|
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 | |
August 27, 2001 Date of Report (Date of earliest event reported) | |
PepsiCo, Inc. (Exact name of registrant as specified in its charter) |
|
North Carolina (State or other jurisdiction of incorporation) | |
1-1183 (Commission File Number) | 13-1584302 (IRS Employer Identification No.) |
700 Anderson Hill Road, Purchase, New York 10577 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (914) 253-2000 | |
Item 5. Other Events
|
As previously reported in our Form 8-K dated August 8, 2001, we completed a merger transaction on August 2, 2001, which resulted in The Quaker Oats Company (Quaker) becoming a wholly-owned subsidiary of PepsiCo. Under the merger agreement dated December 2, 2000, Quaker shareholders received 2.3 shares of PepsiCo common stock for each share of Quaker common stock, including a cash payment for fractional shares. We issued approximately 306 million shares of our common stock in exchange for all the outstanding common stock of Quaker. The transaction was accounted for as a tax-free transaction and as a pooling-of-interests under Accounting Principles Board Opinion No. 16, Business Combinations. This Form 8-K makes available the supplemental consolidated balance sheets as of December 30, 2000 and December 25, 1999, and the related supplemental consolidated statements of income, cash flows and common shareholders’ equity for each of the years in the three-year period ended December 30, 2000, together with the related management’s discussion and analysis of results of operations and financial condition and the supplemental selected financial data for each of the years in the five-year period ended December 30, 2000, which are being filed as Exhibit 99.1 and are incorporated herein by reference. Also incorporated herein by reference is the independent auditors’ report filed as part of Exhibit 99.1. This Form 8-K also makes available the supplemental condensed consolidated balance sheet as of June 16, 2001, the related supplemental condensed consolidated statements of income and comprehensive income for the twelve and twenty-four weeks ended June 16, 2001 and June 10, 2000 and the supplemental condensed consolidated statement of cash flows for the twenty-four weeks ended June 16, 2001 and June 10, 2000, together with the related management’s discussion and analysis of results of operations and financial condition, which are being filed as Exhibit 99.2 and are incorporated herein by reference. Also incorporated herein by reference is the independent accountants’ report filed as part of Exhibit 99.2. This Form 8-K also makes available the supplemental ratio of earnings to fixed charges for each of the years in the five-year period ended December 30, 2000 in Exhibit 12.1 and for the twenty-four weeks ended June 16, 2001 and June 16, 2000 in Exhibit 12.2 which are both incorporated herein by reference.
-2- The supplemental consolidated financial statements and schedules give retroactive effect to the merger of PepsiCo, Inc. and The Quaker Oats Company on August 2, 2001, which has been accounted for as a pooling-of-interests as described in Note 1 to the supplemental consolidated financial statements in Exhibit 99.1. Generally accepted accounting principles prohibit giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements until financial statements are issued for a period which includes the date of consummation. These financial statements and schedules do not extend through the date of consummation. However, they will become the historical consolidated financial statements and schedules of PepsiCo, Inc. and subsidiaries after financial statements covering the date of consummation of the business combination are issued. |
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
|
(a) Financial statements of businesses acquired.
The required financial statements of businesses acquired as of December 31, 1999 and 2000 and for each of the years in the three-year period ended December 31, 2000 are not being filed with this report on Form 8-K because this information is substantially the same as that which was incorporated as part of the joint proxy statement/prospectus dated March 15, 2001. This information is incorporated herein by reference. The required financial statements of businesses acquired as of June 30, 2001 and for the six and three months ended June 30, 2001 and 2000 are being filed as Exhibit 99.3 and are incorporated herein by reference. (b) Pro forma financial information. The required pro forma financial information for each of the years in the three-year period ended December 30, 2000 is not being filed with this report on Form 8-K because this information is substantially the same as that which was included in the joint proxy statement/prospectus dated March 15, 2001. This information is incorporated herein by reference. The required pro forma financial information as of June 16, 2001 and for the twenty-four weeks ended June 16, 2001 and June 10, 2000 is being filed as Exhibit 99.4 and is incorporated herein by reference. -3- |
| (c) Exhibits. | ||
| 12.1 | Supplemental Ratio of Earnings to Fixed Charges for each of the years in the five-year period ended December 30, 2000 | |
| 12.2 | Supplemental Ratio of Earnings to Fixed Charges for the twenty-four weeks ended June 16, 2001 and June 10, 2000 | |
| 15 | Accountants' Acknowledgement | |
| 23.1 | Consent of KPMG LLP | |
| 23.2 | Consent of Arthur Andersen LLP | |
| 99.1 | Audited supplemental financial statements as of December 30, 2000 and December 25, 1999, and for each of the years in the three-year period ended December 30, 2000 and related Management’s Discussion and Analysis of Operations and Financial Condition and the Supplemental Selected Financial Data | |
| 99.2 | Unaudited supplemental financial statements as of June 16, 2001 and June 10, 2000 and for the twelve and/or twenty-four weeks ended June 16, 2001 and June 10, 2000 and related Management’s Discussion and Analysis of Operations and Financial Condition | |
| 99.3 | Financial statements of The Quaker Oats Company and Subsidiaries as of June 30, 2001 and for the six and three months ended June 30, 2001 and 2000 | |
| 99.4 | Unaudited Pro Forma Condensed Combined Financial Information as of June 16, 2001 and for the twenty-four weeks ended June 16, 2001 and June 10, 2000 | |
