FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 12, 1999 (12 and 24 Weeks Ended)
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1183
[GRAPHIC OMITTED]
PEPSICO,
INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-1584302
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
700 Anderson Hill Road, Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
914-253-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Number of shares of Capital Stock outstanding as of July 9, 1999:
1,462,325,734
PEPSICO, INC. AND SUBSIDIARIES
INDEX
Page
No.
Part I Financial Information
Condensed Consolidated Statement of Income -
12 and 24 weeks ended June 12, 1999 and June 13, 2
1998
Condensed Consolidated Statement of Cash Flows -
24 weeks ended June 12, 1999 and June 13, 1998 3
Condensed Consolidated Balance Sheet -
June 12, 1999 and December 26, 1998 4-5
Condensed Consolidated Statement of Comprehensive
Income - 12 and 24 weeks ended June 12, 1999 an
June 13, 1998 6
Notes to Condensed Consolidated Financial Statements 7-10
Management's Discussion and Analysis of Operations,
Cash Flows, Liquidity and Capital Resources, EURO
and Year 2000 11-26
Independent Accountants' Review Report 27
Part II Other Information and Signatures 28
-1-
PART I - FINANCIAL INFORMATION
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts, unaudited)
12 Weeks Ended 24 Weeks Ended
------------------ -----------------
6/12/99 6/13/98 6/12/99 6/13/98
-------- -------- -------- -------
Net Sales
New PepsiCo........................ $4,440 $3,419 $7,985 $6,321
Bottling operations................ 542 1,839 2,111 3,290
------- ------- -------- -------
Total Net Sales................... 4,982 5,258 10,096 9,611
Costs and Expenses, net
Cost of sales...................... 2,012 2,148 4,152 3,898
Selling, general and administrative 2,208 2,286 4,458 4,255
expenses............................
Amortization of intangible assets.. 41 46 105 90
Impairment and restructuring charge - - 65 -
-------- -------- -------- -------
Total Costs and Expenses, net..... 4,261 4,480 8,780 8,243
Operating Profit
New PepsiCo........................ 698 648 1,264 1,186
Bottling operations and equity
investments......................... 23 130 52 182
-------- -------- -------- -------
Total Operating Profit............ 721 778 1,316 1,368
Bottling equity income, net......... 25 - 25 -
Gain on bottling transactions....... 1,000 - 1,000 -
Interest expense.................... (104) (76) (228) (152)
Interest income..................... 50 15 70 47
-------- -------- -------- -------
Income Before Income Taxes........ 1,692 717 2,183 1,263
Provision for Income Taxes.......... 949 223 1,107 392
======= ======== ======== =======
Net Income.......................... $ 743 $ 494 $1,076 $ 871
======== ======== ======== =======
Income Per Share - Basic............ $ 0.50 $ 0.33 $ 0.7 $ 0.58
======== ======== ======== =======
Average Shares Outstanding - Basic.. 1,474 1,485 1,474 1,491
Income Per Share - Assuming Dilution $ 0.49 $ 0.33 $ 0.71 $ 0.57
======== ======== ======== =======
Average Shares Outstanding - Assuming
Dilution............................ 1,505 1,530 1,507 1,534
Cash Dividends Declared Per Share... $ 0.135 $ 0.13 $0.265 $0.255
See accompanying notes.
-2-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
24 Weeks Ended
----------------
6/12/99 6/13/98
------- -------
Cash Flows - Operating Activities
Net income.............................. $1,076 $ 871
Adjustments to reconcile net income to
net cash provided by operating activities
Gain on bottling transactions......... (1,000) -
Bottling equity income, net........... (25) -
Depreciation and amortization......... 532 523
Deferred income taxes................. 518 47
Other noncash charges and credits, net 372 131
Net change in operating working capital. (481) (885)
------- -------
Net Cash Provided by Operating Activities. 992 687
------- -------
Cash Flows - Investing Activities
Capital spending........................ (469) (540)
Acquisitions and investments in
unconsolidated affiliates................. (347) (552)
Short-term investments, by original
maturity
More than three months - purchases..... (1,524) (242)
More than three months - maturities.... 331 305
Three months or less, net.............. 14 692
Other, net.............................. 99 (11)
------- -------
Net Cash Used for Investing Activities.... (1,896) (348)
------- -------
Cash Flows - Financing Activities
Proceeds from issuances of long-term debt 3,259 703
Payments of long-term debt.............. (378) (1,111)
Short-term borrowings, by original
maturity
More than three months - proceeds...... 3,331 110
More than three months - payments...... (210) (52)
Three months or less, net.............. (2,933) 277
Cash dividends paid..................... (383) (375)
Share repurchases....................... (506) (1,723)
Proceeds from exercises of stock options 158 280
-------- -------
Net Cash Provided by/(Used for) Financing
Activities................................ 2,338 (1,891)
------- -------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents........................ 2 (1)
------- -------
Net Increase/(Decrease) in Cash and Cash
Equivalents............................... 1,436 (1,553)
Cash and Cash Equivalents - Beginning of
year...................................... 311 1,928
-------- -------
Cash and Cash Equivalents - End of period. $ 1,747 $ 375
======== =======
See accompanying notes.
-3-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
(Unaudited)
6/12/99 12/26/98
Current Assets
Cash and cash equivalents.................. $1,747 $ 311
Short-term investments, at cost............ 1,263 83
----- -----
3,010 394
Accounts and notes receivable, less
allowance: 6/99 - $88, 12/98 - $127...... 1,948 2,453
Inventories
Raw materials and supplies................ 486 506
Work-in-process........................... 200 70
Finished goods............................ 284 440
---- -----
970 1,016
Prepaid expenses, deferred income taxes and
other current assets...................... 470 499
----- -----
Total Current Assets..................... 6,398 4,362
Property, Plant and Equipment............... 8,328 3,110
Accumulated Depreciation.................... (3,339) (5,792)
------ ------
4,989 7,318
Intangible Assets, net
Goodwill.................................. 3,900 5,131
Reacquired franchise rights............... 161 3,118
Other intangible assets................... 734 747
----- -----
4,795 8,996
Investments in Unconsolidated Affiliates.... 2,706 1,396
Other Assets................................ 600 588
------- -------
Total Assets............................ $19,488 $22,660
======= =======
Continued on next page.
-4-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(in millions except per share amount)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
6/12/99 12/26/98
Current Liabilities
Short-term borrowings..................... $2,931 $3,921
Accounts payable.......................... 856 1,180
Accrued compensation and benefits......... 471 676
Accrued selling and marketing............. 484 596
Other current liabilities................. 1,281 1,418
Income taxes payable...................... 203 123
----- -----
Total Current Liabilities................ 6,226 7,914
Long-term Debt.............................. 2,625 4,028
Other Liabilities........................... 2,414 2,314
Deferred Income Taxes....................... 1,285 2,003
Shareholders' Equity
Capital stock, par value 1 2/3 cents per share:
authorized 3,600 shares, issued 6/99
and 12/98 - 1,726 shares.................. 29 29
Capital in excess of par value............ 1,170 1,166
Retained earnings......................... 13,487 12,800
Accumulated other comprehensive loss...... (965) (1,059)
------ ------
13,721 12,936
Less: Treasury Stock, at Cost:
6/99 - 259 shares, 12/98 - 255 shares..... (6,783) (6,535)
------ ------
Total Shareholders' Equity............... 6,938 6,401
------ ------
Total Liabilities and Shareholders' Equity $19,488 $22,660
======= =======
See accompanying notes.
