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No. 1-1183
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 25, 1999
PepsiCo, Inc.
Incorporated in North Carolina
700 Anderson Hill Road
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
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
10, 2000 was 1,443,515,702. The aggregate market value of PepsiCo Capital Stock
held by nonaffiliates of PepsiCo as of March 10, 2000 was $44,309,988,968.
Documents of Which Portions Parts of Form 10-K into Which Portion of
Are Incorporated by Reference Documents Are Incorporated
- ------------------------------- ---------------------------
Proxy Statement for PepsiCo's III
May 3, 2000 Annual Meeting of
Shareholders
PART I
Item 1. Business
PepsiCo, Inc. was incorporated in Delaware in 1919 and was
reincorporated in North Carolina in 1986. PepsiCo is engaged in the snack food,
soft drink and juice businesses. When used in this Report the terms "we", "us"
and "our" means PepsiCo and its divisions and subsidiaries.
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 (PBG). 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. We
retained a noncontrolling ownership interest of approximately 40%, including
ownership of approximately 7% of the equity of PBG's principal operating
subsidiary, Bottling Group, LLC.
On May 20, 1999, we combined certain of our bottling operations in the
midwestern United States and Central Europe with Whitman Corporation, a publicly
traded corporation. We retained a noncontrolling ownership interest of
approximately 38% in "new Whitman". The remainder of the ownership interest in
new Whitman is held by the public.
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 of 35% in the venture.
On October 15, 1999, we formed a business venture with Pohlad
Companies, a Pepsi-Cola franchisee, combining bottling businesses in Puerto Rico
and parts of the southeastern and midwestern United States. Pohlad Companies
contributed its interests in Dakota Beverage Company, Delta Beverage Group, Inc.
(Delta) and Pepsi-Cola Puerto Rico Bottling Company (PPR). We contributed our
interests in Delta and PPR as well as 2.2 million shares of PepsiCo Capital
Stock. As a result, we have a noncontrolling ownership interest of approximately
24% in the venture's principal operating subsidiary, PepsiAmericas, Inc., a
publicly traded corporation.
FRITO-LAY, INC.
Our Frito-Lay domestic snack food business is conducted by Frito-Lay
North America (FLNA). Our international snack food business is described below
under the heading Frito-Lay International (FLI). Its geographic units are
Frito-Lay Europe/Middle East/Africa and Frito-Lay Latin America/Asia
Pacific/Australia.
FLNA
FLNA manufactures, markets, sells and distributes a varied line of
salty and sweet 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, CHEETOS brand cheese flavored snacks, ROLD GOLD brand
pretzels, SUNCHIPS brand multigrain snacks, WOW! brand low fat and no fat
versions of potato and tortilla chips, a variety of branded dips and salsas,
CRACKER JACK brand candy-coated popcorn and GRANDMA'S brand cookies.
2
FLNA's products are transported from manufacturing plants to major
distribution centers, principally by company-owned trucks. FLNA utilizes a
"store-door-delivery" system, whereby its sales force delivers the snacks
directly to the store shelf. This system permits FLNA to work closely with
retail trade locations and to be responsive to their needs. Frito-Lay believes
this form of distribution allows it to have a marketing advantage and is
essential for the proper distribution of products with a short shelf life.
Frito-Lay also develops the national marketing, promotion and
advertising programs that support the Frito-Lay brands and brand image; oversees
the quality of the Frito-Lay products; develops new products and packaging; and
leads and coordinates selling efforts.
FLI
FLI's products are available in 118 countries outside the United States
and Canada through company-owned facilities and affiliated companies. On most of
the European continent, our snack food business is conducted through Snack
Ventures Europe, a joint venture between PepsiCo and General Mills, Inc., in
which we own a 60% interest. In ten Latin American countries, our snack food
business is conducted through joint ventures between PepsiCo and the parent
company of Empresas Polar SA of Venezuela. We have a 50% interest in these
ventures, except in one country in which we own a 70% interest.
FLI sells a variety of snack food products which appeal to local tastes
including, for example, WALKERS brand snack foods in the United Kingdom,
SABRITAS brand snack foods in Mexico, Smith's brand snack foods in Australia,
and GAMESA brand cookies and ALEGRO brand sweet snacks in Mexico. In addition,
many of our U. S. brands have been introduced internationally such as LAY'S,
RUFFLES, DORITOS, TOSTITOS, FRITOS, and CHEETOS brand salty snack foods.
Principal international markets include Australia, Brazil, Mexico, the
Netherlands, South Africa, Spain and the United Kingdom.
FLI develops the marketing, promotion and advertising programs that
support the local and Frito-Lay brands and develops new products and packaging.
Pepsi-Cola Company
Our soft drink business, which operates as Pepsi-Cola Company, is
comprised of two business units: Pepsi-Cola North America (PCNA) and Pepsi-Cola
International (PCI). As described below, these business units manufacture,
market and sell concentrates to be used in "Pepsi-Cola Beverages", which include
not only beverages bearing the Pepsi-Cola or Pepsi trademarks, such as PEPSI,
Pepsi-Cola, Diet Pepsi, Pepsi One and Pepsi Max, but also other brands owned by
PepsiCo and its subsidiaries including MOUNTAIN DEW, 7UP (outside the U.S.), ALL
SPORT, SLICE, MUG, AQUAFINA, and Mirinda.
PCNA
PCNA manufactures concentrates to be used in Pepsi-Cola Beverages for
sale to franchised bottlers in the United States and Canada. PCNA's bottlers are
licensed to manufacture, market, sell and distribute beverages and syrups
bearing the Pepsi-Cola Beverage trademarks in approximately 440 licensed
territories in the United States and Canada. We have a minority interest in 8 of
these bottlers, comprising approximately 240 licensed territories.
3
PCNA also develops the national marketing, promotion and advertising
programs that support the Pepsi-Cola Beverage brands and brand image; oversees
the quality of the Pepsi-Cola Beverages; develops new products and packaging and
approves packaging suppliers; and leads and coordinates selling efforts for
national fountain, supermarket and mass merchandising accounts.
The Pepsi/Lipton Tea Partnership, a joint venture of PCNA and Lipton,
sells tea concentrate to Pepsi-Cola bottlers, and develops and markets
ready-to-drink tea products under the Lipton trademark, including Lipton Brisk
and LIPTON'S ICED TEA. PepsiCo's partnership with the Starbucks Corporation
develops ready-to-drink coffee products, which are sold under the Starbucks
FRAPPUCCINO trademark and are distributed by Pepsi-Cola bottlers. PCNA also
licenses the processing and distribution of AQUAFINA bottled water.
PCI
PCI manufactures Pepsi-Cola Beverage concentrates for sale to
franchised bottlers outside of the United States and Canada. PCI's bottlers are
licensed to manufacture, market, sell and distribute, within defined
territories, beverages and syrups bearing the Pepsi-Cola Beverage trademarks. We
have a minority interest in approximately 40 of these bottlers. In certain
countries, PCI also owns and operates the bottling businesses which manufacture,
sell and distribute the Pepsi-Cola Beverage products. Pepsi-Cola Beverage
products are sold in approximately 160 countries through PCI's company-owned and
franchised bottlers. Principal international markets include Argentina, Brazil,
China, India, Mexico, the Philippines, Saudi Arabia, Spain, Thailand and the
United Kingdom.
PCI, with its bottlers, develops the marketing, promotion and
advertising programs that support the Pepsi-Cola Beverage brands; oversees the
quality of the Pepsi-Cola Beverages; promotes technical support to its bottlers;
and develops new products and packages for the Pepsi-Cola Beverages.
TROPICANA PRODUCTS, INC.
Tropicana Products, Inc. (TPI) manufactures, markets, sells and
distributes its products under such well-known trademarks as TROPICANA PURE
PREMIUM, TROPICANA SEASON'S BEST and, under license from Dole Food Company,
Inc., DOLE. In the United States, TPI's portfolio also includes TROPICANA
TWISTER juice beverage products and TROPICANA PURE TROPICS 100% juice products.
It also manufactures and sells FRUVITA chilled juices, LOOZA nectars and juices,
COPELLA fruit juices and ALVALLE soups and fruit juices in Europe. Principal
international markets include Belgium, Canada, France and the United Kingdom.
TPI's manufacturing operations in Bradenton, Florida produce
approximately 85% of the worldwide supply of TROPICANA PURE PREMIUM products.
TPI operates 11 regional distribution centers that serve customers in the United
States and Canada. Refrigerated rail cars and trucks are used to transport the
product quickly and efficiently from the Bradenton manufacturing plant to the
principal distribution centers. A high priority is placed on inventory
management techniques that ensure product quality and fresh taste. Tropicana's
products are produced and packaged in approximately 28 plants worldwide
(including 16 independent co-packer facilities) and are available in 52
countries.
TPI also develops the national marketing, promotion and advertising
programs that support the Tropicana brands and brand image; oversees the quality
of the Tropicana juices and juice beverages; develops new products and
packaging; and leads and coordinates selling and distribution efforts for
national supermarket, foodservice and mass merchandising accounts.
4
Competition
All of our businesses are highly competitive. Our snack foods, soft
drinks and, juices 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 we serve, as well as with private label snack foods, soft drinks and
juices and with the products of local and regional manufacturers. The main areas
of our competition are price, quality and variety of products, customer service
and availability of distribution.
Employees
As of December 25, 1999, we employed, subject to seasonal variations,
approximately 118,000 persons worldwide, of whom approximately 52,000 were
employed within the United States. We believe that relations with our employees
are generally good.
Raw Materials and Other Supplies
The principal materials we use in our snack food, soft drink and juice
businesses are corn sweeteners, sugar, aspartame, flavorings, oranges,
grapefruit, juice concentrates, vegetable and essential oils, potatoes, corn,
flour, seasonings and packaging materials. Since we rely on trucks to move and
distribute many of our products, fuel is also an important commodity. We employ
specialists to secure adequate supplies of many of these items and have not
experienced any significant continuous shortages. Prices we pay for such items
are subject to fluctuation. When prices increase, we may or may not pass on such
increases to our customers. When we have decided to pass along price increases
in the past we have done so successfully. However, there is no assurance that we
will be able to do so in the future.
Governmental Regulation
The conduct of our businesses, and the production, distribution and use
of many of our 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. Our businesses are also subject to state, local and
foreign laws.
Patents, Trademarks and Licenses
We own numerous valuable trademarks which are essential to our
worldwide businesses, including FRITO-LAY, LAY'S, DORITOS, RUFFLES, TOSTITOS,
FRITOS, CHEETOS, CRACKER JACK, ROLD GOLD, WOW!, SUNCHIPS, SANTITAS, SMARTFOOD,
SABRITAS, WALKERS, SMITH'S, PEPSI-COLA, PEPSI, DIET PEPSI, PEPSI ONE, PEPSI MAX,
MOUNTAIN DEW, SLICE, MUG, ALL SPORT, AQUAFINA, 7UP and DIET 7UP (outside the
United States), MIRINDA, TROPICANA PURE PREMIUM, TROPICANA SEASON'S BEST,
TROPICANA TWISTER, TROPICANA PURE TROPICS, COPELLA, FRUVITA, and LOOZA.
Trademarks remain valid so long as they are used properly for identification
purposes, and we emphasize correct use of our trademarks. We have authorized
(through licensing arrangements) the use of many of our trademarks in such
contexts as snack food joint ventures and Pepsi-Cola bottling appointments. In
addition, we license the use of our trademarks on collateral products for the
primary purpose of enhancing brand awareness.
We either own or have licenses to use a number of patents which relate
to some of our products and the processes for their production and to the design
and operation of various equipment used in our businesses. Some of these patents
are licensed to others.
5
Environmental Matters
We continue to make expenditures to comply with federal, state, local
and foreign environmental laws and regulations. These expenditures have not been
material with respect to our capital expenditures, net income or competitive
position.
Business Segments
Information related to:
o Net sales;
o Operating profit;
o Total assets;
o Amortization of intangible assets;
o Depreciation and other amortization expense;
o Significant other noncash items;
o Capital spending;
o Investments in unconsolidated affiliates;
o Equity Income/(Loss) from unconsolidated affiliates;
o Geographic net sales and long-lived assets; and
o Impairment and restructuring charges by segment;
for each reportable segment for 1999, 1998, and 1997 may be found in Item 8,
"Financial Statements and Supplementary Data" in Note 18 on pages F-33 through
F-38.
Item 2. Properties
Frito-Lay, Inc.
FLNA operates 45 food manufacturing and processing plants in the United
States and Canada, of which 41 are owned and 4 are leased. In addition, FLNA
owns or leases approximately 230 warehouses and distribution centers for storage
of food products in the United States and Canada. Approximately 1,770 smaller
warehouses and storage spaces located throughout the United States and Canada
are leased or owned. FLNA owns its headquarters building and a research facility
in Plano, Texas. FLNA also leases offices in Dallas, Texas and leases or owns
sales/regional offices throughout the United States. FLI operates approximately
80 plants and approximately 1,160 distribution centers, warehouses and offices
outside of the United States and Canada.
Pepsi-Cola Company
PCNA operates 3 concentrate plants and 7 warehouses throughout the
United States and Canada. Licensed bottlers in which we have a significant
ownership interest operate approximately 76 bottling plants. PCI operates 45
concentrate and bottling plants, of which 40 are owned and 5 are leased. PCI
also operates 67 warehouses and 63 offices outside of the United States and
Canada.
Tropicana
TPI owns 7 production and packing plants, 12 offices worldwide,
including its headquarters building in Bradenton, Florida and 12 distribution
centers around the world. TPI also leases 5 production and packing plants, 19
offices and 13 distribution centers.
6
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.
We believe that our properties are in good operating condition and are
suitable for the purposes for which they are being used.
Item 3. Legal Proceedings
We are 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 for such claims or contingencies is not likely to
have a material adverse effect on our results of operations, financial condition
or liquidity.
Item 4. Submission of Matters to a Vote of Stockholders
Not applicable.
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 our Capital Stock, which is also listed on the Amsterdam, Chicago,
Swiss and Tokyo Stock Exchanges.
Shareholders - At December 25, 1999, there were approximately 220,000
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 2000 are expected to
be March 10, June 9, September 8 and December 8. Quarterly cash dividends have
been paid since PepsiCo was formed in 1965.
Cash Dividends Declared Per Share (in cents):
Quarter 1999 1998
------- ---- ----
1 13.0 12.5
2 13.5 13.0
3 13.5 13.0
4 13.5 13.0
---- ----
Total 53.5 51.5
7
Stock Prices - The high, low and closing composite prices for a share
of PepsiCo Capital Stock, as reported by Bloomberg Services, for each fiscal
quarter of 1999 and 1998 were as follows (in dollars):
1999 High Low Close
- ---- ---- --- -----
First Quarter 42 9/16 36 3/8 39 15/16
Second Quarter 41 7/16 34 1/16 35 3/8
Third Quarter 41 1/2 33 3/8 34 5/8
Fourth Quarter 37 3/4 30 3/16 35 7/16
1998 High Low Close
- ---- ---- --- -----
First Quarter 43 7/8 34 3/16 43
Second Quarter 44 13/16 37 3/8 40 11/16
Third Quarter 43 3/4 27 9/16 30 15/16
Fourth Quarter 41 1/4 28 40 7/16
Sales of Unregistered Securities - We acquired 2,201,445 shares of
PepsiCo's capital stock in open market transactions and contributed such shares
to a newly-formed business venture limited liability company in exchange for a
33% noncontrolling interest in the venture. As a result, we have a
noncontrolling ownership interest of approximately 24% in the venture's
principal operating subsidiary, PepsiAmericas, Inc., a publicly traded
corporation. The dates and amounts of purchase and contribution of such shares
are as follows:
Date of Number of
Transaction Shares
----------- ------
10/18/99 340,000
10/19/99 370,000
10/20/99 320,000
10/21/99 375,000
10/22/99 300,000
10/25/99 270,000
10/26/99 226,445
Item 6. Selected Financial Data
Included on page F-43.
8
Item 7. Management's Discussion and Analysis of Results of Operations,
Consolidated Cash Flows and Liquidity and Capital Resources
Management's Discussion and Analysis (tabular dollars in millions except per
share amounts; all per share amounts assume dilution)
All per share information is computed using weighted average shares outstanding,
assuming dilution.
INTRODUCTION
Management's Discussion and Analysis is presented in four sections. The
Introductory section discusses Bottling Transactions, Acquisitions, Market Risk
(including the EURO conversion), Year 2000, Asset Impairment and Restructuring
Charges and a New Accounting Standard (pages 9-15). The second section analyzes
the Results of Operations, first on a consolidated basis and then for each of
our business segments (pages 15-24). The final two sections address our
Consolidated Cash Flows and Liquidity and Capital Resources (pages 24-25).
Cautionary Statements
From time to time, in written reports (including the Chairman's letter
accompanying this annual report) and in oral statements, we discuss expectations
regarding our future performance, 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
expectations.
Bottling Transactions
During 1999, we completed four transactions creating four anchor bottlers. In
April, certain wholly-owned bottling businesses, referred to as The Pepsi
Bottling Group (PBG), completed an initial public offering with PepsiCo
retaining a direct noncontrolling ownership interest of 35.5%. In May, we
combined certain bottling operations with Whitman Corporation to create new
Whitman, retaining a noncontrolling ownership interest of approximately 38%. In
July, we formed a business venture with PepCom Industries, Inc., a Pepsi-Cola
franchisee, retaining a noncontrolling interest in the venture of 35%. In
October, we formed a business venture with Pohlad Companies, a Pepsi-Cola
franchisee, retaining a noncontrolling ownership interest of approximately 24%
in the venture's principal operating subsidiary. Details of these transactions
are found in Note 2.
Acquisitions
During 1999, we made acquisitions, primarily investments in various bottlers
including investments in unconsolidated affiliates, which aggregated $430
million in cash.
During 1998, acquisitions aggregated $4.5 billion in cash including Tropicana
Products, Inc. for $3.3 billion and The Smith's Snackfoods Company (TSSC) in
Australia for $270 million, the remaining ownership interest in various bottlers
and purchases of various other international salty snack food businesses.
The results of operations of acquisitions are generally included in the
consolidated financial statements from their respective dates of acquisition.
9
Market Risk
The principal market risks (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which we are exposed are:
o commodity prices, affecting the cost of our raw materials,
o foreign exchange risks, and
o interest rates on our debt and short-term investment portfolios.
