-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CO9nNmDqpoMM26GETuXfKYypRYdCrQz/dM92y5eVeyyN3/y5ClD55mE4MurWyUVd jhVtHxm7A6KMWy3XtsLQTA== 0000077476-97-000011.txt : 19971107 0000077476-97-000011.hdr.sgml : 19971107 ACCESSION NUMBER: 0000077476-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970322 FILED AS OF DATE: 19970505 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEPSICO INC CENTRAL INDEX KEY: 0000077476 STANDARD INDUSTRIAL CLASSIFICATION: 2080 IRS NUMBER: 131584302 STATE OF INCORPORATION: NC FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01183 FILM NUMBER: 97595677 BUSINESS ADDRESS: STREET 1: 700 ANDERSON HILL RD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9142532000 MAIL ADDRESS: STREET 1: 700 ANDERSON HILL ROAD CITY: PURCHASE STATE: NY ZIP: 10577-1444 FORMER COMPANY: FORMER CONFORMED NAME: PEPSI COLA CO DATE OF NAME CHANGE: 19700903 10-Q 1 QUARTERLY REPORT 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 March 22, 1997 (12 Weeks) 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 PEPSICO, INC. (Exact name of registrant as specified in its charter) North Carolina 13-1584302 (State or other jurisdiction of (I.R.S. Employer incorporation 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 April 18, 1997: 1,532,358,684 PEPSICO, INC. AND SUBSIDIARIES INDEX Page No. Part I Financial Information: Condensed Consolidated Statement of Income - 12 weeks ended March 22, 1997 and March 23, 1996 2 Condensed Consolidated Statement of Cash Flows - 12 weeks ended March 22, 1997 and March 23, 1996 3 Condensed Consolidated Balance Sheet - March 22, 1997 and December 28, 1996 4-5 Notes to Condensed Consolidated Financial Statements 6-7 Management's Analysis of Operations, Cash Flows and Financial Condition 8-18 Independent Accountants' Review Report 19 Part II Other Information and Signatures 20-21 Exhibit 11 Computation of Net Income Per Share of Capital Stock - Primary and Fully Diluted 22-23 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges 24 Exhibit 15 Letter from KPMG Peat Marwick LLP regarding Unaudited Interim Financial Information (Accountants' Acknowledgment) 25-26 Exhibit 27 Financial Data Schedule 27 - - -1- PART I - FINANCIAL INFORMATION PEPSICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (in millions except per share amounts, unaudited) 12 Weeks Ended 3/22/97 3/23/96 Net Sales $6,702 $6,554 Costs and Expenses, net Cost of sales 3,257 3,206 Selling, general and administrative expenses 2,617 2,549 Amortization of intangible assets 62 67 Unusual disposal charge - 26 Operating Profit 766 706 Interest expense (123) (141) Interest income 13 23 Income Before Income Taxes 656 588 Provision for Income Taxes 229 194 Net Income $ 427 $ 394 Net Income Per Share $ 0.27 $ 0.24 Cash Dividends Declared Per Share $0.115 $ 0.10 Average Shares Outstanding Used To Calculate Net Income Per Share 1,583 1,619 See accompanying notes. - - -2- PEPSICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in millions, unaudited) 12 Weeks Ended 3/22/97 3/23/96 Cash Flows - Operating Activities Net income $ 427 $ 394 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 362 374 Unusual disposal charge - 26 Deferred income taxes 7 6 Other noncash charges and credits, net 30 84 Changes in operating working capital, excluding effects of acquisitions Accounts and notes receivable 66 15 Inventories 22 (6) Prepaid expenses, deferred income taxes and other current assets (201) (73) Accounts payable and other current liabilities (668) (414) Income taxes payable 155 62 Net change in operating working capital (626) (416) Net Cash Provided by Operating Activities 200 468 Cash Flows - Investing Activities Capital spending (360) (370) Acquisitions and investments in unconsolidated affiliates - (14) Refranchising of restaurants 40 101 Sales of property, plant and equipment 31 13 Sales of businesses 72 3 Short-term investments, by original maturity More than three months - purchases (25) (24) More than three months - maturities 114 45 Three months or less, net (6) 33 Other, net 27 (43) Net Cash Used for Investing Activities (107) (256) Cash Flows - Financing Activities Proceeds from issuances of long-term debt - 606 Payments of long-term debt (928) (156) Short-term borrowings, by original maturity More than three months - proceeds 37 248 More than three months - payments (137) (956) Three months or less, net 1,117 482 Proceeds from formation of a REIT 296 - Cash dividends paid (172) (158) Share repurchases (378) (331) Proceeds from exercises of stock options 72 110 Other, net (6) (11) Net Cash Used for Financing Activities (99) (166) Effect of Exchange Rate Changes on Cash and Cash Equivalents (1) (1) Net (Decrease) Increase in Cash and Cash Equivalents (7) 45 Cash and Cash Equivalents - Beginning of year 447 382 Cash and Cash Equivalents - End of period $ 440 $ 427 See accompanying notes. - - -3- PEPSICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (in millions) ASSETS Unaudited 3/22/97 12/28/96 Current