SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999
/ / 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 001-15019
WHITMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-6167838
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3501 Algonquin Road, Rolling Meadows, Illinois 60008
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 818-5000
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 / /
As of October 29, 1999, the Registrant had 141,156,808 outstanding shares
(excluding treasury shares) of common stock, par value $0.01 per share, the
Registrant's only class of common stock.
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 1999
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 1999
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Sales $ 688.6 $ 474.4 $1,574.1 $1,233.3
Cost of goods sold 392.0 283.9 909.8 732.5
-------- -------- -------- --------
Gross profit 296.6 190.5 664.3 500.8
Selling, general and administrative expenses 213.8 112.1 480.7 326.0
Amortization expense 9.6 3.9 19.0 11.8
Special charges (Note 6) 4.5 -- 27.9 --
-------- -------- -------- --------
Operating income 68.7 74.5 136.7 163.0
Interest expense, net (Note 10) (19.4) (9.1) (44.9) (26.9)
Other expense, net (Notes 3 and 7) (2.1) (2.0) (49.9) (12.1)
-------- -------- -------- --------
Income before income taxes 47.2 63.4 41.9 124.0
Income taxes 22.8 29.6 6.9 56.8
-------- -------- -------- --------
Income from continuing operations
before minority interest 24.4 33.8 35.0 67.2
Minority interest -- 7.6 6.6 16.5
-------- -------- -------- --------
Income from continuing operations 24.4 26.2 28.4 50.7
Loss from discontinued operations after
taxes (Note 5) -- -- (27.2) (0.5)
Extraordinary loss on early extinguishment of
debt after taxes (Note 8) -- -- -- (18.3)
-------- -------- -------- --------
Net income $ 24.4 $ 26.2 $ 1.2 $ 31.9
======== ======== ======== ========
Weighted average common shares:
Basic 141.7 101.2 117.6 101.2
Incremental effect of stock options 0.9 1.5 1.1 1.7
-------- -------- -------- --------
Diluted 142.6 102.7 118.7 102.9
======== ======== ======== ========
Income (loss) per share - basic:
Continuing operations $ 0.17 $ 0.26 $ 0.24 $ 0.50
Discontinued operations -- -- (0.23) --
Extraordinary loss on early extinguishment
of debt -- -- -- (0.18)
-------- -------- -------- --------
Net income $ 0.17 $ 0.26 $ 0.01 $ 0.32
======== ======== ======== ========
Income (loss) per share - diluted:
Continuing operations $ 0.17 $ 0.26 $ 0.24 $ 0.49
Discontinued operations -- -- (0.23) --
Extraordinary loss on early extinguishment of debt -- -- -- (0.18)
-------- -------- -------- --------
Net income $ 0.17 $ 0.26 $ 0.01 $ 0.31
======== ======== ======== ========
Cash dividends per share $ 0.01 $ 0.05 $ 0.07 $ 0.15
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 1999
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
October 2, January 2,
1999 1999
------------ ------------
(in millions)
<S> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $ 116.5 $ 147.6
Receivables 252.6 170.7
Inventories 106.7 80.0
Other current assets 39.8 30.8
------------ ------------
Total current assets 515.6 429.1
Investments 60.7 160.0
Property (at cost) 1,375.9 1,006.5
Accumulated depreciation (533.6) (507.2)
------------ ------------
Net property 842.3 499.3
------------ ------------
Intangible assets 1,545.7 602.5
Accumulated amortization (157.6) (155.5)
------------ ------------
Net intangible assets 1,388.1 447.0
------------ ------------
Other assets 39.3 33.9
------------ ------------
Total assets $ 2,846.0 $ 1,569.3
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current maturities of long-term debt $ 331.9 $ --
Accounts and dividends payable 181.2 133.0
Other current liabilities 194.0 100.2
------------ ------------
Total current liabilities 707.1 233.2
------------ ------------
Long-term debt 803.0 603.6
Deferred income taxes 67.9 99.1
Other liabilities 77.9 73.3
Minority interest -- 233.7
Shareholders' equity:
Preferred stock ($0.01 par value, 12.5 million shares authorized;
no shares issued) -- --
Common stock ($0.01 par value, 350.0 million shares authorized;
167.3 million shares issued at October 2, 1999 and 113.3 million
shares issued at January 2, 1999) 1,633.8 499.8