-5-
PEPSICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions, unaudited)
12 Weeks Ended 24 Weeks Ended
---------------- ----------------
6/12/99 6/13/98 6/12/99 6/13/98
------- ------- ------- --------
Net Income............................ $743 $494 $1,076 $871
Other Comprehensive Income/(Loss)
Currency translation adjustment..... 8 (53) (100) (72)
Reclassification adjustment,for
item realized in net income........ 168 9 174 9
------- ------- ------- --------
176 (44) 74 (63)
Minimum pension liability adjustment,
net of tax benefit of $11......... 20 - 20 -
------- ------- ------- --------
196 (44) 94 (63)
------- ------- ------- --------
Comprehensive Income.................. $939 $450 $1,170 $808
======= ======= ======= ========
See accompanying notes.
-6-
PEPSICO, INC. AND SUBSIDIARIES
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all per share information is computed using average shares outstanding,
assuming dilution)
(1) Our Condensed Consolidated Balance Sheet at June 12, 1999 and the Condensed
Consolidated Statements of Income and Comprehensive Income for the 12 and 24
weeks ended June 12, 1999 and June 13, 1998 and the Condensed Consolidated
Statement of Cash Flows for the 24 weeks ended June 12, 1999 and June 13, 1998
have not been audited, and all have been prepared in conformity with the
accounting principles applied in our 1998 Annual Report on Form 10-K for the
year ended December 26, 1998. In our opinion, this information includes all
material normal and recurring adjustments necessary for a fair presentation. The
results for the 12 and 24 weeks are not necessarily indicative of the results
expected for the year.
(2) Our Board of Directors approved a plan in 1998 for the separation from
PepsiCo of certain wholly-owned bottling businesses located in the United
States, Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling
Group. On April 6, 1999, PBG completed the sale of 100 million of its common
stock at $23 per share through an initial public offering with PepsiCo retaining
a noncontrolling ownership interest of 35.5%. During the first quarter, we
received $5.5 billion of debt proceeds obtained by PBG primarily as settlement
of pre-existing intercompany amounts due to us. We recognized a pre-tax gain of
$1.0 billion ($476 million after-tax or $0.32 per share) in the second quarter
consistent with our policy for gain recognition upon the sale of stock by a
subsidiary. The majority of the taxes are expected to be deferred indefinitely.
On May 20, 1999, we combined certain bottling operations in the midwestern
United States and Central Europe (referred to as the PepsiCo Bottling
Operations) with the Whitman Corporation to create new Whitman. We retained a
noncontrolling ownership interest of approximately 38% in new Whitman. The
transaction resulted in an after-tax loss to PepsiCo of $206 million or $0.14
per share.
On July 10, 1999, we formed a joint venture with PepCom Industries, Inc., a
Pepsi-Cola franchisee, combining bottling businesses in parts of North Carolina
and New York. PepCom contributed bottling operations in central and eastern
North Carolina and in Long Island, New York to the joint venture. We contributed
our bottling operations in Winston-Salem and Wilmington, North Carolina in
exchange for a noncontrolling interest in the joint venture of approximately
35%.
(3) As of June 12, 1999, we owned approximately 35% of PBG's outstanding common
stock, 100% of its class B common stock and approximately 7% of the equity of
Bottling Group, LLC, PBG's principal operating subsidiary. This ownership gives
PepsiCo economic ownership of approximately 40% of PBG's combined operations. We
account for our investment using the equity method of accounting. Summarized
financial information of PBG:
($ in millions) 12 Weeks Ended 24 Weeks Ended
6/12/99 6/13/98 6/12/99 6/13/98
------- ------- ------- -------
Net sales $1,831 $1,686 $3,283 $3,026
Gross profit $ 785 $ 696 $1,402 $1,259
Operating income $ 92 $ 104 $ 134 $ 143
Net income $ 20 $ 23 $ 17 $ 17
-7-
Summarized information, continued.
($ in millions) 6/12/99 12/26/98
------- --------
Current assets $1,584 $1,318
Non current assets 6,146 6,004
------ -------
Total assets $7,730 $7,322
====== ======
Current liabilities $1,052 $1,025
Noncurrent liabilities 4,795 6,535
Minority interest 267 -
------ ------
Total liabilities $6,114 $7,560
====== ======
The net assets transferred to PBG as of April 6, 1999 primarily
consisted of the following:
($ in millions)
Property, plant and equipment, net $2,106
Goodwill $1,097
Reacquired franchise rights and other
intangibles $2,734
Long-term debt $3,306
Based upon the quoted closing price of PBG shares on June 12, 1999, the
calculated market value of our investment in PBG would have exceeded its
carrying value by approximately $645 million.
(4) Asset Impairment and Restructuring
($ in millions except per share
amount) 24 Weeks Ended
--------------
6/12/99
-------
Asset impairment charges
Held and used in the business
Property, plant and equipment $ 8
Held for disposal/abandonment
Property, plant and equipment 29
---
Total asset impairment 37
Restructuring charges
Employee related costs 19
Other charges 9
----
Total impairment and restructuring charge $ 65
====
After-tax $ 40
====
Per share $0.03
====
In the first quarter of 1999, Frito-Lay North America recognized a charge of $65
million related to the closure of three plants and impairment of equipment. The
restructuring charges of $28 million primarily include severance costs for
approximately 860 employees and plant closing costs. Year-to-date, approximately
160 of the terminations have occurred. The remaining terminations are expected
to occur in the second half of 1999.
-8-
Analysis of reserve activity for total PepsiCo:
($ in millions) Third
Employee Facility Party
Related Closure Termination Other Total
------- -------- ---------- ----- -----
Reserve, December 26, 1998 $ 42 $ 9 $ 62 $ 1 $ 114
1999 restructuring charges 19 7 - 2 28
Cash payments (13) (2) (46) - (61)
Separation of The Pepsi
Bottling Group (25) (5) (5) - (35)
---- ---- ----- ---- -----
Reserve, June 12, 1999 $ 23 $ 9 $ 11 $ 3 $ 46
==== ==== ===== ==== =====
(5) Through the 24 weeks ended June 12, 1999, we repurchased 13.8 million shares
of our capital stock at a cost of $506 million. From June 13, 1999 through July
23, 1999, we repurchased 7.9 million shares at a cost of $286 million.
