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NO. 1-1183
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 27, 1997
PEPSICO, INC.
INCORPORATED IN NORTH CAROLINA
PURCHASE, NEW YORK 10577-1444
(914) 253-2000
13-1584302
(I.R.S. Employer Identification No.)
-----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE
SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Capital Stock, par value 1-2/3 cents New York and Chicago Stock
per share Exchanges
7-5/8% Notes due 1998 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE SECURITIES
EXCHANGE ACT OF 1934: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE NUMBER OF SHARES OF PEPSICO CAPITAL STOCK OUTSTANDING AS OF MARCH 13,
1998 WAS 1,488,427,405.
DOCUMENTS OF WHICH PORTIONS PARTS OF FORM 10-K INTO WHICH PORTION
ARE INCORPORATED BY REFERENCE OF DOCUMENTS ARE INCORPORATED
----------------------------- -----------------------------
PROXY STATEMENT FOR PEPSICO'S I, III
MAY 6, 1998 ANNUAL MEETING
OF SHAREHOLDERS
PART I
ITEM 1. BUSINESS
PepsiCo, Inc. (the "Company") was incorporated in Delaware in 1919 and was
reincorporated in North Carolina in 1986. Unless the context indicates
otherwise, when used in this Report the term "PepsiCo" shall mean the Company
and its divisions and subsidiaries. PepsiCo is engaged in the beverage and snack
food businesses. On October 6, 1997, the Company spun off certain of its
restaurant businesses, consisting of Pizza Hut, Taco Bell and KFC, to
shareholders as an independent publicly-traded company. In addition, in 1997 the
Company disposed of PFS, its restaurant distribution operation and its non-core
restaurant businesses.
BEVERAGES
PepsiCo's beverage businesses, which operate as Pepsi-Cola Company, are
comprised of two business units: Pepsi-Cola North America ("PCNA"), and
Pepsi-Cola Company International ("PCI").
PCNA manufactures and sells beverage products, primarily soft drinks and
soft drink concentrates, in the United States and Canada. PCNA sells its
concentrates to licensed bottlers ("Pepsi-Cola bottlers"). Under appointments
from PepsiCo, Pepsi-Cola bottlers manufacture, sell and distribute, within
defined territories, soft drinks and syrups bearing trademarks owned by PepsiCo,
including PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, SLICE, MUG, ALL SPORT and,
within Canada, 7UP and DIET 7UP (these products are sometimes referred to as
"Pepsi-Cola beverages"). The Pepsi/Lipton Tea Partnership, a joint venture of
PCNA and Lipton, develops and sells tea concentrate to Pepsi-Cola bottlers and
develops and markets ready-to-drink tea products under the LIPTON trademark.
Such products are distributed by Pepsi-Cola bottlers throughout the United
States and Canada.
Pepsi-Cola beverages are manufactured in approximately 165 plants located
throughout the United States and Canada. PCNA operates approximately 60 plants,
and manufactures, sells and distributes beverages throughout approximately 450
licensed territories, accounting for approximately 60% of the Pepsi-Cola
beverages sold in the United States and Canada. Approximately 105 plants are
operated by independent licensees or unconsolidated affiliates, which
manufacture, sell and distribute approximately 40% of the Pepsi-Cola beverages
sold in the United States and Canada. PCNA has a minority interest in 8 of these
licensees, comprising approximately 70 licensed territories.
PCI manufactures and sells beverage products, primarily soft drinks and
soft drink concentrates, outside the United States and Canada. PCI sells its
concentrates to Pepsi-Cola bottlers. Under appointments from PepsiCo, Pepsi-Cola
bottlers manufacture, sell and distribute, within defined territories, beverages
bearing PEPSI-COLA, 7UP, MIRINDA, DIET PEPSI, PEPSI MAX, MOUNTAIN DEW, DIET 7UP
and other trademarks. PCI operates 37 plants bottling PepsiCo beverage products.
There are approximately 275 plants operated by independent licensees or
unconsolidated affiliates bottling PepsiCo's beverage products which are
available in 186 countries and territories outside the United States and Canada.
Principal international markets include Argentina, Brazil, China, India, Mexico,
the Philippines, Saudi Arabia, Spain, Thailand and the United Kingdom.
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PCNA and PCI make programs available to assist licensed bottlers in
servicing markets, expanding operations and improving production methods and
facilities. PCNA and PCI also offer assistance to Pepsi-Cola bottlers in the
distribution, advertising and marketing of PepsiCo's beverage products and offer
sales assistance through special merchandising and promotional programs and by
training bottler personnel. PCNA and PCI maintain control over the composition
and quality of beverages sold under PepsiCo trademarks.
SNACK FOODS
PepsiCo's snack food businesses, which operate as The Frito-Lay Company,
are comprised of Frito-Lay North America ("Frito-Lay") and Frito-Lay
International ("FLI").
Frito-Lay manufactures and sells a varied line of salty snack foods
throughout the United States and Canada, including LAY'S and RUFFLES brand
potato chips, DORITOS and TOSTITOS brand tortilla chips, FRITOS brand corn
chips, CHEEoTOS brand cheese flavored snacks, ROLD GOLD brand pretzels and
SUNCHIPS brand multigrain snacks.
Frito-Lay's products are transported from its manufacturing plants to
major distribution centers, principally by company-owned trucks. Frito-Lay
utilizes a "store-door-delivery" system, whereby its approximately 20,000 person
sales force delivers the snacks directly to the store shelf. This system permits
Frito-Lay to work closely with approximately 500,000 retail trade customers
weekly and to be responsive to their needs. Frito-Lay believes this form of
distribution is a valuable marketing tool and is essential for the proper
distribution of products with a short shelf life.
FLI's products are available in 111 countries outside the United States
and Canada through company-owned facilities and unconsolidated affiliates. On
most of the European continent, PepsiCo's snack food business consists of Snack
Ventures Europe, a joint venture between PepsiCo and General Mills, Inc., in
which PepsiCo owns a 60% interest. FLI also sells a variety of snack food
products which appeal to local tastes including, for example, WALKERS brand
snack foods, sold in the United Kingdom, WEDEL brand sweet snacks, sold in
Poland, and GAMESA brand cookies and ALEGRO brand sweet snacks, which are sold
in Mexico. In addition, RUFFLES, LAY'S, CHEEoTOS, DORITOS, FRITOS, TOSTITOS, and
SUNCHIPS brand salty snack foods have been introduced to international markets.
Principal international markets include Brazil, France, Mexico, Poland, the
Netherlands, South Africa, Spain and the United Kingdom.
COMPETITION
Both of PepsiCo's businesses are highly competitive. PepsiCo's beverages
and snack foods compete in the United States and internationally with widely
distributed products of a number of major companies that have plants in many of
the areas PepsiCo serves, as well as with private label soft drinks and snack
foods and with the products of local and regional manufacturers. For PepsiCo's
industry segments, the main areas of competition are price, quality and variety
of products, and customer service.
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EMPLOYEES
At December 27, 1997, PepsiCo employed, subject to seasonal variations,
approximately 142,000 persons (including approximately 12,000 part-time
employees), of whom approximately 79,000 (including approximately 10,000
part-time employees) were employed within the United States. PepsiCo believes
that its relations with employees are generally good.
RAW MATERIALS AND OTHER SUPPLIES
The principal materials used by PepsiCo in its beverage and snack food
businesses are corn sweeteners, sugar, aspartame, flavorings, vegetable and
essential oils, potatoes, corn, flour, seasonings and packaging materials. Since
PepsiCo relies on trucks to move and distribute many of its products, fuel is
also an important commodity. PepsiCo employs specialists to secure adequate
supplies of many of these items and has not experienced any significant
continuous shortages. Prices paid by PepsiCo for such items are subject to
fluctuation. When prices increase, PepsiCo may or may not pass on such increases
to its customers. Generally, when PepsiCo has decided to pass along price
increases, it has done so successfully. There is no assurance that PepsiCo will
be able to do so in the future.
GOVERNMENTAL REGULATIONS
The conduct of PepsiCo's businesses, and the production, distribution and
use of many of its products, are subject to various federal laws, such as the
Food, Drug and Cosmetic Act, the Occupational Safety and Health Act and the
Americans with Disabilities Act. The conduct of PepsiCo's businesses is also
subject to state, local and foreign laws.
PATENTS, TRADEMARKS, LICENSES AND FRANCHISES
PepsiCo owns numerous valuable trademarks which are essential to PepsiCo's
worldwide businesses, including PEPSI-COLA, PEPSI, DIET PEPSI, PEPSI MAX,
MOUNTAIN DEW, SLICE, MUG, ALL SPORT, 7UP and DIET 7UP (outside the United
States), MIRINDA, FRITO-LAY, LAY'S, DORITOS, RUFFLES, TOSTITOS, FRITOS,
CHEEoTOS, CRACKER JACK, ROLD GOLD, SUNCHIPS, SANTITAS, SMARTFOOD, SABRITAS and
WALKERS. Trademarks remain valid so long as they are used properly for
identification purposes, and PepsiCo emphasizes correct use of its trademarks.
PepsiCo has authorized (through licensing or franchise arrangements) the use of
many of its trademarks in such contexts as Pepsi-Cola bottling appointments and
snack food joint ventures. In addition, PepsiCo licenses the use of its
trademarks on collateral products for the primary purpose of enhancing brand
awareness.
PepsiCo either owns or has licenses to use a number of patents which relate
to certain of its products and the processes for their production and to the
design and operation of various equipment used in its businesses. Some of these
patents are licensed to others.
ENVIRONMENTAL MATTERS
PepsiCo continues to make expenditures in order to comply with federal,
state, local and foreign environmental laws and regulations, which expenditures
have not been material with respect to PepsiCo's capital expenditures, net
income or competitive position.
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BUSINESS SEGMENTS
Information as to net sales, operating profit and identifiable assets for
each of PepsiCo's industry segments and major geographic areas of operations, as
well as capital spending, acquisitions and investments in unconsolidated
affiliates, amortization of intangible assets and depreciation expense for each
industry segment for 1997, 1996 and 1995 is contained in Item 8 "Financial
Statements and Supplementary Data" in Note 17 on page F-23.
ITEM 2. PROPERTIES
BEVERAGES
PepsiCo's beverage business operates 111 plants throughout the world, of
which 93 are owned and 18 are leased, and unconsolidated affiliates operate
approximately 74 plants. In addition, PepsiCo's beverage business operates
approximately 365 warehouses or offices in the United States and Canada, of
which approximately 250 are owned and approximately 115 are leased.
PepsiCo owns a research and technical facility in Valhalla, New York, for
its beverage businesses. PepsiCo also owns the headquarters facilities for its
beverage businesses in Somers, New York. PepsiCo is seeking a buyer for the
Somers facility, and certain departments of the beverage businesses will be
moving to Purchase, New York to share the corporate headquarters building.
SNACK FOODS
Frito-Lay operates 55 food manufacturing and processing plants in the
United States and Canada, of which 49 are owned and 6 are leased. In addition,
Frito-Lay owns 182 warehouses and distribution centers and leases approximately
40 warehouses and distribution centers for storage of food products in the
United States and Canada. Approximately 1,675 smaller warehouses and storage
spaces located throughout the United States and Canada are leased or owned.
Frito-Lay owns its headquarters building and a research facility in Plano,
Texas. Frito-Lay also leases offices in Dallas, Texas and leases or owns
sales/regional offices throughout the United States. PepsiCo's snack food
businesses also operate approximately 70 plants and approximately 930
distribution centers, warehouses and offices outside of the United States and
Canada.
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.
PepsiCo believes that its properties are in good operating condition and
are suitable for the purposes for which they are being used.
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ITEM 3. LEGAL PROCEEDINGS
PepsiCo is subject to various claims and contingencies related to
lawsuits, taxes, environmental and other matters arising out of the normal
course of business. Management believes that the ultimate liability, if any, of
the claims and contingencies in excess of amounts already provided for, is not
likely to have a material adverse effect on PepsiCo's annual results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of names and ages of all the current executive
officers of the Company:
ROGER A. ENRICO, 53, is Chairman of the Board and Chief Executive Officer of the
Company. 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 of the Company 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,
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.
KARL M. VON DER HEYDEN, 61, is Vice Chairman of the Board and Chief Financial
Officer of the Company, positions he has held since September, 1996. Before
joining PepsiCo, Mr. von der Heyden was Co-Chairman and Chief Executive Officer
of RJR Nabisco from March through May, 1993 and Chief Financial Officer from
1989-1993. He served as President and Chief Executive Officer of
Metallgesellschaft Corp. from 1993 to 1994.
STEVEN S REINEMUND, 49, is Chairman and Chief Executive Officer of The Frito-Lay
Company. Mr. Reinemund 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, Inc. and assumed his
current position in April, 1996.
CRAIG E. WEATHERUP, 52, is currently Chairman and Chief Executive Officer of the
Pepsi-Cola Company, a position he has held since July, 1996. He joined
Pepsi-Cola as Marketing Director for the Far East in 1974, and became President
of Pepsi-Cola Bottling Group in 1986. He was appointed President of the
Pepsi-Cola Company in 1988, President and Chief Executive Officer of Pepsi-Cola
North America in 1991, and served as PepsiCo's President in 1996.
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JOHN CAHILL, 40, is Senior Vice President and Treasurer of the Company. Mr.
Cahill joined the Company in 1989 as Vice President, Corporate Finance and
Assistant Treasurer. Mr. Cahill became Senior Vice President, Finance and Chief
Financial Officer for KFC Corporation (a former subsidiary of the Company) in
1993. In 1996, he assumed the position of Senior Vice President and Chief
Financial Officer of Pepsi-Cola Company and returned to PepsiCo headquarters
when he was promoted to his present position in April 1997.
INDRA K. NOOYI, 42, is Senior Vice President, Strategic Planning, a position she
has held since 1994. Prior to joining PepsiCo, Ms. Nooyi spent four years as
Senior Vice President of Strategy, Planning and Strategic Marketing for Asea
Brown Boveri.
