FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
- ---
For the quarterly period ended September 4, 1999 (12 and 36 Weeks Ended)
---------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1183
[GRAPHIC OMITTED]
PEPSICO, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-1584302
---------------- ----------
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
700 Anderson Hill Road, Purchase, New York 10577
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
914-253-2000
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(Registrant's telephone number, including area code)
N/A
-----
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Number of shares of Capital Stock outstanding as of October 1, 1999:
1,455,698,379
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Condensed Consolidated Statement of Income -
12 and 36 weeks ended September 4, 1999 and September 5, 1998 2
Condensed Consolidated Statement of Cash Flows -
36 weeks ended September 4, 1999 and September 5, 1998 3
Condensed Consolidated Balance Sheet -
September 4, 1999 and December 26, 1998 4-5
Condensed Consolidated Statement of Comprehensive Income -
12 and 36 weeks ended September 4, 1999 and September 5, 1998 6
Notes to Condensed Consolidated Financial Statements 7-10
Management's Discussion and Analysis of Operations,
Cash Flows, Liquidity and Capital Resources, Year 2000 and EURO 11-26
Independent Accountants' Review Report 27
Part II Other Information and Signatures 28-29
-1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended 36 Weeks Ended
------------------- ------------------
9/4/99 9/5/98 9/4/99 9/5/98
--------- -------- -------- --------
Net Sales
New PepsiCo.............................. $4,579 $3,401 $12,564 $ 9,722
Bottling operations...................... 12 2,143 2,123 5,433
--------- -------- -------- --------
Total Net Sales......................... 4,591 5,544 14,687 15,155
Costs and Expenses, net
Cost of sales............................ 1,793 2,283 5,945 6,181
Selling, general and administrative expenses 2,025 2,326 6,483 6,581
Amortization of intangible assets........ 35 46 140 136
Impairment and restructuring charge...... - - 65 -
--------- -------- -------- --------
Total Costs and Expenses, net........... 3,853 4,655 12,633 12,898
Operating Profit
New PepsiCo.............................. 737 707 2,001 1,893
Bottling operations and equity investments 1 182 53 364
--------- -------- -------- --------
Total Operating Profit.................. 738 889 2,054 2,257
Bottling equity income, net............... 58 - 83 -
Gain on bottling transactions............. - - 1,000 -
Interest expense.......................... (72) (89) (300) (241)
Interest income........................... 26 12 96 59
--------- -------- -------- --------
Income Before Income Taxes.............. 750 812 2,933 2,075
Provision for Income Taxes................ 266 51 1,373 443
--------- -------- -------- --------
Net Income................................ $ 484 $ 761 $ 1,560 $ 1,632
========= ======== ======== ========
Income Per Share - Basic.................. $ 0.33 $ 0.52 $ 1.06 $ 1.10
========= ======== ======== ========
Average Shares Outstanding - Basic........ 1,463 1,473 1,470 1,485
Income Per Share - Assuming Dilution...... $ 0.32 $ 0.50 $ 1.04 $ 1.07
========= ======== ======== ========
Average Shares Outstanding - Assuming Dilution 1,492 1,511 1,502 1,526
Cash Dividends Declared Per Share......... $0.135 $ 0.13 $ 0.40 $ 0.385
See accompanying notes.
-2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
36 Weeks Ended
------------------
9/4/99 9/5/98
-------- --------
Cash Flows - Operating Activities
Net income.................................... $ 1,560 $1,632
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on bottling transactions.............. (1,000) -
Bottling equity income, net................ (83) -
Depreciation and amortization.............. 726 792
Deferred income taxes...................... 541 129
Other noncash charges and credits, net .... 385 122
Net change in operating working capital...... (287) (751)
-------- --------
Net Cash Provided by Operating Activities....... 1,842 1,924
-------- --------
Cash Flows - Investing Activities
Capital spending.............................. (663) (821)
Acquisitions and investments in unconsolidated
affiliates................................... (356) (4,141)
Sales of businesses........................... 464 20
Short-term investments, by original maturity
More than three months - purchases........... (1,740) (368)
More than three months - maturities.......... 1,763 432
Three months or less, net.................... (12) 682
Other, net.................................... (38) 27
-------- --------
Net Cash Used for Investing Activities.......... (582) (4,169)
-------- --------
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt..... 3,270 972
Payments of long-term debt.................... (1,131) (1,382)
Short-term borrowings, by original maturity
More than three months - proceeds............ 3,399 2,694
More than three months - payments............ (2,388) (137)
Three months or less, net.................... (2,930) 900
Cash dividends paid........................... (581) (566)
Share repurchases............................. (986) (2,188)
Proceeds from exercises of stock options...... 253 351
-------- --------
Net Cash (Used for)/Provided by Financing Activities (1,094) 644
-------- --------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents.............................. 1 (1)
-------- --------
Net Increase/(Decrease) in Cash and Cash Equivalents 167 (1,602)
Cash and Cash Equivalents - Beginning of year... 311 1,928
-------- --------
Cash and Cash Equivalents - End of period....... $ 478 $ 326
======== ========
See accompanying notes.
-3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
(Unaudited)
9/4/99 12/26/98
--------- ---------
Current Assets
Cash and cash equivalents......................... $ 478 $ 311
Short-term investments, at cost................... 72 83
--------- ---------
550 394
Accounts and notes receivable, less
allowance: 9/99 - $82, 12/98 - $127............ 1,663 2,453
Inventories
Raw materials and supplies...................... 423 506
Work-in-process................................. 125 70
Finished goods.................................. 297 440
--------- ---------
845 1,016
Prepaid expenses, deferred income taxes and
other current assets............................ 539 499
--------- ---------
Total Current Assets.......................... 3,597 4,362
Property, Plant and Equipment...................... 8,371 13,110
Accumulated Depreciation........................... (3,413) (5,792)
--------- ---------
4,958 7,318
Intangible Assets, net
Goodwill........................................ 3,896 5,131
Reacquired franchise rights..................... 72 3,118
Other intangible assets......................... 725 747
--------- ---------
4,693 8,996
Investments in Unconsolidated Affiliates........... 2,859 1,396
Other Assets....................................... 614 588
--------- ---------
Total Assets.................................. $16,721 $22,660
========= =========
Continued on next page.