Assets Cash and cash equivalents $ 440 $ 447 Short-term investments, at cost 272 339 712 786 Accounts and notes receivable, less allowance: 3/97 - $173, 12/96 - $183 2,344 2,516 Inventories Raw materials and supplies 487 571 Finished goods 522 467 1,009 1,038 Prepaid expenses, deferred income taxes and other current assets 987 799 Total Current Assets 5,052 5,139 Property, Plant and Equipment 17,869 17,840 Accumulated Depreciation (7,747) (7,649) 10,122 10,191 Intangible Assets, net 6,996 7,136 Investments in Unconsolidated Affiliates 1,364 1,375 Other Assets 626 671 Total Assets $24,160 $24,512 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 3/22/97 12/28/96 Current Liabilities Accounts payable and other current liabilities $ 4,279 $ 4,626 Income taxes payable 606 487 Short-term borrowings 486 26 Total Current Liabilities 5,371 5,139 Long-term Debt 7,951 8,439 Other Liabilities 2,568 2,533 Deferred Income Taxes 1,778 1,778 Shareholders' Equity Capital stock, par value 1 2/3 cents per share: authorized 3,600 shares, issued 3/97 and 12/96 - 1,726 shares 29 29 Capital in excess of par value 1,220 1,201 Retained earnings 9,434 9,184 Currency translation adjustment (882) (768) 9,801 9,646 Less: Treasury Stock, at Cost: 3/97 - 187 shares, 12/96 - 181 shares (3,309) (3,023) Total Shareholders' Equity 6,492 6,623 Total Liabilities and Shareholders' Equity $24,160 $24,512 See accompanying notes. - - -5- PEPSICO, INC. AND SUBSIDIARIES (unaudited) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) The Condensed Consolidated Balance Sheet at March 22, 1997 and the Condensed Consolidated Statements of Income and Cash Flows for the 12 weeks ended March 22, 1997 and March 23, 1996 have not been audited, but have been prepared in conformity with the accounting principles applied in our 1996 Annual Report on Form 10-K (Annual Report) for the year ended December 28, 1996. In our opinion, this information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 12 weeks are not necessarily indicative of the results expected for the year. Certain reclassifications were made to prior year's first quarter amounts to conform with the Annual Report presentation. (2) The non-core U.S. restaurant businesses held for disposal contributed $103 million and $67 million to net sales in 1997 and 1996, respectively. Excluding the unusual disposal charge in 1996, operating results for the non-core U.S. restaurant businesses were $5 million of profit in 1997 compared to a $6 million loss in 1996. (3) In the first quarter of 1997 we sold East Side Mario's (ESM), one of our non-core U.S. restaurant businesses, and our investment in a non-core International snack food joint venture with Gerber for $72 million. The proceeds from the sale of ESM approximated its carrying amount. The sale of the non-core investment resulted in a gain of $22 million ($2 million loss after-tax). (4) Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which supersedes APB Opinion No. 15, "Earnings per Share," was issued in February, 1997. SFAS 128 requires dual presentation of basic and diluted earnings per share (EPS) for complex capital structures on the face of the income statement. Basic EPS is computed by dividing income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. SFAS 128 is required to be adopted for year-end 1997; earlier application is not permitted. We do not expect the basic or diluted EPS measured under SFAS 128 to be materially different than our primary or fully-diluted EPS measured under APB No. 15. We will present both EPS measures on the face of the income statement. Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure," was issued in February, 1997. We do not expect it to result in any substantive change in our disclosure. (5) Significant debt repayments (exclusive of commercial paper), including the related effects of any interest rate and/or foreign currency swaps entered into concurrently with the debt, are listed below. As disclosed in our Annual Report, we enter into the swaps to effectively change the interest rate and currency of specific debt issuances with the objective of reducing borrowing costs. - - -6- Principal Interest Rate 12 weeks ended March 22, 1997: $678 * 250 5.0% $928 Subsequent to March 22, 1997: $263 * 15 14.0% $278 * Variable rate debt indexed to either LIBOR or commercial paper rates. (6) At March 22, 1997, $3.5 billion of short-term borrowings were included in the Condensed Consolidated Balance Sheet under the caption "Long-term Debt", reflecting our intent and ability, through the existence of unused revolving credit facilities, to refinance these borrowings on a long-term basis. At March 22, 1997, we had unused revolving credit facilities covering potential borrowings aggregating $3.5 billion of which $0.2 billion expire in January 2001 and $3.3 billion in 2002. (7) Through the first quarter ended March 22, 1997, we repurchased 11.7 million shares of our capital stock at a cost of $378 million. For the period March 23, 