deferred at year-end are charged to expense
ratably in relation to sales over the year in which incurred. Advertising
expenses were $1.9 billion, $1.8 billion and $1.7 billion in 1996, 1995 and
1994, respectively. Advertising expenses deferred at year-end, which are
classified in prepaid expenses, deferred income taxes and other current assets
in the Consolidated Balance Sheet, were $49 million and $78 million in 1996 and
1995, respectively. Deferred advertising consists of media and personal service
advertising-related prepayments, promotional materials in inventory and
production costs of future media advertising; these assets are expensed in the
year first used.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which
are expensed as incurred, were $115 million, $96 million and $152 million in
1996, 1995 and 1994, respectively.
STOCK-BASED COMPENSATION. PepsiCo measures stock-based compensation cost as
the excess 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
generally grant stock options at fair market value at the date of grant.
STOCK SPLIT. 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 increased from 1.8 billion to 3.6 billion. The information in the
Consolidated Financial Statements, as well as all other share data in this
report, have been adjusted to reflect the 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.
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 (average shares outstanding).
F-8
DERIVATIVE INSTRUMENTS. 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 related to
non-U.S. dollar denominated debt 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 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 Grupo Embotellador de Mexico, S.A.
(GEMEX) in 1995, an unconsolidated franchised bottling affiliate in Mexico, 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 which is 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 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 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 market value. Depreciation is calculated 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.
PepsiCo reviews most long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used in the business
semi-annually for impairment, or whenever events or changes in circumstances
indicate that the carrying amount of an asset or a group of
F-9
assets may not be recoverable. PepsiCo uses a history of operating losses as 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 restaurants segment and, for each of the snack foods and
beverages segments, Assets are generally grouped at the country level. An
impaired Asset is written down to its estimated fair market value based on the
best information available; PepsiCo generally measures estimated fair market
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.
PepsiCo's methodology for determining and measuring impairment of its
investments in unconsolidated affiliates and enterprise level goodwill was
changed in 1996 to conform with the methodology it uses when applying the
provisions 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," except (a) the recognition test for an investment in an
unconsolidated affiliate compares the investment to a forecast of PepsiCo's
share of the unconsolidated affiliate's undiscounted cash flows including
interest and taxes, compared to undiscounted cash flows before interest and
taxes used for all other long-lived assets and (b) enterprise level goodwill is
evaluated at a country level for the restaurants segment, instead of by
individual restaurant. The change in methodology did not have a material impact
in 1996.
F-10
Note 2 - ITEMS AFFECTING COMPARABILITY OF INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES
1996 1995 1994
- -------------------------------------------------------------------------------------------------
Per Per Per
(a) Share (a) Share (a) Share
--- ------ --- ----- --- -----
Unusual Items
Unusual impairment,
disposal and
other charges............... $ 822 $ 0.45 $520 $ 0.24
Gain on stock
offering by an
unconsolidated
affiliate................... $(18) $(0.01)
----- ------ ---- -------- ----- ------
$ 822 $ 0.45 $520 $ 0.24 $(18) $(0.01)
===== ====== ==== ======== ===== =======
Other Items
Refranchising gains $(139) $(0.05) $(93) $(0.03)
Store closure costs.......... 40 0.01 38 0.01 $ 10 $ -
----- ------ ---- ------ ---- ------
Net refranchising
(gains)/losses............. (99) (0.04) (55) (0.02) 10 -
Reduced depreciation
and amortization (46) (0.02) (21) (0.01)
Recurring restaurant
impairment charges 62 0.03
Fifty-third week.............. (54) (0.02)
------ ------- ----- ------- ---- ------
$ (83) $(0.03) $(76) $(0.03) $(44) $(0.02)
===== ====== ==== ======= ==== ======
- -------------------------------------------------------------------------------------------------
(a) Pre-tax amounts.
See Note 3 for information regarding unusual impairment, disposal and other
charges.
See Note 17 for information regarding the 1994 gain from a public share
offering by Buenos Aires Embotelladora S.A. (BAESA), our Latin American bottling
joint venture.
Net refranchising (gains)/losses reflected PepsiCo's strategy to reduce its
ownership in its restaurant businesses by selling company-operated restaurants
to franchisees and closing underperforming units. See Management's Analysis -
Restaurants beginning on page 26.
Reduced depreciation and amortization reflected the reduced carrying amount
of PepsiCo's long-lived assets to be held and used in the business as a result
of the fourth quarter 1995 adoption of SFAS 121. See Items Affecting
Comparability - Unusual Impairment, Disposal and Other Charges in Note 19 for
the estimated impact of the reduced depreciation and amortization on segment
operating profit.
See Note 4 for information regarding the 1996 recurring restaurant
impairment charges.
The fifty-third week in 1994 increased 1994 net sales by an estimated $434
million. See Items Affecting Comparability - Fiscal Year in Note 19 for the
estimated impact of the fifty-third week on segment net sales and operating
profit.
F-11
Note 3 - UNUSUAL IMPAIRMENT, DISPOSAL AND OTHER CHARGES
1996 1995
- -------------------------------------------------------------------------------
Per Per
(a) Share (a) Share
---- ----- --- -----
International beverages $576 $0.33
Non-core U.S. restaurant
businesses..................... 246 0.12
Initial adoption of
SFAS 121....................... $520 $0.24
---- ----- ---- -----
$822 $0.45 $520 $0.24
==== ===== ==== =====
- -------------------------------------------------------------------------------
(a) Pre-tax amounts.
PepsiCo recognized unusual impairment, disposal and other charges of $822
million ($716 million after-tax or $0.45 per share) in 1996. The International
beverages charge included $454 million ($429 million after-tax or $0.27 per
share) related primarily to investments in unconsolidated affiliates and
concentrate-related and non-core assets (primarily packaging) and its 24% equity
share of unusual charges recorded by BAESA. In addition, it included a
restructuring charge of $122 million ($98 million after-tax or $0.06 per share)
related to a fourth quarter reorganization into 10 business units and reduction
of support staff. The charge primarily reflected severance-related costs,
relocation costs for employees who, in 1996, accepted offers to relocate and
facility closing costs. Included in the International beverages charges are
impairment charges of $373 million (see Note 4).
The non-core U.S. restaurant businesses charge of $246 million ($189
million after-tax or $0.12 per share) was a result of a decision made by PepsiCo
in the fourth quarter of 1996 to dispose of its non-core U.S. restaurant
businesses; California Pizza Kitchen (CPK), Chevys, D'Angelo Sandwich Shops
(D'Angelo) and East Side Mario's (ESM) and a first quarter decision to dispose
of Hot `n Now (HNN). The charge was primarily composed of impairment charges and
estimated disposal costs (see Note 4). The remaining carrying amount of the
assets of these non-core U.S. restaurant businesses of $333 million is included
in 1996 in Prepaid expenses, deferred income taxes and other current assets in
the Consolidated Balance Sheet as PepsiCo plans to dispose of them in 1997. The
non-core U.S. restaurant businesses contributed $394 million, $297 million and
$281 million to net sales in 1996, 1995 and 1994, respectively. Excluding the
unusual impairment, disposal and other charges in 1996 and 1995, the non-core
U.S. restaurant businesses incurred operating losses of $10 million, $42 million
and $40 million in 1996, 1995 and 1994, respectively.
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 $0.24 per share). See Note 4.
F-12
Note 4 - IMPAIRMENT OF LONG-LIVED ASSETS
Impairment charges of $681 million ($396 million after-tax or $0.25 per share)
in 1996 and $520 million ($384 million after-tax or $0.24 per share) in 1995
included in the Consolidated Statement of Income are set forth below:
1996 1995
- --------------------------------------------------------------------------------
International beverages
Investments in unconsolidated
affiliates...................... $210 $ -
Concentrate-related assets....... 110 -
Non-core assets.................. 53 -
---- ----
373 -
Non-core U.S. restaurant businesses 246 -
Initial adoption of SFAS 121....... - 520
---- ----
Unusual charges.................. 619 520
Restaurants-recurring SFAS 121
charges......................... 62 -
---- ----
$681 $520
- -------------------------------------------------------------------------------
The unusual charges and the recurring restaurant charges are included in
unusual impairment, disposal and other charges and selling, general and
administrative expenses, respectively, in the Consolidated Statement of Income.
The impairment charges represented a reduction of the carrying amounts
of impaired Assets to their estimated fair market value. For assets to be held
and used in the business, estimated fair market value was generally determined
by using discounted estimated future cash flows. The estimated fair market value
for assets to be disposed of was determined by using estimated selling prices
based primarily upon the opinion of an investment banking firm, less costs to
sell. Considerable management judgment is necessary to estimate fair market
value. Accordingly, actual results could vary significantly from such estimates.