-4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amount)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
9/4/99 12/26/98
--------- --------
Current Liabilities
Short-term borrowings............................ $ 94 $3,921
Accounts payable................................. 790 1,180
Accrued compensation and benefits................ 535 676
Accrued selling and marketing.................... 519 596
Other current liabilities........................ 1,216 1,418
Income taxes payable............................. 248 123
--------- --------
Total Current Liabilities....................... 3,402 7,914
Long-term Debt..................................... 2,641 4,028
Other Liabilities.................................. 2,479 2,314
Deferred Income Taxes.............................. 1,317 2,003
Shareholders' Equity
Capital stock, par value 1 2/3 cents per share:
authorized 3,600 shares, issued 9/99 and 12/98 -
1,726 shares.................................... 29 29
Capital in excess of par value................... 1,136 1,166
Retained earnings................................ 13,774 12,800
Accumulated other comprehensive loss............. (951) (1,059)
--------- --------
13,988 12,936
Less: Repurchased Shares, at Cost:
9/99 - 266 shares, 12/98 - 255 shares............ (7,106) (6,535)
--------- --------
Total Shareholders' Equity...................... 6,882 6,401
--------- --------
Total Liabilities and Shareholders' Equity.... $16,721 $22,660
========= ========
See accompanying notes.
-5-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
12 Weeks Ended 36 Weeks Ended
---------------- -----------------
9/4/99 9/5/98 9/4/99 9/5/98
------- ------ ------- -------
Net Income.................................. $484 $761 $1,560 $1,632
Other Comprehensive Income/(Loss)
Currency translation adjustment........... 14 (32) (86) (104)
Reclassification adjustment, for items
realized in net income.................. - 15 174 24
------- ------ ------- -------
14 (17) 88 (80)
Minimum pension liability adjustment,
net of tax benefit of $11............... - - 20 -
------- ------ ------- -------
14 (17) 108 (80)
------- ------ ------- -------
Comprehensive Income........................ $498 $744 $1,668 $1,552
======= ====== ======= =======
See accompanying notes.
-6-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all per share information computed using average shares outstanding,
assuming dilution)
(1) Our Condensed Consolidated Balance Sheet at September 4, 1999 and the
Condensed Consolidated Statements of Income and Comprehensive Income for the 12
and 36 weeks ended September 4, 1999 and September 5, 1998 and the Condensed
Consolidated Statement of Cash Flows for the 36 weeks ended September 4, 1999
and September 5, 1998 have not been audited, and have been prepared in
conformity with the accounting principles applied in our 1998 Annual Report on
Form 10-K for the year ended December 26, 1998. In our opinion, this information
includes normal and recurring adjustments necessary for a fair presentation. The
results for the 12 and 36 weeks are not necessarily indicative of the results
expected for the year.
(2) In 1998, our Board of Directors approved a plan for the separation from
PepsiCo of certain wholly-owned bottling businesses located in the United
States, Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling
Group. On April 6, 1999, PBG completed the sale of 100 million shares of its
common stock at $23 per share through an initial public offering with PepsiCo
retaining a noncontrolling ownership interest of 35.5%. During the first
quarter, we received $5.5 billion of debt proceeds obtained by PBG primarily as
settlement of pre-existing intercompany amounts due to us. We recognized a
pre-tax gain of $1.0 billion ($476 million after-tax or $0.32 per share) in the
second quarter consistent with our policy for gain recognition upon the sale of
stock by a subsidiary. The majority of the taxes are expected to be deferred
indefinitely.
On May 20, 1999, we combined certain bottling operations in the midwestern
United States and Central Europe (referred to as the PepsiCo Bottling
Operations) with the Whitman Corporation, a publicly traded corporation, to
create new Whitman. We retained a noncontrolling ownership interest of
approximately 38% in new Whitman. The transaction resulted in an after-tax loss
to PepsiCo of $206 million or $0.14 per share.
On July 10, 1999, we formed a business venture with PepCom Industries, Inc., a
Pepsi-Cola franchisee, combining bottling businesses in parts of North Carolina
and New York. PepCom contributed bottling operations in central and eastern
North Carolina and in Long Island, New York to the venture. We contributed our
bottling operations in Winston-Salem and Wilmington, North Carolina in exchange
for a noncontrolling interest in the venture of 35%. The transaction was
accounted for as a nonmonetary exchange for book purposes. A portion of the
transaction was taxable which resulted in income tax expense of $25 million or
$0.02 per share.
(3) We own approximately 35% of PBG's outstanding common stock, 100% of its
class B common stock and approximately 7% of the equity of Bottling Group, LLC,
PBG's principal operating subsidiary. This ownership gives PepsiCo economic
ownership of approximately 40% of PBG's combined operations. We account for our
investment using the equity method of accounting. Summarized financial
information of PBG follows:
12 Weeks Ended 36 Weeks Ended
($ in millions) 9/4/99 9/5/98 9/4/99 9/5/98
------- ------ ------ -------
Net sales $2,036 $1,963 $5,319 $4,989
Gross profit $ 874 $ 794 $2,276 $2,053
Operating income $ 205 $ 156 $ 339 $ 298
Net income $ 92 $ 45 $ 109 $ 61
-7-
Summarized financial information of PBG, continued.
($ in millions) 9/4/99 12/26/98
------- --------
Current assets $1,717 $1,318
Noncurrent assets 6,127 6,004
------- --------
Total assets $7,844 $7,322
======= ========
Current liabilities $1,087 $1,025
Noncurrent liabilities 4,782 6,535
Minority interest 278 -
------- --------
Total liabilities $6,147 $7,560
======= ========
The net assets transferred to PBG as of April 6, 1999 primarily consisted of the
following:
($ in millions)
Property, plant and equipment, net $2,106
Goodwill $1,097
Reacquired franchise rights and other
intangibles $2,734
Long-term debt $3,306
Based upon the quoted closing price of PBG shares on September 4, 1999, the
calculated market value of our investment in PBG would have exceeded its
carrying value by approximately $528 million.
(4) Asset Impairment and Restructuring
($ in millions except per share amount) 36 Weeks Ended
9/4/99
-------
Asset impairment charges
- ------------------------
Held and used in the business
Property, plant and equipment $ 8
Held for disposal/abandonment
Property, plant and equipment 29
-------
Total asset impairment 37
Restructuring charges
- ---------------------
Employee related costs 19
Other charges 9
-------
Total restructuring 28
-------
Total impairment and restructuring charge $ 65
=======
After-tax $ 40
=======
Per share $0.03
=======
In the first quarter of 1999, Frito-Lay North America recognized a charge of $65
million related to the closure of three plants and impairment of equipment. The
restructuring charges of $28 million primarily include severance costs for
approximately 860 employees and plant closing costs. Year-to-date, approximately
505 of the terminations have occurred. The remaining terminations are expected
to occur in the fourth quarter of 1999.