1997 through May 1, 1997, we repurchased 9.0 million shares of our capital stock at a cost of $294 million. (8) Supplemental Cash Flow Information (in millions) 12 Weeks Ended 3/22/97 3/23/96 Cash Flow Data Interest paid $127 $162 Income taxes paid 70 61 - - -7- MANAGEMENT'S ANALYSIS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION In the following discussion, volume is the estimated dollar effect of the year-over-year change in case sales by company-owned bottling operations and concentrate unit sales to franchisees in beverages, pound or kilo sales of salty and sweet snacks in snack foods and customer transaction counts (i.e., same store sales excluding the impact of effective pricing) in restaurants. Effective net pricing includes price increases/decreases and the effect of product, package and country mix. Our beverages and snack foods segments are reported on a North American basis (U.S. and Canada combined) and an International basis (all other international) while the restaurants segment is reported on a U.S. and international basis. Analysis of Consolidated Operations Net Sales 12 Weeks Ended % ($ in millions) 3/22/97 3/23/96 Change Net Sales $6,702 6,554 2 _______________________________________________________________________________ Worldwide net sales rose $148 million reflecting higher effective net pricing and net volume gains of $72 million. The higher effective net pricing was driven by worldwide snack foods and restaurants, partially offset by North American beverages. The volume gains were driven by worldwide snack foods and North American beverages, partially offset by declines in U.S. restaurants and International beverages. In addition, the increase in sales benefited from the consolidation of California Pizza Kitchen at the end of the second quarter of 1996. The sales growth rate was reduced by one point as a result of our strategy to reduce our ownership of the restaurant system through selling company-operated restaurants to franchisees (refranchising) and closing underperforming restaurants. Cost of Sales 12 Weeks Ended ($ in millions) 3/22/97 3/23/96 Cost of sales $3,257 $3,206 As a percent of net sales 48.6% 48.9% _______________________________________________________________________________ Cost of sales as a percent of net sales decreased primarily due to the impact of higher pricing in North American snack foods and higher effective net pricing in international restaurants, coupled with the lower packaging costs in North American beverages. - - -8- Selling, General and Administrative Expenses (S,G&A) 12 Weeks Ended ($ in millions) 3/22/97 3/23/96 SG&A $2,617 $2,549 As a percent of net sales 39.0% 38.9% _______________________________________________________________________________ SG&A comprises selling and distribution expenses (S&D), advertising and marketing expenses (A&M), general and administrative expenses (G&A), other income and expense and equity income or loss from investments in unconsolidated affiliates. S&D grew faster than net sales, led by worldwide beverages. A&M declined due to reduced spending at International beverages. G&A grew significantly faster than sales driven by U.S. restaurants. Other income and expense included refranchising gains in excess of the costs of closing other restaurants (net refranchising gains) of $12 million ($7 million after-tax), compared to $46 million ($28 million after-tax or 0.02 per share) in 1996, and a 1997 gain of $22 million ($2 million loss after-tax) on a sale by International snack foods of a non- core joint venture investment. Equity income from our unconsolidated affiliates, compared to losses a year ago, primarily reflected the absence of losses from Buenos Aires Embotelladora S.A. (BAESA). Amortization of intangible assets declined 7% to $62 million because we stopped amortizing intangible assets associated with our non-core U.S. restaurants in 1997 because they are being held for disposal. The impact of restaurant refranchisings, restaurant closures and recurring restaurant impairment charges taken in 1996 also reduced 1997 amortization expense. Amortization expense reduced net income per share by $0.03 in 1997 and 1996. Unusual disposal charge of $26 million ($17 million after-tax or $0.01 per share) was associated with the 1996 decision to dispose of Hot'n Now. Operating Profit 12 Weeks Ended % ($ in millions) 3/22/97 3/23/96 Change Reported $766 $706 8 Ongoing* $766 $732 5 * Excluded the unusual disposal charge. ___________________________________________________________________________ Reported operating profit increased $60 million. Ongoing operating profit increased $34 million, primarily due to a combined ongoing segment operating profit increase of $40 million or 5%. The increase reflected volume gains of $24 million and higher franchise royalty revenues. The higher effective net pricing was substantially offset by increased costs. Ongoing segment operating profit growth was hampered by the lower net refranchising