-4- | ||
|
Pursuant
to the requirements 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: August 27, 2001 |
/S/ PETER A. BRIDGMAN Peter A. Bridgman Senior Vice President and Controller |
| Date: August 27, 2001 |
/S/ LAWRENCE F. DICKIE Lawrence F. Dickie Vice President, Associate General Counsel and Assistant Secretary |
- -5- | |
|
INDEX TO EXHIBITS | ||
Exhibit |
Description |
Page
|
| 12.1 | Supplemental Ratio of Earnings to Fixed Charges for each of the years in the five-year period ended December 30, 2000 | 7 |
| 12.2 | Supplemental Ratio of Earnings to Fixed Charges for the twenty-four weeks ended June 16, 2001 and June 10, 2000 | 8 |
| 15 | Accountants' Acknowledgement | 9 |
| 23.1 | Consent of KPMG LLP | 10 |
| 23.2 | Consent of Arthur Andersen LLP | 11 |
| 99.1 | Audited supplemental financial statements as of December 30, 2000 and December 25, 1999, and for each of the years in the three-year period ended December 30, 2000, and related Management's Discussion and Analysis of Operations and Financial Condition and the Supplemental Selected Financial Data | 12 - 73 |
| 99.2 | Unaudited supplemental financial statements as of June 16, 2001 and June 10, 2000 and for the twelve and/or twenty-four weeks ended June 16, 2001 and June 10, 2000, and related Management's Discussion and Analysis of Operations and Financial Condition | 74 - 102 |
| 99.3 | Financial statements of The Quaker Oats Company and Subsidiaries as of June 30, 2001 and for the six and three months ended June 30, 2001 and 2000 | 103 - 117 |
| 99.4 | Unaudited Condensed Combined Pro Forma Financial Information as of June 16, 2001 and for the twenty-four weeks ended June 16, 2001 and June 10, 2000 | 118 - 123 |
-6- | ||
EXHIBIT 12.1
PEPSICO, INC. AND SUBSIDIARIES
"Back to Main Index"
EXHIBIT 12.2
PEPSICO, INC. AND SUBSIDIARIES,
"Back to Main Index"
EXHIBIT 15
Accountant's Acknowledgement
The Board of Directors
We hereby acknowledge our awareness of the use of our report dated
August 20, 2001 on the supplemental condensed consolidated financial
statements of PepsiCo, Inc. for the twelve and twenty-four weeks
ended June 16, 2001, included within the Form 8-K of PepsiCo, Inc.
dated August 27, 2001, and incorporated by reference in the
following Registration Statements and in the related Prospectuses:
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 "Back to Main Index"
EXHIBIT 23.1
Consent of KPMG LLP
The Board of Directors
We consent to incorporation by reference in the registration
statements listed below of PepsiCo, Inc. of our report dated August
20, 2001, relating to the Supplemental Consolidated Balance Sheets
of PepsiCo, Inc. and Subsidiaries as of December 30, 2000 and
December 25, 1999 and the related Supplemental Consolidated
Statements of Income, Cash Flows and Common Shareholders’ Equity for
each of the years in the three-year period ended December 30, 2000,
which report appears in the Form 8-K of PepsiCo, Inc. dated August
27, 2001:
KPMG LLP
New York, New York
"Back to Main Index"
EXHIBIT 23.2
Consent of Arthur Andersen LLP
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our
report dated January 30, 2001, included and incorporated by
reference in The Quaker Oats Company’s Form 10-K for the year ended
December 31, 2000, and to all references to our Firm included in
this registration statement.
Arthur Andersen LLP
Chicago, Illinois
"Back to Main Index"
Management’s Discussion and
Analysis On August 2, 2001, we completed a merger transaction
which resulted in The Quaker Oats Company (Quaker) becoming a wholly-owned
subsidiary of PepsiCo. As a result, we restated all prior periods presented to
reflect the combined results of operations, financial position and cash flows of
both companies as if they had always been merged. For further detail see “
Merger of PepsiCo and The Quaker Oats Company”. All per share amounts reflect common per share
amounts, assume dilution and are based on unrounded amounts. Percentage changes are
based on unrounded amounts. Management’s Discussion and Analysis is
presented in four sections. The first section discusses items affecting the
comparability of results and certain market and other risks we face. The second
section analyzes the Results of Operations, first on a consolidated basis and then
for each of our business segments (pages 21-31). The final two sections address
Consolidated Cash Flows and Liquidity and Capital Resources (page 31). From time to time, in written reports and in oral
statements, we discuss expectations regarding our future performance
including synergies from the merger, the impact of
the euro conversion and the impact of global macro-economic issues. These “
forward-looking statements” are based on currently available competitive,
financial and economic data and our operating plans. They are inherently uncertain, and
investors must recognize that events could turn out to be significantly different from
our expectations. Items Affecting Comparability Fifty-third Week in 2000 Comparisons of 2000 to 1999 are affected by an
additional week of results in the 2000 reporting year. Because our fiscal year ends
on the last Saturday in December, a fifty-third week is added every 5 or 6 years. The
fifty-third week increased 2000 net sales by an estimated $294 million, operating
profit by an estimated $62 million and net income by an estimated $44 million or $0.02
per share. Merger of PepsiCo and
The Quaker Oats Company On August 2, 2001, we
completed a merger transaction with The Quaker Oats Company. Under the merger
agreement dated December 2, 2000, Quaker shareholders received 2.3 shares of
PepsiCo common stock in exchange for each share of Quaker common stock,
including a cash payment for fractional shares. We issued approximately 306
million shares of our common stock in exchange for all the outstanding common
stock of Quaker. In connection with the
merger transaction, we sold the global rights of our All Sport beverage brand to
The Monarch Company, Inc. of Atlanta. As part of the terms of the sale, we agreed
that, for 10 years after the Quaker transaction closing date, we would not
distribute Gatorade through our bottling system and would not include Gatorade
with Pepsi-Cola products in certain marketing or promotional arrangements
covering specific distribution channels.