(6) Schedule of Accumulated Other Comprehensive (Loss)
Currency Minimum Accumulated
Translation Pension Other
($ in millions) Adjustment Liability Comprehensive(Loss)
---------- --------- ------------------
Balance, December 26, 1998 $(1,039) $ (20) $(1,059)
Other comprehensive income 74 20 94
------ ------ --------
Balance, June 12, 1999 $ (965) $ - $ (965)
======= ====== ========
The other comprehensive income adjustments primarily include the effects of the
PBG and PBO bottling transactions.
(7) Schedule of Noncash Investing and Financing Activities
($ in millions) 6/12/99 6/13/98
------- -------
Fair value of assets acquired $ 440 $ 550
Cash paid (347) (552)
---- -----
Liabilities assumed $ 93 $ (2)
==== =====
(8) In 1998, we adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of a Business Enterprise and Related Information."
In contemplation of the separation from PepsiCo of our bottling operations, we
completed a reorganization of our Pepsi-Cola business in 1999. Our segment
disclosure presents the operating results consistent with the new Pepsi-Cola
organization and therefore, the prior year amounts have been reclassified to
conform to the 1999 presentation. Accordingly, the results in 1998 and through
the applicable transaction closing dates in 1999 of consolidated bottling
operations in which we now own an equity interest are presented separately with
the 1998 and first quarter 1999 equity income or loss of other unconsolidated
bottling affiliates. From the applicable transaction closing dates in 1999, the
equity income of those previously consolidated bottling operations and the
equity income or loss of other unconsolidated bottling affiliates for the 12
weeks ended June 12, 1999 are presented separately below operating profit in the
Condensed Consolidated Statement of Income. The combined results for the new
Pepsi-Cola organization, Frito-Lay, Frito-Lay International and Tropicana are
referred to as New PepsiCo. See page 16 and 17 for segment information.
-9-
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is
effective for our fiscal year beginning 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that we recognize all derivative instruments as either assets or liabilities in
the Condensed 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.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS, CASH FLOWS,
LIQUIDITY AND CAPITAL RESOURCES, EURO AND YEAR 2000
General
Cautionary Statements
From time to time, in written reports and in oral statements, we discuss
expectations regarding our future performance, Year 2000 risks, the impact of
the Euro conversion and the impact of current global macro-economic issues.
These "forward-looking statements" are based on currently available competitive,
financial and economic data and our operating plans. They are inherently
uncertain, and investors must recognize that events could turn out to be
significantly different from expectations.
All per share information is computed using average shares outstanding, assuming
dilution.
In the discussions below, the year-over-year dollar change:
o in concentrate shipments to franchisees, including bottling
operations in which we now own an equity interest, for Pepsi-Cola,
o in bottler case sales by company-owned bottling operations for
Pepsi-Cola International,
o in pound or kilo sales of salty and sweet snacks for Frito-Lay and
o in four gallon equivalent cases for Tropicana is referred to as volume.
Price changes over the prior year and the impact of product, package
and country sales mix changes are referred to as effective net pricing.
The combined results for the new Pepsi-Cola organization, Frito-Lay, Frito-Lay
International and Tropicana are referred to as New PepsiCo. See Segments of
Business - Pepsi-Cola for discussion of the New Pepsi-Cola organization.
International Market Risks
Macro-economic conditions in Brazil and across Asia Pacific have negatively
impacted our results. We have taken actions in these markets to respond to these
conditions, such as prudent pricing aimed at sustaining volume, renegotiating
terms with suppliers and securing local currency supply alternatives. However,
macro-economic conditions may continue to adversely impact our results in the
near term.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is
effective for our fiscal year beginning 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that we recognize all derivative instruments as either assets or liabilities in
the consolidated balance sheet and measure those instruments at fair value. We
are currently assessing the effects of adopting SFAS 133, and have not yet made
a determination of the impact adoption will have on our consolidated financial
statements.
-11-
Analysis of Consolidated Operations
Net Sales
($ in millions) 12 Weeks Ended % Change 24 Weeks Ended % Change
6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
------- ------- ----- ------- ------- -------
Reported $4,982 $5,258 (5) $10,096 $9,611 5
====== ====== ======= ======
New PepsiCo $4,440 $3,419 30 $7,985 $6,321 26
Intercompany
elimination * 83 402 79 422 715 41
----- ------- ------- ------
New PepsiCo
before elimination $4,523 $3,821 18 $8,407 $7,036 19
====== ====== ====== ======
* Reflects intercompany concentrate sales between Pepsi-Cola North America and
Pepsi-Cola International and those previously consolidated bottling operations
in which we now own an equity interest.
- --------------------------------------------------------------------------------
Reported net sales declined $276 million for the quarter reflecting the
deconsolidation of PBG and PBO operations as of the transaction closing dates.
New PepsiCo net sales, before the intercompany elimination, increased $702
million or 18%. This increase primarily reflects the inclusion of Tropicana,
volume gains at worldwide Frito-Lay and higher effective net pricing at
Frito-Lay International and Pepsi-Cola North America.
Year-to-date reported net sales increased $485 million including the impact of
the deconsolidation of PBG and PBO operations as of the transaction closing
dates. New PepsiCo net sales, before the intercompany elimination, increased
$1.4 billion or 19%. This increase primarily reflects the inclusion of Tropicana
and volume gains and higher effective net pricing at worldwide Frito-Lay. These
advances were partially offset by an unfavorable foreign currency impact. The
unfavorable foreign currency impact, primarily in Mexico and Brazil, reduced the
New PepsiCo net sales by 3 percentage points.
Operating Profit and Margin
($ in millions) 12 Weeks Ended Change 24 Weeks Ended Change
6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
------ ------ ------ ------- ------- -------
Reported
Operating Profit $721 $778 (7) $1,316 $1,368 (4)
Operating Profit
Margin 14.5% 14.8% (.3) 13.0% 14.2% (1.2)
Ongoing*
New PepsiCo
Operating Profit $698 $648 8 $1,329 $1,186 12
New PepsiCo
Operating Profi Margin** 15.4% 17.0% (1.6) 15.8% 16.9% (1.1)
*Ongoing excludes the effect of an impairment and restructuring
charge described below.
** Based on New PepsiCo net sales before intercompany elimination.
- --------------------------------------------------------------------------------
-12-
For the quarter, reported operating profit margin declined slightly when
compared to the prior year. Ongoing New PepsiCo operating profit margin
decreased 1.6 percentage points. The decrease primarily reflects increased
corporate unallocated general and administrative expenses, increased advertising
and marketing expenses and the margin impact of the Tropicana acquisition. These
decreases were partially offset by higher effective net pricing. A&M grew at a
faster rate than sales reflecting higher spending at Pepsi-Cola North America
and at worldwide Frito-Lay.
Corporate unallocated G&A includes $31 million of nonrecurring expenses related
to a shared services program. The shared services program will provide common
system capabilities, data management and data processing across North America
and Continental Europe. These expenses are comprised of $18 million of start-up
costs and project management, development and installation expenses of $13
million. We will continue to incur project management, development and
installation expenses through the remainder of the year.
Year-to-date, reported operating profit margin declined 1.2 percentage points.