gains, partially offset by the gain on the sale of the non- core investment and the improved results from our unconsolidated - - -9- affiliates. Ongoing operating profit growth was moderated by increased net corporate costs, incurred primarily in connection with the pending spin-off of our core restaurant businesses. Interest Expense, net 12 Weeks Ended % ($ in millions) 3/22/97 3/23/96 Change Interest expense $(123) $(141) (13) Interest income 13 23 (43) Interest expense, net $(110) $(118) (7) _______________________________________________________________________________ The decline in interest expense, net, primarily reflected the net impact of lower average debt levels and interest rates partially offset by lower investment levels. The lower investment and debt levels are due to a 1996 change in the tax law which eliminated a tax exemption on investment income in Puerto Rico effective for us December 1, 1996. Accordingly, as our investments matured in Puerto Rico, the proceeds were repatriated and used to reduce debt. Provision for Income Taxes 12 Weeks Ended ($ in millions) 3/22/97 3/23/96 Provision for Income Taxes $229 $194 Effective tax rate 34.9% 33.0% _____________________________________________________________________________ The 1997 effective tax rate of 34.9% is composed of a full-year forecasted tax rate of about 36%, partially offset in the quarter by a one-time benefit from the reversal of a prior year valuation allowance related to a foreign deferred tax asset. The increase in the full-year effective tax rate is due to a reduction in lower-taxed foreign earnings coupled with a significantly higher effective tax rate on those foreign earnings. Net Income and Net Income Per Share 12 Weeks Ended ($ in millions except % per share amounts) 3/22/97 3/23/96 Change Reported Net Income $ 427 $ 394 8 Net Income Per Share $ .27 $ .24 13 Ongoing* Net Income $ 427 $ 411 4 Net Income Per Share $ .27 $ .25 8 Average Shares Outstanding Used to Calculate Net Income Per Share 1,583 1,619 (2) * Excluded the unusual disposal charge. ______________________________________________________________________________ - - -10- PEPSICO, INC. AND SUBSIDIARIES SUPPLEMENTAL SCHEDULE OF NET SALES AND OPERATING PROFIT (a) Management Basis ($ in millions except per share amount, unaudited) Net Sales Operating Profit 12 Weeks Ended % 12 Weeks Ended % 3/22/97 3/23/96 Change 3/22/97 3/23/96 Change Beverages (b) - - -N.A. (c) $1,591 $1,537 4 $264 $257 3 - - -Int'l 367 426 (14) (27) (10) NM 1,958 1,963 - 237 247 (4) Snack Foods - - -N.A. (c) 1,521 1,428 7 289 252 15 - - -Int'l (d) 709 628 13 99 73 36 2,230 2,056 8 388 325 19 Restaurants (e) - - -U.S. (f) 1,997 2,034 (2) 149 144 3 - - -Int'l 517 501 3 44 36 22 2,514 2,535 (1) 193 180 7 Combined segments $6,702 $6,554 2 818 752 9 Corporate (g) (52) (46) 13 Operating Profit $766 $706 8 NM - Not Meaningful NOTES: (a) This schedule should be read in conjunction with Management's Analysis beginning on page 12. (b) Prior year's results have been restated to conform with the current year presentation. (c) North America is composed of operations in the U.S. and Canada. (d) Included a gain in 1997 of $22 ($2 loss after-tax) from a sale of a non-core investment in a joint venture with Gerber. (e) Restaurant operating profit included the following: 1997 1996 Refranchising gains $ 16 $ 46 Store closure costs (4) - Net refranchising gains $ 12 $ 46 U.S. $ 13 $ 42 International (1) 4 $ 12 $ 46 (f) Included an unusual charge of $26 ($17 after-tax or $0.01 per share) in 1996 as a result of the decision to dispose of Hot'n Now. (g) Includes corporate headquarters expenses, minority interests, foreign exchange translation and transaction gains and losses and other items reported in Corporate. - - -11- Segments Of The Business Beverages 12 Weeks Ended % ($ in millions) 3/22/97 3/23/96 Change Net Sales N.A. $1,591 $1,537 4 Int'l 367 426 (14) $1,958 $1,963 - Operating Profit N.A. $ 264 $ 257 3 Int'l (27) (10) NM $ 237 $ 247 (4) NM - Not Meaningful ____________________________________________________________________________ System bottler case sales (BCS) of Pepsi Corporate brands is our standard volume measure. It represents company-owned brands as well as brands we have the right to produce, distribute and market nationally, and includes sales of packaged products and fountain syrup by company-owned and franchised bottlers. North America Sales for the quarter rose $54 million. The increase reflected volume growth of $94 million, led by packaged products. This gain was partially offset by lower effective net pricing, primarily the result of price decreases in take-home packaged products. BCS increased 6% reflecting double-digit growth by Mountain Dew and a solid increase in Brand Pepsi. Alternative beverages (non-carbonated soft drink products), led by Aquafina bottled water and Lipton Brisk, grew at a strong double-digit rate. Our concentrate shipments to franchisees grew significantly slower than their BCS growth