Commodity Prices
- ----------------
We are subject to market risk with respect to the cost of commodities because
our ability to recover increased costs through higher pricing may be limited by
the competitive environment in which we operate. We use futures contracts to
hedge fluctuations in prices of a portion of anticipated commodity purchases,
primarily oil, corn, fuel and juice concentrates. We had commodity futures
positions of $145 million at December 25, 1999 and $105 million at December 26,
1998. Unrealized losses on net commodity futures positions were $6 million at
December 25, 1999 and $9 million at December 26, 1998. We estimate that a 10%
decline in commodity prices would have increased the 1999 unrealized losses by
$14 million and the 1998 unrealized losses by $9 million.
Foreign Exchange Risks
- ----------------------
Operating in international markets involves exposure to volatile movements in
foreign exchange rates. The economic impact of foreign exchange rate movements
on us is complex because such changes are often linked to variability in real
growth, inflation, interest rates, governmental actions and other factors. These
changes, if material, can cause us to adjust our financing and operating
strategies. Consequently, isolating the effect of changes in currency does not
incorporate these other important economic factors.
International operations constitute about 19% of our 1999 and 19% of our 1998
consolidated operating profit, excluding asset impairment and restructuring
charges. As foreign exchange rates change, translation of the income statements
of our international businesses into U.S. dollars affects year-over-year
comparability of operating results. We do not generally hedge translation risks
because cash flows from international operations are generally reinvested
locally. We do not enter into hedges to minimize volatility of reported earnings
because we do not believe it is justified by the exposure or the cost.
Changes in foreign exchange rates that would have the largest impact on
translating our international operating profit for 1999 include the Mexican
peso, British pound, EURO and Canadian dollar. We estimate that a 10% change in
foreign exchange rates would impact operating profit by approximately $60
million in 1999 and $51 million in 1998. This represents 10% of our non-U.S.
operating profit after adjusting for asset impairment and restructuring charges.
We believe that this quantitative measure has inherent limitations, as discussed
in the first paragraph of this section. Further, the sensitivity analysis
disregards the possibility that rates can move in opposite directions and that
gains from one country may or may not be offset by losses from another country.
Foreign exchange gains and losses reflect transaction gains and losses and also
translation gains and losses arising from the remeasurement into U.S. dollars of
the net monetary assets of businesses in highly inflationary countries.
Transaction gains and losses arise from monetary assets and liabilities
denominated in currencies other than a business unit's functional currency.
There were net foreign exchange losses of $10 million in 1999, $53 million in
1998 and $16 million in 1997. The decrease in net foreign exchange losses in
1999 resulted primarily from the impact in 1998 of unfavorable macro-economic
conditions, primarily in Russia and Asia Pacific.
10
In 1998, the economic turmoil in Russia which accompanied the devaluation of the
ruble had an adverse impact on our operations. Consequently, we experienced a
significant drop in demand, resulting in lower net sales and increased operating
losses. Also, since net bottling sales in Russia were denominated in rubles,
whereas a substantial portion of our related costs and expenses were denominated
in U.S. dollars, bottling operating margins were further eroded. In response to
these conditions, we reduced our cost structure primarily by closing facilities,
renegotiating manufacturing contracts and reducing the number of employees. We
also wrote down our long-lived bottling assets to give effect to the resulting
impairment. See "- Asset Impairment and Restructuring Charges" on page 12.
On January 1, 1999, 11 of 15 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 other system or process
initiatives. We do not expect the system and equipment conversion costs to be
material. 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.
Interest Rates
- --------------
We centrally manage our debt and investment portfolios considering investment
opportunities and risks, tax consequences and overall financing strategies.
We use interest rate and currency swaps to effectively change the interest rate
and currency of specific debt issuances, with the objective of reducing our
overall borrowing costs. These swaps are entered into concurrently with the
issuance of the debt that they are intended to modify. The notional amount,
interest payment and maturity dates of the swaps match the principal, interest
payment 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.
Our investment portfolios primarily consist of cash equivalents and short-term
marketable securities. Accordingly, the carrying amounts approximate market
value. It is our practice to hold these investments to maturity.
Assuming year-end 1999 and 1998 variable rate debt and investment levels, a
one-point increase in interest rates would have increased net interest expense
by $13 million in 1999 and $64 million in 1998. The change in this impact from
1998 resulted from decreased variable rate debt levels and increased variable
rate investment levels at year-end 1999. This sensitivity analysis does not take
into account existing interest rate swaps.
11
Year 2000
To date, neither we nor our franchise bottlers have experienced major
disruptions related to the Year 2000 date change. In addition, we are not aware
of significant Year 2000 disruptions impacting our customers or suppliers. We
will continue to monitor our critical systems over the next several months but
do not anticipate a significant impact as a result of the Year 2000 date change.
Incremental costs directly related to Year 2000 issues for new PepsiCo totaled
$110 million from 1998 to 2000. Approximately 26% of the total estimated
spending represents costs to repair systems while approximately 53% represents
costs to replace and rewrite software. Excluded from the estimated incremental
costs for new PepsiCo for the three-year period are approximately $29 million of
internal recurring costs related to our Year 2000 efforts.
Asset Impairment and Restructuring Charges
1999 1998 1997
- --------------------------------------------------------------------------------
Asset impairment charges
- ------------------------
Held and used in the business
Property, plant and equipment............ $ 8 $ 149 $ 5
Intangible assets........................ - 37 -
Other assets............................. - 14 -
Held for disposal/abandonment
Property, plant and equipment............ 29 54 111
Investments in unconsolidated affiliates. - - 21
Net assets of business units............. - - 63
----- ----- -----
Total asset impairment................ 37 254 200
Restructuring charges
- ---------------------
Employee related costs...................... 19 24 55
Other charges............................... 9 10 35
----- ----- -----
Total restructuring.................. 28 34 90
----- ----- -----
Total....................................... $ 65 $ 288 $ 290
===== ===== =====
After-tax............................ $ 40 $ 261 $ 239
===== ===== =====
Per share............................ $0.03 $0.17 $0.15
===== ===== =====
Impairment by segment
- ---------------------
Frito-Lay North America..................... $37 $ 54 $ 8
Frito-Lay International..................... - - 30
Pepsi-Cola North America.................... - - 52
Pepsi-Cola International.................... - 6 105
----- ----- -----
Combined segments........................... 37 60 195
Bottling operations......................... - 194 5
----- ----- -----
$37 $254 $200
======= ======= =====
12
1999
- --------------------------------------------------------------------------------
The 1999 asset impairment and restructuring charge of $65 million recognized in
the first quarter relates to the closure of three plants and impairment of
equipment at Frito-Lay North America. This charge was the second phase of a
productivity improvement plan developed in the fourth quarter of 1998. The plan
included the consolidation of U.S. production to newer and more efficient plants
and streamlining logistics and transportation systems. The restructuring is
expected to generate approximately $15 million in annual savings beginning in
2000 which we expect to reinvest back into the business.
The asset impairment charges primarily reflect the reduction in the carrying
value of the land and buildings to their estimated fair market value based on
current selling prices for comparable real estate, less costs to sell, and the
write off of the net book value of equipment which cannot be redeployed. The
plant closures were completed during 1999. The majority of these assets were
either disposed of or abandoned in 1999. The restructuring charges of $28
million primarily included severance costs for approximately 860 employees and
plant closing costs. Substantially all of the terminations occurred during 1999.
1998
- --------------------------------------------------------------------------------
The 1998 asset impairment and restructuring charges of $288 million were
comprised of the following:
o A charge of $218 million for asset impairment of $200 million and
restructuring charges of $18 million related to our Russian bottling
operations. The economic turmoil in Russia which accompanied the August
1998 devaluation of the ruble adversely impacted our operations.
Consequently, we experienced a significant drop in demand, resulting in
lower net sales and increased operating losses. Also, since net bottling
sales in Russia were denominated in rubles, whereas a substantial portion
of our related costs and expenses were denominated in U.S. dollars,
bottling operating margins were further eroded. In response to these
conditions, we reduced our cost structure primarily through closing
facilities, renegotiating manufacturing contracts and reducing the number
of employees. We also evaluated our long-lived bottling assets for
impairment, triggered by the reduction in utilization of assets caused by
the lower demand, the adverse change in the business climate and the
expected continuation of operating losses and cash deficits in that market.
The impairment charge reduced the net book value of the assets to their
estimated fair market value, based primarily on amounts recently paid for
similar assets in that marketplace. Of the total charge of $218 million,
$212 million related to bottling operations that became part of PBG in 1999
(see "- Bottling Transactions" on page 9).
o An impairment charge of $54 million related to manufacturing equipment at
Frito-Lay North America. As part of our annual assessment of marketing
plans and related capacity requirements at Frito-Lay North America and the
development of a program to improve manufacturing productivity, we
determined that certain product specific equipment would not be utilized
and certain capital projects would be terminated to avoid production
redundancies. The charge primarily reflected the write off of the net book
value of the equipment and related projects. Disposal or abandonment of
these assets was completed in 1999.
o A charge of $16 million for employee related costs resulting from the
separation of Pepsi-Cola North America's concentrate and bottling
organizations to more effectively serve retail customers in light of the
conversion of PBG to public ownership (see "- Bottling Transactions" on
page 9). Of this amount, $10 million related to bottling operations that
became part of PBG in 1999.
13
The employee related costs for 1998 of $24 million primarily included severance
and relocation costs for approximately 2,700 employees located in the Russian
bottling plants and at Pepsi-Cola North America field locations. During 1998,
approximately 2,600 of the terminations occurred most of which were terminations
of part-time employees with little associated cost. The remaining terminations
either occurred in 1999 or related to the bottling operations that became part
of PBG in 1999.
1997
- --------------------------------------------------------------------------------
The 1997 asset impairment and restructuring charges of $290 million were
comprised of the following:
o Net charges of $183 million in several of our business segments for net
asset impairment of $150 million related to the planned disposal of assets
and for restructuring charges of $33 million. The impairment charges were
taken as a result of decisions to dispose of certain company-owned bottling
operations and non-core international businesses, to dispose of certain
assets to improve the utilization of facilities and to reduce occupancy
costs and to exit certain bottling joint ventures. The impairment charges
reduced the net book value of these assets to their estimated fair market
value, generally based on estimates developed internally or, if available,
amounts paid for similar assets, less costs to sell. The disposals occurred
in 1997 and 1998 and in connection with the separation of certain
company-owned bottling operations (see "- Bottling Transactions" on page
9). The restructuring charges primarily related to the reorganization of an
international company-owned bottling operation.
o Charges of $94 million for asset impairment of $48 million and
restructuring charges of $46 million related to productivity initiatives in
worldwide snacks. These initiatives included closing plants, eliminating
production lines and consolidating distribution facilities. The resulting
impairment charges were recognized primarily for assets held for disposal
or abandonment and reduced the net book value of impaired assets to their
estimated fair market value, generally based on estimates developed
internally or, if available, amounts paid for similar assets, less costs to
sell. Disposal or abandonment of these assets was substantially completed
in 1997, with a significant portion of the remainder completed in 1998 as
planned.
o Net charges of $13 million for net asset impairment of $2 million and net
restructuring charges of $11 million related to actions to strengthen our
international bottling structure. Restructuring charges of $98 million
consisted of third party termination payments related to refranchising
bottling operations and our investments in bottling joint ventures. These
charges were substantially offset by an arbitration settlement of $87
million which we were awarded as a result of the termination of the
bottling appointment with our previous Venezuelan bottler.
The employee related costs for 1997 of $55 million primarily included severance
and relocation costs for approximately 2,100 employees primarily located in
international plants and distribution centers. During 1997, terminations of
approximately 1,100 employees occurred and, in 1998, approximately 500
terminations occurred. As a result of the successful redeployment of employees
to other locations, approximately 500 terminations did not occur as planned
which resulted in a change of estimate in 1998.
- --------------------------------------------------------------------------------
The restructuring reserves are included in accounts payable and other current
liabilities in the Consolidated Balance Sheet. At year-end 1999, the remaining
liability for 1997 restructuring charges associated with investments in
unconsolidated affiliates was $10 million related to indemnifications of
litigation liabilities.
14
The remaining carrying amounts of assets held for disposal at year end were $6
million in 1999, $13 million in 1998 and $60 million in 1997. The net sales from
international bottling business units held for disposal were $202 million in
1998 and $590 million in 1997. Such businesses generated operating profits of
$20 million in 1998 and $42 million in 1997. Our investments in unconsolidated
affiliates held for disposal provided break-even results in 1999 and losses of
$2 million in 1998 and $5 million in 1997.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 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 adoption will have on our consolidated financial
statements.
RESULTS OF OPERATIONS
Consolidated Review
General
In the discussions below, the year-over-year dollar change in pound or kilo
sales of salty and sweet snacks for Frito-Lay, bottler case sales by
company-owned bottling operations and concentrate unit sales to franchisees for
Pepsi-Cola, and 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 of our five reportable segments are referred to as new
PepsiCo.
Net Sales
% Change B/(W)
--------------
1999 1998 1997 1999 1998
- --------------------------------------------------------------------------------
Reported $20,367 $22,348 $20,917 (9) 7
======= ======= =======
New PepsiCo $18,244 $14,686 $13,655 24 8
Intercompany elimination* 422 1,614 1,462 (74) 10
------- ------- -------
New PepsiCo before
Elimination $18,666 $16,300 $15,117 15 8
======= ======= =======
* 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.
- --------------------------------------------------------------------------------
15
Reported net sales decreased $2.0 billion in 1999 reflecting the deconsolidation
of PBG, PBO and PepCom operations as of the transaction closing dates, partially
offset by the inclusion of Tropicana for the first three quarters of 1999. New
PepsiCo net sales, before the intercompany elimination, increased $2.4 billion.
This increase primarily reflects the inclusion of Tropicana for the first three
quarters of 1999, volume gains at worldwide Frito-Lay and higher effective net
pricing at worldwide Frito-Lay and Pepsi-Cola North America. Volume gains
contributed 4 percentage points of growth and higher effective pricing
contributed 3 percentage points. These advances were partially offset by an
unfavorable foreign currency impact. The unfavorable foreign currency impact,
primarily in Brazil and Mexico, reduced new PepsiCo net sales growth by nearly 2
percentage points.
Reported net sales rose $1.4 billion in 1998. New PepsiCo net sales, before
intercompany elimination, increased $1.2 billion. This increase reflects volume
gains in all businesses, net contributions from acquisitions/divestitures and
higher effective net pricing driven by a shift to higher-priced products in
Frito-Lay North America. Volume gains contributed 5 percentage points of growth.
Net acquisitions/divestitures contributed 3 percentage points to the sales
growth and primarily reflect the acquisition of Tropicana partially offset by
the absence of bottling sales as a result of refranchising a Japanese bottler
late in 1997. Excluding foreign currency impact, new PepsiCo net sales would
have risen 9%. Weaker foreign currencies primarily in Canada, Thailand, Brazil,
Poland and India led the unfavorable foreign currency impact.
Operating Profit and Margin
Change B/(W)
---------------
1999 1998 1997 1999 1998
- --------------------------------------------------------------------------------
Reported
Total Operating Profit $2,818 $2,584 $2,662 9% (3)%
Total Operating Profit Margin 13.8% 11.6% 12.7% 2.2 (1.1)
Ongoing
New PepsiCo Operating
Profit $2,830 $2,526 $2,519 12% -
New PepsiCo Operating
Profit Margin* 15.2% 15.5% 16.7% (0.3) (1.2)
Ongoing excludes impairment and restructuring charges of $65, $66 and $267 in
1999, 1998 and 1997, respectively (see Notes 4 and 18). * Based on new PepsiCo
net sales before intercompany elimination.
- --------------------------------------------------------------------------------
Reported operating profit margin increased 2.2 percentage points in 1999.
Ongoing new PepsiCo operating profit margin declined 0.3 percentage point. The
decline reflects the margin impact of the Tropicana acquisition for the first
three quarters, increased general and administrative (G&A) expenses and
increased advertising and marketing (A&M) expenses across all business segments.
These decreases were partially offset by the margin impact of higher effective
net pricing.
The most significant G&A increase in 1999 was corporate G&A which includes $71
million 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. The increase in A&M was led by increases
in promotional allowances at Frito-Lay North America, bottler funding and other
programs at Pepsi-Cola North America and spending at Frito-Lay International's
U.K. business.
16
In 1998, reported operating profit margin decreased over 1 percentage point.
Ongoing new PepsiCo operating profit margin declined over 1 percentage point,
primarily reflecting the margin impact of increased A&M, higher cost of sales
and increased selling and distribution expenses, partially offset by the impact
of volume growth. A&M grew at a significantly faster rate than sales, led by
increases at worldwide Pepsi-Cola and increases at Frito-Lay North America. Cost
of sales as a percentage of sales increased due to costs associated with new
plants and lines at Frito-Lay North America. Selling and distribution (S&D)
expense growth at Frito-Lay North America reflected an increase in the sales
force. Excluding foreign exchange losses, ongoing operating profit would have
increased 1%. Foreign exchange losses, primarily in Asia, are reported in
corporate unallocated expenses. Information technology expense increased on a
year-over-year basis, despite $42 million of software costs that were
capitalized as required by SOP 98-1, driven by our various productivity
initiatives and Year 2000 remediation efforts.
Gain on Bottling Transactions
The gain on bottling transactions of $1.0 billion ($270 million after-tax or
$0.18 per share) relates to the second quarter PBG and Whitman bottling
transactions. The PBG transaction resulted in 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 issuance of stock by a subsidiary.
The majority of the taxes are expected to be deferred indefinitely. The Whitman
transaction resulted in an after-tax loss to us of $206 million or $0.14 per
share.
The third quarter PepCom 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.
The fourth quarter Pohlad transaction was structured as a fair value exchange
with no resulting gain or loss.
Interest Expense, net
Interest expense, net of interest income, declined $76 million or 24% in 1999.
Interest income increased $44 million or 59% primarily due to higher average
investment balances, partially offset by lower average interest rates on these
balances. The higher average investment balances primarily result from the first
quarter proceeds received from PBG as settlement of pre-existing intercompany
balances. Interest expense decreased $32 million or 8% due to lower average
interest rates on slightly lower average outstanding debt levels.
Interest expense, net of interest income, declined $32 million or 9% in 1998.
The decline in interest expense of $83 million or 17% was primarily due to lower
average debt levels, as a result of using cash flows received from discontinued
operations in the latter half of 1997 to repay debt. The lower debt levels were
maintained until the end of the third quarter when the debt level increased to
finance several acquisitions (see "- Acquisitions" on page 9). This decline was
partially offset by higher average interest rates on the remaining debt.
