-----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, KTnZ1PyW2CvLdbMp/5DVKVaVaxfpsUnxwPk/G7ItQsGBNSOuZB1f6o0nxKjOQWF3 wexEsWZbe3S2d3Te/sV9Pg== 0000950131-99-002448.txt : 19990423 0000950131-99-002448.hdr.sgml : 19990423 ACCESSION NUMBER: 0000950131-99-002448 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990422 ITEM INFORMATION: FILED AS OF DATE: 19990422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHITMAN CORP CENTRAL INDEX KEY: 0000049573 STANDARD INDUSTRIAL CLASSIFICATION: BOTTLED & CANNED SOFT DRINKS CARBONATED WATERS [2086] IRS NUMBER: 366076573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-04710 FILM NUMBER: 99598710 BUSINESS ADDRESS: STREET 1: 3501 ALGONQUIN RD CITY: ROLLING MEADOWS STATE: IL ZIP: 60008 BUSINESS PHONE: 8478185000 MAIL ADDRESS: STREET 1: 3501 ALGONQUIN RD CITY: ROLLING MEADOWS STATE: IL ZIP: 60008 FORMER COMPANY: FORMER CONFORMED NAME: IC INDUSTRIES INC DATE OF NAME CHANGE: 19881017 FORMER COMPANY: FORMER CONFORMED NAME: ILLINOIS CENTRAL INDUSTRIES INC DATE OF NAME CHANGE: 19750709 8-K 1 FORM 8-K 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 WHITMAN CORPORATION (Exact name of registrant as specified in its charter) Date of Report (Date of earliest event reported): April 22, 1999 Delaware (State or other jurisdiction of incorporation) 001-4710 36-6076573 (Commission File Number) (IRS Employer Identification No.) 3501 Algonquin Road Rolling Meadows, Illinois 60008 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 291-2000 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (c) Exhibits -------- 4. Form of Supplemental Indenture between Whitman Corporation and the First National Bank of Chicago, as trustee 23. Consent of KPMG LLP 99.1 New Whitman Unaudited Pro Forma Combined Financial Information 99.2 Pepsico Bottling Operations Combined Financial Statements Signature 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, thereunto duly authorized. WHITMAN CORPORATION Date: April 22, 1999 By: /s/ William B. Moore ____________________________ William B. Moore Senior Vice President, Secretary and General Counsel EX-4 2 FORM OF SUPPLEMENTAL INDENTURE EXHIBIT 4 THE FIRST NATIONAL BANK OF CHICAGO, as Trustee _________________________ FIRST SUPPLEMENTAL INDENTURE dated as of May ___, 1999 to INDENTURE dated as of January 15, 1993 _________________________ WHITMAN CORPORATION THIS FIRST SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") is made and dated as of May __, 1999 by and between Whitman Corporation, a Delaware corporation formerly known as Heartland Territories Holdings, Inc. ("New Whitman"), and The First National Bank of Chicago, a national banking association organized and existing under the laws of the United States (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Indenture (as defined below). WHEREAS, Whitman Corporation, a corporation organized and existing under the laws of the State of Delaware, ("Old Whitman") and Trustee entered into an Indenture dated as of January 15, 1993, pursuant to which Old Whitman issued debt securities in the form of unsecured notes (the "Securities"); WHEREAS, as of the date hereof, $__________ aggregate principal amount of the Securities are outstanding; WHEREAS, pursuant to an Amended and Restated Contribution and Merger Agreement dated as of March 18, 1999 among Old Whitman, PepsiCo, Inc., a North Carolina corporation ("PepsiCo"), and Heartland Territories Holdings, Inc., a Delaware corporation and wholly owned subsidiary of PepsiCo ("Heartland"), Old Whitman has been merged (the "Merger") with and into Heartland, with Heartland surviving as New Whitman, and New Whitman has assumed various liabilities and obligations of Old Whitman, including those under the Indenture and with respect to the Securities; WHEREAS, in connection with the Merger and in accordance with Section 10.01(a) of the Indenture, the parties desire to enter into this Supplemental Indenture, without the consent of the holders of the outstanding Securities, in order to evidence the succession under the Indenture of New Whitman to Old Whitman and the assumption by New Whitman of the covenants, agreements and obligations of Old Whitman contained in the Indenture; WHEREAS, Old Whitman has delivered to the Trustee the Certified Board Resolution and Opinion of Counsel required by Sections 10.01 and 11.03 of the Indenture. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, New Whitman and the Trustee agree as follows: 1. Assumption of Obligations. In accordance with Section 11.01 of the Indenture, New Whitman hereby expressly assumes the due and punctual payment of the principal of (and premium, if any) and any interest on all the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture to be performed by Old Whitman. 2. Succession. In accordance with Section 11.02 of the Indenture, New Whitman hereby succeeds to and is substituted for Old Whitman, with the same effect as if New Whitman were a party to the Indenture. 3. Effect of Supplemental Indenture. In accordance with Section 10.03 of the Indenture, the Indenture is hereby deemed to be modified and amended by this Supplemental Indenture with respect to the Securities and the respective rights, limitations of rights, obligations, duties and immunities under the Indenture of the Trustee, Old Whitman and the Holders of Securities shall be determined, exercised and enforced under the Indenture, as supplemented by this Supplemental Indenture, and all the terms and conditions of this Supplemental Indenture shall be and are hereby deemed to be part of the terms and conditions of the Indenture for any and all purposes. As supplemented by this Supplemental Indenture, the Indenture is in all respects ratified and confirmed and the Indenture and this Supplemental Indenture shall be read, taken and construed as one and the same instrument. From and after the date of this Supplemental Indenture, all references in the Indenture to this "Indenture" shall refer to the Indenture as supplemented hereby. 4. Notation of Changes. In accordance with Section 10.04 of the Indenture, Securities authenticated and delivered after the execution of this Supplemental Indenture in exchange for or in lieu of any Securities outstanding shall, if required by the Trustee, bear a legend as follows: "Pursuant to a First Supplemental Indenture dated as of May __, 1999 (the "Supplemental Indenture") between Whitman Corporation, a Delaware corporation formerly known as Heartland Territories Holdings, Inc. ("New Whitman"), and the Trustee, New Whitman has expressly assumed all the obligations under this Security and of the Indenture expressed therein to be performed by Whitman Corporation, a Delaware corporation which merged into New Whitman on May __, 1999. Copies of the Supplemental Indenture are on file with the Trustee." 5. Acceptance by Trustee. The Trustee accepts the amendment of the Indenture effected by this Supplemental Indenture and agrees to perform the Indenture as supplemented hereby, but only upon the terms and conditions set forth in the Indenture. 6. Governing Law. This Supplemental Indenture shall be deemed to be a contract under the laws of the State of Illinois, and for all purposes shall be governed by and construed in accordance with the laws of such State. 7. Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same instrument. 8. Notices. New Whitman and Old Whitman have the same principal business address so any required notices or demands under the Indenture shall be delivered or sent to New Whitman at the address set forth in Section 14.03 of the Indenture. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. WHITMAN CORPORATION By:____________________________ Name: Title: Attest: ___________________________ Secretary [CORPORATE SEAL] THE FIRST NATIONAL BANK OF CHICAGO, as Trustee By:____________________________ Name: Title: Attest: __________________________ Secretary [CORPORATE SEAL] EX-23 3 CONSENT OF KMPG EXHIBIT 23 CONSENT OF KPMG LLP We consent to incorporation by reference in Registration Statement (Nos. 333-16355 and 33-52809) on Form S-3 of our report dated February 19, 1999, relating to the combined balance sheets of PepsiCo Bottling Operations as of December 26, 1998 and December 27, 1997 and the related combined statements of operations, cash flows and shareholder's equity and accumulated other comprehensive loss for each of the years in the three-year period ended December 26, 1998, which report appears in this Current Report on Form 8-K. /s/ KPMG LLP KPMG LLP New York, New York April 22, 1999 EX-99.1 4 NEW WHITMAN PRO FORMA COMBINED FIN. STMTS. EXHIBIT 99.1 NEW WHITMAN UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The unaudited pro forma combined financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and accompanying notes of Whitman contained in Whitman's 1998 Form 10-K/A. Information about the franchise territories acquired from PepsiCo should be read in conjunction with the selected combined financial information and the information included under the caption "Management's Discussion and Analysis of Operations, Cash Flows and Liquidity and Capital Resources of the PepsiCo Bottling Operations" appearing on pages 60 to 65 of our proxy statement dated April 19, 1999, which is incorporated by reference into this prospectus supplement and the combined financial statements of the PepsiCo Bottling Operations appearing on pages F-9 to F-24. The pro forma combined balance sheet gives effect to the following items assuming they occurred as of Whitman's 1998 fiscal year end: . The sale by Pepsi General of its bottling operations and the respective assets and liabilities of the franchise territories located in Marion, Virginia, Princeton, West Virginia, and the St. Petersburg area of Russia to PepsiCo in exchange for $117.8 million. . The acquisition by New Whitman of the bottling operations and the respective assets and liabilities of the franchise territories located in Cleveland, Ohio, Dayton, Ohio, Indianapolis, Indiana, St. Louis, Missouri, southern Indiana, Hungary, the Czech Republic, Slovakia and the balance of Poland, referred to as the PepsiCo Bottling Operations, from PepsiCo for 54 million shares of New Whitman common stock, $176.0 million in cash, $241.8 million of debt and the transfer of PepsiCo's 20% minority interest in Pepsi General. . The repurchase of up to 16 million shares, or $400 million of common stock, whichever is less, of Whitman/New Whitman common stock. The pro forma combined statement of operations gives effect to the following transactions assuming they occurred at the beginning of Whitman's 1998 fiscal year: . The sale by Pepsi General of its bottling operations and the respective assets and liabilities of the franchise territories located in Marion, Virginia, Princeton, West Virginia, and the St. Petersburg area of Russia to PepsiCo and removal of their respective 1998 operating results. . The acquisition by New Whitman of the PepsiCo Bottling Operations from PepsiCo and the inclusion of their respective 1998 operating results, including amortization of goodwill associated with the purchase. . The recognition of interest and debt issuance costs associated with debt incurred in the acquisition of the PepsiCo Bottling Operations from PepsiCo and debt incurred related to the repurchase of 16 million shares of Whitman/New Whitman common stock. . The elimination of interest expense allocated to the PepsiCo Bottling Operations by PepsiCo on debt that will not be assumed by New Whitman. . The elimination of corporate charges paid to PepsiCo by Pepsi General, which by agreement will not continue. . The elimination of PepsiCo's 20% minority interest in Pepsi General. The acquisition of the PepsiCo Bottling Operations territories is accounted for under the purchase method. Pro forma earnings per share is based upon an assumed 139.1 million shares outstanding after completing all transactions. NEW WHITMAN PRO FORMA COMBINED BALANCE SHEET (Unaudited and in Millions)
Fiscal Year End 1998 ------------------------------------------------------------ Pepsico Pepsi Bottling General Operations Whitman Franchise Franchise New Corporation Territories Territories Pro Forma Whitman as Reported Sold(A) Acquired Adjustments Pro Forma ----------- ----------- ----------- ----------- --------- ASSETS: Current assets: Cash and equivalents.. $ 147.6 $ (1.5) $ 6.1 $ (6.1)(C) $ 146.1 Receivables, net...... 170.7 (8.8) 74.4 -- 236.3 Inventories........... 80.0 (6.8) 29.3 -- 102.5 Other current assets.. 30.8 (0.9) 5.2 -- 35.1 -------- ------- ------ -------- -------- Total current assets............. 429.1 (18.0) 115.0 (6.1) 520.0 -------- ------- ------ -------- -------- Investments............. 160.0 -- 37.2 -- 197.2 Property, net........... 499.3 (46.4) 274.0 23.4 (C) 750.3 Intangibles, net........ 447.0 (49.4) 370.0 (370.0)(C) 1,005.3 (C) 1,402.9 Other assets............ 33.9 (1.4) 5.0 -- 37.5 -------- ------- ------ -------- -------- Total assets........ $1,569.3 $(115.2) $801.2 $ 652.6 $2,907.9 ======== ======= ====== ======== ======== LIABILITIES AND EQUITY: Current liabilities: Short-term debt....... $ -- $ -- $ 22.8 $ (22.8)(C) $ -- Other current liabilities.......... 233.2 (7.9) 92.9 1.9 (B) 18.7 (C) 338.8 -------- ------- ------ -------- -------- Total current liabilities........ 233.2 (7.9) 115.7 (2.2) 338.8 -------- ------- ------ -------- -------- Long-term debt.......... 603.6 -- -- (115.5)(B) 417.8 (C) 294.8 (D) 1,200.7 Deferred income taxes... 99.1 (2.7) 9.5 -- 105.9 Other liabilities....... 73.3 (0.8) 14.6 -- 87.1 Minority interest....... 233.7 -- -- (233.7)(C) -- Net equity of operations to be sold............. -- (103.8) -- 103.8 (B) -- Shareholders' equity.... 326.4 -- 661.4 9.8 (B) (661.4)(C) 1,134.0 (C) (294.8)(D) 1,175.4 -------- ------- ------ -------- -------- Total liabilities and equity......... $1,569.3 $(115.2) $801.2 $ 652.6 $2,907.9 ======== ======= ====== ======== ========
See accompanying notes to pro forma combined financial information. NEW WHITMAN PRO FORMA COMBINED STATEMENT OF OPERATIONS (Unaudited and in Millions, Except Per Share Data)
Fiscal Year 1998 ---------------------------------------------------------- PepsiCo Pepsi Bottling General Operations Whitman Franchise Franchise New Corporation Territories Territories Pro Forma Whitman as Reported Sold Acquired Adjustments Pro Forma ----------- ----------- ----------- ----------- --------- Sales................... $1,635.0 $(77.5) $722.1 $ -- $2,279.6 Cost of goods sold...... 1,024.5 (52.6) 440.2 (0.1)(F) 1,412.0 -------- ------ ------ ----- -------- Gross profit.......... 610.5 (24.9) 281.9 0.1 867.6 Selling, general and administrative expenses............... 391.1 (21.7) 249.9 -- (E) 1.8 (F) 621.1 Allocated division and PepsiCo corporate costs.................. -- -- 19.7 -- (E) 19.7 Amortization expense.... 15.6 (1.6) 14.2 (14.2)(G) 25.1 (G) 39.1 -------- ------ ------ ----- -------- Operating income (loss)............... 203.8 (1.6) (1.9) (12.6) 187.7 Interest expense, net... (36.1) 1.8 (4.8) (37.0)(H) 4.8 (I) (71.3) Interest expense allocated by PepsiCo... -- -- (46.1) 46.1 (I) -- Other expense, net...... (15.5) 2.3 (0.8) 9.2 (J) (4.8) -------- ------ ------ ----- -------- Income (loss) before income taxes......... 152.2 2.5 (53.6) 10.5 111.6 Income taxes............ 69.7 1.1 (4.3) 8.6 (K) 75.1 -------- ------ ------ ----- -------- Income (loss) from continuing operations before minority interest............. 82.5 1.4 (49.3) 1.9 36.5 Minority interest....... 20.0 0.3 -- (20.3)(L) -- -------- ------ ------ ----- -------- Income (loss) from continuing operations.. $ 62.5 $ 1.1 $(49.3) $22.2 $ 36.5 ======== ====== ====== ===== ======== Weighted Average Common Shares: Basic................... 101.1 38.0 (M) 139.1 Incremental effect of stock options.......... 1.8 -- 1.8 -------- ----- -------- Diluted................. 102.9 38.0 140.9 ======== ===== ======== Income from Continuing Operations Per Share: Basic................... $ 0.62 $ 0.26 Diluted................. $ 0.61 $ 0.26
See accompanying notes to pro forma combined financial information. NEW WHITMAN NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (A) To record the removal of the net equity of the franchise territories to be sold. (B) To record the sale of Pepsi General franchise territories to PepsiCo by removing the net equity of the franchise territories to be sold and adjusting for the following: . The reduction of Whitman debt by $115.5 million, using the sale proceeds of $117.8 million reduced by transaction costs of $2.3 million. Cash proceeds from the sale will be used immediately to repay existing borrowings. . The increase in shareholders' equity, resulting from the gain on the sale of the franchise territories estimated to be $9.8 million, after tax. The consideration to be received from PepsiCo is subject to adjustments based on changes in the working capital accounts of the franchise territories sold. However, such adjustments are not expected to be significant. The gain on sale has not been reflected in the pro forma combined statement of operations for fiscal year 1998. Instead, the actual gain on sale will be recorded at the time of the sale in fiscal 1999. (C) To record the transactions related to the acquisition of the PepsiCo Bottling Operations franchise territories and the minority interest in Pepsi General previously held by PepsiCo, as follows (in millions): Acquisition costs: Issuance of 54 million shares of common stock................... $1,134.0 Issuance of long-term debt...................................... 417.8 Accrual of estimated transaction costs.......................... 18.7 -------- Total acquisition costs....................................... 1,570.5 -------- Allocation of acquisition costs: Net assets of the PepsiCo Bottling Operations franchise territories.................................................... 661.4 Less: intangible assets of the PepsiCo Bottling Operations franchise territories.......................................... (370.0) -------- Net tangible assets of the PepsiCo Bottling Operations franchise territories........................................ 291.4 Recorded value of PepsiCo's minority interest in Pepsi General.. 233.7 Payoff by PepsiCo of short-term debt of the PepsiCo Bottling Operations franchise territories............................... 22.8 Less: cash balances of the PepsiCo Bottling Operations franchise territories remaining with PepsiCo............................... (6.1) -------- Total allocation of acquisition costs......................... 541.8 -------- Excess of acquisition costs over recorded values of assets and liabilities...................................................... $1,028.7 ======== Allocation of acquisition costs over recorded values: Fair value of property in excess of its recorded value, net..... $ 23.4 Intangible assets............................................... 1,005.3 -------- Total allocation of acquisition costs over recorded values.... $1,028.7 ========