rate. Profit grew $7 million or 3% on top of 18% growth last year. The profit growth reflected volume gains of $53 million and lower packaging costs, partially offset by the lower effective net pricing and increased S&D. S&D grew faster than sales and volume due to wage increases. Increased A&M were fully offset by lower administrative expenses, primarily reflecting the benefit of lapping the 1996 costs incurred in connection with national initiatives to upgrade information systems. A&M grew faster than sales but increased in line with volume. International Sales declined $59 million due to lower volume of $37 million and unfavorable currency translation. The volume decline primarily reflected lower concentrate shipments to franchisees. BCS decreased 3%. Excluding the impact of the loss of our Venezuelan bottler in August 1996, BCS declined about a half of a point. A double- digit decline in South America was partially offset by strong double-digit growth in China. Our concentrate shipments to franchisees declined at a significantly greater rate than the decline in their BCS. - - -12- Operating losses increased $17 million. The increase reflected the volume decline of $29 million and lapping a 1996 favorable settlement of a take-or-pay sales contract. These decreases were partially offset by reduced net equity losses from our unconsolidated affiliates, primarily the absence of losses from BAESA. Last year we recognized $8 million of equity losses from BAESA. In the current quarter, our fourth quarter 1996 restructuring generated about $4 million of the $50 million of savings expected in 1997. Beginning in 1997, we categorized Mexico as highly inflationary and, therefore, the U.S. dollar became the functional currency. Although difficult to measure, we believe the reported results of our operations in Mexico were not materially affected. - - -13- Snack Foods 12 Weeks Ended % ($ in millions) 3/22/97 3/23/96 Change Net Sales N.A. $1,521 $1,428 7 Int'l 709 628 13 $2,230 $2,056 8 Operating Profit N.A. $ 289 $ 252 15 Int'l 99 73 36 $ 388 $ 325 19 ___________________________________________________________________________ North America Sales grew $93 million. The sales increase reflected volume growth of $50 million and higher pricing taken across all core brands in late 1996. Sales increased in most core brands with low-fat and no-fat snacks accounting for about 30% of the sales growth. Pound volume advanced 4%. Low-fat and no-fat snacks contributed over 35% of the growth. Core brand growth, excluding their low-fat and no-fat versions, was led by strong double-digit growth in Lay's brand potato chips and Tostitos brand tortilla chips. Profit grew $37 million. The profit increase reflected the higher pricing, lower promotional price allowances and merchandising support and volume growth of $24 million. These gains were partially offset by increased manufacturing costs, S&D and administrative expenses. The increased manufacturing costs reflected higher capacity costs partially offset by lower packaging and commodity prices. An increased number of delivery routes over the prior year drove S&D, although S&D declined as a percentage of sales compared to 1996 as we improved system efficiency. Administrative expenses increased as a percentage of sales, reflecting a significant increase in investment spending to improve manufacturing and delivery systems. Advertising and marketing expenses were unchanged for the quarter. International Sales increased $81 million. The sales increase reflected higher effective net pricing, volume growth of $22 million and a favorable translation of the British Pound. Kilo growth is reported on a systemwide basis, which includes both consolidated businesses and unconsolidated affiliates operating for at least one year. Salty snack kilos rose 10%, while sweet snack kilos declined 12%. Operating profit increased $26 million or 36% reflecting the $22 million gain on the sale of an investment in a non-core Mexican joint venture with Gerber. The impact of the higher effective net pricing and volume gains of $5 million slightly exceeded inflation-driven cost increases, primarily in Mexico. Beginning in 1997, we categorized Mexico as highly inflationary and, therefore, the U.S. dollar became the functional currency. Although difficult to measure, we believe the reported results of our Mexican operations were not materially affected. - - -14- Restaurants The unit activity and operating results presented below include both the U.S. and international operations of Pizza Hut, Taco Bell and KFC. In addition, the U.S. information includes our non-core restaurant businesses consisting of California Pizza Kitchen (CPK), Chevys, D'Angelo Sandwich Shops (D'Angelo), East Side Mario's (ESM) (through February 19, 1997, see Note 3) and Hot'n Now (HNN) units. PepsiCo Food Systems is included in our U.S. operating results. 