Retained income 88.1 94.3
Accumulated other comprehensive loss:
Cumulative translation adjustment (18.8) (12.0)
Unrealized investment gain 4.7 3.4
------------ ------------
Accumulated other comprehensive loss (14.1) (8.6)
------------ ------------
Treasury stock (26.1 million shares held at October 2, 1999
and 12.3 million shares held at January 2, 1999) (517.7) (259.1)
------------ ------------
Total shareholders' equity 1,190.1 326.4
------------ ------------
Total liabilities and shareholders' equity $ 2,846.0 $ 1,569.3
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 1999
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
-----------------------------
1999 1998
----------- -----------
(in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 28.4 $ 50.7
Adjustments to reconcile to net cash provided by continuing operations:
Depreciation and amortization 88.7 57.7
Deferred income taxes (39.3) 18.2
Gain on sale of franchises (8.0) --
Special charges (Notes 6 and 7) 84.2 --
Cash outlays related to special charges (Note 6) (9.1) (22.1)
Other 7.1 10.9
Changes in assets and liabilities, exclusive of acquisitions:
Increase in receivables (41.0) (50.8)
Decrease (increase) in inventories 9.7 (5.6)
Increase in payables 17.2 43.9
Net change in other assets and liabilities (19.4) 5.3
----------- -----------
Net cash provided by continuing operations 118.5 108.2
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of franchises, net of cash divested (Note 3) 113.6 --
Franchises acquired, net of cash acquired (Note 3) (105.7) --
Dividends from and settlement of intercompany indebtedness with
Hussmann and Midas prior to spin-offs -- 434.3
Capital investments, net of dispositions (126.5) (103.4)
Net activity with joint ventures 1.2 3.2
Purchases of investments -- (12.6)
Proceeds from sales of investments 7.0 14.7
----------- -----------
Net cash (used in) provided by investing activities (110.4) 336.2
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term debt (16.8) (8.0)
Proceeds from issuance of long-term debt 298.0 --
Repayment of long-term debt (33.9) (311.2)
Common dividends (7.4) (15.2)
Treasury stock purchases (261.1) (37.7)
Issuance of common stock 2.5 20.0
----------- -----------
Net cash used in financing activities (18.7) (352.1)
----------- -----------
Net cash used in discontinued operations (19.6) (10.6)
Effect of exchange rate changes on cash and equivalents (0.9) --
----------- -----------
Change in cash and equivalents (31.1) 81.7
Cash and equivalents at beginning of year 147.6 52.4
----------- -----------
Cash and equivalents at end of nine months $ 116.5 $ 134.1
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein have been
prepared, without audit, by New Whitman (as defined below). The financial
statements include the results of operations of the former Whitman
Corporation ("Old Whitman"), which was merged with and into Heartland
Territories Holdings, Inc. ("Heartland") on May 20, 1999 (the "Merger"),
following which Heartland changed its name to Whitman Corporation ("New
Whitman"). Unless the context dictates otherwise, the use of the terms
"Whitman" or "the Company" herein shall include the results of operations
of both Old Whitman and New Whitman. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Company believes that the
disclosures made are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in Old Whitman's Annual Report on Form 10-K/A for the
fiscal year ended January 2, 1999. In the opinion of management, the
information furnished herein reflects all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair statement of results
for the interim periods presented. Certain prior year amounts have been
reclassified to conform to the current year presentation.
2. Effective at the end of 1998, Old Whitman changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the
Saturday closest to December 31. The Company's third quarter and
year-to-date results were based on thirteen weeks and thirty-nine weeks,
respectively, ended October 2, 1999. In the second quarter of 1999, the
Company eliminated the two-month reporting lag in consolidating results of
its existing international territories, resulting in additional sales of
$11.6 million and operating losses of $0.6 million.