SEAN F. ORR, 43, is Senior Vice President and Controller of PepsiCo. Prior to
assuming his current position in 1997, Mr. Orr was Chief Financial Officer for
Frito-Lay North America. He joined PepsiCo in 1994 as Senior Vice President,
Finance and Chief Financial Officer of Frito-Lay. Prior to joining PepsiCo, Mr.
Orr was Vice President and Controller for The Reader's Digest Association from
1990 until 1994.
ROBERT F. SHARPE, JR., 45, became Senior Vice President, General Counsel and
Secretary of PepsiCo in January, 1998. Mr. Sharpe was Senior Vice President and
General Counsel of RJR Nabisco Holdings Corp. from 1996 until 1998, when he
joined PepsiCo. 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.
Executive officers are elected by the Company's Board of Directors, and
their terms of office continue until the next annual meeting of the Board or
until their successors are elected and have qualified. There are no family
relationships among the Company's executive officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Stock Trading Symbol - PEP
Stock Exchange Listings - The New York Stock Exchange is the principal
market for PepsiCo Capital Stock, which is also listed on the Amsterdam,
Chicago, Swiss and Tokyo Stock Exchanges.
Shareholders - At year-end 1997, there were approximately 229,000
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 1998 are expected to
be March 13, June 12, September 11 and December 11. Quarterly cash dividends
have been paid since PepsiCo was formed in 1965, and dividends paid per share
have increased for 25 consecutive years.
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Cash Dividends Declared Per Share (in cents): (See Note 1)
Quarter 1997 1996
- ------- ---- ----
1 11.5 10
2 12.5 11.5
3 12.5 11.5
4 12.5 11.5
---- ----
Total 49.0 44.5
Stock Prices - The high, low and closing prices for a share of PepsiCo
Capital Stock on the New York Stock Exchange, as reported by Bloomberg Service,
for each fiscal quarter of 1997 and 1996 were as follows (in dollars): (See Note
1)
1997 High Low Close
First Quarter 32 3/64 26 49/64 29 7/8
Second Quarter 35 27/32 28 23/32 35 27/32
Third Quarter 36 31/64 32 5/8 34 37/64
Fourth Quarter 40 34 1/4 34 11/16
1996 High Low Close
First Quarter 30 43/64 25 9/32 29 1/16
Second Quarter 31 45/64 27 9/32 30 29/64
Third Quarter 32 3/4 25 31/32 26 5/64
Fourth Quarter 30 7/32 25 27/32 27 15/64
Note 1: Cash dividends and stock prices have been adjusted to reflect the
two-for-one stock split effective for shareholders of record at the close of
business on May 10, 1996. Stock prices have also been adjusted to reflect the
spin-off of restaurant operations on October 6, 1997.
Item 6. Selected Financial Data
Included on pages F-33 through F-36.
Item 7. Management's Discussion and Analysis of Results of Operations, Cash
Flows and Liquidity and Capital Resources
Management's Discussion and Analysis
All per share information is computed using average shares outstanding, assuming
dilution.
INTRODUCTION
Management's Discussion and Analysis is presented in four sections. The
introductory section discusses the 1997 Disposal of the Restaurants Segment and
two pervasive issues impacting many companies, Market Risk and Year 2000 (pages
9-11). The second section analyzes the Results of Operations, first on a
consolidated basis and then for each of our two
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industry segments (pages 11-23). The final two sections address our consolidated
Cash Flows and Liquidity and Capital Resources (pages 23-26).
Cautionary Statements
From time to time, in written reports and oral statements, we discuss our
expectations regarding PepsiCo's future performance. These "forward-looking
statements" are based on currently available competitive, financial and economic
data and our operating plans. They are also inherently uncertain, and investors
must recognize that events could turn out to be significantly different from
what we expect.
Disposal of the Restaurants Segment
On August 14, 1997 we announced that our Board of Directors approved a formal
plan to spin off our restaurant businesses to our shareholders. Under the plan,
owners of PepsiCo capital stock as of September 19, 1997 received one share of
common stock of the new restaurant company, TRICON Global Restaurants, Inc.
(TRICON), for every ten shares of PepsiCo capital stock. The spin-off was
completed on October 6, 1997 (Distribution Date). In 1997, we also sold PepsiCo
Food Systems (PFS), the restaurant distribution operation and all of the
non-core U.S. restaurant businesses. As a result, the sales, costs and expenses,
assets and liabilities, and cash flows of the Restaurants segment have been
classified as discontinued operations in our financial statements. See Note 4.
Accordingly, the discussions that follow focus on the continuing operations of
our packaged goods businesses.
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:
- interest rates on our debt and short-term investment portfolios;
- foreign exchange rates, generating translation and transaction gains and
losses and
- commodity prices, affecting the cost of our products.
Interest Rates
PepsiCo centrally manages its 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 generally 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 offset by the
opposite market impact on the related debt.
Our investment portfolios 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.
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Assuming year-end 1997 variable rate debt and investment levels, a
one-point change in interest rates would impact net interest expense by $13
million.
Foreign Exchange
Operating in international markets sometimes involves exposure to volatile
movements in currency exchange rates. The economic impact of currency 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 16% percent of our 1997
consolidated operating profit, excluding unusual items. As currency exchange
rates change, translation of the income statements of our international
businesses into U.S. dollars affects year-over-year comparability of operating
results. 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 currency exchange rates that would have the largest impact
on translating our international operating profit include the Mexican peso,
British pound, Canadian dollar and Brazilian real. We estimate that a 10% change
in foreign exchange rates would impact reported operating profit by less than
$50 million. This represents 10% of the international segment operating profit
(disclosed on page F-27) after adjusting for unusual items. We believe that this
quantitative measure has inherent limitations because, as discussed in the first
paragraph of this section, it does not take into account any governmental
actions or changes in either customer purchasing patterns or our financing and
operating strategies.
Foreign exchange gains and losses reflect transaction gains and losses
and 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. Net foreign exchange gains and losses were not material to our
earnings for the last three years.
The sensitivity analyses presented in the interest and foreign exchange
discussions above disregard the possibility that rates can move in opposite
directions and that gains from one category may or may not be offset by losses
from another category and vice versa.
Commodities
We are subject to market risk with respect to 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 immaterial
amounts of our commodity purchases.
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Year 2000
The Year 2000 issue is the result of computer programs using two digits rather
than four to define the applicable year. Computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
leading to disruptions in a company's operations. If either we, our significant
customers or suppliers fail to correct Year 2000 issues, such failure could have
a significant impact on our ability to operate our businesses. However, the
impact cannot be quantified at this time.
We are in the process of taking actions to address and complete the
work associated with the Year 2000. Each of our business segments and Corporate
have established teams to identify and correct Year 2000 issues. Internal
software with non-compliant code is expected to be fixed or replaced with
software that is Year 2000 compliant. Similar attention is being given to
technology infrastructures, manufacturing plants and building facilities to
achieve compliance in all these areas. The teams are also charged with
investigating the Year 2000 capabilities of suppliers, customers and other
external entities, and with developing contingency plans where necessary.
An inventory and assessment of all computer systems and application
software have been completed, and plans for establishing compliance have been
developed in the U.S. These plans identify which non-compliant hardware and
software will be corrected, upgraded or replaced; the timetable and resource
requirements to achieve those objectives and estimated associated costs.
Remediation and testing activities are under way at both Pepsi-Cola and
Frito-Lay. Most of our larger international operations have made similar
progress, while some of our smaller international operations, which are
generally less automated, are still developing their strategies.
We do not expect Year 2000 spending to materially affect consolidated
profitability or liquidity. This expectation assumes that our existing forecast
of costs to be incurred contemplates all significant actions required and that
we will not be obligated to incur significant Year 2000 related costs on behalf
of our customers or suppliers. About 40% of the total estimated spending
represents replacement systems that, in addition to being Year 2000 compliant,
provide significantly enhanced capability which will benefit operations in
future years.
RESULTS OF OPERATIONS
Consolidated Review
Net Sales rose $580 million or 3% in 1997, reflecting volume gains, partially
offset by the impact of unfavorable currency translation. Net sales rose $1.3
billion or 7% in 1996, reflecting net volume gains and higher effective net
pricing (including the effect of product, package and country mix) in both of
our business segments. These gains were partially offset by an unfavorable
foreign currency translation impact. Volume gains in both years were driven by
worldwide Snack Foods and North American Beverages.
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Cost of sales as a percent of net sales decreased .8 of a point to 40.8 percent
in 1997, primarily reflecting favorable raw material costs in International
Beverages and, the leveraging effect of higher pricing partially offset by
increased costs for new plant capacity and the planned introduction of new
products in 1998 by North American Snack Foods. Cost of sales as a percent of
net sales decreased .6 of a point to 41.6 percent in 1996 primarily due to lower
raw materials costs in North American Beverages coupled with the leveraging
effect of the higher effective net pricing.
Selling, general and administrative expenses (SG&A) comprises selling and
distribution expenses (S&D), advertising and marketing expenses (A&M), general
and administrative expenses (G&A), other income and expense and equity income or
loss from investments in unconsolidated affiliates. In 1997, SG&A grew 2%, or at
a slower rate than sales. This primarily reflects equity income from our
investments in unconsolidated affiliates, compared to losses a year ago, and A&M
growing at a significantly slower rate than sales. The change in equity income
primarily reflects the absence of losses from our Latin American bottler, Buenos
Aires Embotelladora S.A. (BAESA). G&A grew significantly faster than sales,
reflecting information systems-related expenses, customer focus leadership
training and infrastructure costs related to our new fountain beverage sales
team. These increased expenses were partially offset by savings from a prior
year restructuring and the consolidation of certain administrative functions.
In 1996, A&M and S&D grew faster than net sales, driving an 11%
increase in SG&A, led by International Beverages. Equity losses from our
unconsolidated affiliates, compared to equity income in 1995, primarily reflect
our share of operating losses from BAESA.
Amortization of intangible assets declined 3% to $199 million and 1% to $206
million in 1997 and 1996, respectively.
Unusual items of $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 relate
to decisions to dispose of and write down assets, improve productivity and
strengthen the international bottler structure. See Note 2. The 1995 charge of
$66 million ($64 million after-tax or $0.04 per share) is the initial, noncash
impairment charge upon adoption of Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." See Note 3.
12
Operating Profit
% Growth Rates
($ in millions) 1997 1996 1995 1997 1996
------ ------ ------ ------ ------
Operating Profit
Reported $2,662 $2,040 $2,606 30 (22)
Ongoing $2,952 $2,616 $2,672 13 (2)
Ongoing excludes the effect of the unusual items (see Note 2).
- ---------------------------------------------------------------------------
In 1997, reported operating profit increased $622 million. Ongoing operating
profit increased $336 million reflecting segment operating profit growth of $392
million or 14%, partially offset by a $56 million or 32% increase in unallocated
expenses. The increase in segment operating profit primarily reflects the volume
gains and lower raw material costs in worldwide Beverages. The increase in
unallocated expenses relates to higher corporate expenses and foreign exchange
losses in 1997 compared to gains in 1996.
In 1996, reported operating profit declined $566 million. Ongoing
operating profit decreased $56 million due to a $30 million or 21% increase in
unallocated expenses and a combined segment operating profit decrease of $26
million or 1%. The increased unallocated expenses relate to centrally
administered benefit plans and higher corporate expenses. The decline in segment
operating profit reflects increased costs in excess of higher effective net
pricing, partially offset by volume gains. The change in ongoing segment
operating profit also includes unfavorable currency translation impacts.
Interest expense, net of interest income, declined $121 million or 26%. Interest
expense declined $87 million or 15% in 1997, primarily reflecting lower average
U.S. debt levels. Debt levels were reduced using a portion of the cash flows
provided by discontinued operations and proceeds repatriated from our
investments in Puerto Rico. The repatriation of funds resulted from a 1996
change in tax law which eliminated a tax exemption on investment income in
Puerto Rico. Interest income increased $34 million or 37% reflecting higher
average investment levels, which also benefited from cash flows provided by
discontinued operations.
Interest expense, net of interest income in 1996 declined $41 million
or 8%, reflecting lower international debt levels and U.S. interest rates.
13
Provision for Income Taxes
($ in millions) 1997 1996 1995
------- ------- -------
Reported
Provision for income taxes $ 818 $ 624 $ 669
Effective tax rate 35.4% 39.8% 32.0%
Ongoing
Provision for income taxes $ 869 $ 673 $ 671
Effective tax rate 33.4% 31.4% 31.1%
Ongoing excludes the effect of the unusual items (see Note 2).
__________________________________________________________________
Our 1997 reported effective tax rate decreased 4.4 points to 35.4%. Our ongoing
effective tax rate increased 2.0 points to 33.4%, primarily reflecting the
absence of cumulative tax credits recognized in 1996 that related to prior
years, lower benefits in 1997 from the current year resolution of prior years'
audit issues and other individually immaterial items.
Our 1996 reported effective tax rate increased 7.8 points to 39.8%. Our
ongoing effective tax rate remained about even with the prior year as lower
benefits from the current year resolution of prior years' audit issues were
offset by the cumulative tax credits related to prior years and other
individually immaterial items.
Income From Continuing Operations and Income Per Share
($ in millions except
per share amounts)
% Growth Rates
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
Income from con-
tinuing operations
Reported $ 1,491 $ 942 $ 1,422 58 (34)
Ongoing $ 1,730 $ 1,469 $ 1,486 18 (1)
Income per share
from continuing
operations*
Reported $ 0.95 $ 0.59 $ 0.88 62 (34)
Ongoing $ 1.10 $ 0.92 $ 0.92 20 (1)
Ongoing excludes the effect of the unusual items (see Note 2).
* The percentage change in income per share is calculated by using income per
share calculated to four decimal places in order to eliminate the effects of
rounding.
