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-
<PAGE>
<audit-report>
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-
</audit-report>
<PAGE>
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-
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-
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-
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-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> 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.
<CIK> 0000077476
<NAME> PepsiCo, Inc.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> Dec-27-1997
<PERIOD-END> Mar-22-1997
<PERIOD-TYPE> 3-MOS
<CASH> 440
<SECURITIES> 272
<RECEIVABLES> 2,344
<ALLOWANCES> 173
<INVENTORY> 1,009
<CURRENT-ASSETS> 5,052
<PP&E> 17,869
<DEPRECIATION> 7,747
<TOTAL-ASSETS> 24,160
<CURRENT-LIABILITIES> 5,371
<BONDS> 7,951
<COMMON> 29
0
0
<OTHER-SE> 6,463
<TOTAL-LIABILITY-AND-EQUITY> 24,160
<SALES> 6,702
<TOTAL-REVENUES> 6,702
<CGS> 3,257
<TOTAL-COSTS> 3,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 656
<INCOME-TAX> 229
<INCOME-CONTINUING> 427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 427
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