3. On January 25, 1999, Old Whitman announced that its Board of Directors had
approved a new business relationship with PepsiCo, Inc. ("PepsiCo"). The
new relationship was approved by Old Whitman's shareholders on May 20,
1999. As part of the Contribution and Merger Agreement (the "Agreement")
with PepsiCo and New Whitman, on May 20, 1999 PepsiCo contributed certain
assets of several domestic franchise territories to New Whitman and Old
Whitman merged into New Whitman. Contributed territories included
Cleveland, Ohio, Dayton, Ohio, Indianapolis, Indiana, St. Louis, Missouri
and southern Indiana. Pepsi-Cola General Bottlers, Inc. ("Pepsi General"),
a wholly owned subsidiary of Old Whitman prior to the Merger and a wholly
owned subsidiary of the Company following the merger, acquired PepsiCo's
international operations in Hungary, the Czech Republic, Slovakia and the
balance of Poland on May 31, 1999. In exchange for the territories
acquired/contributed from PepsiCo and the elimination of PepsiCo's 20
percent minority interest in Pepsi General, New Whitman issued 54 million
shares of common stock to PepsiCo. In addition, New Whitman paid PepsiCo
cash totaling $133.7 million, assumed bank debt of $42.3 million, and
assumed $241.8 million of notes payable to PepsiCo, which were refinanced
on August 31, 1999 through the issuance of commercial paper. As part of
the Agreement, the Company agreed to repurchase up to 16 million shares,
or $400 million of its common stock, whichever is less, during the
12-month period following the close of the transaction. Through October 2,
1999, the Company repurchased approximately 14.0 million shares of its
common stock at a total cost of $261.1 million, which reduced New
Whitman's remaining repurchase commitment.
The Agreement provided for Pepsi General to sell to PepsiCo its operations
in Marion, Virginia; Princeton, West Virginia; and the St. Petersburg area
of Russia. On March 19, 1999, Pepsi General completed the sale to PepsiCo
of the franchises in Marion, Virginia and Princeton, West Virginia. The
sale of the franchise in Russia was completed on March 31, 1999. Proceeds
from these sales were $117.8 million and the Company recorded a pretax
gain of $11.4 million ($8.0 million after tax and minority interest),
which is reflected in other expense, net, on the Condensed Consolidated
Statements of Income. In accordance with the terms of the Agreement, this
gain is subject to adjustment pending a final determination of closing
date working capital of the territories sold.
Details of domestic and Central European territories acquired from PepsiCo
in the second quarter of 1999 are as follows (in millions):
Fair value of assets acquired, including
intangible assets of $1,009.0 million $ 1,410.7
Liabilities assumed (165.6)
----------
Cost of acquisition 1,245.1
Common stock issued to PepsiCo (54.0 million shares) (1,134.0)
Assumed notes payable to PepsiCo (241.8)
Elimination of PepsiCo's 20 percent minority
interest in Pepsi General 243.2
Cash and equivalents acquired (6.8)
----------
Net cash paid for acquired territories $ 105.7
==========
The acquisitions of the domestic and Central European territories have
been accounted for under the purchase method; accordingly, the results of
operations of the acquired territories have been included in the Company's
consolidated financial statements since the dates of acquisition. The net
cash paid for the acquisitions is subject to adjustment pending final
determination of the closing working capital of the territories acquired.
The excess of the aggregate purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over 40 years.
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 intangible assets. The portion of the
excess purchase price allocated to property is based on preliminary
appraisals. The allocation is subject to adjustment when the final
appraisals are completed. The Company anticipates that the final
appraisals will not differ significantly from the preliminary appraisals.
The pro forma condensed consolidated results of operations presented below
for the third quarter and nine months of 1999 and 1998 assume the
following:
- The territories described above were acquired and divested as of
January 1, 1998.
- The 16 million share repurchase commitment was completed as of
January 1, 1998.