The International beverages assets were deemed impaired due to a
reduction in forecasted cash flows that was attributable to increased
competitive activity and weakened macroeconomic factors in various geographic
regions and an estimate of the fair market value, less estimated costs to sell,
of certain non-core businesses PepsiCo decided to dispose of.
The charges for PepsiCo's non-core U.S. restaurant businesses were a
result of decisions made by PepsiCo to dispose of its non-core U.S. restaurant
businesses: CPK, Chevys, D'Angelo, ESM and HNN. See Note 3.
The recurring SFAS 121 restaurant charge resulted from the semi-annual
impairment evaluations of all restaurants that either initially met the
"two-year history of operating losses" impairment indicator that PepsiCo uses to
identify potentially impaired restaurants or were previously evaluated for
impairment and, 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.
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. The initial charge resulted from PepsiCo grouping assets at a lower
level than under its previous accounting policy for evaluating and measuring
impairment. This initial charge affected worldwide
F-13
restaurants, International beverages and, to a much lesser extent, International
snack foods and certain unconsolidated affiliates.
As a result of the reduced carrying amount of certain long-lived assets
due to the adoption of SFAS 121, depreciation and amortization expense for the
fourth quarter of 1995 was reduced by $21 million ($15 million after-tax or
$0.01 per share) and for the first three quarters of 1996 by $46 million ($29
million after-tax or $0.02 per share). See Items Affecting Comparability in Note
19.
Note 5 - INVENTORIES
1996 1995
- --------------------------------------------------------------------------------
Raw materials and supplies.................. $ 571 $ 550
Finished goods.............................. 467 501
------ ------
$1,038 $1,051
====== ======
- --------------------------------------------------------------------------------
The cost of 33% of 1996 inventories and 32% of 1995 inventories was computed
using the last-in, first-out (LIFO) method. The carrying amount of total LIFO
inventories was lower than the approximate current cost of those inventories by
$8 million at year-end 1996 and $11 million at year-end 1995.
Note 6 - PROPERTY, PLANT AND EQUIPMENT, NET
1996 1995
- -------------------------------------------------------------------------------
Land........................................ $ 1,294 $ 1,327
Buildings and improvements.................. 5,838 5,668
Capital leases, primarily
buildings.................................. 418 531
Machinery and equipment..................... 9,503 8,598
Construction in progress.................... 787 627
------- -------
17,840 16,751
Accumulated depreciation.................... (7,649) (6,881)
------- -------
$10,191 $ 9,870
======= =======
- -------------------------------------------------------------------------------
Note 7 - INTANGIBLE ASSETS, NET
1996 1995
- -------------------------------------------------------------------------------
Reacquired franchise rights................. $3,684 $3,826
Trademarks.................................. 742 711
Other identifiable
intangibles................................ 220 286
Goodwill.................................... 2,490 2,761
------ ------
$7,136 $7,584
====== ======
- -------------------------------------------------------------------------------
Identifiable intangible assets primarily arose from the allocation of purchase
prices of businesses acquired. 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 $2.1 billion
and $1.8 billion at year-end 1996 and 1995, respectively.
F-14
Note 8 - ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
1996 1995
- ------------------------------------------------------------------------------------------
Accounts payable.......................................... $1,565 $1,556
Accrued compensation and benefits......................... 847 815
Accrued selling and marketing............................. 573 469
Other current liabilities................................. 1,641 1,297
------ ------
$4,626 $4,137
====== ======
- ------------------------------------------------------------------------------------------
Note 9 - LEASES
PepsiCo has noncancelable commitments under both capital and long-term operating
leases, primarily for restaurant units. Capital and operating lease commitments
expire at various dates through 2087 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 were insignificant.
Future minimum commitments under noncancelable leases are set forth
below:
Later
1997 1998 1999 2000 2001 Years Total
- ------------------------------------------------------------------------------------------------------------
Capital $ 47 67 36 34 31 239 $ 454
Operating $356 317 276 243 220 1,139 $2,551
- ------------------------------------------------------------------------------------------------------------
At year-end 1996, the present value of minimum payments under capital
leases was $263 million, after deducting $1 million for estimated executory
costs and $190 million representing imputed interest.
The details of rental expense are set forth below:
1996 1995 1994
- --------------------------------------------------------------------------------------------------
Minimum................................................... $464 $452 $433
Contingent................................................ 28 27 32
---- ---- ----
$492 $479 $465
==== ==== ====
- --------------------------------------------------------------------------------------------------
Contingent rentals are based on sales by restaurants in excess of levels
stipulated in the lease agreements.
F-15
Note 10 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
1996 1995
- ------------------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
Commercial paper (5.4% and 5.7%)(A).............................. $ 1,176 $ 2,006
Current maturities of long-term
debt issuances (A)(B)........................................... 1,918 1,405
Other borrowings (6.0% and 7.4%)(A)(C)........................... 432 795
Amount reclassified
to long-term debt (D)........................................... (3,500) (3,500)
------- -------
$ 26 $ 706
======= =======
LONG-TERM DEBT
Short-term borrowings, reclassified (D).......................... $ 3,500 $ 3,500
Notes due 1997-2011 (6.4% and
6.4%) (A)....................................................... 3,111 3,886
Various foreign currency debt, due 1997-2001
(5.5% and 5.6%) (A)(C).......................................... 1,448 677
Zero coupon notes, $1.5 billion
due 1997-2012 (7.9% and 11.1% annual yield
to maturity) (A)................................................ 930 395
Euro notes due 1997-1999
(5.5% and 5.7%) (A)............................................. 700 550
Swiss franc perpetual Foreign Interest
Payment bonds (E)............................................... 39 214
Capital lease obligations
(See Note 9).................................................... 263 294
Other, due 1997-2020 (7.1% and 7.4%)............................. 366 398
------- -------
10,357 9,914
Less current maturities of long-term
debt issuances (B).............................................. (1,918) (1,405)
------- -------
$ 8,439 $ 8,509
======= =======
- -----------------------------------------------------------------------------------------------------
The interest rates in the above table included the effects of associated
interest rate and currency swaps at year-end 1996 and 1995. See Note 11 for a
discussion of PepsiCo's use of interest rate and currency swaps, its management
of the inherent credit risk and fair value information related to debt and
interest rate and currency 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 2001, excluding capital
lease obligations and the reclassified short-term borrowings, are: 1997-$1.9
billion, 1998-$1.9 billion, 1999-$1.1 billion, 2000-$952 million and 2001-$218
million.
(A) The following table indicates the notional amount and weighted
average interest rates, by category, of interest rate swaps outstanding at
year-end 1996 and 1995, respectively. The weighted average variable interest
rates that PepsiCo pays, which are primarily indexed to either commercial paper
or LIBOR rates, were 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. The swaps terminate at various dates through 2011.
F-16
1996 1995
- ---------------------------------------------------------------------------------------------
Receive fixed-pay variable
Notional amount....................................... $3,976 $2,657
Weighted average receive rate......................... 6.6% 6.8%
Weighted average pay rate............................. 5.5% 5.7%
Receive variable-pay variable
Notional amount....................................... $ 552 $ 577
Weighted average receive rate......................... 5.5% 5.7%
Weighted average pay rate............................. 5.7% 5.8%
Receive variable-pay fixed
Notional amount....................................... $ 215 $ 215
Weighted average receive rate......................... 5.6% 5.8%
Weighted average pay rate............................. 8.2% 8.2%
- ----------------------------------------------------------------------------------------------
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.
1996 1995
- ----------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Carrying Interest Carrying Interest
Amount Rate Amount Rate
-------- -------- -------- --------
Variable interest
rate debt
Short-term
borrowings.................... $3,504 5.7% $4,177 6.4%
Long-term debt................. 2,573 5.5% 2,103 5.8%
------ ------
6,077 5.6% 6,280 6.2%
Fixed interest rate
debt............................. 2,125 7.9% 2,641 7.4%
------ ------
$8,202 6.2% $8,921 6.6%
====== ======
- ----------------------------------------------------------------------------------------
(B) Included certain long-term notes aggregating $110 million, which are
reasonably expected to be called, without penalty, by PepsiCo in 1997. The 1996
amount was $248 million. 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 in 1995 is the $214 million carrying amount of the Swiss franc
perpetual Foreign Interest Payment bonds in 1995, which were expected to be
redeemed in 1996. At year-end 1996, $39 million of these bonds were still
outstanding and are classified as long-term debt (see (E) below).