1997 Restaurant Unit Activity Company-Operated and Joint Venture U.S. International Worldwide December 28, 1996 9,662* 3,520 13,182 New Builds & Acquisitions 32 40 72 Refranchising & Licensing (82) (7) (89) Closures (244) (24) (268) Divestiture of ESM (14) - ( 14) March 22, 1997 9,354* 3,529 12,883 Units as a percent of the total system December 28, 1996 46% 41% 45% March 22, 1997 45% 41% 44% * Non-core restaurant units were 296 and 284 at December 28, 1996 and March 22, 1997, respectively. ___________________________________________________________________________ As a result of the above unit activity, coupled with net new points of distribution by our franchisees and licensees, our overall ownership percentage of total system units declined to 44% at the end of the quarter, driven by declines in the U.S. Total system units declined less than half a point from the end of 1996. Operating Results 12 Weeks Ended % ($ in millions) 3/22/97 3/23/96 Change Net Sales U.S. $1,997 $2,034 (2) Int'l 517 501 3 $2,514 $2,535 (1) Operating Profit Reported U.S. $ 149 $ 144 3 Int'l 44 36 22 $ 193 $ 180 7 Ongoing* U.S. $ 149 $ 170 (12) Int'l 44 36 22 $ 193 $ 206 (6) * Excluded a $26 charge in 1996 related to the decision to dispose of HNN. ___________________________________________________________________________ - - -15- U.S. Sales decreased $37 million. The decrease was driven by fewer company- operated units and reduced sales of $78 million as a result of our strategic initiative to refranchise units and close underperforming units. This decrease was partially offset by a $37 million increase in our non- core restaurant businesses, primarily as a result of the consolidation of CPK at the end of the second quarter of 1996. Combined same store sales were not a factor in the total sales decline as transaction declines of $54 million, primarily due to lapping the first quarter 1996 introduction of Triple Decker Pizza, were offset by higher effective net pricing. Same store sales at Pizza Hut decreased 8% reflecting fewer customer transactions. Same store sales increased 4% at Taco Bell reflecting the very successful Star Wars promotion, mix shifts into higher-priced products such as Border Select Combos and Fajita Wraps and higher pricing taken in late 1996. Same store sales at KFC also increased 4% due to the favorable impact of core products. Reported operating profit increased $5 million. Ongoing operating profit decreased $21 million due to lower net refranchising gains of $29 million, as summarized below, and increased labor costs. The increased labor costs were due to national customer service improvement initiatives and increased wages and benefits. The above effects were partially offset by the effect of combined same store sales, reflecting higher effective net pricing partially offset by transaction declines of $28 million, and income in our U.S. non-core restaurant businesses in 1997 compared to losses in 1996. About half of the improvement in our U.S. non-core restaurant businesses was due to stopping depreciation and amortization expense in 1997 because these businesses are being held for sale. Net Refranchising Gains/(Losses) 12 Weeks Ended ($ in millions) 3/22/97 3/23/96 Change Refranchising gains $ 16 $ 44 $ (28) Store closure costs (3) (2) (1) $ 13 $ 42 $ (29) International Sales increased $16 million due to higher effective net pricing, net additional company-operated units of $16 million and increased franchise royalty revenues. Sales growth was hampered by the effect of one less accounting period for Canada and Korea in 1997 to facilitate the quarterly closing process. Operating profit increased $8 million, reflecting the increased franchise royalty revenues. The positive impact of higher effective net pricing and net increases in company units of $4 million were offset by higher store operating costs, led by labor, and lower net refranchising gains of $5 million, as summarized below: Net Refranchising Gains/(Losses) 12 Weeks Ended ($ in millions) 3/22/97 3/23/96 Change Refranchising gains $ - $ 2 $ (2) Store closure costs (1) 2 (3) $ (1) $ 4 $ (5) -16- Cash Flows and Financial Condition Please refer to our 1996 Annual Report on Form 10-K for information regarding our liquidity. Net cash provided by operating activities decreased $268 million or 57% to $200 million. The decrease reflected an increase in operating working capital cash outflows of $210 million and a $58 million decline in income before noncash charges and credits. The increased cash used for operating working capital primarily reflected a greater reduction in Accounts payable and other current liabilities and a larger increase in Prepaid expenses, deferred income taxes and other current assets. The change in Accounts payable and other current liabilities was driven primarily by timing of payments. The increase in Prepaid expenses, deferred income taxes and other current assets reflected a 1997 premium prepayment for U.S. casualty insurance. A comparable premium prepayment was not made in 1996 because we were largely self-insured. These cash outflows were partially