Interest income declined $51 million or 41% reflecting lower investment levels
as a result of utilizing investment balances to make acquisitions and repay
debt.
17
Provision for Income Taxes
1999 1998 1997
- --------------------------------------------------------------------------------
Reported
Provision for Income Taxes $1,606 $270 $ 818
Effective tax rate 43.9% 11.9% 35.4%
Ongoing
Provision for Income Taxes $ 876 $791 $ 869
Effective tax rate 32.2% 31.0% 33.4%
Ongoing excludes the effects of the bottling transactions in 1999, impairment
and restructuring charges for all years (see Note 4) and the 1998 income tax
benefit (see Note 14).
- --------------------------------------------------------------------------------
In 1999, the reported effective tax rate increased 32 percentage points
primarily as a result of the tax effects of the bottling transactions and the
absence in 1999 of the 1998 income tax benefit. The ongoing effective tax rate
increased 1.2 percentage point. The increase resulted primarily from the absence
in 1999 of the settlement in 1998 of prior years' audit issues offset by the
benefit of proportionately lower bottling income.
In 1998, the reported effective tax rate decreased 23.5 percentage points
primarily as a result of an income tax benefit of $494 million (or $0.32 per
share). The tax benefit reflects a final agreement with the Internal Revenue
Service to settle substantially all remaining aspects of a tax case relating to
our concentrate operations in Puerto Rico. The ongoing effective tax rate
declined 2.4 percentage points attributable to the favorable settlement of prior
years' audit issues, including issues related to the deductibility of purchased
franchise rights.
Income from Continuing Operations and Income Per Share
% Change B/(W)
--------------
1999 1998 1997 1999 1998
- --------------------------------------------------------------------------------
Income from Continuing
Operations
Reported $2,050 $1,993 $1,491 3 34
Ongoing $1,845 $1,760 $1,730 5 2
Income Per Share from
Continuing Operations
Reported $1.37 $1.31 $0.95 5 38
Ongoing $1.23 $1.16 $1.10 6 5
Ongoing excludes the effects of the bottling transactions in 1999, impairment
and restructuring charges for all years (see Note 4) and the 1998 income tax
benefit (see Note 14).
- --------------------------------------------------------------------------------
For 1999, reported income from continuing operations increased $57 million while
income per share increased $0.06. Ongoing income from continuing operations
increased $85 million and income per share increased $0.07. The ongoing
increases are due to increased operating profit, a decrease in net interest
expense and, for income per share, the benefit from a 1.5% reduction in average
shares outstanding. These were partially offset by a higher effective tax rate.
18
For 1998, reported income from continuing operations increased $502 million
while income per share increased $0.36. Ongoing income from continuing
operations increased $30 million and income per share increased $0.06. The
ongoing increases are due to the lower effective tax rate and, for income per
share, the benefit from a 3% reduction in average shares outstanding. These were
partially offset by lower operating profit.
Net Income and Net Income Per Share
For 1997, net income of $2.1 billion and income per share of $1.36 include the
results of income from discontinued operations, which primarily reflect the
operating results of Tricon's core restaurant businesses through October 6, 1997
and the operating results and a gain on sale of the restaurant distribution
operation sold in the second quarter of 1997.
BUSINESS SEGMENTS
Additional information concerning our operating segments is presented in Note
18.
Frito-Lay
- ---------
The standard volume measure is pounds for North America and kilos for
International. Pound and kilo growth are reported on a systemwide and constant
territory basis, which includes currently consolidated businesses and
unconsolidated affiliates reported for at least one year.
Frito-Lay North America
% Change B/(W)
--------------
1999 1998 1997 1999 1998
- -------------------------------------------------------------------------------
Net Sales $7,865 $7,474 $6,967 5 7
Operating Profit
Reported $1,580 $1,424 $1,388 11 3
Ongoing $1,645 $1,478 $1,410 11 5
Ongoing excludes impairment and restructuring charges of $65 in 1999, $54 in
1998 and $22 in 1997 (see Notes 4 and 18).
- --------------------------------------------------------------------------------
1999 vs. 1998
- -------------
Net sales grew $391 million due to volume gains and higher effective net
pricing.
Pound volume advanced 4%. The advance was led by high single-digit growth in our
core corn products, excluding the low-fat and no-fat versions, mid single-digit
growth in Lay's brand potato chips and significant growth in Cracker Jack brand
products and branded dips. Volume declines in our "WOW!", "Baked" Lay's and
"Baked" Tostitos brand products partially offset these gains.
19
Reported operating profit increased $156 million. Ongoing operating profit
increased $167 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.
Ongoing operating profit margin increased over 1 percentage point due to the
margin impact of higher effective net pricing, reduced commodity costs and
volume gains, partially offset by the margin impact of higher A&M expenses.
1998 vs. 1997
- -------------
Net sales grew $507 million due to increased volume and a favorable mix shift to
higher-priced products.
Pound volume advanced 5% led by core brand growth and "WOW!" products. The
growth in core brands, excluding the low-fat and no-fat versions, was led by
double-digit growth in Lay's brand potato chips and double-digit growth in
Doritos brand tortilla chips. These gains were partially offset by declines in
Ruffles brand potato chips, "Baked" Lay's and "Baked" Tostitos brand products
and the elimination of Doritos Reduced Fat brand tortilla chips.
Reported operating profit increased $36 million. Ongoing operating profit
increased $68 million reflecting the higher volume and the favorable mix shift,
partially offset by increased operating costs. The increase in operating costs
was led by increased A&M, higher manufacturing costs, reflecting costs
associated with new plants and lines related to "WOW!" and Doritos 3-D products,
and higher S&D expenses. A&M grew at a significantly faster rate than sales and
volume due to increased promotional allowances and "WOW!" launch costs. S&D grew
at a slightly slower rate than sales but faster than volume.
Frito-Lay International
% Change B/(W)
------------------
1999 1998 1997 1999 1998
- --------------------------------------------------------------------------------
Net Sales $3,750 $3,501 $3,409 7 3
Operating Profit
Reported $ 406 $ 367 $ 318 11 15
Ongoing $ 406 $ 367 $ 380 11 (3)
Ongoing excludes impairment and restructuring charges of $62 in 1997 (see Notes
4 and 18).
- --------------------------------------------------------------------------------
1999 vs. 1998
- -------------
Net sales increased $249 million. Excluding the negative impact of Brazil, which
was primarily due to macro-economic conditions, net sales increased $397 million
or 13% reflecting higher volume and higher effective net pricing. Overall, 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 4 percentage points. Net contributions
from acquisitions/divestitures contributed 1 percentage point to the sales
growth.
20
Salty snack kilos increased 6%. The advance was led by double-digit growth at
Sabritas in Mexico and several of our businesses in Central and South America
and in Asia. Including acquisitions/divestitures, total salty snack kilos
increased an additional 4 percentage points to 10% driven primarily by the
acquisition in Australia and by acquisitions and mergers of salty snack food
businesses in South America. Sweet snack kilos increased 6% led by strong growth
at Gamesa and Sabritas in Mexico. Sweet snack kilos, including the net effect of
acquisitions/divestitures, declined 5% primarily as a result of the sales of our
chocolate and biscuit businesses in Poland.
Operating profit increased $39 million. Excluding Brazil, operating profit
increased $81 million or 25% 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 and the United Kingdom,
reduced operating profit growth by 5 percentage points. The unfavorable foreign
currency impact was more than offset by higher effective net pricing.
1998 vs. 1997
- -------------
Net sales increased $92 million. The increase in net sales was driven by net
contributions from acquisitions/divestitures and by higher volume. The increase
was partially offset by the impact of weaker foreign currencies including the
unfavorable effect in Mexico of the devaluation of the peso against the U.S.
dollar net of local pricing actions. Excluding Mexico, the impact of weaker
foreign currencies, primarily Brazil, Poland, Australia and Thailand, reduced
net sales growth by 2 percentage points. Net acquisitions/divestitures
contributed 3 percentage points to the sales growth.
Salty snack kilos increased 6%, led by solid double-digit growth at Sabritas in
Mexico and the Snack Ventures Europe joint venture, partially offset by
double-digit declines in Brazil. Including acquisitions/divestitures, salty
snack kilos increased to 14%. The increase of 8 percentage points was primarily
driven by the acquisitions through partnership with, as well as, purchase of
salty snack food businesses in Central and South America. Sweet snack kilos
declined 2% driven by a single-digit decline at Gamesa in Mexico and a
double-digit decline at Wedel in Poland. These declines in sweet snack kilos
were partially offset by double-digit growth at Sabritas. Sweet snack kilos,
including the effect of acquisitions/divestitures, declined 8% primarily as a
result of the first quarter sale of a French biscuit business.
Reported operating profit increased $49 million. Ongoing operating profit
declined $13 million. Deterioration of operating performance in Brazil due to
the macro-economic conditions and market softness at Gamesa was partially offset
by growth at Sabritas and in Poland. The growth in Poland was substantially
driven by the sweet snack businesses which were sold in early 1999.
Pepsi-Cola
- ----------
In early 1999, in contemplation of the separation from PepsiCo of our bottling
operations, we completed a reorganization of our Pepsi-Cola business.
Accordingly, our 1999 disclosure presents the operating results consistent with
the new Pepsi-Cola organization. Prior years' amounts have been reclassified to
conform to the 1999 presentation. For additional information see Note 18. 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.
System bottler case sales (BCS) represents PepsiCo-owned brands as well as
brands that we have been granted the right to produce, distribute and market
nationally and are sold by system bottlers.
21
Pepsi-Cola North America
% Change B/(W)
--------------
1999 1998 1997 1999 1998
- --------------------------------------------------------------------------------
Net Sales $3,005 $ 2,912 $ 2,727 3 7
Intercompany elimination (400) (1,523) (1,383) 74 (10)
======== ======== ========
Reported $2,605 $ 1,389 $ 1,344 88 3
======== ======== ========
Operating Profit
Repor $ 751 $ 732 $ 755 3 (3)
Ongoing $ 751 $ 738 $ 807 2 (9)
Ongoing excludes impairment and restructuring charges of $6 in 1998 and $52 in
1997 (see Notes 4 and 18).
- --------------------------------------------------------------------------------
1999 vs. 1998
- -------------
Reported net sales increased $1.2 billion, primarily due to the decrease in the
intercompany elimination of concentrate sales resulting from the deconsolidation
of the PBG, PBO and PepCom bottling operations. Before the elimination, net
sales increased $93 million reflecting higher concentrate pricing net of
increased customer support and increased royalty income associated with Aquafina
bottled water.
BCS increased nearly 2% led by Pepsi One, introduced late last year, mid
single-digit growth of our Mountain Dew brand and strong double-digit growth of
our Aquafina brand of bottled water. These gains were partially offset by
single-digit declines in Pepsi and Diet Pepsi brands. Concentrate shipments were
even with prior year.
Reported operating profit increased $19 million. Ongoing operating profit
increased $13 million primarily reflecting the increase in the net benefit of
the higher pricing and the increased royalty income. These increases were
partially offset by higher fountain related costs, increased A&M spending
related to bottler funding and other programs and higher G&A costs as a result
of costs associated with building our concentrate company infrastructure.
1998 vs. 1997
- -------------
Reported net sales increased $45 million. Before the elimination of intercompany
concentrate sales, net sales increased $185 million primarily reflecting higher
concentrate volume.
BCS increased 6%, led by the strong single-digit growth of the Mountain Dew
brand, contributions from Pepsi One and strong double-digit growth of Aquafina
bottled water and Lipton Brisk. Pepsi and Diet Pepsi brands also contributed to
the growth, both advancing at single-digit rates. Concentrate shipments
increased 5%.
Reported operating profit decreased $23 million. Ongoing operating profit
decreased $69 million primarily due to planned increases in A&M and higher G&A
costs. These increases were partially offset by the increased concentrate
volume. A&M expenses grew faster than sales and volume reflecting new product
launches, such as Pepsi One, and planned increases for Project Globe and Pop
Culture promotions. G&A costs grew due to higher costs associated with building
our fountain infrastructure.
22
Pepsi-Cola International
% Change B/(W)
----------------
1999 1998 1997 1999 1998
- --------------------------------------------------------------------------------
Net Sales $1,793 $1,691 $2,014 6 (16)
Intercompany elimination (22) (91) (79) 76 (15)
------- ------- -------
Reported $1,771 $1,600 $1,935 11 (17)
======= ======= =======
Operating Profit
Reported $ 108 $ 99 $ (67) 9 NM
Ongoing $ 108 $ 105 $ 64 3 64
Ongoing excludes impairment and restructuring charges of $6 in 1998 and $131 in
1997 (see Notes 4 and 18). NM - Not meaningful.
- --------------------------------------------------------------------------------
1999 vs. 1998
- -------------
Reported net sales increased $171 million which includes 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 $102 million. This advance reflects net contributions from
acquisitions/divestitures, higher volume and higher effective net pricing,
partially offset by a net unfavorable foreign currency impact. The net
unfavorable foreign currency impact, primarily in Brazil, Mexico, India and
Germany, reduced net sales by 3 percentage points.
BCS increased 1% primarily reflecting double-digit growth in China, strong
double-digit growth in Germany, Japan and Pakistan, and single-digit growth in
India and Saudi Arabia. These advances were partially offset by lower BCS in
Brazil, Russia, the Philippines and Thailand. Through December total concentrate
shipments to franchisees, including those former wholly-owned bottlers in which
we now own an equity interest, increased 2% while their BCS increased at a
slower rate.
Reported operating profit increased $9 million. Ongoing operating profit
increased $3 million reflecting volume gains and higher effective net pricing.
These gains were reduced by higher A&M, net losses from
acquisitions/divestitures and unfavorable foreign currency impact.
1998 vs. 1997
- -------------
Reported net sales decreased $335 million. Before the elimination of
intercompany concentrate sales, net sales decreased $323 million. This decline
was primarily due to the absence of Japan bottling sales in 1998 as a result of
the refranchising of our Japanese bottler late in 1997 and net unfavorable
foreign currency impact, partially offset by higher volume. The net unfavorable
foreign currency impact, primarily in Thailand and India, reduced net sales by 2
percentage points.
BCS increased 6% reflecting double-digit growth in Mexico, the Philippines,
India, Pakistan and China. In addition, BCS grew at a high double-digit rate in
Venezuela reflecting the continued momentum by the joint venture as it increased
its territories and capacity. These advances were partially offset by lower BCS
in Japan due to the elimination of certain PepsiCo-owned brands by the new
bottler Suntory. The PepsiCo-owned brands that continued to be sold by Suntory
grew at a double-digit rate. Total concentrate shipments to franchisees,
including those former wholly-owned bottlers in which we now own an equity
interest, increased 6% while their BCS increased at a slightly higher rate.
23
Reported operating profit increased $166 million. Ongoing operating profit
increased $41 million reflecting higher volume gains (reported by most of our
business units) and lower G&A expenses, due in part to savings from our 1996
restructuring. These gains were partially reduced by higher A&M.
Tropicana
- ---------
The standard measure of volume is four-gallon equivalent cases.
In its first full year as part of PepsiCo, net sales were $2.25 billion and
operating profit was $170 million for 1999. For the period August 26, 1998 (the
date of acquisition) through December 26, 1998, net sales were $722 million and
operating profit was $40 million. This 18 week period in 1998 was reported in
the fourth quarter and, therefore, is not comparable to the 16 week fourth
quarter of 1999. Including the impact of the additional two weeks in 1998, net
sales decreased 2% and operating profit increased 35%. On a comparable 16 week
basis, net sales and operating profit increased 10% and 55%, respectively.
Volume for the fiscal year 1999 increased 4%, led by an 8% increase in Tropicana
Pure Premium worldwide. Higher pricing taken to offset increases in the cost of
oranges, combined with volume growth, drove 1999 operating performance.
CONSOLIDATED CASH FLOWS
1999 vs. 1998
- -------------
Our 1999 consolidated cash and cash equivalents increased $653 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, and lower share
repurchase activity in 1999. In addition, cash and cash equivalents increased as
a result of net proceeds from long-term debt financings in 1999 primarily
related to the PBG separation, versus net payments in 1998. These comparative
increases were partially offset by net payments of short-term borrowings in
1999, primarily funded from amounts received from PBG, versus net short-term
borrowings in 1998 and the comparative impact of net maturities of short-term
investments in 1998.
1998 vs. 1997
- -------------
Our 1998 consolidated cash and cash equivalents decreased $1.6 billion compared
to a $1.6 billion increase in 1997. Excluding cash provided by discontinued
operations in 1997, the decrease in cash and cash equivalents was $1.6 billion
in 1998 compared with a $4.6 billion decrease in 1997. The change in cash flow
primarily reflects net proceeds from issuance of debt and the liquidation of
investment portfolios in 1998 compared to net debt repayments in 1997. These
cash inflows were primarily used to fund acquisitions and investments in
unconsolidated affiliates during the year. The acquisitions and investments in
unconsolidated affiliates include the purchases of Tropicana, the remaining
ownership interest in various bottlers, TSSC and various other international
salty snack food businesses.
24
Share Repurchases
- -----------------
Our share repurchase activity was as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Cost $1,285 $2,230 $2,459
Shares repurchased
Number of shares (in millions) 35.8 59.2 69.0
% of shares outstanding at beginning of year 2.4% 3.9% 4.5%
The current authorization for share repurchases granted by our Board of
Directors is $3 billion over the three year period from 1999 to 2001.
Liquidity and Capital Resources
We reduced our revolving credit facilities to $1.5 billion in 1999. Of the $4.75
billion as of year-end 1998, $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 $600 million facility expiring in
June of 2000 and a $900 million facility expiring in June of 2004. At
expiration, these facilities can be extended an additional year upon the mutual
consent of PepsiCo and the lending institutions. The credit facilities exist
largely to support issuances of short-term debt and remain unused at year-end
1999. At year-end 1999, $900 million of short-term borrowings were reclassified
as long-term, reflecting our intent and ability, through the existence of the
unused credit facilities, to refinance these borrowings.
As discussed in Note 2, 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
February and March of 1999, in preparation for the IPO, PBG and its principal
operating subsidiary, Bottling Group, LLC, incurred $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, long-term debt and deferred income taxes, and an increase
in investments in unconsolidated affiliates.
Our strong cash-generating capability and financial condition give us ready
access to capital markets throughout the world.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Included in Item 7, Management's Discussion and Analysis - Market Risk beginning
on page 10.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Information on page F-2.