-13-
The merger was accounted for as a tax-free transaction and as
a
pooling-of-interests under Accounting Principles Board
Opinion No. 16, Business Combinations. As a result, all prior period supplemental
consolidated financial statements
presented have been restated to include the results of operations, financial position and cash flows
of both companies
as if they had always been combined. Certain reclassifications were made to conform the
presentation of the
supplemental financial statements and, for interim reporting, the fiscal calendar and certain
interim reporting policies were also conformed. There were no material transactions between pre-
merger
PepsiCo and Quaker. The results of operations of the separate companies and the
combined company for the most recent quarter prior to the
merger and for the years presented in the supplemental consolidated financial statements are as follows:
(a)
Adjustments reflect the impact of changing Quaker’s
fiscal calendar to conform to PepsiCo’s and adjustments to conform
accounting policies of the two companies applicable to interim reporting. These
changes have no impact on full year net sales or net income.
We expect to incur transaction
costs of approximately $125 million related to the merger, most of which will be
recognized in the third quarter. We also expect to incur approximately $450 to $550
million of additional costs to integrate the two companies.
We have identified ongoing merger-related cost savings and
revenue
enhancement opportunities that are expected to reach
$400 million a year by 2005. Synergies are expected to be achieved by the end of
2002 approximate $140 to $175 million. Bottling Transactions In 1998, we announced our intention to restructure our
bottling
operations in order to compete more effectively,
particularly in the North American market. During 1999, we completed a series of transactions creating
our
anchor bottlers. In April 1999, certain wholly-owned
bottling businesses, referred to as The Pepsi Bottling Group (PBG), completed an initial public
offering, with PepsiCo
retaining a direct noncontrolling ownership interest of 35.5%. In May, we
-14-
combined certain other bottling operations with Whitman
Corporation
retaining a noncontrolling ownership interest of
approximately 38%. In July, we combined certain other bottling operations with PepCom Industries,
Inc. retaining a
noncontrolling interest of 35%. In October, we formed a business venture with Pohlad
Companies, a Pepsi-Cola
franchisee, retaining a noncontrolling ownership interest of approximately 24% in the venture’
s principal operating
subsidiary, PepsiAmericas, Inc.
Our financial statements include the results of our bottling
operations on a consolidated basis through the transaction
dates above, and our proportionate share of income under the equity method subsequent to those dates.
In December 2000, Whitman merged with PepsiAmericas. We
now own
approximately 37% of the combined bottler which has
since changed its name to PepsiAmericas, Inc. As part of the merger, we will participate in an earn-
out option whereby
we may receive additional PepsiAmericas’ shares if certain performance targets are met. Our
three anchor bottlers
distribute approximately three-fourths of our beverage products in North America. Asset Impairment and Restructuring Charges
2000 The asset impairment charges of $125 million primarily
reflect
the reduction in the carrying value of the land,
buildings and production machinery and equipment to their estimated fair market value based on
-15-
analyses of the liquidation values of similar assets. The
closures
of distribution
centers were completed in
2000. The closures of manufacturing facilities will occur in 2001. The assets will be either
disposed of or abandoned
in 2001. The restructuring charges of $59 million primarily included severance and
termination benefits for
approximately 1,000 employees and other shutdown costs. Substantially all of the terminations will be
completed during
2001.
1999
The employee related costs for 1999 of $20 million
primarily
included severance and early retirement benefits for
approximately 930 employees. Substantially all of the terminations occurred during 1999.
1998
-16-
The employee related costs for 1998 of $66 million
primarily
included severance and other termination benefits and
relocation costs for approximately 4,000 full-time and part-time employees. The terminations
unrelated to the bottling
operations that became part of PBG occurred during 1998 and 1999.
Restructuring reserves totaling $63 million at December
30, 2000
are included in accounts payable and other current
liabilities in the Supplemental Consolidated Balance Sheet.
Tropicana Acquisition
In August 1998, we acquired Tropicana Products, Inc. for
$3.3
billion. The 1998 results of operations include Tropicana
subsequent to the acquisition date.
Tax Items
In 1999, Quaker adjusted its tax accruals and tax assets to
reflect
developments and information received during the
year. The net effect of these adjustments reduced the income tax provision by $59 million (or $0.03 per
share).
In 1998, PepsiCo reported a tax benefit, included in the
provision for income taxes, of $494 million (or $0.27 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.
Acquisition of South Beach Beverages Company, LLC
On January 5, 2001, we completed the acquisition of South
Beach
Beverages Company, LLC for approximately $337 million in
cash, retaining a 91% interest in the newly formed South Beach Beverages Company, Inc. (SoBe). SoBe
manufactures and
markets an innovative line of alternative non-carbonated beverages including fruit blends, energy
drinks, dairy-based
drinks, exotic teas and other beverages with herbal ingredients, which prior to our acquisition were
distributed under
license by a network of independent distributors, primarily in the United States.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board
(FASB)
issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS
-17-
133, as amended by SFAS 137 and SFAS 138, was adopted by us on
December 30, 2000.
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. Based on
derivatives outstanding at
December 30, 2000, the adoption increased assets by approximately $12 million and liabilities by
approximately $10
million with approximately $3 million recognized in accumulated other comprehensive income and
less than $1 million
recognized in the Supplemental Consolidated Statement of Income.