Additional information about the acquisition costs and allocation of those costs is as follows: . The shares to be issued by New Whitman were valued at $21 per share, based on the average closing market price of Whitman common stock as reported on the NYSE during the three-day period immediately before and after the January 25, 1999 announcement of the original merger agreement between Whitman and PepsiCo. . The long-term debt to be issued of $417.8 million will be used to make a cash payment of $176.0 million to PepsiCo payable when the transactions are closed and subsequent payments under notes payable to PepsiCo of $241.8 million. . The accrual of estimated transaction costs is primarily attributable to the $15.0 million financial advisory fee payable to Credit Suisse/First Boston with the remainder associated with legal, accounting and other advisory fees and expenses directly associated with the transaction. A portion of these fees and expenses have been allocated to the sale of the Pepsi General franchise territories. . The portion of the excess purchase cost allocated to property is based on preliminary appraisals. The allocation is subject to refinement when the final appraisals are completed after the transactions are closed. Whitman anticipates that the final appraisals will not differ significantly from the preliminary appraisals. . The remainder of the excess purchase cost has been allocated to intangibles, which are comprised of the franchise rights acquired and goodwill. No portion of the excess purchase cost has been allocated to the other assets acquired or liabilities assumed. Whitman believes that the fair values of those other assets and liabilities will approximate their carrying values. . The consideration to be paid to PepsiCo is subject to adjustments based on changes in the working capital accounts of the PepsiCo Bottling Operations franchise territories. However, such adjustments are not expected to be significant. (D) To record the repurchase of 16 million shares of Whitman/New Whitman common stock, pursuant to the merger agreement, and to record the issuance of debt to finance the repurchases (in millions): Repurchase of 12.9 million shares through April 12, 1999............. $243.3 Additional repurchases of 3.1 million shares......................... 51.5 ------ Debt issued to fund repurchases.................................... $294.8 ======
The merger agreement provides that during the 12 months following the closing of the merger, New Whitman will repurchase up to 16 million shares of New Whitman common stock. PepsiCo has agreed that shares repurchased by Whitman after February 5, 1999 and prior to the closing may be used to reduce New Whitman's repurchase obligation. New Whitman need not complete the remaining repurchases if the New Whitman board of directors determines in good faith that they are impractical or inadvisable. The repurchase cost of the remaining 3.1 million shares is based on an assumed average price of $16.62 per share, which approximates the average price of the shares repurchased in the five business days ending on April 7, 1999. An increase or decrease in the repurchase cost of $1 per share on the remaining 3.1 million shares would change the amount of debt issued to fund repurchases by $3.1 million. The change in debt would change pro forma interest expense by $0.2 million on an annual basis or $0.1 million after tax. (E) Adjustments have not been made to give effect to the potential reduction in administrative expenses that may be realized by New Whitman due to facility consolidations and other cost savings initiatives, because the amount of such potential savings cannot be estimated with an adequate level of certainty. (F) To adjust depreciation expense based on the preliminary appraisals of property, plant and equipment (Note C). The increase in depreciation expense is based upon the following adjustments to property, plant and equipment and estimated remaining useful lives:
Range of Adjustment useful lives ---------- -------------- Land................................................ $ 0.9 Buildings and improvements.......................... (0.8) 13 to 22 years Machinery and equipment............................. 23.3 1 to 14 years ----- Total............................................. 23.4 =====
(G) To reflect the amortization of intangible assets acquired, the following entries were made: . The elimination of amortization expense recorded by the PepsiCo Bottling Operations franchise territories. . The recording of $25.1 million of amortization expense on intangible assets of $1,005.3 million, related to the PepsiCo Bottling Operations franchise territories, using a forty-year amortization period. The principal factors considered in determining the use of a 40 year amortization period include: (1) the franchise agreements with PepsiCo are granted in perpetuity and provide the exclusive right to manufacture and sell PepsiCo branded products within the territories prescribed in the agreements, and (2) the existing and projected cash flows are adequate to support the carrying values of the intangible assets to be recorded. (H) To record the net increase in interest expense based on the net increase in long-term debt, as follows (in millions): Debt incurred by New Whitman to fund payments to PepsiCo (Note C).. $ 417.8 Debt incurred for share repurchases (Note D)....................... 294.8 Less: net cash proceeds from sale of Pepsi General franchise territories (Note B).............................................. (115.5) ------- Net increase in long-term debt................................... $ 597.1 ======= Interest at an assumed effective rate of 6.2%...................... $ 37.0 =======
The effective interest rate assumed in the pro forma adjustment of 6.2 percent is based upon rates available to Whitman/New Whitman under its existing commercial paper program and rates expected through additional public debt offerings. A change in the interest rate of 1/8 of a percentage point would have the effect of changing interest expense $0.7 million or $0.4 million after tax. (I) To eliminate the interest expense, net, of $4.8 million recorded by the PepsiCo Bottling Operations and interest expense of $46.1 million allocated by PepsiCo to the PepsiCo Bottling Operations. The underlying debt will not be assumed by New Whitman. (J) To eliminate the corporate charge paid by Pepsi General to PepsiCo. Whitman and PepsiCo have agreed to terminate this charge once the transactions are closed. (K) To record the estimated tax impact of the pro forma adjustments, using an incremental tax rate of 40%, determined as follows: Pretax income of pro forma adjustments................................ $10.5 Plus: additional non-deductible intangible amortization............... 10.9 ----- Total............................................................... 21.4 Incremental tax rate.................................................. X 40% ----- Pro forma tax adjustment.............................................. $ 8.6 =====
