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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 26, 1998
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
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 12, 1999 was 1,475,878,212. The aggregate market value of PepsiCo Capital
Stock held by nonaffiliates of PepsiCo as of March 12, 1999 was $56,821,311,162.
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 5,1999 Annual Meeting of
Shareholders
PART I
Item 1. Business
PepsiCo, Inc. was incorporated in Delaware in 1919 and was reincorporated
in North Carolina in 1986. PepsiCo is engaged in the soft drink, juice and snack
food businesses. When used in this Report the terms "we", "us" and "our" shall
mean PepsiCo and its divisions and subsidiaries.
In October 1997, we spun off to our shareholders all of our quick service
restaurant businesses, consisting of Pizza Hut, Taco Bell and KFC, as an
independent publicly-traded company. Also in 1997 we sold PFS, our restaurant
distribution operation, and our non-core restaurant businesses.
On November 12, 1998, our Board of Directors authorized conversion of a
majority stake in our company-owned bottling operations to public ownership
through an initial public offering, subject to market conditions and regulatory
approvals. The new company, named The Pepsi Bottling Group, Inc. ("PBG"), is a
wholly-owned subsidiary of PepsiCo. PBG has filed an S-1 registration statement
with the Securities and Exchange Commission for the initial public offering of
its common stock. We expect that the S-1 registration statement will be
effective and the public offering completed during PepsiCo's second fiscal
quarter.
The reorganization of our beverage business was undertaken in connection
with the proposed conversion to public ownership of a majority stake in our
bottling operations, and the reorganization was not completed until early 1999.
Accordingly, our 1998 Financial Statements and Management's Discussion and
Analysis contained in Part II of this Annual Report do not reflect the
reorganization.
THE PEPSI-COLA COMPANY
The Pepsi-Cola Company ("PCC") was reorganized in November, 1998 into
three business units: Pepsi-Cola North America ("PCNA"), Pepsi-Cola Company
International ("PCI") and The Pepsi Bottling Group. As described below, these
business units manufacture, sell and distribute "Pepsi-Cola Beverages", which
include not only beverages bearing the Pepsi-Cola or Pepsi trademarks, such as
Pepsi-Cola, Diet Pepsi, Pepsi One and Pepsi Max, but also other brands owned by
PepsiCo including MOUNTAIN DEW, 7UP (outside the U.S.), SLICE, MUG, AQUAFINA,
and Mirinda.
Pepsi-Cola North America
PCNA manufactures Pepsi-Cola Beverage concentrates and sells them to
bottlers in the United States and Canada. PCNA's bottlers are licensed by us to
manufacture, sell and distribute, within defined territories, beverages and
syrups bearing the Pepsi-Cola Beverage trademarks. Approximately 100 plants are
operated by independent licensees or unconsolidated affiliates of PCNA, who
manufacture, sell and distribute beverages in approximately 275 licensed
territories in the United States and Canada. PCNA has a minority interest in 6
of these licensees, comprising approximately 60 licensed territories. Pepsi-Cola
Beverage concentrates are manufactured in two company-owned syrup and
concentrate plants in the United States and Canada.
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PCNA also develops the national marketing, promotion and advertising
programs that support the Pepsi-Cola Beverage brands and brand image; oversees
the quality of the Pepsi-Cola Beverages; develops new products and packaging and
approves packaging suppliers; and leads and coordinates selling efforts for
national fountain, supermarket and mass merchandising accounts.
The Pepsi/Lipton Tea Partnership, a joint venture of PCNA and Lipton,
sells tea concentrate to Pepsi-Cola bottlers, and develops and markets
ready-to-drink tea products under the LIPTON trademark, including LIPTON BRISK
and LIPTON'S ICED TEA. PepsiCo's partnership with the Starbucks Corporation
develops ready-to-drink coffee products, which are sold under the Starbucks
FRAPPUCINO trademark. These products are distributed by Pepsi-Cola bottlers.
Pepsi-Cola International
PCI manufactures Pepsi-Cola Beverage concentrates and sells them to
bottlers outside of the United States and Canada who are licensed by us to
manufacture, sell and distribute, within defined territories, Pepsi-Cola
Beverage products. In certain countries, PCI also owns and operates the bottling
businesses which manufacture, sell and distribute the Pepsi-Cola Beverage
products.
PCI operates 24 bottling plants and its authorized bottlers operate
approximately 330 additional bottling plants. Pepsi-Cola Beverage products are
sold in approximately 168 countries through PCI's company-owned and independent
bottlers. Principal international markets include Argentina, Brazil, China,
India, Mexico, the Philippines, Saudi Arabia, Spain, Thailand and the United
Kingdom.
The Pepsi Bottling Group
The Pepsi Bottling Group was recently organized as an operating unit of
PepsiCo to conduct company-owned bottling operations in the United States,
Canada, Spain, Greece and Russia. In the United States and Canada, PBG
manufactures Pepsi-Cola Beverages in approximately 64 bottling plants and sells
and distributes those beverages in all or a portion of 41 states,the District of
Columbia and eight Canadian provinces. This accounts for approximately 55% of
the Pepsi-Cola Beverages sold in the United States and Canada. PBG also operates
11 bottling plants outside of the United States and Canada.
On January 25, 1999, PepsiCo signed an agreement with Whitman Corporation
providing for the combination of certain of PepsiCo's bottling businesses and
assets in the midwestern United States and Central Europe with those of Whitman.
The agreement also provides that Whitman will assume liabilities associated with
the U.S. operations of PepsiCo being transferred to it and will acquire certain
of PepsiCo's international operations in Central Europe for cash. PepsiCo will
receive $300 million in net proceeds plus 35% of the common stock in the newly
created Whitman. Whitman will also transfer to PBG bottling operations in
Virginia, West Virginia and St. Petersburg, Russia. Whitman has agreed to
undertake a stock repurchase program that is anticipated to raise PepsiCo's
stake in Whitman to 40%. The transaction is subject to approval by regulators
and Whitman shareholders.
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TROPICANA PRODUCTS, INC.
Tropicana Products, Inc. ("TPI"), which we acquired in the third quarter
of 1998, is the world's largest marketer and producer of branded juices. TPI
manufactures and sells its products under such well known trademarks as
Tropicana Pure Premium, TROPICANA SEASON'S BEST and, under license from Dole
Food Company, Inc., DOLE. In the United States, TPI's portfolio also includes
TROPICANA TWISTER juice beverage products and TROPICANA PURE TROPICS 100% juice
products. Outside the United States, TPI holds leading positions in the chilled
orange juice industries in Belgium, Canada, France and the United Kingdom. It
also manufactures and sells FRUVITA chilled juices, LOOZA nectars and juices,
COPELLA fruit juices and HITCHCOCK shelf-stable juices in the United Kingdom and
elsewhere in Europe.
TPI's manufacturing operations in Bradenton, Florida provide approximately
90% of the worldwide distribution of TROPICANA PURE PREMIUM products. TPI
operates seven regional distribution centers that serve customers in the United
States and Canada. High-speed refrigerated trains are used to transport the
product quickly and efficiently from the Bradenton manufacturing plant to the
principal field distribution centers. A high priority is placed on inventory
management techniques that ensure product quality and freshness. Tropicana's
products are produced and packaged in approximately 25 plants worldwide
(including 17 independent co-packer facilities) and are available in 23
countries.
THE FRITO-LAY COMPANY
Our snack food business is conducted by The Frito-Lay Company, an
operating group comprised of two business units: Frito-Lay North America
("Frito-Lay") and Frito-Lay International ("FLI").
Frito-Lay North America
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, CHEETOS brand cheese flavored snacks, ROLD GOLD brand pretzels, SUNCHIPS
brand multigrain snacks, as well as WOW! brand potato and tortilla chips.
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 480,000 retail trade locations
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.
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Frito-Lay International
FLI's products are available in 109 countries outside the United States
and Canada through company-owned facilities and affiliated companies. On most of
the European continent, PepsiCo's snack food business is conducted through Snack
Ventures Europe, a joint venture between PepsiCo and General Mills, Inc., in
which PepsiCo owns a 60% interest. FLI sells a variety of snack food products
which appeal to local tastes including, for example, WALKERS brand snack foods,
sold in the United Kingdom, SMITH'S brand snack foods, sold in Australia, and
GAMESA brand cookies and ALEGRO brand sweet snacks, which are sold in Mexico. In
addition, LAY'S, CHEETOS, RUFFLES, DORITOS, FRITOS, TOSTITOS, and SUNCHIPS brand
salty snack foods have been introduced to international markets. Principal
international markets include Australia, Brazil, Mexico, the Netherlands,
Poland, South Africa, Spain and the United Kingdom.
Competition
All of our businesses are highly competitive. Our soft drinks, juices 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 we serve, as well as with private label soft drinks, juices and snack
foods and with the products of local and regional manufacturers. The main areas
of our competition are price, quality and variety of products, and customer
service.
Employees
At December 26, 1998, we employed, subject to seasonal variations,
approximately 150,000 persons (including approximately 10,000 part-time
employees), of whom approximately 83,000 (including approximately 8,000
part-time employees) were employed within the United States. We believe that
relations with our employees are generally good.
Raw Materials and Other Supplies
The principal materials we use in our soft drink, juice and snack food
businesses are corn sweeteners, sugar, aspartame, flavorings, oranges,
grapefruit, juice concentrates, vegetable and essential oils, potatoes, corn,
flour, seasonings and packaging materials. Since we rely on trucks to move and
distribute many of our products, fuel is also an important commodity. We employ
specialists to secure adequate supplies of many of these items and have not
experienced any significant continuous shortages. Prices we pay for such items
are subject to fluctuation. When prices increase, we may or may not pass on such
increases to our customers. When we have decided to pass along price increases
in the past we have done so successfully, however there is no assurance that we
will be able to do so in the future.
Governmental Regulation
The conduct of our businesses, and the production, distribution and use of
many of our products, are subject to various federal laws, such as the Food,
Drug and Cosmetic Act, the Occupational Safety and Health Act and the Americans
with Disabilities Act. Our businesses are also subject to state, local and
foreign laws.
5
Patents, Trademarks, Licenses and Franchises
We own numerous valuable trademarks which are essential to our worldwide
businesses, including PEPSI-COLA, PEPSI, DIET PEPSI, PEPSI ONE, PEPSI MAX,
MOUNTAIN DEW, SLICE, MUG, ALL SPORT, AQUAFINA, 7UP and DIET 7UP (outside the
United States), MIRINDA, TROPICANA PURE PREMIUM, TROPICANA TWISTER, TROPICANA
SEASON'S BEST, TROPICANA PURE TROPICS, FRUVITA, HITCHCOCK, LOOZA, FRITO-LAY,
LAY'S, DORITOS, RUFFLES, TOSTITOS, FRITOS, CHEETOS, CRACKER JACK, ROLD GOLD,
WOW!, SUNCHIPS, SANTITAS, SMARTFOOD, SABRITAS, WALKERS and SMITH'S. Trademarks
remain valid so long as they are used properly for identification purposes, and
we emphasize correct use of our trademarks. We have authorized (through
licensing or franchise arrangements) the use of many of our trademarks in such
contexts as Pepsi-Cola bottling appointments and snack food joint ventures. In
addition, we license the use of our trademarks on collateral products for the
primary purpose of enhancing brand awareness.
We either own or have licenses to use a number of patents which relate to
some of our products and the processes for their production and to the design
and operation of various equipment used in our businesses. Some of these patents
are licensed to others.
Environmental Matters
We continue 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 our capital expenditures, net income or
competitive position.
Business Segments
Information related to:
o Net sales
o Operating profit
o Total assets
o Geographic net sales and long-lived assets
o Capital spending
o Equity Income/(Loss) from unconsolidated affiliates
o Investments in unconsolidated affiliates
o Amortization of intangible assets
o Depreciation and other amortization expense
o Significant other noncash items
for each reportable segment for 1998, 1997 and 1996 may be found in Item 8
"Financial Statements and Supplementary Data" in Note 16 on pages F-28 through
F-33.
6
Item 2. Properties
The Pepsi-Cola Company
PCC operates 110 plants throughout the world, of which 100 are owned and
10 are leased, and unconsolidated affiliates operate approximately 70 plants. In
addition, PCC operates approximately 600 warehouses or offices worldwide, of
which approximately half are owned and half are leased. PCC leases office space
in Somers, New York.
Tropicana
TPI owns 8 plants and 14 offices worldwide, including its headquarters
building in Bradenton, Florida. TPI also leases 7 and owns 9 distribution
centers around the world.
The Frito-Lay Company
Frito-Lay operates 50 food manufacturing and processing plants in the
United States and Canada, of which 44 are owned and 6 are leased. In addition,
Frito-Lay owns 189 warehouses and distribution centers and leases approximately
35 warehouses and distribution centers for storage of food products in the
United States and Canada. Approximately 1,840 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. Our snack food businesses
also operate approximately 75 plants and approximately 1,000 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.
We believe that our properties are in good operating condition and are
suitable for the purposes for which they are being used.
Item 3. Legal Proceedings
We are subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, of the claims
and contingencies in excess of amounts already provided for, is not likely to
have a material adverse effect on our annual results of operations, financial
condition or liquidity.
7
Item 4. Submission of Matters to a Vote of Stockholders
Not applicable.
Executive Officers of the Registrant
The following is a list of names and ages of all the current executive
officers of the Company:
Roger A. Enrico, 54, 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,
and Chairman and Chief Executive Officer of Frito-Lay, Inc. in 1991. Mr. Enrico
served as Chairman and Chief Executive Officer of PepsiCo Worldwide Foods from
1992 to 1994 and as Chairman and Chief Executive Officer, PepsiCo Worldwide
Restaurants from 1994 to 1997.
Steven S Reinemund, 50, 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, 53, is currently Chairman and Chief Executive Officer of the
The Pepsi-Bottling Group, Inc., a position he has held since December, 1998. 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.
Matthew M. McKenna, 48, is Senior Vice President and Treasurer of PepsiCo.
Previously he was Senior Vice President, Taxes. Mr. McKenna joined PepsiCo
as Vice President, Taxes in 1993.
Indra K. Nooyi, 43, is Senior Vice President, Strategic Planning, a position she
has held since 1994.
Sean F. Orr, 44, 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.
Robert F. Sharpe, Jr., 47, is Senior Vice President, Public Affairs, General
Counsel and Secretary. He joined PepsiCo in January, 1998 as Senior Vice
President, General Counsel and Secretary. Mr. Sharpe was Senior Vice
President and General Counsel of RJR Nabisco Holdings Corp. from 1996 until
1998. He was previously Vice President, Tyco International Ltd. from
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1994 to 1996 and Vice President, Assistant General Counsel and Secretary of RJR
Nabisco Holdings Corp. and RJR Nabisco, Inc. from 1989 to 1994.
Michael D. White, 47, is Senior Vice President and Chief Financial Officer of
PepsiCo. Mr. White, who assumed his present position in March 1998, is
responsible for treasury, tax, control, audit, information technology and
investor relations functions. Prior to his current position, he served as
Executive Vice President and CFO of Pepsi-Cola Company worldwide. He has also
served as Executive Vice President and CFO of PepsiCo Foods International and
CFO of Frito-Lay North America. He joined Frito-Lay in 1990 as Vice President of
Planning.
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 our Capital Stock, which is also listed on the Amsterdam, Chicago,
Swiss and Tokyo Stock Exchanges.
Shareholders - At December 26, 1998, there were approximately 230,000
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 1999 are expected to
be March 12, June 11, September 10 and December 10. Quarterly cash dividends
have been paid since PepsiCo was formed in 1965.
Cash Dividends Declared Per Share (in cents):
Quarter 1998 1997
1 12.5 11.5
2 13.0 12.5
3 13.0 12.5
4 13.0 12.5
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Total 51.5 49.0
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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 1998 and 1997 were as follows (in
dollars): (See Note)
1998 High Low Close
First Quarter 43 9/16 34 7/8 43
Second Quarter 44 11/16 37 5/8 40 11/16
Third Quarter 43 5/8 27 11/16 30 5/16
Fourth Quarter 41 1/16 28 11/16 40 7/16
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
Note: Stock prices have been adjusted to reflect the spin-off of restaurant
operations on October 6, 1997.
Item 6. Selected Financial Data
Included on pages F-40 through F-44.
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 Pending Transactions/Events, Acquisitions, Market
Risk (including the EURO conversion), Year 2000, Impairment and Other Items
Affecting Comparability of Results and a New Accounting Standard (pages 11-16).
The second section analyzes the Results of Operations, first on a consolidated
basis and then for each of our business segments (pages 17-28). The final two
sections address our Consolidated Cash Flows and Liquidity and Capital Resources
(pages 29 and 30).