-8-
Analysis of restructuring reserve for total PepsiCo:
Employee Facility Third Party
($ in millions) Related Closure Termination Other Total
------- ------- ----------- ----- ------
Balance at December 26, 1998 $ 42 $ 9 $ 62 $ 1 $114
1999 restructuring charges 19 7 - 2 28
Cash payments (17) (3) (46) (1) (67)
Separation of The Pepsi Bottling Group (25) (5) (5) - (35)
----- ---- ----- ---- ------
Balance at September 4, 1999 $ 19 $ 8 $ 11 $ 2 $ 40
===== ==== ===== ==== ======
(5) Through the 36 weeks ended September 4, 1999, we repurchased 27 million
shares of our capital stock at a cost of $986 million. From September 6, 1999
through October 14, 1999, we repurchased 5.4 million shares at a cost of $180
million.
(6) Schedule of Accumulated Other Comprehensive Loss
Currency Minimum Accumulated
Translation Pension Other
($ in millions) Adjustment Liability Comprehensive Loss
Balance, December 26, 1998 $(1,039) $(20) $(1,059)
Other comprehensive income 88 20 108
-------- ----- --------
Balance, September 4, 1999 $ (951) $ - $ (951)
======== ===== ========
Reclassification adjustments were made to other comprehensive income for the 36
weeks ended September 4, 1999. These adjustments primarily include the effects
of the PBG and PBO bottling transactions.
(7) Schedule of Noncash Investing and Financing Activities
($ in millions) 9/4/99 9/5/98
------ -------
Fair value of assets acquired $ 491 $ 4,291
Cash paid (356) (4,141)
------ -------
Liabilities assumed $ 135 $ 150
====== =======
(8) Derivatives
During the quarter, we entered into equity derivative contracts with financial
institutions in the notional amount of $54 million. These prepaid forward
contracts hedge a portion of our deferred compensation liability which is based
on PepsiCo stock price. The change in the fair value of these contracts resulted
in $7 million of expense which was included as interest for the 12 weeks ended
September 4, 1999.
(9) Revolving Credit Facilities
As of year-end 1998, we maintained $4.75 billion of revolving credit facilities.
Of the $4.75 billion total, $3.1 billion expired March 26, 1999 and was not
renewed due to our reduced borrowing needs. The remaining $1.65 billion was
cancelled on June 18, 1999 and replaced with a $900 million facility expiring
June 2004 and a $600 million facility expiring June 2000. These credit
facilities exist largely to support issuances of short-term debt. At expiration,
these facilities can be extended an additional year upon the mutual consent of
PepsiCo and the lending institutions. At September 4, 1999, $900 million of
short-term borrowings were reclassified as long-term, reflecting our intent and
ability, through the existence of the unused revolving facilities to refinance
these borrowings.
-9-
(10) In the fourth quarter 1998, we adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of a Business Enterprise and
Related Information." In contemplation of the separation from PepsiCo of our
bottling operations, we completed a reorganization of our Pepsi-Cola business in
1999. Our disclosure presents the operating results consistent with the new
Pepsi-Cola organization and, therefore, the prior year amounts have been
reclassified to conform to the 1999 presentation. Accordingly, the results in
1998 and through the applicable transaction closing dates in 1999 of
consolidated bottling operations in which we now own an equity interest are
presented separately with the 1998 and first quarter 1999 equity income or loss
of other unconsolidated bottling affiliates. From the applicable transaction
closing dates in 1999, the equity income of those previously consolidated
bottling operations and the equity income or loss of other unconsolidated
bottling affiliates for the second and third quarters of 1999 are presented
separately below operating profit in the Condensed Consolidated Statement of
Income. The combined results for the new Pepsi-Cola organization, Frito-Lay,
Frito-Lay International and Tropicana are referred to as new PepsiCo. See page
16 and 17 for segment information.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is
effective for our fiscal year beginning 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that we recognize all derivative instruments as either assets or liabilities in
the consolidated balance sheet and measure those instruments at fair value. We
are currently assessing the effects of adopting SFAS 133, and have not yet made
a determination of the impact that adoption will have on our consolidated
financial statements.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS, CASH FLOWS,
LIQUIDITY AND CAPITAL RESOURCES, YEAR 2000 AND EURO
General
Cautionary Statements
- ---------------------
From time to time, in written reports and in oral statements, we discuss
expectations regarding our future performance, Year 2000 risks, the impact of
the Euro conversion and the impact of current global macro-economic issues.
These "forward-looking statements" are based on currently available competitive,
financial and economic data and our operating plans. They are inherently
uncertain, and investors must recognize that events could turn out to be
significantly different from our expectations.
All per share information is computed using average shares outstanding, assuming
dilution.
In the discussions below, the year-over-year dollar change:
o in concentrate shipments to franchisees, including bottling operations in
which we now own an equity interest, for Pepsi-Cola,
o in bottler case sales by company-owned bottling operations for
Pepsi-Cola International,
o in pound or kilo sales of salty and sweet snacks for Frito-Lay and
o in four gallon equivalent cases for Tropicana is referred to as volume.
Price changes over the prior year and the impact of product, package and
country sales mix changes are referred to as effective net pricing.
The combined results for the new Pepsi-Cola organization, Frito-Lay,
Frito-Lay International and Tropicana are referred to as new PepsiCo. See
Segments of Business - Pepsi-Cola for discussion of the New Pepsi-Cola
organization.
International Market Risks
- --------------------------
Macro-economic conditions in portions of South America and Asia Pacific have
negatively impacted our results. We have taken actions in these markets to
respond to these conditions, such as prudent pricing aimed at sustaining volume,
renegotiating terms with suppliers and securing local currency supply
alternatives. However, macro-economic conditions may continue to adversely
impact our results in the near term.
Accounting Standards
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is
effective for our fiscal year beginning 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that we recognize all derivative instruments as either assets or liabilities in
the consolidated balance sheet and measure those instruments at fair value. We
are currently assessing the effects of adopting SFAS 133, and have not yet made
a determination of the impact that adoption will have on our consolidated
financial statements.
-11-
Analysis of Consolidated Operations
Net Sales
($ in millions) 12 Weeks Ended % Change 36 Weeks Ended % Change
9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------- ------ ----- ------- -------- -----
Reported $4,591 $5,544 (17) $14,687 $15,155 (3)
======= ====== ======= ========
New PepsiCo $4,579 $3,401 35 $12,564 $ 9,722 29
Intercompany
elimination * - 437 NM 422 1,152 NM
------- ------ ------- --------
New PepsiCo before
elimination $4,579 $3,838 19 $12,986 $10,874 19
======= ====== ======= ========
* Reflects intercompany concentrate sales between Pepsi-Cola North America and
Pepsi-Cola International and those previously consolidated bottling operations
in which we now own an equity interest.
NM- Not Meaningful.
- --------------------------------------------------------------------------------
Reported net sales declined $953 million for the quarter reflecting the
deconsolidation of PBG, PBO and PepCom operations as of the transaction closing
dates, partially offset by the inclusion of Tropicana. New PepsiCo net sales,
before the intercompany elimination, increased $741 million or 19%. This
increase primarily reflects the inclusion of Tropicana, volume gains at
worldwide Frito-Lay and higher effective net pricing at worldwide Frito-Lay and
Pepsi-Cola North America.