- ---------------------------------------------------------------------------
14
Income From Discontinued Operations and Income Per Share
($ in millions except
per share amounts)
% Growth Rates
1997 1996 1995 1997 1996
----- ----- ----- ---- ----
Income from discon-
tinued operations $ 651 $ 207 $ 184 NM 13
Income per share
from discontinued
operations* $0.41 $0.13 $0.12 NM 13
* The percentage change in income per share is calculated by using income per
share calculated to four decimal places in order to eliminate the effects of
rounding.
NM - Not Meaningful
- ---------------------------------------------------------------------------
Income from discontinued operations reflects the operating results of TRICON's
core restaurant businesses of Pizza Hut, KFC and Taco Bell through the
Distribution Date, as well as PFS, the restaurant distribution operation sold in
the second quarter, and several non-core U.S. restaurant businesses through
their respective disposal dates in 1997. Reported operating results include
expenses associated with the spin-off and interest expense directly related to
the Restaurants segment. It does not include an allocation of PepsiCo interest
expense or G&A. It also includes the 1997 gain from the sale of PFS. (See Note
4).
Net Income and Net Income Per Share
($ in millions except
per share amounts)
% Growth Rates
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
Net income $2,142 $1,149 $1,606 86 (28)
Net income per share* $ 1.36 $ 0.72 $ 1.00 91 (28)
Average shares out-
standing used to calculate
net income per share 1,570 1,606 1,608 (2) -
* The percentage change in income per share is calculated by using income per
share calculated to four decimal places in order to eliminate the effects of
rounding.
- ---------------------------------------------------------------------------
15
INDUSTRY SEGMENTS (page 1 of 2)
----------------------------------------------------------------------------
($ in millions) 1997 1996 1995 1994 1993
----- ---- ---- ---- ----
NET SALES
Beverages
North America(a) $ 7,852 $ 7,734 $ 7,427 $ 7,045 $ 6,464
International 2,689 2,853 3,040 2,609 2,168
-------- -------- -------- -------- -------
10,541 10,587 10,467 9,654 8,632
-------- -------- -------- -------- -------
Snack Foods
North America(a) 6,967 6,628 5,873 5,379 4,686
International 3,409 3,122 2,727 2,951 2,388
-------- -------- -------- -------- -------
10,376 9,750 8,600 8,330 7,074
-------- -------- -------- -------- -------
Combined Segments $ 20,917 $ 20,337 $ 19,067 $ 17,984 $15,706
======== ======== ======== ======== =======
OPERATING PROFIT(b)
Beverages
North America(a) $ 1,297 $ 1,412 $ 1,238 $ 1,104 $ 1,012
International (137) (830) 128 147 104
-------- -------- -------- -------- -------
1,160 582 1,366 1,251 1,116
-------- -------- -------- -------- -------
Snack Foods
North America(a) 1,414 1,286 1,149 1,043 914
International 318 346 301 354 285
-------- -------- -------- -------- -------
1,732 1,632 1,450 1,397 1,199
-------- -------- -------- -------- -------
Combined Segments 2,892 2,214 2,816 2,648 2,315
-------- -------- ------- -------- -------
Adjustments
Equity (income)/loss
from unconsolidated
affiliates (84) 274 (38) (52) (31)
Other(c) 1 10 (37) (2) 15
-------- -------- ------- -------- -------
Total Adjustments (83) 284 (75) (54) (16)
-------- ------- ------- -------- -------
Combined Segments
SFAS 14 Basis(d) $ 2,809 $ 2,498 $ 2,741 $ 2,594 $ 2,299
======== ======== ======== ======== =======
Continued on next page.
16
INDUSTRY SEGMENTS (page 2 of 2)
($ in millions)
- ---------------------------------------------------------------------------
(a) North America is composed of operations in the U.S. and Canada.
(b) Represents reported amounts. See Note 2 - Unusual Items Affecting
Comparability for 1997 and 1996. In addition, 1995 segment operating
profit excludes the $66 charge for the initial, noncash impact of
adopting SFAS 121 and 1994 International Beverages includes an $18 gain
on the stock offering by BAESA.
(c) Adjustments directly allocable to industry segments for SFAS 14
purposes but reported in Corporate. Adjustments include the $66 SFAS
121 charge in 1995 and elimination of the $18 gain on a stock offering
by BAESA in 1994.
(d) Operating profit as defined by SFAS 14 and as disclosed in Note 17.
17
Beverages
% Growth Rates
($ in millions) 1997 1996 1995 1997 1996
---- ---- ---- ---- ----
Net Sales
North America $ 7,852 $ 7,734 $ 7,427 2 4
International 2,689 2,853 3,040 (6) (6)
-------- -------- -------
$ 10,541 $ 10,587 $10,467 - 1
======== ======== =======
Operating Profit
Reported
North America $ 1,297 $ 1,412 $ 1,238 (8) 14
International (137) (830) 128 83 NM
-------- -------- -------
$ 1,160 $ 582 $ 1,366 99 (57)
======== ======== =======
Ongoing
North America $ 1,349 $ 1,412 $ 1,238 (4) 14
International 17 (254) 128 NM NM
-------- -------- -------
$ 1,366 $ 1,158 $ 1,366 18 (15)
======== ======== =======
Ongoing excludes unusual items of $206 ($52-North America, $154-International)
in 1997 and $576 (all International) in 1996 (see Note 2). Unless otherwise
noted, operating profit comparisons within the following discussions are based
on ongoing operating profit.
NM - Not Meaningful
- ---------------------------------------------------------------------------
System bottler case sales (BCS) is our standard volume measure. It represents
PepsiCo-owned brands as well as brands we have been granted the right to
produce, distribute and market nationally.
1997 vs. 1996
North America
Net sales increased $118 million reflecting volume growth, led by take-home
packaged products, partially offset by lower effective net pricing. The decrease
in effective net pricing was primarily in take-home packaged products,
reflecting an intensely competitive environment.
BCS increased 4%, primarily reflecting double-digit growth by the
Mountain Dew brand. Non-carbonated soft drink products, led by Aquafina bottled
water and Lipton Brisk tea, grew at a double-digit rate. Our concentrate
shipments to franchisees grew at a slower rate than their BCS growth during the
year.
18
Reported operating profit declined $115 million. Ongoing operating
profit declined $63 million, reflecting the lower effective net pricing, higher
S&D costs and increased A&M. S&D grew significantly faster than sales, but in
line with volume. A&M grew significantly faster than sales and volume, primarily
reflecting above average levels of expenditures late in 1997. These unfavorable
items were partially offset by the volume gains and lower packaging and
commodity costs. G&A savings from centralizing certain administrative functions
were fully offset by Year 2000 spending and infrastructure development costs
related to our new fountain beverage sales team. The decline in ongoing
operating profit also reflects lapping 1996 gains from the sale of an investment
in a bottling cooperative and a settlement made with a supplier.
International
Net sales declined $164 million. The decline was due to unfavorable currency
translation effects, primarily driven by Spain and Japan.
BCS increased 1%. Strong double-digit growth in China, the Philippines
and India was partially offset by double-digit declines in Brazil, Venezuela and
South Africa. The declines in Venezuela and South Africa reflect the impact of
the unexpected loss of our bottler in August 1996 and the cessation of our joint
venture operation, respectively. In November 1996, we entered into a new joint
venture to replace the Venezuelan bottler. Total concentrate shipments to
franchisees increased at about the same rate as their BCS.
Reported operating losses declined $693 million. Ongoing operating
results improved by $271 million, reflecting a small profit in 1997 compared to
a loss in 1996. The increase in ongoing operating results was driven by lower
manufacturing costs, reduced net losses from our investments in unconsolidated
affiliates and lower G&A expenses. Operating results also benefited from the
lapping of 1996's higher-than-normal expenses from fourth quarter balance sheet
adjustments and actions. The lower manufacturing costs were primarily due to
favorable raw material costs and lower depreciation resulting from certain
businesses held for disposal. The reduced net losses from our unconsolidated
affiliates were primarily driven by the absence of losses from BAESA. The lower
G&A expenses reflect savings from our fourth quarter 1996 restructuring of about
$70 million.
19
1996 vs. 1995
North America
Net sales rose $307 million. The gain reflects volume growth, led by carbonated
soft drink products, and higher effective net pricing.
BCS increased 4%, with solid increases in Brand Pepsi and the Mountain
Dew brand. Non-carbonated soft drink products, led by Aquafina bottled water and
Hawaiian Punch fountain syrup, grew at a double-digit rate. Our concentrate
shipments to franchisees grew at a slightly faster rate than their BCS growth.
Operating profit increased $174 million. The growth reflects the volume
gains, lower product costs and the higher effective net pricing. A&M expenses
grew significantly faster than sales, primarily due to the Pepsi Stuff
promotion. S&D expenses grew at the same rate as sales and volume. Profit growth
was aided by lapping charges taken in 1995, primarily for losses on supply
contracts, take-or-pay co-packing penalties and a write down of excess
co-packing assets. A 1996 gain on the sale of an investment in a bottling
cooperative and a 1996 settlement with a supplier for purchases made in prior
years also helped profit growth.
Benefits of approximately $130 million related to the 1992 U.S.
restructuring were achieved in 1996 due to the centralization of purchasing and
improved administrative and business processes. All benefits from the
restructuring will be reinvested in the business.
International
In 1996 we began to implement a new strategy to focus on building our core
business in markets in which we are already strong and in certain emerging
markets. Decisions were made accordingly to dispose of certain businesses and to
restructure operations, resulting in unusual impairment and restructuring
charges. Liabilities associated with the restructuring charge were expected to
be paid by the end of 1997 and the restructuring was expected to generate about
$50 million in savings in 1997 and about $80 million a year thereafter.
Net sales declined $187 million, primarily due to unfavorable currency
translation impacts and lower volume. The volume decline reflects lower
concentrate shipments to franchisees, partially offset by higher packaged
product sales to retailers.
BCS decreased 2%. Excluding the impact of the unexpected loss of our
Venezuelan bottler, BCS declined 1%. A single-digit decline in Latin America was
partially offset by strong double-digit growth in China and India. Our
concentrate shipments to franchisees declined at a significantly faster rate
than their BCS decline.
20
Reported operating results declined $958 million. Ongoing operating
results declined $382 million. The decline reflects broad-based increases in
A&M, higher-than-normal expenses from fourth quarter balance sheet adjustments
and actions, increased net losses from our unconsolidated affiliates and a
decline in volume. The increased net losses from our unconsolidated affiliates
were driven by our equity share of BAESA's operating losses.
Snack Foods
% Growth Rates
($ in millions) 1997 1996 1995 1997 1996
---- ---- ---- ---- ----
Net Sales
North America $ 6,967 $6,628 $5,873 5 13
International 3,409 3,122 2,727 9 14
------- ------ ------
$10,376 $9,750 $8,600 6 13
======= ====== ======
Operating Profit
Reported
North America $ 1,414 $1,286 $1,149 10 12
International 318 346 301 (8) 15
------- ------ ------
$ 1,732 $1,632 $1,450 6 13
======= ====== ======
Ongoing
North America $ 1,436 $1,286 $1,149 12 12
International 380 346 301 10 15
------- ------ ------
$ 1,816 $1,632 $1,450 11 13
======= ====== ======
Ongoing excludes unusual charges of $84 ($22-North America, $62-International)
in 1997 (see Note 2). Unless otherwise noted, operating profit comparisons
within the following discussions are based on ongoing operating profit.
- ---------------------------------------------------------------------------
Pound and kilo sales are our standard volume measures. Pound and kilo growth are
reported on a systemwide basis, which includes both consolidated businesses and
unconsolidated affiliates operating for at least one year.
21
1997 vs. 1996
North America
Net sales grew $339 million reflecting increased volume and the benefit of
higher pricing taken on most major brands late in 1996.
Pound volume advanced 3%. Growth of our core brands, excluding their
low-fat and no-fat versions, was led by high single-digit growth in Lay's brand
potato chips, strong double-digit growth by Tostitos brand tortilla chips and
single-digit growth by Doritos brand tortilla chips. Baked Lay's brand potato
crisps reported low double-digit growth; however, the remainder of our low-fat
and no-fat snacks business depressed the overall growth rate.
Reported operating profit grew $128 million. Ongoing operating profit rose
$150 million, reflecting the higher pricing and volume growth, partially offset
by increased manufacturing costs and G&A expenses. The increased manufacturing
costs relate to new plant capacity and the planned introduction of new products
in 1998. S&D grew slower than sales, A&M was about even with prior year and G&A
increased significantly faster than sales reflecting information systems-related
expenses and customer focus leadership training. Operating profit growth was
hampered by lapping a 1996 gain from the sale of a non-core business.
International
Net sales increased $287 million reflecting volume gains and higher effective
net pricing.
Salty snack kilos rose 11%, led by strong double-digit growth by Sabritas
and our business in Brazil, while sweet snack kilos declined 5%, due to a market
contraction at Gamesa.
Reported operating profit decreased $28 million. Ongoing operating profit
increased $34 million. The increase primarily reflects volume gains partially
offset by increased G&A. The higher effective net pricing was fully offset by
inflation-driven higher operating and manufacturing costs, primarily in Mexico.
Ongoing operating profit also benefited from the gain on the sale of a flour
mill.
1996 vs. 1995
North America
Net sales grew $755 million. The increase reflects strong volume growth and
higher effective net pricing taken across all core brands in late 1995 and late
1996.
Pound volume advanced 9%, reflecting exceptional performance from the
low-fat and no-fat categories. These categories contributed over 45% of the
total pound growth, led by Baked Lay's brand potato crisps. Core brands,
excluding their low-fat and no-fat versions, had mid-single-digit growth led by
double-digit growth in Lay's brand potato chips and strong double-digit growth
in Tostitos brand tortilla chips.