Cautionary Statements
From time to time, in written reports and in oral statements, we discuss
expectations regarding our future performance, Year 2000 risks, pending
transactions/events, the impact of the Euro conversion and the impact of current
global macro-economic issues. These "forward-looking statements" are based on
currently available competitive, financial and economic data and our
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operating plans. They are inherently uncertain, and investors must recognize
that events could turn out to be significantly different from expectations.
Pending Transactions/Events
In November 1998, our Board of Directors approved a plan for the separation from
PepsiCo of certain wholly-owned bottling businesses located in the United
States, Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling
Group. Pursuant to this plan, PBG intends to sell shares of its common stock in
an initial public offering and PepsiCo intends to retain a noncontrolling
ownership interest in PBG. A registration statement relating to the Offering has
been filed on Form S-1 with the Securities and Exchange Commission. The
transaction is expected to be consummated in the second quarter of 1999, subject
to market conditions and regulatory approval. If consummated, the transaction is
expected to result in a gain to PepsiCo, net of related costs. These related
costs will include a charge for the early vesting of PepsiCo stock options held
by PBG employees, which will be based on the price of our stock at the date of
the Offering. See Management's Discussion and Analysis-Liquidity and Capital
Resources on page 30 regarding PBG related financing and expected use of
proceeds.
In January 1999, we announced an agreement with the Whitman Corporation to
realign bottling territories. Subject to approval by the Whitman shareholders
and various regulatory authorities, we plan to combine certain of our bottling
operations in the mid-western United States and Central Europe with most of
Whitman's existing bottling businesses to create new Whitman. Under the
agreement, our current equity interest of 20% in General Bottlers, the principal
operating company of Whitman, will also be transferred to new Whitman. Whitman
transferred its existing bottling operations in Marion, Virginia; Princeton,
West Virginia; and St. Petersburg, Russia to PBG. It is planned for new Whitman
to assume certain indebtedness associated with our transferred U.S. operations
with net proceeds to us of $300 million. Upon completion of the transaction, we
will receive 54 million shares of new Whitman common stock. Whitman has
undertaken a share repurchase program and it is anticipated that upon completion
of the transaction and the repurchase program, our noncontrolling ownership
interest will be approximately 40%. If approved, this transaction is expected to
be completed in the second quarter of 1999 and result in a net gain to PepsiCo.
The Frito-Lay program to improve productivity, discussed in Management's
Discussion and Analysis-Impairment and Other Items Affecting Comparability of
Results beginning on page 15, also includes consolidating U.S. production in our
most modern and efficient plants and streamlining logistics and transportation
systems. This program is expected to result in additional asset impairment and
restructuring charges of approximately $65 million to be recorded in the first
quarter of 1999.
Acquisitions
At the end of the third quarter 1998, we completed the acquisitions of Tropicana
Products, Inc. from the Seagram Company Ltd. for $3.3 billion in cash and The
Smith's Snackfoods Company (TSSC) in Australia from United Biscuits Holdings plc
for $270 million in cash. In addition, acquisitions and investments in
unconsolidated affiliates included the purchases of the remaining ownership
interest in various bottlers and purchases of other international salty snack
food businesses. Acquisitions for the year aggregated $4.5 billion in cash. The
results of operations
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of all acquisitions are generally included in the consolidated financial
statements from their respective dates of acquisition.
Market Risk
The principal market risks (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which we are exposed are: o interest rates on our
debt and short-term investment portfolios, o foreign exchange rates and other
international market risks, and o commodity prices, affecting the cost of our
raw materials.
Interest Rates
- --------------
PepsiCo centrally manages its debt and investment portfolios balancing
investment opportunities and risks, tax consequences and overall financing
strategies.
We use interest rate and currency swaps to effectively modify 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 that they are intended to modify. The notional
amount, interest payment and maturity dates of the swaps match the principal,
interest payment and maturity dates of the related debt. Accordingly, any market
risk or opportunity associated with these swaps is fully offset by the opposite
market impact on the related debt.
Our investment portfolios consist of cash equivalents and short-term marketable
securities. The carrying amounts approximate market value because of the
short-term maturity of these portfolios. It is our practice to hold these
investments to maturity.
Assuming year-end 1998 variable rate debt and investment levels, a one-point
change in interest rates would impact net interest expense by $64 million. This
sensitivity analysis does not take into account existing interest rate swaps and
the possibility that rates on debt and investments can move in opposite
directions and that gains from one category may or may not be offset by losses
from another category.
Foreign Exchange and Other International Market Risks
- -----------------------------------------------------
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically affect economic
growth, inflation, interest rates, governmental actions and other factors. These
changes, if material, can cause us to adjust our financing and operating
strategies. The discussion of changes in currency below does not incorporate
these other important economic factors. The sensitivity analysis presented below
does not take into account 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.
International operations constitute about 15% of our 1998 consolidated operating
profit, excluding unusual impairment and other 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
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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 approximately
$45 million. This was estimated using 10% of the international segment operating
profit after adjusting for unusual impairment and other 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.
There were net foreign exchange losses of $53 million in 1998, $16 million in
1997 and $1 million in 1996.
During the year, macro-economic conditions in Brazil, Mexico, Russia and across
Asia Pacific have adversely impacted our results (see Russia discussion below).
We are taking actions in these markets to respond to these conditions, such as
prudent pricing aimed at sustaining volume, renegotiating terms with suppliers
and securing local currency supply alternatives. However, we expect that the
macro-economic conditions, particularly in Brazil, will continue to adversely
impact our results in the near term.
The economic turmoil in Russia which accompanied the August 1998 devaluation of
the ruble had an adverse impact on our operations. Consequently in our fourth
quarter, we experienced a significant drop in demand, resulting in lower net
sales and increased operating losses. Also, since net bottling sales in Russia
are denominated in rubles, whereas a substantial portion of our related costs
and expenses are denominated in U.S. dollars, bottling operating margins were
further eroded. In response to these conditions, we have reduced our cost
structure primarily through closing facilities, renegotiating manufacturing
contracts and reducing the number of employees. We also wrote down our
long-lived bottling assets to give effect to the resulting impairment. See
Management's Discussion and Analysis-Impairment and Other Items Affecting
Comparability of Results beginning on page 15.
On January 1, 1999, eleven of fifteen member countries of the European Union
fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency-the EURO. The euro trades on currency exchanges and may
be used in business transactions. Conversion to the euro eliminated currency
exchange rate risk between the member countries. Beginning in January 2002, new
EURO-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. Our operating subsidiaries affected by the euro
conversion have established plans to address the issues raised by the euro
currency conversion. These issues include, among others, the need to adapt
computer and financial systems, business processes and equipment, such as
vending machines, to accommodate EURO-denominated transactions and the impact of
one common currency on pricing. Since financial systems and
13
processes currently accommodate multiple currencies, the plans contemplate
conversion by the middle of 2001 if not already addressed in conjunction with
Year 2000 remediation. We do not expect the system and equipment conversion
costs to be material. Due to numerous uncertainties, we cannot reasonably
estimate the long-term effects one common currency will have on pricing and the
resulting impact, if any, on financial condition or results of operations.
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.
Year 2000
Each of PepsiCo's business segments and corporate headquarters has established
teams to identify and address Year 2000 compliance issues. Information
technology systems with non-compliant code are expected to be modified or
replaced with systems that are Year 2000 compliant. Similar actions are being
taken with respect to non-IT systems, primarily systems embedded in
manufacturing and other facilities. The teams are also charged with
investigating the Year 2000 readiness of suppliers, customers, franchisees,
financial institutions and other third parties and with developing contingency
plans where necessary.
Key information technology systems have been inventoried and assessed for
compliance, and detailed plans have been established for required system
modifications or replacements. Remediation and testing activities are in process
with work on approximately 70% of the systems already completed and the systems
back in operation. This percentage is expected to increase to approximately 85%
and 98% by the end of the first and second quarters of 1999, respectively.
PepsiCo systems are expected to be compliant by the fourth quarter of 1999.
Inventories and assessments of non-IT systems have been completed and
remediation activities are under way with a mid-year 1999 target completion
date.
Independent consultants have monitored progress of remediation programs at
selected businesses and performed testing at certain key locations. In addition,
other experts performed independent verification and validation audits of a
sample of remediated systems with satisfactory results. Other independent
consultants also performed a high-level review of our Year 2000 efforts and
concluded that there were no significant deficiencies in our process, provided
that resources are maintained at their current level and schedules are met.
Progress is also monitored by senior management, and periodically reported to
PepsiCo's Board of Directors.
We have identified critical suppliers, customers, financial institutions, and
other third parties and have surveyed their Year 2000 remediation programs. We
have completed on-site meetings with many of the third parties identified as
presenting the greatest impact if not compliant. Risk assessments and
contingency plans, where necessary, will be finalized in the first half of 1999
and tested where feasible in the second half of 1999. In addition, independent
consultants have completed a survey of the state of readiness of our significant
bottling franchisees. Such surveys have identified readiness issues and,
therefore, potential risk to us. As a result, the franchisees' remediation
programs are being accelerated to minimize the risk. We are also providing
14
assistance to the franchisees with processes and with certain manufacturing
equipment compliance data.
Incremental costs directly related to Year 2000 issues are estimated to be $141
million from 1998 to 2000, of which $64 million or 45% has been spent to date.
Approximately 35% of the total estimated spending represents costs to repair
systems while approximately 50% represents costs to replace and rewrite
software. This estimate assumes that we will not incur significant Year 2000
related costs on behalf of our suppliers, customers, franchisees, financial
institutions or other third parties. Costs incurred prior to 1998 were
immaterial. Excluded from the estimated incremental costs are approximately $55
million of internal recurring costs related to our Year 2000 efforts.
Contingency plans for Year 2000 related interruptions are being developed and
will include, but not be limited to, the development of emergency backup and
recovery procedures, the staffing of a centralized team to react to unforeseen
events, remediation of existing systems parallel with installation of new
systems, replacing electronic applications with manual processes, identification
of alternate suppliers and increasing raw material and finished goods inventory
levels. The potential failure of a power grid or public telecommunication
system, particularly internationally, will be considered in our contingency
planning. All plans are expected to be completed by the end of the second
quarter in 1999.
Our most likely worst case scenarios are the temporary inability of bottling
franchisees to manufacture or bottle some products in certain locations, of
suppliers to provide raw materials on a timely basis and of some customers to
order and pay on a timely basis.
Our Year 2000 efforts are ongoing and our overall plan, including our
contingency plans, will continue to evolve as new information becomes available.
While we anticipate no major interruption of our business activities, that will
be dependent in part upon the ability of third parties, particularly bottling
franchisees, to be Year 2000 compliant. Although we have implemented the actions
described above to address third party issues, we are not able to require the
compliance actions by such parties. Accordingly, while we believe our actions in
this regard should have the effect of mitigating Year 2000 risks, we are unable
to eliminate them or to estimate the ultimate effect Year 2000 risks will have
on our operating results.
Impairment and Other Items Affecting Comparability of Results
Asset Impairment and Restructuring Charges
- ------------------------------------------
Asset impairment and restructuring charges were $288 million ($261 million
after-tax or $0.17 per share) in 1998, $290 million ($239 million after-tax or
$0.15 per share) in 1997 and $576 million ($527 million after-tax or $0.33 per
share) in 1996.
The 1998 asset impairment and restructuring charges of $288 million are
comprised of the following:
o A fourth quarter charge of $218 million for asset impairment of $200
million and restructuring charges of $18 million resulting from the adverse
impact of market conditions of our Russian bottling operations described in
Management's Discussion and Analysis-Market Risks beginning on page 12. The
impairment evaluation was triggered by the reduction in utilization of
assets caused by the lower demand, the adverse change in the
15
business climate and the expected continuation of operating losses and cash
deficits in that market. The impairment charge reduced the net book value
of the assets to their estimated fair market value, based primarily on
values recently paid for similar assets in that marketplace. Of the total
$218 million charge, $212 million relates to bottling operations that will
be part of PBG.
o An impairment charge of $54 million relating to manufacturing equipment at
Frito-Lay North America. In the fourth quarter, as part of our annual
assessment of marketing plans and related capacity requirements at
Frito-Lay North America and the development of a program to improve
manufacturing productivity, we determined that certain product specific
equipment would not be utilized and certain capital projects would be
terminated to avoid production redundancies. The charge primarily reflects
the write off of the net book value of the equipment and related projects.
o A fourth quarter charge of $16 million for employee related costs resulting
from the separation of Pepsi-Cola North America's concentrate and bottling
organizations to more effectively serve retail customers in light of the
expected conversion of PBG to public ownership. Of this amount, $10 million
relates to bottling operations that will be part of PBG.
Most of the 1998 restructuring related amounts have been or will be paid in
1999.
In 1997 and 1996, asset impairment and restructuring charges of $290 million and
$576 million reflected strategic decisions to realign the international bottling
system, improve Frito-Lay International operating productivity and exit certain
businesses. In 1997, restructuring charges included proceeds of $87 million
associated with a settlement related to a previous Venezuelan bottler agreement,
partially offset by related costs.
Income Tax Benefit
- ------------------
In 1998 we reported a tax benefit, included in the provision for income taxes,
of $494 million (or $0.32 per share) as a result of reaching a final agreement
with the Internal Revenue Service to settle substantially all remaining aspects
of a tax case relating to our concentrate operations in Puerto Rico.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 is effective for our fiscal year beginning
2000. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities in the balance sheet and
measure those instruments at fair value. We are currently assessing the effects
of adopting SFAS 133, and have not yet made a determination of the impact
adoption will have on our consolidated financial statements.
16
RESULTS OF OPERATIONS
Consolidated Review
General
- -------
In the discussions below, the year-over-year dollar change in bottler case sales
by company-owned bottling operations and concentrate unit sales to franchisees
for Pepsi-Cola, and in pound or kilo sales of salty and sweet snacks for
Frito-Lay is referred to as volume. Price changes over the prior year and the
impact of product, package and country sales mix changes are referred to as
effective net pricing.
Net Sales
% Change B/(W)
--------------
($ in millions) 1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Net sales $22,348 $20,917 $20,337 7 3
- ------------------------------------------------------------------------------
Net sales rose $1.4 billion or 7% in 1998. Excluding foreign currency impact,
net sales would have risen 8%. This increase reflects volume gains in all
businesses, net contributions from acquisitions/divestitures and higher
effective net pricing driven by a shift to higher-priced products in Frito-Lay
North America. Volume gains contributed 4 percentage points of growth. Net
acquisitions/divestitures contributed 3 percentage points to the sales growth
and primarily reflect the acquisitions of Tropicana and certain North American
bottlers partially offset by the absence of bottling sales as a result of
refranchising a Japanese bottler late in 1997. In addition, net
acquisitions/divestitures also include the addition of TSSC and certain other
international salty snack food businesses which were partially offset by the
loss of net sales from previously consolidated businesses contributed to a new
Frito-Lay International joint venture in Central and South America. Weaker
foreign currencies primarily in Canada, Thailand, Brazil, Poland and India led
the unfavorable foreign currency impact.
Net sales rose $580 million or 3% in 1997. Excluding foreign currency impact,
net sales would have risen 4%. This increase reflects volume gains in Frito-Lay
Worldwide and Pepsi-Cola North America and higher effective net pricing. Weaker
foreign currencies primarily in Spain, Japan, Germany and Hungary led the
unfavorable foreign currency impact.
17
Operating Profit and Margin
Change B/(W)
------------
($ in millions) 1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Reported
Operating Profit $2,584 $2,662 $2,040 (3.0)% 30%
Operating Profit
Margin 11.6% 12.7% 10.0% (1.1) 2.7
Ongoing
Operating Profit $2,872 $2,952 $2,616 (3.0)% 13%
Operating Profit
Margin 12.9% 14.1% 12.9% (1.2) 1.2
Ongoing excludes the effect in all years of impairment and other items affecting
comparability (see Note 3).
- ------------------------------------------------------------------------------
In 1998, reported operating profit margin decreased over 1 percentage point.
Ongoing operating profit margin declined over 1 percentage point primarily
reflecting the margin impact of increased advertising and marketing (A&M) and
selling and distribution (S&D) expenses and higher cost of sales partially
offset by the impact of volume growth. A&M grew at a significantly faster rate
than sales led by increases at Pepsi-Cola Worldwide which included the Pepsi One
launch costs and increases at Frito-Lay North America for promotional allowances
and "WOW!" launch costs. S&D expenses grew at a slightly faster rate than sales
primarily in Pepsi-Cola North America and in Frito-Lay North America, reflecting
an increase in our sales forces and higher depreciation, maintenance and labor
costs associated with Pepsi-Cola North America cooler and vendor placements.