offset by faster growth in Income taxes payable. Net cash used for investing activities decreased $149 million or 58% to $107 million. The decline primarily reflected increased proceeds of $69 million in 1997 from the sale of businesses and a $70 million favorable swing in Other, net, composed of many small individual items. Lower proceeds from refranchising of restaurants of $61 million were offset by increased proceeds from other investing activities. Net cash used for financing activities declined $67 million or 40% to $99 million. We received cash proceeds of $296 million from the sale of preferred stock in a real estate investment trust (REIT) we established in 1997. These proceeds were partially offset by reduced proceeds from net debt activities of $135 million and from other financing activities. Our share repurchase activity was as follows: 12 Weeks Ended ($ and shares in millions) 3/22/97 3/23/96 Cost $ 378 $ 331 Number of shares repurchased 11.7 10.8 % of shares outstanding at beginning of year .8% .7% - - -17- Free cash flow is the primary measure we use internally to evaluate our cash flow performance. 12 Weeks Ended ($ in millions) 3/22/97 3/23/96 Net cash provided by operating activities $ 200 $ 468 Cash dividends paid (172) (158) Investing activities Capital spending (360) (370) Sales of businesses 72 3 Refranchising of restaurants 40 101 Sales of property, plant and equipment 31 13 Other, net 27 (43) Free cash flow $(162) 14 Free cash flow decreased $176 million, primarily reflecting the decline in net cash provided by operating activities partially offset by the favorable swing in Other, net. Our negative operating working capital position, which reflects the cash sales nature of our restaurant operations partially offset by our more working capital intensive packaged goods businesses, effectively provides additional capital for investment. Operating working capital, which excludes short-term investments and short-term borrowings, was a negative $105 million and $313 million at the end of the first quarter of 1997 and year-end 1996, respectively. The $208 million decline was primarily due to increased investments in working capital by North American beverages, worldwide restaurants and worldwide snack foods. The increase was primarily due to the U.S. prepaid casualty insurance premium coupled with a reduction in other current liabilities, primarily reflecting reduced promotions by North American beverages. These investments in working capital were partially offset by the minority interest associated with the REIT (see Cash Flow - Financing Activities on page 17) and increased Income taxes payable. Cautionary Statement From time to time, in written reports and oral statements, we discuss our expectations regarding future performance of the Company. These "forward- looking statements" are based on currently available competitive, financial and economic data and our operating plans. They are also inherently uncertain, and investors must recognize that events could turn out to be significantly different from what we had expected. - - -18- 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 March 22, 1997 and the related condensed consolidated statements of income and cash flows for the twelve weeks ended March 22, 1997 and March 23, 1996. 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 28, 1996, 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 4, 1997, 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 28, 1996, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Our report, referred to above, contains an explanatory paragraph that states that PepsiCo, Inc. in 1995 adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of," and in 1994 adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" and changed its method for calculating the market-related value of pension plan assets used in the determination of pension expense. KPMG Peat Marwick LLP New York, New York April 29, 1997 - - -19- PART II - OTHER INFORMATION AND SIGNATURES Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index Exhibit 11 - Computation of Net Income Per Share of Capital Stock - Primary and Fully Diluted Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges Exhibit 15 - Letter from KPMG Peat Marwick LLP regarding Unaudited Interim Financial Information (Accountants' Acknowledgment) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K We filed a Current Report on Form 8-K dated January 24, 1997 which among other items announced a plan to spin off our restaurant businesses to our shareholders as an independent publicly-traded company. We filed a Current Report on Form 8-K dated February 4, 1997 attaching our 1996 earnings release of February 4, 1997. - - -20- 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 May 5, 1997 Robert L. Carleton Senior Vice President and Controller Date May 5, 1997 Lawrence F. Dickie Vice President, Associate General Counsel and Assistant Secretary - - -21- EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 