In May 2000, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on Issue 00-14,
Accounting for Certain
Sales Incentives. EITF 00-14 addresses the recognition and income statement
classification of various sales
incentives. Among its requirements, the consensus will require the costs related to consumer
coupons currently
classified as marketing costs to be classified as a reduction of revenue. In April 2001, the EITF
delayed the effective
date for this consensus to 2002. The impact of adopting this consensus is not expected to have a
material impact on our
consolidated financial statements.
In January 2001, the EITF reached a consensus on Issue
00-22, Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in the
Future. Issue 00-22 requires that certain volume-based cash rebates to customers
currently recognized as marketing costs be classified as a reduction of revenue. The
consensus was effective for the first quarter of 2001 and was not material to our
consolidated financial statements.
In April 2001, the EITF reached a consensus on Issue 00-25,
Vendor
Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor’s Products.
EITF 00-25 addresses the income statement classification of consideration, other than
that directly addressed in Issue 00-14, from a vendor to a reseller or another
party that purchases the vendor’s products. The consensus requires most of our
customer promotional incentives currently classified as marketing costs to be
classified as a reduction of revenue. Total promotional expenses classified as
marketing costs were $3.2 billion in 2000, $2.9 billion in 1999 and $2.7 billion in
1998. The consensus is effective for 2002.
In July 2001, the FASB issued Statement of Financial
Accounting
Standards No.
141, Business Combinations, which supersedes Accounting Principles Board (APB)
Opinion No. 16, Business Combinations. SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations and modifies the
application of the purchase accounting method. The elimination of the pooling-of-interests
method is effective for transactions initiated after June 30, 2001. The
remaining provisions of SFAS 141 will be effective for transactions accounted for
using the purchase method that are completed after June 30, 2001. Since our merger
with The Quaker Oats Company is accounted for as a pooling-of-interests and
was initiated in December 2000, this Statement will not
have an impact on our consolidated financial statements.
In July 2001, the FASB also issued Statement of
Financial Accounting Standards No. 142, Goodwill and Intangible Assets which
supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 eliminates the current
requirement to amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the impairment
testing and recognition for goodwill and intangible assets. SFAS 142 will apply to
existing goodwill and intangible assets as well as to transactions completed after the
Statement’s effective date. SFAS 142 is effective for 2002. We are currently
assessing the Statement and the impact that
adoption will have on our consolidated financial statements.
-18-
Market and Other Risk Factors
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:
In the normal course of business, we manage these risks
through a
variety of strategies, including the use of hedging
transactions, executed in accordance with our policies. Our hedging transactions include, but are
not limited to, the
use of various derivative financial and commodity instruments. As a matter of policy, we do
not use derivative
instruments unless there is an underlying exposure. We do not use derivative instruments for
trading or speculative
purposes.
Commodity Prices
We are subject to market risk with respect to the cost of
commodities because our ability to recover increased costs through higher pricing may be limited by
the competitive environment in which we operate. We manage this risk primarily through the use of
fixed-price purchase orders, pricing agreements, geographic diversity and derivative instruments.
Derivative instruments, including futures, options and swaps, are used to hedge fluctuations in
prices of a portion of anticipated commodity purchases, primarily vegetable oil, corn, oats,
natural gas and fuel. Our use of derivative instruments is not significant to our commodity purchases.
Our commodity futures positions were $52 million at
December 30,
2000 and $177 million at December 25, 1999. Our commodity futures position resulted in a net
unrealized gain of $3 million at December 30, 2000 and a net unrealized loss of $7 million at December
25, 1999. We estimate that a 10% decline in commodity prices would have reduced the 2000 unrealized
net gain by $6 million and increased the 1999 unrealized net loss by $19 million. Any change in the
value of our derivative instruments would be substantially offset by an opposite change in the
value of the underlying hedged items.
Foreign Exchange
International operations constitute about 21% of our 2000
and 19%
of our 1999 business segment operating profit. Operating in international markets involves
exposure to movements in foreign exchange rates, primarily the Mexican peso, British pound, Canadian
dollar, euro and Brazilian real, which principally impact the translation of our international
operating profit into U.S. dollars.
On occasion, we may enter into derivative financial
instruments, as
necessary, to reduce the effect of foreign exchange
rate changes. We manage the use of foreign exchange derivatives centrally. At December 30,
2000, we had forward
contracts to exchange foreign currencies with an aggregate notional amount of $344 million, with
$336 million relating
to contracts to exchange British pounds for U.S. dollars. Unrealized losses on forward contracts
were $9 million at
December 30, 2000. We estimate that an unfavorable 10% change in the exchange rate would have
increased the 2000
unrealized losses by $35 million. Any change in the value of our derivative instruments would be
substantially offset by
an opposite change in the value of the underlying hedged items. Forward contracts outstanding at
December 25, 1999 were
not material to the financial statements.
-19-
Interest Rates
We centrally manage our debt and investment portfolios
considering
investment opportunities and risks, tax consequences
and overall financing strategies. We use interest rate and currency swaps to effectively change the
interest rate and
currency of specific debt issuances, with the objective of reducing our overall borrowing
costs. These swaps are
entered into concurrently with the issuance of the debt that they are intended to modify. The notional
amount, interest
payment and maturity dates of the swaps match the principal, interest payment and maturity dates of
the related debt.
Accordingly, any market risk or opportunity associated with these swaps is substantially offset by
the opposite market
impact on the related debt.