Cost of sales as a percentage of sales increased due to costs associated with
new plants and lines related to "WOW!" and Doritos 3-D products at Frito-Lay
North America and an unfavorable shift from higher-margin concentrate business
to packaged products in Pepsi-Cola North America. Excluding foreign exchange
losses, ongoing operating profit would have declined 1%. Foreign exchange
losses, primarily in Russia and Asia, are reported as part of Corporate
unallocated expenses. Information technology expense increased on a
year-over-year basis, despite $42 million of software costs that were
capitalized as required by SOP 98-1, driven by our various productivity
initiatives and Year 2000 remediation efforts.
Reported operating profit margin increased over 2 1/2 percentage points in 1997.
Ongoing operating profit margin increased over 1 percentage point due to the
margin impact of volume growth in all businesses, equity income from investments
in unconsolidated affiliates compared to losses in 1996 and lower cost of sales.
The impact of these advances were partially offset by the impact of higher S&D
and G&A. The change in equity income primarily reflects the absence of losses in
1997 from our Latin American bottler, Buenos Aires Embotelladora S.A. (BAESA).
Cost of sales as a percentage of sales decreased due to favorable raw material
costs in Pepsi-Cola International and the favorable effect of higher pricing
partially offset by increased costs for new plant capacity and the planned
introduction of new products in 1998 by Frito-Lay North America. The higher S&D
was driven by increased distribution costs to meet demand. The increase in G&A
is due to information systems-related expenses, customer focus leadership
training and infrastructure costs related to our new fountain beverage sales
team. These increased G&A expenses were partially offset by savings from a prior
year restructuring and the consolidation of certain administrative functions.
Ongoing operating profit margin was also reduced by the absence of 1996 gains
from the sale of an investment in a U. S. bottling
18
cooperative, a settlement with a Pepsi-Cola North America supplier and the sale
of a non-core business at Frito-Lay North America.
Interest Expense, net
% Change B/(W)
--------------
($ in millions) 1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Interest expense $(395) $(478) $(565) 17 15
Interest income 74 125 91 (41) 37
-- --- -- --- --
Interest expense, net $(321) $(353) $(474) 9 26
===== ===== ===== ==== ====
- ------------------------------------------------------------------------------
Interest expense, net of interest income, declined $32 million in 1998. The
decline in interest expense was primarily due to lower average U.S. debt levels,
as a result of using cash flows received from discontinued operations in the
latter half of 1997 to repay debt. The lower U.S. debt levels were maintained
until the end of the third quarter when the debt level increased to finance
several acquisitions (see Management's Discussion and Analysis-Acquisitions
beginning on page 11). This decline was partially offset by higher average
interest rates on the remaining debt. Interest income declined $51 million
reflecting lower U.S. and international investment levels as a result of
utilizing investment balances to make acquisitions and repay debt. See
Management's Discussion and Analysis-Liquidity and Capital Resources on page 30
for disclosure related to 1999 debt offerings.
In 1997 interest expense, net of interest income, declined $121 million.
Interest expense declined $87 million primarily reflecting lower average U.S.
debt levels. Debt levels were reduced by using a portion of the cash flows
provided by discontinued operations and from 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 $34 million reflecting higher investment
levels, which also benefited from the cash flows provided by discontinued
operations.
Provision for Income Taxes
($ in millions) 1998 1997 1996
---- ---- ----
Reported
Provision for income taxes $ 270 $ 818 $ 624
Effective tax rate 11.9% 35.4% 39.8%
Ongoing
Provision for income taxes $ 791 $ 869 $ 673
Effective tax rate 31.0% 33.4% 31.4%
Ongoing excludes the effect in all years of impairment and other items affecting
comparability (see Note 3).
- ------------------------------------------------------------------------------
19
In 1998, the reported effective tax rate decreased 23.5 percentage points
primarily as a result of a tax benefit of $494 million (or $0.32 per share). The
tax benefit reflects a final agreement with the Internal Revenue Service to
settle substantially all remaining aspects of a tax case relating to our
concentrate operations in Puerto Rico. The ongoing effective tax rate declined
2.4 percentage points attributable to favorable settlement of prior years' audit
issues, including issues related to the deductibility of purchased franchise
rights.
For 1997, the reported effective tax rate decreased 4.4 percentage points to
35.4%. The ongoing effective tax rate increased 2.0 percentage points to 33.4%,
primarily reflecting the absence of cumulative tax credits recognized in 1996
that related to prior years and lower benefits in 1997 from the resolution of
prior years' audit issues.
Income from Continuing Operations and Income Per Share
($ in millions except per share amounts) % Change B/(W)
--------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Income from con-
tinuing operations
Reported $1,993 $1,491 $ 942 34 58
Ongoing $1,760 $1,730 $1,469 2 18
Income per share
from continuing
operations
Reported $1.31 $0.95 $0.59 38 62*
Ongoing $1.16 $1.10 $0.92 5 20
Ongoing excludes the effect in all years of impairment and other items affecting
comparability (see Note 3).
* Based on unrounded amounts.
- ------------------------------------------------------------------------------
For 1998, reported income from continuing operations increased $502 million
while income per share increased $0.36. Ongoing income from continuing
operations and income per share increased $30 million and $0.06, respectively.
The ongoing increases are due to the lower effective tax rate and the benefit
from a 3% reduction in average shares outstanding, partially offset by lower
operating profit.
For 1997, reported income from continuing operations increased $549 million
while income per share increased $0.36. Ongoing income from continuing
operations and income per share increased $261 million and $0.18, respectively.
The ongoing increases are due to the increase in operating profit and the lower
net interest expense, partially offset by the higher effective tax rate. In
addition, income per share also benefited from a 2% reduction in average shares
outstanding.
20
Net Income and Net Income Per Share
($ in millions except per share amounts) % Change B/(W)
--------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Net income $1,993 $2,142 $1,149 (7) 86
Net income per share $1.31 $1.36 $0.72 (4) 91*
Average shares outstanding
used to calculate
net income per share 1,519 1,570 1,606 3 2
* Based on unrounded amounts.
- ------------------------------------------------------------------------------
For 1997 and 1996, Net Income and Income Per Share include the results of income
from discontinued operations, which primarily reflects the operating results of
TRICON's core restaurant businesses through October 6, 1997 and the operating
results and a gain on sale of the restaurant distribution operation sold in the
second quarter of 1997. Discontinued operations also include the expenses
associated with the spin-off and interest expense directly related to the
restaurants segment.
21
BUSINESS SEGMENTS (a)
($ in millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
NET SALES
Pepsi-Cola
North America (b) $ 8,266 $ 7,899 $ 7,788 $ 7,485 $ 7,119
International 2,385 2,642 2,799 2,982 2,535
------ ------ ------ ------ ------
10,651 10,541 10,587 10,467 9,654
------ ------ ------ ------ -----
Frito-Lay
North America (b) 7,474 6,967 6,628 5,873 5,379
International 3,501 3,409 3,122 2,727 2,951
------ ------ ----- ----- -----
10,975 10,376 9,750 8,600 8,330
------ ------ ----- ----- -----
Tropicana (c) 722 - - - -
--- ------ ----- ----- -----
Combined Segments $22,348 $20,917 $20,337 $19,067 $17,984
======= ======= ======= ======= =======
OPERATING PROFIT (d)
Pepsi-Cola
North America (b) $1,211 $1,274 $1,428 $1,249 $1,115
International (219) (144) (846) 117 136
- ------ ------ ------ ------ ------
992 1,130 582 1,366 1,251
------ ----- ----- ----- -----
Frito-Lay
North America (b) 1,424 1,388 1,286 1,149 1,043
International 367 318 346 301 354
----- ----- ----- ----- -----
1,791 1,706 1,632 1,450 1,397
----- ----- ----- ----- -----
Tropicana (c) 40 - - - -
----- ----- ----- ----- -----
Combined Segments $2,823 $2,836 $2,214 $2,816 $2,648
====== ====== ====== ====== ======
(a) Certain reclassifications were made to 1997 through 1994 amounts to conform
with the 1998 presentation and to maintain comparability.
(b) North America is composed of operations in the U.S. and Canada.
(c) Represents results since the acquisition date. See Management's Discussion
and Analysis-Acquisitions beginning on page 11.
(d) Represents reported amounts. See Note 16 -- Business Segments for 1998,
1997 and 1996 impairment and restructuring charges by segment. In addition,
1995 segment operating profit excludes the $66 charge for the initial,
noncash impact of adopting SFAS 121 and 1994 includes an $18 gain on a
stock offering by BAESA in Pepsi-Cola International.
22
Business Segments
- -----------------
Pepsi-Cola
- ----------
See Management's Discussion and Analysis-Pending Transactions/Events on page 11.
The standard volume measure is system bottler case sales (BCS). It represents
PepsiCo-owned brands, as well as brands, that we have been granted the right to
produce, distribute and market nationally.
Pepsi-Cola North America
% Growth Rates
--------------
($ in millions) 1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Net Sales $8,266 $7,899 $7,788 5 1
Operating Profit
Reported $1,211 $1,274 $1,428 (5) (11)
Ongoing $1,227 $1,326 $1,428 (7) (7)
Ongoing excludes unusual impairment and other items of $16 in 1998 and $52 in
1997 (see Note 3). Unless otherwise noted, operating profit comparisons within
the following discussions are based on ongoing operating profit.
==============================================================================
1998 vs. 1997
- -------------
Net sales increased $367 million or 5%. The increase reflects significant volume
growth and contributions from acquisitions, reduced by unfavorable foreign
exchange rates with Canada and lower effective net pricing. The increased sales
volume was primarily in packaged products. Acquisitions contributed 1 percentage
point to the sales growth.
BCS increased 6%, led by the strong single-digit growth of the Mountain Dew
brand, contributions from Pepsi One (our new one-calorie cola) and strong
double-digit growth of Aquafina bottled water and Lipton Brisk. Brand Pepsi and
brand Diet Pepsi also contributed to this year's growth, both advancing at
single-digit rates. Concentrate shipments to franchisees grew at a slightly
faster rate than their BCS growth.
Reported operating profit decreased $63 million. Ongoing operating profit
declined $99 million primarily due to planned increases in S&D and A&M and
higher G&A costs, partially offset by volume growth. S&D grew faster than sales
and volume, due to an increase in our sales force and higher depreciation,
maintenance and labor costs associated with cooler and vendor placements. A&M
expenses grew significantly faster than sales and volume reflecting new product
launches, such as Pepsi One, and planned increases for Project Globe and Pop
Culture
23
promotions. The G&A growth includes higher spending on information systems
related to the Year 2000 and other projects and higher costs associated with the
continued building of our fountain business infrastructure.
1997 vs. 1996
- -------------
Net sales increased $111 million reflecting volume growth, led by take-home
packaged products, reduced 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.
Reported operating profit declined $154 million. Ongoing operating profit
declined $102 million, reflecting the lower effective net pricing, higher S&D
costs and increased A&M. S&D grew significantly faster than sales, but in line
with volume. A&M grew significantly faster than sales and volume, primarily
reflecting above average levels of expenditures late in 1997. These unfavorable
items were reduced by the volume gains and lower packaging and commodity costs.
G&A savings from centralizing certain administrative functions were fully offset
by Year 2000 spending and infrastructure development costs related to our new
fountain business sales team. The decline in ongoing operating profit is also
due to the absence of 1996 gains from the sale of an investment in a bottling
cooperative and a settlement made with a supplier.
Pepsi-Cola International
% Growth Rates
--------------
($ in millions) 1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Net Sales $2,385 $2,642 $2,799 (10) (6)
Operating Profit
Reported $(219) $ (144) $(846) (52) 83
Ongoing $ (1) $ 10 $(270) NM NM
Ongoing excludes unusual impairment and other items of $218 in 1998, $154 in
1997 and $576 in 1996 (see Note 3). Unless otherwise noted, operating profit
comparisons within the following discussions are based on ongoing operating
profit.
NM-Not Meaningful
==============================================================================
24
1998 vs. 1997
- -------------
Net sales declined $257 million or 10%. Excluding foreign currency impact, net
sales would have declined 7%. This decline was primarily due to the absence of
Japan bottling sales in 1998 as a result of the refranchising of our Japanese
bottler late in 1997. Volume gains partially offset the decline in net sales.
Weaker foreign currencies primarily in Thailand, India and Hungary led the
unfavorable foreign currency impact.
BCS increased 6% reflecting double-digit growth in Mexico, the Philippines,
India, Pakistan and China. In addition, BCS grew at a high double-digit rate in
Venezuela reflecting the continued momentum by the joint venture as it increased
its territories and capacity. These advances were partially offset by lower BCS
in Japan due to the elimination of certain PepsiCo-owned brands by the new
bottler Suntory. The PepsiCo-owned brands that continued to be sold by Suntory
grew at a double-digit rate. Total concentrate shipments to franchisees
increased at about the same rate as their BCS.
Reported operating results declined $75 million. Ongoing operating results
declined $11 million. The decline primarily reflects higher losses in Russia due
to our increased ownership as well as the impact of the economic crisis.
Excluding the impact of Russia, operating results would have increased driven by
volume gains (reported by most of our Business Units) and lower G&A expenses,
due in part to savings from our 1996 restructuring. These gains were partially
reduced by higher A&M, increased equity losses from unconsolidated affiliates
and lower effective net pricing.
1997 vs. 1996
- -------------
Net sales declined $157 million or 6%. Excluding foreign currency impact, net
sales would have increased 1% driven by volume gains. The unfavorable foreign
currency impact was led by Spain and Japan.
BCS increased 1%. Strong double-digit growth in China, the Philippines and India
was reduced by double-digit declines in Brazil, Venezuela and South Africa. The
decline in Venezuela reflects the impact of the loss of our bottler in August
1996 while the decline in South Africa results from the cessation of our joint
venture operation. 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 $702 million. Ongoing operating results
improved by $280 million, reflecting a small profit in 1997 compared to a loss
in 1996. The improvement 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
absence 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
$70 million.
25
Frito-Lay
- ---------
The standard volume measure is pounds for North America and kilos for
International. Pound and kilo growth are reported on a systemwide and constant
territory basis, which includes currently consolidated businesses and
unconsolidated affiliates reported for at least one year.
Frito-Lay North America
% Growth Rates
--------------
($ in millions) 1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Net Sales $7,474 $6,967 $6,628 7 5
Operating Profit
Reported $1,424 $1,388 $1,286 3 8
Ongoing $1,478 $1,410 $1,286 5 10
Ongoing excludes unusual impairment and other items of $54 in 1998 and $22 in
1997 (see Note 3). Unless otherwise noted, operating profit comparisons within
the following discussions are based on ongoing operating profit.
==============================================================================
1998 vs. 1997
- -------------
Net sales grew $507 million due to increased volume and a favorable mix shift to
higher-priced products.
Pound volume advanced 5% led by core brand growth and "WOW!" products. The
growth in core brands, excluding their low-fat and no-fat versions, was led by
double-digit growth in Lay's brand potato chips and double-digit growth in
Doritos brand tortilla chips. These gains were partially offset by declines in
Ruffles brand potato chips, "Baked" Lay's and "Baked" Tostitos brand products
and the elimination of Doritos Reduced Fat brand tortilla chips.
Reported operating profit increased $36 million. Ongoing operating profit
increased $68 million reflecting the higher volume and the favorable mix shift,
partially offset by increased operating costs. The increase in operating costs
was led by increased A&M, higher manufacturing costs, reflecting costs
associated with new plants and lines related to "WOW!" and Doritos 3-D products,
and higher S&D expenses. A&M grew at a significantly faster rate than sales and
volume due to increased promotional allowances and "WOW!" launch costs. S&D grew
at a slightly slower rate than sales but faster than volume.
26
1997 vs. 1996
- -------------
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 $102 million. Ongoing operating profit rose $124
million, reflecting the higher pricing and volume growth, partially offset by
increased manufacturing costs and G&A expenses. The increased manufacturing
costs related to new plant capacity and the planned introduction of new products
in 1998. S&D grew slower than sales, A&M was about even with prior year and G&A
increased significantly faster than sales reflecting information systems-related
expenses and customer focus leadership training. Operating profit growth was
hampered by the absence of a 1996 gain from the sale of a non-core business.
Frito-Lay International
% Growth Rates
--------------
($ in millions) 1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Net Sales $3,501 $3,409 $3,122 3 9
Operating Profit
Reported $ 367 $ 318 $ 346 15 (8)
Ongoing $ 367 $ 380 $ 346 (3) 10
`
Ongoing excludes unusual impairment and other items of $62 in 1997 (see Note 3).
Unless otherwise noted, operating profit comparisons within the following
discussions are based on ongoing operating profit.