(L) To eliminate PepsiCo's 20% minority interest in the earnings of Pepsi General, due to the transfer of that minority interest to New Whitman. (M) To record the net increase in weighted average common shares outstanding, giving effect to the issuance of 54 million shares to PepsiCo (Note C) less the 16 million shares to be acquired pursuant to the merger agreement (Note D). EBITDA is defined as income before income taxes plus the sum of interest, depreciation and amortization. Information concerning EBITDA has been included below because it is expected to be used by some investors as a measure of operating performance and of the ability to service potential debt. EBITDA is not required by GAAP and, accordingly, should not be considered an alternative to income from continuing operations or any other measure of performance required by GAAP. It also should not be used as a measure of cash flow or liquidity under GAAP. Following is a summary of historical and pro forma EBITDA, and depreciation and amortization for 1998 (in millions):
Depreciation and EBITDA Amortization ------ ------------ Whitman Corporation as reported............................ $266.0 $ 77.7 Pepsi General franchise territories sold................... (5.3) (6.0) PepsiCo Bottling Operations franchise territories.......... 62.1 64.8 Pro forma adjustments...................................... 15.2 18.6 ------ ------ New Whitman--pro forma basis............................... $338.0 $155.1 ====== ======
EX-99.2 5 PEPSICO COMBINED FINANCIAL STATEMENTS EXHIBIT 99.2 PEPSICO BOTTLING OPERATIONS REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders of PepsiCo, Inc.: We have audited the accompanying combined balance sheets of PepsiCo Bottling Operations ("PBO") as of December 26, 1998 and December 27, 1997 and the related combined statements of operations, cash flows and shareholder's equity and accumulated other comprehensive loss for each of the years in the three- year period ended December 26, 1998. These combined financial statements are the responsibility of PBO's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of PBO as of December 26, 1998 and December 27, 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 26, 1998, in conformity with generally accepted accounting principles. KPMG LLP New York, New York February 19, 1999 PEPSICO BOTTLING OPERATIONS COMBINED STATEMENTS OF OPERATIONS Fiscal Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
1998 1997 1996 ------ ------ ------ (In Millions) Net Sales United States........................................ $541.9 $517.4 $507.0 Central Europe....................................... 180.2 186.3 219.5 ------ ------ ------ 722.1 703.7 726.5 ------ ------ ------ Cost of Sales United States........................................ 321.3 304.2 300.2 Central Europe....................................... 118.9 126.3 148.7 ------ ------ ------ 440.2 430.5 448.9 ------ ------ ------ Gross Profit........................................... 281.9 273.2 277.6 Selling, Delivery and Administrative Expenses United States........................................ 171.6 170.9 169.9 Central Europe....................................... 92.5 104.6 126.8 Allocated division and PepsiCo corporate costs....... 19.7 19.8 18.8 ------ ------ ------ 283.8 295.3 315.5 ------ ------ ------ Operating Loss......................................... (1.9) (22.1) (37.9) Other Expense Interest expense: External........................................... 4.8 5.1 7.7 PepsiCo allocation................................. 46.1 46.6 48.1 ------ ------ ------ 50.9 51.7 55.8 Foreign exchange losses.............................. 0.8 14.4 1.9 ------ ------ ------ Total other expense.............................. 51.7 66.1 57.7 ------ ------ ------ Loss Before Income Taxes............................... (53.6) (88.2) (95.6) Income tax benefit................................... 4.3 7.0 9.3 ------ ------ ------ Net Loss............................................... $(49.3) $(81.2) $(86.3) ====== ====== ======
See accompanying Notes to Combined Financial Statements. PEPSICO BOTTLING OPERATIONS COMBINED STATEMENTS OF CASH FLOWS Fiscal Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
1998 1997 1996 ------ ------ ------- (In Millions) Cash Flows--Operations Net loss............................................. $(49.3) $(81.2) $ (86.3) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation....................................... 50.6 53.5 55.9 Amortization....................................... 14.2 14.4 14.6 Deferred income taxes.............................. (4.3) (7.0) (9.3) Other noncash charges and credits, net............. -- 5.4 -- Equity in (income) loss of affiliate............... (2.8) (4.9) 9.4 Changes in operating working capital: Trade accounts receivable, net................... (4.7) 5.6 8.9 Inventories...................................... 0.8 5.6 10.4 Prepaid expenses and other current assets........ 2.8 0.5 5.8 Accounts payable and other current liabilities... (2.7) 7.7 8.3 Trade accounts payable to PepsiCo................ 5.1 (0.5) (6.1) ------ ------ ------- Net change in operating working capital............ 1.3 18.9 27.3 ------ ------ ------- Net Cash Provided by (Used for) Operations........... 9.7 (0.9) 11.6 ------ ------ ------- Cash Flows--Investing Activities Capital expenditures................................. (54.8) (57.6) (108.7) Investments in and advances to affiliates............ -- (1.4) (7.9) Proceeds from sales of property, plant and equipment. 5.4 6.3 9.8 Other, net........................................... (2.2) (0.6) 4.4 ------ ------ ------- Net Cash Used for Investing Activities............... (51.6) (53.3) (102.4) ------ ------ ------- Cash Flows--Financing Activities Short-term borrowings--three months or less, net..... 7.5 (22.9) (30.8) Proceeds from issuance of long-term debt............. -- -- 4.0 Payments on long-term debt........................... -- (10.5) (0.6) Net investment by PepsiCo............................ 16.9 101.0 123.4 ------ ------ ------- Net Cash Provided by Financing Activities............ 24.4 67.6 96.0 ------ ------ ------- Effect of Exchange Rate Changes on Cash and Cash Equivalents......................................... 0.4 (1.8) (0.5) ------ ------ ------- Net Increase/(Decrease) in Cash and Cash Equivalents. (17.1) 11.6 4.7 Cash and Cash Equivalents--Beginning of Year......... 23.2 11.6 6.9 ------ ------ ------- Cash and Cash Equivalents--End of Year............... $ 6.1 $ 23.2 $ 11.6 ====== ====== =======
See accompanying Notes to Combined Financial Statements. PEPSICO BOTTLING OPERATIONS COMBINED BALANCE SHEETS December 26, 1998 and December 27, 1997
1998 1997 ------ ------ (In Millions) ASSETS Current Assets Cash and cash equivalents...................................... $ 6.1 $ 23.2 Trade accounts receivable, less allowance of $5.1 and $4.7 in 1998 and 1997, respectively................................... 74.4 70.0 Inventories.................................................... 29.3 29.5 Prepaid expenses and other current assets...................... 5.2 6.6 ------ ------ Total Current Assets....................................... 115.0 129.3 Property, plant and equipment, net............................. 274.0 271.3 Intangible assets, net......................................... 370.0 418.7 Other assets................................................... 42.2 37.8 ------ ------ Total Assets............................................... $801.2 $857.1 ====== ====== LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities Accounts payable and other current liabilities................. $ 87.1 $122.6 Short-term borrowings.......................................... 22.8 15.6 Trade accounts payable to PepsiCo.............................. 5.8 2.3 ------ ------ Total Current Liabilities.................................. 115.7 140.5 Other liabilities.............................................. 14.6 11.6 Deferred income taxes.......................................... 9.5 13.8 ------ ------ Total Liabilities.......................................... 139.8 165.9 ------ ------ Shareholder's Equity Net investment by PepsiCo...................................... 713.8 746.8 Accumulated other comprehensive loss........................... (52.4) (55.6) ------ ------ Total Shareholder's Equity................................. 661.4 691.2 ------ ------ Total Liabilities and Shareholder's Equity................. $801.2 $857.1 ====== ======
See accompanying Notes to Combined Financial Statements. PEPSICO BOTTLING OPERATIONS COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY AND ACCUMULATED OTHER COMPREHENSIVE LOSS Fiscal Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