(C) PepsiCo has entered into currency swaps to hedge its currency
exposure on non-U.S. dollar denominated debt. At year-end 1996, the aggregate
carrying amount of the debt was $1.8 billion and the receivables and payables
under related currency swaps were $54 million and $59 million, respectively,
resulting in a net effective U.S. dollar liability of $1.8 billion with a
weighted average interest rate of 5.6%, including the
F-17
effects of related interest rate swaps. At year-end 1995, the carrying amount of
this debt aggregated $696 million and the receivables and payables under related
currency swaps aggregated $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.
(D) At year-end 1996 and 1995, PepsiCo had unused revolving credit
facilities covering potential borrowings aggregating $3.5 billion expiring in
2001 and 2000, respectively. Effective January 10, 1997, PepsiCo extended to
2002 $3.3 billion of the credit facilities. At year-end 1996 and 1995, $3.5
billion 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 general
corporate purposes.
(E) The coupon rate of the Swiss franc 400 million perpetual Foreign
Interest Payment bonds issued in 1986 was 7 1/2% through 1996, and 5.6% through
2006. 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. This debt was included in current maturities of
long-term debt (see (B) above) at year-end 1995 because the bondholders had the
right to cause PepsiCo to redeem the debt in 1996 on its 10-year anniversary
date. During 1996, $175 million of this debt was redeemed.
Note 11 - FINANCIAL INSTRUMENTS
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'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 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 generally match the principal, interest payment
dates and maturity dates of the related debt. Accordingly, any market risk or
opportunity associated with these swaps is 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 10 for the notional amounts, related
interest rates and maturities of the interest rate and currency swaps.
F-18
Fair Value
- ----------
The carrying amounts and fair values of PepsiCo's financial instruments are as
follows:
1996 1995
- -----------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
ASSETS
Cash and
cash equivalents.......................... $ 447 $ 447 $ 382 $ 382
Short-term
investments............................... $ 339 $ 339 $1,116 $1,116
Other assets (noncurrent
investments) ............................. $ 15 $ 15 $ 23 $ 23
LIABILITIES
Debt
Short-term borrowings
and long-term debt,
net of capital
leases................................. $8,202 $8,298 $8,921 $9,217
Debt-related derivative
instruments
Open contracts in asset
position............................... (91) (122) (25) (96)
Open contracts in liability
position............................... 62 74 13 26
------ ------ ------ -----
Net debt............................. $8,173 $8,250 $8,909 $9,147
------ ------ ------ ------
Other liabilities
(GEMEX put option)....................... $ 28 $ 28 $ 30 $ 30
Guarantees................................. - $ 25 - $ 4
- -----------------------------------------------------------------------------------------------------
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 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 (see Note 1) is based upon a valuation model.
Note 12 - 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
F-19
PepsiCo's Board of Directors (the Committee), which is comprised of outside
directors.
Under SharePower, approved by the Board of Directors and effective in
1989, essentially all full-time 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 12 million
were granted to approximately 130,000 employees in 1996; 16 million to 134,000
employees in 1995; and 23 million to 128,000 employees in 1994.
The shareholder-approved 1994 LTIP succeeds and continues the principal
features of the shareholder-approved 1987 LTIP (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 1996, there were 121 million shares 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 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
exchanged by employees for a specified number of PSUs within 60 days of the
option grant date. At year-end 1996, 1995 and 1994, there were 916,100,
1,198,200 and 1,258,400 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 for both 1996 and 1995 and $7 million in 1994.
In 1995, the Committee approved the 1995 SOIP for middle-management
employees. SOIP stock options are expected to be granted annually and are
exercisable after 1 year and must be exercised within 10 years after their grant
date. At year-end 1996, there were 37 million shares available for future grants
under the SOIP. In 1994, grants similar to those under the SOIP were made under
the LTIP to a more limited number of middle-management employees.
Effective in 1996, PepsiCo adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." As permitted under SFAS 123, PepsiCo will continue to
measure stock-based compensation cost as the excess of the quoted market price
of PepsiCo's capital stock at the grant date over the amount the employee must
pay for the stock.
SFAS 123 requires disclosure of pro forma net income and pro forma net
income per share as if the fair value-based method had been applied in measuring
compensation cost for stock-based awards granted in 1996 and 1995. Management
believes that 1996 and 1995 pro forma amounts are not representative of the
effects of stock-based awards on future pro forma net income and pro forma net
income per share because those pro forma amounts exclude the pro forma
compensation expense related to unvested stock options granted before 1995.
F-20
Reported and pro forma net income and net income per share amounts are set
forth below:
1996 1995
- ---------------------------------------------------------------------------------------
Reported
Net income $1,149 $1,606
Net income per share $ 0.72 $ 1.00
Pro forma
Net income $1,081 $1,590
Net income per share $ 0.67 $ 0.99
- ----------------------------------------------------------------------------------------
The fair values of the options granted were estimated on the date of
their grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions:
1996 1995
- --------------------------------------------------------------------------------------
Risk free interest rate 6.0% 6.2%
Expected life 6 years 5 years
Expected volatility 20% 20%
Expected dividend yield 1.5% 1.75%
- ---------------------------------------------------------------------------------------
Stock option activity for 1996, 1995 and 1994 is set forth below:
(Options in thousands)
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding at
beginning of year 160,662 $16.10 165,162 $14.60 133,570 $13.43
Granted 51,305 31.19 26,390 22.70 55,740 17.34
Exercised (22,687) 14.19 (21,181) 11.91 (9,744) 10.01
Surrendered
for PSUs (431) 29.91 (201) 20.67 (3,082) 19.48
Forfeited (11,632) 23.13 (9,508) 17.69 (11,322) 16.79
------- ------- ------
Outstanding at end
of year 177,217 20.22 160,662 16.10 165,162 14.60
======= ======= =======
Exercisable at
end of year 80,482 14.92 65,474 12.63 69,107 11.66
======= ======= =======
- ---------------------------------------------------------------------------------------------------------
Weighted-average
fair value of
options granted
during the year $ 8.89 $ 5.53
- ---------------------------------------------------------------------------------------------------------
F-21
Stock options outstanding at December 28, 1996:
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Price Options Life Price Options Price
- ---------------- ------- ----------- -------- ------- -----
$ 4.38 to $ 8.79 14,163 2.51 yrs. $ 6.55 11,089 $ 7.01
$ 8.82 to $17.63 63,658 5.35 14.70 49,653 14.41
$18.16 to $35.56 99,396 8.32 25.70 19,740 20.65
------- ------
177,217 6.79 20.22 80,482 14.92
======= ======
Note 13 - 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." The principal effect to PepsiCo resulted 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 $0.03 per share).
Note 14 - 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.
F-22
The components of postretirement benefit expense for 1996, 1995 and 1994
are set forth below:
1996 1995 1994
- --------------------------------------------------------------------------------------------------
Service cost of benefits earned........................... $ 15 $ 13 $ 19
Interest cost on accumulated
postretirement benefit obligation...................... 46 46 41
Amortization of prior service gain........................ (20) (20) (20)
Amortization of net loss/(gain)........................... 2 (1) 6
---- ---- ----
$ 43 $ 38 $ 46
==== ==== ====
- --------------------------------------------------------------------------------------------------
The components of the 1996 and 1995 postretirement benefit liability
recognized in the Consolidated Balance Sheet are set forth below:
1996 1995
- --------------------------------------------------------------------------------------------------
Actuarial present value of postretirement
benefit obligation
Retirees.............................................................. $(288) $(344)
Fully eligible active plan participants............................... (103) (96)
Other active plan participants........................................ (166) (171)
----- -----
Accumulated postretirement benefit obligation........................... (557) (611)
Unrecognized prior service gain......................................... (115) (132)
Unrecognized net (gain)/loss............................................ (17) 68
----- -----
$(689) $(675)
===== =====
- --------------------------------------------------------------------------------------------------
The discount rate assumptions used to compute the accumulated
postretirement benefit obligation were 7.8% and 7.7% in 1996 and 1995,
respectively.
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 was 8.1% for 1997, declining
gradually to 5.5% in 2010 and thereafter. For employees retiring after the
effective date, the trend rate was 7.0% for 1997, declining to zero in 2004 and
thereafter. A 1 point increase in the assumed health care cost trend rate would
have increased the 1996 postretirement benefit expense by $2 million and would
have increased the 1996 accumulated postretirement benefit obligation by $23
million.