==============================================================================
27
1998 vs. 1997
- -------------
Net sales increased $92 million or 3%. The increase in net sales was driven by
net contributions from acquisitions/divestitures and by higher volume. The
increase was partially offset by the impact of weaker foreign currencies
including the unfavorable effect in Mexico of the devaluation of the peso
against the U.S. dollar net of local pricing actions. Excluding Mexico, the
impact of weaker foreign currencies, primarily Brazil, Poland, Australia and
Thailand, reduced net sales growth by 2 percentage points. Net
acquisitions/divestitures contributed 3 percentage points to the sales growth.
Salty snack kilos increased 6%, led by solid double-digit growth at Sabritas in
Mexico and the Snack Ventures Europe joint venture, partially offset by
double-digit declines in Brazil. Sweet snack kilos declined 2% driven by a
single-digit decline at Gamesa in Mexico and a double-digit decline at Wedel in
Poland. These declines in sweet snack kilos were partially offset by
double-digit growth at Sabritas. Including acquisitions/divestitures, salty
snack kilos increased to 14%. The increase of 8 percentage points was primarily
driven by the acquisitions through partnership with, as well as, purchase of
salty snack food businesses in Central and South America. Sweet snack kilos,
including the effect of acquisitions/divestitures, declined 8% primarily as a
result of the first quarter sale of a French biscuit business.
Reported operating profit increased $49 million. Ongoing operating profit
declined $13 million. Deterioration of operating performance in Brazil due to
the macro-economic conditions and market softness at Gamesa was partially offset
by growth at Sabritas and in Poland. The growth in Poland was substantially
driven by the sweet snack business. As part of a global strategy to focus on
core businesses, we previously announced that we had completed negotiations for
the sales in early 1999 of the chocolate and biscuit businesses in Poland.
1997 vs. 1996
- -------------
Net sales increased $287 million due to 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 or 10%. Excluding foreign currency impact, ongoing
operating profit increased 8%. This increase was due to 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. The foreign currency impact resulted from the strength of the British
pound at Walkers.
Tropicana
- ---------
From the date of acquisition in 1998, net sales were $722 million and operating
profit was $40 million. The operating profit reflects the impact of fourth
quarter increases in the cost of oranges in advance of related selling price
increases.
28
CONSOLIDATED CASH FLOWS
1998 vs. 1997
- -------------
Our 1998 consolidated cash and cash equivalents decreased $1.6 billion compared
to a $1.6 billion increase in 1997. Excluding cash provided by discontinued
operations in 1997, the decrease in cash and cash equivalents was $1.6 billion
in 1998 compared with a $4.6 billion decrease in 1997. The change in cash flow
primarily reflects net proceeds from issuance of debt and the liquidation of
investment portfolios in 1998 compared to net debt repayments in 1997. These
cash inflows were primarily used to fund acquisitions and investments in
unconsolidated affiliates during the year.
The acquisitions and investments in unconsolidated affiliates include the
purchases of Tropicana, the remaining ownership interest in various bottlers,
TSSC and various other international salty snack food businesses.
1997 vs. 1996
- -------------
Our 1997 consolidated cash and cash equivalents increased $1.6 billion over the
prior year reflecting a significant increase in cash provided by discontinued
operations which was used to reduce debt, increase our investment portfolios and
repurchase shares.
The 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, the increase 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.
Share Repurchases
- -----------------
Our share repurchase activity was as follows:
(in millions) 1998 1997 1996
---- ---- ----
Cost $2,230 $2,459 $1,651
Shares repurchased
Number of shares 59.2 69.0 54.2
% of shares outstanding at
beginning of year 3.9% 4.5% 3.4%
At December 26, 1998, 73.2 million shares remain available under the current
repurchase authority granted by our Board of Directors.
29
LIQUIDITY AND CAPITAL RESOURCES
At the end of the third quarter, we completed the acquisitions of Tropicana for
$3.3 billion in cash and TSSC for $270 million in cash. The purchase prices were
largely funded by the issuance of one year notes and commercial paper resulting
in an increase in short-term borrowings at year-end 1998.
We increased our revolving credit facilities by $2.0 billion to $4.75 billion
from $2.75 billion at year-end 1997. These unused credit facilities exist
largely to support issuances of short-term debt. The facilities are composed of
$3.1 billion expiring March 1999 and $1.65 billion expiring March 2003. At
year-end 1998, $1.65 billion of short-term borrowings were reclassified as
long-term, reflecting our intent and ability, through the existence of the
unused revolving credit facilities, to refinance these borrowings. Annually,
these facilities can be extended an additional year upon the mutual consent of
PepsiCo and the lending institutions.
As discussed in Management's Discussion and Analysis-Pending
Transactions/Events, our Board of Directors approved a plan for the separation
of PBG. As noted, an initial public offering is expected to be consummated in
the second quarter of 1999 subject to market conditions and regulatory
approvals. In February and March of 1999, PBG and its principal operating
subsidiary, Bottling LLC incurred $6.55 billion of indebtedness, a large portion
of which is intended to be temporary and be repaid with the proceeds of the
Offering. It is intended that the remainder will be carried as PBG's long-term
indebtedness of which $2.3 billion is unconditionally guaranteed by PepsiCo. A
substantial portion of the debt proceeds obtained by PBG was used to settle
pre-existing intercompany amounts due to us. We plan to use these proceeds for
general corporate purposes, including the repayment of a portion of our
short-term borrowings.
As noted earlier in the discussion regarding pending transactions, as part of
our agreement with Whitman to realign bottling territories, certain indebtedness
associated with our transferred U.S. operations is planned to be assumed by new
Whitman with net proceeds to us of $300 million.
Capital spending is expected to decline in 1999 to approximately $1.2 billion as
we will no longer directly fund the capital spending related to PBG after the
Offering. The decline will be offset, in part, by continued investment in other
international bottling operations and in Frito-Lay International and full year
capital spending in Tropicana.
Our strong cash-generating capability and financial condition give us ready
access to capital markets throughout the world.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Included in Item 7, Management's Discussion and Analysis - Market Risk
beginning on page 12.
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 election are contained under the caption "Election of Directors" in the
Company's Proxy Statement for its 1999 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 1999 Annual
Meeting of Shareholders under the captions "Directors Compensation" and
"Executive Compensation", respectively, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information on the number of shares of PepsiCo Capital Stock beneficially
owned by each director and by all directors and officers as a group is contained
under the caption "Ownership of Capital Stock by Directors and Officers" in the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders and is
incorporated herein by reference. As far as is known to the Company, no person
beneficially owns more than 5% of the outstanding shares of PepsiCo Capital
Stock.
Item 13. Certain Relationships and Related Transactions
Not applicable.
31
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.
32
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 23, 1999
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 23, 1999
Roger A. Enrico and
Chief Executive Officer
/s/ MICHAEL D. WHITE Senior Vice President March 23, 1999
Michael D. White and Chief Financial
Officer
/s/ SEAN F. ORR Senior Vice President March 23, 1999
Sean F. Orr and Controller
(Principal Accounting
Officer)
/s/ KARL M. VON DER HEYDEN Vice Chairman of the March 23, 1999
Karl M. von der Heyden Board
/s/ JOHN F. AKERS Director March 23, 1999
John F. Akers
/s/ ROBERT E. ALLEN Director March 23, 1999
Robert E. Allen
/s/ PETER FOY Director March 23, 1999
Peter Foy
/s/ RAY L. HUNT Director March 23, 1999
Ray L. Hunt
S-1
/s/ JOHN J. MURPHY Director March 23, 1999
John J. Murphy
/s/ STEVEN S REINEMUND Chairman and Chief March 23, 1999
Steven S Reinemund Executive Officer of
The Frito-Lay Company
and Director
/s/ SHARON PERCY ROCKEFELLER Director March 23, 1999
Sharon Percy Rockefeller
/s/ FRANKLIN A. THOMAS Director March 23, 1999
Franklin A. Thomas
/s/ P. ROY VAGELOS Director March 23, 1999
P. Roy Vagelos
/s/ CRAIG E. WEATHERUP Chairman and Chief March 23, 1999
Craig E. Weatherup Executive Officer of
The Pepsi Bottling
Group and Director
/s/ ARNOLD R. WEBER Director March 23, 1999
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"), as amended
and restated, effective as of September 24, 1998.
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).
10.6 PepsiCo, Inc. 1994 Long-Term Incentive Plan,as amended and restated,
effective as of September 24, 1998.
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 which
is incorporated herein by reference from PepsiCo's Annual Report on
Form 10-K for the fiscal year ended December 27, 1997.
E-1
10.9 Restated PepsiCo Pension Equalization Plan, which is incorporated
herein by reference from PepsiCo's Annual Report on Form 10-K for
the fiscal year ended December 27, 1997.
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of PepsiCo, Inc.
23 Report and Consent of KPMG LLP.
24 Copy of Power of Attorney.
27 Financial Data Schedule.
E-2
PepsiCo, Inc. and Subsidiaries
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 26, 1998
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 26, 1998,
December 27, 1997 and December 28, 1996......... F-2
Consolidated Statement of Cash Flows for
the fiscal years ended December 26, 1998,
December 27, 1997 and December 28, 1996......... F-3 - F-4
Consolidated Balance Sheet at December 26, 1998
and December 27, 1997........................... F-5
Consolidated Statement of Shareholders' Equity
for the fiscal years ended December 26, 1998,
December 27, 1997 and December 28, 1996......... F-6 - F-7
Notes to Consolidated Financial Statements........ F-8 - F-37
Management's Responsibility for Financial Statements F-38
Report of Independent Auditors, KPMG LLP.......... F-39
Selected Financial Data........................... F-40 - F-44
Item 14(a)(2) Financial Statement Schedule
II Valuation and Qualifying Accounts for the fiscal years ended
December26, 1998, December 27, 1997 and December 28, 1996.... F-45
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 26, 1998, December 27, 1997 and December 28, 1996
1998 1997 1996
- --------------------------------------------------------------------------
Net Sales........................ $22,348 $20,917 $20,337
Costs and Expenses, net
Cost of sales.................... 9,330 8,525 8,452
Selling, general and
administrative expenses......... 9,924 9,241 9,063
Amortization of intangible assets 222 199 206
Unusual impairment and other items 288 290 576
------- ------- -------
Operating Profit................. 2,584 2,662 2,040
Interest expense................. (395) (478) (565)
Interest income.................. 74 125 91
------- ------- -------
Income from Continuing Operations
Before Income Taxes............ 2,263 2,309 1,566
Provision for Income Taxes....... 270 818 624
------- ------- -------
Income from Continuing Operations 1,993 1,491 942
Income from Discontinued
Operations, net of tax......... - 651 207
------- ------- -------
Net Income....................... $ 1,993 $ 2,142 $ 1,149
======= ======= =======
Income Per Share - Basic
Continuing Operations............ $ 1.35 $ 0.98 $ 0.60
Discontinued Operations.......... - 0.42 0.13
------- ------- --------
Net Income ..................... $ 1.35 $ 1.40 $ 0.73
======= ======= =======
Average shares outstanding....... 1,480 1,528 1,564
Income Per Share - Assuming Dilution
Continuing Operations............ $ 1.31 $ 0.95 $ 0.59
Discontinued Operations.......... - 0.41 0.13
------- ------- -------
Net Income....................... $ 1.31 $ 1.36 $ 0.72
======= ======= =======
Average shares outstanding....... 1,519 1,570 1,606
- -----------------------------------------------------------------------------
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 26, 1998, December 27, 1997 and December 28, 1996
1998 1997 1996
- ---------------------------------------------------------------------------
Operating Activities
Income from continuing operations..... $ 1,993 $ 1,491 $ 942
Adjustments to reconcile income
from continuing operations to net
cash provided by operating
activities
Depreciation and amortization....... 1,234 1,106 1,073
Noncash portion of 1998
tax benefit........................ (259) - -
Noncash portion of unusual impairment
and other items.................... 254 233 366
Deferred income taxes............... 150 51 160
Other noncash charges and
credits, net....................... 237 342 505
Changes in operating working capital,
excluding effects of acquisitions
and dispositions
Accounts and notes receivable...... (104) (53) (67)
Inventories........................ 29 79 (97)
Prepaid expenses and other current
assets............................. (12) (56) 84
Accounts payable and other
current liabilities............... (195) 84 297
Income taxes payable............... (116) 142 (71)
------ ------ ------
Net change in operating
working capital.................... (398) 196 146
------ ------ ------
Net Cash Provided by Operating
Activities........................... 3,211 3,419 3,192
------ ------ ------
Investing Activities
Capital spending...................... (1,405) (1,506) (1,630)
Acquisitions and investments
in unconsolidated affiliates......... (4,537) (119) (75)
Sales of businesses................... 17 221 43
Sales of property, plant
and equipment........................ 134 80 9
Short-term investments, by original
maturity
More than three months-purchases.... (525) (92) (115)
More than three months-maturities... 584 177 192
Three months or less, net........... 839 (735) 736
Other, net............................ (126) (96) (214)
------ ------ ------
Net Cash Used for Investing
Activities........................... (5,019) (2,070) (1,054)
------ ------ ------
- ---------------------------------------------------------------------------
(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 26, 1998, December 27, 1997 and December 28, 1996
1998 1997 1996
- ---------------------------------------------------------------------------
Financing Activities
Proceeds from issuances of
long-term debt................. 990 - 1,772
Payments of long-term debt...... (2,277) (1,875) (1,432)
Short-term borrowings, by original
maturity
More than three months-proceeds 2,713 146 740
More than three months-payments (417) (177) (1,873)
Three months or less, net..... 1,753 (1,269) 89
Cash dividends paid............. (757) (736) (675)
Share repurchases............... (2,230) (2,459) (1,651)
Proceeds from exercises of
stock options.................. 415 403 323
Other, net...................... - 5 (9)
------- -------- -------
Net Cash Provided by (Used for)
Financing Activities........... 190 (5,962) (2,716)
------- ------- -------
Net Cash Provided by Discontinued
Operations..................... - 6,236 605
Effect of Exchange Rate Changes on
Cash and Cash Equivalents...... 1 (2) (5)
------- ------- -------
Net (Decrease) Increase in Cash
and Cash Equivalents........... (1,617) 1,621 22
Cash and Cash Equivalents
- Beginning of Year............ 1,928 307 285
------- ------- -------
Cash and Cash Equivalents
- End of Year.................. $ 311 $ 1,928 $ 307
======= ======= =======
- ---------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid................... $ 367 $ 462 $ 538
Income taxes paid............... $ 521 $ 696 $ 611
Schedule of Noncash Investing and
Financing Activities
Fair value of assets acquired... $ 5,359 $ 160 $ 81
Cash paid and stock issued...... (4,537) (134) (76)
------- ------- -------
Liabilities assumed............. $ 822 $ 26 $ 5
======= ======= =======
- ---------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-4
Consolidated Balance Sheet
(in millions)
PepsiCo, Inc. and Subsidiaries
December 26, 1998 and December 27, 1997
1998 1997
- -----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents................ $ 311 $ 1,928
Short-term investments, at cost.......... 83 955
------- -------
394 2,883
Accounts and notes receivable, less allowance:
$127 in 1998 and $125 in 1997........... 2,453 2,150
Inventories.............................. 1,016 732
Prepaid expenses, deferred income taxes
and other current assets................ 499 486
------- -------
Total Current Assets................. 4,362 6,251
Property, Plant and Equipment, net....... 7,318 6,261
Intangible Assets, net................... 8,996 5,855
Investments in Unconsolidated Affiliates. 1,396 1,201
Other Assets............................. 588 533
------- -------
Total Assets........................ $22,660 $20,101
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings.................... $ 3,921 $ -
Accounts payable and other current
liabilities ............................ 3,870 3,617
Income taxes payable..................... 123 640
------- -------
Total Current Liabilities............ 7,914 4,257
Long-Term Debt........................... 4,028 4,946
Other Liabilities........................ 2,314 2,265
Deferred Income Taxes.................... 2,003 1,697
Shareholders' Equity
Capital stock, par value 1 2/3(cent) per share:
authorized 3,600 shares, issued 1,726 shares 29 29
Capital in excess of par value........... 1,166 1,314
Retained earnings........................ 12,800 11,567
Accumulated other comprehensive loss..... (1,059) (988)
-------- -------
12,936 11,922
Less: Treasury stock, at cost:
255 shares and 224 shares in 1998 and
1997, respectively..................... (6,535) (4,986)
------- -------
Total Shareholders' Equity........... 6,401 6,936
------- -------
Total Liabilities and
Shareholders' Equity............... $22,660 $20,101
======= =======
- -------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-5
Consolidated Statement of Shareholders' Equity (page 1 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 26, 1998, December 27, 1997 and December 28, 1996
Capital Stock
Issued Treasury
Shares Amount Shares Amount
Shareholders' Equity,
December 30, 1995.............. 1,726 $29 (150) $(1,683)
---------------------------------
1996 Net income............... - - - -
Currency translation adjustment - - - -
Comprehensive income........