- The effective tax rate, excluding special charges and non-recurring
items, was approximately 48 percent in 1998, consistent with the 1999
effective rate.
However, the pro forma information excludes sales of $11.6 million and
operating losses of $0.6 million attributable to eliminating the two-month
reporting lag in consolidating results of the existing international
territories (unaudited and in millions, except per share data):
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 688.6 $ 686.1 $1,834.4 $1,743.8
Income from continuing operations 24.4 32.9 17.2 57.6
Net income (loss) 24.4 32.9 (10.0) 38.8
Net income (loss) per common share-basic 0.17 0.24 (0.07) 0.28
Net income (loss) per common share-diluted 0.17 0.23 (0.07) 0.28
</TABLE>
The above pro forma information includes the effects of certain special
factors impacting comparability. The following pro forma information
further adjusts for the effects of the following items:
- Eliminates the impact of the $4.5 million of charges ($2.2 million
after taxes and minority interest) in the first quarter of 1999
related to the settlement of insurance, severance and legal matters;
the impact of the special charges of $27.9 million ($19.0 million
after taxes) recorded in the second and third quarters of 1999; and
the second quarter charge recorded for the write-down of
non-operating real estate held by the Company in the amount of $56.3
million ($35.9 million after taxes).
- Eliminates the gain on the sale of the divested territories recorded
in the first quarter of 1999.
- Eliminates the management charges allocated by PepsiCo to the
acquired territories. Includes fees incurred by Whitman for support
services related to the acquired domestic territories.
- Certain 1998 amounts have been reclassified to conform to 1999
presentation.
- Adjusts for the impact of the change in the domestic reporting
calendar on sales, but does not reflect the effect of the calendar
change on income from continuing operations or earnings per share.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 688.6 $ 685.4 $1,834.4 $1,798.9
Income from continuing operations 26.9 32.9 57.7 57.6
Income from continuing operations
per share - basic 0.19 0.24 0.41 0.41
Income from continuing operations
per share - diluted 0.19 0.23 0.41 0.41
</TABLE>
The above pro forma results are for information purposes only and may not
be indicative of actual results that would have occurred had the
transactions described taken place on January 1, 1998.
4. On January 30, 1998, the Company established Hussmann International, Inc.
("Hussmann") and Midas, Inc. ("Midas") as independent publicly held
companies through tax-free distributions (spin-offs) to Whitman
shareholders. Whitman retained Pepsi General as its principal operating
company. The financial information of Hussmann and Midas is reflected as
discontinued operations.
5. Loss from discontinued operations in the first nine months of 1999
includes a second quarter $12 million settlement of environmental
litigation filed against Pneumo Abex, a former subsidiary of the Company,
as well as a second quarter increase of $30.8 million in accruals for
other environmental matters related to Pneumo Abex. The loss from
discontinued operations in 1998 includes the net losses of Hussmann and
Midas through January 30, 1998, the date of the spin-offs. Losses from
discontinued operations have been reduced by income taxes of $15.6 million
for the first nine months of 1999 and increased by $0.1 million for the
first nine months of 1998.
6. In the third quarter of 1999, Pepsi General recorded a special charge of
$4.5 million ($2.8 million after tax) for staff reduction costs in certain
domestic markets.
In the second quarter of 1999, Pepsi General recorded a special charge of
$23.4 million, which included $18.6 million ($11.4 million after tax) for
staff reduction costs and non-cash asset write-downs, principally related
to the acquisition of the domestic and international territories from
PepsiCo. In addition, the Company announced it will seek the sale of the
Baltics operations to a third party and recorded a write-down of the
Company's investment by $4.8 million to the expected net realizable value.
In 1997, the Company recorded special charges totaling $49.3 million,
consisting of $14.8 million recorded by Pepsi General to consolidate a
number of its domestic divisions, including reductions in staffing levels,
and to write-down certain assets in its domestic and international
operations, and $34.5 million recorded by Whitman relating to the
severance of essentially all of the Whitman corporate management and staff
and for expenses associated with the spin-offs.