Our investment portfolios primarily consist of cash
equivalents and
short-term marketable securities. Accordingly, the
carrying amounts approximate market value.
Assuming year-end 2000 and 1999 variable rate debt and investment levels, a one-point increase in
interest rates would
have increased net interest expense by $9 million in 2000 and $14 million in 1999. The change in
this impact from 1999
resulted from decreased variable rate debt levels and increased investment levels at year-end 2000.
This sensitivity
analysis includes the impact of existing interest rate and currency swaps.
Euro Conversion
On January 1, 1999, 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
is 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 are executing 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 end of 2001 if not already addressed in
conjunction with other
system or process initiatives. The system and equipment conversion costs are not material.
Due to numerous
uncertainties, we cannot reasonably estimate the long-term effects one common currency may have
on pricing and the
resulting impact, if any, on financial condition or results of operations.
-20-
RESULTS OF OPERATIONS
General
In the discussions below, the year-over-year dollar change in unit sales
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.
Comparable results discussed below exclude the impact of the fifty-third
week in 2000, impairment and restructuring charges, the gain
on the bottling transactions in 1999, various Quaker one-time
charges and Quaker divested businesses and reflect the impact of
certain reclassifications and tax items in all periods presented.
Comparable net sales and operating profit, referred to as new
PepsiCo, also present the deconsolidation of our bottling
operations as if it had occurred at the beginning of 1998.
Tropicana results are included subsequent to its acquisition in
1998.
Consolidated Review
Net Sales
In 2000, comparable net sales increased 8%. This increase is primarily due to volume gains and
effective net pricing of
Worldwide Snacks, Pepsi-Cola North America and PepsiCo Beverages International. These increases were
partially offset by
a net unfavorable foreign currency impact, primarily in Europe, which reduced comparable net
sales by 1 percentage
point. The fifty-third week enhanced reported net sales by 1 percentage point.
In 1999, comparable net sales increased 12%. This increase primarily reflects the inclusion of
Tropicana for the full
year in 1999, volume gains in Worldwide Snacks and higher effective net pricing in Worldwide Snacks
and Pepsi-Cola North
America. The inclusion of Tropicana for the full year in 1999 contributed 6 percentage points
of growth. These
advances were partially offset by a net unfavorable foreign currency impact, primarily in Brazil and
Mexico, which reduced
comparable net sales growth by nearly 2 percentage points. Reported net sales decreased 8%
reflecting the bottling
deconsolidation, partially offset by the inclusion of Tropicana for the full year in 1999.
Volume
Servings are based on U.S. Food and Drug Administration guidelines
for single serving sizes of our products.
Total servings increased 5% in 2000 compared to 1999 driven by our
international divisions, as well as contributions from Frito-Lay
North America and Gatorade/Tropicana North America.
Total servings increased 2% in 1999 compared to 1998 due to volume
growth of Worldwide Snacks and of Pepsi-Cola North America.
-21- Operating Profit and Margin
In 2000, comparable operating profit margin increased 0.8
percentage points primarily
reflecting the favorable margin
impact of the higher effective net pricing and increased volume. These improvements were partially
offset by the margin
impact of increases in selling and distribution expenses primarily in Frito-Lay International,
advertising and marketing
expenses and general and administrative expenses.
In 1999, comparable operating profit margin was flat. The
margin
impact of the higher
effective net pricing was offset by the
negative margin impact of Tropicana for a full year in 1999, increased general and administrative
expenses and increased
advertising and marketing expenses.
Bottling Equity Income
Bottling equity income includes our share of the net earnings
or
losses from our bottling equity investments. From time
to time, we may increase or dispose of particular bottling investments. Any gains or losses from
disposals, as well as
other transactions related to our bottling investments, are reflected in equity income.
In 2000, net bottling equity income was $130 million. The
$18
million favorable impact of an accounting change by PBG
was offset by our share of restructuring actions in certain other bottling affiliates and the net
loss from changes in
our equity ownership interests. The fifty-third week in 2000 enhanced reported net bottling equity
income by $5 million.
In 1999, bottling equity income of $83 million reflects
the
equity income of our previously consolidated bottling
operations from the applicable transaction closing dates and the equity income or loss of other
unconsolidated bottling
affiliates for the second, third and fourth quarters.
Gain on Bottling Transactions
The 1999 gain on bottling transactions of $1.0 billion ($270
million
after-tax or $0.15 per share) relates to the second
quarter PBG and Whitman bottling transactions. The PBG transaction resulted in a pre-tax gain of
$1.0 billion ($476
million after-tax or $0.26 per share) in the second quarter. The majority of the taxes are
expected to be deferred
indefinitely. The Whitman transaction resulted in an after-tax loss to us of $206 million or $0.11
per share. The 1999
PepCom transaction was accounted for as a nonmonetary exchange for book purposes. However, a portion
of the transaction
was taxable which resulted in income tax expense of $25 million or $0.01 per share. The 1999 Pohlad
transaction was
structured as a fair value exchange with no resulting gain or loss.
-22-
Interest Expense, net
In 2000,
comparable interest expense declined 36% reflecting
significantly lower average debt levels, partially offset by higher
average interest rates. Lower average debt levels reflect the
third quarter 1999 repayment of borrowings used to finance the
Tropicana acquisition and the absence of the financing related to
the Pepsi Bottling Group. Comparable interest income declined 51%
primarily due to lower average investment balances. The fifty-third
week increased net interest expense by $3 million. Reported
interest income in 2000 and 1999 includes gains or losses from the
equity derivative contracts that, in connection with the 2001
adoption of the new accounting standard on derivative instruments,
are now classified in selling, general and administrative expenses.