Cash dividends declared....... - - - -
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............... - - - -
Currency translation adjustment - - - -
Comprehensive income........
Cash dividends declared....... - - - -
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)
-----------------------------------
1998 Net income............... - - - -
Currency translation adjustment - - - -
Reclassification adjustment... - - - -
Total currency translation
adjustment.................
Minimum pension liability
adjustment, net of tax
benefits of $11............ - - - -
Comprehensive income........
Cash dividends declared....... - - - -
Share repurchases............. - - (59) (2,230)
Stock option exercises, including
tax benefits of $109.......... - - 28 675
Other......................... - - - 6
----------------------------------
Shareholders' Equity,
December 26, 1998............. 1,726 $29 (255) $(6,535)
==================================
(Continued on following page)
F-6
Consolidated Statement of Shareholders' Equity (page 2 of 2)
(in millions)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 26, 1998, December 27, 1997 and December 28, 1996
Capital Accumulated
in Other
Excess of Retained Comprehensive
Par Value Earnings (Loss)/Income Total
- -------------------------------------------------------------------------
Shareholders' Equity,
December 30, 1995.............. $1,045 $ 8,730 $ (808) $ 7,313
---------------------------------------
1996 Net income............... - 1,149 - 1,149
Currency translation adjustment - - 40 40
-------
Comprehensive income........ 1,189
Cash dividends declared....... - (695) - (695)
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
Currency translation adjustment - - (220) (220)
-------
Comprehensive income........ 1,922
Cash dividends declared....... - (746) - (746)
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
---------------------------------------
1998 Net income............... - 1,993 - 1,993
Currency translation adjustment - - (75) (75)
Reclassification adjustment... - - 24 24
-------
Total currency translation
adjustment................. (1,039)
Minimum pension liability.....
adjustment (net of tax
benefits of $11)........... - - (20) (20)
------
Comprehensive income.......... 1,922
Cash dividends declared....... - (760) - (760)
Share repurchases............. - - - (2,230)
Stock option exercises, including
tax benefits of $109........ (151) - - 524
Other......................... 3 - - 9
---------------------------------------
Shareholders' Equity,
December 26, 1998.............. $1,166 $12,800 $(1,059) $ 6,401
=======================================
- ------------------------------------------------------------------------
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, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. Actual results
could differ from these estimates.
Certain reclassifications were made to 1997 and 1996 amounts to conform with the
1998 presentation.
Principles of Consolidation
- ---------------------------
The financial statements include the consolidated accounts of PepsiCo, Inc. and
its controlled affiliates. Intercompany balances and transactions have been
eliminated. Investments in Unconsolidated Affiliates, over which we exercise
significant influence but not control, are accounted for by the equity method.
Our share of the net income or loss of such unconsolidated affiliates is
included in selling, general and administrative expenses.
Revenue Recognition
- -------------------
We recognize revenue when products are delivered to customers. Sales terms
generally do not allow a right to return.
Marketing Costs
- ---------------
Marketing costs are reported in selling, general and administrative expenses and
include costs of advertising and other marketing activities. Advertising
expenses were $1.9 billion in 1998 and $1.8 billion in both 1997 and 1996.
Deferred advertising expense, classified as prepaid expenses in the Consolidated
Balance Sheet, was $34 million in 1998 and $53 million in 1997. Deferred
advertising costs are expensed in the year first used and consist of:
o media and personal service prepayments, o promotional materials in inventory,
and o production costs of future media advertising.
Stock-Based Compensation
- ------------------------
We measure stock-based compensation cost as the excess of the quoted market
price of PepsiCo capital stock at the grant date over the amount the employee
must pay for the stock (exercise price). Our policy is to generally grant stock
options with an exercise price equal to the stock price at the date of grant and
accordingly, no compensation cost is recognized.
F-8
Derivative Instruments
- ----------------------
The interest differential to be paid or received on an interest rate swap is
recognized as an adjustment to interest expense as the differential occurs. The
interest differential not yet settled in cash is reflected in the Consolidated
Balance Sheet as a receivable or payable under the appropriate current asset or
liability caption. If an interest rate swap position were to be terminated, the
gain or loss realized upon termination would be deferred and amortized to
interest expense over the remaining term of the underlying debt instrument it
was intended to modify. However, if the underlying debt instrument were to be
settled prior to maturity, the gain or loss realized upon termination would be
recognized immediately.
The differential to be paid or received on a currency swap related to non-U.S.
dollar denominated debt is charged or credited to income as the differential
occurs. This is fully offset by the corresponding gain or loss recognized in
income on the currency translation of the debt, as both amounts are based upon
the same exchange rates. The currency differential not yet settled in cash is
reflected in the Consolidated Balance Sheet under the appropriate current or
noncurrent receivable or payable caption. If a currency swap position were 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 hedged commodity when
purchased. Changes in the value of such contracts used to hedge commodity
purchases are highly correlated to the changes in the value of the purchased
commodity. If the degree of correlation between the futures contracts and the
purchased commodity were to significantly diminish during the contract term,
subsequent changes in the value of the futures contracts would be recognized in
income. If a futures contract were to be terminated, the gain or loss realized
upon termination would be included in the cost of the hedged commodity when
purchased.
Cash Equivalents
- ----------------
Cash equivalents represent funds temporarily invested, with maturities of three
months or less. All other investment portfolios are primarily classified as
short-term investments.
Inventories
- -----------
Inventories are valued at the lower of cost (computed on the average, first-in,
first-out or last-in, first-out method) or net realizable value.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. 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.
F-9
Recoverability of Long-Lived Assets to be Held and Used in the Business
- ----------------------------------------------------------------------------
All long-lived assets are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impaired asset is written down to its estimated fair market
value based on the best information available. Estimated fair market value is
generally measured by discounting estimated future cash flows. Considerable
management judgment is necessary to estimate discounted future cash flows.
Accounting and Reporting Changes
- --------------------------------
As of December 28, 1997, we adopted Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, issued by
The American Institute of Certified Public Accountants in March 1998. The SOP
requires capitalization of certain costs related to computer software developed
or obtained for internal use which we had previously expensed in selling,
general and administrative expenses. The amount capitalized under the SOP in
1998 was $42 million.
As of December 28, 1997, we adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, issued in June 1997. SFAS 130 requires
the reporting and display of comprehensive income, which is composed of net
income and other comprehensive income or loss items, in a full set of general
purpose financial statements. Other comprehensive income or loss items are
revenues, expenses, gains and losses that under generally accepted accounting
principles are excluded from net income and reflected as a component of equity,
such as currency translation and minimum pension liability adjustments.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 is effective for our fiscal year beginning
2000. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities in the Consolidated
Balance Sheet and measure those instruments at fair value. We are currently
assessing the effects of adopting SFAS 133, and have not yet made a
determination of the impact adoption will have on our consolidated financial
statements.
Note 2 - Acquisitions and Investments in Unconsolidated Affiliates
At the end of the third quarter in 1998, we completed the acquisitions of
Tropicana Products, Inc. from The Seagram Company Ltd. for $3.3 billion in cash
and The Smith's Snackfoods Company (TSSC) in Australia from United Biscuits
Holdings plc for $270 million in cash. In addition, acquisitions and investments
in unconsolidated affiliates included the remaining ownership interest in
various bottlers and purchases of various other international salty snack food
businesses. Acquisitions for the year aggregated $4.5 billion in cash. The
results of operations of all acquisitions are generally included in the
consolidated financial statements from their respective dates of acquisition.
The acquisitions were accounted for under the purchase method and the purchase
prices were largely funded by the issuance of one year notes and commercial
paper. The
F-10
purchase prices have been allocated based on the estimated fair value of the
assets acquired and liabilities assumed. The excess purchase prices over the
fair value of the net assets acquired of approximately $3.2 billion was
allocated to goodwill and are amortized on a straight-line basis over 40 years.
The following table presents the unaudited pro forma combined results of PepsiCo
and Tropicana as if the acquisition had occurred at the beginning of our fiscal
years 1998 and 1997. The aggregate impact of other acquisitions in these periods
was not material to our net sales, income or income per share from continuing
operations.
Unaudited
-------------------
1998 1997
---- ----
Net Sales $23,674 $22,851
Income from Continuing Operations $ 1,939 $ 1,427
Income Per Share from Continuing Operations $ 1.28 $0.91
These pro forma amounts reflect the inclusion of the results of Tropicana for
1997 and the first three quarters of 1998 prior to the acquisition date as well
as the results that are already included in the historical financial statements
from the date of acquisition. In addition, the pro forma amounts include the
amortization of the goodwill arising from the allocation of the purchase price
and interest expense on the debt issued to finance the purchase. The pro forma
information does not necessarily present what the combined results would have
been for these periods and is not intended to be indicative of future results.
F-11
Note 3 - Impairment and Other Items Affecting Comparability of
Income From Continuing Operations
Asset Impairment and Restructuring
- ----------------------------------
1998 1997 1996
- ------------------------------------------------------------
Asset impairment charges
Held and used in the business
Property, plant and equipment. $ 149 $ 5 $ 8
Intangible assets............. 37 - 2
Investments in unconsolidated
affiliates.................. - - 190
Other assets.................. 14 - 106
Held for disposal/abandonment
Property, plant and equipment. 54 111 -
Investments in unconsolidated
affiliates.................. - 21 20
Net assets of business units.. - 63 47
----- ----- -----
Total asset impairment......... 254 200 373
Restructuring charges
Employee related costs......... 24 55 107
Other charges.................. 10 35 96
----- ----- -----
Total unusual impairment and
other items................... $ 288 $ 290 $ 576
===== ===== =====
After-tax.................... $ 261 $ 239 $ 527
===== ===== =====
Per share.................... $0.17 $0.15 $0.33
===== ===== =====
Impairment by segment
1998 1997 1996
- -----------------------------------------------------------
Pepsi-Cola North America....... $ - $ 52 $ -
Pepsi-Cola International....... 200 110 373
Frito-Lay North America......... 54 8 -
Frito-Lay International........ - 30 -
---- ---- ----
$254 $200 $373
==== ==== ====
The 1998 asset impairment and restructuring charges of $288 million are
comprised of the following:
o A fourth quarter charge of $218 million for asset impairment of $200
million and restructuring charges of $18 million related to our Russian
bottling operations. The economic turmoil in Russia which accompanied the
August 1998 devaluation of the ruble had an adverse impact on our
operations. Consequently, in our fourth quarter we experienced a
significant drop in demand, resulting in lower net sales and increased
operating losses. Also, since net bottling sales in Russia are denominated
in rubles, whereas a substantial portion of our related costs and expenses
are denominated in U.S. dollars, bottling operating margins were further
eroded. In response to these conditions, we have reduced our cost structure
primarily through closing facilities,
F-12
renegotiating manufacturing contracts and reducing the number of employees.
We also evaluated our long-lived bottling assets for impairment, triggered
by the reduction in utilization of assets caused by the lower demand, the
adverse change in the business climate and the expected continuation of
operating losses and cash deficits in that market. The impairment charge
reduced the net book value of the assets to their estimated fair market
value, based primarily on amounts recently paid for similar assets in that
marketplace. Of the total charge of $218 million, $212 million relates to
bottling operations that will be part of The Pepsi Bottling Group, Inc.
(see Note 18).
o An impairment charge of $54 million related to manufacturing equipment at
Frito-Lay North America. In the fourth quarter, as part of our annual
assessment of marketing plans and related capacity requirements at
Frito-Lay North America and the development of a program to improve
manufacturing productivity, we determined that certain product specific
equipment would not be utilized and certain capital projects would be
terminated to avoid production redundancies. The charge primarily reflects
the write off of the net book value of the equipment and related projects.
Disposal or abandonment of these assets will be substantially completed in
the first quarter of 1999. See Note 18 for a discussion of future charges
related to this program.
o A fourth quarter charge of $16 million for employee related costs resulting
from the separation of Pepsi-Cola North America's concentrate and bottling
organizations to more effectively serve retail customers in light of the
expected conversion of PBG to public ownership (see Note 18). Of this
amount, $10 million relates to bottling operations that will be part of
PBG.
The employee related costs for 1998 of $24 million primarily include severance
and relocation costs for approximately 2,700 employees located in the Russia
bottling operations and at Pepsi-Cola North America field locations.
Terminations of employees, which were communicated during the fourth quarter of
1998, have either occurred or will generally occur in the first half of 1999.
Most amounts have been paid or will be paid in 1999.
In 1997 and 1996, asset impairment and restructuring charges reflected strategic
decisions to realign the international bottling system, improve Frito-Lay
International operating productivity and exit certain businesses. The impairment
of assets to be held and used reflected reductions in forecasted cash flows
attributable to increased competitive activity and weakened macro-economic
factors in various geographic regions. The restructuring charges were primarily
employee related severance which was substantially paid in 1997. The 1997
restructuring charges included proceeds of $87 million associated with a
settlement related to a previous Venezuelan bottler agreement, partially offset
by related costs.
At year-end 1998, the remaining 1997 and 1996 restructuring charges included in
accounts payable and other current liabilities primarily relate to liabilities
associated with investments in unconsolidated affiliates for which settlement is
expected in 1999.
F-13
Income Tax Benefit
- ------------------
In 1998 we reported a tax benefit, included in the provision for income taxes,
of $494 million (or $0.32 per share) as a result of reaching a final agreement
with the Internal Revenue Service to settle substantially all remaining aspects
of a tax case relating to our concentrate operations in Puerto Rico.
Note 4 - Discontinued Operations
The restaurants segment was composed of the core restaurant businesses of Pizza
Hut, Taco Bell and Kentucky Fried Chicken, PepsiCo Food Systems, a restaurant
distribution operation, and several non-core U.S. restaurant businesses. In
1997, we spun off the restaurant businesses to our shareholders as an
independent publicly traded company (Distribution). The spin-off was effective
as a tax-free Distribution on October 6, 1997 (Distribution Date). Owners of
PepsiCo capital stock as of September 19, 1997 received one share of common
stock of TRICON Global Restaurants, Inc., the new company, for every ten shares
of PepsiCo capital stock. Immediately before the Distribution Date, we received
$4.5 billion in cash from TRICON as repayment of certain amounts due and a
dividend. PFS and the non-core U.S. restaurant businesses were sold before the
Distribution Date resulting in after-tax cash proceeds of approximately $1.0
billion.
Income from discontinued operations:
1997 1996
- --------------------------------------------------------------------------------
Net sales.................. $ 8,375 $ 11,441
Costs and expenses......... (7,704) (10,935)
PFS gain................... 500 -
Interest expense, net...... (20) (25)
Provision for income taxes. (500) (274)
------- --------
Income from discontinued
operations................ $ 651 $ 207
======= ========
The above amounts include costs directly associated with the spin-off but do not
include an allocation of our interest or general and administrative expenses.
Note 5 - Income Per Share
We present two income per share measures, basic and assuming dilution, on the
face of the Consolidated Statement of Income. "Basic" income per share equals
net income divided by weighted average common shares outstanding during the
period. Income per share "assuming dilution" equals net income divided by the
sum of weighted average common shares outstanding during the period plus common
stock equivalents, such as stock options.
F-14
The following reconciles shares outstanding at the beginning of the year to
average shares outstanding:
1998 1997 1996
- --------------------------------------------------------------------------------
Shares outstanding at beginning
of year........................ 1,502 1,545 1,576
Weighted average shares issued
during the year for exercise of
stock options.................. 18 14 13
Weighted average shares
repurchased.................... (40) (31) (25)
----- ----- -----
Average shares outstanding -
basic........................ 1,480 1,528 1,564
Effect of dilutive securities
Dilutive shares contingently
issuable upon the exercise of
stock options.................. 144 151 169
Shares assumed to have been
purchased for treasury with
assumed proceeds from the
exercise of stock options...... (105) (109) (127)
----- ----- -----
Average shares outstanding -
assuming dilution.............. 1,519 1,570 1,606
===== ===== =====
Note 6 - Inventories
1998 1997
- -------------------------------------------------------------------------------
Raw materials and supplies....... $ 506 $398
Work-in-process.................. 70 2
Finished goods................... 440 332
------ ----
$1,016 $732
====== ====
The cost of 36% of 1998 inventories and 43% of 1997 inventories was computed
using the last-in, first-out method.