Year-to-date reported net sales decreased $468 million reflecting the
deconsolidation of PBG, PBO and PepCom operations as of the transaction closing
dates, partially offset by the inclusion of Tropicana. New PepsiCo net sales,
before the intercompany elimination, increased $2.1 billion or 19%. This
increase primarily reflects the inclusion of Tropicana, volume gains at
worldwide Frito-Lay and higher effective net pricing at worldwide Frito-Lay and
Pepsi-Cola North America. These advances were partially offset by an unfavorable
foreign currency impact. The unfavorable foreign currency impact, primarily in
Mexico and Brazil, reduced new PepsiCo net sales by 2 percentage points.
Operating Profit and Margin
($ in millions) 12 Weeks Ended Change 36 Weeks Ended Change
9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------ ------- ----- ------ ------- -----
Reported
Total Operating Profit $738 $889 (17)% $2,054 $2,257 (9)%
Operating Profit Margin 16.1% 16.0% 0.1 14.0% 14.9% (0.9)
Ongoing*
New PepsiCo
Operating Profit $737 $707 4% $2,066 $1,893 9%
New PepsiCo
Operating Profit Margin** 16.1% 18.4% (2.3) 15.9% 17.4% (1.5)
*Ongoing excludes the effect of an impairment and restructuring charge described below.
**Based on new PepsiCo net sales before intercompany elimination.
- --------------------------------------------------------------------------------------------
-12-
For the quarter, reported operating profit margin was comparable with the prior
year. Ongoing new PepsiCo operating profit margin decreased 2.3 percentage
points. The decrease primarily reflects the margin impact of the Tropicana
acquisition, increased general and administrative expenses and increased A & M
expenses at Pepsi-Cola North America and at worldwide Frito-Lay. These decreases
were partially offset by the margin impact of higher effective net pricing.
Corporate G&A for the 12 weeks includes $18 million of nonrecurring expenses and
$53 million for the 36 weeks related to the start-up, project management,
development and installation of a shared services program. The shared services
program will provide common system capabilities, data management and data
processing across North America and Continental Europe. We expect to incur
project management, development and installation expenses through the remainder
of the year.
Year-to-date, reported operating profit margin declined 0.9 percentage points.
Ongoing new PepsiCo operating profit margin declined 1.5 percentage points. The
decline reflects the margin impact of the Tropicana acquisition, increased A&M
expenses at Pepsi-Cola North America and at worldwide Frito-Lay and increased
general and administrative expenses. These decreases were partially offset by
the margin impact of higher effective net pricing.
Impairment and restructuring charge of $65 million ($40 million after-tax or
$0.03 per share), recognized in the first quarter of 1999, relates to the
consolidation of U.S. production to our most modern and efficient plants and
streamlining logistics and transportation systems in Frito-Lay North America as
part of the program to improve productivity. The restructuring is expected to
generate approximately $15 million in annual savings beginning in 2000 which we
expect to reinvest back into the business. See Note 4.
Interest expense, net of interest income, decreased $31 million for the quarter.
This decrease, primarily in the U.S., reflects higher average investment
balances and lower average debt levels. The lower average debt levels reflect
the late third quarter repayment from investment balances of borrowings used to
finance the Tropicana acquisition. Year-to-date, net interest expense increased
$22 million, due to higher average debt levels, partially offset by lower
interest rates on debt and higher average investment balances. The higher
average year-to-date debt levels reflect the increased borrowings to finance the
Tropicana acquisition in the second half of 1998, as well as an increase in debt
during the first quarter of 1999 in preparation for the PBG IPO. The higher
average investment balances result from the first quarter proceeds received from
PBG as settlement of pre-existing intercompany amounts.
Gain on bottling transactions of $1.0 billion ($270 million after-tax or $0.18
per share) relates to the PBG and Whitman bottling transactions.
On April 6, 1999, PBG completed the sale of 100 million shares of its common
stock at $23 per share through an initial public offering with PepsiCo retaining
a noncontrolling ownership interest of 35.5%. During the first quarter, we
received $5.5 billion of debt proceeds obtained by PBG primarily as settlement
of pre-existing intercompany amounts due to us. We recognized a pre-tax gain of
$1.0 billion ($476 million after- tax or $0.32 per share) in the second quarter
consistent with our policy for gain recognition upon the sale of stock by a
subsidiary. The majority of the taxes are expected to be deferred indefinitely.
The deferred taxes substantially arise from the difference between the book and
tax basis of our investment in PBG that we are required to recognize now that
PBG is an unconsolidated affiliate.
-13-
On May 20, 1999, we combined PBO with the Whitman Corporation, a publicly traded
corporation, to create new Whitman. We retained a noncontrolling ownership
interest in new Whitman of approximately 38%. The transaction resulted in an
after-tax loss to us of $206 million or $0.14 per share. The net book value of
our PBO businesses approximated the consideration, net of related transaction
costs, that we received from Whitman and accordingly, there was no pre-tax gain
on this transaction. Similar to PBG, we established deferred taxes for the
difference between the book and tax basis of our investment in Whitman.
On July 10, 1999, we formed a business venture with PepCom Industries, Inc. We
contributed our bottling operations in North Carolina in exchange for a
noncontrolling ownership interest of 35%. The transaction was accounted for as a
nonmonetary exchange for book purposes. A portion of the transaction was taxable
which resulted in an income tax expense of $25 million or $0.02 per share.
Provision for Income Taxes
($ in millions) 12 Weeks Ended % Change 36 Weeks Ended % Change
9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------ ------ ----- ------ ------ -----
Reported
Provision for income taxes $266 $ 51 NM $1,373 $443 NM
Effective tax rate 35.5% 6.3% 46.8% 21.3%
Ongoing*
Provision for income taxes $241 $251 (4) $ 643 $643 -
Effective tax rate 32.2% 30.9% 32.2% 31.0%
*Ongoing excludes the tax effect of the 1999 impairment and restructuring charge
and bottling transactions as well as the 1998 income tax benefit.
NM- Not Meaningful.
- --------------------------------------------------------------------------------
The reported effective tax rate, which includes the tax impact of the PepCom
bottling transaction, increased over 29 percentage points for the quarter. In
the third quarter of 1998, PepsiCo recorded an income tax benefit of $200
million (or $0.13 per share) related to a tax case concerning concentrate
operations in Puerto Rico. Excluding this benefit and the tax effect of the
PepCom transaction, the ongoing effective tax rate increased 1.3 percentage
points for the quarter. The increase resulted primarily from the absence of 1998
settlements of prior years' audit issues offset by the benefit of
proportionately lower bottling income.