In 1999, comparable interest expense decreased 9% due to lower
average interest rates on slightly lower average debt
levels. Interest income increased 59% primarily due to higher
average investment balances, partially offset by lower average
interest rates on these balances. The higher average investment
balances primarily result from the first quarter proceeds received
from PBG as settlement of pre-existing intercompany balances.
Reported interest income in 1999 includes gains or losses from the
equity derivative contracts as described above.
Provision for Income Taxes
In 2000, the comparable effective tax rate remained nearly
flat.
The reported effective tax rate decreased 9 percentage
points primarily as a result of the 1999 bottling transactions.
In 1999, the comparable effective tax rate increased 1 percentage point primarily from the
absence in 1999 of the
settlement in 1998 of prior years’ audit issues offset by the benefit of proportionately lower
bottling income. The
reported effective tax rate increased 27 percentage points primarily as a result of the bottling
transactions and the
absence in 1999 of the 1998 income tax benefit relating to our concentrate operations in Puerto Rico.
-23-
Net Income and Net Income Per Common Share - Assuming Dilution
In 2000, comparable net income increased 17% and the related net income per common share increased 18%
reflecting higher
operating profit and lower net interest expense. The increase in net income per common share also
reflects the benefit
from a 1.4% reduction in average shares outstanding assuming dilution.
In 1999, comparable net income increased 7% and the related net income per common share increased
9% due to increased
operating profit and a decrease in net interest expense, partially offset by a higher effective tax
rate. Net income per
common share also benefited from a 1.7% reduction in average shares outstanding assuming dilution.
Business Segments
Additional information concerning our operating segments is presented in Note 21.
Worldwide Snacks
Worldwide Snacks primarily include our salty, sweet and grain-based snack businesses. Products
manufactured and sold
include Lay’s and Ruffles potato chips, Doritos and Tostitos tortilla chips, Cheetos cheese-
flavored snacks, Fritos corn
chips, a variety of dips and salsas, Rold Gold pretzels, Quaker Chewy granola bars, Grandma’s
cookies, Oberto’s meat
snacks and Cracker Jack candy coated popcorn. Frito-Lay International includes Sabritas snack
foods and Alegro and
Gamesa sweet snacks in Mexico, Walkers snack foods in the United Kingdom and Smith’s
snack foods in Australia.
Frito-Lay International also includes non-snack products, including cereals, that are not material.
Volume growth is reported on a system-wide basis which includes joint ventures.
- -24-
Frito-Lay North America
2000 vs. 1999
Comparable net sales increased 7% primarily due to volume gains and higher effective net pricing.
Sales of our new
Snack Kit and Snack Mix products and Oberto’s natural beef jerky snacks accounted for almost
30% of this growth. The
fifty-third week enhanced reported net sales by 2 percentage points.
Pound volume advanced 5% excluding the impact of the fifty-third week. This growth was primarily
driven by most of our
core brands, excluding the low-fat and no-fat versions, and by our new Snack Kit products. The
growth in core brands
was led by solid single-digit growth in Lay’s brand potato chips, Cheetos brand cheese puffs
and Ruffles brand potato
chips, as well as double-digit growth in Tostitos brand tortilla chips. These gains were partially
offset by continued
declines in WOW! brand products. Pound volume growth including the fifty-third week was 7%.
Comparable operating profit increased 12% primarily reflecting the higher volume, the higher
effective net pricing and
reduced vegetable oil costs, partially offset by higher energy and fuel costs. Advertising and
marketing expenses grew
at a slightly slower rate than sales. The margin impact of these favorable factors contributed
to the comparable
operating profit margin improvement of 0.9 percentage points. The fifty-third week enhanced reported
operating profit
growth by 2 percentage points.
1999 vs. 1998
Net sales grew 5% due to volume gains and higher effective net pricing.
Pound volume advanced 4%. The advance was led by high single-digit growth in our core corn
products, excluding the
low-fat and no-fat versions, mid single-digit growth in Lay’s brand potato chips and significant
growth in Cracker Jack
brand products and branded dips. Volume declines in our WOW!, "Baked" Lay’s and "Baked"
Tostitos brand products
partially offset these gains.
Operating profit increased 11% reflecting the higher volume, the higher effective net pricing and
reduced commodity
costs, partially offset by higher advertising and marketing expenses. Advertising and marketing
expenses grew at a
faster rate than sales due primarily to increased promotional allowances.
-25-
Frito-Lay International
2000 vs. 1999
Comparable net sales increased 13% primarily driven by volume growth at Sabritas in Mexico,
Walkers in the United
Kingdom, and in Turkey, largely due to promotional programs, and effective net pricing at
Gamesa and Sabritas in
Mexico. The net impact from acquisitions/divestitures contributed 2 percentage points to sales
growth. Weaker foreign
currencies, primarily in the United Kingdom and Australia, decreased net sales by 3 percentage points.
Kilo volume increased 10% excluding the impact of the fifty-third week. This growth was
primarily driven by a 13%
increase in salty snack kilos and a 9% increase in other non-snack food kilos. The salty snack
growth was led by
double-digit increases at Sabritas, our European and Latin American joint ventures and Walkers.
The other non-snack
food growth was led by our business in Brazil. Acquisitions did not significantly impact the kilo
growth. Kilo volume
growth including the fifty-third week was 11%.