Note 7 - Property, Plant and Equipment, net
1998 1997
- -------------------------------------------------------------------------------
Land.............................$ 460 $ 365
Buildings and improvements....... 3,114 2,623
Machinery and equipment.......... 8,806 7,513
Construction in progress......... 730 793
------- -------
13,110 11,294
Accumulated depreciation......... (5,792) (5,033)
------- -------
$ 7,318 $ 6,261
======= =======
Note 8 - Intangible Assets, net
1998 1997
- --------------------------------------------------------------------------------
Goodwill................................. $ 5,131 $ 2,298
Reacquired franchise rights.............. 3,118 2,860
Trademarks and other identifiable
intangibles............................. 747 697
------- -------
$ 8,996 $ 5,855
======= =======
F-15
Identifiable intangible assets possess economic value but lack physical
substance. These assets primarily arise from the allocation of purchase prices
of businesses acquired. Amounts assigned to such identifiable intangibles are
based on independent appraisals or internal estimates. Goodwill represents the
residual purchase price after allocation to all identifiable net assets (see
Note 2).
The above amounts are presented net of accumulated amortization of $1.9 billion
at year-end 1998 and $1.7 billion at year-end 1997.
Note 9 - Accounts Payable and Other Current Liabilities
1998 1997
- --------------------------------------------------------------------------------
Accounts payable......................... $ 1,180 $ 1,047
Accrued compensation and benefits........ 676 640
Accrued selling and marketing............ 596 485
Other current liabilities................ 1,418 1,445
------- --------
$ 3,870 $ 3,617
======= =======
Note 10 - Short-Term Borrowings and Long-Term Debt
1998 1997
- --------------------------------------------------------------------------------
Short-Term Borrowings
Commercial paper (5.3%).................. $ 1,901 $ -
Current maturities of long-term debt..... 1,075 1,819
Notes (5.2% and 5.7%).................... 2,076 80
Other borrowings (7.4% and 7.4%)......... 519 222
Amount reclassified to long-term debt.... (1,650) (2,121)
------- -------
$ 3,921 $ -
======= =======
Long-Term Debt
Short-term borrowings, reclassified...... $ 1,650 $ 2,121
Notes due 1999-2013 (5.8% and 6.4%)...... 1,693 3,063
Various foreign currency debt,
due 1999-2001 (5.3% and 5.2%) .......... 956 809
Zero coupon notes, $1.0 billion
due 1999-2012 (10.1% and 10.5%) ........ 504 480
Other, due 1999-2014 (6.8% and 7.2%)..... 300 292
------- -------
5,103 6,765
Less current maturities of long-term debt (1,075) (1,819)
------- -------
$ 4,028 $ 4,946
======= =======
The interest rates in the above table include the effects of associated interest
rate and currency swaps at year-end 1998 and 1997. Also, see Note 11 for a
discussion of our use of interest rate and currency swaps, our management of the
inherent credit risk and fair value information related to debt and interest
rate and currency swaps.
F-16
Interest Rate Swaps
- -------------------
The following table indicates the notional amount and weighted average interest
rates, by category, of interest rate swaps outstanding at year-end 1998 and
1997. The weighted average variable interest rates that we pay, which are
primarily linked to either commercial paper or LIBOR rates, are based on rates
as of the respective balance sheet date and are subject to change. The terms of
the interest rate swaps match the terms of the debt they modify. The swaps
terminate at various dates through 2013.
1998 1997
- -------------------------------------------------------------------------------
Receive fixed-pay variable
Notional amount................... $1,855 $2,584
Weighted average receive rate..... 6.1% 6.8%
Weighted average pay rate......... 5.3% 5.8%
Receive variable-pay variable
Notional amount................... $ - $ 250
Weighted average receive rate..... - 5.7%
Weighted average pay rate......... - 5.8%
Receive variable-pay fixed
Notional amount................... $ - $ 215
Weighted average receive rate..... - 5.9%
Weighted average pay rate......... - 8.2%
At year-end 1998, approximately 83% of total debt was exposed to variable
interest rates, compared to 77% in 1997. In addition to variable rate long-term
debt, all debt with maturities of less than one year is categorized as variable
for purposes of this measure.
Currency Swaps
- --------------
We enter into currency swaps to hedge our currency exposure on certain non-U.S.
dollar denominated debt. At year-end 1998, the aggregate carrying amount of the
debt was $678 million and the net receivables and payables under related
currency swaps were $1 million and $70 million, respectively, resulting in a net
effective U.S. dollar liability of $747 million with a weighted average interest
rate of 5.3%, including the effects of related interest rate swaps. At year-end
1997, the carrying amount of this debt aggregated $629 million and the net
payables under related currency swaps aggregated $104 million, resulting in an
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.
Revolving Credit Facilities
- ---------------------------
We increased our 1998 unused revolving credit facility by $2.0 billion to $4.75
billion from $2.75 billion at year-end 1997. These unused credit facilities
exist largely to support the issuances of short-term borrowings and are
available for general corporate purposes. The 1998 facilities are composed of
$3.1 billion expiring March 1999 and $1.65 billion expiring March 2003.
F-17
Short-term borrowings of $1.65 billion at year-end 1998 and $2.1 billion at
year-end 1997 were reclassified as long-term debt. This reflects our intent and
ability, through the existence of the unused credit facilities, to refinance
these borrowings.
Long-term debt outstanding at December 26, 1998 matures as follows during the
next five years:
1999 2000 2001 2002 2003
-----------------------------------------------------
Maturities $1,075 $716 $323 $ 36 $284
Note 11 - Financial Instruments
Derivative Instruments
- ----------------------
Our policy prohibits the use of derivative instruments for speculative purposes
and we have procedures in place to monitor and control their use. The following
discussion excludes future contracts to hedge immaterial amounts of our
commodity purchases.
Our use of derivative instruments is primarily limited to interest rate and
currency swaps, which are used to reduce borrowing costs by effectively
modifying the interest rate and currency of specific debt issuances. These swaps
are entered into concurrently with the issuance of the debt they are intended to
modify. The notional amount, interest payment and maturity dates of the swaps
match the principal, interest payment and maturity dates of the related debt.
Accordingly, any market risk or opportunity associated with these swaps is fully
offset by the opposite market impact on the related debt. Our credit risk
related to interest rate and currency swaps is considered low because such swaps
are entered into only with strong creditworthy counterparties, are generally
settled on a net basis and are of relatively short duration. Further, there is
no concentration with counterparties. 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 12.
F-18
Fair Value
- ----------
Carrying amounts and fair values of our financial instruments:
1998 1997
- -------------------------------------------------------------------------------
Carrying Fair CarryingFair
Amount Value Amount Value
------ ----- ------ -----
Assets
Cash and cash equivalents. $ 311 $ 311 $1,928 $1,928
Short-term investments.... $ 83 $ 83 $ 955 $ 955
Other assets (noncurrent
investments) ............ $ 5 $ 5 $ 15 $ 15
Liabilities
Debt
Short-term borrowings and
long-term debt, net of
capital leases ......... $7,934 $8,192 $4,909 $5,124
Debt-related derivative
instruments
Open contracts in asset
position................ (6) (20) (28) (22)
Open contracts in
liability position...... 72 57 107 109
------ ------ ------ ------
Net debt............... $8,000 $8,229 $4,988 $5,211
====== ====== ====== ======
The above carrying amounts 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
U.S. and foreign income from continuing operations before income
taxes:
1998 1997 1996
- --------------------------------------------------------------------------------
U.S........................ $1,629 $1,731 $1,630
Foreign.................... 634 578 (64)
------ ------ ------
$2,263 $2,309 $1,566
====== ====== ======
F-19
Provision for income taxes on income from continuing operations:
1998 1997 1996
- --------------------------------------------------------------------------------
Current: Federal.......... $(193) $598 $254
Foreign.......... 267 110 138
State............ 46 59 72
----- ---- ----
120 767 464
----- ---- ----
Deferred:Federal.......... 136 23 204
Foreign.......... 4 15 (41)
State............ 10 13 (3)
----- ---- ----
150 51 160
----- ---- ----
$ 270 $818 $624
===== ==== ====
Reconciliation of the U.S. Federal statutory tax rate to our effective tax rate
on continuing operations:
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal
tax benefit.................. 1.6 2.0 2.9
Effect of lower taxes
on foreign results............ (3.0) (5.5) (4.4)
Settlement of prior years'
audit issues.................. (5.7) (1.7) (2.9)
Puerto Rico settlement......... (21.8) - -
Effect of unusual impairment
and other items............... 3.4 2.2 9.7
Other, net..................... 2.4 3.4 (0.5)
---- ---- ----
Effective tax rate on continuing
operations.................... 11.9% 35.4% 39.8%
==== ==== ====
In 1998, we reached final agreement with the IRS to settle substantially all
remaining aspects of a tax case related to our concentrate operations in Puerto
Rico. As a result, we recognized a tax benefit totaling $494 million (or $0.32
per share) which reduced our 1998 provision for income taxes.
Deferred taxes are recorded to give recognition to temporary differences between
the tax bases of assets or liabilities and their reported amounts in the
financial statements. We record the tax effect of these temporary differences as
deferred tax assets or deferred tax liabilities. Deferred tax assets generally
represent items that can be used as a tax deduction or credit in future years.
Deferred tax liabilities generally represent items that we have taken a tax
deduction for, but have not yet recorded in the income statement.
F-20
Deferred tax liabilities (assets):
1998 1997
- --------------------------------------------------------------------------------
Intangible assets other than
nondeductible goodwill....... $ 1,444 $ 1,363
Property, plant and equipment... 665 500
Safe harbor leases.............. 109 115
Zero coupon notes............... 79 84
Other........................... 473 335
------- -------
Gross deferred tax liabilities.. 2,770 2,397
------- -------
Net operating loss carryforwards (562) (520)
Postretirement benefits......... (246) (247)
Various current liabilities
and other...................... (702) (510)
------- -------
Gross deferred tax assets....... (1,510) (1,277)
Deferred tax assets
valuation allowance............ 571 458
------- -------
Net deferred tax assets......... (939) (819)
------- -------
Net deferred tax liabilities.... $ 1,831 $ 1,578
======= =======
Included in:
Prepaid expenses, deferred income
taxes and other current assets $ (172) $ (119)
Deferred income taxes......... 2,003 1,697
------- -------
$ 1,831 $ 1,578
======= =======
Deferred tax liabilities are not recognized for temporary differences related to
investments in foreign subsidiaries and in unconsolidated foreign affiliates
that are essentially permanent in duration. It would not be practicable to
determine the amount of any such deferred tax liabilities.
Net operating losses of $2.7 billion at year-end 1998 were carried forward and
are available to reduce future taxable income of certain subsidiaries in a
number of foreign and state jurisdictions. These net operating losses will
expire as follows: $96 million in 1999, $2.4 billion between 2000 and 2012,
while $201 million may be carried forward indefinitely.
Note 13 - Employee Stock Options
Stock options have been granted to employees under three different incentive
plans:
o the SharePower Stock Option Plan (SharePower),
o the Long-Term Incentive Plan (LTIP) and
o the Stock Option Incentive Plan (SOIP).
SharePower
- ----------
SharePower stock options are granted to essentially all full-time employees.
SharePower options have a 10 year term. Prior to 1998, the number of options
granted was based on each employee's annual earnings and generally became
exercisable ratably over 5 years. In 1998, the number of SharePower options
granted was based on earnings and tenure and generally become exercisable after
3 years.
F-21
SOIP and LTIP Prior to 1998
- ---------------------------
Prior to 1998, SOIP options were granted to middle management employees and were
exercisable after 1 year. LTIP options were granted to senior management
employees and were generally exercisable after 4 years. Both SOIP and LTIP
options have 10 year terms. Certain LTIP options could be exchanged by employees
for a specified number of performance share units (PSUs) within 60 days of the
grant date. The value of a PSU was fixed at the stock price at the grant date
and the PSU was payable 4 years from the grant date, contingent upon attainment
of prescribed performance goals. At year-end 1998, 1997 and 1996, there were
84,000, 801,000 and 763,000 PSUs outstanding, respectively. Payment of PSUs is
made in cash and/or stock as approved by the Compensation Committee of our Board
of Directors. Amounts expensed in continuing operations for PSUs were $1 million
in 1998 and $4 million in both 1997 and 1996.
SOIP and LTIP in 1998
- ---------------------
Beginning in 1998, all executive (including middle management) awards are made
under the LTIP. Under the LTIP, an executive receives an award based on a
multiple of base salary. Two-thirds of the award consists of stock options with
an exercise price equal to the stock price at the date of the award. These
options become exercisable at the end of 3 years and have a 10 year term.
At the executive's discretion at the date of the award, the remaining one-third
of the award will be granted in stock options at the end of 3 years or paid in
cash at the end of 3 years. The number of options granted or the cash payment,
if any, will depend on the attainment of prescribed performance goals over the 3
year period. If the executive chooses stock options, they are granted with an
exercise price equal to the stock price at the date of the grant, vest
immediately and have a 10 year term. If the executive chooses a cash payment,
one dollar of cash will be received for every four dollars of the award. Amounts
expensed for expected cash payments were $7 million in 1998. At year-end 1998,
162 million shares were available for grants under the LTIP.
F-22
Stock option activity:
(Options in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- ----- ------- -----
Outstanding at
beginning of year 146,329 $18.95 177,217 $20.22 160,662 $16.10
Granted......... 34,906 36.33 3,457 31.54 51,305 31.19
Exercised....... (28,076) 15.31 (25,504) 15.77 (22,687) 14.19
Surrendered
for PSUs....... (24) 37.46 (15) 37.68 (431) 29.91
Forfeited....... (6,144) 28.83 (7,819) 24.89 (11,632) 23.13
Spin-off related:
Conversion to
TRICON
options(a).... - - (13,267) 25.75 - -
PepsiCo modifi-
cation(b)..... - - 12,260 - - -
------- ------- -------
Outstanding at end
of year.......... 146,991 23.28 146,329 18.95 177,217 20.22
======= ======= =======
Exercisable at
end of year...... 82,692 16.74 81,447 15.39 80,482 14.92
======= ======= =======
- --------------------------------------------------------------------------------
Weighted average
fair value of
options granted
during the year.. $ 9.82 $10.55 $ 8.89
- --------------------------------------------------------------------------------
(a) Effective on the date of the TRICON spin-off, unvested PepsiCo capital stock
options held by TRICON employees were converted to TRICON stock options.
(b) Immediately following the spin-off, the number of options were increased and
exercise prices were decreased (the "modification") to preserve the economic
value of those options that existed just prior to the spin-off for the
holders of PepsiCo capital stock options.
Stock options outstanding and exercisable at December 26, 1998:
Options Outstanding Options Exercisable
--------------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Price Options Life Price Options Price
- -------------- ------- ----------- -------- ------- ----------
$ 4.25 to $ 9.84 11,469 1.39 yrs. $ 7.43 11,449 $ 7.45
$11.12 to $23.78 69,021 4.49 16.87 63,449 16.70
$26.04 to $41.50 66,501 8.27 32.80 7,794 30.53
------- ------
146,991 5.85 23.28 82,692 16.74
======= ======
F-23
Pro forma income and pro forma income per share, as if we had recorded
compensation expense based on fair value for stock-based awards:
1998 1997 1996
- --------------------------------------------------------------------------------
Reported
Income
Continuing operations.......... $1,993 $1,491 $ 942
Discontinued operations........ - 651 207
------ ------ ------
Net income..................... $1,993 $2,142 $1,149
====== ====== ======
Income per share
Continuing operations.......... $ 1.31 $ 0.95 $ 0.59
Discontinued operations........ - 0.41 0.13
------ ------ ------
Net income $ 1.31 $ 1.36 $ 0.72
====== ====== ======
Pro Forma
Income
Continuing operations.......... $1,888 $1,390 $ 893
Discontinued operations........ - 635 188
------ ------ ------
Net income..................... $1,888 $2,025 $1,081
====== ====== ======
Income per share
Continuing operations.......... $ 1.24 $ 0.89 $ 0.55
Discontinued operations........ - 0.40 0.12
------ ------ ------
Net income $ 1.24 $ 1.29 $ 0.67
====== ====== ======
- --------------------------------------------------------------------------------
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 $1,899 million or $1.25 per share in 1998 and $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, except for the impact resulting from the
TRICON modification, the amounts exclude the pro forma cost related to the
unvested stock options granted before 1995.
The fair value of the options granted (including the modification) is estimated
using the Black-Scholes option-pricing model based on the following weighted
average assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Risk free interest rate......... 4.7% 5.8% 6.0%
Expected life................... 5 years 3 years 6 years
Expected volatility............. 23% 20% 20%
Expected dividend yield......... 1.14% 1.32% 1.5%
- --------------------------------------------------------------------------------
Note 14 - Pension and Postretirement Benefits
In 1998, we adopted the revised disclosure requirements of Statement of
Financial Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. SFAS 132 standardized the disclosures of
pensions and other postretirement benefits into a combined format but did not
change the accounting for these benefits. Prior years' information has been
reclassified to conform to the 1998 disclosure format.