The following table summarizes the remaining accrued liabilities
associated with the special charges at January 2, 1999, activity during
the first nine months of 1999, and the remaining accrued liabilities at
October 2, 1999 (in millions):
Accrued liabilities at January 2, 1999
(all employee related costs) $ 14.5
Special charges:
Asset write-downs associated with exit of
plastic returnable bottle package in existing
international territories 7.6
Other asset write-downs 5.9
Employee related costs 9.6
Write-down of Baltics operations 4.8
------
Total special charges 27.9
------
Expenditures and asset write-downs:
Asset write-downs (18.3)
Expenditures for employee related costs (9.1)
------
Total expenditures and asset write-downs (27.4)
------
Accrued liabilities at October 2, 1999
(all employee related costs) $ 15.0
======
Employee related costs of $4.5 million recorded in the third quarter 1999
special charges include severance payments for management and staff
affected by changes in certain domestic markets. Employee related costs of
$5.1 million recorded in the second quarter 1999 special charges include
severance payments for the management and staff affected by the
consolidation of international headquarters and operations in Poland and
management changes in certain domestic markets. Employee related costs
recorded in 1997 special charges include severance payments for the
management and staff affected by changes in the organizational structure,
as well as other headcount reduction programs. The 1997 charges affected
approximately 125 positions at Pepsi General and essentially all employees
at Whitman Corporate, of which 12 positions are yet to be eliminated at
October 2, 1999. The charges recorded in the second and third quarters of
1999 resulted in the elimination of approximately 310 positions, of which
approximately 49 positions are yet to be eliminated at October 2, 1999.
The accrued liabilities remaining at October 2, 1999 are comprised of
deferred severance payments and certain employee benefits. The Company
expects to pay a significant portion of the $15.0 million of employee
related costs during the next twelve months; accordingly, such amounts are
classified as other current liabilities.
7. The Company entered into an agreement for the sale of property in downtown
Chicago and recorded a charge of $56.3 million ($35.9 million after tax)
in the second quarter of 1999 to reduce the book value of the property.
This charge is reflected in other expense, net on the Condensed
Consolidated Statements of Income. The close of the sale is subject to
completion of due diligence and certain other conditions.
8. In January, 1998, Whitman made a tender offer for any and all of its
outstanding 7.625% and 8.25% notes maturing June 15, 2015, and February
15, 2007, respectively. In connection with the tender offer, Whitman
repurchased 7.625% and 8.25% notes with principal amounts of $91.0 million
and $88.5 million, respectively. The Company paid total premiums in
connection with the tender offer of $26.4 million and the remaining
unamortized discount and issue costs related to repurchased notes were
$2.1 million. The Company also repaid a term loan and notes with principal
amounts of $50.0 million scheduled to mature in 1998 and 1999, notes due
in 2002 with principal amounts of $50.0 million and industrial revenue
bonds of $5.0 million due 2013. Costs associated with these repayments and
the remaining unamortized issue costs were not significant. The Company
recorded an extraordinary charge of $18.3 million, net of income tax
benefits of $10.4 million, in the first quarter of 1998 related to these
early extinguishments of debt.
9. The Company's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Net income $ 24.4 $ 26.2 $ 1.2 $ 31.9
Foreign currency translation adjustment (1.4) (0.2) (6.8) 2.7
Unrealized gains on securities 1.2 (4.9) 1.3 0.6
-------- -------- -------- --------
Comprehensive income (loss) $ 24.2 $ 21.1 $ (4.3) $ 35.2
======== ======== ======== ========
</TABLE>
Unrealized gains on securities are presented net of tax expense (benefit)
of $0.8 million, $(2.7) million, $0.9 million and $0.3 million,
respectively.
Prior to May 20, 1999, the Company classified PepsiCo's 20 percent share
of Pepsi General's cumulative translation adjustment within minority
interest. As a result of the elimination of PepsiCo's minority interest in
Pepsi General, approximately $3.7 million of cumulative translation
adjustment has been reclassified from minority interest to cumulative
translation adjustment, and therefore has been included in comprehensive
loss for the first nine months of 1999.