Accumulated Total Net Other Shareholder's Investment Comprehensive Equity by Pepsico Loss ------------- ---------- ------------- (In Millions) Balance at December 30, 1995............. $676.6 $703.2 $(26.6) Comprehensive loss: Net loss............................... (86.3) (86.3) Currency translation adjustment........ (13.2) (13.2) ------ Total comprehensive loss................. (99.5) ------ Net investment by PepsiCo................ 122.7 122.7 ------ ------ ------ Balance at December 28, 1996............. $699.8 $739.6 $(39.8) Comprehensive loss: Net loss............................... (81.2) (81.2) Currency translation adjustment........ (15.8) (15.8) ------ Total comprehensive loss................. (97.0) ------ Net investment by PepsiCo................ 88.4 88.4 ------ ------ ------ Balance at December 27, 1997............. $691.2 $746.8 $(55.6) Comprehensive loss: Net loss............................... (49.3) (49.3) Currency translation adjustment........ 3.2 3.2 ------ Total comprehensive loss................. (46.1) ------ Net investment by PepsiCo................ 16.3 16.3 ------ ------ ------ Balance at December 26, 1998............. $661.4 $713.8 $(52.4) ====== ====== ======
See accompanying Notes to Combined Financial Statements. PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS (Tabular Dollars in Millions) Note 1--Business Description The accompanying financial statements reflect the combined results of operations, cash flows and net assets of certain direct and indirect wholly- owned bottling operations of PepsiCo, Inc. ("PepsiCo"). These bottling operations (herein referred to as "PepsiCo Bottling Operations" or "PBO") present the carved-out operating results and financial position of PepsiCo's bottling operations predominantly located in the midwestern part of the United States (the "Heartland") and in certain countries in Central Europe: the Czech Republic, Slovakia, Poland and Hungary. The financial information in these financial statements is not necessarily indicative of results that would have been obtained if PBO had been a separate stand-alone entity. PBO produces and distributes Pepsi, Diet Pepsi, Mountain Dew and other brands of carbonated soft drinks and other non-alcoholic beverages. Approximately 88% of PBO's 1998 net sales were derived from the distribution of PepsiCo products. Note 2--Summary of Significant Accounting Policies The preparation of Combined Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. Basis of Presentation The accompanying Combined Financial Statements include the results of operations and assets and liabilities directly related to PBO operations. All intercompany amounts and transactions have been eliminated in combination. PBO was allocated $19.7 million, $19.8 million and $18.8 million of overhead costs related to divisional headquarters and PepsiCo corporate administrative functions in 1998, 1997 and 1996, respectively. The allocations were based on the specific identification of administrative costs where practicable and, to the extent that specific identification was not practicable, based upon PBO's sales volume as a percentage of PepsiCo's related total sales volume. Such allocated costs are included in selling, delivery and administrative expenses in the Combined Statements of Operations. Management believes that such allocation methodology is reasonable. The expenses allocated to PBO for these services are not necessarily indicative of the expenses that would have been incurred if PBO had been a separate stand-alone entity. PBO's operations have been financed through its operating cash flows and net investment by PepsiCo. PBO's interest expense includes an allocation of PepsiCo's interest expense based on PepsiCo's weighted average interest rate applied to the average balance of net investment by PepsiCo to PBO. PBO was allocated $46.1 million, $46.6 million and $48.1 million of interest expense reflecting PepsiCo's average interest rates of 6.4%, 6.2% and 6.2% in 1998, 1997 and 1996, respectively. The interest expense is not necessarily indicative of interest costs that would have been incurred if PBO had been a separate independent entity. Deferred taxes result from temporary differences between the financial bases and tax bases of PBO's assets and liabilities. Deferred tax assets and liabilities are adjusted for changes in tax rates and tax laws in the period that such changes are enacted. Gross potential deferred tax assets are reduced by a valuation allowance to the extent that it is not "more likely than not" that such deferred tax assets will be realized. Historically, PBO results have been included in the consolidated income tax returns of PepsiCo. PepsiCo manages its tax position on a consolidated basis which takes into account the results of all of its businesses and PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) global tax strategies. The income taxes in the Combined Financial Statements are computed as if PBO had actually filed separate tax returns and as such, do not include the tax benefits that may have been recognized by PepsiCo by utilizing global tax strategies. Income taxes payable or receivable and allocations from PepsiCo of corporate overhead and interest costs have been deemed to have been paid by PBO to PepsiCo, in cash, in the period in which the cost was incurred or the income taxes were recorded. Cash paid for external interest was $4.8 million, $5.1 million and $7.7 million, for 1998, 1997 and 1996, respectively. There were no cash payments made for income taxes in 1998, 1997 and 1996. Fiscal Year PBO's fiscal year ends on the last Saturday in December and, as a result, a fifty-third week is added every five or six years. The fiscal years ending 1998, 1997 and 1996 each consisted of fifty-two weeks. Revenue Recognition PBO recognizes revenue when goods are delivered to customers. Sales terms generally do not allow a right of return. Advertising and Marketing Costs PBO is involved in a variety of programs to promote its products. Advertising and marketing costs included in selling, delivery and administrative expenses are expensed in the year incurred. Advertising and marketing costs were $38.5 million, $39.7 million and $38.9 million, in 1998, 1997 and 1996, respectively. Bottler Incentives PepsiCo and other brand owners, at their sole discretion, provide PBO with various forms of marketing support. This marketing support covers a variety of programs and initiatives, including direct marketplace support, capital equipment funding and shared media and advertising support. Based on the objectives of the programs and initiatives, marketing support is recorded as an adjustment to net sales or a reduction of selling, delivery and administrative expenses. Direct marketplace support is primarily funding by PepsiCo and other brand owners of sales discounts and similar programs and is recorded as an adjustment to net sales. Capital equipment funding is designed to support the purchase and placement of marketing equipment and is recorded within selling, delivery and administrative expenses. Shared media and advertising support is recorded as a reduction to advertising and marketing expense within selling, delivery and administrative expenses. There are no conditions or other requirements which could result in a repayment of any support payments received by PBO. The total amount of bottler incentives received from PepsiCo and other brand owners in the form of marketing support amounted to $51 million, $56 million, and $59 million for 1998, 1997 and 1996, respectively. Of these amounts, $15 million, $15 million and $15 million for 1998, 1997 and 1996 were recorded in net sales and the remainder was recorded in selling, delivery and administrative expenses. The amount of bottler incentives received from PepsiCo was approximately 97% of total bottler incentives in each of the three years, with the balance received from the other brand owners. Stock-Based Employee Compensation PBO measures stock-based compensation cost in accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees", and its related interpretations. PepsiCo's policy is to grant stock options at fair market value at the date of grant. PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Derivative Financial Instruments PBO did not utilize any derivative financial instruments during 1998, 1997 and 1996. Cash Equivalents Cash equivalents represent funds temporarily invested with original maturities not exceeding three months. Inventories Inventories are valued at the lower of cost (computed on the first-in, first-out method) or net realizable value. Property, Plant and Equipment Property, plant and equipment ("PP&E") is stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: 20 to 33 years for buildings and improvements and 3 to 10 years for machinery and equipment. Intangible Assets Intangible assets, which are primarily franchise rights and goodwill are both amortized on a straight-line basis over a period of generally 40 years. Recoverability of Long-Lived Assets PBO reviews all long-lived assets, including intangible assets, when facts and circumstances indicate that the carrying value of the asset may not be recoverable. An impaired asset is written down to its estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. Foreign Currency Transactions Foreign exchange gains and losses reflect (1) transaction gains and losses and (2) when