25
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 following is a list of names, ages and background of our current
executive officers:
Roger A. Enrico, 55, is our Chairman of the Board and Chief Executive Officer.
Mr. Enrico was elected as PepsiCo's Chief Executive Officer in April, 1996 and
as Chairman of the Board in November, 1996, after serving as Vice Chairman since
1993. Mr. Enrico, who joined PepsiCo in 1971, became President and Chief
Executive Officer of Pepsi-Cola USA in 1983, President and Chief Executive
Officer of PepsiCo Worldwide Beverages in 1986, and Chairman and Chief Executive
Officer of Frito-Lay, Inc. in 1991. Mr. Enrico served as Chairman and Chief
Executive Officer of PepsiCo Worldwide Foods from 1992 to 1994 and as Chairman
and Chief Executive Officer, PepsiCo Worldwide Restaurants from 1994 to 1997.
Steven S Reinemund, 51, is our President and Chief Operating Officer. Mr.
Reinemund was appointed President and Chief Operating Officer in September 1999.
He began his career with PepsiCo as Senior Operating Officer of Pizza Hut, Inc.
(a former subsidiary of the Company) in 1984. He became President and Chief
Executive Officer of Pizza Hut in 1986, and President and Chief Executive
Officer of Pizza Hut Worldwide in 1991. In 1992, Mr. Reinemund became President
and Chief Executive Officer of Frito-Lay. He became Chairman and Chief Executive
Officer of the Frito-Lay Company in 1996.
Matthew M. McKenna, 49, is our Senior Vice President and Treasurer. Previously,
he was Senior Vice President, Taxes. Prior to joining PepsiCo in 1993 as Vice
President, Taxes, he was a partner with the law firm Winthrop, Stimson, Putnam &
Roberts in New York.
Lionel L. Nowell III, 46, is our Senior Vice President and Controller. Prior to
joining PepsiCo, he was Senior Vice President, Strategy and Business Development
for RJR Nabisco, Inc. From 1991 to 1998, he served as Chief Financial Officer of
Pillsbury North America, and its Pillsbury Foodservice and Haagen Dazs units. He
also served as Vice President and Controller of the Pillsbury Company, Vice
President of Food and International Retailing Audit and Director of Internal
Audit.
Indra K. Nooyi, 44, is our Senior Vice President and Chief Financial Officer.
She joined PepsiCo in 1994 as Senior Vice President, Corporate Strategy and
Development. Prior to joining PepsiCo, she was Senior Vice President of
Strategy, Planning and Strategic Markets for Asea Brown Boveri. She was also
Vice President and Director of Corporate Strategy and Planning at Motorola.
Robert F. Sharpe, Jr., 48, is our Senior Vice President, Public Affairs, General
Counsel, and Secretary. He joined PepsiCo in January, 1998 as Senior Vice
President, General Counsel and Secretary. Mr. Sharpe was Senior Vice President
and General Counsel of RJR Nabisco Holdings Corp. from 1996 until 1998. He was
previously Vice President, Tyco International Ltd. from 1994 to 1996 and Vice
President, Assistant General Counsel and Secretary of RJR Nabisco Holdings Corp.
and RJR Nabisco, Inc. from 1989 to 1994.
26
Karl M. von der Heyden, 63, is our Vice Chairman of the Board. He also served as
Chief Financial Officer from September 1996 until March 1998. He served as
President and Chief Executive Officer of Metallgesellshaft Corp. from 1993
through 1994 and was Chairman and Chief Executive Officer of RJR Nabisco from
March through May 1993 and Chief Financial Officer from 1989 to 1993.
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.
The name, age and background of each of the Company's directors
nominated for election are contained under the caption "Election of Directors"
in the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders and
are incorporated herein by reference.
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 2000 Annual
Meeting of Shareholders under the captions "Directors Compensation" and
"Executive Compensation", respectively, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information on the number of shares of PepsiCo Capital Stock
beneficially owned by each director and by all directors and officers as a group
is contained under the caption "Ownership of Capital Stock by Directors and
Executive Officers" in the Company's Proxy Statement for its 2000 Annual Meeting
of Shareholders and is incorporated herein by reference. As far as is known to
the Company, no person beneficially owns 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-2.
2. Exhibits
See Index to Exhibits on page E-1.
(b) Reports on Form 8-K
None.
27
S-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 21, 2000
PepsiCo, Inc.
By: __________________________
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
/S/ ROGER A. ENRICO Chairman of the Board and March 21, 2000
Roger A. Enrico Chief Executive Officer
/S/INDRA K. NOOYI Senior Vice President March 21, 2000
Indra K. Nooyi Chief Financial Officer
/S/ LIONEL L. NOWELL III Senior Vice President and March 21, 2000
Lionel L. Nowell III Controller (Principal
Accounting Officer)
/S/ KARL M. VON DER HEYDEN Vice Chairman of the Board March 21, 2000
Karl M. von der Heyden
/S/JOHN F. AKERS Director March 21, 2000
John F. Akers
/S/ ROBERT E. ALLEN Director March 21, 2000
Robert E. Allen
/S/ PETER FOY Director March 21, 2000
Peter Foy
/S/ RAY L. HUNT Director March 21, 2000
Ray L. Hunt
S-1
/S/ ARTHUR C. MARTINEZ Director March 21, 2000
Arthur C. Martinez
/S/ JOHN J. MURPHY Director March 21, 2000
John J. Murphy
/S/ FRANKLIN D. RAINES Director March 21, 2000
Franklin D. Raines
/S/ STEVEN S REINEMUND President and Chief March 21, 2000
Steven S Reinemund Operating Officer and
Director
/S/ SHARON PERCY ROCKEFELLER Director March 21, 2000
Sharon Percy Rockefeller
/S/ FRANKLIN A. THOMAS Director March 21, 2000
Franklin A. Thomas
/S/ P. ROY VAGELOS Director March 21, 2000
P. Roy Vagelos
/S/ ARNOLD R. WEBER Director March 21, 2000
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 to 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 March 16, 2000.
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 onsolidated 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 to Post-Effective
Amendment No. 2 to PepsiCo's Registration Statement on Form S-8
(Registration No. 33-22970).
10.2 PepsiCo, Inc. 1987 Incentive Plan (the "1987 Plan"), as amended
and restated, effective as of October 1, 1999.
10.3 Operating Guideline No. 1 under the 1987 Plan, as amended through
July 25, 1991, which is incorporated by reference to Exhibit 10(d)
to PepsiCo's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.4 Operating Guideline No. 2 under the 1987 Plan and the Plan, as
amended through January 22, 1987, which is incorporated herein
by reference to Exhibit 28(b) to PepsiCo's Registration Statement
on Form S-8 (Registration No. 33-19539).
10.6 PepsiCo, Inc. 1994 Long-Term Incentive Plan, as amended and restated,
effective as of October 1, 1999.
10.7 PepsiCo, Inc. Executive Incentive Compensation Plan, which is
incorporated herein by reference to Exhibit B to PepsiCo's Proxy
Statement for its 1994 Annual Meeting of Shareholders.
10.8 Amended and Restated PepsiCo Executive Income Deferral Program
which is incorporated herein by reference to PepsiCo's Annual
Report on Form 10-K for the fiscal year ended December 27, 1997.
10.9 Restated PepsiCo Pension Equalization Plan, which is incorporated
herein by reference to PepsiCo's Annual Report on Form 10-K for
the fiscal year ended December 27, 1997.
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of PepsiCo, Inc.
E-1
23 Report and Consent of KPMG LLP.
24.1 Power of Attorney executed by Roger A. Enrico, Lionel L.
Nowell III, Indra K. Nooyi, , John F. Akers, Robert E. Allen,
Peter Foy, Ray L. Hunt, Arthur C. Martinez, John J. Murphy,
Franklin D. Raines, Steve S Reinemund, Sharon Percy
Rockerfeller, Franklin A. Thomas, P. Roy Vagelos, Karl M. von
der Heyden and Arnold R. Weber.
24.2 Power of Attorney executed by Cynthia M. Trudell.
24.3 Power of Attorney executed by Solomon D. Trujillo.
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 25, 1999
PEPSICO, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
Item 14(a)(1)
Page
Reference
-----------
Item 14(a)(1) Financial Statements
Consolidated Statement of Income for the fiscal years ended
December 25, 1999, December 26, 1998 and December 27, 1997......... F-3
Consolidated Statement of Cash Flows for the fiscal years ended
December 25, 1999, December 26, 1998 and December 27, 1997......... F-4 - F-5
Consolidated Balance Sheet at December 25, 1999 and December 26,
1998............................................................... F-6
Consolidated Statement of Shareholders' Equity for the fiscal years
ended December 25, 1999, December 26, 1998 and December 27, 1997.... F-7 - F-8
Notes to Consolidated Financial Statements.......................... F-9 - F-40
Management's Responsibility for Financial Statements................ F-41
Report of Independent Auditors, KPMG LLP............................ F-42
Selected Financial Data............................................. F-43
All other financial statements and schedules have been omitted since the
required information is not applicable or is included in Item 14(a)(1) Financial
Statements.
F-2
Consolidated Statement of Income
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
1999 1998 1997
- ---------------------------------------------------------------------------------
Net Sales
New PepsiCo................................. $18,244 $14,686 $13,655
Bottling operations......................... 2,123 7,662 7,262
-------- -------- --------
Total Net Sales............................. 20,367 22,348 20,917
Costs and Expenses
Cost of sales............................... 8,198 9,330 8,525
Selling, general and administrative expenses 9,103 9,924 9,241
Amortization of intangible assets........... 183 222 199
Impairment and restructuring charges........ 65 288 290
-------- -------- --------
Total Costs and Expenses.................... 17,549 19,764 18,255
Operating Profit
New PepsiCo................................. 2,765 2,460 2,252
Bottling operations and equity investments.. 53 124 410
-------- -------- --------
Total Operating Profit...................... 2,818 2,584 2,662
Bottling equity income, net................. 83 - -
Gain on bottling transactions............... 1,000 - -
Interest expense............................ (363) (395) (478)
Interest income............................. 118 74 125
-------- -------- --------
Income from Continuing Operations
Before Income Taxes....................... 3,656 2,263 2,309
Provision for Income Taxes.................. 1,606 270 818
-------- -------- --------
Income from Continuing Operations........... 2,050 1,993 1,491
Income from Discontinued Operations, net of
tax........................................ - - 651
-------- -------- --------
Net Income.................................. $ 2,050 $ 1,993 $ 2,142
======== ======== ========
Income Per Share - Basic
Continuing Operations....................... $ 1.40 $ 1.35 $ 0.98
Discontinued Operations..................... - - 0.42
======== ======== ========
Net Income ................................ $ 1.40 $ 1.35 $ 1.40
======== ======== ========
Average shares outstanding.................. 1,466 1,480 1,528
Income Per Share - Assuming Dilution
Continuing Operations....................... $ 1.37 $ 1.31 $ 0.95
Discontinued Operations..................... - - 0.41
======== ======== ========
Net Income.................................. $ 1.37 $ 1.31 $ 1.36
======== ======== ========
Average shares outstanding.................. 1,496 1,519 1,570
- ---------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-3
Consolidated Statement of Cash Flows
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
1999 1998 1997
- ------------------------------------------------------------------------------------
Operating Activities
Income from continuing operations................. $ 2,050 $ 1,993 $ 1,491
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities
Gain on bottling transactions................. (1,000) - -
Bottling equity income, net................... (83) - -
Depreciation and amortization................. 1,032 1,234 1,106
Noncash portion of 1998 income tax benefit.... - (259) -
Noncash portion of impairment and
restructuring charges........................ 37 254 233
Deferred income taxes......................... 529 150 51
Other noncash charges and credits, net........ 364 237 342
Changes in operating working capital,
excluding effects of acquisitions and
dispositions
Accounts and notes receivable............. (149) (104) (53)
Inventories............................... (186) 29 79
Prepaid expenses and other current
assets................................... (203) (12) (56)
Accounts payable and other current
liabilities.............................. 310 (195) 84
Income taxes payable...................... 326 (116) 142
-------- ------- --------
Net change in operating working capital...... 98 (398) 196
-------- ------- --------
Net Cash Provided by Operating Activities......... 3,027 3,211 3,419
-------- ------- --------
Investing Activities
Capital spending.................................. (1,118) (1,405) (1,506)
Acquisitions and investments in unconsolidated
affiliates....................................... (430) (4,537) (119)
Sales of businesses............................... 499 17 221
Sales of property, plant and equipment............ 126 134 80
Short-term investments, by original maturity
More than three months-purchases.............. (2,025) (525) (92)
More than three months-maturities............. 2,008 584 177
Three months or less, net..................... 12 839 (735)
Other, net........................................ (144) (126) (96)
-------- ------- --------
Net Cash Used for Investing Activities............ (1,072) (5,019) (2,070)
-------- ------- --------
- ------------------------------------------------------------------------------------
(Continued on following page)
F-4
Consolidated Statement of Cash Flows
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
1999 1998 1997
- -----------------------------------------------------------------------------------
Financing Activities
Proceeds from issuances of long-term debt....... 3,480 990 -
Payments of long-term debt...................... (1,123) (2,277) (1,875)
Short-term borrowings, by original maturity
More than three months-proceeds............. 3,691 2,713 146
More than three months-payments............. (2,741) (417) (177)
Three months or less, net................... (2,856) 1,753 (1,269)
Cash dividends paid............................. (778) (757) (736)
Share repurchases............................... (1,285) (2,230) (2,459)
Proceeds from exercises of stock options........ 308 415 403
Other, net...................................... - - 5
------- ------- --------
Net Cash (Used for) Provided by Financing
Activities..................................... (1,304) 190 (5,962)
------- ------- --------
Net Cash Provided by Discontinued Operations.... - - 6,236
Effect of Exchange Rate Changes on Cash and
Cash Equivalents............................... 2 1 (2)
------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................... 653 (1,617) 1,621
Cash and Cash Equivalents - Beginning of Year... 311 1,928 307
------- ------- --------
Cash and Cash Equivalents - End of Year......... $ 964 $ 311 $ 1,928
======= ======= ========
- -----------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid................................... $ 321 $ 367 $ 462
Income taxes paid............................... $ 525 $ 521 $ 696
Schedule of Noncash Investing and Financing
Activities
Fair value of assets acquired................... $ 717 $ 5,359 $ 160
Cash paid and stock issued...................... (438) (4,537) (134)
------- ------- --------
Liabilities assumed............................. $ 279 $ 822 $ 26
======= ======= ========
- -----------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-5
Consolidated Balance Sheet
(in millions except per share amount)
PepsiCo, Inc. and Subsidiaries
December 25, 1999 and December 26, 1998
1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents............................. $ 964 $ 311
Short-term investments, at cost....................... 92 83
-------- --------
1,056 394
Accounts and notes receivable, net.................... 1,704 2,453
Inventories........................................... 899 1,016
Prepaid expenses and other current assets............. 514 499
-------- --------
Total Current Assets.............................. 4,173 4,362
Property, Plant and Equipment, net.................... 5,266 7,318
Intangible Assets, net................................ 4,735 8,996
Investments in Unconsolidated Affiliates.............. 2,846 1,396
Other Assets.......................................... 531 588
-------- --------
Total Assets.................................... $17,551 $22,660
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings................................. $ 233 $ 3,921
Accounts payable and other current liabilities........ 3,399 3,870
Income taxes payable.................................. 156 123
-------- --------
Total Current Liabilities......................... 3,788 7,914
Long-Term Debt........................................ 2,812 4,028
Other Liabilities..................................... 2,861 2,314
Deferred Income Taxes................................. 1,209 2,003
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........................ 1,081 1,166
Retained earnings..................................... 14,066 12,800
Accumulated other comprehensive loss.................. (989) (1,059)
-------- --------
14,187 12,936
Less: repurchased shares, at cost:
271 shares in 1999 and 255 shares in 1998........... (7,306) (6,535)
-------- --------
Total Shareholders' Equity....................... 6,881 6,401
-------- --------
Total Liabilities and Shareholders' Equity..... $17,551 $22,660
======== ========
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-6
Consolidated Statement of Shareholders' Equity
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
Capital Stock
----------------------------------------------
Net Out-
Issued Repurchased standing
----------------- ----------------
Shares Amount Shares Amount Shares
- --------------------------------------------------------------------------------------
Shareholders' Equity, December 28,
1996.................................. 1,726 $29 (181) $(3,023) 1,545
----------------------------------------------
1997 Net income...................... - - - - -
Currency translation adjustment...... - - - - -
Comprehensive income...............
Cash dividends declared.............. - - - - -
Share repurchases.................... - - (69) (2,459) (69)
Stock option exercises, including
tax benefit......................... - - 25 488 25
Spin-off of restaurant businesses.... - - - - -
Other................................ - - 1 8 1
----------------------------------------------
Shareholders' Equity, December 27,
1997.................................. 1,726 29 (224) (4,986) 1,502
----------------------------------------------
1998 Net income...................... - - - - -
Currency translation adjustment...... - - - - -
CTA reclassification adjustment...... - - - - -
Minimum pension liability adjustment
(net of tax benefit of $11)......... - - - - -
Comprehensive income...............
Cash dividends declared.............. - - - - -
Share repurchases.................... - - (59) (2,230) (59)
Stock option exercises, including
tax benefit......................... - - 28 675 28
Other................................ - - - 6 -
----------------------------------------------
Shareholders' Equity, December 26,
1998.................................. 1,726 29 (255) (6,535) 1,471
----------------------------------------------
1999 Net income...................... - - - - -
Currency translation adjustment...... - - - - -
CTA reclassification adjustment...... - - - - -
Minimum pension liability adjustment
(net of tax of $9).................. - - - - -
Other comprehensive income........... - - - - -
Comprehensive income...............