22
Operating profit grew $137 million. The increase reflects the volume
growth and the higher effective net pricing, which exceeded increased
promotional price allowances and merchandising support. The growth rate of
promotional price allowances moderated in the fourth quarter. These gains were
partially offset by higher operating and manufacturing costs and increased
administrative expenses. The increased operating costs reflect increased S&D and
A&M. S&D and manufacturing costs both reflect capacity costs and some
inefficiencies incurred to capture the volume opportunities created when
Anheuser-Busch exited the salty snack food business. These inefficiencies began
to moderate in the fourth quarter. The increase in operating expenses coupled
with higher G&A expenses, partially reflect investment spending to sustain
strong volume growth. This increased investment spending, including costs of
developing and testing new products, was partially offset by a gain on the sale
of a non-core business.
International
Net sales increased $395 million. This growth reflects inflation-based price
increases in Mexico and volume growth, partially offset by an unfavorable
currency translation impact, led by the peso.
Salty snack kilos rose 8%, reflecting double-digit growth at Sabritas
and strong single-digit growth in the U.K. Sweet snack kilos declined 2%, led by
a single-digit decline at Gamesa, due to marketwide contraction, and a
double-digit decline at Alegro, the sweet snack division of Sabritas.
Operating profit increased $45 million. The increase reflects higher
effective net pricing in advance of inflation-driven product and operating cost
increases, primarily in Mexico, and the increased volumes. These gains were
partially offset by increased administrative expenses and the net unfavorable
currency translation impact. A&M expenses increased, partially reflecting
investment in global advertising and design.
CONSOLIDATED CASH FLOWS
PepsiCo's 1997 consolidated cash and cash equivalents increased $1.6 billion
over the prior year reflecting a significant increase in cash provided by
discontinued operations, partially offset by increased cash outflows to reduce
debt, increase our investment portfolios and repurchase shares.
Net cash provided by operating activities rose $227 million or 7% to
$3.4 billion in 1997, driven by increased income before all noncash charges and
credits. Cash flow growth from operating working capital was reduced by the
year-over-year change in accounts payable and other current liabilities,
primarily due to lapping restructuring accruals recorded in the fourth quarter
of 1996.
Net cash used for investing activities nearly doubled in 1997 to $2.1
billion, primarily reflecting a $1.5 billion swing in our short-term investment
portfolio activity, partially offset by $178 million of increased proceeds from
sales of businesses and reduced
23
capital spending of $124 million. The change in our short-term investment
portfolio activity primarily reflects investing a portion of the cash flows
provided by discontinued operations. This compares to 1996 when we repatriated
the proceeds from our maturing investments in Puerto Rico as a result of the
Small Business Job Protection Act of 1996. This tax law eliminated our exemption
from U.S. Federal income tax on investment income generated in Puerto Rico. The
repatriated proceeds were used to reduce outstanding commercial paper debt. The
cash flow from sales of businesses in 1997 primarily reflects the sale of
international bottling operations and our investment in a non-core international
snack food business. Lower capital spending was driven by North American Snack
Foods. The decline reflects the lapping of 1996 capital spending incurred to
capture volume opportunities created when Anheuser-Busch exited the salty snack
food business, partially offset by 1997 new product-related spending. Spending
on acquisitions and investments in unconsolidated affiliates is expected to
increase in 1998.
Net cash used for financing activities more than doubled to $6.0
billion in 1997. The increase primarily reflects increased net debt repayments
of $2.5 billion and share repurchases.
Share repurchase activity:
(in millions) 1997 1996 1995
---- ---- ----
Cost $ 2,459 $ 1,651 $ 541
Shares repurchased
Number of shares 69.0 54.2 24.6
% of shares outstanding at
beginning of year 4.5% 3.4% 1.6%
At December 27, 1997, 132 million shares were available under the current
repurchase authority granted by our Board of Directors.
Net cash flow provided by discontinued operations increased $5.6
billion in 1997. The significant increase primarily reflects a $4.5 billion cash
distribution received from TRICON just prior to the Restaurant spin-off. In
addition, it reflects after-tax cash proceeds of $1.0 billion associated with
the sale of PFS and the non-core U.S. restaurant businesses, the effects of
refranchising restaurants and other operating activities.
24
Free Cash Flow
Free cash flow is a measure we use internally to evaluate our cash flow
performance and should be considered in addition to, but not as a substitute
for, other measures of financial performance in accordance with generally
accepted accounting principles. These funds provide us with flexibility to
reduce our debt outstanding, repurchase shares or make strategic investments and
acquisitions.
($ in millions) 1997 1996 1995
---- ---- ----
Earnings before interest, taxes,
depreciation and amortization* $ 4,001 $ 3,479 $ 3,718
Interest expense, net (353) (474) (515)
Provision for income taxes (818) (624) (669)
Other noncash items and working
capital 589 811 108
------- ------- -------
Net cash provided by operating
activities 3,419 3,192 2,642
Investing activities
Capital spending (1,506) (1,630) (1,365)
Sales of businesses 221 43 14
Sales of property, plant and
equipment 80 9 93
Other, net (96) (214) (229)
------- ------- -------
Free cash flow before cash
dividends paid 2,118 1,400 1,155
Cash dividends paid (736) (675) (599)
------- ------- -------
Free cash flow
Continuing operations 1,382 725 556
Discontinued operations 6,236 605 506
------- ------- -------
$ 7,618 $ 1,330 $ 1,062
======= ======= =======
* Net of the noncash portion of unusual items.
- ---------------------------------------------------------------------------
The $6.3 billion increase in free cash flow in 1997 largely reflects our
strategic initiative to exit the restaurant business. In addition, free cash
flow from continuing operations nearly doubled with improved cash flows from
operating activities, larger proceeds arising from the sale of businesses and
reduced capital spending. Both continuing and discontinued operations
contributed to the $268 million or 25% increase in the 1996 free cash flow.
25
LIQUIDITY AND CAPITAL RESOURCES
At year-end 1997, $2.1 billion of short-term borrowings were reclassified as
long-term, reflecting our intent and ability, through the existence of our
unused revolving credit facilities, to refinance these borrowings. Our unused
credit facilities, which exist largely to support the issuances of short-term
debt, were $2.75 billion and $3.5 billion at year-end 1997 and 1996,
respectively. Annually, these facilities can be extended an additional year upon
the mutual consent of PepsiCo and the lending institutions. We reduced our
credit facilities by $750 million at year-end 1997 due to decreased borrowing
needs.
Our net debt level, which reflects the pro forma remittance of
investment portfolios (net of related taxes) as a reduction of total debt, and
leverage at year-end 1997 were lower than prior years. We plan to gradually
releverage over time.
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 9.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Information on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and background of each of the Company's directors nominated
for reelection are contained under the caption "Election of Directors" in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders on pages 2
through 4 and are incorporated herein by reference. Pursuant to Item 401(b) of
Regulation S-K, the executive officers of the Company are reported in Part I of
this report.
ITEM 11. EXECUTIVE COMPENSATION
Information on compensation of the Company's directors and executive
officers is contained in the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders under the captions "Directors Compensation" and
"Executive Compensation", respectively, and is incorporated herein by reference.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on the number of shares of PepsiCo Capital Stock beneficially
owned by each director and by all directors and officers as a group is contained
under the caption "Ownership of Capital Stock by Directors and Officers" in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is
incorporated herein by reference. As far as is known to the Company, no person
owns beneficially more than 5% of the outstanding shares of PepsiCo Capital
Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to Financial Information on page F-1.
2. Financial Statement Schedule
See Index to Financial Information on page F-1.
3. Exhibits
See Index to Exhibits on page E-1.
(b) Reports on Form 8-K
None.
27
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, PepsiCo has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 24, 1998
PepsiCo, Inc.
By: /s/ ROGER A. ENRICO
-------------------
Roger A. Enrico
Chairman of the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of PepsiCo and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ ROGER A. ENRICO Chairman of the Board March 24, 1998
Roger A. Enrico and
Chief Executive Officer
/s/ KARL M. VON DER HEYDEN Vice Chairman of the March 24, 1998
Karl M. von der Heyden Board and Chief
Financial Officer
/s/ SEAN F. ORR Senior Vice President March 24, 1998
Sean F. Orr and Controller
(Principal Accounting
Officer)
/s/ JOHN F. AKERS Director March 24, 1998
John F. Akers
/s/ ROBERT E. ALLEN Director March 24, 1998
Robert E. Allen
/s/ D. WAYNE CALLOWAY Director March 24, 1998
D. Wayne Calloway
/s/ PETER FOY Director March 24, 1998
Peter Foy
/s/ RAY L. HUNT Director March 24, 1998
Ray L. Hunt
S-1
/s/ JOHN J. MURPHY Director March 24, 1998
John J. Murphy
/s/ STEVEN S REINEMUND Chairman and Chief March 24, 1998
Steven S Reinemund Executive Officer of
The Frito-Lay Company
and Director
/s/ SHARON PERCY ROCKEFELLER Director March 24, 1998
Sharon Percy Rockefeller
/s/ FRANKLIN A. THOMAS Director March 24, 1998
Franklin A. Thomas
/s/ P. ROY VAGELOS Director March 24, 1998
P. Roy Vagelos
/s/ CRAIG E. WEATHERUP Chairman and Chief March 24, 1998
Craig E. Weatherup Executive Officer of
Pepsi-Cola Company and
Director
/s/ ARNOLD R. WEBER Director March 24, 1998
Arnold R. Weber
S-2
INDEX TO EXHIBITS
ITEM 14(A)(3)
EXHIBIT
3.1 Restated Articles of Incorporation of PepsiCo, Inc., which is
incorporated herein by reference from Exhibit 3(i) to PepsiCo's
Quarterly Report on Form 10-Q for the quarterly period ended June
15, 1996.
3.2 By-Laws of PepsiCo, Inc., as amended to July 25, 1996, which are
incorporated herein by reference from Exhibit 3(ii) to PepsiCo's
Quarterly Report on Form 10-Q for the quarterly period ended June
15, 1996.
4 PepsiCo, Inc. agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any instrument defining the
rights of holders of long-term debt of PepsiCo, Inc. and all of its
subsidiaries for which consolidated or unconsolidated financial
statements are required to be filed with the Securities and Exchange
Commission.
10.1 Description of PepsiCo, Inc. 1988 Director Stock Plan, which is
incorporated herein by reference from Post-Effective Amendment
No. 2 to PepsiCo's Registration Statement on Form S-8
(Registration No. 33-22970).
10.2 PepsiCo, Inc. 1987 Incentive Plan (the "1987 Plan"), which is
incorporated by reference from Exhibit 10(b) to PepsiCo's Annual
Form 10-K for the fiscal year ended December 26, 1992.
10.3 Operating Guideline No. 1 under the 1987 Plan, as amended through
July 25, 1991, which is incorporated by reference from Exhibit 10(d)
to PepsiCo's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.4 Operating Guideline No. 2 under the 1987 Plan and the Plan, as
amended through January 22, 1987, which is incorporated herein by
reference from Exhibit 28(b) to PepsiCo's Registration Statement
on Form S-8 (Registration No. 33-19539).
10.5 PepsiCo, Inc. 1995 Stock Option Incentive Plan, which is
incorporated herein by reference from PepsiCo's Registration
Statement on Form S-8 (Registration No. 33-61731).
10.6 PepsiCo, Inc. 1994 Long-Term Incentive Plan, which is incorporated
herein by reference from Exhibit A to PepsiCo's Proxy Statement for
its 1994 Annual Meeting of Shareholders.
10.7 PepsiCo, Inc. Executive Incentive Compensation Plan, which is
incorporated herein by reference from Exhibit B to PepsiCo's Proxy
Statement for its 1994 Annual Meeting of Shareholders.
10.8 Amended and Restated PepsiCo Executive Income Deferral Program.
10.9 Restated PepsiCo Pension Equalization Plan.
E-1
12 Computation of Ratio of Earnings to Fixed Charges.
21 Active Subsidiaries of PepsiCo, Inc.
23 Report and Consent of KPMG Peat Marwick LLP.
24 Power of Attorney.
27 Financial Data Schedule.
E-2
PEPSICO, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
Item 14(a)(1)-(2)
Page
Reference
Item 14(a)(1) Financial Statements
Consolidated Statement of Income for
the fiscal years ended December 27, 1997
December 28, 1996 and December 30, 1995 F-2
Consolidated Statement of Cash Flows for
the fiscal years ended December 27, 1997,
December 28, 1996 and December 30, 1995 F-3
Consolidated Balance Sheet at December 27, 1997
and December 28, 1996 F-5
Consolidated Statement of Shareholders' Equity
for the fiscal years ended December 27, 1997,
December 28, 1996 and December 30, 1995 F-6
Notes to Consolidated Financial Statements F-8
Management's Responsibility for Financial Statements F-31
Report of Independent Auditors, KPMG Peat Marwick LLP F-32
Selected Financial Data F-33 - F-36
Item 14(a)(2) Financial Statement Schedule
II Valuation and Qualifying Accounts for the
fiscal years ended December 27, 1997,
December 28, 1996 and December 30, 1995 F-37
All other financial statements and schedules have been omitted since the
required information is not applicable.