F-24
Pension Benefits
- ----------------
Our pension plans cover substantially all full-time U.S. employees and certain
international employees. Benefits depend on years of service and earnings or are
based on stated amounts for each year of service.
Postretirement Benefits
- -----------------------
Our postretirement plans provide medical and life insurance benefits principally
to U.S. retirees and their dependents. Employees are eligible for benefits if
they meet age and service requirements and qualify for retirement benefits.
Components of net periodic benefit cost:
1998 1997 1996
- --------------------------------------------------------------------
Pension
------------------------------
Service cost........................ $ 95 $ 82 $ 74
Interest cost....................... 136 123 111
Expected return on plan assets...... (169) (148) (136)
Amortization of transition asset.... (9) (14) (14)
Amortization of prior service
amendments......................... 12 11 10
Amortization of net loss............ 5 4 2
----- ----- -----
Net periodic benefit cost........... $ 70 $ 58 $ 47
Settlement loss/(gain).............. 9 (4) -
Special termination benefits 4 8 -
----- ----- -----
Net periodic benefit cost including
settlements and special
termination benefits............... $ 83 $ 62 $ 47
===== ===== =====
Components of net periodic benefit cost:
1998 1997 1996
- ---------------------------------------------------------------------
Postretirement
------------------------------
Service cost........................ $ 16 $ 12 $ 12
Interest cost....................... 39 40 43
Amortization of prior service
amendments......................... (18) (18) (18)
Amortization of net (gain)/loss..... (2) - 2
----- ----- -----
Net periodic benefit cost........... $ 35 $ 34 $ 39
Special termination benefits........ 1 - -
----- ----- -----
Net periodic benefit cost including
special termination benefits....... $ 36 $ 34 $ 39
===== ===== =====
Prior service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits.
F-25
Change in the benefit obligation:
1998 1997 1998 1997
- ---------------------------------------------------------------------
Pension Postretirement
Obligation at beginning of year.... $ 1,928 $1,672 $ 528 $ 525
Service cost....................... 95 82 16 12
Interest cost...................... 136 123 39 40
Plan amendments.................... 5 11 - -
Participant contributions.......... 4 3 - -
Actuarial loss/(gain).............. 229 153 56 (13)
Acquisitions/(divestitures)........ 236 (16) 42 (5)
Benefit payments................... (149) (99) (38) (31)
Curtailment gain................... (1) (1) - -
Special termination benefits....... 4 8 1 -
Foreign currency adjustment........ (8) (8) - -
------- ------ ----- -----
Obligation at end of year.......... $ 2,479 $1,928 $ 644 $ 528
======= ====== ===== =====
Change in the fair value of plan assets:
1998 1997 1998 1997
- ---------------------------------------------------------------------
Pension Postretirement
---------------------------------
Fair value at beginning ofyear.... $ 1,997 $1,638 $ - $ -
Actual return on plan assets...... (71) 439 - -
Acquisitions/(divestitures)....... 240 (5) - -
Employer contributions............ 31 29 38 31
Participant contributions......... 4 3 - -
Benefit payments.................. (149) (99) (38) (31)
Foreign currency adjustment....... (7) (8) - -
------ ------ ---- -----
Fair value at end of year......... $ 2,045 $1,997 $ - $ -
======= ====== ===== =====
Selected information for plans with accumulated benefit obligation in excess of
plan assets:
1998 1997 1998 1997
- ---------------------------------------------------------------------
Pension Postretirement
---------------------------------
Projected benefit obligation... $(1,960) $ (161) $(644) $(528)
Accumulated benefit obligation.. $(1,661) $ (83) $(644) $(528)
Fair value of plan assets....... $ 1,498 $ 14 $ - $ -
Funded status as recognized on the Consolidated Balance Sheet:
1998 1997 1998 1997
- ---------------------------------------------------------------------
Pension Postretirement
---------------------------------
Funded status at end of year...... $ (434) $ 69 $(644) $(528)
Unrecognized prior service cost... 76 83 (69) (87)
Unrecognized loss/(gain).......... 338 (122) 29 (29)
Unrecognized transition asset..... (7) (16) - -
-------- ------ ----- -----
Net amounts recognized............ $ (27) $ 14 $(684) $(644)
======= ====== ===== =====
F-26
Net amounts as recognized in the Consolidated Balance Sheet:
1998 1997 1998 1997
- ---------------------------------------------------------------------
Pension Postretirement
-------------------------------
Prepaid benefit cost................. $ 116 $ 137 $ - $ -
Accrued benefit liability............ (210) (123) (684) (644)
Intangible assets.................... 36 - - -
Accumulated other comprehensive income 31 - - -
----- ----- ----- -----
Net amounts recognized............... $ (27) $ 14 $(684) $(644)
===== ===== ===== =====
Weighted-average assumptions at end of year:
1998 1997 1996
- --------------------------------------------------------------
Pension
-----------------------
Discount rate for benefit obligation 6.8% 7.3% 7.8%
Expected return on plan assets....... 10.2% 10.3% 10.3%
Rate of compensation increase........ 4.7% 4.8% 4.8%
The discount rate assumptions used to compute the postretirement benefit
obligation at year-end were 6.9% in 1998 and 7.4% in 1997.
Components of Pension Assets
The pension plan assets are principally stocks and bonds. The U.S. plan held
approximately 10.1 million shares of PepsiCo capital stock with a fair value of
$298 million in 1998 and 11.7 million shares with a fair value of $436 million
in 1997. The plan received dividends on PepsiCo capital stock of $6 million in
both 1998 and 1997. To maintain diversification, 1.6 million shares of PepsiCo
capital stock were sold in 1998 and .5 million shares were sold in 1997.
Health Care Cost Trend Rates
An average increase of 6.7% in the cost of covered postretirement medical
benefits is assumed for 1999 for employees who retired before cost sharing was
introduced. This average increase is then projected to decline gradually to 5.5%
in 2005 and thereafter.
An average increase of 6.5% in the cost of covered postretirement medical
benefits is assumed for 1999 for employees who retired after cost sharing was
introduced. This average increase is then projected to decline gradually to zero
in 2005 and thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for postretirement medical plans. A one percentage point change in
assumed health care costs would have the following effects:
1% Increase 1% Decrease
----------- -----------
Effect on total of 1998 service and interest
cost components............................ $ 2 $ (2)
Effect on the 1998 accumulated postretirement
benefit obligation......................... $ 30 $ (28)
F-27
Note 15 - Contingencies
We are subject to various claims and contingencies related to lawsuits, taxes,
environmental and other matters arising out of the normal course of business.
Contingent liabilities primarily reflect guarantees to support financial
arrangements of certain unconsolidated affiliates. We believe that the ultimate
liability, if any, in excess of amounts already recognized arising from such
claims or contingencies is not likely to have a material adverse effect on our
annual results of operations, financial condition or liquidity.
Note 16 - Business Segments
In 1998, we adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of a Business Enterprise and Related Information,
which is generally based on our 1998 management reporting. The prior years'
segment information presented in this footnote has been restated to present our
five reportable segments as follows:
o Pepsi-Cola
- North America
- International
o Frito-Lay
- North America
- International
o Tropicana
The North American segments include the United States and Canada. The Tropicana
segment includes its worldwide results. In contemplation of the proposed
separation from PepsiCo of our bottling operations (see Note 18), we completed a
reorganization of our Pepsi-Cola businesses in 1999. Our 1998 financial
statements do not reflect the reorganization.
The accounting policies of the segments are the same as those described in Note
1 - Summary of Significant Accounting Policies. All intersegment net sales and
expenses are immaterial and have been eliminated in computing net sales and
operating profit.
Pepsi-Cola North America
- ------------------------
Pepsi-Cola North America markets and distributes its Pepsi-Cola, Diet Pepsi,
Mountain Dew and other brands. PCNA manufactures concentrates of its brands for
sale to franchised bottlers. PCNA operates bottling plants and distribution
facilities for the production and distribution of company-owned and licensed
brands. PCNA also manufactures and distributes ready-to-drink Lipton tea
products through a joint venture and processes and distributes Aquafina bottled
water.
Investments in unconsolidated affiliates are primarily in franchised bottling
and distribution operations.
F-28
Pepsi-Cola International
- ------------------------
Pepsi-Cola International markets and distributes its Pepsi-Cola, Diet Pepsi,
Mountain Dew, 7UP, Diet 7UP, Mirinda, Pepsi Max and other brands
internationally. PCI manufactures concentrates of its brands for sale to
franchised bottlers. PCI operates bottling plants and distribution facilities in
various international markets for the production and distribution of
company-owned and licensed brands.
Principal international markets include Argentina, Brazil, China, India, Mexico,
the Philippines, Saudi Arabia, Spain, Thailand and the United Kingdom.
Investments in unconsolidated affiliates are primarily in franchised bottling
and distribution operations.
Frito-Lay North America
- -----------------------
Frito-Lay North America primarily markets, manufactures and distributes salty
snacks. Products manufactured and distributed in North America include Lay's and
Ruffles brand potato chips, Doritos and Tostitos brand tortilla chips, Fritos
brand corn chips, Cheetos brand cheese flavored snacks, Rold Gold brand
pretzels, and a variety of dips and salsas. Low-fat and no-fat versions of
several core brands are also manufactured and distributed in North America.
Frito-Lay International
- -----------------------
Frito-Lay International markets, manufactures and distributes salty and sweet
snacks. Products include Walkers brand snack foods in the United Kingdom,
Sabritas brand snack foods in Mexico, and Alegro and Gamesa brand sweet snacks
in Mexico. Many of our U.S. brands have been introduced internationally such as
Lay's and Ruffles brand potato chips, Doritos and Tostitos brand tortilla chips,
Fritos brand corn chips and Cheetos brand cheese flavored snacks.
Principal international snack markets include Australia, Brazil, Mexico, the
Netherlands, South Africa, Spain and the United Kingdom.
Tropicana
- ---------
Tropicana markets, produces and distributes its juices worldwide. Products
include Tropicana Pure Premium, Season's Best, Dole, Tropicana Pure Tropics and
Tropicana Twister brand juices primarily sold in the United States and many in
Canada and brands such as Fruvita, Hitchcock, Looza and Copella available in
Europe.
Principal international markets include Belgium, Canada, France and the United
Kingdom. The investment in unconsolidated affiliates is a distribution
operation.
F-29
Impairment and Other Items Affecting Comparability
- --------------------------------------------------
Effects on segments of impairment and other items are as follows:
1998 1997 1996
---- ---- ----
Pepsi-Cola
- - North America............. $ 16 $ 52 $ -
- - International............. 218 154 576
Frito-Lay
- - North America............. 54 22 -
- - International............. - 62 -
---- ---- ----
Combined Segments........ $288 $290 $576
==== ==== ====
See Note 3 for details on the above unusual impairment and other items.
F-30
BUSINESS SEGMENTS (page 1 of 3)
1998 1997 1996
- ----------------------------------------------------------------
Net Sales
---------------------------
Pepsi-Cola
- - North America............ $ 8,266 $ 7,899 $ 7,788
- - International............ 2,385 2,642 2,799
Frito-Lay
- - North America............ 7,474 6,967 6,628
- - International............ 3,501 3,409 3,122
Tropicana 722 - -
------- ------- -------
$22,348 $20,917 $20,337
======= ======= =======
- ---------------------------------------------------------------------
Operating Profit (a)
---------------------------
Pepsi-Cola
- - North America............ $ 1,211 $ 1,274 $ 1,428
- - International............ (219) (144) (846)
Frito-Lay
- - North America............ 1,424 1,388 1,286
- - International............ 367 318 346
Tropicana 40 - -
------- ------- -------
Combined Segments.......... 2,823 2,836 2,214
Corporate (b).............. (239) (174) (174)
------- ------- -------
$ 2,584 $ 2,662 $ 2,040
======= ======= =======
- ---------------------------------------------------------------------
Total Assets
---------------------------
Pepsi-Cola
- - North America............ $ 8,269 $ 7,562 $ 7,199
- - International............ 2,536 3,134 3,487
Frito-Lay
- - North America............ 3,915 3,650 3,116
- - International............ 4,039 3,583 3,418
Tropicana.................. 3,661 - -
Corporate (c)............ 240 2,172 490
Net Assets of Discontinued
Operations.............. - - 4,450
------- ------- -------
$22,660 $20,101 $22,160
======= ======= =======
- ---------------------------------------------------------------------
Amortization of Intangible Assets
---------------------------------
Pepsi-Cola
- - North America............ $ 136 $ 141 $ 143
- - International............ 14 14 22
Frito-Lay
- - North America............ 7 6 5
- - International............ 43 38 36
Tropicana 22 - -
------- ------- -------
$ 222 $ 199 $ 206
======= ======= =======
- ---------------------------------------------------------------------
(a) Includes Impairment and Other Items Affecting Comparability on
page F-30.
(b) Includes unallocated corporate headquarters expenses and costs of centrally
managed insurance programs, minority interests and foreign exchange
translation and transaction gains and losses.
(c) Corporate assets consist principally of cash and cash equivalents,
short-term investments primarily held outside the U.S. and property and
equipment.
F-31
BUSINESS SEGMENTS (page 2 of 3)
1998 1997 1996
- -----------------------------------------------------------------
Depreciation and Other Amortization Expense
-------------------------------------------
Pepsi-Cola
- - North America............ $ 369 $ 337 $ 323
- - International............ 140 166 191
Frito-Lay
- - North America............ 326 285 243
- - International............ 142 112 103
Tropicana.................. 27 - -
Corporate.................. 8 7 7
------ ------ ------
$1,012 $ 907 $ 867
====== ====== ======
- ---------------------------------------------------------------------
Significant Other Noncash Items (d)
-------------------------------
Pepsi-Cola
- - North America............ $ - $ 52 $ -
- - International............ 200 119 366
Frito-Lay
- - North America............ 54 9 -
- - International............ - 53 -
------ ------ ------
$ 254 $ 233 $ 366
====== ====== ======
- ---------------------------------------------------------------------
Capital Spending
------------------------------
Pepsi-Cola
- - North America............ $ 472 $ 430 $ 399
- - International............ 138 188 249
Frito-Lay
- - North America............ 402 622 760
- - International............ 314 251 213
Tropicana.................. 50 - -
Corporate................ 29 15 9
------ ------ ------
$1,405 $1,506 $1,630
====== ====== ======
- ---------------------------------------------------------------------
Investments in
Unconsolidated Affiliates
------------------------------
Pepsi-Cola
- - North America............ $ 326 $ 340 $ 308
- - International............ 685 605 562
Frito-Lay
- - North America............ - - 3
- - International............ 341 234 252
Tropicana.................. 22 - -
Corporate.................. 22 22 22
------ ------ ------
$1,396 $1,201 $1,147
====== ====== ======
- ---------------------------------------------------------------------
(d) Represents the noncash portion of unusual impairment and other items. See
Note 3.
F-32
BUSINESS SEGMENTS (page 3 of 3)
1998 1997 1996
- --------------------------------------------------------------------
Equity Income/(Loss) from
Unconsolidated Affiliates (e)
-------------------------------
Pepsi-Cola
- - North America............ $ 50 $ 41 $ 32
- - International............ (21) (4) (341)
Frito-Lay
- - North America............ - (3) -
- - International............ (5) 50 35
Tropicana.................. 1 - -
------- ------- -------
$ 25 $ 84 $ (274)
======= ======= =======
- ---------------------------------------------------------------------
GEOGRAPHIC AREAS 1998 1997 1996
- ---------------------------------------------------------------------
Net Sales
---------------------------
United States............ $15,381 $13,878 $13,408
International............ 6,967 7,039 6,929
------- ------- -------
Combined Segments........ $22,348 $20,917 $20,337
======= ======= =======
- ---------------------------------------------------------------------
Long-Lived Assets (f)
-------------------------------
United States............ $12,948 $ 9,466 $ 9,271
International............ 4,762 3,851 3,998
------- ------- -------
Combined Segments........ $17,710 $13,317 $13,269
======= ======= =======
- ---------------------------------------------------------------------
(e) Includes unusual charges of $256 million in 1996 in PCI related to the
write down of our investment in Buenos Aires Embotelladora S.A. and our
share of the unusual charges recorded by BAESA. In 1997, FLI included a
gain of $22 million related to the sale of a non-core investment.
(f) Represents Property, Plant and Equipment, net, Intangible Assets, net and
Investments in Unconsolidated Affiliates.