Comparable operating profit grew 17% reflecting strong operating performances at Sabritas, Gamesa
and in Turkey. The
net impact from acquisitions/divestitures decreased operating profit by 3 percentage points. Weaker
foreign currencies,
primarily in the United Kingdom, decreased operating profit by 2 percentage points.
Supplemental Computation of Ratio of Earnings to Fixed Charges (a)
Years Ended December 30, 2000, December 25, 1999, December 26,
1998,
December 27, 1997 and December 28, 1996
(in millions except ratio amounts)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Earnings:
Income from continuing operations
before income taxes and cumulative
effect of accounting changes ................. $3,761 $4,275 $2,660 $1,245 $1,982
Unconsolidated affiliates interests, net ....... (90) (69) 28 15 272
Amortization of capitalized interest ........... 9 10 8 10 7
Interest expense ............................... 272 421 461 560 669
Interest portion of net rent expense (b) ....... 57 46 60 55 60
------ ------ ------ ------ ------
Earnings available for fixed charges ........... $4,009 $4,683 $3,217 $1,885 $2,990
====== ====== ====== ====== ======
Fixed Charges:
Interest expense ............................... $ 272 $ 421 $ 461 $ 560 $ 669
Capitalized interest ........................... 7 10 12 22 15
Interest portion of net rent expense (b) ....... 57 46 60 55 60
------ ------ ------ ------ ------
Total fixed charges ....................... $ 336 $ 477 $ 533 $ 637 $ 744
====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges (c) ......... 11.91 9.82 6.03 2.96 4.02
====== ====== ====== ====== ======
(a)
Based on unrounded amounts. (b) One-third of net rent expense is the portion deemed
representative of the interest factor. (c)
Includes the impact of the 1999 gain on the bottling
transactions of $1 billion, the $1.4 billion loss on a business
divestiture in 1997, and asset impairment and restructuring charges
of $184 million in 2000, $73 million in 1999, $482 million in 1998,
$331 million in 1997 and $593 million in 1996. Excluding the gain
in 1999, the loss in 1997, and the charges for all years, the ratio
of earnings to fixed charges would have been 12.46 in 2000, 7.87 in
1999, 6.93 in 1998, 5.61 in 1997 and 4.80 in 1996.
- 7 -
Supplemental Computation of Ratio of Earnings to Fixed Charges (a)
(in millions except ratio amounts, unaudited)
24 Weeks Ended
-----------------
6/16/01 6/10/00
------- -------
Earnings:
Income before income taxes ............................ $2,011 $1,602
Unconsolidated affiliates interests, net .............. (70) (48)
Amortization of capitalized interest .................. 5 4
Interest expense ...................................... 105 125
Interest portion of rent expense (b) .................. 28 21
------ ------
Earnings available for fixed charges ................ $2,079 $1,704
====== ======
Fixed Charges:
Interest expense ...................................... $ 105 $ 125
Capitalized interest .................................. 1 4
Interest portion of rent expense (b) .................. 28 21
------ ------
Total fixed charges ................................. $ 134 $ 150
====== ======
Ratio of Earnings to Fixed Charges .................... 15.52 11.32
====== ======
(a)
Based on unrounded amounts. (b) One-third of net rent expense is the portion deemed
representative of the interest factor.
Note: Amounts include the impact of asset
impairment and
restructuring charges of $8 in 2001 and $172 in 2000. Excluding
these charges, the ratio of earnings to fixed charges would have
been 15.58 for the 24 weeks ended June 16, 2001 and 12.46 for the
24 weeks ended June 10, 2000.
- 8 -
PepsiCo, Inc.
Description
Registration 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
$500,000,000 Capital Stock, 1 2/3 cents par value
333-56302 Form S-4
330,000,000 Shares of Common Stock, 1 2/3 cents par value
and 840,582 Shares of Convertible Stock, no par value
333-53436
Form S-8
PepsiCo SharePower Stock Option Plan
33-35602,
33-29037,
33-42058, 33-51496, 33-54731 & 33-
661501988 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
PepsiCo 401(K) Plan
333-89265
PepsiCo Puerto Rico 1165(e) Plan
333-56524
Retirement Savings and Investment Plan for Union Employees of
Tropicana Products, Inc. and Affiliates 333-65992
The Quaker Long Term Incentive Plan of 1990, The Quaker Long
Term Incentive Plan of 1999 and The Quaker Oats Company
Stock Option Plan for Outside Directors 333-66632
The Quaker 401(k) Plan for Salaried Employees and The Quaker
401(k) Plan for Hourly Employees 333-66634
August 27, 2001
-9-
PepsiCo, Inc.