F - 1
Consolidated Statement of Income
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995
1997 1996 1995
- --------------------------------------------------------------------------
Net Sales $20,917 $20,337 $19,067
Costs and Expenses, net
Cost of sales 8,525 8,452 8,054
Selling, general and
administrative expenses 9,241 9,063 8,133
Amortization of intangible assets 199 206 208
Unusual items 290 576 66
Operating Profit 2,662 2,040 2,606
Interest expense (478) (565) (629)
Interest income 125 91 114
Income from Continuing Operations
Before Income Taxes 2,309 1,566 2,091
Provision for Income Taxes 818 624 669
Income from Continuing Operations 1,491 942 1,422
Income from Discontinued
Operations, net of tax 651 207 184
Net Income $ 2,142 $ 1,149 $ 1,606
Income Per Share - Basic
Continuing Operations $ 0.98 $ 0.60 $ 0.90
Discontinued Operations 0.42 0.13 0.12
Net Income $ 1.40 $ 0.73 $ 1.02
Average shares outstanding 1,528 1,564 1,576
Income Per Share - Assuming Dilution
Continuing Operations $ 0.95 $ 0.59 $ 0.88
Discontinued Operations 0.41 0.13 0.12
Net Income $ 1.36 $ 0.72 $ 1.00
Average shares outstanding 1,570 1,606 1,608
- -----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F - 2
Consolidated Statement of Cash Flows (page 1 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995
1997 1996 1995
- ---------------------------------------------------------------------------
Cash Flows - Operating Activities
Income from continuing operations $ 1,491 $ 942 $ 1,422
Adjustments to reconcile income
from continuing operations to net
cash provided by operating
activities
Depreciation and amortization 1,106 1,073 1,046
Noncash portion of unusual
items 233 366 66
Deferred income taxes 51 160 119
Other noncash charges and
credits, net 342 505 585
Changes in operating working capital,
excluding effects of acquisitions
and dispositions
Accounts and notes receivable (53) (67) (182)
Inventories 79 (97) (83)
Prepaid expenses, deferred income
taxes and other current assets (56) 84 59
Accounts payable and other
current liabilities 84 297 (2)
Income taxes payable 142 (71) (388)
Net change in operating
working capital 196 146 (596)
Net Cash Provided by Operating
Activities 3,419 3,192 2,642
Cash Flows - Investing Activities
Capital spending (1,506) (1,630) (1,365)
Acquisitions and investments
in unconsolidated affiliates (119) (75) (400)
Sales of businesses 221 43 14
Sales of property, plant
and equipment 80 9 93
Short-term investments, by original
maturity
More than three months-purchases (92) (115) (285)
More than three months-maturities 177 192 333
Three months or less, net (735) 736 (2)
Other, net (96) (214) (229)
Net Cash Used for Investing
Activities (2,070) (1,054) (1,841)
- ---------------------------------------------------------------------------
(Continued on following page)
F - 3
Consolidated Statement of Cash Flows (page 2 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995
1997 1996 1995
- ---------------------------------------------------------------------------
Cash Flows - Financing Activities
Proceeds from issuances of
long-term debt - 1,772 2,027
Payments of long-term debt (1,875) (1,432) (939)
Short-term borrowings, by original
maturity
More than three months-proceeds 146 740 2,053
More than three months-payments (177) (1,873) (2,711)
Three months or less, net (1,269) 89 (782)
Cash dividends paid (736) (675) (599)
Share repurchases (2,459) (1,651) (541)
Proceeds from exercises of
stock options 403 323 252
Other, net 5 (9) (7)
Net Cash Used for
Financing Activities (5,962) (2,716) (1,247)
Net Cash Provided by Discontinued
Operations 6,236 605 506
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (2) (5) (5)
Net Increase in Cash
and Cash Equivalents 1,621 22 55
Cash and Cash Equivalents
- Beginning of Year 307 285 230
Cash and Cash Equivalents
- End of Year $ 1,928 $ 307 $ 285
- ---------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 462 $ 538 $ 621
Income taxes paid $ 696 $ 611 $ 741
- ---------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F - 4
Consolidated Balance Sheet
(in millions except per share amount)
PepsiCo, Inc. and Subsidiaries
December 27, 1997 and December 28, 1996
1997 1996
- -----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,928 $ 307
Short-term investments, at cost 955 289
2,883 596
Accounts and notes receivable, less allowance:
$125 in 1997 and $166 in 1996 2,150 2,276
Inventories 732 853
Prepaid expenses, deferred income taxes and
other current assets 486 225
Total Current Assets 6,251 3,950
Property, Plant and Equipment, net 6,261 6,086
Intangible Assets, net 5,855 6,036
Investments in Unconsolidated Affiliates 1,201 1,147
Other Assets 533 491
Net Assets of Discontinued Operations - 4,450
Total Assets $20,101 $22,160
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current
liabilities $ 3,617 $ 3,378
Income taxes payable 640 413
Total Current Liabilities 4,257 3,791
Long-term Debt 4,946 8,174
Other Liabilities 2,265 1,997
Deferred Income Taxes 1,697 1,575
Shareholders' Equity
Capital stock, par value 1 2/3 cents per share:
authorized 3,600 shares, issued 1,726 shares 29 29
Capital in excess of par value 1,314 1,201
Retained earnings 11,567 9,184
Currency translation adjustment (988) (768)
11,922 9,646
Less: Treasury stock, at cost:
224 shares and 181 shares in 1997 and
1996, respectively (4,986) (3,023)
Total Shareholders' Equity 6,936 6,623
Total Liabilities and
Shareholders' Equity $20,101 $22,160
- ----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F - 5
Consolidated Statement of Shareholders' Equity (page 1 of 2)
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995
Capital Stock
Issued Treasury
Shares Amount Shares Amount
Shareholders' Equity,
December 31, 1994 1,726 $29 (146) $(1,361)
1995 Net income - - - -
Cash dividends declared
(per share-$0.39) - - - -
Currency translation adjustment - - - -
Share repurchases - - (24) (541)
Stock option exercises, including
tax benefits of $91 - - 20 218
Other - - - 1
Shareholders' Equity,
December 30, 1995 1,726 $29 (150) $(1,683)
1996 Net income - - - -
Cash dividends declared
(per share-$0.445) - - - -
Currency translation adjustment - - - -
Share repurchases - - (54) (1,651)
Stock option exercises, including
tax benefits of $145 - - 23 310
Other - - - 1
Shareholders' Equity,
December 28, 1996 1,726 $29 (181) $(3,023)
1997 Net income. - - - -
Cash dividends declared
(per share $0.49) - - - -
Currency translation adjustment - - - -
Share repurchases - - (69) (2,459)
Stock option exercises, including
tax benefits of $173 - - 25 488
Spin-off of restaurant businesses - - - -
Other - - 1 8
Shareholders' Equity,
December 27, 1997 1,726 $29 (224) $(4,986)
(Continued on following page)
F - 6
Consolidated Statement of Shareholders' Equity (page 2 of 2)
(in millions except per share amounts)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995
Capital
in Currency
Excess of Retained Translation
Par Value Earnings Adjustment Total
Shareholders' Equity,
December 31, 1994 $ 920 $ 7,739 $(471) $ 6,856
1995 Net income - 1,606 - 1,606
Cash dividends declared
(per share-$0.39) - (615) - (615)
Currency translation adjustment - - (337) (337)
Share repurchases - - - (541)
Stock option exercises, including
tax benefits of $91 125 - - 343
Other - - - 1
Shareholders' Equity,
December 30, 1995 $1,045 $ 8,730 $(808) $ 7,313
1996 Net income - 1,149 - 1,149
Cash dividends declared
(per share-$0.445) - (695) - (695)
Currency translation adjustment - - 40 40
Share repurchases - - - (1,651)
Stock option exercises, including
tax benefits of $145 158 - - 468
Other (2) - - (1)
Shareholders' Equity,
December 28, 1996 $1,201 $ 9,184 $(768) $ 6,623
1997 Net income. - 2,142 - 2,142
Cash dividends declared
(per share $0.49) - (746) - (746)
Currency translation adjustment - - (220) (220)
Share repurchases - - - (2,459)
Stock option exercises, including
tax benefits of $173 88 - - 576
Spin-off of restaurant businesses - 987 - 987
Other 25 - - 33
Shareholders' Equity,
December 27, 1997 $1,314 $11,567 $(988) $ 6,936
See accompanying Notes to Consolidated Financial Statements.
F - 7
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications were made to prior year amounts to conform with
the 1997 presentation, including classifying our Restaurants segment as
discontinued operations. The consolidated financial statements for all years
have been restated. See Note 4.
Principles of Consolidation. The financial statements reflect the
consolidated accounts of PepsiCo, Inc. and its controlled affiliates.
Intercompany accounts and transactions have been eliminated. Investments in
unconsolidated affiliates in which PepsiCo exercises significant influence but
not control are accounted for by the equity method and PepsiCo's share of the
net income or loss of its unconsolidated affiliates is included in selling,
general and administrative expenses.
Marketing Costs. Marketing costs are reported in selling, general and
administrative expenses and include costs of advertising and other marketing
activities. Marketing costs not deferred at year-end are charged to expense
ratably in relation to sales over the year in which incurred. Advertising
expenses were $1.8 billion, $1.8 billion and $1.4 billion in 1997, 1996 and
1995, respectively. Advertising expenses deferred at year-end, which are
classified as prepaid expenses in the Consolidated Balance Sheet, were $53
million and $37 million in 1997 and 1996, respectively. Deferred advertising
consists of media and personal service advertising- related prepayments,
promotional materials in inventory and production costs of future media
advertising; these assets are expensed in the year first used.
Stock-Based Compensation. PepsiCo measures stock-based compensation cost as
the excess of the quoted market price of PepsiCo's capital stock at the grant
date over the amount the employee must pay for the stock. PepsiCo's policy is to
generally grant stock options at fair market value at the date of grant;
accordingly, no compensation cost is incurred.
Derivative Instruments. The interest differential to be paid or received on
an interest rate swap is recognized as an adjustment to interest expense as the
differential occurs. The interest differential not yet settled in cash is
reflected in the Consolidated Balance Sheet as a receivable or payable under the
appropriate current asset or liability caption. If an interest rate swap
position was to be terminated, the gain or loss realized upon termination would
be deferred and amortized to interest expense over the remaining term of the
underlying debt instrument it was intended to modify or would be recognized
immediately if the underlying debt instrument was settled prior to maturity.
The differential to be paid or received on a currency swap related to
non-U.S. dollar denominated debt is charged or credited to income as the
F - 8
differential occurs. This is fully offset by the corresponding gain or loss
recognized in income on the currency translation of the debt, as both amounts
are based upon the same exchange rates. The currency differential not yet
settled in cash is reflected in the Consolidated Balance Sheet under the
appropriate current or noncurrent receivable or payable caption. If a currency
swap position was to be terminated prior to maturity, the gain or loss realized
upon termination would be immediately recognized in income.
Gains and losses on futures contracts designated as hedges of future
commodity purchases are deferred and included in the cost of the related raw
materials when purchased. Changes in the value of futures contracts used to
hedge commodity purchases are highly correlated to the changes in the value of
the purchased commodity. If the degree of correlation between the futures
contracts and the purchased commodity were to ever significantly diminish during
the contract term, subsequent changes in the value of the futures contracts
would be recognized in income.
Cash Equivalents. Cash equivalents represent funds temporarily invested,
with original maturities not exceeding three months, as part of PepsiCo's
management of day-to-day operating cash receipts and disbursements. All other
investment portfolios are primarily classified as short-term investments.
Inventories. Inventories are valued at the lower of cost (computed on the
average, first-in, first-out or last-in, first-out method) or net realizable
value.
Property, Plant and Equipment. Property, plant and equipment (PP&E) are
stated at cost, except for PP&E that have been impaired, for which the carrying
amount is reduced to estimated net realizable value. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the assets.
Intangible Assets. Intangible assets are amortized on a straight-line basis
over appropriate periods, generally ranging from 20 to 40 years.
Recoverability of Long-Lived Assets to be Held and Used in the Business.
All long-lived assets are evaluated for impairment in accordance with Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Assets are generally grouped at the country level, by segment, for this purpose.
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. Accordingly,
actual results could vary significantly from such estimates.
F - 9
Note 2 - Unusual Items Affecting Comparability of Income From Continuing
Operations
1997 1996 1995
Dispose and write down assets $ 183 $ 454 $ -
Improve productivity 94 122 -
Strengthen the international
bottler structure 13 - -
Initial adoption of SFAS 121 - - 66
Net loss $ 290 $ 576 $ 66
After-tax $ 239 $ 527 $ 64
Per share $0.15 $0.33 $0.04
- ---------------------------------------------------------------------------
The 1997 and 1996 unusual items include impairment charges of $200 million and
$373 million, respectively, (see Note 3). The 1997 net charge to strengthen the
international bottler structure includes proceeds of $87 million associated with
a settlement related to a previous Venezuelan bottler agreement, which were
partially offset by related costs.
The 1995 initial, noncash charge reflects the early adoption of SFAS 121
(see Note 3).
Note 3 - Impairment of Long-Lived Assets
Impairment charges included in unusual items:
1997 1996 1995
Held and Used in the Business
Investments in unconsolidated
affiliates $ - $ 190 $ -
Concentrate-related assets 5 116 -
Disposal of assets
Investments in unconsolidated
affiliates 21 20 -
Other businesses/assets 174 47 -
Initial adoption of SFAS 121 - - 66
Total $ 200 $ 373 $ 66
After-tax $ 169 $ 356 $ 64
Per share $0.11 $0.22 $0.04
By Segment
Beverages $ 162 $ 373 $ 62
Snack Foods 38 - 4
$ 200 $ 373 $ 66
- ---------------------------------------------------------------------------
The charges associated with assets to be held and used in the business reflect a
reduction in forecasted cash flows attributable to increased competitive
activity and weakened macroeconomic factors in various geographic regions. The
net charges for disposal of assets primarily reflect strategic decisions to
realign the international bottling system, restructure certain Snack Foods
operations and exit certain businesses. We anticipate the disposal of assets to
be completed in 1998.
F - 10
PepsiCo early adopted SFAS 121 as of the beginning of the fourth quarter of
1995. The initial, noncash charge resulted from PepsiCo grouping assets at a
lower level than under its previous accounting policy for evaluating and
measuring impairment.
Note 4 - Discontinued Operations
The Restaurants segment was composed of the core restaurant businesses of Pizza
Hut, Taco Bell and KFC, PepsiCo Food Systems (PFS), the restaurant distribution
operation, and several non-core U.S. restaurant businesses. In 1997, PepsiCo
announced its intention to spin off its restaurant businesses to its
shareholders as an independent publicly traded company (Distribution) and sell
PFS separately. 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.
(TRICON), the new company, for every ten shares of PepsiCo capital stock. Just
prior to the Distribution Date, PepsiCo 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 prior to the Distribution Date resulting in
after-tax cash proceeds of approximately $1.0 billion.