Ongoing New PepsiCo operating profit margin declined 1.1 percentage points. The
decline reflects the margin impact of the Tropicana acquisition, increased A&M
expenses and increased selling and distribution expenses at Frito-Lay
International. These decreases were partially offset by higher effective net
pricing. A&M grew at a faster rate than sales reflecting higher spending at
Pepsi-Cola North America and at worldwide Frito-Lay.
Impairment and restructuring charge of $65 million ($40 million after-tax or
$0.03 per share), recognized in the first quarter, relates to the consolidation
of U.S. production to our most modern and efficient plants and streamlining
logistics and transportation systems in Frito-Lay North America as part of the
program to improve productivity. The restructuring is expected to generate
approximately $15 million in annual savings beginning in 2000 which we expect to
reinvest back into the business. See Note 4.
Interest expense, net of interest income, decreased $7 million for the quarter.
This decrease, primarily in the U.S., reflects higher average investment
balances and lower interest rates on debt, partially offset by higher average
debt levels. Year-to-date, net interest expense increased $53 million, primarily
in the U.S., due to higher average debt levels, partially offset by lower
interest rates on debt and higher average investment balances. The higher
average debt levels reflect increased borrowings in the second half of 1998
primarily used to finance the Tropicana acquisition, as well as an increase in
debt during the first quarter of 1999 in preparation for the PBG IPO. The higher
average investment balances result from the first quarter proceeds received from
PBG as settlement of pre-existing intercompany amounts.
Gain on bottling transactions of $1.0 billion ($270 million after-tax or $0.18
per share) relates to the PBG and Whitman bottling transactions.
On April 6, 1999, PBG completed the sale of 100 million of its common stock at
$23 per share through an initial public offering with PepsiCo retaining a
noncontrolling ownership interest of 35.5%. During the first quarter, we
received $5.5 billion of debt proceeds obtained by PBG primarily as settlement
of pre-existing intercompany amounts due to us. We recognized a pre-tax gain of
$1.0 billion ($476 million after- tax or $0.32 per share) in the second quarter
consistent with our policy for gain recognition upon the sale of stock by a
subsidiary. The majority of the taxes are expected to be deferred indefinitely.
The deferred taxes substantially arise from the difference between the book and
tax basis of our investment in PBG that we are required to recognize now that
PBG is an unconsolidated affiliate.
-13-
On May 20, 1999, we combined PBO with the Whitman Corporation to create new
Whitman. We retained a noncontrolling ownership interest of approximately 38%.
The transaction resulted in an after-tax loss to us of $206 million or $0.14 per
share. The net book value of our PBO businesses approximate the consideration,
net of related transaction costs, that we received from Whitman and accordingly,
there was no pre-tax gain on this transaction. Similar to PBG, we established
deferred taxes for the difference between the book and tax basis of our
investment in Whitman.
Provision for Income Taxes
($ in millions) 12 Weeks Ended % Change 24 Weeks Ended % Change
6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
------- ------- ------ ------- ------- --------
Reported
Provision for
income taxes $949 $223 NM $1,107 $392 NM
Effective tax rate 56.1% 31.1% 50.7% 31.0%
Ongoing*
Provision for
income taxes $219 $223 2 $402 $392 (3)
Effective tax rate 31.6% 31.1% 32.2% 31.0%
*Ongoing excludes the tax effect of an impairment and restructuring charge and
gain on bottling transactions described above.
NM- Not Meaningful.
- --------------------------------------------------------------------------------
The reported effective tax rate, which includes the tax impact of the bottling
transactions, increased 25 percentage points for the quarter. The ongoing
effective tax rate increased .5 percentage point for the quarter primarily due
to the absence of 1998 reserve reversals related to settlement of prior years'
audit issues partially offset by lower state and local income taxes and the
benefit of proportionately lower bottling income.
Year-to-date, the reported effective tax rate, which includes the tax impact of
the bottling transactions, increased 19.7 percentage points. The ongoing
effective tax rate increased 1.2 percentage points primarily due to the absence
of 1998 reserve reversals related to settlement of prior years' audit issues
partially offset by lower state and local income taxes and the benefit of
proportionately lower bottling income. We expect our full-year effective tax
rate to be 32.2%.
For discussion of taxes related to bottling transactions, see discussion on gain
on bottling transactions beginning on page 13.
-14-
Net Income and Net Income Per Share
($ in millions except per share amounts)
12 Weeks Ended % Change 24 Weeks Ended % Change
6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
------- ------- ------- ------- ------- -------
Net income
Reported $743 $494 50 $1,076 $871 24
Ongoing* $473 $494 (4) $846 $871 (3)
Net income per share
Reported $0.49 $0.33 48 $0.71 $0.57 26**
Ongoing* $0.31 $0.33 (3)** $0.56 $0.57 (1)**
*Ongoing excludes the effect of an impairment and restructuring charge and the
gain on bottling transactions described above.
** Based on unrounded amounts.
- --------------------------------------------------------------------------------
For the quarter, reported net income increased $249 million and the related net
income per share increased $0.16. Ongoing net income decreased $21 million and
the related net income per share decreased $0.02. These decreases primarily
reflect the deconsolidation of PBG and PBO operations as of the transaction
closing dates. In addition, the decrease in ongoing net income per share was
partially offset by the benefit of a 2% reduction in average shares outstanding.
Year-to-date reported net income increased $205 million and the related net
income per share increased $0.14. Ongoing net income decreased $25 million and
the related net income per share decreased $0.01. These decreases are primarily
due to the deconsolidation of PBG and PBO operations as of the transaction
closing dates and the increase in net interest expense. In addition, the
decrease in ongoing net income per share was partially offset by the benefit of
a 2% reduction in average shares outstanding.
-15-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES, OPERATING PROFIT AND
TOTAL ASSETS (a)
($ in millions, unaudited)
12 Weeks Ended 24 Weeks Ended
------------------ ------------------
6/12/99 6/13/98 6/12/99 6/13/98
------- ------- ------- -------
Net Sales
- ---------
Pepsi-Cola
- -North America $ 751 $ 717 $ 1,364 $ 1,306
- -International 497 496 740 733
----- ----- ------ -------
1,248 1,213 2,104 2,039
Intercompany elimination (83) (402) (422) (715)
----- ----- ----- -------
1,165 811 1,682 1,324
Frito-Lay
- -North America 1,875 1,802 3,617 3,433
- -International 867 806 1,654 1,564
----- ------ ------ -----
2,742 2,608 5,271 4,997
Tropicana
533 - 1,032 -
----- ------ ----- -----
New PepsiCo Net Sales 4,440 3,419 7,985 6,321
Bottling Operations 542 1,839 2,111 3,290
----- ------ ----- -----
Total Net Sales $4,982 $ 5,258 $10,096 $ 9,611
====== ======= ======= =======
Operating Profit
- ----------------
Pepsi-Cola
- -North America $ 205 $ 200 $ 377 $ 365
- -International 44 41 60 51
----- ----- ----- -----
249 241 437 416
Frito-Lay
- -North America (b) 393 351 673 659
- -International 91 86 169 162
---- ---- ---- ----
484 437 842 821
Tropicana 44 - 79 -
---- ---- ----- -----
Combined Segments 777 678 1,358 1,237
Corporate Unallocated (79) (30) (94) (51)
----- ---- ----- -----
New PepsiCo Operating 698 648 1,264 1,186
Profit
Bottling Operations and
Equity Investments 23 130 52 182
------ ----- ------- -------
Operating Profit $ 721 $ 778 $ 1,316 $ 1,368
====== ===== ======= =======
-16-
PEPSICO, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE OF NET SALES, OPERATING PROFIT AND
TOTAL ASSETS (continued) (a)
($ in millions, unaudited)
Total Assets
6/12/99 12/26/98
Pepsi-Cola
- - North America $ 633 $ 547
- - International 1,472 1,177
Frito-Lay
- - North America 4,010 3,915
- - International 3,938 4,039
Tropicana 3,796 3,661
Bottling Assets/Equity
Investments 2,459 9,106
Corporate 3,180 215
------- -------
Total Assets $19,488 $22,660
======= =======
Notes:
(a) This schedule should be read in conjunction with Management's Discussion
and Analysis beginning on page 18. Certain reclassifications were made to
prior year amounts to conform to the 1999 presentation.