Cash dividends declared.............. - - - - -
Share repurchases.................... - - (36) (1,285) (36)
Stock option exercises, including
tax benefit......................... - - 20 514 20
Other................................ - - - - -
----------------------------------------------
Shareholders' Equity, December 25,
1999.................................. 1,726 $29 (271) $(7,306) 1,455
==============================================
- ---------------------------------------------------------------------------------------
(Continued on following page)
F-7
Consolidated Statement of Shareholders' Equity
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
Capital Accumulated Total
in Other Currency
Excess of Retained Comprehensive Translation
Par Value Earnings Loss Total Adjustment
- ---------------------------------------------------------------------------------------------
Shareholders' Equity, December 28,
1996.................................. $1,201 $ 9,184 $ (768) $ 6,623 $ (768)
-----------------------------------------------------
1997 Net income...................... - 2,142 - 2,142
Currency translation adjustment...... - - (220) (220) (220)
-------
Comprehensive income............... 1,922
Cash dividends declared.............. - (746) - (746)
Share repurchases.................... - - - (2,459)
Stock option exercises, including
tax benefit......................... 88 - - 576
Spin-off of restaurant businesses.... - 987 - 987
Other................................ 25 - - 33
-----------------------------------------------------
Shareholders' Equity, December 27,
1997.................................. 1,314 11,567 (988) 6,936 (988)
-----------------------------------------------------
1998 Net income...................... - 1,993 - 1,993
Currency translation adjustment...... - - (75) (75) (75)
CTA reclassification adjustment...... - - 24 24 24
Minimum pension liability adjustment
(net of tax benefit of $11)......... - - (20) (20)
-------
Comprehensive income............... 1,922
Cash dividends declared.............. - (760) - (760)
Share repurchases.................... - - - (2,230)
Stock option exercises, including....
tax benefit......................... (151) - - 524
Other................................ 3 - - 9
-----------------------------------------------------
Shareholders' Equity, December 26,
1998.................................. 1,166 12,800 (1,059) 6,401 (1,039)
-----------------------------------------------------
1999 Net income...................... - 2,050 - 2,050
Currency translation adjustment...... - - (121) (121) (121)
CTA reclassification adjustment...... - - 175 175 175
Minimum pension liability adjustment
(net of tax of $9).................. - - 17 17
Other comprehensive income........... - - (1) (1)
-------
Comprehensive income............... 2,120
Cash dividends declared.............. - (784) - (784)
Share repurchases.................... - - - (1,285)
Stock option exercises, including
tax benefit......................... (131) - - 383
Other................................ 46 - - 46
-----------------------------------------------------
Shareholders' Equity, December 25,
1999.................................. $1,081 $14,066 $ (989) $ 6,881 $ (985)
=====================================================
- ---------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-8
Notes to Consolidated Financial Statements
(tabular dollars in millions except per share amounts; all per share
amounts assume dilution)
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, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. Actual results
could differ from these estimates.
Items Affecting Comparability
Certain reclassifications were made to the 1998 and 1997 amounts to conform to
the 1999 presentation, particularly the segment reclassifications resulting from
the 1999 reorganization of our Pepsi-Cola business described in Note 18. As a
result of the 1999 bottling transactions described in Note 2, certain bottling
operations that were previously consolidated are now accounted for under the
equity method. Therefore, the consolidated financial statements subsequent to
the bottling transactions are not comparable to the consolidated financial
statements presented for prior periods. In addition, the third quarter 1998
acquisition of Tropicana described in Note 3 affects comparability.
Principles of Consolidation
The financial statements include the consolidated accounts of PepsiCo, Inc. and
its controlled affiliates. Intercompany balances and transactions have been
eliminated. Investments in unconsolidated affiliates, over which we exercise
significant influence, but not control, are accounted for by the equity method.
Accordingly, our share of the net income or loss of such unconsolidated
affiliates is included in consolidated net income.
Issuances of Subsidiary Stock
The issuance of stock by one of our subsidiaries to third parties reduces our
proportionate ownership interest in the subsidiary. Unless the issuance of such
stock is part of a broader corporate reorganization, we recognize a gain or
loss, equal to the difference between the issuance price per share and our
carrying amount per share. Such gain or loss, net of the related tax, is
recognized in consolidated net income when the transaction occurs.
Revenue Recognition
We recognize revenue when products are delivered to customers. Sales terms
generally do not allow a right to return.
Marketing Costs
Marketing costs are reported in selling, general and administrative expenses and
include costs of advertising and other marketing activities. Advertising
expenses were $1.8 billion in 1999, $1.9 billion in 1998 and $1.8 billion in
1997. Deferred advertising expense, classified as prepaid expenses in the
Consolidated Balance Sheet, was $30 million in 1999 and $34 million in 1998.
Deferred advertising costs are expensed in the year first used and consist of:
o media and personal service prepayments,
o promotional materials in inventory, and
o production costs of future media advertising.
F-9
Stock-Based Compensation
We measure stock-based compensation cost as the excess of the quoted market
price of PepsiCo Capital Stock at the grant date over the amount the employee
must pay for the stock (exercise price). Our policy is to generally grant stock
options with an exercise price equal to the stock price at the date of grant and
accordingly, no compensation cost is recognized. Under our incentive programs,
compensation cost for performance share units granted and for cash payments
expected to be paid to employees in lieu of stock options is based on the grant
date value and recognized over the vesting period of the award.
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. If
an interest rate swap position were 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.
However, if the underlying debt instrument were to be settled prior to maturity,
the gain or loss realized upon termination would be recognized immediately.
The differential to be paid or received on a currency swap related to non-U.S.
dollar denominated debt is charged or credited to selling, general and
administrative expenses as the differential occurs. This is fully offset by the
corresponding gain or loss recognized 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 were to be terminated prior to maturity, the gain or
loss realized upon termination would be immediately recognized in selling,
general and administrative expenses.
Gains and losses on futures contracts designated as hedges of future commodity
purchases are deferred in the Consolidated Balance Sheet under the appropriate
current asset or liability caption and included in the cost of the hedged
commodity when purchased. Changes in the value of such contracts used to hedge
commodity purchases are highly correlated to the changes in the value of the
purchased commodity. Subsequent changes in the value of such contracts that
cease to be highly correlated or changes in the value of futures contracts not
designated as hedges would be recognized in cost of sales immediately. If a
futures contract designated as a hedge were to be terminated, the gain or loss
realized upon termination would be included in the cost of the hedged commodity
when purchased.
Prepaid forward contracts for the purchase of PepsiCo Capital Stock are
reflected in the Consolidated Balance Sheet at fair value as a prepaid expense.
Changes in fair value of these contracts are recognized as interest expense.
The cash flows related to the above derivative instruments are classified in the
Consolidated Statement of Cash Flows in a manner consistent with those of the
transactions being hedged.
Cash Equivalents
Cash equivalents represent funds temporarily invested with original maturities
of three months or less. All other investment portfolios 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.
F-10
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated on
a straight-line basis. Buildings and improvements are depreciated over their
estimated useful lives, generally ranging from 20 to 50 years. Machinery and
equipment (including fleet) are depreciated over their estimated useful lives,
generally ranging from 2 to 10 years.
Intangible Assets
Goodwill, the excess of our investments in unconsolidated affiliates over our
equity in the underlying assets of these investments, and reacquired franchise
rights are amortized on a straight-line basis over their estimated useful lives,
generally ranging from 20 to 40 years. Trademarks and other identifiable
intangibles are amortized on a straight-line basis over their estimated useful
lives, generally ranging from 20 to 40 years.
Recoverability of Long-Lived Assets to be Held and Used in the Business
All long-lived assets, including goodwill, investments in unconsolidated
affiliates and other identifiable intangibles, are evaluated for impairment on
the basis of undiscounted cash flows whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impaired asset is written down to its estimated fair market value based on the
best information available. Estimated fair market value is generally measured by
discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows.
The depreciation or amortization periods for long-lived assets to be held and
used are periodically evaluated to determine whether events or circumstances
have occurred that warrant revision.
Accounting Changes
As of December 28, 1997, we adopted Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, issued by
The American Institute of Certified Public Accountants in March 1998. The amount
capitalized under the SOP was $52 million in 1999 and $42 million in 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 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 adoption will have on our consolidated financial
statements.
Note 2 - Investments in Unconsolidated Affiliates
Investments in Unconsolidated Affiliates
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 (PBG).
On April 6, 1999, PBG completed the sale of 100 million shares of its
F-11
common stock at $23 per share through an initial public offering with PepsiCo
retaining a direct 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.
On May 20, 1999, we combined certain bottling operations in the midwestern
United States and Central Europe (PBO) 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, Pepsi Bottling Venture LLC, 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.
On October 15, 1999, we formed a business venture with Pohlad Companies, a
Pepsi-Cola franchisee, combining bottling businesses in Puerto Rico and parts of
the southeastern and midwestern United States. Pohlad Companies contributed its
interests in Dakota Beverage Company, Delta Beverage Group, Inc. (Delta) and
Pepsi-Cola Puerto Rico Bottling Company (PPR). We contributed our interests in
Delta and PPR as well as 2.2 million shares of PepsiCo Capital Stock in exchange
for a 33% noncontrolling interest in the venture. As a result, we have a
noncontrolling ownership interest of approximately 24% in the venture's
principal operating subsidiary, PepsiAmericas, Inc., a publicly traded
corporation. The Pohlad transaction was structured as a fair value exchange with
no resulting gain or loss.
Pepsi Bottling Group
The Pepsi Bottling Group, Inc. is the world's largest manufacturer, distributor
and seller of carbonated and non-carbonated Pepsi-Cola beverages and operates
under master bottling agreements with us. In addition to approximately 37% of
PBG's outstanding common stock that we now own, we own 100% of PBG's class B
common stock and approximately 7% of the equity of Bottling Group, LLC, PBG's
principal operating subsidiary. This gives us economic ownership of
approximately 40% of PBG's combined operations. We account for our investment
using the equity method.
PBG's summarized full year 1999 and 1998 financial information is as follows:
1999 1998
- ---------------------------------------------
Current assets......... $1,493 $1,318
Noncurrent assets...... 6,126 6,004
------- -------
Total assets......... $7,619 $7,322
======= =======
Current liabilities.... $ 947 $1,025
Noncurrent liabilities. 4,831 6,535
Minority interest...... 278 -
------- -------
Total liabilities.... $6,056 $7,560
======= =======
Our equity investment.. $ 829 $ -
======= =======
F-12
1999 1998 1997
- -------------------------------------------------------
Net sales.............. $7,505 $7,041 $6,592
Gross profit........... $3,209 $2,860 $2,760
Operating profit....... $ 412 $ 55 $ 335
Net income (loss)...... $ 118 $ (146) $ 59
The net assets transferred to PBG as of April 6, 1999, primarily consisted of
the following:
1999
- -------------------------------------------------------
Property, plant and equipment, net.......... $2,106
Goodwill, net............................... $1,097
Reacquired franchise rights and other
intangibles, net............................ $2,734
Long-term debt.............................. $3,306
Deferred income taxes....................... $1,218
Based upon the quoted closing price of PBG shares at year-end 1999, the
calculated market value of our direct investment in PBG, excluding our
investment in Bottling Group, LLC, was approximately $887 million.
Whitman
Whitman manufactures, distributes and sells carbonated and non-carbonated
Pepsi-Cola beverages and operates under master bottling agreements with us. We
now own approximately 40% of Whitman common stock and account for our investment
using the equity method.
Whitman's summarized full year 1999 financial information is as follows:
1999
- ------------------------------------
Current assets......... $ 538
Noncurrent assets...... 2,326
--------
Total assets......... $2,864
========
Current liabilities.... $ 739
Noncurrent liabilities. 983
--------
Total liabilities.... $1,722
========
Our equity investment.. $ 668
========
1999
- ----------------------------------------
Net sales.................... $2,138
Gross profit................. $ 890
Operating profit............. $ 182
Income from continuing
operations.................. $ 43
Net loss..................... $ (9)
Comparable prior year information for Whitman is not available.
The excess of our investment in new Whitman over our equity in the underlying
net assets, net of amortization, was approximately $234 million at year-end
1999. Based upon the quoted closing price of Whitman shares at year-end 1999,
the calculated market value of our investment in Whitman was approximately $740
million.
F-13
Other Equity Investments
Summarized financial information, in the aggregate, regarding our principal
equity investments, other than PBG and Whitman, follows. Information is
presented in the aggregate and generally from the acquisition date.
1999 1998
- -------------------------------------------------
Current assets............. $1,173 $ 901
Noncurrent assets.......... 2,539 2,037
-------- -------
Total assets............. $3,712 $2,938
======== =======
Current liabilities........ $1,168 $1,125
Noncurrent liabilities..... 664 170
Minority interest.......... 36 -
-------- -------
Total liabilities........ $1,868 $1,295
======== =======
Our related equity
investments................ $1,054 $ 768
======== =======
1999 1998 1997
- ----------------------------------------------------------
Net sales.................. $3,754 $3,071 $2,713
Gross profit............... $1,721 $1,360 $1,242
Operating profit........... $ 89 $ 101 $ 166
Net (loss) income.......... $ (10) $ 22 $ 103
Related Party Transactions
Our significant related party transactions involve our investments in
unconsolidated bottling affiliates. We sell concentrate to these affiliates that
is used in the production of carbonated soft drinks and non-carbonated
beverages. They purchase sweeteners and certain other raw materials through us.
The raw material purchases on behalf of these bottling affiliates, related
payments to suppliers and collections from the bottlers are not reflected in our
consolidated financial statements. We also provide certain administrative and
other services to these bottling affiliates under negotiated fee arrangements.
Further, because we share a business objective with these bottling affiliates of
increasing the availability and consumption of Pepsi-Cola beverages, we provide
various forms of marketing support to or on behalf of them to promote our
beverages. This support covers a variety of initiatives, including marketplace
support, marketing programs, capital equipment investment and shared media
expense. Based on the objective of the programs and initiatives, we record
marketing support as an adjustment to net revenues or as selling, general and
administrative expense.
These transactions with our unconsolidated bottling affiliates are reflected in
the Consolidated Statement of Income as follows:
1999 1998 1997
- -------------------------------------------------------------------
Net revenues............................ $1,779 $576 $538
Selling, general and administrative
expenses............................... $ 554 $169 $153
As of December 25, 1999, the receivables from these bottling affiliates are $93
million and payables to these affiliates are $131 million. Such amounts are
settled in terms consistent with other trade receivable and payable terms. See
Note 13 regarding our guarantee of PBG related debt.
F-14
Note 3 - Acquisitions
During 1999, we made acquisitions, primarily investments in various bottlers
including investments in unconsolidated affiliates, which aggregated $430
million in cash.
During 1998, we completed the acquisitions of Tropicana Products, Inc. from The
Seagram Company Ltd. for $3.3 billion in cash and The Smith's Snackfoods Company
(TSSC) in Australia from United Biscuits Holdings plc for $270 million in cash.
In addition during 1998, acquisitions and investments in unconsolidated
affiliates included the remaining ownership interest in various bottlers and
purchases of various other international salty snack food businesses.
Acquisitions for 1998 aggregated $4.5 billion in cash.
The results of operations of acquisitions are generally included in the
consolidated financial statements from their respective dates of acquisition.
The acquisitions were accounted for under the purchase method. The purchase
prices have been allocated based on the estimated fair value of the assets
acquired and liabilities assumed. The excess purchase prices over the fair
values of the net assets acquired of approximately $310 million in 1999 and $3.2
billion in 1998 were allocated to goodwill.
Unaudited Tropicana Pro Forma
The following table presents the unaudited pro forma combined results of PepsiCo
and Tropicana as if the acquisition had occurred at the beginning of our fiscal
years 1998 and 1997. The aggregate impact of other acquisitions in these periods
was not material to our net sales, income or income per share from continuing
operations.
Unaudited
-------------------
1998 1997
-------------------
Net sales $23,674 $22,851
Income from continuing operations $ 1,939 $ 1,427
Income per share from continuing
operations $ 1.28 $ 0.91
The pro forma amounts include the amortization of the goodwill arising from the
allocation of the purchase price and interest expense on the debt issued to
finance the purchase. The pro forma information does not necessarily present
what the combined results would have been for these periods and is not intended
to be indicative of future results.
F-15
Note 4 - Asset Impairment and Restructuring
1999 1998 1997
- ----------------------------------------------------------------------
Asset impairment charges
Held and used in the business
Property, plant and equipment........... $ 8 $ 149 $ 5
Intangible assets....................... - 37 -
Other assets............................ - 14 -
Held for disposal/abandonment
Property, plant and equipment........... 29 54 111
Investments in unconsolidated affiliates - - 21
Net assets of business units............ - - 63
------ ------ ------
Total asset impairment................ 37 254 200
Restructuring charges
Employee related costs.................... 19 24 55
Other charges............................. 9 10 35
------ ------ ------
Total restructuring................... 28 34 90
------ ------ ------
Total..................................... $ 65 $ 288 $ 290
====== ====== ======
After-tax.............................. $ 40 $ 261 $ 239
====== ====== ======
Per share.............................. $0.03 $0.17 $0.15
====== ====== ======
Impairment by segment
1999 1998 1997
- -----------------------------------------------------------------------
Frito-Lay North America................... $37 $ 54 $ 8
Frito-Lay International................... - - 30
Pepsi-Cola North America.................. - - 52
Pepsi-Cola International.................. - 6 105
------ ------ ------
Combined segments......................... 37 60 195
Bottling operations....................... - 194 5
------ ------ ------
$37 $254 $200
====== ====== ======
1999
The 1999 asset impairment and restructuring charge of $65 million recognized in
the first quarter relates to the closure of three plants and impairment of
equipment at Frito-Lay North America. This charge was the second phase of a
productivity improvement plan developed in the fourth quarter of 1998. The plan
included the consolidation of U.S. production to newer and more efficient plants
and streamlining logistics and transportation systems.
F-16
The asset impairment charges primarily reflect the reduction in the carrying
value of the land and buildings to their estimated fair market value based on
current selling prices for comparable real estate, less costs to sell, and the
write off of the net book value of equipment which cannot be redeployed. The
plant closures were completed during 1999. The majority of these assets were
either disposed of or abandoned in 1999. The restructuring charges of $28
million primarily included severance costs for approximately 860 employees and
plant closing costs. Substantially all of the terminations occurred during 1999.