Income from discontinued operations:
1997 1996 1995
Net sales $ 8,375 $ 11,441 $ 11,328
Costs and expenses (7,704) (10,935) (10,946)
PFS gain 500 - -
Interest expense, net (20) (25) (40)
Provision for income taxes (500) (274) (158)
Income from discontinued
operations $ 651 $ 207 $ 184
The above amounts include costs directly associated with the spin-off but do not
include an allocation of PepsiCo interest or general and administrative
expenses.
Note 5 - Income Per Share
PepsiCo adopted the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," in 1997. Application of its provisions results in
disclosure of two income per share measures, basic and assuming dilution, on the
face of the Consolidated Statement of Income.
F - 11
PepsiCo's reported net income represents its net income available to
common stockholders for purposes of computing both measures. The following
reconciles shares outstanding at the beginning of the year to average shares
outstanding used to compute both income per share measures.
1997 1996 1995
Shares outstanding at beginning
of year 1,545 1,576 1,580
Weighted average shares issued
during the year for exercise of
stock options 14 13 9
Weighted average shares
repurchased (31) (25) (13)
Average shares outstanding -
basic 1,528 1,564 1,576
Effect of dilutive securities
Dilutive shares contingently
issuable upon the exercise of
stock options 151 169 151
Shares assumed to have been
purchased for treasury with
assumed proceeds from the
exercise of stock options (109) (127) (119)
Average shares outstanding -
assuming dilution 1,570 1,606 1,608
- ---------------------------------------------------------------------------
Note 6 - Inventories
1997 1996
Raw materials and supplies $400 $484
Finished goods 332 369
$732 $853
- ---------------------------------------------------------------------------
The cost of 43% of 1997 inventories and 39% of 1996 inventories was computed
using the last-in, first-out method.
Note 7 - Property, Plant and Equipment, net
1997 1996
Land $ 365 $ 361
Buildings and improvements 2,623 2,543
Machinery and equipment 7,513 7,253
Construction in progress 793 751
11,294 10,908
Accumulated depreciation (5,033) (4,822)
$ 6,261 $ 6,086
- ---------------------------------------------------------------------------
F - 12
Note 8 - Intangible Assets, net
1997 1996
Reacquired franchise rights $2,780 $2,917
Trademarks 625 650
Other identifiable intangibles 152 122
Goodwill 2,298 2,347
$5,855 $6,036
- ---------------------------------------------------------------------------
Identifiable intangible 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 residual purchase price after allocation to all identifiable net assets.
The above amounts are net of accumulated amortization of $1.7 billion and
$1.5 billion at year-end 1997 and 1996, respectively.
Note 9 - Accounts Payable and Other Current Liabilities
1997 1996
Accounts payable $1,047 $1,034
Accrued compensation and benefits 640 565
Accrued selling and marketing 485 542
Other current liabilities 1,445 1,237
$3,617 $3,378
- ---------------------------------------------------------------------------
Note 10 - Long-term Debt
1997 1996
Long-term Debt
Commercial paper (5.4%) $ - $1,176
Notes due 1998-2011 (6.5% and 6.4%) 2,643 3,111
Various foreign currency debt,
due 1998-2001 (5.2% and 5.5%) 809 1,448
Zero coupon notes, $1.0 billion
due 1998-2012 (10.5% and 7.9%) 480 930
Euro notes due 1998-1999
(5.8% and 5.5%) 500 700
Other, due 1998-2020 (7.5% and 7.1%) 514 809
$4,946 $8,174
- ---------------------------------------------------------------------------
The interest rates in the above table include the effects of associated interest
rate and currency swaps at year-end 1997 and 1996. See Note 11 for a discussion
of PepsiCo's use of interest rate and currency swaps, its management of the
inherent credit risk and fair value information related to debt and interest
rate and currency swaps.
F - 13
The following table indicates the notional amount and weighted average
interest rates, by category, of interest rate swaps outstanding at year-end 1997
and 1996, respectively. The weighted average variable interest rates that
PepsiCo pays, which are primarily indexed to either commercial paper or LIBOR
rates, are based on rates as of the respective balance sheet date and are
subject to change. Terms of interest rate swaps match the terms of the debt they
modify. The swaps terminate at various dates through 2011.
1997 1996
Receive fixed-pay variable
Notional amount $2,584 $3,976
Weighted average receive rate 6.8% 6.6%
Weighted average pay rate 5.8% 5.5%
Receive variable-pay variable
Notional amount $ 250 $ 552
Weighted average receive rate 5.7% 5.5%
Weighted average pay rate 5.8% 5.7%
Receive variable-pay fixed
Notional amount $ 215 $ 215
Weighted average receive rate 5.9% 5.6%
Weighted average pay rate 8.2% 8.2%
- --------------------------------------------------------------------
At year-end 1997, approximately 77% of total debt was exposed to variable
interest rates, compared to 74% in 1996. 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.
PepsiCo enters into currency swaps to hedge its currency exposure on
certain non-U.S. dollar denominated debt. At year-end 1997, the aggregate
carrying amount of the debt was $629 million and the payables under related
currency swaps were $104 million, resulting in a net effective U.S. dollar
liability of $733 million with a weighted average interest rate of 5.8%,
including the effects of related interest rate swaps. At year-end 1996, the
carrying amount of this debt aggregates $1.8 billion and the receivables and
payables under related currency swaps aggregate $54 million and $59 million,
respectively, resulting in a net effective U.S. dollar liability of $1.8 billion
with a weighted average interest rate of 5.6%, including the effects of related
interest rate swaps.
At year-end 1997 and 1996, PepsiCo's unused revolving credit facilities
covering potential borrowings aggregate $2.75 billion and $3.5 billion,
respectively. The 1997 facilities expire in 2002. These credit facilities exist
largely to support the issuances of short-term borrowings and are available for
general corporate purposes.
At year-end 1997 and 1996, $2.1 billion and $3.5 billion, respectively, of
short-term borrowings were classified as long-term debt, reflecting PepsiCo's
intent and ability, through the existence of the unused credit facilities, to
refinance these borrowings.
The annual maturities of long-term debt through 2002 are: 1998-$2.1
billion, 1999-$939 million, 2000-$746 million, 2001-$353 million and 2002- $330
million.
F - 14
Note 11 - Financial Instruments
Derivative Instruments
PepsiCo's policy prohibits the use of derivative instruments for trading
purposes and PepsiCo has procedures in place to monitor and control their use.
PepsiCo's use of derivative instruments is primarily limited to interest
rate and currency swaps, which are entered into with the objective of reducing
borrowing costs. PepsiCo enters into interest rate and currency swaps to
effectively change the interest rate and currency of specific debt issuances.
These swaps are 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 offset by the opposite market impact on the related debt. PepsiCo's
credit risk related to interest rate and currency swaps is considered low
because they are entered into only with strong creditworthy counterparties, are
generally settled on a net basis and are of relatively short duration. See Note
10 for the notional amounts, related interest rates and maturities of the
interest rate and currency swaps. See Management's Discussion and Analysis -
Market Risk beginning on page 9.
Fair Value
Carrying amounts and fair values of PepsiCo's financial instruments:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets
Cash and cash equivalents $1,928 $1,928 $ 307 $ 307
Short-term investments $ 955 $ 955 $ 289 $ 289
Other assets (noncurrent
investments) $ 15 $ 15 $ 15 $ 15
Liabilities
Debt
Long-term debt $4,946 $5,161 $8,174 $8,254
Debt-related derivative
instruments
Open contracts in asset
position (28) (22) (91) (122)
Open contracts in
liability position 107 109 62 74
Net debt $5,025 $5,248 $8,145 $8,206
F - 15
The carrying amounts in the above table are included in the Consolidated Balance
Sheet under the indicated captions, except for debt-related derivative
instruments (interest rate and currency swaps), which are included in the
appropriate current or noncurrent asset or liability caption. Short-term
investments consist primarily of debt securities and have been classified as
held-to-maturity. Noncurrent investments mature at various dates through 2000.
Because of the short maturity of cash equivalents and short-term
investments, the carrying amounts approximate fair value. The fair value of
noncurrent investments is based upon market quotes. The fair value of debt and
debt-related derivative instruments was estimated using market quotes and
calculations based on market rates.
Note 12 - Income Taxes
Provision for income taxes on income from continuing operations:
1997 1996 1995
Current: Federal $598 $ 254 $ 427
Foreign 110 138 63
State 59 72 60
767 464 550
Deferred: Federal 23 204 101
Foreign 15 (41) 16
State 13 (3) 2
51 160 119
$818 $ 624 $ 669
- ---------------------------------------------------------------------------
U.S. and foreign income from continuing operations before income taxes:
1997 1996 1995
U.S. $1,731 $1,630 $1,679
Foreign 578 (64) 412
$2,309 $1,566 $2,091
- ---------------------------------------------------------------------------
Reconciliation of the U.S. Federal statutory tax rate to PepsiCo's effective tax
rate on continuing operations:
1997 1996 1995
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal
tax benefit 2.0 2.9 2.0
Effect of lower taxes
on foreign results (5.5) (4.4) (4.8)
Settlement of prior years'
audit issues (1.7) (2.9) (4.8)
Effect of unusual items 2.2 9.7 1.0
Other, net 3.4 (0.5) 3.6
Effective tax rate on continuing
operations 35.4% 39.8% 32.0%
- ---------------------------------------------------------------------------
F - 16
Deferred tax liabilities are not recognized for basis differences related to
investments in foreign subsidiaries and unconsolidated affiliates that are
essentially permanent in duration. Determination of the amount of such
unrecognized deferred tax liabilities is not practicable.
Deferred tax liabilities (assets):
1997 1996
Intangible assets other than
nondeductible goodwill $ 1,363 $ 1,354
Property, plant and equipment 500 388
Safe harbor leases 115 143
Zero coupon notes 84 103
Other 335 172
Gross deferred tax liabilities 2,397 2,160
Net operating loss carryforwards (520) (406)
Postretirement benefits (247) (242)
Casualty claims (51) (36)
Various current liabilities
and other (459) (350)
Gross deferred tax assets (1,277) (1,034)
Deferred tax assets
valuation allowance 458 435
Net deferred tax assets (819) (599)
Net deferred tax liability $ 1,578 $ 1,561
Included in
Prepaid expenses, deferred income
taxes and other current assets $ (119) $ (14)
Deferred income taxes 1,697 1,575
$ 1,578 $ 1,561
- ----------------------------------------------------------------------------
Net operating loss carryforwards totaling $2.3 billion at year-end 1997 are
available to reduce future taxable income of certain subsidiaries and are
related to a number of foreign and state jurisdictions. Of these carryforwards,
$56 million expire in 1998, $2.0 billion expire at various times between 1999
and 2011 and $215 million may be carried forward indefinitely.
Note 13 - Employee Stock Options
PepsiCo granted stock options to employees pursuant to three different incentive
plans - the SharePower Stock Option Plan (SharePower), the Long- Term Incentive
Plan (LTIP) and the Stock Option Incentive Plan (SOIP). SharePower stock options
were granted to essentially all full-time employees. The number of options
granted was based on each employee's annual earnings. The options generally
became exercisable ratably over 5 years and had to be exercised within 10 years
of the grant date.
F - 17
Under the SOIP and LTIP, stock options were granted to middle and senior
management employees, respectively. SOIP options were exercisable after 1 year
and had to be exercised within 10 years of the grant date. Most LTIP options
were exercisable after 4 years and had to be exercised within 10 years of the
grant date. In addition, 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 value of a share of stock at the
grant date and vested 4 years from the grant date, contingent upon attainment of
prescribed Corporate performance goals. At year-end 1997, 1996 and 1995, there
were 801,000, 763,000 and 970,600 PSUs outstanding, respectively. Payment of
PSUs are made in cash and/or stock as approved by the Compensation Committee of
PepsiCo's Board of Directors. Amounts expensed in continuing operations for PSUs
were $4 million in both 1997 and 1996 and $5 million in 1995. At year-end 1997,
there were 41 million and 137 million shares available for grant under the SOIP
and LTIP, respectively.
Stock option activity:
(Options in thousands) 1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at
beginning of year 177,217 $20.22 160,662 $16.10 165,162 $14.60
Granted 3,457 31.54 51,305 31.19 26,390 22.70
Exercised (25,504) 15.77 (22,687) 14.19 (21,181) 11.91
Surrendered
for PSUs (15) 37.68 (431) 29.91 (201) 20.67
Forfeited (7,819) 24.89 (11,632) 23.13 (9,508) 17.69
Spin-off related
Conversion to
TRICON
options(a) (13,267) 25.75 - - - -
PepsiCo modifi-
cation(b) 12,260 - - - - -
Outstanding at end
of year 146,329 18.95 177,217 20.22 160,662 16.10
Exercisable at
end of year 81,447 15.39 80,482 14.92 65,474 12.63
- ---------------------------------------------------------------------------
Weighted average
fair value of
options granted
during the year $10.55 $ 8.89 $ 5.53
- ---------------------------------------------------------------------------
(a)Effective on the date of the TRICON spin-off, PepsiCo 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 stock options.
F - 18
Stock options outstanding at December 27, 1997:
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 $ 8.17 10,304 2.08 yrs. $ 6.18 9,739 $ 6.20
$ 8.20 to $16.37 52,340 4.30 13.63 45,470 13.52
$16.87 to $37.72 83,685 7.28 23.85 26,238 22.04
146,329 5.85 18.95 81,447 15.39
Pro forma income and pro forma income per share, as if the fair value-based
method had been applied in measuring compensation cost for stock-based awards:
1997 1996 1995
Reported
Income
Continuing operations $1,491 $ 942 $1,422
Discontinued operations 651 207 184
Net income $2,142 $1,149 $1,606
Income per share
Continuing operations $ 0.95 $ 0.59 $ 0.88
Discontinued operations 0.41 0.13 0.12
Net income $ 1.36 $ 0.72 $ 1.00
Pro Forma
Income
Continuing operations $1,390 $ 893 $1,411
Discontinued operations 635 188 179
Net income $2,025 $1,081 $1,590
Income per share
Continuing operations $ 0.89 $ 0.55 $ 0.88
Discontinued operations 0.40 0.12 0.11
Net income $ 1.29 $ 0.67 $ 0.99
- --------------------------------------------------------------------------
Without the effect of pro forma costs related to the modification of outstanding
options arising from the TRICON spin-off, pro forma income from continuing
operations is $1,436 million or $0.92 per share in 1997.