(b) For the 24 weeks, includes an asset impairment and restructuring charge of
$65 million. See Note 4.
-17-
Segments of the Business
Pepsi-Cola
Our Board of Directors approved a plan in 1998 for the separation from PepsiCo
of certain wholly-owned bottling businesses located in the United States,
Canada, Spain, Greece and Russia, referred to as The Pepsi Bottling Group. On
April 6, 1999, PBG completed the sale of 100 million of its common stock through
an initial public offering, with PepsiCo retaining a noncontrolling ownership
interest of 35.5%. On May 20, 1999, we combined certain bottling operations in
the mid-western United States and Central Europe (referred to as the PepsiCo
Bottling Operations) with Whitman Corporation to create new Whitman. We retained
a noncontrolling ownership interest of approximately 38%. On July 10, 1999, we
formed a joint venture with PepCom Industries, Inc., a Pepsi-Cola franchisee,
combining bottling businesses in parts of North Carolina and New York. PepCom
contributed to the joint venture bottling operations in central and eastern
North Carolina and in Long Island, New York. We contributed our bottling
operations in Winston-Salem and Wilmington, North Carolina in exchange for a
noncontrolling interest of approximately 35% in the joint venture.
In contemplation of the separation from PepsiCo of our bottling operations, we
completed a reorganization of our Pepsi-Cola business in early 1999. Our segment
disclosure presents the operating results consistent with the new Pepsi-Cola
organization and therefore, the prior year amounts have been reclassified to
conform to the 1999 presentation. Accordingly, the results in 1998 and through
the applicable transaction closing dates in 1999 of consolidated bottling
operations in which we now own an equity interest are presented separately with
the 1998 and first quarter 1999 equity income or loss of other unconsolidated
bottling affiliates. From the applicable transaction closing dates in 1999, the
equity income of those previously consolidated bottling operations and the
equity income or loss of other unconsolidated bottling affiliates for the 12
weeks ended June 12, 1999 are presented separately below operating profit in the
Condensed Consolidated Statement of Income. Pepsi-Cola North America results
includes the North American concentrate and fountain businesses. Pepsi-Cola
International results include the international concentrate business and other
consolidated international bottling operations. The discussion that follows
presents net sales prior to the elimination of intercompany concentrate sales
between Pepsi-Cola North America and Pepsi-Cola International and those
previously consolidated bottling operations in which we now own an equity
interest.
The standard volume measure is system-wide bottler case sales. It represents
PepsiCo-owned brands as well as brands we have been granted the right to
produce, distribute and market nationally. Second quarter BCS includes the
months of April and May. The net sales and operating profit of Pepsi-Cola
International include the operating results of March, April and May.
-18-
Pepsi-Cola North America
------------------------
12 Weeks Ended % Change 24 Weeks Ended % Change
($ in millions) 6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
Net Sales $751 $717 5 $1,364 $1,306 4
Intercompany
elimination (72) (372) 81 (400) (675) 41
----- ----- ------ ------
Reported $679 $345 97 $ 964 $ 631 53
===== ===== ===== ======
Operating
Profit $205 $ 200 2.5 $ 377 $ 365 31
- --------------------------------------------------------------------------------
12 Weeks
Reported net sales increased $334 million due to the decrease in the
intercompany elimination resulting from the deconsolidation of the PBG and PBO
bottling operations. Before the elimination of intercompany concentrate sales,
net sales increased $34 million primarily due to higher concentrate pricing and
volume growth. The higher concentrate pricing was partially offset by increased
customer support.
BCS volume increased 3% led by the inclusion of Pepsi One, mid-single digit
growth of our Mountain Dew brand and strong double digit growth of Aquafina
bottled water. These gains were partially offset by a mid-single digit decline
in brand Diet Pepsi and a low-single digit decline in brand Pepsi.
Concentrate shipments increased 1%.
Operating profit increased $5 million due primarily to the net benefit of the
higher concentrate pricing and, to a lesser extent, volume growth. These gains
were partially offset by higher A&M spending led by Pepsi One. A&M grew at a
faster rate than sales and at a significantly faster rate than BCS volume.
24 Weeks
Reported net sales increased $333 million due to the decrease in the
intercompany elimination resulting from the deconsolidation of the PBG and PBO
bottling operations. Before the elimination of intercompany concentrate sales,
net sales increased $58 million primarily due to volume growth and higher
concentrate pricing. The higher concentrate pricing was partially offset by
increased customer support.
BCS volume increased 4% led by the inclusion of Pepsi One, mid-single digit
growth of our Mountain Dew brand and strong double digit growth of Aquafina
bottled water. These gains were partially offset by a mid-single digit decline
in brand Diet Pepsi and a low-single digit decline in brand Pepsi.
Concentrate shipments increased 1.5%.
Operating profit increased $12 million due to the volume growth and the net
benefit of higher concentrate pricing. These gains were partially offset by
higher A&M spending led by Pepsi One. A&M grew at a faster rate than sales and
BCS volume.
-19-
Pepsi-Cola International
------------------------
12 Weeks Ended % Change 24 Weeks Ended % Change
($ in millions) 6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
Net Sales $497 $496 - $740 $733 1
Intercompany
elimination (11) (30) 63 (22) (40) 45
---- ----- ----- -----
Reported $486 $466 4 $718 $693 4
==== ===== ==== =====
Operating
Profit $ 44 $ 41 7 $ 60 $ 51 18
- --------------------------------------------------------------------------------
12 Weeks
Reported net sales increased $20 million due to the decrease in the intercompany
elimination resulting from the deconsolidation of PBG and PBO bottling
operations. Before the elimination of intercompany concentrate sales, net sales
remained about even with the prior year. This result reflects net contributions
from acquisitions/divestitures and higher effective net pricing offset by a net
unfavorable foreign currency impact. The net unfavorable foreign currency
impact, primarily in Mexico, India and Brazil, reduced net sales by 4 percentage
points.