a country is considered highly inflationary, the translation gains and losses arising from the remeasurement into United States dollars of the net monetary assets of the businesses in that country. Transaction gains and losses arise from foreign exchange differences on monetary assets and liabilities that are denominated in currencies other than the business' functional currency. Amounts recorded as transaction losses were $0.8 million, $12.2 million and $0.2 million in 1998, 1997 and 1996, respectively. Poland was considered a highly inflationary economy in 1996 and 1997, and accordingly, translation losses from the remeasurement into United States dollars of the net monetary assets related to Poland were $2.2 million and $1.7 million in 1997 and 1996, respectively. New Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for the reporting and display of net income and other gains and losses affecting shareholders' equity that are PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) excluded from net income. The only components of other comprehensive loss are net loss and the foreign currency translation component of shareholder's equity. These financial statements reflect the adoption of SFAS 130. Other items of comprehensive income or loss are reported in the Combined Statements of Shareholder's Equity and Accumulated Other Comprehensive Loss. In June 1997, the FASB issued Statement of Financial Accounting Standard 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. SFAS 131 requires that the definition of operating segments align with the measurements used internally to assess performance. SFAS 131 is a disclosure standard and its adoption will not impact PBO's financial condition or results of operations. These financial statements reflect the adoption of SFAS 131. In June 1998, the FASB issued Statement of Financial Accounting Standard 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. PBO is currently assessing the effects of adopting SFAS 133, and has not yet made a determination of the impact of its financial position or results of operations. SFAS 133 will be effective for PBO's first quarter of fiscal year 2000. Note 3--Inventories
1998 1997 ------ ------ Raw materials and supplies...................................... $ 13.3 $ 14.3 Finished goods.................................................. 16.0 15.2 ------ ------ $29.3 $29.5 ====== ======
Note 4--Property, Plant and Equipment, Net
1998 1997 -------- --------- Land...................................................... $ 7.9 $ 7.6 Buildings and improvements................................ 83.6 82.5 Machinery and equipment................................... 398.0 371.6 Other..................................................... 12.7 4.8 -------- --------- 502.2 466.5 Accumulated depreciation.................................. (228.2) (195.2) -------- --------- $274.0 $271.3 ======== =========
PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Note 5--Intangible Assets, Net
1998 1997 -------- -------- Franchise rights and other identifiable intangibles....... $ 384.4 $ 384.4 Goodwill.................................................. 127.6 161.8 512.0 546.2 Accumulated amortization.................................. (142.0) (127.5) -------- -------- $370.0 $418.7 ======== ========
Identifiable intangible assets principally arise from the allocation of the purchase price of businesses acquired and consist primarily of territorial franchise rights. Amounts assigned to such identifiable intangibles were based on their estimated fair value at the date of acquisition. Goodwill represents the residual purchase price after allocation to all identifiable net assets. In the fourth quarter of 1998, a disputed claim was settled with the Internal Revenue Service relating to the deductibility of the amortization of acquired franchise rights. The settlement resulted in the reduction of goodwill and income taxes payable by $34.0 million. Note 6--Accounts Payable and Other Current Liabilities
1998 1997 ----- ------ Accounts payable.................................................. $30.6 $ 25.2 Income taxes...................................................... -- 34.0 Accrued compensation and benefits................................. 16.5 15.0 Accrued advertising............................................... 15.1 19.0 Other current liabilities......................................... 24.9 29.4 ----- ------ $87.1 $122.6 ===== ======
Note 7--Short-Term Borrowings Short-term borrowings on the Combined Balance Sheets primarily represent loans from financial institutions and bank overdrafts. Interest rates on these borrowings ranged from 4.0% to 18.2% in 1998 and between 4.0% to 24.3% in 1997. Note 8--Pension Plans United States employees of PBO participate in PepsiCo sponsored noncontributory defined benefit pension plans which cover substantially all full-time salaried employees, as well as certain hourly employees. Benefits generally are based on years of service and compensation or stated amounts for each year of service. All plans but one are funded and contributions are made in amounts not less than minimum statutory funding requirements nor more than the maximum amount that can be deducted for United States income tax purposes. Net periodic United States pension expense allocated from PepsiCo's plans to PBO was $1.0 million in 1998, 1997 and 1996. There are no defined benefit pension plans for PBO's foreign operations. Note 9--Financial Instruments and Risk Management Foreign Exchange Risk As currency exchange rates change, translation of the statements of operations of our international business into United States dollars affects year-over-year comparability. PBO has not historically hedged PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) translation risks because cash flows from international operations have generally been reinvested locally, nor historically has PBO entered into hedges to minimize the volatility of reported earnings. Fair Value of Financial Instruments The carrying amount of PBO's financial instruments approximates fair value due to the short maturity of PBO's financial instruments and since interest rates approximate fair value for long-term debt. PBO does not use any financial instruments for trading or speculative purposes. Note 10--Employee Stock Option Plans PBO employees were granted stock options under PepsiCo's three long-term incentive plans--the SharePower Stock Option Plan ("SharePower"), the Long-Term Incentive Plan ("LTIP"), and the Stock Option Incentive Plan ("SOIP"). Prior to 1997, SharePower options were granted annually to essentially all full-time employees. SharePower options generally become exercisable ratably over 5 years from the grant date and must be exercised within 10 years from the grant date. There were no SharePower options granted in 1997. All SharePower options granted in 1998 become exercisable in 3 years from the grant date and must be exercised within 10 years from the grant date. Most LTIP options were granted every other year to senior management employees. Most of these options become exercisable after 4 years and must be exercised within 10 years from the grant date. In addition, the LTIP allows for grants of performance share units ("PSUs"). The maximum value of a PSU is fixed at the value of a share of PepsiCo stock at the grant date and vests 4 years from the grant date. Payment of PSUs are made in cash and/or stock and the payment amount is determined based on the attainment of prescribed performance goals. There were no amounts expensed for PSUs for PBO employees. In 1998 the LTIP was modified. Under the revised program, executives are granted stock options which vest over a three-year period and must be exercised within 10 years from the grant date. In addition to these option grants, executives may receive an additional grant or cash based upon the achievement of PepsiCo performance objectives over three years. PBO accrues compensation expense for the cash portion of the LTIP grant. SOIP options are granted to middle-management employees and, prior to 1997, were granted annually. SOIP options are exercisable after one year and must be exercised within 10 years after their grant date. In 1998, the SOIP was combined with the LTIP. PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) The amounts presented below represent options granted under PepsiCo employee stock option plans. The pro forma amounts below are not necessarily representative of the effects of stock-based awards on future pro forma net income because (1) future grants of employee stock options to PBO management may not be comparable to awards made to employees while PBO was a part of PepsiCo, and (2) the assumptions used to compute the fair value of any stock option awards may not be comparable to the PepsiCo assumptions used.