Description
Registration 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
$500,000,000 Capital Stock, 1 2/3 cents par value
333-56302 Form S-4
330,000,000 Shares of Common Stock, 1 2/3 cents par value
and 840,582 Shares of Convertible Stock, no par value
333-53436 Form S-8
PepsiCo SharePower Stock Option Plan
33-35602,
33-29037,
33-42058, 33-51496, 33-54731 & 33-
661501988 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
PepsiCo 401(K) Plan
333-89265
PepsiCo Puerto Rico 1165(e) Plan 333-56524
Retirement Savings and Investment Plan for Union Employees of
Tropicana Products, Inc. and Affiliates 333-65992
The Quaker Long Term Incentive Plan of 1990, The Quaker Long
Term Incentive Plan of 1999 and The Quaker Oats Company
Stock Option Plan for Outside Directors 333-66632
The Quaker 401(k) Plan for Salaried Employees and The Quaker
401(k) Plan for Hourly Employees 333-66634
August 27, 2001
- -10-
August 27, 2001
- -11-
Management’s Discussion and
Analysis of Results of Operations and Financial Condition
(tabular dollars in millions except per share
amounts)Cautionary Statements
INTRODUCTION TO OUR BUSINESS
24 Weeks
Ended
June 16, 2001 2000 1999 1998
- ----------------------------------------------------------------------------------
Net Sales:
PepsiCo............... $ 9,820 $20,438 $20,367 $22,348
Quaker................ 2,741 5,041 4,726 4,843
Adjustments .......... (518) - - -
------------ ---------- --------- ----------
Combined................ $12,043 $25,479 $25,093 $27,191
============ ========== ========= ==========
Net Income:
PepsiCo............... $ 1,150 $ 2,183 $ 2,050 $ 1,993
Quaker................ 279 360 455 285
Adjustments (a)....... (61) - - -
------------ ---------- --------- ----------
Combined................ $ 1,368 $ 2,543 $ 2,505 $ 2,278
============ ========== ========= ==========
2000 1999 1998
- ------------------------------------------------------------------------------------
Asset impairment charges
- ------------------------
Held and used in the business
Property, plant and equipment..... $ 125 $ 8 $ 190
Intangible assets................. - - 41
Other assets...................... - - 8
Held for disposal/abandonment
Property, plant and equipment..... - 34 83
Intangible assets................. - - 65
---------- ---------- ----------
Total asset impairment......... 125 42 387
Restructuring charges
- ---------------------
Employee related costs............... 41 20 66
Other charges........................ 18 11 29
---------- ---------- ----------
Total restructuring............ 59 31 95
---------- ---------- ----------
Total................................ $ 184 $ 73 $ 482
========== ========== ==========
After-tax....................... $ 111 $ 45 $ 379
========== ========== ==========
Per share....................... $0.06 $0.02 $0.21
========== ========== ==========
The 2000 asset impairment and restructuring charge of $184 million related to
the
closure of two cereal manufacturing
facilities and two Quaker distribution centers in the United States. This charge was part of a three-
year supply chain
reconfiguration project announced in 1999 to upgrade and optimize Quaker’s North American
manufacturing and distribution
capabilities.
The 1999 asset impairment and restructuring charges of $73 million were comprised
of the
following:
The 1998 asset impairment and restructuring charges of $482 million were comprised of the following:
An impairment charge of $88 million related to Quaker businesses
that
were divested. Charges of $40 million and $25
million were recognized related to the Continental Coffee and Nile Spice soup cup businesses,
which were divested in
1998 at a combined net gain of $2 million. In addition, a charge of $23 million was recognized
related to Quaker’s
Brazilian pasta business, which was divested in 1999 at a gain of $5 million.
% Change B/(W)
--------------
2000 1999 1998 2000 1999
- --------------------------------------------------------------------------------
Reported $25,479 $25,093 $27,191 2 (8)
Comparable $25,185 $23,385 $20,859 8 12
- --------------------------------------------------------------------------------
Change B/(W)
-----------------
2000 1999 1998 2000 1999
- ------------------------------------------------------------------------------------
Reported
Operating profit $3,818 $3,483 $3,036 10% 15%
Operating profit margin 15.0% 13.9% 11.2% 1.1 2.7
Comparable
Operating profit $3,957 $3,487 $3,109 13% 12%
Operating profit margin 15.7% 14.9% 14.9% 0.8 -
- -------------------------------------------------------------------------------------
% Change B/(W)
-----------------
2000 1999 1998 2000 1999
- ----------------------------------------------------------------------------------------
Reported
Interest expense $ (272) $ (421) $ (461) 35 9
Interest income 85 130 85 (34) 53
--------- --------- ----------
Interest expense, net $ (187) $ (291) $ (376) 36 22
========= ========= ==========
Comparable
Interest expense $ (268) $ (421) $ (461) 36 9
Interest income 66 136 85 (51) 59
--------- --------- ----------
Interest expense, net $ (202) $ (285) $ (376) 29 24
========= ========= ==========
- ----------------------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------
Reported
Provision for income taxes $1,218 $1,770 $382
Effective tax rate 32.4% 41.4% 14.4%
Comparable
Provision for income taxes $1,270 $1,099 $982
Effective tax rate 32.7% 32.9% 31.9%
- ----------------------------------------------------------------------------------
% Change B/(W)
--------------
2000 1999 1998 2000 1999
- -----------------------------------------------------------------------------------------
Net income
Reported $2,543 $2,505 $2,278 2 10
Comparable $2,610 $2,239 $2,097 17 7
Net income per common
share - assuming dilution
Reported $1.42 $1.38 $1.23 3 12
Comparable $1.46 $1.23 $1.13 18 9
- -----------------------------------------------------------------------------------------
% Change B/(W)
-----------------
2000 1999 1998 2000 1999
- -------------------------------------------------------------------------------------
Net sales
Reported $8,971 $8,232 $7,821 9 5
Comparable $8,807 $8,232 $7,821 7 5
Operating profit
Reported $1,915 $1,679 $1,515 14 11
Comparable $1,875 $1,679 $1,515 12 11
- -------------------------------------------------------------------------------------
% Change B/(W)
---------------
2000 1999 1998 2000 1999
- ----------------------------------------------------------------------------
Net sales
Reported $4,875 $4,274 $4,077 14 5
Comparable $4,814 $4,274 $4,077 13 5
Operating profit
Reported $ 546 $ 455 $ 397 20 15
Comparable $ 536 $ 455 $ 397 17 15
- ----------------------------------------------------------------------------