The pro forma amounts disclosed above are not fully representative of the
effects of stock-based awards because they 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:
1997 1996 1995
Risk free interest rate 5.8% 6.0% 6.2%
Expected life 3 years 6 years 5 years
Expected volatility 20% 20% 20%
Expected dividend yield 1.32% 1.5% 1.75%
- ---------------------------------------------------------------------------
F - 19
Note 14 - Postretirement Benefits Other Than Pensions
PepsiCo provides postretirement health care benefits to eligible retired
employees and their dependents, principally in the U.S. Retirees who have 10
years of service and attain age 55 while in service with PepsiCo are eligible to
participate in the postretirement benefit plans. The plans are not funded and
include some retiree cost sharing beginning in 1993.
Postretirement benefit expense for 1997, 1996 and 1995 was $34 million, $39
million and $36 million, respectively.
Postretirement benefit liability recognized in the Consolidated Balance Sheet:
1997 1996
Actuarial present value of postretirement
benefit obligation
Retirees $255 $275
Fully eligible active plan participants 100 96
Other active plan participants 173 154
Accumulated postretirement benefit obligation 528 525
Unrecognized gains 116 122
$644 $647
- ------------------------------------------------------------------------
The discount rate assumptions used to compute the accumulated postretirement
benefit obligation were 7.4% and 7.8% in 1997 and 1996, respectively.
Separate assumed health care cost trend rates are used for employees who
retire before and after retiree cost sharing was introduced. The assumed health
care cost trend rate for employees who retired before cost sharing was 7.4% for
1998, declining gradually to 5.5% in 2005 and thereafter. For employees retiring
after the introduction of cost sharing, the trend rate was 6.5% for 1998,
declining to zero in 2004 and thereafter.
Note 15 - Pension Plans
PepsiCo sponsors noncontributory defined benefit pension plans covering
substantially all full-time U.S. employees as well as contributory and
noncontributory defined benefit pension plans covering certain international
employees. Benefits generally are based on years of service and compensation or
stated amounts for each year of service. PepsiCo funds the U.S. plans in amounts
not less than minimum statutory funding requirements nor more than the maximum
amount that can be deducted for U.S. income tax purposes. International plans
are funded in amounts sufficient to comply with local statutory requirements.
The plans' assets consist principally of equity securities, government and
corporate debt securities and other fixed-income obligations. The U.S. plans'
assets include 11.7 million and 12.2 million shares of PepsiCo capital stock in
1997 and 1996, with a post-spin adjusted market value of $436 million and $316
million, respectively. In the interest of maintaining an appropriate level of
diversification within the U.S. plans' asset portfolio, .5 million and 1.5
million shares of PepsiCo capital stock were sold during the 1997 and 1996 plan
years, respectively. Dividends on PepsiCo capital stock of $6 million and $5
million were received by the U.S. plans in 1997 and 1996, respectively.
F - 20
Components of net pension expense for U.S. plans:
1997 1996 1995
Service cost of benefits earned $ 69 $ 62 $ 46
Interest cost on projected benefit
obligation 103 93 78
Return on plan assets
Actual gain (370) (163) (287)
Deferred gain 253 55 188
(117) (108) (99)
Amortization of net transition gain (14) (14) (14)
Net other amortization 13 11 4
$ 54 $ 44 $ 15
- ------------------------------------------------------------------------
Reconciliations of the funded status of the U.S. plans to the pension
liability:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1997 1996 1997 1996
Actuarial present value of
benefit obligation
Vested benefits $(1,177) $(1,036) $ (57) $ (34)
Nonvested benefits (153) (133) (3) (2)
Accumulated benefit
obligation (1,330) (1,169) (60) (36)
Effect of projected
compensation increases (165) (143) (69) (67)
Projected benefit
obligation (1,495) (1,312) (129) (103)
Plan assets at fair value 1,655 1,337 - 2
Plan assets in excess of
(less than) projected
benefit obligation 160 25 (129) (101)
Unrecognized prior
service cost 63 65 17 20
Unrecognized net
(gain)/loss (205) (26) 39 28
Unrecognized net
transition gain (15) (29) - -
Prepaid (accrued) pension
liability $ 3 $ 35 $ (73) $ (53)
- ------------------------------------------------------------------------
Assumptions used to compute the U.S. information presented above:
1997 1996 1995
Expected long-term rate of return
on plan assets 10.0% 10.0 10.0
Discount rate - projected benefit
obligation 7.2% 7.7 7.7
Future compensation growth rate 3.2%-6.5% 3.2-6.6 3.3-6.6
- ------------------------------------------------------------------------
F - 21
Components of net pension expense for international plans:
1997 1996 1995
Service cost of benefits earned $ 13 $ 12 $ 10
Interest cost on projected benefit
obligation 20 18 16
Return on plan assets
Actual gain (57) (38) (30)
Deferred gain 26 10 6
(31) (28) (24)
Net other amortization 3 1 -
$ 5 $ 3 $ 2
- ------------------------------------------------------------------------
Reconciliations of the funded status of the international plans to the
pension liability:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1997 1996 1997 1996
Actuarial present value of
benefit obligation
Vested benefits $(223) $(173) $(21) $(30)
Nonvested benefits (7) (5) (2) (4)
Accumulated benefit
obligation (230) (178) (23) (34)
Effect of projected
compensation increases (42) (33) (9) (12)
Projected benefit
obligation (272) (211) (32) (46)
Plan assets at fair value 328 282 14 17
Plan assets in excess of
(less than) projected
benefit obligation 56 71 (18) (29)
Unrecognized prior
service cost 3 3 - -
Unrecognized net loss 42 25 2 5
Unrecognized net transition
(gain)/loss (1) (1) - 3
Prepaid (accrued) pension
liability $ 100 $ 98 $(16) $(21)
- ----------------------------------------------------------------------
Assumptions used to compute the international information presented above:
1997 1996 1995
Expected long-term rate of return
on plan assets 11.5% 11.4 11.3
Discount rate - projected benefit
obligation 7.6% 8.4 8.8
Future compensation growth rate 3.0%-13.8% 3.0-10.5 3.0-11.8
- ---------------------------------------------------------------------------
F - 22
The discount rates and rates of return for the international plans represent
weighted averages.
Note 16 - Contingencies
PepsiCo is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, in excess of
amounts already recognized arising from such claims or contingencies is not
likely to have a material adverse effect on PepsiCo's annual results of
operations or financial condition.
Note 17 - Business Segments
PepsiCo operates on a worldwide basis within two industry segments:
beverages and snack foods.
Beverages
The beverage segment (Beverages) markets and distributes its Pepsi-Cola, Diet
Pepsi, Mountain Dew and other brands worldwide, and 7UP, Diet 7UP, Mirinda,
Pepsi Max and other brands internationally. Beverages manufactures concentrates
of its brands for sale to franchised bottlers worldwide. Beverages operates
bottling plants and distribution facilities located in North America and in
various international markets for the production and distribution of
company-owned and licensed brands. Beverages also manufactures and distributes
ready-to-drink Lipton tea products in North America.
Principal international markets include Argentina, Brazil, China, India,
Mexico, the Philippines, Saudi Arabia, Spain, Thailand and the U.K. Investments
in unconsolidated affiliates of $340 million in the U.S. and $605 million
outside the U.S. at year-end 1997 are primarily in franchised bottling and
distribution operations. The primary investment in the U.S. is General Bottlers.
Internationally, the largest investments in unconsolidated affiliates are Grupo
Embotellador de Mexico, S.A. (Mexico), General Bottlers (Poland), Serm Suk
(Thailand) and Sociedad Productora de Refrescos y Sabores, SOPRESA, C.A.
(Venezuela) as well as the aggregate of several investments in China.
Snack Foods
The snack food segment (Snack Foods) manufactures, distributes and markets salty
and sweet snacks worldwide, with Frito-Lay representing the North American
business. Products primarily manufactured and distributed in North America
include Lay's and Ruffles brand potato chips, Doritos and Tostitos brand
tortilla chips, Fritos brand corn chips, Chee.tos brand cheese flavored snacks,
Rold Gold brand pretzels, a variety of dips and salsas and other brands. Low-fat
and no-fat versions of several core brands are also manufactured and distributed
in North America.
Principal international salty snack markets include Brazil, Mexico, the
Netherlands, South Africa, Spain and the U.K. In addition, International Snack
Foods manufactures and distributes sweet snacks in certain countries, primarily
in France, Mexico and Poland. Snack Foods has
F - 23
$234 million of investments in several unconsolidated affiliates outside the
U.S. at year-end 1997. The largest investments are Snack Ventures Europe, a
joint venture with General Mills, Inc., which has operations on the continent of
Europe, and an investment in Simba, with operations in South Africa.
Unallocated expenses, net includes corporate headquarters expenses,
minority interests and foreign exchange translation and transaction gains and
losses. Corporate identifiable assets consist principally of cash and cash
equivalents and short-term investments.
Unusual Items Affecting Comparability
1997 1996 1995
Beverages $206 $320 $62
Snack Foods 106 - 4
Combined Segments 312 320 66
Equity (Income)/Loss (22) 256 -
$290 $576 $66
The 1997 and 1996 unusual items relate to decisions to dispose of and write down
assets, improve productivity and strengthen the international bottler structure
(see Note 2). Equity (Income)/Loss in 1996 includes charges primarily related to
the write down of our investment in Buenos Aires Embotelladora S.A. (BAESA) and
our share of the unusual charges recorded by BAESA. The 1995 unusual item
reflects the initial, noncash charge upon adoption of SFAS 121.
F - 24
INDUSTRY SEGMENTS (page 1 of 3)
1997 1996 1995
NET SALES
Beverages $10,541 $10,587 $10,467
Snack Foods 10,376 9,750 8,600
$20,917 $20,337 $19,067
OPERATING PROFIT (a)
Beverages $ 1,114 $ 890 $ 1,309
Snack Foods 1,695 1,608 1,432
Combined Segments 2,809 2,498 2,741
Equity Income/(Loss) 84 (274) 38
Unallocated
Expenses, net (231) (184) (173)
$ 2,662 $ 2,040 $ 2,606
(a) See Unusual Items Affecting Comparability on page F-24.
F - 25
INDUSTRY SEGMENTS (page 2 of 3)
- ---------------------------------------------------------------------
1997 1996 1995
Amortization of Intangible Assets
Beverages $ 155 $ 165 $ 167
Snack Foods 44 41 41
$ 199 $ 206 $ 208
- ---------------------------------------------------------------------
Depreciation Expense
Beverages $ 444 $ 440 $ 445
Snack Foods 394 346 304
Corporate 7 7 7
$ 845 $ 793 $ 756
- ---------------------------------------------------------------------
Identifiable Assets
Beverages $ 9,752 $ 9,816 $10,032
Snack Foods 6,998 6,279 5,451
Investments in Unconsoli-
dated Affiliates 1,201 1,147 1,253
Corporate 2,150 468 1,464
Net Assets of Discontinued
Operations - 4,450 4,744
$20,101 $22,160 $22,944
- ---------------------------------------------------------------------
Capital Spending
Beverages $ 618 $ 648 $ 563
Snack Foods 873 973 768
Corporate 15 9 34
$ 1,506 $ 1,630 $ 1,365
United States $ 996 $ 1,109 $ 928
International 510 521 437
$ 1,506 $ 1,630 $ 1,365
- ---------------------------------------------------------------------
Acquisitions and Investments
in Unconsolidated Affiliates
Beverages $ 43 $ 75 $ 318
Snack Foods 76 - 82
$ 119 $ 75 $ 400
United States $ 3 $ 15 $ 37
International 116 60 363
$ 119 $ 75 $ 400
- ---------------------------------------------------------------------
F - 26
GEOGRAPHIC AREAS (b) (page 3 of 3)
- ---------------------------------------------------------------------
Net Sales
1997 1996 1995
Europe $ 2,327 $ 2,513 $ 2,451
Canada 941 946 889
Mexico 1,541 1,314 1,204
United Kingdom 859 810 751
Other 1,371 1,346 1,371
Total International 7,039 6,929 6,666
United States 13,878 13,408 12,401
Combined Segments $20,917 $20,337 $19,067
- ---------------------------------------------------------------------
Segment Operating Profit (Loss)(c)
1997 1996 1995
Europe $ (133) $ (88) $ (7)
Canada 105 116 94
Mexico 214 105 135
United Kingdom 106 159 139
Other (50) (342) 103
Total International 242 (50) 464
United States 2,567 2,548 2,277
Combined Segments $ 2,809 $ 2,498 $ 2,741
- ---------------------------------------------------------------------
Identifiable Assets
1997 1996 1995
Europe $ 1,130 $ 1,224 $ 1,382
Canada 1,013 1,045 1,054
Mexico 685 583 550
United Kingdom 1,582 1,542 1,408
Other 1,670 1,698 1,672
Total International 6,080 6,092 6,066
United States 10,670 10,003 9,417
Combined Segments 16,750 16,095 15,483
Investments in Unconsoli-
dated Affiliates 1,201 1,147 1,253
Corporate 2,150 468 1,464
Net Assets of Discontinued
Operations - 4,450 4,744
$20,101 $22,160 $22,944
- ---------------------------------------------------------------------
(b) The results of centralized concentrate manufacturing operations in Puerto
Rico and Ireland have been allocated based upon sales to the respective
geographic areas.
(c) The unusual items reduce combined segment operating profit by $290 (United
States - $74, Europe - $96, Mexico - $(17), United Kingdom - $53, Other -
$84) in 1997, $576 (Europe - $69, Mexico - $4, Other - $503) in 1996 and
$66 (Europe - $62, Other - $4) in 1995 (see Unusual Items Affecting
Comparability on page F-24).