1998
The 1998 asset impairment and restructuring charges of $288 million were
comprised of the following:
o A charge of $218 million for asset impairment of $200 million and
restructuring charges of $18 million related to our Russian bottling
operations. The economic turmoil in Russia which accompanied the August 1998
devaluation of the ruble adversely impacted our operations. Consequently, we
experienced a significant drop in demand, resulting in lower net sales and
increased operating losses. Also, since net bottling sales in Russia were
denominated in rubles, whereas a substantial portion of our related costs and
expenses were denominated in U.S. dollars, bottling operating margins were
further eroded. In response to these conditions, we reduced our cost
structure primarily through closing facilities, renegotiating manufacturing
contracts and reducing the number of employees. We also evaluated our
long-lived bottling assets for impairment, triggered by the reduction in
utilization of assets caused by the lower demand, the adverse change in the
business climate and the expected continuation of operating losses and cash
deficits in that market. The impairment charge reduced the net book value of
the assets to their estimated fair market value, based primarily on amounts
recently paid for similar assets in that marketplace. Of the total charge of
$218 million, $212 million related to bottling operations that became part of
PBG in 1999 (see Note 2).
o An impairment charge of $54 million related to manufacturing equipment at
Frito-Lay North America. As part of our annual assessment of marketing plans
and related capacity requirements at Frito-Lay North America and the
development of a program to improve manufacturing productivity, we determined
that certain product specific equipment would not be utilized and certain
capital projects would be terminated to avoid production redundancies. The
charge primarily reflected the write off of the net book value of the
equipment and related projects. Disposal or abandonment of these assets was
completed in 1999.
o A charge of $16 million for employee related costs resulting from the
separation of Pepsi-Cola North America's concentrate and bottling
organizations to more effectively serve retail customers in light of the
conversion of PBG to public ownership (see Note 2). Of this amount, $10
million related to bottling operations that became part of PBG in 1999.
The employee related costs for 1998 of $24 million primarily included severance
and relocation costs for approximately 2,700 employees located in the Russian
bottling plants and at Pepsi-Cola North America field locations. During 1998,
approximately 2,600 of the terminations occurred most of which were terminations
of part-time employees with little associated cost. The remaining terminations
either occurred in 1999 or related to the bottling operations that became part
of PBG in 1999.
F-17
1997
The 1997 asset impairment and restructuring charges of $290 million were
comprised of the following:
o Net charges of $183 million in several of our business segments for net
asset impairment of $150 million related to the planned disposal of
assets and for restructuring charges of $33 million. The impairment charges
were taken as a result of decisions to dispose of certain company-owned
bottling operations and non-core international businesses, to dispose of
certain assets to improve the utilization of facilities and to reduce
occupancy costs and to exit certain bottling joint ventures. The impairment
charges reduced the net book value of these assets to their estimated fair
market value, generally based on estimates developed internally or, if
available, amounts paid for similar assets, less costs to sell. The disposals
occurred in 1997 and 1998 and in connection with the separation of certain
company-owned bottling operations (see Note 2). The restructuring charges
primarily related to the reorganization of an international company-owned
bottling operation.
o Charges of $94 million for asset impairment of $48 million and restructuring
charges of $46 million related to productivity initiatives in worldwide
snacks. These initiatives included closing plants, eliminating production
lines and consolidating distribution facilities. The resulting impairment
charges were recognized primarily for assets held for disposal or abandonment
and reduced the net book value of impaired assets to their estimated fair
market value, generally based on estimates developed internally or, if
available, amounts paid for similar assets, less costs to sell. Disposal
or abandonment of these assets was substantially completed in 1997, with
a significant portion of the remainder completed in 1998 as planned.
o Net charges of $13 million for net asset impairment of $2 million and net
restructuring charges of $11 million related to actions to strengthen our
international bottling structure. Restructuring charges of $98 million
consisted of third party termination payments related to refranchising
bottling operations and our investments in bottling joint ventures. These
charges were substantially offset by an arbitration settlement of $87 million
which we were awarded as a result of the termination of the bottling
appointment with our previous Venezuelan bottler.
The employee related costs for 1997 of $55 million primarily included severance
and relocation costs for approximately 2,100 employees primarily located in
international plants and distribution centers. During 1997, terminations of
approximately 1,100 employees occurred and, in 1998, approximately 500
terminations occurred. As a result of the successful redeployment of employees
to other locations, approximately 500 terminations did not occur as planned
which resulted in a change of estimate in 1998.
F-18
Analysis of restructuring reserve for total PepsiCo:
Employee Facility Third Party
Related Closure Termination Other Total
- -------------------------------------------------------------------------------------------
Reserve, December 28, 1996........... $ 95 $ 12 $ 46 $ 16 $ 169
1997 restructuring charges......... 55 2 22 11 90
Cash payments...................... (79) (13) (46) (21) (159)
Cash receipt....................... - - 87 - 87
------ ------ ------ ------ ------
Reserve, December 27, 1997........... 71 1 109 6 187
1998 restructuring charges......... 24 5 5 - 34
Cash payments...................... (41) (1) (46) (5) (93)
Changes in estimate................ (12) 4 (6) - (14)
------ ------ ------ ------ ------
Reserve, December 26, 1998........... 42 9 62 1 114
1999 restructuring charges......... 19 7 - 2 28
Cash payments...................... (23) (4) (47) (1) (75)
Separation of PBG (see Note 2)..... (25) (5) (5) - (35)
------ ------ ------ ------ ------
Reserve, December 25, 1999........... $ 13 $ 7 $ 10 $ 2 $ 32
====== ====== ====== ====== ======
The restructuring reserves are included in accounts payable and other current
liabilities in the Consolidated Balance Sheet. At year-end 1999, the remaining
liability for restructuring charges associated with investments in
unconsolidated affiliates was $10 million related to indemnifications of
litigation liabilities.
The remaining carrying amounts of assets held for disposal were $6 million as of
December 25, 1999, $13 million as of December 26, 1998 and $60 million as of
December 27, 1997. During 1998 and 1997, the net sales from international
bottling business units held for disposal were $202 million and $590 million,
respectively. Such businesses generated operating profits of $20 million in 1998
and $42 million in 1997. Our investments in unconsolidated affiliates held for
disposal provided break-even results in 1999 and losses of $2 million in 1998
and $5 million in 1997.
Note 5 - Discontinued Operations
The restaurants segment was composed of the core restaurant businesses of Pizza
Hut, Taco Bell and Kentucky Fried Chicken, PepsiCo Food Systems (PFS), a
restaurant distribution operation, and several non-core U.S. restaurant
businesses. In 1997, we spun off the restaurant businesses to our shareholders
as an independent publicly traded company (Distribution). The spin-off was
effective as a tax-free Distribution on October 6, 1997 (Distribution Date).
Owners of PepsiCo Capital Stock as of September 19, 1997 received one share of
common stock of Tricon Global Restaurants, Inc., the new company, for every 10
shares of PepsiCo Capital Stock. Immediately before the Distribution Date, we
received $4.5 billion in cash from Tricon as repayment of certain amounts due
and a dividend. PFS and the non-core U.S. restaurant businesses were sold before
the Distribution Date resulting in after-tax cash proceeds of approximately $1.0
billion.
Income from discontinued operations: 1997
- -------------------------------------------------
Net sales........................... $ 8,375
Costs and expenses.................. (7,704)
PFS gain............................ 500
Interest expense, net............... (20)
Provision for income taxes.......... (500)
--------
Income from discontinued operations. $ 651
========
F-19
The above amounts include costs directly associated with the spin-off but do not
include an allocation of our interest or general and administrative expenses.
Note 6 - Income Per Share
We present two income per share measures, basic and assuming dilution, on the
face of the Consolidated Statement of Income. "Basic" income per share equals
net income divided by weighted average common shares outstanding during the
period. Income per share "assuming dilution" equals net income divided by the
sum of weighted average common shares outstanding during the period plus common
stock equivalents, such as stock options.
The following reconciles shares outstanding at the beginning of the year to
average shares outstanding:
1999 1998 1997
- -------------------------------------------------------------------------------
Shares outstanding at beginning of year........ 1,471 1,502 1,545
Weighted average shares issued during the
year for exercise of stock options............ 11 18 14
Weighted average shares repurchased............ (16) (40) (31)
-------- ------- ------
Average shares outstanding - basic............. 1,466 1,480 1,528
Effect of dilutive securities
Dilutive shares contingently issuable upon
the exercise of stock options............... 132 144 151
Shares assumed purchased with proceeds from
exercise of stock options................... (102) (105) (109)
-------- ------- ------
Average shares outstanding - assuming dilution 1,496 1,519 1,570
======== ======= ======
Diluted earnings per share excludes incremental shares of 48.9 million in 1999,
31.1 million in 1998 and .2 million in 1997 related to employee stock options
due to their antidilutive effect.
Note 7 - Accounts and Notes Receivable, net
1999 1998 1997
- -------------------------------------------------------------------------------
Trade receivables............................ $1,234 $2,126
Receivables from affiliates.................. 243 59
Other receivables............................ 312 395
-------- -------
1,789 2,580
-------- -------
Allowance, beginning of year................. 127 125 $166
Charged to expense......................... 26 47 41
Other additions............................ 9 8 7
Deductions................................. (77) (53) (89)
-------- ------- ------
Allowance, end of year....................... 85 127 $125
-------- ------- ======
Net receivables.............................. $1,704 $2,453
======== =======
Other additions include acquisitions and reclassifications and deductions
include the impact of the bottling transactions, accounts written off and
currency translation effects.
F-20
Note 8 - Inventories
1999 1998
- ---------------------------------------------------------------------
Raw materials................................ $464 $ 506
Work-in-process.............................. 89 70
Finished goods............................... 346 440
-------- -------
$899 $1,016
======== =======
The cost of approximately 9% of 1999 inventories and approximately 36% of 1998
inventories was computed using the last-in, first-out method.
Note 9 - Property, Plant and Equipment, net
1999 1998
- ---------------------------------------------------------------------
Land......................................... $ 363 $ 460
Buildings and improvements................... 2,352 3,114
Machinery and equipment, including fleet..... 5,554 8,806
Construction in progress..................... 547 730
-------- --------
8,816 13,110
Accumulated depreciation..................... (3,550) (5,792)
-------- --------
$ 5,266 $ 7,318
======== ========
Depreciation expense was $759 million in 1999, $968 million in 1998 and $881
million in 1997. At December 25, 1999, property, plant and equipment with a
total net book value of $93 million were pledged as collateral for mortgage
loans.
Note 10 - Intangible Assets, net
1999 1998
- ---------------------------------------------------------------------
Goodwill..................................... $3,808 $5,131
Reacquired franchise rights.................. 78 3,118
Trademarks and other identifiable intangibles 849 747
-------- --------
$4,735 $8,996
======== ========
Identifiable intangible assets possess economic value but lack physical
substance. These assets primarily arise from the allocation of purchase prices
of businesses acquired. Amounts assigned to such identifiable intangibles are
based on independent appraisals or internal estimates. Goodwill represents the
excess purchase price after allocation to all identifiable net assets.
The above amounts are presented net of accumulated amortization of $640 million
at year-end 1999 and $1.9 billion at year-end 1998.
Note 11 - Accounts Payable and Other Current Liabilities
1999 1998
- -----------------------------------------------------------------------------
Accounts payable........................................ $1,121 $1,180
Accrued compensation and benefits....................... 602 676
Accrued selling and marketing........................... 524 596
Other current liabilities............................... 1,152 1,418
-------- -------
$3,399 $3,870
======== =======
F-21
Note 12 - Short-Term Borrowings and Long-Term Debt
1999 1998
- ------------------------------------------------------------------------------
Short-Term Borrowings
Commercial paper (5.3%)................................ $ - $ 1,901
Current maturities of long-term debt................... 718 1,075
Notes (5.2%)........................................... - 2,076
Other borrowings (6.9% and 7.4%)....................... 415 519
Amounts reclassified to long-term debt................. (900) (1,650)
-------- --------
$ 233 $ 3,921
======== ========
Long-Term Debt
Short-term borrowings, reclassified.................... $ 900 $ 1,650
Notes due 2000-2013 (6.1% and 5.8%).................... 1,685 1,693
Various foreign currency debt, due 2000-2001 (6.1% and
5.3%)................................................ 341 956
Zero coupon notes, $735 million due 2011-2012 (13.4%
and 10.1%)............................................ 324 504
Other, due 2000-2014 (7.3% and 6.8%)................... 280 300
-------- --------
3,530 5,103
Less current maturities of long-term debt.............. (718) (1,075)
-------- --------
$2,812 $ 4,028
======== ========
The weighted average interest rates in the above table include the effects of
associated interest rate and currency swaps at year-end 1999 and 1998. Also, see
Note 13 for a discussion of our use of interest rate and currency swaps, our
management of the inherent credit risk and fair value information related to
debt and interest rate and currency swaps.
Interest Rate Swaps
The following table indicates the notional amount and weighted average interest
rates, by category, of interest rate swaps outstanding at year-end 1999 and
1998. The weighted average variable interest rates that we pay, which are
primarily linked to either commercial paper or LIBOR rates, are based on rates
as of the respective balance sheet date and are subject to change.
1999 1998
- ------------------------------------------------------------
Receive fixed-pay variable
Notional amount................ $1,162 $1,855
Weighted average receive rate.. 6.1% 6.1%
Weighted average pay rate...... 6.1% 5.3%
The terms of the interest rate swaps match the terms of the debt they modify.
The swaps terminate at various dates through 2013. At year-end 1999,
approximately 67% of total debt, including the effects of the associated
interest rate swaps, was exposed to variable interest rates, compared to 83% in
1998. In addition to variable rate long-term debt, all debt with maturities of
less than one year is categorized as variable for purposes of this measure.
Currency Swaps
We enter into currency swaps to hedge our currency exposure on certain non-U.S.
dollar denominated debt upon issuance of such debt. The terms of the currency
swaps match the terms of the debt they modify. The currency swaps terminate at
various dates through 2001.
F-22
At year-end 1999, the aggregate carrying amount of the debt was $244 million
denominated in Swiss francs, Luxembourg francs and Australian dollars. The
payables under related currency swaps were $62 million, resulting in an
effective U.S. dollar liability of $306 million with a weighted average interest
rate of 6.3%, including the effects of related interest rate swaps.
At year-end 1998, the aggregate carrying amount of the debt was $678 million
denominated in Japanese yen, Swiss francs, Luxembourg francs and Australian
dollars. The receivables and payables under related currency swaps were $1
million and $70 million, respectively, resulting in a net effective U.S. dollar
liability of $747 million with a weighted average interest rate of 5.3%,
including the effects of related interest rate swaps.
Revolving Credit Facilities
As of year-end 1999, we maintained a $600 million facility expiring in June 2000
and a $900 million facility expiring in June 2004. These credit facilities exist
largely to support issuances of short-term debt and remained unused at year-end
1999. At expiration, these facilities can be extended an additional year upon
the mutual consent of PepsiCo and the lending institutions. These facilities are
subject to normal banking terms and conditions.
The current reclassification of short-term borrowings to long-term debt reflects
our intent and ability, through the existence of the unused credit facilities,
to refinance these borrowings on a long-term basis.
Long-term debt outstanding at December 25, 1999, matures as follows during the
next five years:
2000 2001 2002 2003 2004
- -----------------------------------------------------------------
Maturities $718 $337 $258 $287 $33
Note 13 - Financial Instruments
Derivative Financial Instruments
Our policy prohibits the use of derivative financial instruments for speculative
purposes and we have procedures in place to monitor and control their use. The
following discussion excludes futures contracts used to hedge our commodity
purchases.
Our use of derivative financial instruments is primarily limited to interest
rate and currency swaps, which are used to reduce borrowing costs by effectively
modifying the interest rate and currency of specific debt issuances. These swaps
are entered into concurrently with the issuance of the debt they are intended to
modify. The notional amount, interest payment and maturity dates of the swaps
match the principal, interest payment and maturity dates of the related debt.
Accordingly, any market risk or opportunity associated with these swaps is fully
offset by the opposite market impact on the related debt. Our credit risk
related to interest rate and currency swaps is considered low because such swaps
are entered into only with strong creditworthy counterparties, are generally
settled on a net basis and are of relatively short duration. Further, there is
no significant concentration with counterparties. See Note 12 for the notional
amounts, related interest rates and maturities of the interest rate and currency
swaps.
At year-end 1999, we have equity derivative contracts with financial
institutions in the notional amount of $52 million. These prepaid forward
contracts hedge a portion of our deferred compensation liability which is based
on PepsiCo's stock price. During 1999, the change in the fair value of these
contracts resulted in $6 million of expense.
F-23
Fair Value
Carrying amounts and fair values of our financial instruments:
1999 1998
- ---------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- ------- -------
Assets
Cash and cash equivalents............... $ 964 $ 964 $ 311 $ 311
Short-term investments.................. $ 92 $ 92 $ 83 $ 83
Prepaid expenses........................ $ 47 $ 47 $ - $ -
Other assets (noncurrent investments)... $ - $ - $ 5 $ 5
Liabilities
Debt
Short-term borrowings and long-term
debt, excluding capital leases....... $3,042 $3,121 $7,934 $8,192
Debt-related derivative instruments
Interest rate swaps in asset
position........................... - - - (18)
Interest rate swaps in liability
position........................... - 29 - 1
Combined currency and interest rate
swaps in asset position............ - - (1) (2)
Combined currency and interest rate
swaps in liability position........ 62 57 70 56
------- ------- ------- -------
Net debt.......................... $3,104 $3,207 $8,003 $8,229
======= ======= ======= =======
The above carrying amounts are included in the Consolidated Balance Sheet under
the indicated captions, except for combined currency and interest rate 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. Prepaid forward contracts are classified
within prepaid expenses.
Because of the short maturity of cash equivalents and short-term investments,
the carrying amounts approximate fair values. The fair values of debt and
debt-related derivative instruments were estimated using market quotes and
calculations based on market rates. We have unconditionally guaranteed $2.3
billion of Bottling Group, LLC's long-term debt. The guarantee has a fair value
of $64 million based on market rates.
Note 14 - Income Taxes
U.S. and foreign income from continuing operations before income taxes:
1999 1998 1997
- ---------------------------------------------------
U.S.................. $2,771 $1,629 $1,731
Foreign.............. 885 634 578
------- ------ ------
$3,656 $2,263 $2,309
======= ====== ======
F-24
Provision for income taxes on income from continuing operations:
1999 1998 1997
- ----------------------------------------------------
Current: Federal..... $ 730 $(193) $598
Foreign..... 306 267 110
State....... 40 46 59
------- ------ ------
1,076 120 767
------- ------ ------
Deferred: Federal..... 519 136 23
Foreign..... (12) 4 15
State....... 23 10 13
------- ------ ------
530 150 51
------- ------ ------
$1,606 $ 270 $818
======= ====== ======
Reconciliation of the U.S. Federal statutory tax rate to our effective tax rate
on continuing operations:
1999 1998 1997
- ---------------------------------------------------------------------
U.S. Federal statutory tax rate........ 35.0% 35.0% 35.0%
State income tax, net of Federal tax
benefit............................... 1.1 1.6 2.0
Lower taxes on foreign results......... (2.7) (3.0) (5.5)
Settlement of prior years' audit issues - (5.7) (1.7)
Puerto Rico settlement................. - (21.8) -
Bottling transactions.................. 10.6 - -
Asset impairment and restructuring..... - 3.4 2.2
Other, net............................. (0.1) 2.4 3.4
------- ------- -------
Effective tax rate on continuing
operations............................ 43.9% 11.9% 35.4%
======= ======= =======
In 1998, we reached final agreement with the IRS to settle substantially all
remaining aspects of a tax case related to our concentrate operations in Puerto
Rico. As a result, we recognized a tax benefit totaling $494 million (or $0.32
per share) which reduced our 1998 provision for income taxes.