BCS decreased 3%. This decrease reflects double digit declines in Thailand,
Russia, the Philippines and Brazil. These declines were partially offset by
double digit growth in the India, Pakistan and China. For March through May,
total concentrate shipments to franchisees, including those former wholly-owned
bottlers in which we now own an equity interest, decreased 1%, the same rate as
their BCS.
Operating profit increased $3 million reflecting higher effective net pricing
partially offset by net losses from the acquisitions/divestitures.
24 Weeks
Reported net sales increased $25 million due to the decrease in the intercompany
elimination resulting from the deconsolidation of PBG and PBO bottling
operations. Before the elimination of intercompany concentrate sales, net sales
increased $7 million. This advance reflects net contributions from
acquisitions/divestitures and higher effective net pricing partially offset by a
net unfavorable foreign currency impact. The net unfavorable foreign currency
impact, primarily in Mexico, Brazil and India, reduced net sales by 3 percentage
points.
BCS remained even with the prior year. This result reflects strong double digit
growth in China, India and Pakistan. Offsetting these advances were double digit
declines in Thailand, the Philippines, Brazil and Russia. Through May, total
concentrate shipments to franchisees, including those former wholly-owned
bottlers in which we now own an equity interest, decreased 1%, the same rate as
their BCS.
Operating profit increased $9 million reflecting higher effective net pricing
and lower G&A expenses, partially offset by net losses from
acquisitions/divestitures.
-20-
Frito-Lay
The standard volume measure is pounds for North America and kilos for
International. Pound and kilo growth are reported on a system-wide and constant
territory basis, which includes currently consolidated businesses and
unconsolidated affiliates reported for at least one year.
Frito-Lay North America
($in millions) 12 Weeks Ended % Change 24 Weeks Ended % Change
6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
------- ------- ------- -------
Net Sales $1,875 $1,802 4 $3,617 $3,433 5
Operating Profit
Reported $ 393 $ 351 12 $ 673 $ 659 2
Ongoing* $ 393 $ 351 12 $ 738 $ 659 12
*Ongoing excludes the effect of an impairment and restructuring charge of $65
million for the 24 weeks in 1999.
- --------------------------------------------------------------------------------
12 Weeks
Net sales grew $73 million primarily due to increased volume.
Pound volume advanced 3.5% primarily due to double digit growth in Lay's brand
potato chips, single digit growth in our core corn products, excluding the
low-fat and no-fat versions, and significant growth in Cracker Jack brand
products. Volume declines in our "WOW!" brand product category as a result of
the high trial volume in 1998 and declines in "Baked" Lay's and "Baked" Tostitos
brand products partially offset these gains.
Operating profit increased $42 million reflecting higher volume, reduced
commodity costs and reduced G&A expenses. These gains were partially offset by
higher A&M expenses. A&M grew at a faster rate than sales due primarily to
increased promotional allowances.
24 Weeks
Net sales grew $184 million primarily due to increased volume and higher
effective net pricing.
Pound volume advanced 4% led by solid single digit growth in our core corn
products, excluding the low-fat and no-fat versions, and Lay's brand potato
chips and significant growth in Cracker Jack brand products. Volume declines in
our "Baked" Lay's and "Baked" Tostitos brand products partially offset these
gains.
Reported operating profit increased $14 million. Ongoing operating profit
increased $79 million reflecting the higher volume, higher effective net pricing
and reduced commodity costs partially offset by higher A&M expenses. A&M grew at
a faster rate than sales due primarily to increased promotional allowances.
-21-
Frito-Lay International
($ in millions) 12 Weeks Ended % Change 24 Weeks Ended % Change
6/12/99 6/13/98 B/(W) 6/12/99 6/13/98 B/(W)
------- ------- ------- -------
Net Sales $867 $806 8 $1,654 $1,564 6
Operating
Profit $ 91 $ 86 6 $ 169 $ 162 4
- --------------------------------------------------------------------------------
12 Weeks
Net sales increased $61 million. Excluding the negative impact of Brazil, due
primarily to macro-economic conditions, net sales increased $84 million or 12%
reflecting higher effective net pricing, higher volume and net contributions
from acquisitions/divestitures. The higher effective net pricing was taken, in
part, to offset the impact of weaker currencies outside of Brazil. The
unfavorable foreign currency impact, primarily in Mexico, reduced net sales
growth by 6 percentage points.
Salty snack kilos increased 5%. Excluding Brazil, salty snack kilos increased 4%
led by double digit growth in several of our businesses in Asia and by sustained
solid growth at Sabritas in Mexico. Including acquisitions/divestitures, total
salty snack kilos increased an additional 5 percentage points to 10% driven
primarily by a merger of salty snack food businesses in South America and an
acquisition in Australia. Sweet snack kilos increased 9% primarily reflecting
double digit growth by Gamesa in Mexico. Sweet snack kilos, including the effect
of acquisitions/divestitures, declined 8% primarily as a result of the sales of
our chocolate and biscuit businesses in Poland.
Operating profit increased $5 million. In response to macro-economic conditions
in Brazil, $4 million of nonrecurring expenses were recognized to reflect
actions to reduce redundant overhead and distribution systems. Excluding these
expenses and the operating profit from Brazil, operating profit increased $15
million or 20% driven primarily by strong performances at Sabritas and Gamesa.
The net impact of weaker foreign currencies outside of Brazil, primarily in
Mexico, reduced operating profit growth by 8 percentage points. The unfavorable
foreign currency impact was more than offset by higher effective net pricing.
24 Weeks
Net sales increased $90 million. Excluding the negative impact of Brazil, due
primarily to macro-economic conditions, net sales increased $157 million or 11%
reflecting higher effective net pricing, higher volume and net contributions
from acquisitions/divestitures. The higher effective net pricing was taken, in
part, to offset the net impact of weaker currencies outside of Brazil. The
unfavorable foreign currency impact, primarily in Mexico, reduced net sales
growth by 9 percentage points.
Salty snack kilos increased 5%. Excluding Brazil, salty snack kilos growth
remained at 5% led by solid growth at Walkers in the United Kingdom, Sabritas
and several of our businesses in Asia. Including acquisitions/divestitures,
total salty snack kilos increased an additional 6 percentage points to 11%
driven
-22-
primarily by acquisitions and mergers of salty snack food businesses in Central
and South America and the acquisition in Australia. Sweet snack kilos increased
4% led by strong year-to-date growth by Gamesa. Sweet snack kilos, including the
effect of acquisitions/divestitures, declined 3%.
Operating profit increased $7 million. Excluding Brazil, operating profit
increased $35 million or 26% driven by strong performances at Sabritas, Gamesa
and Walkers. The net impact of weaker foreign currencies outside of Brazil,
primarily in Mexico, reduced operating profit growth by 13 percentage points.
The unfavorable foreign currency impact was more that offset by higher effective
net pricing.