1998 1997 1996 ---------------------- ---------------------- ---------------------- Weighted Avg. Weighted Avg. Weighted Avg. Options Exercise Price Options Exercise Price Options Exercise Price ------- -------------- ------- -------------- ------- -------------- (Options in Thousands) Outstanding at beginning of year................ 1,872 $19.39 2,220 $20.35 2,298 $17.91 Granted............... 613 36.50 -- -- 331 33.31 Exercised............. (496) 17.88 (340) 16.16 (271) 15.11 Forfeited............. (81) 28.60 (141) 24.21 (138) 21.12 PepsiCo modification(a).... -- -- 133 -- -- -- ----- ------ ----- ------ ----- ------ Outstanding at end of year................... 1,908 $24.87 1,872 $19.39 2,220 $20.35 ===== ====== ===== ====== ===== ====== Exercisable at end of year................... 991 $17.83 1,180 $16.85 1,089 $15.99 ===== ====== ===== ====== ===== ====== Weighted average fair value of options granted during the year................... $ 9.71 $ -- $ 8.90 ====== ====== ======
- -------- (a) In 1997, PepsiCo spun off its restaurant businesses to its shareholders. Immediately following this spin-off, the number of options exercisable for PepsiCo capital stock was increased and their exercise prices were decreased to preserve the economic value of those options that existed just prior to the spin-off for the holders of PepsiCo stock options. Stock options outstanding at December 26, 1998:
Options Outstanding Options Exercisable --------------------------------------- ---------------------- Weighted Avg. Range of Remaining Weighted Avg. Weighted Avg. Exercise Price Options Contractual Life Exercise Price Options Exercise Price -------------- ------- ---------------- -------------- ------- -------------- $ 8.17 to $16.37 563 3.77 years $13.94 521 $13.90 $16.87 to $36.50 1,345 7.46 $29.43 470 $22.16 ----- --- 1,908 6.37 $24.87 991 $17.83 ===== ===
PBO adopted the disclosure provisions of Statement of Financial Accounting Standards 123 "Accounting for Stock-Based Compensation," ("SFAS 123") but continues to measure stock-based compensation cost in accordance with APB Opinion No. 25 and its related interpretations. If PBO had measured compensation cost for the PepsiCo stock options granted to its employees in 1998, 1997 and 1996 under the fair value based method prescribed by SFAS 123, the net loss would have been changed to the pro forma amounts set forth below:
1998 1997 1996 ------ ------ ------ Net loss: Reported........................................ $(49.3) $(81.2) $(86.3) Pro forma....................................... $(50.7) $(82.4) $(86.8)
PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) The fair value of PepsiCo stock options granted to PBO employees used to compute pro forma net income disclosures were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions used by PepsiCo:
1998 1997 1996 ------- ------- ------- Risk free interest rate........................... 4.7% 5.8% 6.0% Expected life..................................... 5 years 3 years 6 years Expected volatility............................... 23% 20% 20% Expected dividend yield........................... 1.14% 1.32% 1.5%
Note 11--Income Taxes The details of the income tax benefit are set forth below:
1998 1997 1996 ----- ----- ----- Current: Federal............................................ $ -- $ -- $ -- Foreign............................................ -- -- -- State.............................................. -- -- -- ----- ----- ----- $ -- $ -- $ -- ===== ===== ===== Deferred: Federal............................................ $(3.7) $(6.3) $(8.3) Foreign............................................ -- -- -- State.............................................. (0.6) (0.7) (1.0) ----- ----- ----- $(4.3) $(7.0) $(9.3) ===== ===== =====
United States and foreign loss before income taxes are set forth below:
1998 1997 1996 ------ ------ ------ United States..................................... $(11.4) $(17.7) $(23.4) Foreign........................................... (42.2) (70.5) (72.2) ------ ------ ------ Total............................................. (53.6) $(88.2) $(95.6) ====== ====== ======
A reconciliation of income tax benefit calculated at the United States federal statutory rate to PBO's effective tax benefit rate is set forth below:
1998 1997 1996 ----- ----- ----- Income tax benefit computed at the United States federal statutory rate............................. 35.0% 35.0% 35.0% State income tax, net of federal tax benefit........ 0.7 0.5 0.7 Effect of foreign tax rate differences.............. (9.0) (5.6) (5.6) Valuation allowance--foreign........................ (13.0) (18.3) (15.3) Nondeductible amortization of a portion of United States intangible assets........................... (2.8) (1.7) (1.6) Nondeductible expenses.............................. (2.8) (2.0) (3.4) ----- ----- ----- Effective income tax benefit rate................... 8.1% 7.9% 9.8% ===== ===== =====
PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Deferred tax liabilities and assets are attributable to temporary differences between the financial statement bases and tax bases of certain assets and liabilities and to net operating loss carryforwards, as set forth below:
1998 1997 ------ ------ Intangible assets and property, plant and equipment...... $118.2 $106.5 Other.................................................... 3.2 2.8 ------ ------ Gross deferred tax liabilities........................... 121.4 109.3 ------ ------ Net operating loss carryforwards......................... 171.8 153.9 Allowance for doubtful accounts.......................... 1.2 1.1 Various liabilities and other............................ 4.3 7.0 ------ ------ Gross deferred tax assets................................ 177.3 162.0 Deferred tax asset valuation allowance................... (64.2) (65.3) Net deferred tax assets.................................. 113.1 96.7 ------ ------ Net deferred income liability............................ $ 8.3 $ 12.6 ====== ====== Portion recorded in: Prepaid expenses and other current assets.............. $ (1.2) $ (1.2) Deferred income taxes.................................. 9.5 13.8 ------ ------ $ 8.3 $ 12.6 ====== ======