Note 15 - 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. 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 12.2
F-23
million and 13.7 million shares of PepsiCo capital stock in 1996 and 1995, with
a market value of $344 million and $350 million, respectively. In the interest
of maintaining an appropriate level of diversification within the U.S. plans'
asset portfolio, 1.5 million shares of PepsiCo capital stock were sold during
the 1996 plan year to offset the large increase in market value of PepsiCo
capital stock holdings relative to other portfolio assets. Dividends on PepsiCo
capital stock of $5 million were received by the U.S. plans in both 1996 and
1995.
The components of net pension expense for U.S. company-sponsored plans are
set forth below:
1996 1995 1994
- --------------------------------------------------------------------------------------------------
Service cost of benefits earned........................... $ 80 $ 60 $ 70
Interest cost on projected benefit
obligation............................................... 110 92 84
Return on plan assets
Actual (gain)/loss...................................... (192) (338) 20
Deferred gain/(loss).................................... 65 221 (131)
----- ----- -----
(127) (117) (111)
Amortization of net transition gain....................... (19) (19) (19)
Net other amortization.................................... 12 5 9
----- ----- -----
$ 56 $ 21 $ 33
===== ===== =====
- --------------------------------------------------------------------------------------------------
F-24
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
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------
Actuarial present value of
benefit obligation
Vested benefits......................... $(1,159) $ (824) $ (53) $(270)
Nonvested benefits...................... (154) (110) (5) (30)
------- ------ ----- -----
Accumulated benefit
obligation............................... (1,313) (934) (58) (300)
Effect of projected
compensation increases................... (175) (155) (80) (78)
------- ------ ----- -----
Projected benefit obligation.............. (1,488) (1,089) (138) (378)
Plan assets at fair value................. 1,547 1,152 17 267
------- ------ ----- -----
Plan assets in excess of
(less than) projected
benefit obligation...................... 59 63 (121) (111)
Unrecognized prior
service cost............................. 65 37 23 51
Unrecognized net
(gain)/loss ............................. (53) (20) 38 34
Unrecognized net
transition (gain)/loss................... (35) (51) - (3)
Adjustment required to
recognize minimum liability.............. - - - (26)
------- ------ ----- -----
Prepaid (accrued) pension
liability................................ $ 36 $ 29 $ (60) $ (55)
======= ====== ===== =====
- -----------------------------------------------------------------------------------------------
The assumptions used to compute the U.S. information above are set forth below:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
Expected long-term rate of return
on plan assets........................................... 10.0% 10.0 10.0
Discount rate - projected benefit
obligation............................................... 7.7% 7.7 9.0
Future compensation growth rate........................... 3.2%-6.6% 3.3-6.6 3.3-7.0
- -----------------------------------------------------------------------------------------------------
F-25
The components of net pension expense for international
company-sponsored plans are set forth below:
1996 1995 1994
- --------------------------------------------------------------------------------------------------
Service cost of benefits earned........................... $ 13 $ 11 $ 15
Interest cost on projected benefit
obligation............................................... 19 16 15
Return on plan assets
Actual (gain)/loss...................................... (39) (31) 8
Deferred gain/(loss).................................... 10 6 (32)
---- ---- ----
(29) (25) (24)
Net other amortization.................................... 1 - 2
---- ---- ----
$ 4 $ 2 $ 8
==== ==== ====
- --------------------------------------------------------------------------------------------------
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
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------
Actuarial present value of
benefit obligation
Vested benefits......................... $(179) $(144) $(30) $(34)
Nonvested benefits...................... (5) (2) (4) (1)
----- ----- ---- ----
Accumulated benefit
obligation............................... (184) (146) (34) (35)
Effect of projected
compensation increases................... (34) (23) (13) (12)
----- ----- ---- ----
Projected benefit obligation.............. (218) (169) (47) (47)
Plan assets at fair value................. 289 235 17 18
----- ----- ---- ----
Plan assets in excess of
(less than) projected
benefit obligation...................... 71 66 (30) (29)
Unrecognized prior
service cost............................. 4 3 - -
Unrecognized net
loss/(gain).............................. 24 16 5 4
Unrecognized net
transition (gain)/loss................... (1) (1) 3 4
Adjustment required to
recognize minimum
liability............................... - - (3) (2)
----- ----- ---- ----
Prepaid (accrued) pension
liability................................ $ 98 $ 84 $(25) $(23)
===== ===== ==== ====
============================================================================================================
F-26
The assumptions used to compute the international information above are set
forth below:
1996 1995 1994
- ------------------------------------------------------------------------------------------------
Expected long-term rate of return
on plan assets........................................... 11.4% 11.3 11.3
Discount rate - projected benefit
obligation............................................... 8.4% 8.8 9.3
Future compensation growth rate...........................3.0%-10.5% 3.0-11.8 3.0-8.5
- -------------------------------------------------------------------------------------------------
The discount rates and rates of return for the international plans represent
weighted averages.
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 is preferable because it results in calculated plan
asset values that more closely approximate fair value, while still mitigating
the effect of annual market-value fluctuations. This change resulted in a
noncash benefit in 1994 of $38 million ($23 million after-tax or $0.01 per
share) representing the cumulative effect of the change related to years prior
to 1994.
Note 16 - INCOME TAXES
The details of the provision for income taxes on income before cumulative effect
of accounting changes are set forth below:
1996 1995 1994
- --------------------------------------------------------------------------------
Current: Federal................... $520 $ 706 $642
Foreign................... 262 154 174
State..................... 105 77 131
---- ----- ----
887 937 947
---- ----- ----
Deferred: Federal.................. 102 (92) (64)
Foreign................... (55) (18) (2)
State..................... (36) (1) (1)
---- ----- ----
11 (111) (67)
---- ----- ----
$898 $ 826 $880
==== ===== ====
- --------------------------------------------------------------------------------
F-27
U.S. and foreign income before income taxes and cumulative effect of
accounting changes are set forth below:
1996 1995 1994
- ----------------------------------------------------------------------------------
U.S......................................... $2,015 $1,792 $1,762
Foreign..................................... 32 640 902
------ ------ ------
$2,047 $2,432 $2,664
====== ====== ======
- ----------------------------------------------------------------------------------
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 73%, 70% and 50% in 1996, 1995 and 1994,
respectively, (consistent with the income subject to U.S. tax) of the income
from sales of concentrate manufactured in Puerto Rico. The increases in 1996 and
1995 reflected the effects of the 1993 U.S. Federal income tax legislation,
which limited the U.S. Federal tax credit on income earned in Puerto Rico. See
Management's Analysis - Provision for Income Taxes beginning on page 17 for a
discussion of the reduction of the U.S. Federal tax credit associated with
beverage concentrate operations in Puerto Rico.
A reconciliation of the U.S. Federal statutory tax rate to PepsiCo's
effective tax rate is set forth below:
1996 1995 1994
- -------------------------------------------------------------------------------------
U.S. Federal statutory tax rate.................. 35.0% 35.0% 35.0%
State income tax, net of Federal
tax benefit................................... 2.8 2.0 3.2
Effect of lower taxes
on foreign results (including
Puerto Rico and Ireland)....................... (0.9) (3.0) (5.4)
Adjustment to the beginning-of-
the-year deferred tax assets
valuation allowance............................ - - (1.3)
Settlement of prior years'
audit issues.................................... (2.4) (4.1) -
Effect of unusual impairment,
disposal and other charges...................... 8.9 1.4 -
Nondeductible amortization of
U.S. goodwill................................... 1.1 1.0 0.8
Other, net....................................... (0.6) 1.7 0.7
---- ---- ----
Effective tax rate............................... 43.9% 34.0% 33.0%
==== ==== ====
- -------------------------------------------------------------------------------------
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 unconsolidated affiliates. These differences, which consist primarily of
unremitted earnings intended to be indefinitely reinvested, aggregated
approximately $4.0 billion at year-end 1996 and $4.5 billion at year-end 1995,
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.
F-28
The details of the 1996 and 1995 deferred tax liabilities (assets) are
set forth below:
1996 1995
- -----------------------------------------------------------------------------------
Intangible assets other than
nondeductible goodwill.......................... $ 1,635 $ 1,631
Property, plant and equipment...................... 387 496
Safe harbor leases................................. 143 165
Zero coupon notes.................................. 103 100
Other.............................................. 394 257
------- -------
Gross deferred tax liabilities..................... 2,662 2,649
------- -------
Net operating loss carryforwards................... (503) (418)
Postretirement benefits............................ (254) (248)
Casualty claims.................................... (123) (119)
Various current liabilities
and other......................................... (749) (790)
------- -------
Gross deferred tax assets.......................... (1,629) (1,575)
Deferred tax assets
valuation allowance............................... 560 498
------- -------
Net deferred tax assets............................ (1,069) (1,077)
------- -------
Net deferred tax liability......................... $ 1,593 $ 1,572
======= =======
Included in
Prepaid expenses, deferred income
taxes and other current assets................ $ (185) $ (313)
Deferred income taxes............................ 1,778 1,885
------- -------
$ 1,593 $ 1,572
======= =======
- ---------------------------------------------------------------------------------
The valuation allowance related to deferred tax assets increased by $62
million in 1996 primarily due to additions related to current year operating
losses and temporary differences in a number of foreign and state jurisdictions.