Tropicana
12 Weeks
Net sales were $533 million and operating profit was $44 million. Volume growth,
combined with higher pricing taken to offset increases in the cost of oranges,
drove operating performance.
24 Weeks
Net sales were $1.0 billion and operating profit was $79 million. Volume growth,
combined with higher pricing taken to offset increases in the cost of oranges,
drove operating performance.
Cash Flows
Our 1999 consolidated cash and cash equivalents increased $1.4 billion compared
to a $1.6 billion decrease in 1998. The change primarily reflects net proceeds
from the issuance of debt in 1999 versus net payments in 1998 and lower share
repurchase activity in 1999. The comparative increases were partially offset by
the use of the debt proceeds to purchase short-term investments compared to the
liquidation of our investment portfolios in 1998.
Our share repurchase activity was as follows:
24 Weeks Ended
---------------------
($ and shares in millions) 6/12/99 6/13/98
---------- ---------
Cost $506 $1,723
Number of shares
repurchased 13.8 45.6
% of shares outstanding at
beginning of year 0.9% 3.0%
Liquidity and Capital Resources
As of year-end 1998, we maintained $4.75 billion of revolving credit facilities.
Of the $4.75 billion total, $3.1 billion expired March 26, 1999 and was not
renewed due to our reduced borrowing needs. The remaining $1.65 billion was
cancelled on June 18, 1999 and replaced with a $900 million facility expiring
June 2004 and $600 million facility expiring June 2000. These credit facilities
exist largely to support
-23-
issuances of short-term debt. At June 12, 1999, $900 million of short-term
borrowings were reclassified as long-term, reflecting our intent and ability,
through existence of the unused revolving 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 - Segments of the Business
- - Pepsi-Cola, our Board of Directors approved a plan in 1998 for the separation
from PepsiCo of PBG. PBG completed an IPO on April 6, 1999. In preparation for
the IPO, PBG and its principal operating subsidiary, Bottling Group, LLC
incurred, in February and March of 1999, $6.55 billion of indebtedness. Of the
$6.55 billion, $3.25 billion was repaid by PBG with the proceeds of the IPO and
the issuance of long-term debt. PepsiCo has unconditionally guaranteed $2.3
billion of the remaining $3.3 billion of Bottling Group, LLC long-term debt.
During the first quarter, we received $5.5 billion of the debt proceeds obtained
by PBG primarily as settlement of pre-existing intercompany amounts due to us.
These proceeds were partially used to repay a portion of our short-term
borrowings and the remaining amount was invested in cash equivalents and
short-term investments. We plan to use these investments for general corporate
purposes, including future debt repayments, acquisitions and share repurchases.
In connection with the Whitman transaction completed on May 20, 1999, we will
generate net cash proceeds of $300 million.
The deconsolidation of the PBG and PBO operations resulted in declines in
current assets, intangible assets, property, plant and equipment, net, current
liabilities and long-term debt and in an increase in investments in
unconsolidated affiliates.
There are no significant changes in our market risk from year-end. Our strong
cash-generating capability and financial condition give us ready access to
capital markets throughout the world.
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union
fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency-the EURO. The euro trades on currency exchanges and may
be used in business transactions. Conversion to the euro eliminated currency
exchange rate risk between the member countries. Beginning in January 2002, new
EURO-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. Our operating subsidiaries affected by the euro
conversion have established plans to address the issues raised by the euro
currency conversion. These issues include, among others, the need to adapt
computer and financial systems, business processes and equipment, such as
vending machines, to accommodate EURO-denominated transactions and the impact of
one common currency on pricing. Since financial systems and processes currently
accommodate multiple currencies, the plans contemplate conversion by the middle
of 2001 if not already addressed in conjunction with Year 2000 remediation. We
do not expect the system and equipment conversion costs to be material. To date,
one common currency has not had a significant impact on pricing. However, due to
numerous uncertainties, we cannot reasonably estimate the long-term effects one
common currency will have on pricing and the resulting impact, if any, on
financial condition or results of operations.
-24-
Year 2000
Each of our business segments and corporate headquarters have teams in place to
identify and address Year 2000 compliance issues. Information technology systems
with non-compliant code are being 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 are in place for required system modifications or
replacements. Remediation and testing activities are already completed for
approximately 98% of the systems with the systems back in operation. The
completion of substantially all of the remaining systems is planned for the
third quarter of 1999. Inventories and assessments of non-IT systems have been
completed and remediation activities are under way with a third quarter 1999
target completion date.
Independent consultants continue to monitor progress of remediation programs at
selected businesses and perform testing at certain key locations. In addition,
other experts are performing independent verification and validation audits of a
sample of remediated systems with satisfactory results. Progress is also
monitored by senior management, and regularly reported to PepsiCo's Board of
Directors.
During 1998, we identified critical suppliers, customers, financial
institutions, and other third parties and surveyed their Year 2000 remediation
programs. Risk assessments and contingency plans, where necessary, are being
finalized and tested where feasible in the second half of 1999.
In addition, independent consultants completed in 1998 a survey of the state of
readiness of our significant bottling franchisees. Such surveys identified
readiness issues for certain international bottlers and, therefore, potential
risk to us. Our current assessment of international bottlers comprising
approximately 95% of international volume indicates that bottlers representing
3% of the international volume are currently at risk. Divisional personnel are
providing these bottlers with self assessment tools to identify areas still
needing attention. We are also providing assistance to the franchisees with
processes and with certain manufacturing equipment compliance data. Our
contingency planning includes specific focus on those bottlers that remain at
risk at the end of the second quarter.
Incremental costs directly related to Year 2000 issues for New PepsiCo are
estimated to be $113 million from 1998 to 2000, of which $87 million or 77% has
been spent to date. The remaining spending includes costs related to contingency
plans. Currently, approximately 27% of the total estimated spending represents
costs to repair systems while approximately 53% represents costs to replace and
rewrite software. This estimate assumes that we will not incur significant Year
2000 related costs on behalf of our suppliers, customers, franchisees, financial
institutions or other third parties. Costs incurred prior to 1998 were
immaterial. Excluded from the estimated incremental costs for New PepsiCo for
the 3 year period are approximately $30 million of internal recurring costs
related to our Year 2000 efforts.
-25-
Contingency plans for Year 2000 related interruptions are being finalized. The
plans include, but are not limited to, the development of emergency backup and
recovery procedures, the staffing of a centralized team to react to unforeseen
events, remediation of existing systems parallel with installation of new
systems, replacement of electronic applications with manual processes,
identification of alternate suppliers and increases in raw material and finished
goods inventory levels.
Our most likely worst case scenarios would involve the temporary inability of
bottling franchisees to manufacture or bottle some products in certain
locations, of suppliers to provide raw materials on a timely basis and of some
customers to order and pay on a timely basis.
Our Year 2000 efforts are ongoing and our overall plan, including our
contingency plans, will be modified to take into account new information when
available. While we anticipate no major interruption of our business activities,
that will be dependent in part upon the ability of third parties, particularly
bottling franchisees, to be Year 2000 compliant. Although we have implemented
the actions described above to address third party issues, we are not able to
require the compliance actions by such parties. Accordingly, while we believe
our actions in this regard should have the effect of mitigating Year 2000 risks,
we are unable to eliminate them or to estimate the ultimate effect Year 2000
risks will have on our operating results.