F-33
Note 17 - Selected Quarterly Financial Data
($ in millions except per share amounts, unaudited) (page 1 of 3)
First Quarter
(12 Weeks)
1998 1997
- --------------------------------------------------------------------------------
Net sales................................ $ 4,353 4,213
Gross profit............................. $ 2,603 2,492
Unusual impairment and other
items - (gain) (b)...................... $ - (22)
Operating profit......................... $ 590 581
Income from continuing operations........ $ 377 318
Income from discontinued operations (d).. $ - 109
Net income............................... $ 377 427
Net income per share - basic
Continuing operations.................. $ 0.25 0.21
Discontinued operations................ $ - 0.07
Net income............................. $ 0.25 0.28
Net income per share - assuming dilution
Continuing operations.................. $ 0.24 0.20
Discontinued operations................ $ - 0.07
Net income............................. $ 0.24 0.27
Cash dividends declared per share........ $ 0.125 0.115
Stock price per share (e)
High................................... $ 43 9/16 34 55/64
Low.................................... $ 34 7/8 29 1/8
Close.................................. $ 43 32 1/2
- --------------------------------------------------------------------------------
Second Quarter
(12 Weeks)
1998 1997
- --------------------------------------------------------------------------------
Net sales................................ $ 5,258 5,086
Gross profit............................. $ 3,110 3,017
Unusual impairment and other
items - loss (b)........................ $ - 326
Operating profit......................... $ 778 436
Income from continuing operations........ $ 494 176
Income from discontinued operations (d).. $ - 480
Net income .............................. $ 494 656
Net income per share - basic
Continuing operations.................. $ 0.33 0.11
Discontinued operations................ $ - 0.31
Net income............................. $ 0.33 0.42
Net income per share - assuming dilution
Continuing operations.................. $ 0.33 0.11
Discontinued operations................ $ - 0.31
Net income............................. $ 0.33 0.42
Cash dividends declared per share........ $ 0.13 0.125
Stock price per share (e)
High................................... $44 11/16 39
Low................................... $ 37 5/8 31 1/4
Close.................................. $40 11/16 39
- ---------------------------------------------------------------------------
F-34
($ in millions except per share amounts, unaudited) (page 2 of 3)
Third Quarter
(12 Weeks)
1998 1997
- --------------------------------------------------------------------------------
Net sales................................ $ 5,544 5,362
Gross profit............................. $ 3,261 3,183
Operating profit......................... $ 889 929
Income from continuing operations (c).... $ 761 551
Income from discontinued operations (d).. $ - 107
Net income .............................. $ 761 658
Net income per share - basic
Continuing operations.................. $ 0.52 0.36
Discontinued operations................ $ - 0.07
Net income............................. $ 0.52 0.43
Net income per share - assuming dilution
Continuing operations.................. $ 0.50 0.35
Discontinued operations................ $ - 0.07
Net income............................. $ 0.50 0.42
Cash dividends declared per share........ $ 0.13 0.125
Stock price per share (e)
High................................... $ 43 5/8 39 11/16
Low.................................... $27 11/16 35 1/2
Close.................................. $ 30 5/16 37 5/8
- --------------------------------------------------------------------------------
Fourth Quarter(a)
(16 Weeks)
1998 1997
- --------------------------------------------------------------------------------
Net sales................................ $ 7,193 6,256
Gross profit............................. $ 4,044 3,700
Unusual impairment and other
items - loss/(gain) (b)................. $ 288 (14)
Operating profit......................... $ 327 716
Income from continuing operations (c).... $ 361 446
Income (loss) from discontinued operations(d)$ - (45)
Net income .............................. $ 361 401
Net income (loss) per share - basic
Continuing operations.................. $ 0.25 0.30
Discontinued operations................ $ - (0.03)
Net income............................. $ 0.25 0.27
Net income (loss) per share -
assuming dilution
Continuing operations.................. $ 0.24 0.29
Discontinued operations................ $ - (0.04)
Net income............................. $ 0.24 0.25
Cash dividends declared per share........ $ 0.13 0.125
Stock price per share (e)
High................................... $ 41 1/16 40
Low.................................... $28 11/16 34 1/4
Close.................................. $ 40 7/16 34 11/16
- --------------------------------------------------------------------------------
F-35
($ in millions except per share amounts, unaudited) (page 3 of 3)
Full Year
(52 Weeks)
1998 1997
- --------------------------------------------------------------------------------
Net sales................................ $ 22,348 20,917
Gross profit............................. $ 13,018 12,392
Unusual impairment and other
items - loss (b)........................ $ 288 290
Operating profit......................... $ 2,584 2,662
Income from continuing operations (c).... $ 1,993 1,491
Income from discontinued operations (d).. $ - 651
Net income............................... $ 1,993 2,142
Net income per share - basic
Continuing operations.................. $ 1.35 0.98
Discontinued operations................ $ - 0.42
Net income............................. $ 1.35 1.40
Net income per share - assuming dilution
Continuing operations.................. $ 1.31 0.95
Discontinued operations................ $ - 0.41
Net income............................. $ 1.31 1.36
Cash dividends declared per share........ $ 0.515 0.49
Stock price per share (e)
High................................... $44 11/16 40
Low.................................... $27 11/16 29 1/8
Close.................................. $40 7/16 34 11/16
- ---------------------------------------------------------------------------
(a) Fourth quarter 1998 includes the operating results of Tropicana which was
acquired in August of 1998.
(b) Unusual impairment and other items - loss/(gain) (see Note 3):
1998 1997
-------------------- ------------------
Pre- After Per Pre- After Per
Tax Tax Share Tax Tax Share
---- ----- ----- ---- ----- -----
First quarter.... $ - $ - $ - $(22) $ 2 $ -
Second quarter... - - - 326 238 0.15
Fourth quarter... 288 261 0.17 (14) (1) -
---- ---- ----- ---- ---- -----
Full year..... $288 $261 $0.17 $290 $239 $0.15
==== ==== ===== ==== ==== =====
(c) Includes in 1998 a tax benefit of $200 million (or $0.13 per share) in the
third quarter and $294 million (or $0.19 per share) in the fourth quarter.
See Note 12.
(d) See Note 4.
(e) Represents the high, low and closing prices for one share of PepsiCo's
capital stock on the New York Stock Exchange. Stock prices on or before
October 6, 1997 are not adjusted to reflect the TRICON spin-off. See Note 4.
F-36
Note 18 - Pending Transactions/Events
In November 1998, our Board of Directors approved a plan for the separation from
PepsiCo of certain wholly-owned bottling businesses located in the United
States, Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling
Group. Pursuant to this plan, PBG intends to sell shares of its common stock in
an initial public offering and PepsiCo intends to retain a noncontrolling
ownership interest in PBG. A registration statement relating to the Offering was
filed on Form S-1 with the Securities and Exchange Commission. The transaction
is subject to market conditions and regulatory approval. If consummated, the
transaction is expected to result in a gain to PepsiCo, net of related costs.
These related costs will include a charge for the early vesting of PepsiCo stock
options held by PBG employees, which will be based on the price of our stock at
the date of the Offering. In February and March of 1999, PBG and its principal
operating subsidiary, Bottling LLC, incurred $6.55 billion of indebtedness, a
large portion of which is intended to be temporary and be repaid with the
proceeds of the Offering. It is intended that the remainder will be carried as
PBG's long-term indebtedness of which $2.3 billion is unconditionally guaranteed
by PepsiCo.
In January 1999, we announced an agreement with the Whitman Corporation to
realign bottling territories. Subject to approval by the Whitman shareholders
and various regulatory authorities, we plan to combine certain of our bottling
operations in the mid-western United States and Central Europe with most of
Whitman's existing bottling businesses to create new Whitman. Under the terms of
the agreement, our current equity interest of 20% in General Bottlers, the
principal operating company of Whitman, will also be transferred to new Whitman.
Whitman transferred its existing bottling operations in Marion, Virginia;
Princeton, West Virginia; and St. Petersburg, Russia to PBG. It is planned for
new Whitman to assume certain indebtedness associated with our transferred U.S.
operations with net proceeds to us of $300 million. Upon completion of the
transaction, we will receive 54 million shares of new Whitman common stock
resulting in a noncontrolling ownership interest. If approved, this transaction
is expected to result in a net gain to PepsiCo.
The Frito-Lay program, to improve productivity discussed in Note 3, also
includes consolidating U.S. production in our most modern and efficient plants
and streamlining logistics and transportation systems. This program is expected
to result in additional asset impairment and restructuring charges of
approximately $65 million to be recorded in the first quarter of 1999.
F-37
Management's Responsibility for Financial Statements
To Our Shareholders:
Management is responsible for the reliability of the consolidated financial
statements and related notes. The financial statements were prepared in
conformity with generally accepted accounting principles and include amounts
based upon our estimates and assumptions, as required. The financial statements
have been audited by our independent auditors, KPMG LLP, who were given free
access to all financial records and related data, including minutes of the
meetings of the Board of Directors and Committees of the Board. We believe that
our representations to the independent auditors were valid and appropriate.
Management maintains a system of internal controls designed to provide
reasonable assurance as to the reliability of the financial statements, as well
as to safeguard assets from unauthorized use or disposition. The system is
supported by formal policies and procedures, including an active Code of Conduct
program intended to ensure employees adhere to the highest standards of personal
and professional integrity. Our internal audit function monitors and reports on
the adequacy of and compliance with the internal control system, and appropriate
actions are taken to address significant control deficiencies and other
opportunities for improving the system as they are identified. The Audit
Committee of the Board of Directors, consists solely of directors, who are not
salaried employees and who are, in the opinion of the Board of Directors, free
from any relationship that would interfere with the exercise of independent
judgment as a committee member. The Committee meets several times each year with
representatives of management, including internal auditors and the independent
accountants to review our financial reporting process and our controls to
safeguard assets. Both our independent auditors and internal auditors have free
access to the Audit Committee.
Although no cost-effective internal control system will preclude all errors and
irregularities, we believe our controls as of December 26, 1998 provide
reasonable assurance that the financial statements are reliable and that our
assets are reasonably safeguarded.
F-38
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 26, 1998 and December 27, 1997 and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the years in the three-year period ended December 26, 1998. 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 26, 1998 and December 27, 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 26, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
February 1, 1999, except as to Note 18 which is as of March 8, 1999
F-39
- --------------------------------------------------------------------
Selected Financial Data (Page 1 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- --------------------------------------------------------------------
Compounded
Growth Rates
5-Year
1993-1998 1998(a)(b) 1997(a)
- --------------------------------------------------------------------
Summary of Operations
Net sales........................... 7% $ 22,348 20,917
Operating profit.................... 4% $ 2,584 2,662
Income from continuing operations... 12% $ 1,993 1,491
Cash Flow Data
Provided by operating activities.... $ 3,211 3,419
Dividends paid...................... 10% $ 757 736
Share repurchases................... 37% $ 2,230 2,459
Per Share Data
Income from continuing operations -
assuming dilution.................. 13% $ 1.31 0.95
Cash dividends declared............. 11% $ 0.515 0.49
Book value per share at year-end.... 2% $ 4.35 4.62
Market price per share at year-end (g) 14% $ 40 7/16 34 11/16
Market price per share at year-end -
continuing operations (h).......... 16% $ 40 7/16 34 11/16
Balance Sheet
Net assets of discontinued
operations (i)..................... $ - -
Total assets (j).................... $ 22,660 20,101
Long-term debt...................... $ 4,028 4,946
Total debt (k)...................... $ 7,949 4,946
Shareholders' equity................ $ 6,401 6,936
Other Statistics
EBITDA from continuing operations (l) $ 4,072 4,001
Return on invested capital (m)...... 16% 18
Number of shares repurchased........ 59.2 69.0
Shares outstanding at year-end...... 1,471 1,502
Average shares outstanding used to
calculate income per share from
continuing operations -
assuming dilution.................. 1,519 1,570
Employees of continuing operations.. 151,000 142,000
F-40
- --------------------------------------------------------------------------------
Selected Financial Data (Page 2 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
1996(a) 1995(c)
- --------------------------------------------------------------------------------
Summary of Operations
Net sales........................... $ 20,337 19,067
Operating profit.................... $ 2,040 2,606
Income from continuing operations... $ 942 1,422
Cash Flow Data
Provided by operating activities.... $ 3,192 2,642
Dividends paid...................... $ 675 599
Share repurchases................... $ 1,651 541
Per Share Data
Income from continuing operations -
assuming dilution.................. $ 0.59 0.88
Cash dividends declared............. $ 0.445 0.39
Book value per share at year-end.... $ 4.29 4.64
Market price per share at year-end (g) $ 29 5/8 27 15/16
Market price per share at year-end -
continuing operations (h).......... $27 15/64 25 43/64
Balance Sheet
Net assets of discontinued operations(i) $ 4,450 4,744
Total assets (j).................... $ 22,160 22,944
Long-term debt...................... $ 8,174 8,248
Total debt (k) ..................... $ 8,174 8,806
Shareholders' equity................ $ 6,623 7,313
Other Statistics
EBITDA from continuing operations (l) $ 3,479 3,718
Return on invested capital (m)......... 17% 18
Number of shares repurchased........ 54.2 24.6
Shares outstanding at year-end...... 1,545 1,576
Average shares outstanding used to
calculate income per share from
continuing operations -
assuming dilution.................. 1,606 1,608
Employees of continuing operations.. 137,000 137,000
- --------------------------------------------------------------------------------
F-41
Selected Financial Data (Page 3 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1994(d)(e)(f) 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
Provided by operating activities.... $ NA NA
Dividends paid...................... $ 540 462
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 (g) $ 18 1/8 20 15/16
Market price per share at year-end -
continuing operations (h).......... $16 21/32 19 1/4
Balance Sheet
Net assets of discontinued
operations (i)..................... $ 5,183 4,548
Total assets (j).................... $ 22,533 21,628
Long-term debt...................... $ 8,570 7,148
Total debt (k) ..................... $ 9,114 9,209
Shareholders' equity................ $ 6,856 6,339
Other Statistics
EBITDA from continuing operations (l) $ NA NA
Return on invested capital (m)...... 18% 17
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
We made a significant acquisition in 1998 (see Note 2), numerous acquisitions in
most years presented and a few divestitures in certain years. Such transactions
do not materially affect the comparability of our operating results for the
periods presented. In 1997, we disposed of our restaurants segment and accounted
for it as discontinued operations (see Note 4). Accordingly, all information has
been reclassified for the years 1997 and prior. 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.
F-42
- ---------------------------------------------------------------------------
Selected Financial Data (Page 4 of 4)
(in millions except per share and employee amounts, unaudited)
PepsiCo, Inc. and Subsidiaries
- ---------------------------------------------------------------------------
(a) Includes unusual impairment and other items of $288 ($261 after-tax or
$0.17 per share) in 1998, $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 3.
(b) Includes a tax benefit of $494 (or $0.32 per share). See Note
12.
(c) Includes the initial, noncash charge of $66 ($64 after-tax or $0.04 per
share) upon adoption in 1995 of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
(d) 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.
(e) Includes a benefit of changing to the preferable method for calculating the
market-related value of plan assets in 1994, which reduced full year
pension expense by $29 ($18 after-tax or $0.01 per share).
(f) 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).
(g) Represents historically reported market price of one share of PepsiCo
capital stock.
(h) For 1996 and prior, represents approximately 92% of the historical market
price of one share of PepsiCo capital stock, which is the allocated market
value of our packaged goods businesses used by the NYSE on or before
October 6, 1997. The remaining 8% represents the market value allocated to
TRICON. See Note 4.
(i) Represents net assets of discontinued operations, which are included in
total assets. See Note 4.
(j) Includes net assets of discontinued operations.
(k) Includes short-term borrowings and long-term debt.
(l) Defined as earnings before interest, taxes, depreciation, amortization and
the noncash portion of unusual impairment and other items of $254 in 1998,
$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.
F-43
(m) Defined as income from continuing operations before after-tax interest
expense, amortization of intangible assets, unusual impairment and other
items and 1998 tax benefit divided by an average of the 5 most recent
quarters net asset base before accumulated amortization of intangible
assets and net asset base of discontinued operations. Return on invested
capital is used by certain investors as a measure of a company's return on
its investments. It should be considered in addition to, but not as a
substitute for, other measures of financial performance in accordance with
GAAP. In addition, our EDITDA may not be comparable to similar measures
reported by other companies.
F-44
PEPSICO, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS Fiscal Years Ended
December 26, 1998, December 27, 1997 and
December 28, 1996
(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)
1998
- ----
Allowance for
doubtful accounts $ 125 $ 47 $ 8 $ 53 $ 127
===== ===== ===== ===== =====
Valuation allowance for
deferred tax assets $ 458 $ 113 $ - $ - $ 571
===== ===== ===== ===== =====
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
===== ===== ===== ===== =====
- -----------------------
(1) Other additions to the allowances principally relate to acquisitions and
reclassifications.
(2) Primarily accounts written off and translation effects.
F-45