F - 27
Note 18 - Selected Quarterly Financial Data
($ in millions except per share amounts, unaudited) (page 1 of 3)
First Quarter
(12 Weeks)
1997 1996
Net sales $ 4,213 4,053
Gross profit $ 2,492 2,387
Unusual items - gain (a) $ (22) -
Operating profit $ 581 532
Income from continuing operations $ 318 296
Income from discontinued operations (b) $ 109 98
Net income $ 427 394
Net income per share - basic
Continuing operations $ 0.21 0.19
Discontinued operations $ 0.07 0.06
Net income $ 0.28 0.25
Net income per share - assuming dilution
Continuing operations $ 0.20 0.18
Discontinued operations $ 0.07 0.06
Net income $ 0.27 0.24
Cash dividends declared per share $ 0.115 0.10
Stock price per share(c)
High $34 55/64 33 3/8
Low $ 29 1/8 27 1/2
Close $ 32 1/2 31 5/8
- ---------------------------------------------------------------------------
Second Quarter
(12 Weeks)
1997 1996
Net sales $ 5,086 5,075
Gross profit $ 3,017 2,963
Unusual items - loss (a) $ 326 -
Operating profit $ 436 774
Income from continuing operations $ 176 438
Income from discontinued operations (b) $ 480 145
Net income $ 656 583
Net income per share - basic
Continuing operations $ 0.11 0.27
Discontinued operations $ 0.31 0.10
Net income $ 0.42 0.37
Net income per share - assuming dilution
Continuing operations $ 0.11 0.27
Discontinued operations $ 0.31 0.09
Net income $ 0.42 0.36
Cash dividends declared per share $ 0.125 0.115
Stock price per share (c)
High $ 39 34 1/2
Low $ 31 1/4 29 11/16
Close $ 39 33 1/8
- ---------------------------------------------------------------------------
F - 28
($ in millions except per share amounts, unaudited) (page 2 of 3)
Third Quarter
(12 Weeks)
1997 1996
Net sales $ 5,362 5,159
Gross profit $ 3,183 3,001
Unusual items - loss (a) $ - 390
Operating profit $ 929 333
Income from continuing operations $ 551 10
Income from discontinued operations (b) $ 107 134
Net income $ 658 144
Net income per share - basic
Continuing operations $ 0.36 0.01
Discontinued operations $ 0.07 0.08
Net income $ 0.43 0.09
Net income per share - assuming dilution
Continuing operations $ 0.35 0.01
Discontinued operations $ 0.07 0.08
Net income $ 0.42 0.09
Cash dividends declared per share $ 0.125 0.115
Stock price per share (c)
High $39 11/16 35 5/8
Low $ 35 1/2 28 1/4
Close $ 37 5/8 28 3/8
- ---------------------------------------------------------------------------
Fourth Quarter
(16 Weeks)
1997 1996
Net sales $ 6,256 6,050
Gross profit $ 3,700 3,534
Unusual items - (gain)/loss (a) $ (14) 186
Operating profit $ 716 401
Income from continuing operations $ 446 198
Income (loss) from discontinued operations(b) $ (45) (170)
Net income $ 401 28
Net income (loss) per share - basic
Continuing operations $ 0.30 0.13
Discontinued operations $ (0.03) (0.11)
Net income $ 0.27 0.02
Net income (loss) per share -
assuming dilution
Continuing operations $ 0.29 0.13
Discontinued operations $ (0.04) (0.10)
Net income $ 0.25 0.03
Cash dividends declared per share $ 0.125 0.115
Stock price per share (c)
High $ 40 32 7/8
Low $ 34 1/4 28 1/8
Close $34 11/16 29 5/8
- ---------------------------------------------------------------------------
F - 29
($ in millions except per share amounts, unaudited) (page 3 of 3)
Full Year
(52 Weeks)
1997 1996
Net sales $ 20,917 20,337
Gross profit $ 12,392 11,885
Unusual items - loss (a) $ 290 576
Operating profit $ 2,662 2,040
Income from continuing operations $ 1,491 942
Income from discontinued operations (b) $ 651 207
Net income $ 2,142 1,149
Net income per share - basic
Continuing operations $ 0.98 0.60
Discontinued operations $ 0.42 0.13
Net income $ 1.40 0.73
Net income per share - assuming dilution
Continuing operations $ 0.95 0.59
Discontinued operations $ 0.41 0.13
Net income $ 1.36 0.72
Cash dividends declared per share $ 0.49 0.445
Stock price per share (c)
High $ 40 35 5/8
Low $ 29 1/8 27 1/2
Close $34 11/16 29 5/8
- ---------------------------------------------------------------------------
Notes:
(a)Unusual items - (gain)/loss (see Note 2):
1997 1996
Pre- After Per Pre- After Per
Tax Tax Share Tax Tax Share
First quarter $(22) $ 2 $ - $ - $ - $ -
Second quarter 326 238 0.15 - - -
Third quarter - - - 390 376 0.23
Fourth quarter (14) (1) - 186 151 0.10
Full year $290 $239 $0.15 $576 $527 $0.33
(b)See Note 4.
(c)Represents the high, low and closing prices for one share of PepsiCo capital
stock on the New York Stock Exchange (NYSE). Stock prices on or before
October 6, 1997 are not adjusted to reflect the TRICON spin- off(see Note 4).
F - 30
Management's Responsibility for Financial Statements
To Our Shareholders:
Management is responsible for the reliability of the consolidated financial
statements and related notes, which have been prepared in conformity with
generally accepted accounting principles and include amounts based upon our
estimates and assumptions, as required. The financial statements have been
audited and reported on by our independent auditors, KPMG Peat Marwick LLP, who
were given free access to all financial records and related data, including
minutes of the meetings of the Board of Directors and Committees of the Board.
We believe that management representations made to the independent auditors were
valid and appropriate.
PepsiCo maintains a system of internal control over financial reporting,
designed to provide reasonable assurance as to the reliability of the financial
statements, as well as to safeguard assets from unauthorized use or disposition.
The system is supported by formal policies and procedures, including an active
Code of Conduct program intended to ensure employees adhere to the highest
standards of personal and professional integrity. PepsiCo's internal audit
function monitors and reports on the adequacy of and compliance with the
internal control system, and appropriate actions are taken to address
significant control deficiencies and other opportunities for improving the
system as they are identified. The Audit Committee of the Board of Directors,
which is composed solely of outside directors, provides oversight to our
financial reporting process and our controls to safeguard assets through
periodic meetings with our independent auditors, internal auditors and
management. Both our independent auditors and internal auditors have free access
to the Audit Committee.
Although no cost-effective internal control system will preclude all errors
and irregularities, we believe our controls as of December 27, 1997 provide
reasonable assurance that the financial statements are reliable and that our
assets are reasonably safeguarded.
F - 31
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 27, 1997 and December 28, 1996 and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the years in the three-year period ended December 27, 1997. 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 27, 1997 and December 28, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 27, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the consolidated financial statements, PepsiCo,
Inc. in 1995 adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
KPMG Peat Marwick LLP
New York, New York
February 3, 1998
F - 32
Selected Financial Data (Page 1 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
1997(a) 1996(a) 1995(b)
Summary of Operations
Net sales $ 20,917 20,337 19,067
Operating profit $ 2,662 2,040 2,606
Income from continuing operations $ 1,491 942 1,422
Cash Flow Data
Dividends paid $ 736 675 599
EBITDA from continuing operations (f) $ 4,001 3,479 3,718
Free cash flow from continuing
operations (g) $ 1,382 725 556
Share repurchases $ 2,459 1,651 541
Per Share Data
Income from continuing operations -
assuming dilution $ 0.95 0.59 0.88
Cash dividends declared $ 0.49 0.445 0.39
Book value per share at year-end $ 4.62 4.29 4.64
Market price per share at year-end (h) $34 11/16 29 5/8 27 15/16
Market price per share at year-end -
continuing operations (i) $34 11/16 27 15/64 25 43/64
Balance Sheet
Net assets of discontinued
operations (j) $ - 4,450 4,744
Total assets (k) $ 20,101 22,160 22,944
Long-term debt $ 4,946 8,174 8,248
Total debt (l) $ 4,946 8,174 8,806
Shareholders' equity $ 6,936 6,623 7,313
Other Statistics
Number of shares repurchased 69.0 54.2 24.6
Shares outstanding at year-end 1,502 1,545 1,576
Average shares outstanding used to
calculate income per share from
continuing operations -
assuming dilution 1,570 1,606 1,608
Employees of continuing operations 142,000 137,000 137,000
F - 33
Selected Financial Data (Page 2 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
1994(c)(d)(e) 1993
Summary of Operations
Net sales $ 17,984 15,706
Operating profit $ 2,506 2,141
Income from continuing operations $ 1,363 1,152
Cash Flow Data
Dividends paid $ 540 462
EBITDA from continuing operations (f) $ NA NA
Free cash flow from continuing
operations (g) $ NA NA
Share repurchases $ 549 463
Per Share Data
Income from continuing operations -
assuming dilution $ 0.85 0.71
Cash dividends declared $ 0.35 0.305
Book value per share at year-end $ 4.34 3.97
Market price per share at year-end (h) $ 18 1/8 20 15/16
Market price per share at year-end -
continuing operations (i) $16 21/32 19 1/4
Balance Sheet
Net assets of discontinued
operations (j) $ 5,183 4,548
Total assets (k) $ 22,533 21,628
Long-term debt $ 8,570 7,148
Total debt (l) $ 9,114 9,209
Shareholders' equity $ 6,856 6,339
Other Statistics
Number of shares repurchased 30.0 24.8
Shares outstanding at year-end 1,580 1,598
Average shares outstanding used to
calculate income per share from
continuing operations -
assuming dilution 1,608 1,620
Employees of continuing operations 129,000 119,000
NA - Not available
F - 34
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Selected Financial Data (Page 3 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ---------------------------------------------------------------------------
PepsiCo disposed of its Restaurants segment in 1997 and accounted for it as
discontinued operations (see Note 4); all information has been reclassified
accordingly. Additionally, PepsiCo made numerous acquisitions in most years
presented and a few divestitures in certain years. Such transactions do not
materially affect the comparability of PepsiCo's operating results for the
periods presented. All share and per share amounts reflect a two-for-one stock
split in 1996 and per share amounts are computed using average shares
outstanding, assuming dilution.
(a) Includes unusual items of $290 ($239 after-tax or $0.15 per share)in 1997
and $576 ($527 after-tax or $0.33 per share) in 1996. See Note 2.
(b) Includes the initial, noncash charge of $66 ($64 after-tax or $0.04 per
share) upon adoption of SFAS 121 at the beginning of the fourth quarter.
(c) Includes the cumulative effect of adopting SFAS 112 "Employers' Accounting
for Postemployment Benefits" of $77 ($51 after-tax or $0.03 per share) and
changing to a preferable method for calculating the market-related value of
plan assets used in determining the return-on- asset component of annual
pension expense and the cumulative net unrecognized gain or loss subject to
amortization of $32 ($20 after- tax or $0.01 per share). Prior years were
not restated for these changes in accounting.
(d) Includes a benefit of changing to the preferable method for calculating the
market value of plan assets in 1994, which reduced full year pension
expense by $29 ($18 after-tax or $0.01 per share).
(e) Fiscal year 1994 consists of 53 weeks. Normally, fiscal years consist of 52
weeks; however, because the fiscal year ends on the last Saturday in
December, a week is added every 5 or 6 years. The fifty- third week
increased 1994 earnings by approximately $31 ($28 after-tax or $0.02 per
share).
(f) Defined as earnings before interest, taxes, depreciation and amortization
which is presented net of the noncash portion of unusual items of $233 in
1997, $366 in 1996 and $66 in 1995. EBITDA is used by certain investors as
a measure of a company's ability to service its debt. It should be
considered in addition to, but not as a substitute for, other measures of
financial performance in accordance with generally accepted accounting
principles (GAAP).
(g) Defined as net cash provided by operating activities reduced by cash
dividends paid and adjusted for the following investing activities: capital
spending, sales of businesses, sales of property, plant and equipment and
other, net. Free cash flow is a measure we use internally to evaluate our
cash flow performance and should be considered in addition to, but not as a
substitute for, other measures of financial performance in accordance with
GAAP.
F - 35
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Selected Financial Data (Page 4 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ---------------------------------------------------------------------------
(h) Represents historically reported market price of one share of PepsiCo, Inc.
capital stock.
(i) Represents approximately 92% of the historical market price of one share of
PepsiCo, Inc. capital stock, which is the allocated market value of
PepsiCo's packaged goods businesses used by the NYSE on or before October
6, 1997. The remaining 8% represents the market value allocated to TRICON
Global Restaurants, Inc.
(j) Represents net assets of discontinued operations (see Note 4), which are
included in total assets.
(k) Includes net assets of discontinued operations.
(l) Includes short-term borrowings and long-term debt.
F - 36
PEPSICO, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Fiscal Years Ended December 27, 1997, December 28, 1996
and December 30, 1995
(in millions)
Additions
Balance Charged Deduct- Balance
at to ions at
beginning costs and Other from end
of year expenses additions reserves of year
(1) (2)
1997
Allowance for
doubtful accounts $ 166 $ 41 $ 7 $ 89 $ 125
Valuation allowance for
deferred tax assets $ 435 $ 47 $ - $ 24 $ 458
1996
Allowance for
doubtful accounts $ 132 $ 53 $ 9 $ 28 $ 166
Valuation allowance for
deferred tax assets $ 390 $ 76 $ - $ 31 $ 435
1995
Allowance for
doubtful accounts $ 138 $ 37 $ 5 $ 48 $ 132
Valuation allowance for
deferred tax assets $ 262 $ 149 $ - $ 21 $ 390
(1) Other additions to the allowances principally relate to acquisitions and
reclassifications.
(2) Primarily accounts written off and translation effects.
F - 37