Year-to-date, the reported effective tax rate increased over 25 percentage
points. The ongoing effective tax rate increased 1.2 percentage points. The
increase resulted primarily from the absence of settlements of 1998 prior years'
audit issues offset by the benefit of proportionately lower bottling income. We
expect our full-year effective tax rate to be 32.2%.
For discussion of taxes related to bottling transactions, see Gain on bottling
transactions beginning on page 13.
-14-
Net Income and Net Income Per Share
($ in millions except per share amounts)
12 Weeks Ended % Change 36 Weeks Ended % Change
9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------ ------ ----- ------ ------ -----
Net income
Reported $ 484 $ 761 (36) $1,560 $1,632 (4)
Ongoing* $ 509 $ 561 (9) $1,355 $1,432 (5)
Net income per share
Reported $0.32 $0.50 (36) $ 1.04 $1.07 (3)
Ongoing* $0.34 $0.37 (8) $ 0.90 $0.94 (4)
*Ongoing excludes the effect of the 1999 impairment and restructuring charge
and bottling transactions as well as the 1998 income tax benefit.
- --------------------------------------------------------------------------------------------
For the quarter, reported net income decreased $277 million and the related net
income per share decreased $0.18. Ongoing net income decreased $52 million and
the related net income per share decreased $0.03. These decreases primarily
reflect the deconsolidation of PBG, PBO and PepCom operations as of the
transaction closing dates. The decreases were partially offset by an increase in
new PepsiCo operating profit.
Year-to-date reported net income decreased $72 million and the related net
income per share decreased $0.03. Ongoing net income decreased $77 million and
the related net income per share decreased $0.04. These decreases primarily
reflect the deconsolidation of PBG, PBO and PepCom operations as of the
transaction closing dates. The decreases were partially offset by an increase in
new PepsiCo operating profit. In addition, the decrease in ongoing net income
per share was partially offset by the benefit of a 2% reduction in average
shares outstanding.
-15-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES, OPERATING PROFIT AND
TOTAL ASSETS (a)
($ in millions, unaudited)
12 Weeks Ended 36 Weeks Ended
---------------- -------------------
Net Sales 9/4/99 9/5/98 9/4/99 9/5/98
------- ------ -------- --------
Pepsi-Cola
- -North America $ 774 $ 758 $ 2,138 $ 2,064
- -International 504 474 1,244 1,207
------- ------ -------- --------
1,278 1,232 3,382 3,271
Intercompany elimination - (437) (422) (1,152)
------- ------ -------- --------
1,278 795 2,960 2,119
Frito-Lay
- -North America 1,915 1,821 5,532 5,254
- -International 869 785 2,523 2,349
------- ------ -------- --------
2,784 2,606 8,055 7,603
Tropicana 517 - 1,549 -
------- ------ -------- --------
New PepsiCo Net Sales 4,579 3,401 12,564 9,722
Bottling Operations 12 2,143 2,123 5,433
------- ------ -------- --------
Total Net Sales $4,591 $5,544 $14,687 $15,155
======= ====== ======== ========
Operating Profit
Pepsi-Cola
- -North America $174 $210 $ 551 $ 575
- -International 55 55 115 106
------- ------ -------- --------
229 265 666 681
Frito-Lay
- -North America (b) 417 373 1,090 1,032
- -International 99 90 268 252
------- ------ -------- --------
516 463 1,358 1,284
Tropicana 37 - 116 -
------- ------ -------- --------
Combined Segments 782 728 2,140 1,965
Corporate Unallocated (45) (21) (139) (72)
------- ------ -------- --------
New PepsiCo Operating Profit 737 707 2,001 1,893
Bottling Operations and
Equity Investments 1 182 53 364
------- ------ -------- --------
Total Operating Profit $738 $889 $2,054 $2,257
======= ====== ======== ========
-16-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES, OPERATING PROFIT AND
TOTAL ASSETS (continued) (a)
($ in millions, unaudited)
Total Assets
- ------------
9/4/99 12/26/98
------- --------
Pepsi-Cola
- - North America $ 673 $ 547
- - International 1,397 1,177
Frito-Lay
- - North America 3,985 3,915
- - International 3,950 4,039
Tropicana 3,749 3,661
Bottling Assets/Equity Investments 2,446 9,106
Corporate 521 215
------- --------
Total Assets $16,721 $22,660
======= ========
Notes:
(a) This schedule should be read in conjunction with Management's Discussion
and Analysis beginning on page 18. Certain reclassifications were made to
prior year amounts to conform to the 1999 presentation.
(b) For the 36 weeks in 1999, includes an asset impairment and restructuring
charge of $65 million. See Note 4.
-17-
Segments of the Business
Pepsi-Cola
- ----------
In 1998, our Board of Directors approved a plan for the separation from PepsiCo
of certain wholly-owned bottling businesses located in the United States,
Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling Group. On
April 6, 1999, PBG completed the sale of 100 million shares of its common stock
through an initial public offering, with PepsiCo retaining a noncontrolling
ownership interest of 35.5%. On May 20, 1999, we combined certain bottling
operations in the mid-western United States and Central Europe (referred to as
the PepsiCo Bottling Operations) with Whitman Corporation, a publicly traded
corporation, to create new Whitman. We retained a noncontrolling ownership
interest in new Whitman of approximately 38%. On July 10, 1999, we formed a
business venture with PepCom Industries, Inc., a Pepsi-Cola franchisee,
combining bottling businesses in parts of North Carolina and New York. PepCom
contributed to the venture bottling operations in central and eastern North
Carolina and in Long Island, New York. We contributed our bottling operations in
Winston-Salem and Wilmington, North Carolina in exchange for a noncontrolling
interest of 35%.
In contemplation of the separation from PepsiCo of our bottling operations, we
completed a reorganization of our Pepsi-Cola business in early 1999. Our
disclosure presents the operating results consistent with the new Pepsi-Cola
organization and, therefore, the prior year amounts have been reclassified to
conform to the 1999 presentation. Accordingly, the results in 1998 and through
the applicable transaction closing dates in 1999 of consolidated bottling
operations in which we now own an equity interest are presented separately with
the 1998 and first quarter 1999 equity income or loss of other unconsolidated
bottling affiliates. From the applicable transaction closing dates in 1999, the
equity income of those previously consolidated bottling operations and the
equity income or loss of other unconsolidated bottling affiliates for the second
and third quarters of 1999 are presented separately below operating profit in
the Condensed Consolidated Statement of Income. Pepsi-Cola North America results
include the North American concentrate and fountain businesses. Pepsi-Cola
International results include the international concentrate business and other
consolidated international bottling operations. The discussion that follows
presents net sales prior to the elimination of intercompany concentrate sales
between Pepsi-Cola North America and Pepsi-Cola International and those
previously consolidated bottling operations in which we now own an equity
interest.