Net operating loss carryforwards are primarily generated by allocations of interest and corporate overhead from PepsiCo as if PBO had operated on a stand- alone basis and had actually filed a separate income tax return. The valuation allowance related to deferred tax assets decreased by $1.1 million in 1998 primarily due to additions related to current year operating losses offset by temporary differences in a number of foreign and state jurisdictions. Net operating loss carryforwards totaling $125.7 million at year-end 1998 are available to reduce future taxes and are related to a number of foreign jurisdictions. These carryforwards expire at various times between 1999 and 2005. Note 12--Transactions with PepsiCo PBO is a licensed producer and distributor of carbonated soft drinks and other non-alcoholic beverages on behalf of PepsiCo. In addition, PBO has the following relationships with PepsiCo. PBO purchases concentrate from PepsiCo to be used in the production of carbonated soft drinks and other non-alcoholic beverages. PepsiCo and PBO share a business objective of increasing availability and consumption of PepsiCo's brands. Accordingly, PepsiCo provides PBO with various forms of marketing support to promote PepsiCo's brands. This support covers a variety of programs and initiatives, including direct marketplace support, marketing programs, capital equipment funding and shared media and advertising expense. PepsiCo and PBO each record their share of the cost of marketing programs in their financial statements. Based on the objectives of the programs and initiatives, marketing support is recorded as an adjustment to net sales or a reduction of selling, delivery and administrative expense. PBO manufactures and distributes fountain products and provides fountain equipment service to PepsiCo customers in certain territories in accordance with the master bottling agreement. There are other products which PBO produces and/or distributes through various arrangements with PepsiCo or partners of PepsiCo. PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) PBO purchases finished goods and concentrate from the Lipton Tea Partnership and finished goods from the North American Coffee Partnership. PBO pays a royalty fee to PepsiCo for the use of the Aquafina trademark. PepsiCo provides certain administrative support to PBO, including collection of trade receivables, development and maintenance of information systems, and insurance coverage. The Combined Statements of Operations include the following income and (expense) transactions with PepsiCo:
1998 1997 1996 ------- ------- ------- Net sales.................................. $ 13.9 $ 13.6 $ 13.4 Cost of goods sold......................... $(68.8) $(66.3) $(60.7) Selling, delivery and administrative expenses.................................. $ 43.2 $ 49.0 $ 51.8
There are no minimum fees or payments that PBO is required to make to PepsiCo, nor is PBO obligated to PepsiCo under any minimum purchase requirements. There are no conditions or other requirements that could result in the repayment of any marketing support payments received by PBO from PepsiCo. Note 13--Contingencies PBO is subject to various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. Management believes that the ultimate liability, if any, in excess of amounts already recognized arising from such claims or contingencies is not likely to have a material adverse effect on PBO's annual results of operations, financial condition or liquidity. Note 14--Business Segments In 1998, PBO adopted Statement of Financial Accounting Standards No. 131 Disclosures about Segments of a Business Enterprise and Related Information. PBO operates in one industry segment which is the manufacture, sale and distribution of carbonated soft drinks and other ready-to-drink beverages. The prior year's segment information presented has been restated to present our two reportable operating segments which are based on geographic area: United States and Central Europe. The relevant measure of profitability that is used to evaluate the performance of the operating segments is operating profit before allocation of corporate overhead charges. There are no significant intra- segment transactions. Revenues are based upon the location of where product was sold.
1998 1997 1996 ------- ------ ------ Net Sales United States................................. $ 541.9 $517.4 $507.0 Central Europe................................ 180.2 186.3 219.5 ------- ------ ------ $ 722.1 $703.7 $726.5 ======= ====== ====== Operating profit (loss) United States................................. $ 49.0 $ 42.3 $ 36.9 United States allocated overhead.............. (14.0) (13.4) (12.2) ------- ------ ------ 35.0 28.9 24.7 Central Europe................................ (31.2) (44.6) (56.0) Central Europe allocated overhead............. (5.7) (6.4) (6.6) ------- ------ ------ (36.9) (51.0) (62.6) ------- ------ ------ $ (1.9) $(22.1) $(37.9) ======= ====== ======
PEPSICO BOTTLING OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
1998 1997 1996 ------ ------ ------ Amortization of Intangible Assets United States..................................... $ 13.9 $ 14.1 $ 14.1 Central Europe.................................... .3 .3 .5 ------ ------ ------ $ 14.2 $ 14.4 $ 14.6 ====== ====== ====== Depreciation Expense United States..................................... $ 22.7 $ 22.5 $ 22.8 Central Europe.................................... 27.9 31.0 33.1 ------ ------ ------ $ 50.6 $ 53.5 $ 55.9 ====== ====== ====== Capital Spending United States..................................... $ 30.4 $ 25.6 $ 29.1 Central Europe.................................... 24.4 32.0 79.6 ------ ------ ------ $ 54.8 $ 57.6 $108.7 ====== ====== ====== Total Assets United States..................................... $580.9 $619.6 $628.5 Central Europe.................................... 220.3 237.5 289.3 ------ ------ ------ 801.2 857.1 917.8 ====== ====== ====== Long-lived Assets United States..................................... $507.4 $548.4 $560.1 Central Europe.................................... 178.8 179.4 225.6 ------ ------ ------ $686.2 $727.8 $785.7 ====== ====== ======
Other assets on the Combined Balance Sheets include a $37.2 million, $34.6 million and $28.3 million investment in a Polish joint venture at December 26, 1998, December 27, 1997 and December 28, 1996, respectively. PBO's equity income or loss in such joint venture was $2.8 million and $4.9 million equity income in 1998 and 1997 and $9.4 million equity loss in 1996. Note 15--Subsequent Events (Unaudited) On January 25, 1999, the Board of Directors of Whitman Corporation ("Whitman") approved an agreement in which PepsiCo will consolidate certain of its bottling territories and other assets with Whitman's existing bottling businesses to create a new bottling company referred to as "New Whitman." PepsiCo will transfer to the new company a number of bottling operations, including territories in Illinois, Indiana, Missouri and Ohio in the United States as well as in the Czech Republic, Slovakia, Hungary and Poland. PepsiCo also will transfer to the new company the 20% stake it currently holds in Whitman's Pepsi-Cola General Bottlers subsidiary. The agreement specified that Whitman will transfer to PepsiCo operations in: Marion, Virginia; Princeton, West Virginia and St. Petersburg, Russia. New Whitman will assume liabilities associated with PepsiCo's United States operations and will acquire PepsiCo's international operations for cash, resulting in net proceeds to PepsiCo of $300 million. In addition, PepsiCo will receive 54 million shares of common stock in New Whitman, giving PepsiCo immediate ownership of approximately 35% of New Whitman. The merger transaction is subject to the approval of the shareholders of Whitman. On March 19, 1999, Whitman sold its bottling operations located in Marion, Virginia and Princeton, West Virginia along with related transportation assets to PepsiCo for $97.8 million in cash. -----END PRIVACY-ENHANCED MESSAGE-----