Net operating loss carryforwards totaling $2.5 billion at year-end 1996 are
available to reduce future tax of certain subsidiaries and are related to a
number of foreign and state jurisdictions. Of these carryforwards, $21 million
expire in 1997, $2.2 billion expire at various times between 1998 and 2010 and
$291 million may be carried forward indefinitely.
Tax benefits associated with exercises of stock options of $145 million in
1996, $91 million in 1995 and $27 million in 1994 were credited to shareholders'
equity.
Note 17 - 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 Argentina, Brazil, Chile, Costa Rica and Uruguay, 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
F-29
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
one-time, noncash gain to PepsiCo was $18 million ($17 million after-tax or
$0.01 per share).
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. PepsiCo was contingently liable under
guarantees for $338 million and $283 million at year-end 1996 and 1995,
respectively. At year-end 1996, $74 million represented contingent liabilities
to lessors as a result of PepsiCo assigning its interest in real estate leases
as a condition to the refranchising of company-operated restaurants. The $74
million represented the present value of the minimum payments of the assigned
leases, excluding any renewal option periods, discounted at PepsiCo's pre-tax
cost of debt. On a nominal basis, the contingent liability resulting from the
assigned leases was $115 million. The balance of the contingent liabilities
primarily reflected guarantees to support financial arrangements of certain
unconsolidated affiliates, and other restaurant franchisees.
Note 19 - BUSINESS SEGMENTS
PepsiCo operates on a worldwide basis within three industry segments: beverages,
snack foods and restaurants. However, as discussed in Note 21 and Management's
Analysis - Restaurants beginning on page 26, PepsiCo announced in 1997 that it
would pursue a spin off of its Pizza Hut, Taco Bell and KFC businesses to its
shareholders as an independent publicly-traded company and explore the
possibility that PFS would be sold separately. In addition, decisions were made
in 1996 to sell PepsiCo's non-core U.S. restaurant businesses (see Note 3).
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 North America and in
various International markets for the production and distribution of
company-owned and licensed brands. Beverages also manufactures and distributes
ready-to-drink Lipton tea products in North America.
F-30
Beverages products are available in 191 countries and territories outside
North America, including emerging markets such as China, the Czech Republic,
Hungary, India, Poland, Russia and Slovakia. Principal International markets
include Argentina, Brazil, China, Mexico, Saudi Arabia, Spain, Thailand and the
U.K. Investments in unconsolidated affiliates are primarily in franchised
bottling and distribution operations. Internationally, the largest investments
in unconsolidated affiliates are GEMEX (Mexico), General Bottlers (Poland), Serm
Suk (Thailand) and SOPRESA (Venezuela) as well as the aggregate of several
investments in China. The primary investment 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 North American
business. Products primarily manufactured and distributed in North America
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. Low-fat
and no-fat versions of several core brands are also manufactured and distributed
in North America. Snack Foods products are available in 81 countries and
territories outside North America. Principal International markets include
Australia, Brazil, France, Mexico, the Netherlands, Poland, Spain and the U.K.
International snack foods manufactures and distributes salty snacks in almost
all countries and sweet snacks in certain countries, primarily in France, Mexico
and Poland. Snack Foods has investments in several unconsolidated affiliates
outside the U.S., the largest of which are Snack Ventures Europe (SVE), a joint
venture with General Mills, Inc., which has operations on the continent of
Europe, and an 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 non-core U.S. businesses including
CPK, Chevys, D'Angelo, ESM and HNN. PepsiCo Restaurant Services Group (PRSG), a
new unit formed in 1996 which also includes the existing operations of PFS,
PepsiCo's restaurant distribution operation, is responsible for the
consolidation of many restaurants activities. The activities include licensing
arrangements in non-traditional locations, real estate and asset management and
accounting services for the U.S. operations in addition to worldwide
procurement. PFS 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
included in U.S. restaurants results.
Pizza Hut, Taco Bell and KFC operate throughout the U.S. Pizza Hut, KFC
and, to a lesser extent, Taco Bell operate in 94 countries and territories
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 unconsolidated affiliates outside the U.S., the most
significant of which are located in Japan and the U.K.
F-31
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 85 unconsolidated affiliates in which it
exercises significant influence but not control. As noted above, the investments
are primarily international and principally within PepsiCo's three industry
segments.
PepsiCo's year-end investments in unconsolidated affiliates totaled $1.4
billion in 1996 and $1.6 billion in 1995. The decrease in 1996 reflected the
unusual impairment, disposal and other charges of $256 million recorded by
International beverages (see below) and the consolidation of CPK, previously an
unconsolidated equity investment, at the end of the second quarter of 1996.
Significant investments in unconsolidated affiliates at year-end 1996 included a
combined $306 million in General Bottlers U.S. and Poland, $206 million in
GEMEX, $140 million in a KFC Japan joint venture and $99 million in SVE.
ITEMS AFFECTING COMPARABILITY
UNUSUAL IMPAIRMENT, DISPOSAL AND OTHER CHARGES
Beverages and restaurants operating profit and equity (loss) income included
$320 million, $246 million and $256 million, respectively, of unusual
impairment, disposal and other charges in 1996. The charges included in
beverages operating profit and equity (loss) income reflected impairment,
disposal and other costs related to International investments in unconsolidated
affiliates and concentrate-related and non-core assets as well as costs
associated with a restructuring of International operations. The restaurants
charge reflected management's decisions in 1996 to dispose of all of its
non-core U.S. restaurant businesses: CPK, Chevys, D'Angelo, ESM and HNN. See
Note 3.
PepsiCo adopted SFAS 121 as of the beginning of the fourth quarter of
1995. See Note 4. The initial, noncash charges reduced operating profit as
follows:
1995
----
Beverages.................................. $ 62
Snack Foods ............................... 4
Restaurants(a)............................. 437
----
Combined Segments ......................... 503
Equity (Loss) Income(b).................... 17
---
$520
(a) HNN and Chevys incurred $103 of this charge, with HNN
responsible for almost all of the charge.
(b) Primarily related to CPK.
F-32
As a result of the reduced carrying amount of certain of PepsiCo's
long-lived assets to be held and used in the business in connection with the
1995 adoption of SFAS 121, depreciation and amortization expense for the first
three quarters of 1996 and the fourth quarter of 1995 was reduced by $46 million
and $21 million, respectively, as follows:
1996 1995
---- ----
Beverages $ 6 $ 4
Restaurants 40 16
Equity (Loss) Income - 1
--- ---
$46 $21
=== ===
RECURRING RESTAURANT IMPAIRMENT
Restaurants operating profit in 1996 included impairment charges of $62 million
as a result of the ongoing application of SFAS 121 to long-lived assets held and
used in the business. See Note 4.
NET REFRANCHISING GAINS
Restaurants operating profit in 1996 and 1995 included net gains of $99 million
and $55 million, respectively, from refranchising of restaurants in excess of
the cost of closing other restaurants. These gains compared to $10 million of
costs in 1994 to close stores.
FISCAL YEAR
Fiscal year 1994 consisted of 53 weeks, and the years 1995 and 1996 consisted of
52 weeks. The fifty-third week increased 1994 consolidated net sales by an
estimated $434 million and beverages, snack foods and restaurants net sales by
$119 million, $143 million and $172 million, respectively. The fifty-third week
increased 1994 consolidated operating profit by an estimated $65 million and
beverages, snack foods and restaurants operating profit by $17 million, $26
million and $23 million, respectively, and increased unallocated expenses, net
by $1 million.
F-33
- --------------------------------------------------------------------------------
INDUSTRY SEGMENTS (page 1 of 3)
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
NET SALES
Beverages $10,524 $10,382 $ 9,566
Snack Foods 9,680 8,545 8,264
Restaurants 11,441 11,328 10,521
------- ------- -------
$31,645 $30,255 $28,351
======= ======= =======
OPERATING PROFIT (a)
Beverages $ 890 $ 1,309 $ 1,217
Snack Foods 1,608 1,432 1,377
Restaurants 511 430 730
------- ------- -------
Combined Segments 3,009 3,171 3,324
Equity (Loss) Income (266) (3) 38
Unallocated
Expenses, net (197) (181) (161)
------- ------- -------
Operating Profit $ 2,546 $ 2,987 $ 3,201
======= ======= =======
- --------------------------------------------------------------------------------
(a) See Items Affecting Comparability beginning on page F-32.