10. Interest expense, net, is comprised of the following:
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Interest expense $ (20.0) $ (11.6) $ (47.6) $ (35.1)
Interest income from Hussmann and Midas -- -- -- 1.6
Interest income 0.6 2.5 2.7 6.6
--------- --------- -------- --------
Interest expense, net $ (19.4) $ (9.1) $ (44.9) $ (26.9)
========= ========= ======== ========
</TABLE>
Interest income from Hussmann and Midas related to intercompany loans and
advances. The related interest expense recorded by Hussmann and Midas is
included in loss from discontinued operations after taxes.
11. Net cash provided by operating activities reflected cash payments and
receipts for interest and income taxes as follows:
Nine Months
------------------------
1999 1998
-------- --------
(in millions)
Interest paid $ 48.0 $ 48.0
Interest received 3.2 6.2
Income taxes paid, net of refunds 33.1 4.0
The increase in income taxes paid in the first nine months of 1999 as
compared to the comparable period in 1998 was due primarily to the impact
of the tax benefits arising from the extraordinary loss recorded during
the first quarter of 1998 (see Note 8).
12. As a result of the Central European territory acquisitions, the Company
re-evaluated certain previous tax positions related to its international
operations and eliminated $19.8 million of deferred tax liabilities
recorded in prior periods. Beginning in the second quarter of 1999, the
Company no longer defers the tax benefits on international losses. The
following table reconciles the income tax provision for continuing
operations at the U.S. federal statutory rate to the Company's actual
income tax provision on continuing operations (dollars in millions):
<TABLE>
<CAPTION>
Nine Months Nine Months
1999 1998
--------------------- ---------------------
Amount % Amount %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income taxes computed at the U.S. federal statutory rate $ 40.1 35.0 $ 43.4 35.0
State income taxes, net of federal income tax benefit 5.0 4.4 6.0 4.8
Non-U.S. losses 0.6 0.5 4.5 3.6
Non-deductible portion of amortization - intangibles 7.6 6.6 3.6 2.9
Other items, net 1.4 1.2 (0.7) (0.5)
-------- -------- -------- --------
Income tax on continuing operations, excluding
non-recurring items 54.7 47.7 56.8 45.8
======== ========
Tax benefit of special charges and elimination of
deferred tax liabilities recorded in prior periods (47.8) --
-------- --------
Income tax expense on continuing operations $ 6.9 $ 56.8
======== ========
</TABLE>
13. At October 2, 1999, the components of inventory were approximately: raw
materials and supplies - 43 percent; finished goods - 57 percent.
14. The Company continues to be subject to certain indemnification obligations
under agreements with previously sold subsidiaries for potential
environmental liabilities. There is significant uncertainty in assessing
the Company's share of the potential liability for such claims. The
assessment and determination for cleanup at the various sites involved is
inherently difficult to estimate, and the Company's share of related costs
is subject to various factors, including possible insurance recoveries and
the allocation of liabilities among many other potentially responsible and
financially viable parties.
At October 2, 1999, the Company had accruals of $36.2 million to cover
these potential liabilities, including $12.0 million classified as current
liabilities. Such amounts are determined using estimated undiscounted
future cash requirements, and have not been reduced by potential future
insurance recoveries. These estimated liabilities include expenses for the
remediation of identified sites, payments to third parties for claims and
expenses, and the expenses of on-going evaluation and litigation. The
estimates are based upon current technology and remediation techniques,
and do not take into consideration any inflationary trends upon such
claims or expenses, nor do they reflect the possible benefits of
continuing improvements in remediation methods. The accruals also do not
provide for any claims for environmental liabilities or other potential
issues which may be filed against the Company in the future.