Deferred taxes are recorded to give recognition to temporary differences between
the tax bases of assets or liabilities and their reported amounts in the
financial statements. We record the tax effect of these temporary differences as
deferred tax assets or deferred tax liabilities. Deferred tax assets generally
represent items that can be used as a tax deduction or credit in future years.
Deferred tax liabilities generally represent items that we have taken a tax
deduction for, but have not yet recorded in the Consolidated Statement of
Income.
F-25
Deferred tax liabilities (assets):
1999 1998
- ------------------------------------------------------------------------
Intangible assets other than nondeductible
goodwill....................................... $ 47 $ 1,444
Investments in unconsolidated affiliates........ 667 17
Property, plant and equipment................... 545 665
Safe harbor leases.............................. 101 109
Zero coupon notes............................... 76 79
Other........................................... 328 456
-------- --------
Gross deferred tax liabilities.................. 1,764 2,770
-------- --------
Net operating loss carryforwards................ (450) (562)
Postretirement benefits......................... (179) (246)
Various current liabilities and other........... (626) (702)
-------- --------
Gross deferred tax assets....................... (1,255) (1,510)
Deferred tax assets valuation allowances........ 461 571
-------- --------
Deferred tax assets, net of valuation allowances (794) (939)
-------- --------
Net deferred tax liabilities.................... $ 970 $ 1,831
======== ========
Included in:
Prepaid expenses and other current assets..... $ (239) $ (172)
Deferred income taxes......................... 1,209 2,003
-------- --------
$ 970 $ 1,831
======== ========
Deferred tax liabilities are not recognized for temporary differences related to
investments in foreign subsidiaries and in unconsolidated foreign affiliates
that are essentially permanent in duration. It would not be practicable to
determine the amount of any such deferred tax liabilities.
Valuation allowances have been established for deferred tax assets related to
net operating losses in certain state and foreign tax jurisdictions where the
amount of expected future taxable income from operations does not support the
recognition of these deferred tax assets.
Analysis of Valuation Allowances:
1999 1998 1997
- -------------------------------------------------------------------------------
Balance, beginning of year................... $ 571 $458 $435
Provision.................................. 81 113 47
Other deductions........................... (191) - (24)
------ ------ ------
Balance, end of year......................... $ 461 $571 $458
====== ====== ======
Other deductions include the impact of the bottling transactions and currency
translation effects.
Net operating losses of $2.7 billion for year-end 1999 are being carried forward
and are available to reduce future taxable income of certain subsidiaries in a
number of foreign and state jurisdictions. These net operating losses will
expire as follows: $.1 billion in 2000, $2.3 billion between 2001 and 2015,
while $.3 billion may be carried forward indefinitely.
F-26
Note 15 - Employee Stock Options
Stock options have been granted to employees under three different incentive
plans:
o the SharePower Stock Option Plan (SharePower),
o the Long-Term Incentive Plan (LTIP) and
o the Stock Option Incentive Plan (SOIP).
SharePower
SharePower stock options are granted to essentially all full-time employees.
SharePower options generally have a 10 year term. Beginning in 1998, the number
of SharePower options granted is based on each employee's annual earnings and
tenure and generally become exercisable after three years. Prior to 1998, the
number of options granted was based on each employee's annual earnings and
generally became exercisable ratably over five years.
SOIP and LTIP Since 1998
Beginning in 1998, all executive (including middle management) awards are made
under the LTIP. Under the LTIP, an executive generally receives an award based
on a multiple of base salary. Two-thirds of the award consists of stock options
with an exercise price equal to the average stock price on the date of the
award. These options generally become exercisable at the end of three years and
have a 10 year term. At the date of the award, the executive selects whether the
remaining one-third of the award will be granted in stock options or paid in
cash at the end of three years. The number of options granted or the cash
payment, if any, will depend on the attainment of prescribed performance goals
over the three year measurement period. If the executive chooses stock options,
they are granted with an exercise price equal to the average stock price on the
date of the grant, vest immediately and have a 10 year term. If the executive
chooses a cash payment, one dollar of cash will be received for every four
dollars of the award. Amounts expensed for expected cash payments were $17.9
million in 1999 and $7 million in 1998. At year-end 1999, 135 million shares
were available for grants under the LTIP.
SOIP and LTIP Prior to 1998
Prior to 1998, SOIP options were granted to middle management employees and were
exercisable after one year. LTIP options were granted to senior management
employees and were generally exercisable after four years. Both SOIP and LTIP
options have 10 year terms. Certain LTIP options could be exchanged by employees
for a specified number of performance share units (PSUs) within 60 days of the
grant date. The value of a PSU was fixed at the stock price at the grant date
and the PSU was payable four years from the grant date, contingent upon
attainment of prescribed performance goals. At year-end 1999, 1998 and 1997,
there were 68,000, 84,000 and 801,000 PSUs outstanding, respectively. Payment of
PSUs is made in cash and/or in stock as approved by the Compensation Committee
of our Board of Directors. Amounts expensed for PSUs were $.3 million in 1999,
$1 million in 1998 and $4 million in 1997.
F-27
Stock option activity:
(Options in thousands)
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- --------- -------- -------- -------- --------
Outstanding at
beginning of year................... 146,991 $23.28 146,329 $18.95 177,217 $20.22
Granted............................ 44,017 35.04 34,906 36.33 3,457 31.54
Exercised.......................... (19,646) 15.68 (28,076) 15.31 (25,504) 15.77
Surrendered for PSUs............... - - (24) 37.46 (15) 37.68
Forfeited / expired................ (7,979) 33.34 (6,144) 28.83 (7,819) 24.89
Spin-off related:
Conversion to Tricon options (a). - - - - (13,267) 25.75
PepsiCo modification (b)......... - - - - 12,260 -
------- -------- --------
Outstanding at end of year........... 163,383 26.90 146,991 23.28 146,329 18.95
======= ======== ========
Exercisable at end of year (c)....... 75,045 $18.98 82,692 $16.74 81,447 $15.39
======= ======== ========
- -----------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year..... $10.43 $ 9.82 $10.55
- -----------------------------------------------------------------------------------------------------
(a) Effective on the date of the Tricon spin-off, unvested PepsiCo Capital
Stock options held by Tricon employees were converted to Tricon stock
options.
(b) Immediately following the spin-off, the number of options were increased
and exercise prices were decreased (the "modification") to preserve the
economic value of those options that existed just prior to the spin-off for
the holders of PepsiCo Capital Stock options.
(c) In connection with the bottling transactions discussed in Note 2,
substantially all non-vested PepsiCo Capital Stock options held by bottling
employees vested. The acceleration resulted in a $46 million pre-tax charge
included in the determination of the related net gain.
Stock options outstanding and exercisable at December 25, 1999:
Options Outstanding Options Exercisable
---------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Price Options Life Price Options Price
- ---------------- -------- ----------- --------- -------- ---------
$ 4.25 to $ 9.84 5,832 1.47 yrs. $ 6.37 5,822 $ 6.37
$11.12 to $27.73 73,745 4.13 19.40 56,383 17.05
$29.44 to $41.50 83,806 8.71 35.04 12,840 33.63
-------- --------
163,383 6.36 26.90 75,045 18.98
======== ========
F-28
Pro forma income and pro forma income per share, as if we had recorded
compensation expense based on fair value for stock-based awards:
1999 1998 1997
- ---------------------------------------------------------------
Reported
Income
Continuing operations......... $2,050 $1,993 $1,491
Discontinued operations....... - - 651
------- ------- -------
Net income.................... $2,050 $1,993 $2,142
======= ======= =======
Income per share - basic
Continuing operations......... $ 1.40 $ 1.35 $ 0.98
Discontinued operations....... - - 0.42
------- ------- -------
Net income.................... $ 1.40 $ 1.35 $ 1.40
======= ======= =======
Income per share - assuming
dilution
Continuing operations......... $ 1.37 $ 1.31 $ 0.95
Discontinued operations....... - - 0.41
------- ------- -------
Net income.................... $ 1.37 $ 1.31 $ 1.36
======= ======= =======
Pro Forma
Income
Continuing operations......... $1,904 $1,888 $1,390
Discontinued operations....... - - 635
------- ------- -------
Net income.................... $1,904 $1,888 $2,025
======= ======= =======
Income per share - basic
Continuing operations......... $ 1.30 $ 1.28 $ 0.91
Discontinued operations....... - - 0.42
------- ------- -------
Net income.................... $ 1.30 $ 1.28 $ 1.33
======= ======= =======
Income per share - assuming
dilution
Continuing operations......... $ 1.27 $ 1.24 $ 0.89
Discontinued operations....... - - 0.40
------- ------- -------
Net income.................... $ 1.27 $ 1.24 $ 1.29
======= ======= =======
- ---------------------------------------------------------------
The pro forma amounts disclosed above are not fully representative of the
effects of stock-based awards because, except for the impact resulting from the
bottling transactions and Tricon modification, the amounts exclude the pro forma
cost related to the unvested stock options granted before 1995.
The fair value of the options granted (including the modification) is estimated
using the Black-Scholes option-pricing model based on the following weighted
average assumptions:
1999 1998 1997
- -------------------------------------------------------------
Risk free interest rate...... 5.2% 4.7% 5.8%
Expected life................ 5 yrs. 5 yrs. 3 yrs.
Expected volatility.......... 27% 23% 20%
Expected dividend yield...... 1.34% 1.14% 1.32%
- -------------------------------------------------------------
F-29
Note 16 - Pension and Postretirement Benefits
In 1998, we adopted the revised disclosure requirements of Statement of
Financial Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. SFAS 132 standardized the disclosures of
pensions and other postretirement benefits into a combined format but did not
change the accounting for these benefits. Information for 1997 has been
reclassified to conform to the revised disclosure
format.
Pension Benefits
Our pension plans cover substantially all full-time U.S. employees and certain
international employees. Benefits depend on years of service and earnings are
based on stated amounts for each year of service.
Postretirement Benefits
Our postretirement plans provide medical and life insurance benefits principally
to U.S. retirees and their dependents. Employees are eligible for benefits if
they meet age and service requirements and qualify for retirement benefits.
Components of net periodic benefit cost:
1999 1998 1997
---------------------------------------------------------------------
Pension
-------------------------
Service cost............................. $ 99 $ 95 $ 82
Interest cost............................ 128 136 123
Expected return on plan assets........... (156) (169) (148)
Amortization of transition asset......... (2) (9) (14)
Amortization of prior service amendments 8 12 11
Amortization of net loss................. 15 5 4
------ ------ ------
Net periodic benefit cost................ 92 70 58
Curtailment/settlement loss (gain)....... 52 9 (4)
Special termination benefits............. 10 4 8
------ ------ ------
Net periodic benefit cost including
curtailments/settlements and special
termination benefits.................... $ 154 $ 83 $ 62
====== ====== ======
Components of net periodic benefit cost:
1999 1998 1997
- ----------------------------------------------------------------------
Postretirement
-------------------------
Service cost............................. $ 16 $ 16 $ 12
Interest cost............................ 35 39 40
Amortization of prior service amendments (14) (18) (18)
Amortization of net gain................. (1) (2) -
------ ------ ------
Net periodic benefit cost................ 36 35 34
Special termination benefits............. 3 1 -
------ ------ ------
Net periodic benefit cost including
special termination benefits............ $ 39 $ 36 $ 34
====== ====== ======
Prior service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits.
F-30
Change in benefit obligation:
1999 1998 1999 1998
- ----------------------------------------------------------------------------
Pension Postretirement
------------------ ---------------
Obligation at beginning of year.... $2,479 $1,928 $ 644 $528
Service cost....................... 99 95 16 16
Interest cost...................... 128 136 35 39
Plan amendments.................... 1 5 - -
Participant contributions.......... 6 4 - -
Actuarial loss..................... 3 229 6 56
(Divestitures)/acquisitions........ (717) 236 (205) 42
Benefit payments................... (134) (149) (31) (38)
Curtailment/settlement............. - (1) - -
Special termination benefits....... 10 4 3 1
Foreign currency adjustment........ (3) (8) - -
------- -------- ------ -----
Obligation at end of year.......... $1,872 $2,479 $ 468 $644
======= ======== ====== =====
Change in fair value of plan assets:
1999 1998 1999 1998
- ---------------------------------------------------------------------------
Pension Postretirement
------------------ --------------
Fair value at beginning of year.... $2,045 $1,997 $ - $ -
Actual return on plan assets....... 343 (71) - -
(Divestitures)/acquisitions........ (659) 240 - -
Employer contributions............. 17 31 31 38
Participant contributions.......... 6 4 - -
Benefit payments................... (134) (149) (31) (38)
Foreign currency adjustment........ (3) (7) - -
------- -------- ----- -----
Fair value at end of year.......... $1,615 $2,045 $ - $ -
======= ======== ===== =====
As a result of the bottling transactions described in Note 2, $717 million of
pension benefit obligation and $205 million of postretirement benefit obligation
were assumed by bottling affiliates. In addition, bottling affiliate plans
assumed ownership of $659 million of pension assets. The net gain on the
bottling transactions includes a curtailment/settlement net loss of $52 million.
Selected information for plans with accumulated benefit obligation in excess of
plan assets:
1999 1998 1999 1998
- ------------------------------------------------------------------------------
Pension Postretirement
------------------ -----------------
Projected benefit obligation....... $(780) $(1,960) $(468) $(644)
Accumulated benefit obligation..... $(586) $(1,661) $(468) $(644)
Fair value of plan assets.......... $ 500 $ 1,498 $ - $ -
F-31
Funded status as recognized in the Consolidated Balance Sheet:
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Pension Postretirement
---------------- ----------------
Funded status at end of year........... $ (257) $(434) $(468) $(644)
Unrecognized prior service cost........ 34 76 (33) (69)
Unrecognized loss...................... 61 338 14 29
Unrecognized transition asset.......... (3) (7) - -
------ ------ ------ -------
Net amounts recognized................. $(165) $ (27) $(487) $(684)
====== ====== ====== =======
Net amounts as recognized in the consolidated balance sheet:
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Pension Postretirement
---------------- -----------------
Prepaid benefit cost................... $ 117 $ 116 $ - $ -
Accrued benefit liability.............. (287) (210) (487) (684)
Intangible assets...................... - 36 - -
Accumulated other comprehensive income 5 31 - -
------ ------ ------ -------
Net amounts recognized................. $(165) $ (27) $(487) $(684)
====== ====== ====== =======
Weighted-average assumptions at end of year:
1999 1998 1997
- ------------------------------------------------------------------------
Pension
------------------------------
Discount rate for benefit obligation.. 7.7% 6.8% 7.3%
Expected return on plan assets........ 10.4% 10.2% 10.3%
Rate of compensation increase......... 4.6% 4.7% 4.8%
The discount rate assumptions used to compute the postretirement benefit
obligation at year end were 7.75% in 1999 and 6.9% in 1998.
Components of Pension Assets
The pension plan assets are principally stocks and bonds. These assets include
approximately 6.5 million shares of PepsiCo Capital Stock with a fair value of
$198 million in 1999 and 10.1 million shares with a fair value of $298 million
in 1998. To maintain diversification, .5 million shares of PepsiCo Capital Stock
were sold in 1999 and 1.6 million shares were sold in 1998. In addition in 1999,
PBG pension plans assumed ownership of 3.1 million shares of PepsiCo Capital
Stock with a fair value of $95 million.
Health Care Cost Trend Rates
An average increase of 6.1% in the cost of covered postretirement medical
benefits is assumed for 2000 for employees who retire without cost sharing. This
average increase is then projected to decline gradually to 5.5% in 2005 and
thereafter.
An average increase of 6.0% in the cost of covered postretirement medical
benefits is assumed for 2000 for employees who retire with cost sharing. This
average increase is then projected to decline gradually to zero in 2005 and
thereafter.
F-32
Assumed health care cost trend rates have a significant effect on the amounts
reported for postretirement medical plans. A one percentage point change in
assumed health care costs would have the following effects:
1% Increase 1% Decrease
------------ -------------
Effect on total of 1999 service and interest cost
components......................................... $ 2 $ (2)
Effect on the 1999 accumulated postretirement
benefit obligation................................. $23 $(22)
Note 17 - Commitments, Contingencies and Leases
We are subject to various claims and contingencies related to lawsuits, taxes,
environmental and other matters arising out of the normal course of business.
Contingent liabilities primarily reflect guarantees to support financial
arrangements of certain unconsolidated affiliates, including the unconditional
guarantee for $2.3 billion of Bottling Group, LLC's long-term debt. We believe
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 our results of operations, financial condition or liquidity.
We have noncancelable commitments under both capital and long-term operating
leases, primarily for warehouses, distribution centers and office space. Capital
and operating lease commitments expire at various dates through 2022 and, in
many cases, provide for renewal options. Most leases require payment of related
executory costs, which include property taxes, maintenance and insurance.
Future minimum commitments under noncancelable leases:
Capital Operating
---------- ----------
2000......................................... $1 $ 63
2001......................................... 1 57
2002......................................... - 44
2003......................................... - 18
2004......................................... - 14
Later years.................................. 2 68
------ -----
Total minimum lease payments................. 4 $264
=====
Less imputed interest........................ (1)
------
Present value of net minimum capital lease
payments.................................... $3
======
Capitalized leases, included as property, plant and equipment, were $13 million
in 1999 and $46 million in 1998. The related accumulated amortization was $7
million in 1999 and $25 million in 1998. Amortization expense related to
capitalized leases was $1 million in 1999, $6 million in 1998 and $6 million in
1997.
Details of rental expense:
1999 1998 1997
- ---------------------------------------------------------
Minimum................ $91 $141 $127
Contingent............. 1 1 1
----- ----- -----
$92 $142 $128
===== ===== =====
Note 18 - Business Segments
In 1998, we adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of a Business Enterprise and Related Information,
which is based on management reporting. In early 1999, in contemplation of the
separation from PepsiCo of our bottling operations, we completed a
F-33
reorganization of our Pepsi-Cola business. Accordingly, our 1999 disclosure
presents operating results consistent with the new Pepsi-Cola organization.