The standard volume measure is system-wide bottler case sales. It represents
PepsiCo-owned brands as well as brands we have been granted the right to
produce, distribute and market nationally. Third quarter BCS include the months
of June, July and August. The net sales and operating profit of Pepsi-Cola
International include the operating results of June, July and August.
-18-
Pepsi-Cola North America
------------------------
12 Weeks Ended % Change 36 Weeks Ended % Change
($ in millions) 9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------ ------- ----- ------ ------- -----
Net Sales $774 $758 2 $2,138 $ 2,064 4
Intercompany
elimination - (400) NM (400) (1,075) 63
------ ------- ------ -------
Reported $774 $358 NM $1,738 $ 989 76
====== ======= ====== =======
Operating Profit $174 $210 (17) $551 $ 575 (4)
NM- Not Meaningful.
- --------------------------------------------------------------------------------------------
12 Weeks
- --------
Reported net sales increased $416 million due to the absence of the intercompany
elimination resulting from the deconsolidation of the PBG, PBO and PepCom
bottling operations. Before the elimination of intercompany concentrate sales,
net sales increased $16 million primarily due to higher concentrate pricing, net
of increased customer support. This net benefit was partially offset by lower
concentrate volume.
BCS volume remained flat as the inclusion of Pepsi One, strong double digit
growth of Aquafina bottled water and low single digit growth of our Mountain Dew
brand were offset by single digit declines in brands Pepsi and Diet Pepsi.
Concentrate shipments decreased 2.5% which we believe is a result of higher
retail prices.
Operating profit decreased $36 million due primarily to increased A&M expenses,
lower concentrate volume and higher fountain related costs. These declines were
partially offset by the net benefit of the higher concentrate pricing. A&M grew
at a significantly faster rate than sales.
36 Weeks
- --------
Reported net sales increased $749 million due to the decrease in the
intercompany elimination resulting from the deconsolidation of the PBG, PBO and
PepCom bottling operations. Before the elimination of intercompany concentrate
sales, net sales increased $74 million primarily due to higher concentrate
pricing. The higher concentrate pricing was partially offset by increased
customer support.
BCS volume increased 2% led by the inclusion of Pepsi One, mid-single digit
growth of our Mountain Dew brand and strong double digit growth of Aquafina
bottled water. These gains were partially offset by single digit declines in
brands Pepsi and Diet Pepsi. Concentrate shipments were flat.
Operating profit decreased $24 million primarily due to increased A&M expenses
and higher fountain related costs. These declines were partially offset by the
net benefit of the higher concentrate pricing. A&M grew at a significantly
faster rate than sales and BCS volume.
-19-
Pepsi-Cola International
------------------------
12 Weeks Ended % Change 36 Weeks Ended % Change
($ in millions) 9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------- ------- ----- ------- ------- -----
Net Sales $504 $474 6 $1,244 $1,207 3
Intercompany
elimination - (37) NM (22) (77) 71
------- ------- ------- -------
Reported $504 $437 15 $1,222 $1,130 8
======= ======= ======= =======
Operating Profit $ 55 $ 55 - $ 115 $ 106 8
NM- Not Meaningful.
- --------------------------------------------------------------------------------------------
12 Weeks
- --------
Reported net sales increased $67 million due to the absence of the intercompany
elimination resulting from the deconsolidation of PBG and PBO bottling
operations. Before the elimination of intercompany concentrate sales, net sales
increased $30 million. This result primarily reflects net contributions from
acquisitions/divestitures partially offset by a net unfavorable foreign currency
impact. The net unfavorable foreign currency impact, primarily in Brazil, Mexico
and Germany, reduced net sales growth by 3 percentage points.
BCS were flat. This was primarily due to double digit growth in Japan, Germany,
Pakistan, and solid growth in Saudi Arabia, offset by lower volume primarily in
Brazil and Russia. For June through August, total concentrate shipments to
franchisees, including those former wholly-owned bottlers in which we now own an
equity interest, decreased 1% about the same rate as their BCS.
Operating profit remained even with the prior year primarily as a result of net
losses from acquisitions/divestitures offsetting higher effective net pricing.
36 Weeks
- --------
Reported net sales increased $92 million due to the decrease in the intercompany
elimination resulting from the deconsolidation of PBG and PBO bottling
operations. Before the elimination of intercompany concentrate sales, net sales
increased $37 million. This advance primarily reflects net contributions from
acquisitions/divestitures, partially offset by a net unfavorable foreign
currency impact. The net unfavorable foreign currency impact, primarily in
Mexico, Brazil and India, reduced net sales growth by 3 percentage points.
BCS were flat. This was primarily due to double digit growth in China, Pakistan,
Japan, India and solid growth in Saudi Arabia, offset by lower volume in Brazil,
Russia, the Philippines and Thailand. Through August, total concentrate
shipments to franchisees, including those former wholly-owned bottlers in which
we now own an equity interest, decreased 3% while their BCS decreased at a
slower rate.
Operating profit increased $9 million. The increase reflected higher effective
net pricing and higher volume in certain countries, partially offset by net
losses from acquisitions/divestitures.
-20-
Frito-Lay
- ---------
The standard volume measure is pounds for North America and kilos for
International. Pound and kilo growth are reported on a system-wide and constant
territory basis, which includes currently consolidated businesses and
unconsolidated affiliates reported for at least one year.
Frito-Lay North America
-----------------------
12 Weeks Ended % Change 36 Weeks Ended % Change
($ in millions) 9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------ ------ ----- ------ ------ -----
Net Sales $1,915 $1,821 5 $5,532 $5,254 5
Operating Profit
Reported $ 417 $ 373 12 $1,090 $1,032 6
Ongoing* $ 417 $ 373 12 $1,155 $1,032 12
- --------------------------------------------------------------------------------------------
*Ongoing excludes the effect of an impairment and restructuring charge of $65
million for the 36 weeks in 1999.
12 Weeks
- --------
Net sales grew $94 million due to increased volume and higher effective net
pricing.
Pound volume advanced 4% primarily due to low double digit growth in our core
corn products, excluding the low-fat and no-fat versions, and significant growth
in Cracker Jack brand products. Volume declines in our "WOW!" brand products as
a result of the high trial volume in 1998 partially offset these gains.
Operating profit increased $44 million primarily reflecting the higher volume,
higher effective net pricing and reduced commodity costs. These gains were
partially offset by higher A&M expenses. A&M grew at a faster rate than sales
due primarily to increased promotional allowances.
36 Weeks
- --------
Net sales grew $278 million due to increased volume and higher effective net
pricing.