The Company also has other contingent liabilities from various pending
claims and litigation on a number of matters, including indemnification
claims under agreements with previously sold subsidiaries for product
liability and toxic torts. The ultimate liability for these claims, if
any, cannot be determined. In the opinion of management, and based upon
information currently available, the ultimate resolution of these claims
and litigation, including potential environmental exposures, and
considering amounts already accrued, will not have a material effect on
the Company's financial condition or the results of operations. Additional
claims and liabilities may develop and may result in additional charges to
income, principally through discontinued operations. Existing
environmental liabilities associated with the Company's continuing
operations are not material.
15. During the first nine months of 1999, the Company entered into several
derivative financial instruments to reduce the Company's exposure to
adverse fluctuations in interest rates and commodity prices. These
financial instruments were "over-the-counter" instruments and were
designated at their inception as hedges of underlying exposures. The
Company does not enter into derivative financial instruments for trading
purposes.
During the first nine months of 1999, the Company entered into several
swap contracts to hedge future fluctuations in aluminum prices. Each
contract hedges price fluctuations on a portion of the Company's domestic
aluminum can requirements over a specified future six-month period,
including requirements extending into the year 2000. Because of the high
correlation between aluminum commodity prices and the Company's cost of
aluminum cans, the Company considers these hedges to be highly effective.
16. Basic earnings per share are based upon the weighted-average number of
common shares outstanding. Diluted earnings per share assume the exercise
of all options which are dilutive, whether exercisable or not. The
dilutive effects of stock options are measured under the treasury stock
method.
Options to purchase 2,651,000 shares and 276,000 shares at a
weighted-average price of $22.27 and $19.90 per share, respectively, that
were outstanding at October 2, 1999 and September 30, 1998, respectively,
were not included in the computation of diluted EPS because the exercise
price was greater than the average market price of the common shares
during the related period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
1999 THIRD QUARTER COMPARED WITH 1998 THIRD QUARTER
Due to the 1999 transaction with PepsiCo that resulted in the divestiture
of certain of the Company's operations, as well as the acquisition of
significant domestic and Central European territories from PepsiCo, as more
fully described in Note 3 to the Condensed Consolidated Financial Statements,
the Company believes that comparable results provide a better indication of
current operating trends than reported results.
Comparable operating results exclude results of territories divested and
include results of territories acquired as if such transactions occurred as of
the beginning of 1998. With respect to the following discussion of sales volumes
and sales dollars only, adjustment has been made for the change in the Company's
reporting calendar; no such adjustment for this reporting calendar change has
been made to the comparable amounts presented for operating income. In addition,
comparable operating results exclude the $4.5 million of special charges
incurred in the third quarter of 1999; the $23.4 million of special charges
incurred in the second quarter of 1999; the $4.5 million of charges incurred in
the first quarter of 1999 related to the settlement of insurance, severance and
legal matters; and the impact of eliminating the two-month reporting lag in
consolidating international results.
Sales for the third quarter of 1999 and 1998 are summarized below (in
millions):
<TABLE>
<CAPTION>
Reported Comparable
----------------------- % ------------------------ %
1999 1998 Change 1999 1998 Change
-------- -------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 611.4 $ 442.6 38.1 $ 611.4 $ 610.8 0.1
International 77.2 31.8 142.8 77.2 74.6 3.5
-------- -------- --------- ---------
Total Sales $ 688.6 $ 474.4 45.2 $ 688.6 $ 685.4 0.5
======== ======== ========= =========
</TABLE>
On a reported basis, domestic sales increased $168.8 million, or 38.1
percent, in the third quarter of 1999 compared to 1998, reflecting sales
contributed by the acquired territories and improved pricing. These were
partially offset by lower volumes in existing territories, as a result of the
divestiture of the franchises in Marion, Virginia and Princeton, West Virginia
and the timing of recording Fourth of July holiday sales. Fourth of July holiday
sales in existing Whitman markets were recorded in the third quarter of 1998,
whereas such volume was recorded in the second quarter of 1999.