-26-
Independent Accountants' Review Report
The Board of Directors
PepsiCo, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
PepsiCo, Inc. and Subsidiaries as of June 12, 1999 and the related condensed
consolidated statements of income and comprehensive income for the twelve and
twenty-four weeks ended June 12, 1999 and June 13, 1998 and the condensed
consolidated statement of cash flows for the twenty-four weeks ended June 12,
1999 and June 13, 1998. These financial statements are the responsibility of
PepsiCo, Inc.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PepsiCo, Inc. and Subsidiaries as
of December 26, 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended not presented
herein; and in our report dated February 1, 1999, except as to Note 18 which is
as of March 8, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 26, 1998, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG LLP
New York, New York
July 20, 1999
-27-
PART II - OTHER INFORMATION AND SIGNATURES
Item 4. Submission of Matters to a Vote of Security Holders (a) PepsiCo's
Annual Meeting of Shareholders was held on May 5, 1999.
(c) Certain proposals voted upon at the Annual Meeting, and the
number of votes cast for, against and abstentions with respect
to each, were as follows:
Description of Proposals Number of Shares (in millions)
For Against Abstain
Approval of the appointment
of KPMG LLP as
independent auditors. 1,247 4 5
Shareholders' proposal
concerning a Report on Executive
Compensation - Financial and
Social Accountability 74 930 24
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 30.
(b) Reports on Form 8-K
PepsiCo filed a current report on Form 8-K dated April 21, 1999
reporting under Item 2, the Acquisition or Disposition of Assets
information related to the public sale of The Pepsi Bottling
Group, Inc.'s common stock and under Item 7(b), Pro Forma
Information, of PepsiCo reflecting the PBG transaction and other
bottling transactions.
-28-
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
PEPSICO, INC.
(Registrant)
Date: July 26, 1999 Michael D.White
---------------- ----------------------------------
Senior Vice President and
Chief Financial Officer
Date: July 26, 1999 Lawrence F.Dickie
- ---------------------------- ----------------------------------
Vice President, Associate General
Counsel and Assistant Secretary
-29-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
Exhibit 11 Computation of Net Income Per Share of Capital Stock -
Basic and Assuming Dilution
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 15 Letter from KPMG LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment)
Exhibit 27 Financial Data Schedule 24 Weeks Ended June 12, 1999
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EXHIBIT 11
PEPSICO, INC. AND SUBSIDIARIES
Computation of Net Income Per Share of Capital Stock
(in millions except per share amounts, unaudited)
12 Weeks Ended 24 Weeks Ended
------------------ --------------------
6/12/99 6/13/98 6/12/99 6/13/98
-------- --------- ---------- --------
Shares outstanding at
beginning of period............... 1,476 1,491 1,471 1,502
Weighted average of shares issued
during the period for exercise
of stock options.................. 3 3 5 12
Weighted average shares repurchased.. (5) (9) (2) (23)
-------- --------- ---------- ---------
Average shares outstanding - Basic. 1,474 1,485 1,474 1,491
Effect of dilutive securities
Dilutive shares contingently
issuable upon the exercise of
stock options................... 134 155 147 158
Shares assumed to have been
purchased for treasury with
assumed proceedsfrom the exercise
of stock options..... (103) (110) (114) (115)
-------- --------- ---------- -------
Average shares outstanding -
Assuming dilution................ 1,505 1,530 1,507 1,534
======== ========= ========== ========
Net Income......................... $ 743 $ 494 $1,076 $ 871
======== ========= ========== ========
Net Income Per Share - Basic....... $0.50 $ 0.33 $ 0.73 $ 0.58
======== ========= ========== ========
Net Income Per Share - Assuming
dilution.......................... $0.49 $ 0.33 $ 0.71 $ 0.57
======== ========= ========== ========
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EXHIBIT 12
PEPSICO, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(in millions except ratio amounts, unaudited)
24 Weeks Ended
-------------------
6/12/99 6/13/98
-------- ---------
Earnings: (a)
Income before income taxes......... $2,183 $1,263
Joint ventures and minority
interests, net..................... (13) 1
Amortization of capitalized
interest........................... 3 3
Interest expense................... 228 152
Interest portion of rent expense (b) 23 21
-------- ---------
Earnings available for fixed
charges............................ $2,424 $1,440
======== =========
Fixed Charges:
Interest expense................... $ 228 $ 152
Capitalized interest............... 4 6
Interest portion of rent expense (b) 23 21
-------- ---------
Total fixed charges.............. $ 255 $ 179
======== =========
Ratio of Earnings to Fixed Charges. 9.51 8.04
======== =========
(a) Includes a $65 impairment and restructuring charge and gain on bottling
transactions in 1999. Excluding the charge and the gain, the ratio of
earnings to fixed charges for the 24 weeks ended June 12, 1999 would have
been 5.84.
(b) One-third of net rent expense is the portion deemed representation of the
interest factor.
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EXHIBIT 15
Accountants' Acknowledgment
The Board of Directors
PepsiCo, Inc.
We hereby acknowledge our awareness of the use of our report dated July 20, 1999
included within the Quarterly Report on Form 10-Q of PepsiCo, Inc. for the
twelve and twenty-four weeks ended June 12, 1999, and incorporated by reference
in the following Registration Statements and in the related Prospectuses:
Registration
Description Statement Number
Form S-3
PepsiCo SharePower Stock Option Plan for PCDC
Employees 33-42121
$32,500,000 Puerto Rico Industrial, Medical and
Environmental Pollution Control Facilities
Financing Authority Adjustable Rate Industrial
Revenue Bonds 33-53232
Extension of the PepsiCo SharePower Stock Option
Plan to Employees of Snack Ventures Europe, a
joint venture between PepsiCo Foods International
and General Mills, Inc. 33-50685
$4,587,000,000 Debt Securities and Warrants 33-64243
Form S-8
PepsiCo SharePower Stock Option Plan 33-35602, 33-29037,
33-42058, 33-51496,
33-54731 & 33-66150
1988 Director Stock Plan 33-22970
1979 Incentive Plan and the 1987 Incentive Plan 33-19539
1994 Long-Term Incentive Plan 33-54733
1995 Stock Option Incentive Plan 33-61731 & 333-09363
1979 Incentive Plan 2-65410
PepsiCo, Inc. Long Term Savings Program 2-82645, 33-51514 &
33-60965
Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
KPMG LLP
New York, New York
July 26, 1999
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5
0000077476
PepsiCo, Inc.
1,000,000
Dec-25-1999
Jun-12-1999
6-MOS
1,747
1,263
2,036
88
970
6,398
8,328
3,339
19,488
6,226
2,625
29
0
0
6,909
19,488
10,096
10,096
4,152
4,152
0
7
228
2,183
1,107
1,076
0
0
0
1,076
0.73
0.71