Prior years' amounts have been reclassified to conform to the 1999 presentation.
Therefore, the results in 1997, 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 1997, 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, third and fourth
quarters of 1999 are presented separately below operating profit in the
Condensed Consolidated Statement of Income. The combined results of our five
reportable segments are referred to as new PepsiCo.
The North American segments include the United States and Canada. The Tropicana
segment includes its international results. Pepsi-Cola North America results
include the North American concentrate and fountain businesses. Pepsi-Cola
International results include the international concentrate business and
consolidated international bottling operations.
The accounting policies of the segments are the same as those described in Note
1. All intersegment net sales and expenses are immaterial and have been
eliminated in computing net sales and operating profit.
Frito-Lay North America
Frito-Lay North America manufactures, markets, distributes and sells salty
snacks. Products manufactured and sold in North America include Lay's and
Ruffles brand potato chips, Doritos and Tostitos brand tortilla chips, Fritos
brand corn chips, Cheetos brand cheese flavored snacks, Rold Gold brand
pretzels, Cracker Jack brand candy-coated popcorn, Grandma's brand cookies and a
variety of branded dips and salsas. Low-fat and no-fat versions of several
brands are also manufactured and sold in North America.
Frito-Lay International
Frito-Lay International manufactures, markets, distributes and sells salty and
sweet snacks. Products include Walkers brand snack foods in the United Kingdom,
Smith's brand snack foods in Australia, Sabritas brand snack foods and Alegro
and Gamesa brand sweet snacks in Mexico. Many of our U.S. brands have been
introduced internationally such as Lay's and Ruffles brand potato chips, Doritos
and Tostitos brand tortilla chips, Fritos brand corn chips and Cheetos brand
cheese flavored snacks.
Principal international system-wide snack markets include Australia, Brazil,
Mexico, the Netherlands, South Africa, Spain and the United Kingdom.
Pepsi-Cola North America
Pepsi-Cola North America manufactures concentrates of Pepsi-Cola, Diet Pepsi,
Pepsi One, Mountain Dew and other brands for sale to franchised bottlers. PCNA
markets and promotes its brands. PCNA also manufactures, markets and distributes
ready-to-drink tea and coffee products through joint ventures with Lipton and
Starbucks and licenses the processing, distribution and sale of Aquafina bottled
water.
Pepsi-Cola International
Pepsi-Cola International manufactures concentrates of Pepsi-Cola, Diet Pepsi,
Mountain Dew, 7UP, Diet 7UP, Mirinda, Pepsi Max and other brands internationally
for sale to franchised bottlers and company-
F-34
owned bottlers. PCI operates bottling plants and distribution facilities in
various international markets for the production, distribution and sale of
company-owned and licensed brands. PCI markets and promotes its brands
internationally.
Principal international system-wide markets include Argentina, Brazil, China,
India, Mexico, the Philippines, Saudi Arabia, Spain, Thailand and the United
Kingdom.
Tropicana
Tropicana produces, markets, distributes and sells its juices internationally.
Products include Tropicana Pure Premium, Season's Best, Tropicana Twister, Dole
and Tropicana Pure Tropics brand juices primarily sold in the United States.
Many of these products are distributed and sold in Canada and brands such as
Fruvita, Looza and Copella are available in Europe.
Principal international markets include Belgium, Canada, France and the United
Kingdom.
Impairment and Restructuring Charges By Segment
1999 1998 1997
----- ----- -----
Frito-Lay
- - North America.............. $65 $ 54 $ 22
- - International.............. - - 62
Pepsi-Cola
- - North America.............. - 6 52
- - International.............. - 6 131
----- ----- -----
Combined segments............ 65 66 267
Bottling
Operations/Investments....... - 222 23
----- ----- -----
$65 $288 $290
===== ===== =====
See Note 4 for details on the above asset impairment and restructuring charges.
BUSINESS SEGMENTS
1999 1998 1997
- ----------------------------------------------------------------------
Net Sales
------------------------------
Frito-Lay
- - North America.................... $ 7,865 $ 7,474 $ 6,967
- - International.................... 3,750 3,501 3,409
Pepsi-Cola
- - North America.................... 2,605 1,389 1,344
- - International.................... 1,771 1,600 1,935
Tropicana.......................... 2,253 722 -
-------- -------- --------
New PepsiCo........................ 18,244 14,686 13,655
Bottling Operations/Investments.... 2,123 7,662 7,262
-------- -------- --------
$20,367 $22,348 $20,917
======== ======== ========
F-35
BUSINESS SEGMENTS (continued)
1999 1998 1997
- ----------------------------------------------------------------------
Operating Profit (a)
------------------------------
Frito-Lay
- - North America.................... $ 1,580 $ 1,424 $ 1,388
- - International.................... 406 367 318
Pepsi-Cola
- - North America.................... 751 732 755
- - International.................... 108 99 (67)
Tropicana.......................... 170 40 -
-------- -------- --------
Combined segments.................. 3,015 2,662 2,394
Corporate (b)...................... (250) (202) (142)
-------- -------- --------
New PepsiCo........................ 2,765 2,460 2,252
Bottling Operations/Investments.... 53 124 410
-------- -------- --------
$ 2,818 $ 2,584 $ 2,662
======== ======== ========
- ----------------------------------------------------------------------
Total Assets
------------------------------
Frito-Lay
- - North America.................... $ 4,013 $ 3,915 $ 3,650
- - International.................... 4,170 4,039 3,583
Pepsi-Cola
- - North America.................... 729 547 600
- - International.................... 1,454 1,177 1,814
Tropicana.......................... 3,708 3,661 -
-------- -------- --------
Combined segments.................. 14,074 13,339 9,647
Corporate (c)...................... 1,008 215 2,160
Bottling Operations/Investments.... 2,469 9,106 8,294
-------- -------- --------
$17,551 $22,660 $20,101
======== ======== ========
- ----------------------------------------------------------------------
Amortization of Intangible
Assets
------------------------------
Frito-Lay
- - North America.................... $ 8 $ 7 $ 6
- - International.................... 46 43 38
Pepsi-Cola
- - North America.................... 2 3 3
- - International.................... 13 8 8
Tropicana.......................... 70 22 -
-------- -------- --------
Combined segments.................. 139 83 55
Corporate.......................... - - 2
Bottling Operations/Investments.... 44 139 142
-------- -------- --------
$ 183 $ 222 $ 199
======== ======== ========
F-36
BUSINESS SEGMENTS (continued)
1999 1998 1997
- ----------------------------------------------------------------------
Depreciation and Other
Amortization Expense
------------------------------
Frito-Lay
- - North America.................... $ 338 $ 326 $ 285
- - International.................... 149 142 112
Pepsi-Cola
- - North America.................... 72 30 23
- - International.................... 85 64 100
Tropicana.......................... 81 27 -
-------- -------- --------
Combined segments.................. 725 589 520
Corporate.......................... 10 8 7
Bottling Operations/Investments.... 114 415 380
-------- -------- --------
$ 849 $ 1,012 $ 907
======== ======== ========
- ----------------------------------------------------------------------
Significant Other Noncash
Items (d)
------------------------------
Frito-Lay
- - North America.................... $ 37 $ 54 $ 9
- - International.................... - - 53
Pepsi-Cola
- - North America.................... - - 52
- - International.................... - 6 114
-------- -------- --------
Combined segments.................. 37 60 228
Bottling Operations/Investments.... - 194 5
-------- -------- --------
$ 37 $ 254 $ 233
======== ======== ========
- ----------------------------------------------------------------------
Capital Spending
------------------------------
Frito-Lay
- - North America.................... $ 472 $ 402 $ 622
- - International.................... 282 314 251
Pepsi-Cola
- - North America.................... 22 21 12
- - International.................... 82 46 94
Tropicana.......................... 123 50 -
-------- -------- --------
Combined segments.................. 981 833 979
Corporate.......................... 42 29 15
Bottling Operations/Investments.... 95 543 512
-------- -------- --------
$ 1,118 $ 1,405 $ 1,506
======== ======== ========
- ----------------------------------------------------------------------
Investments in
Unconsolidated Affiliates
------------------------------
Frito-Lay International............ $ 284 $ 341 $ 234
Pepsi-Cola North America........... 50 33 33
Tropicana.......................... 21 22 -
-------- -------- --------
Combined segments.................. 355 396 267
Corporate.......................... 22 22 22
Bottling Operations/Investments.... 2,469 978 912
-------- -------- --------
$ 2,846 $ 1,396 $ 1,201
======== ======== ========
F-37
BUSINESS SEGMENTS (continued)
1999 1998 1997
- ----------------------------------------------------------------------
Equity Income/(Loss) from
Unconsolidated Affiliates (e)
------------------------------
Frito-Lay
- - North America.................... $ - $ - $ (3)
- - International.................... 3 (5) 50
Pepsi-Cola North America........... 31 21 14
Tropicana.......................... 2 1 -
-------- -------- --------
Combined segments.................. 36 17 61
Bottling Operations/Investments.... 76 8 23
-------- -------- --------
$ 112 $ 25 $ 84
======== ======== ========
GEOGRAPHIC AREAS
- ----------------------------------------------------------------------
Net Sales
------------------------------
United States...................... $11,772 $ 8,782 $ 7,630
International...................... 6,472 5,904 6,025
-------- -------- --------
Combined segments.................. 18,244 14,686 13,655
Bottling Operations/Investments.... 2,123 7,662 7,262
-------- -------- --------
$20,367 $22,348 $20,917
======== ======== ========
- ----------------------------------------------------------------------
Long-Lived Assets (f)
------------------------------
United States...................... $ 7,980 $ 6,732 $ 3,700
International...................... 4,867 4,276 3,306
-------- -------- --------
Combined segments.................. 12,847 11,008 7,006
Bottling Operations/Investments.... - 6,702 6,311
-------- -------- --------
$12,847 $17,710 $13,317
======== ======== ========
- ----------------------------------------------------------------------
(a) Includes asset impairment and restructuring charges on page F-35.
(b) Includes unallocated corporate headquarters expenses and costs of centrally
managed insurance programs, minority interests and foreign exchange
translation and transaction gains and losses.
(c) Corporate assets consist principally of cash and cash equivalents,
short-term investments primarily held outside the U.S. and property and
equipment.
(d) Represents the noncash portion of asset impairment and restructuring
charges. See Note 4.
(e) 1999 includes $18.2 million for our share of a gain recorded by PBG related
to accrual and reserve adjustments and $9.6 million for our share of an
unusual charge recorded by Whitman related to discontinued operations. In
1997, FLI included a gain of $22 million related to the sale of a non-core
investment.
(f) Represents net property, plant and equipment, net intangible assets and
investments in unconsolidated affiliates.
F-38
Note 19 - Selected Quarterly Financial Data
(unaudited) First Quarter (a)(b)
(12 Weeks)
1999 1998
- --------------------------------------------------------------------
Net sales................................ $ 5,114 4,353
Gross profit............................. $ 2,974 2,603
Asset impairment and restructuring
charges (c)............................. $ 65 -
Gain on bottling transactions (d)........ $ - -
Net income (e)........................... $ 333 377
Net income per share - basic............. $ 0.23 0.25
Net income per share - assuming dilution. $ 0.22 0.24
Stock price per share (f)
High................................. $ 42 9/16 43 7/8
Low.................................. $ 36 3/16 34 3/16
Close................................ $39 15/16 43
- --------------------------------------------------------------------
Second Quarter (a)(b)
(12 Weeks)
1999 1998
- --------------------------------------------------------------------
Net sales................................ $ 4,982 5,258
Gross profit............................. $ 2,970 3,110
Asset impairment and restructuring
charges (c)............................. $ - -
Gain on bottling transactions (d)........ $ 1,000 -
Net income (e)........................... $ 743 494
Net income per share - basic............. $ 0.50 0.33
Net income per share - assuming dilution. $ 0.49 0.33
Stock price per share (f)
High................................. $ 41 7/16 44 13/16
Low.................................. $ 34 1/16 37 3/8
Close................................ $ 35 3/8 40 11/16
- --------------------------------------------------------------------
Third Quarter (a)(b)
(12 Weeks)
1999 1998
- --------------------------------------------------------------------
Net sales................................ $ 4,591 5,544
Gross profit............................. $ 2,798 3,261
Asset impairment and restructuring
charges (c)............................. $ - -
Gain on bottling transactions (d)........ $ - -
Net income (e)........................... $ 484 761
Net income per share - basic............. $ 0.33 0.52
Net income per share - assuming dilution. $ 0.32 0.50
Stock price per share (f)
High................................. $ 41 1/2 43 3/4
Low.................................. $ 33 3/8 27 9/16
Close................................ $ 34 5/8 30 15/16
- --------------------------------------------------------------------
F-39
Fourth Quarter
(16 Weeks)
1999 1998
- --------------------------------------------------------------------
Net sales................................ $ 5,680 7,193
Gross profit............................. $ 3,427 4,044
Asset impairment and restructuring
charges (c)............................. $ - 288
Gain on bottling transactions (d)........ $ - -
Net income (e)........................... $ 490 361
Net income per share - basic............. $ 0.34 0.25
Net income per share - assuming dilution. $ 0.33 0.24
Stock price per share (f)
High................................. $ 37 3/4 41 1/4
Low.................................. $ 30 1/8 28
Close................................ $ 35 7/16 40 7/16
- --------------------------------------------------------------------
Full Year (a) (b)
(52 Weeks)
1999 1998
- --------------------------------------------------------------------
Net sales................................ $ 20,367 22,348
Gross profit............................. $ 12,169 13,018
Asset impairment and restructuring
charges (c)............................. $ 65 288
Gain on bottling transactions (d)........ $ 1,000 -
Net income (e)........................... $ 2,050 1,993
Net income per share - basic............. $ 1.40 1.35
Net income per share - assuming dilution. $ 1.37 1.31
Stock price per share (f)
High................................. $ 42 9/16 44 13/16
Low.................................. $ 30 1/8 27 9/16
Close................................ $ 35 7/16 40 7/16
- --------------------------------------------------------------------
(a) First through third quarter of 1998 excludes the operating results of
Tropicana which was acquired in August of 1998.
(b) 1999 includes the operating results of deconsolidated bottling operations
through their respective closing dates (see Note 2).
(c) Asset impairment and restructuring charges (see Note 4):
1999 1998
----------------------------- -----------------------------
Per Per
Pre-Tax After-Tax Share Pre-Tax After-Tax Share
-------- --------- -------- -------- --------- --------
First quarter.... $65 $40 $0.03 $ - $ - $ -
Fourth quarter... - - - 288 261 0.17
-------- --------- -------- -------- --------- --------
Full year... $65 $40 $0.03 $288 $261 $0.17
======== ========= ======== ======== ========= ========
(d) Second quarter 1999 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 (see Note 2).
(e) Includes, in 1999, in addition to $270 million associated with the bottling
transactions described in (d) above, a tax provision of $25 million (or
$0.02 per share) in the third quarter related to the PepCom transaction. In
1998, includes tax benefits of $200 million (or $0.13 per share) in the
third quarter and $294 million (or $0.19 per share) in the fourth quarter
related to the settlement of a tax case (see Note 14).
(f) Represents the composite high, low and closing prices for one share of
PepsiCo's Capital Stock.
F-40
Management's Responsibility for Financial Statements
To Our Shareholders:
Management is responsible for the reliability of the consolidated financial
statements and related notes. The financial statements were 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 by our independent auditors, KPMG 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
our representations to the independent auditors are valid and appropriate.
Management maintains a system of internal controls 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. Our 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 consists solely of directors who are not
salaried employees and who are, in the opinion of the Board of Directors, free
from any relationship that would interfere with the exercise of independent
judgment as a committee member. The Committee meets several times each year with
representatives of management, including internal auditors and the independent
accountants to review our financial reporting process and our controls to
safeguard assets. 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 25, 1999 provide
reasonable assurance that the financial statements are reliable and that our
assets are reasonably safeguarded.
F-41
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 25, 1999 and December 26, 1998 and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the years in the three-year period ended December 25, 1999. 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 25, 1999 and December 26, 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 25, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
New York, New York
February 9, 2000
Selected Financial Data
(in millions except per share amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------
1999(a)(b) 1998(b)(c) 1997(b)
- ---------------------------------------------------------------------------------------------
Net sales.......................................... $20,367 22,348 20,917
Income from continuing operations.................. $ 2,050 1,993 1,491
Income per share - continuing operations - basic... $ 1.40 1.35 0.98
Income per share - continuing operations
- assuming dilution............................... $ 1.37 1.31 0.95
Cash dividends declared per share.................. $ 0.535 0.515 0.49
Total assets (e)................................... $17,551 22,660 20,101
Long-term debt..................................... $ 2,812 4,028 4,946
- ---------------------------------------------------------------------------------
1996(b) 1995(d)
- ---------------------------------------------------------------------------------
Net sales.......................................... $20,337 19,067
Income from continuing operations.................. $ 942 1,422
Income per share - continuing operations - basic... $ 0.60 0.90
Income per share - continuing operations
- assuming dilution............................... $ 0.59 0.88
Cash dividends per share........................... $ 0.445 0.39
Total assets (e)................................... $22,160 22,944
Long-term debt..................................... $ 8,174 8,248
- ---------------------------------------------------------------------------------------------
As a result of the deconsolidation of PBG and other bottling operations in 1999
and the Tropicana acquisition late in 1998, the data provided above is not
comparable (see Note 1).
In 1997, we disposed of our restaurants segment and accounted for the disposal
as discontinued operations (see Note 5). Accordingly, all information has been
restated for the years 1997 and prior. Per share amounts reflect a two-for-one
stock split in 1996.
(a) Includes a net gain on bottling transactions in 1999 of $1.0 billion ($270
million after-tax or $0.18 per share) and a tax provision related to the
PepCom transaction of $25 million ($0.02 per share).
(b) Includes asset impairment and restructuring charges of $65 million ($40
million after-tax or $0.03 per share) in 1999, $288 million ($261 million
after-tax or $0.17 per share) in 1998, $290 million ($239 million
after-tax or $0.15 per share) in 1997 and $576 million ($527 million
after-tax or $0.33 per share) in 1996 (see Note 4).
(c) Includes a tax benefit of $494 million (or $0.32 per share) (see Note 14).
(d) Includes the initial, noncash charge of $66 million ($64 million after-tax
or $0.04 per share) upon adoption in 1995 of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of.
(e) Includes net assets of discontinued operations in 1996 and 1995.
F-43