Pound volume advanced 4% led by high single digit growth in our core corn
products, excluding the low-fat and no-fat versions, and Lay's brand potato
chips and significant growth in Cracker Jack brand products. Volume declines in
our "Baked" Lay's, "Baked" Tostitos and "WOW!" brand products partially offset
these gains.
Reported operating profit increased $58 million. Ongoing operating profit
increased $123 million reflecting the higher volume, higher effective net
pricing and reduced commodity costs partially offset by higher A&M expenses. A&M
grew at a faster rate than sales due primarily to increased promotional
allowances.
-21-
Frito-Lay International
-----------------------
($ in millions) 12 Weeks Ended % Change 36 Weeks Ended % Change
9/4/99 9/5/98 B/(W) 9/4/99 9/5/98 B/(W)
------ ------ ----- ------ ------ -----
Net Sales $869 $785 11 $2,523 $2,349 7
Operating Profit $ 99 $ 90 10 268 $ 252 6
- -----------------------------------------------------------------------------
12 Weeks
- --------
Net sales increased $84 million reflecting higher volume, higher effective net
pricing and net contributions from acquisitions/divestitures. The higher
effective net pricing more than offset the net impact of weaker currencies. The
unfavorable foreign currency impact, primarily in Brazil and Mexico, reduced net
sales growth by 6 percentage points.
Salty snack kilos increased 5% led by double digit growth at Sabritas in Mexico.
Including acquisitions/divestitures, total salty snack kilos increased an
additional 4 percentage points to 9% driven primarily by an acquisition in
Australia and a merger of salty snack food businesses in South America. Sweet
snack kilos increased 12% primarily reflecting double digit growth by Gamesa and
Sabritas in Mexico. Sweet snack kilos, including the net effect of
acquisitions/divestitures, declined 4% primarily as a result of the sales of our
chocolate and biscuit businesses in Poland.
Operating profit increased $9 million. Strong performances at Sabritas and
Gamesa more than offset declines at Walkers in the United Kingdom and in our
business in Brazil. The net impact of weaker foreign currencies, primarily in
Mexico and Brazil, reduced operating profit growth by 4 percentage points. The
unfavorable foreign currency impact was more than offset by higher effective net
pricing.
36 Weeks
- --------
Net sales increased $174 million. Excluding the negative impact of Brazil, due
primarily to macro-economic conditions, net sales increased $275 million or 13%
reflecting higher effective net pricing, higher volume and net contributions
from acquisitions/divestitures. The higher effective net pricing more than
offset the net impact of weaker currencies outside of Brazil. The unfavorable
foreign currency impact, primarily in Mexico, reduced net sales growth by 7
percentage points.
Salty snack kilos increased 5% led by strong growth at Sabritas in Mexico and
double digit growth in several of our businesses in Asia. Including
acquisitions/divestitures, total salty snack kilos increased an additional 6
percentage points to 11% driven primarily by acquisitions and mergers of salty
snack food businesses in Central and South America and the acquisition in
Australia. Sweet snack kilos increased 7% led by strong growth at Gamesa and
Sabritas in Mexico. Sweet snack kilos, including the net effect of
acquisitions/divestitures, declined 3% primarily as a result of the sales of our
chocolate and biscuit businesses in Poland.
Operating profit increased $16 million. Excluding Brazil, operating profit
increased $48 million or 22% driven by strong performances at Sabritas, Gamesa
and several of our businesses in Asia. The net impact of weaker foreign
currencies outside of Brazil, primarily in Mexico, reduced operating profit
growth by 9 percentage points. The unfavorable foreign currency impact was more
than offset by higher effective net pricing.
-22-
Tropicana
- ---------
12 Weeks
- --------
Net sales were $517 million and operating profit was $37 million. Volume
increased by 5%, led by an 11% increase in Tropicana Pure Premium worldwide.
Higher pricing taken to offset increases in the cost of oranges, combined with
volume growth, drove operating performance.
36 Weeks
- --------
Net sales were $1.5 billion and operating profit was $116 million. Volume
increased 4%, led by a 9% increase in Tropicana Pure Premium worldwide. Higher
pricing taken to offset increases in the cost of oranges, combined with volume
growth, drove operating performance.
Cash Flows
Our 1999 consolidated cash and cash equivalents increased $167 million compared
to a $1.6 billion decrease in 1998. The change primarily reflects a decrease in
cash outflows for acquisitions and investments in unconsolidated affiliates as
compared to 1998 which included the acquisition of Tropicana, an increase in net
proceeds from the issuance of debt and lower share repurchase activity in 1999.
These comparative increases were partially offset by payments of short-term
borrowings in 1999 versus net short-term borrowings in 1998.
Our share repurchase activity was as follows:
36 Weeks Ended
----------------
($ and shares in millions) 9/4/99 9/5/98
------ ------
Cost $986 $2,188
Number of shares repurchased 27.0 57.8
% of shares outstanding at
beginning of year 1.8% 3.8%
Liquidity and Capital Resources
As of year-end 1998, we maintained $4.75 billion of revolving credit facilities.
Of the $4.75 billion total, $3.1 billion expired March 26, 1999 and was not
renewed due to our reduced borrowing needs. The remaining $1.65 billion was
cancelled on June 18, 1999 and replaced with a $900 million facility expiring
June 2004 and a $600 million facility expiring June 2000. These credit
facilities exist largely to support issuances of short-term debt. At expiration,
these facilities can be extended an additional year upon the mutual consent of
PepsiCo and the lending institutions. At September 4, 1999, $900 million of
short-term borrowings were reclassified as long-term, reflecting our intent and
ability, through the existence of unused revolving facilities, to refinance
these borrowings.
-23-
As discussed in Management's Discussion and Analysis - Segments of the Business
- - Pepsi-Cola, our Board of Directors approved a plan in 1998 for the separation
from PepsiCo of PBG. PBG completed an IPO on April 6, 1999. In preparation for
the IPO, PBG and its principal operating subsidiary, Bottling Group, LLC
incurred, in February and March of 1999, $6.55 billion of indebtedness. Of the
$6.55 billion, $3.25 billion was repaid by PBG with the proceeds of the IPO and
the issuance of long-term debt. PepsiCo has unconditionally guaranteed $2.3
billion of Bottling Group, LLC long-term debt. During the first quarter, we
received $5.5 billion of the debt proceeds obtained by PBG primarily as
settlement of pre-existing intercompany amounts due to us. These proceeds were
used to repay our short-term borrowings and for share repurchases.
The Whitman transaction, completed on May 20, 1999, generated net cash proceeds
of $300 million.
The deconsolidation of the PBG, PBO and PepCom operations resulted in declines
in current assets, intangible assets, property, plant and equipment, net,
current liabilities and long-term debt and an increase in investments in
unconsolidated affiliates.