F-34
- ---------------------------------------------------------------------------------------
GEOGRAPHIC AREAS (b) (page 2 of 3)
- ---------------------------------------------------------------------------------------
Net Sales
-------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
Europe $ 2,865 $ 2,783 $ 2,177
Canada 1,340 1,299 1,244
Mexico 1,334 1,228 2,023
Other 3,658 3,437 2,782
------- ------- -------
Total International 9,197 8,747 8,226
United States 22,448 21,508 20,125
------- ------- -------
Combined Segments $31,645 $30,255 $28,351
======= ======= =======
- ---------------------------------------------------------------------------------------
Segment Operating Profit (Loss)
-------------------------------------
1996(c) 1995(c) 1994
- ---------------------------------------------------------------------------------------
Europe $ (90) $ (65) $ 17
Canada 134 86 82
Mexico 116 80 261
Other (73) 342 258
------- ------- -------
Total International 87 443 618
United States 2,922 2,728 2,706
------- ------- -------
Combined Segments $ 3,009 $ 3,171 $ 3,324
======= ======= =======
- ---------------------------------------------------------------------------------------
Identifiable Assets
--------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
Europe $ 3,159 $ 3,127 $ 3,062
Canada 1,354 1,344 1,342
Mexico 661 637 995
Other 2,628 2,629 2,196
------- ------- -------
Total International 7,802 7,737 7,595
United States 14,728 14,505 14,218
------- ------- -------
Combined Segments 22,530 22,242 21,813
Investments in Unconsolidated
Affiliates 1,375 1,635 1,295
Corporate 607 1,555 1,684
------- ------- -------
$24,512 $25,432 $24,792
======= ======= =======
- ---------------------------------------------------------------------------------------
(b) The results of centralized concentrate manufacturing operations in
Puerto Rico and Ireland have been allocated based upon sales to the
respective geographic areas.
(c) The unusual impairment, disposal and other charges reduced combined
segment operating profit by $822 (United States - $246, Europe - $69,
Mexico - $4, Other - $503) in 1996 and $503 (United States - $302,
Europe - $119, Mexico - $21, Canada - $30, Other - $31) in 1995 (see
Items Affecting Comparability beginning on page F-32).
F-35
- ---------------------------------------------------------------------------------------
INDUSTRY SEGMENTS (page 3 of 3)
- ---------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------
Amortization of Intangible Assets
-----------------------------------------
Beverages $ 164 $ 166 $ 165
Snack Foods 41 41 42
Restaurants 96 109 105
------- ------- -------
$ 301 $ 316 $ 312
======= ======= =======
- ---------------------------------------------------------------------------------------
Depreciation Expense
----------------------------------------
Beverages $ 440 $ 445 $ 385
Snack Foods 346 304 297
Restaurants 546 579 539
Corporate 7 7 7
------- ------- -------
$ 1,339 $ 1,335 $ 1,228
======= ======= =======
- ---------------------------------------------------------------------------------------
Identifiable Assets
----------------------------------------
Beverages $ 9,816 $10,032 $ 9,566
Snack Foods 6,279 5,451 5,044
Restaurants 6,435 6,759 7,203
Investments in Unconsolidated
Affiliates 1,375 1,635 1,295
Corporate 607 1,555 1,684
------- ------- -------
$24,512 $25,432 $24,792
======= ======= =======
- ---------------------------------------------------------------------------------------
Capital Spending (d)
--------------------
Beverages $ 650 $ 566 $ 677
Snack Foods 973 769 532
Restaurants 665 750 1,072
Corporate 9 34 7
------- ------- -------
$ 2,297 $ 2,119 $ 2,288
======= ======= =======
United States $ 1,613 $ 1,496 $ 1,492
International 684 623 796
------- ------- -------
$ 2,297 $ 2,119 $ 2,288
======= ======= =======
- ---------------------------------------------------------------------------------------
Acquisitions and Investments
in Unconsolidated Affiliates (e)
------------------------------------------
Beverages $ 75 $ 323 $ 195
Snack Foods - 82 12
Restaurants 1 70 148
------- ------- -------
$ 76 $ 475 $ 355
======= ======= =======
United States $ 16 $ 73 $ 88
International 60 402 267
------- ------- -------
$ 76 $ 475 $ 355
======= ======= =======
- ---------------------------------------------------------------------------------------
(d) Included immaterial, noncash amounts related to capital leases, largely in
the restaurants segment.
(e) Included immaterial noncash amounts related to treasury stock and debt
issued.
F-36
Note 20 - SELECTED QUARTERLY FINANCIAL DATA
($ in millions except per share amounts, unaudited) (page 1 of 4)
First Quarter
(12 Weeks)
1996(a) 1995(a)
- -----------------------------------------------------------------------------------------------------
Net sales........................................................ $ 6,554 6,157
Gross profit..................................................... $ 3,348 3,135
Unusual impairment, disposal and other
charges(b)..................................................... $ 26 -
Operating profit................................................. $ 706 629
Net income....................................................... $ 394 321
Net income per share............................................. $ 0.24 0.20
Cash dividends declared per share................................ $ 0.10 0.09
Stock price per share(c)
High........................................................... $ 33 3/8 20 1/2
Low............................................................ $ 27 1/2 16 15/16
Close.......................................................... $ 31 5/8 20 3/16
- --------------------------------------------------------------------------------------------------
Second Quarter
(12 Weeks)
1996(a) 1995
- --------------------------------------------------------------------------------------------------
Net sales........................................................ $ 7,691 7,245
Gross profit..................................................... $ 3,995 3,694
Operating profit................................................. $ 986 869
Net income ...................................................... $ 583 487
Net income per share............................................. $ 0.36 0.30
Cash dividends declared per share................................ $ 0.115 0.10
Stock price per share (c)
High........................................................... $ 34 1/2 24 1/2
Low........................................................... $29 11/16 19 1/2
Close.......................................................... $ 33 1/8 23 5/16
- --------------------------------------------------------------------------------------------------
Third Quarter
(12 Weeks)
1996(a) 1995(a)
- ----------------------------------------------------------------------------------------------------
Net sales........................................................ $ 7,867 7,648
Gross profit..................................................... $ 4,050 3,897
Unusual impairment, disposal and other
charges(b)..................................................... $ 390 -
Operating profit................................................. $ 560 1,031
Net income ...................................................... $ 144 617
Net income per share............................................. $ 0.09 0.39
Cash dividends declared per share................................ $ 0.115 0.10
Stock price per share (c)
High........................................................... $ 35 5/8 23 5/8
Low............................................................ $ 28 1/4 21 13/16
Close.......................................................... $ 28 3/8 22 7/8
- -------------------------------------------------------------------------------------------------
F-37
($ in millions except per share amounts, unaudited) (page 2 of 4)
Fourth Quarter
(16 Weeks)
1996(a) 1995(a)
- -----------------------------------------------------------------------------------------------------
Net sales........................................................ $ 9,533 9,205
Gross profit..................................................... $ 4,869 4,643
Unusual impairment, disposal and other
charges(b)..................................................... $ 406 520
Operating profit................................................. $ 294 458
Net income ...................................................... $ 28 181
Net income per share............................................. $ 0.03 0.11
Cash dividends declared per share................................ $ 0.115 0.10
Stock price per share (c)
High........................................................... $32 7/8 29
Low............................................................ $28 1/8 23 1/8
Close.......................................................... $29 5/8 27 15/16
- --------------------------------------------------------------------------------------------------
Full Year
(52 Weeks)
1996(a) 1995(a)
- -----------------------------------------------------------------------------------------------------
Net sales........................................................ $31,645 30,255
Gross profit..................................................... $16,262 15,369
Unusual impairment, disposal and other
charges(b)..................................................... $ 822 520
Operating profit................................................. $ 2,546 2,987
Net income....................................................... $ 1,149 1,606
Net income per share............................................. $ 0.72 1.00
Cash dividends declared per share................................ $ 0.445 0.39
Stock price per share (c)
High........................................................... $35 5/8 29
Low............................................................ $27 1/2 16 15/16
Close.......................................................... $29 5/8 27 15/16
- --------------------------------------------------------------------------------------------------
F-38
($ in millions except per share amounts, unaudited) (page 3 of 4)
Notes:
(a) Included certain items affecting comparability as summarized below. Net
refranchising gains represent gains from sales of restaurants to
franchisees in excess of costs of closing other restaurants. The
depreciation and amortization reduction for the first three quarters of
1996 arose from the adoption of SFAS 121, at the beginning of the fourth
quarter of 1995, which reduced the carrying amount of certain long-lived
assets to be held and used in the business (see Note 4). The restaurant
impairment charges represent the ongoing application of SFAS 121 (see Note
4).