PEPSICO, INC. AND SUBSIDIARIES Computation of Net Income Per Share of Capital Stock - Primary (in millions except per share amounts, unaudited) 12 Weeks Ended 3/22/97 3/23/96 Shares outstanding at beginning of period 1,545 1,576 Weighted average of shares issued during the period for exercise of stock options, conversion of debentures and payment of compensation awards 3 4 Shares repurchased (weighted) (4) (5) Dilutive shares contingently issuable upon exercise of stock options, conversion of debentures and payment of compensation awards, net of shares assumed to have been purchased for treasury (at the average price) with assumed proceeds from exercise of stock options and compensation awards 39 44 Total shares - primary 1,583 1,619 Net income $ 427 $ 394 Net income per share - primary $ 0.27 $ 0.24 - - -22- PEPSICO, INC. AND SUBSIDIARIES Computation of Net Income Per Share of Capital Stock - Fully Diluted (in millions except per share amounts, unaudited) 12 Weeks Ended 3/22/97 3/23/96 Shares outstanding at beginning of period 1,545 1,576 Shares issued during the period for exercise of stock options, conversion of debentures and payment of compensation awards 5 9 Shares repurchased (weighted) (4) (5) Dilutive shares contingently issuable upon exercise of stock options, conversion of debentures and payment of compensation awards, net of shares assumed to have been purchased for treasury (at the higher of average or quarter-end price) with assumed proceeds from exercise of stock options and compensation awards 39 44 Total shares - fully diluted 1,585 1,624 Net income $ 427 $ 394 Net income per share - fully diluted $ 0.27 $ 0.24 - - -23- EX-12 3 STATEMENT RE COMPUTATION OF RATIOS EXHIBIT 12 PEPSICO, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (in millions except ratio amounts, unaudited) 12 Weeks Ended 3/22/97 3/23/96 Earnings: Income before income taxes $656 $588 Unconsolidated affiliates and minority interests, net 5 10 Amortization of capitalized interest 1 1 Interest expense 123 141 Interest portion of net rent expense (a) 13 39 Earnings available for fixed charges $798 $779 Fixed Charges: Interest expense $123 $141 Capitalized interest 2 3 Interest portion of net rent expense (a) 13 39 Total fixed charges $138 $183 Ratio of Earnings to Fixed Charges 5.78 4.26 (a) One-third of net rent expense is the portion deemed representative of the interest factor. - - -24- EX-15 4 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 Accountants' Acknowledgment The Board of Directors PepsiCo, Inc. We hereby acknowledge our awareness of the use of our report dated April 29, 1997 included within the Quarterly Report on Form 10-Q of PepsiCo, Inc. for the twelve weeks ended March 22, 1997, and incorporated by reference in the following Registration Statements and in the related Prospectuses: Registration Description Statement Number Form S-3 Pizza Hut Cincinnati, Inc. and Tri-L Pizza Huts, Inc. acquisitions 33-37271 PepsiCo SharePower Stock Option Plan for Employees of Monsieur Henri Wines, Ltd. 33-35601, 33-42122, 33-56666 & 33-66146 PepsiCo SharePower Stock Option Plan for Opco Employees 33-30658 & 33-38014 PepsiCo SharePower Stock Option Plan for PCDC Employees 33-42121 PepsiCo SharePower Stock Option Plan for Employees of Chevys, Inc. 33-66144 PepsiCo SharePower Stock Option Plan for Employees of Southern Tier Pizza Hut, Inc. and STPH Delco, Inc. 33-66148 Pepsi-Cola Bottling Company Annapolis acquisition 33-30372 $500,000,000 Euro-Medium-Term Notes 33-8677 $2,500,000,000 Debt Securities and Warrants 33-39283 Semoran Management Corporation acquisition 33-47527 $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-4 Erin Investment Corp. acquisition 33-31844 A&M Food Services, Inc. acquisition 33-4635 Pizza Hut Titusville, Inc. acquisition 33-21607 U.S. Kentucky Fried Chicken operations of Collins Foods International, Inc. acquisition 33-37978 Pizza Management, Inc. acquisition 33-47314 - - -25- Form S-8 PepsiCo SharePower Stock Option Plan 33-35602, 33-29037, 33-42058, 33-51496, 33-54731 & 33-66150 PepsiCo SharePower Stock Option Plan for Opco Employees 33-43189 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 Long Term Savings Programs of Taco Bell Corp., Pizza Hut, Inc. and Kentucky Fried Chicken Corporation, respectively 2-93163, 2-99532 & 33-10488 Restaurant Deferred Compensation Plan 333-01377 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 Peat Marwick LLP New York, New York May 5, 1997 - - -26- EX-27 5 FINANCIAL DATA SCHEDULE FOR FIRST QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEPSICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 12 WEEKS ENDED MARCH 22, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000077476 PepsiCo, Inc. 1,000,000 Dec-27-1997 Mar-22-1997 3-MOS 440 272 2,344 173 1,009 5,052 17,869 7,747 24,160 5,371 7,951 29 0 0 6,463 24,160 6,702 6,702 3,257 3,257 0 13 123 656 229 427 0 0 0 427 .27 .27
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