During the quarter, we entered into equity derivative contracts with financial
institutions in the notional amount of $54 million. These prepaid forward
contracts hedge a portion of our deferred compensation liability that is based
on PepsiCo stock price. The changes in the fair values, for the 12 weeks ended
September 4, 1999, of the forward contracts and that portion of the deferred
compensation liability reflect the reduction in the stock price. The change in
fair value of the forward contracts of $7 million in expense, included as
interest, was more than offset by the benefit in operating profit from the
change in the portion of the deferred compensation liability that is based on
PepsiCo stock price.
There are no significant changes in our market risk from year-end. Our strong
cash-generating capability and financial condition give us ready access to
capital markets throughout the world.
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union
fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency-the EURO. The euro trades on currency exchanges and may
be used in business transactions. Conversion to the euro eliminated currency
exchange rate risk between the member countries. Beginning in January 2002, new
EURO-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. Our operating subsidiaries affected by the euro
conversion have established plans to address the issues raised by the euro
currency conversion. These issues include, among others, the need to adapt
computer and financial systems, business processes and equipment, such as
vending machines, to accommodate EURO-denominated transactions and the impact of
one common currency on pricing. Since financial systems and processes currently
accommodate multiple currencies, the plans contemplate conversion by the middle
of 2001 if not already addressed in conjunction with Year 2000 remediation or
other system or process initiatives. We do not expect the system and equipment
conversion costs to be material. To date, one common currency has not had a
significant impact on pricing. However, due to numerous uncertainties, we cannot
reasonably estimate the long-term effects one common currency will have on
pricing and the resulting impact, if any, on financial condition or results of
operations.
-24-
Year 2000
Each of our business segments and corporate headquarters have had teams in place
to identify and address Year 2000 compliance issues. Information technology
systems with non-compliant code have been modified or replaced with systems that
are Year 2000 compliant. Similar actions have been taken with respect to non-IT
systems, primarily systems embedded in manufacturing and other facilities. The
teams were also charged with investigating the Year 2000 readiness of suppliers,
customers, franchisees, financial institutions and other third parties and with
developing contingency plans where necessary.
Key information technology and non-IT systems were inventoried and assessed for
compliance, and detailed plans put in place for required system modifications or
replacements. Remediation and testing activities are completed for over 99% of
the systems with the systems back in operation.
Other experts have performed independent verification and validation audits of a
large sample of remediated systems with satisfactory results. Progress has been
monitored by senior management, and regularly reported to PepsiCo's Board of
Directors.
During 1998, we identified critical suppliers, customers, financial
institutions, and other third parties and surveyed their Year 2000 remediation
programs. Risk assessments and contingency plans, where necessary, have been
finalized and critical plans will be tested, where feasible, during the
remainder of the year.
In addition, independent consultants completed a survey in 1998 of the state of
readiness of our significant bottling franchisees. The survey identified
readiness issues for certain international bottlers and, therefore, potential
risk to us. Our current assessment of international bottlers comprising
approximately 95% of international volume indicates that bottlers representing
1% of our international volume are currently at high risk. Divisional personnel
have provided these bottlers with self assessment tools to identify areas still
needing attention. We have also provided assistance to the franchisees with
processes and with certain manufacturing equipment compliance data. Our
contingency planning includes specific focus on those bottlers that are at risk,
and includes arrangements to ship finished goods to bottlers in certain regions.
Incremental costs directly related to Year 2000 issues for new PepsiCo are
estimated to be $111 million from 1998 to 2000, of which $95 million or 85% has
been spent to date. The remaining estimate primarily relates to contingency
plans. Currently, approximately 26% of the total estimated spending represents
costs to repair systems while approximately 55% represents costs to replace and
rewrite software. This estimate assumes that we will not incur significant Year
2000 related costs on behalf of our suppliers, customers, franchisees, financial
institutions or other third parties. Costs incurred prior to 1998 were
immaterial. Excluded from the estimated incremental costs for new PepsiCo for
the 3-year period are approximately $30 million of internal recurring costs
related to our Year 2000 efforts.
Contingency plans for Year 2000 related interruptions have been developed and
are being implemented. The plans include, but are not limited to, the
development of emergency backup and recovery procedures, the staffing of a
centralized team to react to unforeseen events, replacement of electronic
applications with manual processes, identification of alternate suppliers and
increases in raw material and finished goods inventory levels.
Our most likely worst case scenarios would involve the temporary inability of
bottling franchisees to manufacture or bottle some products in certain
locations, of suppliers to provide raw materials on a timely basis and of some
customers to order and pay on a timely basis.
-25-
Our Year 2000 efforts are ongoing and now focused on the millennium rollovers
and event management processes. However, our overall plan including our
contingency plans will be modified to take into account any new information that
becomes available. While we anticipate no major interruption of our business
activities, that will be dependent in part upon the ability of third parties,
particularly bottling franchisees, to be Year 2000 compliant. Although we have
implemented the actions described above to address third party issues, we are
not able to require the compliance actions by such parties. Accordingly, while
we believe our actions in this regard should have the effect of mitigating Year
2000 risks, we are unable to eliminate them or to estimate the ultimate effect
Year 2000 risks will have on our operating results.
-26-
Independent Accountants' Review Report
--------------------------------------
The Board of Directors
PepsiCo, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
PepsiCo, Inc. and Subsidiaries as of September 4, 1999 and the thirty-six weeks
ended September 4, 1999 and September 5, 1998 and the condensed consolidated
statement of cash flows for the thirty-six weeks ended September 4, 1999 and
September 5, 1998. These financial statements are the responsibility of PepsiCo,
Inc.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PepsiCo, Inc. and Subsidiaries as
of December 26, 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended not presented
herein; and in our report dated February 1, 1999, except as to Note 18 which is
as of March 8, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 26, 1998, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG LLP
New York, New York
October 6, 1999
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PART II - OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
See Index to Exhibits on page 30.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter covered by
this report.
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Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
PEPSICO, INC.
--------------
(Registrant)
Date: October 15, 1999 Lionel L. Nowell, III
---------------- ----------------------------------
Senior Vice President and
Controller
Date: October 15, 1999 Michael D. White
---------------- ----------------------------------
Senior Vice President and
Chief Financial Officer
Date: October 15, 1999 Lawrence F. Dickie
---------------- ----------------------------------
Vice President, Associate General
Counsel and Assistant Secretary
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INDEX TO EXHIBITS
-----------------
ITEM 6 (a)
----------
EXHIBITS
- --------
Exhibit 11 Computation of Net Income Per Share of Capital Stock -
Basic and Assuming Dilution
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 15 Letter from KPMG LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment)
Exhibit 27 Financial Data Schedule 36 Weeks Ended September 4, 1999
-30-