1996 1995
------------------------ ----------------------------
Pre- After- Per Pre- After- Per
Tax Tax Share Tax Tax Share
--- --- ----- --- --- -----
Net refranchising gains
First quarter $ 46 $28 $0.02 $ 3 $ 2 $ -
Second quarter 38 25 0.01 - - -
Third quarter 25 15 0.01 (3) (2) -
Fourth quarter (10) (7) - 55 29 0.02
---- --- ----- --- --- -----
Full year $ 99 $61 $0.04 $55 $29 $0.02
==== === ===== === === =====
Depreciation and amorti-
zation reduction
First quarter $ 15 $10 $0.01
Second quarter 18 12 -
Third quarter 13 7 0.01
---- --- -----
Full year $ 46 $29 $0.02
==== === =====
Restaurant impairment
charges
Second quarter $ 18 $12 $0.01
Fourth quarter 44 28 0.02
---- --- -----
Full year $ 62 $40 $0.03
==== === =====
Notes continued on next page
F-39
($ in millions except per share amounts, unaudited) (page 4 of 4)
Notes(cont'd):
(b) Included unusual impairment, disposal and other charges (see Note 3) as follows:
1996 1995
-------------------------- -------------------------
Pre- After- Per Pre- After- Per
Tax Tax Share Tax Tax Share
----- ------ ------ ---- ----- -----
International beverages
Impairment, disposal
and other charges
Third quarter $390 $376 $0.23
Fourth quarter 64 53 0.04
---- ---- ----
Full year $454 $429 $0.27
Restructuring
Fourth quarter $122 $ 98 $0.06
---- ---- -----
Full year $122 $ 98 $0.06
Disposal of non-core
restaurant businesses
First quarter $ 26 $ 17 $0.01
Fourth quarter 220 172 0.11
---- ---- -----
Full year $246 $189 $0.12
Initial impact of
adopting SFAS 121
Fourth quarter $520 $384 $0.24
---- ---- -----
Full year $520 $384 $0.24
Total
First quarter $ 26 $ 17 $0.01
Third quarter 390 376 0.23
Fourth quarter 406 323 0.21 $520 $384 $0.24
---- ---- ----- ---- ---- -----
Full year $822 $716 $0.45 $520 $384 $0.24
==== ==== ===== ==== ==== =====
(c) Represented the high, low and closing prices for a share of PepsiCo
capital stock on the New York Stock Exchange adjusted for the 1996
two-for-one stock split (see Note 1).
Note 21 - SUBSEQUENT EVENTS
In January 1997, PepsiCo announced that it would pursue a plan to spin off its
restaurant businesses to its shareholders as an independent publicly- traded
company. The new company will include both the U.S. and international operations
of PepsiCo's core restaurant concepts - Pizza Hut, Taco Bell and KFC. PepsiCo is
exploring the possibility that PFS, our restaurant distribution operation, will
be sold separately. Subject to a
F-40
tax ruling by the Internal Revenue Service that would allow the spin off to be
tax free to shareholders, various regulatory approvals, appropriate stock market
conditions for distribution, and final approval from PepsiCo's Board of
Directors, PepsiCo expects to complete these activities by the end of 1997.
F-41
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 28, 1996
provide reasonable assurance that the financial statements are reliable and that
our assets are reasonably safeguarded.
F-42
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 28, 1996 and December 30, 1995 and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the years in the three-year period ended December 28, 1996. 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 28, 1996 and December 30, 1995, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 28, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 4 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 15 and 13 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.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
February 4, 1997
F-43
- ------------------------------------------------------------------------------------------------------------
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
1986-96 1991-96 1995-96
SUMMARY OF OPERATIONS
Net sales................................................. 13% 10% 5%
Operating profit.......................................... 12% 4% (15)%
Gain on stock offering by an
unconsolidated affiliate (k).............................
Interest expense, net.....................................
Income from continuing operations
before income taxes and cumulative
effect of accounting changes 11% 4% (16)%
Income from continuing operations
before cumulative effect of
accounting changes....................................... 9% 1% (28)%
Cumulative effect of accounting
changes (l)..............................................
Net income................................................ 10% 1% (28)%
CASH FLOW DATA
Dividends paid............................................ 15% 14% 13%
Free cash flow(m)......................................... 18% 21% 41%
Share repurchases.........................................
Acquisitions and investments in
unconsolidated affiliates................................
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................................... 9% 1% (28)%
Cumulative effect of accounting
changes (l)..............................................
Net income................................................ 10% 1% (28)%
Cash dividends declared................................... 16% 14% 14%
Book value per share at year-end.......................... 13% 4% (8)%
Market price per share at year-end........................ 21% 12% 6%
Number of shares repurchased..............................
Shares outstanding at year-end............................
Average shares outstanding used to
calculate income (charge) per
share (n)................................................
BALANCE SHEET
Total assets.............................................. 12% 5% (4)%
Long-term debt............................................ 12% 2% (1)%
Total debt (o)............................................ 11% 1% (8)%
Shareholders' equity......................................
STATISTICS
Return on average shareholders'
equity (p)...............................................
Market net debt ratio (q).................................
Historical cost net debt ratio (r)........................
Employees................................................. 9% 7% 1%
F-44
- ------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 2 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------
1996(a)(b) 1995(b)(c) 1994(d)(e)
- ------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................................. $31,645 30,255 28,351
Operating profit.......................................... $ 2,546 2,987 3,201
Gain on stock offering by an
unconsolidated affiliate (k)............................. - - 18
Interest expense, net..................................... (499) (555) (555)
------- ------- ------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............................. $ 2,047 2,432 2,664
======= ======== ======
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 1,149 1,606 1,784
Cumulative effect of accounting
changes (l).............................................. $ - - (32)
Net income................................................ $ 1,149 1,606 1,752
CASH FLOW DATA
Dividends paid............................................ $ 675 599 540
Free cash flow(m)......................................... $ 1,544 1,095 710
Share repurchases......................................... $ 1,651 541 549
Acquisitions and investments in
unconsolidated affiliates................................ $ 75 466 316
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 0.72 1.00 1.11
Cumulative effect of accounting
changes (l).............................................. $ - - (0.02)
Net income................................................ $ 0.72 1.00 1.09
Cash dividends declared................................... $ 0.445 0.39 0.35
Book value per share at year-end.......................... $ 4.29 4.64 4.34
Market price per share at year-end........................ $29 5/8 27 15/16 18 1/8
Number of shares repurchased.............................. 54.2 24.6 30.0
Shares outstanding at year-end............................ 1,545 1,576 1,580
Average shares outstanding used to
calculate income (charge) per
share (n)................................................ 1,606 1,608 1,608
BALANCE SHEET
Total assets.............................................. $24,512 25,432 24,792
Long-term debt............................................ $ 8,439 8,509 8,841
Total debt (o) ........................................... $ 8,465 9,215 9,519
Shareholders' equity...................................... $ 6,623 7,313 6,856
STATISTICS
Return on average shareholders'
equity (p)............................................... 16% 23 27
Market net debt ratio (q)................................. 18% 18 26
Historical cost net debt ratio (r)........................ 48% 46 49
Employees................................................. 486,000 480,000 471,000
F-45
- ------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 3 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------
1993(f) 1992(g)(h) 1991(i)
- ------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................................. $ 24,935 21,885 19,218
Operating profit.......................................... $ 2,907 2,371 2,112
Gain on stock offering by an
unconsolidated affiliate (k)............................. - - -
Interest expense, net..................................... (484) (472) (452)
--------- ------- -------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............................. $ 2,423 1,899 1,660
========= ======= =======
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 1,588 1,302 1,080
Cumulative effect of accounting
changes (l).............................................. $ - (928) -
Net income................................................ $ 1,588 374 1,080
CASH FLOW DATA
Dividends paid............................................ $ 462 396 343
Free cash flow(m)......................................... $ 653 824 593
Share repurchases......................................... $ 463 32 195
Acquisitions and investments in
unconsolidated affiliates................................ $ 1,011 1,210 641
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 0.98 0.81 0.68
Cumulative effect of accounting
changes (l) ............................................. $ - (0.58) -
Net income .............................................. $ 0.98 0.23 0.68
Cash dividends declared................................... $ 0.305 0.255 0.23
Book value per share at year-end.......................... $ 3.97 3.35 3.52
Market price per share at year-end........................ $20 15/16 21 1/8 16 7/8
Number of shares repurchased.............................. 24.8 2.0 12.8
Shares outstanding at year-end............................ 1,598 1,598 1,578
Average shares outstanding used to
calculate income (charge) per
share (n)................................................ 1,620 1,613 1,605
BALANCE SHEET
Total assets.............................................. $ 23,706 20,951 18,775
Long-term debt............................................ $ 7,443 7,965 7,806
Total debt (o) ........................................... $ 9,634 8,672 8,034
Shareholders' equity...................................... $ 6,339 5,356 5,545
STATISTICS
Return on average shareholders'
equity (p) .............................................. 27% 24 21
Market net debt ratio (q) ................................ 22% 19 21
Historical cost net debt ratio (r) ....................... 50% 49 51
Employees................................................. 423,000 372,000 338,000
F-46
- ------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 4 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------
1990(j) 1989 1988(e)
- ------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................................. $17,516 15,049 12,381
Operating profit.......................................... $ 2,042 1,773 1,342
Gain on stock offering by an
unconsolidated affiliate (k) ............................ 118 - -
Interest expense, net..................................... (506) (433) (222)
------- ------- -------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............................. $ 1,654 1,340 1,120
======= ======= =======
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 1,091 901 762
Cumulative effect of accounting
changes (l) ............................................. $ - - -
Net income................................................ $ 1,077 901 762
CASH FLOW DATA
Dividends paid............................................ $ 294 242 199
Free cash flow(m)......................................... $ 561 672 978
Share repurchases......................................... $ 148 - 72
Acquisitions and investments in
unconsolidated affiliates................................ $ 631 3,297 1,416
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 0.69 0.57 0.49
Cumulative effect of accounting
changes (l) ............................................. $ - - -
Net income................................................ $ 0.68 0.57 0.49
Cash dividends declared................................... $ 0.192 0.16 0.133
Book value per share at year-end.......................... $ 3.11 2.46 2.01
Market price per share at year-end........................ $12 7/8 10 43/64 6 5/8
Number of shares repurchased.............................. 12.6 - 12.4
Shares outstanding at year-end............................ 1,577 1,582 1,577
Average shares outstanding used to
calculate income (charge) per
share (n)................................................ 1,597 1,592 1,580
BALANCE SHEET
Total assets.............................................. $17,143 15,127 11,135
Long-term debt............................................ $ 5,900 6,077 2,656
Total debt (o) ........................................... $ 7,526 6,943 4,107
Shareholders' equity...................................... $ 4,904 3,891 3,161
STATISTICS
Return on average shareholders'
equity (p) .............................................. 25% 26 27
Market net debt ratio (q) ................................ 24% 26 24
Historical cost net debt ratio (r) ....................... 51% 54 43
Employees................................................. 308,000 266,000 235,000
F-47
- ------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 5 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------
1987 1986
- ------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales................................................. $ 11,018 9,017
Operating profit.......................................... $ 1,128 829
Gain on stock offering by an
unconsolidated affiliate (k)............................. - -
Interest expense, net..................................... (182) (139)
-------- --------
Income from continuing operations
before income taxes and cumulative
effect of accounting changes............................. $ 946 690
======== ========
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 605 464
Cumulative effect of accounting
changes (l).............................................. $ - -
Net income................................................ $ 595 458
CASH FLOW DATA
Dividends paid............................................ $ 172 160
Free cash flow(m)......................................... $ 418 301
Share repurchases......................................... $ 19 158
Acquisitions and investments in
unconsolidated affiliates................................ $ 372 1,680
PER SHARE DATA AND OTHER SHARE INFORMATION
Income from continuing operations
before cumulative effect of
accounting changes....................................... $ 0.39 0.30
Cumulative effect of accounting
changes (l).............................................. $ - -
Net income................................................ $ 0.38 0.29
Cash dividends declared................................... $ 0.112 0.105
Book value per share at year-end.......................... $ 1.61 1.32
Market price per share at year-end........................ $5 41/64 4 3/8
Number of shares repurchased.............................. 3.8 40.4
Shares outstanding at year-end............................ 1,562 1,562
Average shares outstanding used to
calculate income (charge) per
share (n)................................................ 1,579 1,573
BALANCE SHEET
Total assets.............................................. $ 9,023 8,027
Long-term debt............................................ $ 2,579 2,633
Total debt (o) ........................................... $ 3,225 2,865
Shareholders' equity...................................... $ 2,509 2,059
STATISTICS
Return on average shareholders'
equity (p) .............................................. 27% 24
Market net debt ratio (q) ................................ 22% 28
Historical cost net debt ratio (r)........................ 41% 46
Employees................................................. 225,000 214,000
F-48
- -------------------------------------------------------------------------------
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 a two-for-one stock split in
1996 and 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 $246 ($189 after-tax or $0.12
per share) of charges included in 1996 as a result of the decisions made to
dispose of PepsiCo's non-core U.S. restaurant businesses. See Note 3.
(a) Included unusual impairment, disposal and other charges of $822 ($716
after-tax or $0.45 per share). See Note 3. Also included the benefit of
reduced depreciation and amortization expense for the first three
quarters of 1996 of $46 ($29 after-tax or $0.02 per share) as a result
of the initial impact of adopting 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 of 1995. See (c) below.
(b) Included a net refranchising gain of $99 ($61 after-tax or $0.04 per
share) and $55 ($29 after-tax or $0.02 per share) in 1996 and 1995, re-
spectively.
(c) Included the initial, noncash charge of $520 ($384 after-tax or $0.24
per share) upon adoption of SFAS 121 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 $0.01 per share). See Note 4.
(d) Included a benefit of changing to a preferable method for calculating
the market-related value of plan assets in 1994, which reduced full-year
pension expense by $35 ($22 after-tax or $0.01 per share).
(e) 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 $0.02 per share) and 1988 earnings by approximately $23
($16 after-tax or $0.01 per share).
(f) Included a $30 charge ($0.02 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.
(g) Included $193 ($129 after-tax or $0.08 per share) in unusual charges to
reorganize and streamline worldwide beverages and certain International
snack foods operations.
(h) Included increased postretirement benefits expense of $52 ($32 after-tax
or $0.02 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 pre-tax income by $21 and the provision for income taxes by $34.
(i) Included $170 in unusual charges ($120 after-tax or $0.07 per share)
primarily to streamline operations in worldwide snack foods and KFC in
the U.S.
F-49
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (Page 7 of 7)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(j) Included $83 in unusual charges ($49 after-tax or $0.03 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.
(k) The $18 gain ($17 after-tax or $0.01 per share) in 1994 arose from a
public share offering by BAESA, an unconsolidated franchised bottling
affiliate in South America. See Note 17. The $118 gain ($53 after-tax or
$0.03 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.
(l) Represented the cumulative effect of adopting in 1994 SFAS 112,
"Employers' Accounting for Postemployment Benefits," and changing to a
preferable 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 13 and 15, respectively) and adopting in 1992
SFAS 106 ($575 ($357 after-tax or $0.22 per share)) and SFAS 109 ($571
tax charge ($0.35 per share)). Prior years were not restated for these
changes in accounting.
(m) Defined as net cash provided by operating activities reduced by cash
dividends paid and adjusted for the following investing activities:
capital spending, refranchising of restaurants, sales of property, plant
and equipment and other, net. 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-50
PEPSICO, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES Years Ended December 28, 1996, December 30, 1995 and
December 31, 1994
(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:
1996
- ----
Allowance for
doubtful accounts $ 150 $ 62 $ 9 $ 38 $ 183
===== ===== ===== ===== =====
Valuation allowance for
deferred tax assets $ 498 $ 99 $ 12 $ 49 $ 560
===== ===== ===== ===== =====
1995
- ----
Allowance for
doubtful accounts $ 151 $ 49 $ 6 $ 56 $ 150
===== ===== ===== ===== =====
Valuation allowance for
deferred tax assets $ 319 $ 150 $ 29 $ - $ 498
===== ===== ===== ===== =====
1994
- ----
Allowance for
doubtful accounts $ 128 $ 59 $ 8 $ 44 $ 151
===== ===== ===== ===== =====
Valuation allowance for
deferred tax assets $ 249 $ 69 $ 1 $ - $ 319
===== ===== ===== ===== =====
(1) Other additions to the allowances principally related to acquisitions and
reclassifications.
(2) Principally accounts written off.
F-51