On a comparable basis, domestic sales were essentially flat, with an
increase in average net selling price per 8-ounce case of 3.3 percent and a 3.2
percent decrease in 8-ounce equivalent case volume. Despite lower overall
volumes, the vending and mass merchandising channels showed strong growth, as
did the water brands Aquafina and Avalon. Also providing growth were the Dr
Pepper and Mountain Dew brands. Growth of 20-ounce non-returnable ("NR") package
sales continued, aided by the increased investment in the cold drink channel,
which includes increasing points of access through investment in vending
equipment and coolers.
Reported international sales increased significantly due to sales
contributed by the newly acquired Central European territories. On a comparable
basis, sales increased by $2.6 million, or 3.5 percent, due, in part, to higher
sales in Poland, driven by a mix shift to more polyethylene ("PET") packing,
partially offset by year-over-year currency depreciation. Increased contract
sales in the Czech Republic also contributed to the increase in comparable
sales.
The consolidated gross profit margin on a reported basis increased to 43.1
percent of sales in the third quarter of 1999, compared with 40.2 percent of
sales in the comparable period of 1998. This increase was due to improved
domestic margins and improved international margins in Poland, as well as the
absence in the third quarter of 1999 of lower margin sales associated with the
previously sold Russian operations. The reported domestic margin increased 1.7
percentage points, reflecting higher net selling prices and reduced packaging
costs, partially offset by the lower margin channel and package mix of the
acquired domestic territories.
Reported selling, general and administrative ("SG&A") expenses represented
31.0 percent of sales in the third quarter of 1999, compared with 23.6 percent
in the comparable period of 1998. This increase is due, in part, to the higher
cost structure in the acquired territories; higher depreciation expense as a
result of increases in capital spending; higher field operating expenses to
support the Company's cold drink initiative, which was not fully staffed until
the latter part of the third quarter of 1998, and higher advertising and media
expenses. In addition, incremental expense associated with Year 2000
remediation, together with the integrated enterprise-wide resource planning
("ERP") system implementation, in the third quarter of 1999 amounted to
approximately $0.9 million. Amortization expense increased due to the
transaction with PepsiCo.
In the third quarter of 1999, Pepsi General recorded a special charge of
$4.5 million ($2.8 million after tax) for staff reduction costs in certain
domestic markets. As a result of the actions taken leading to the special
charge, the Company expects to realize approximately $9-10 million in annual
pretax savings, resulting principally from reduced employee related costs. Such
annual savings will not be fully realized until the year 2000.
Operating income for the third quarter of 1999 and 1998 is summarized
below (in millions):
<TABLE>
<CAPTION>
Reported Comparable
----------------------- % ------------------------ %
1999 1998 Change 1999 1998 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 72.9 $ 74.7 -2.4 $ 77.4 $ 89.2 -13.2
International (4.2) (0.2) N/M (4.2) (3.3) -27.3
-------- -------- -------- --------
Total Operating
Income $ 68.7 $ 74.5 -7.8 $ 73.2 $ 85.9 -14.8
======== ======== ======== ========
</TABLE>
In the third quarter of 1999, reported domestic operating income decreased
$1.8 million, or 2.4 percent. Included in third quarter 1999 domestic operating
income are $4.5 million of special charges, resulting from the elimination of
approximately 200 positions in certain domestic markets (see Note 6 to the
Condensed Consolidated Financial Statements). Excluding these charges, reported
operating income increased $2.7 million, or 3.6 percent, to $77.4 million in the
third quarter of 1999, reflecting higher operating income contributed by the
acquired territories, partially offset by the impact of the timing of Fourth of
July holiday sales in existing Whitman markets and higher SG&A expenses. As a
result of the change in the Company's reporting calendar, such sales were
reported in the second quarter of 1999 and the third quarter of 1998.
On a comparable basis, domestic operating income decreased $11.8 million,
or 13.2 percent, principally due to the timing of Fourth of July holiday sales.
The domestic operating margin for the third quarter of 1999, at 12.7 percent,
was 1.9 percentage points lower than a year ago, reflecting, in part, increased
depreciation and field operating expenses to support the cold drink initiative,
incremental Year 2000 remediation expenses together with the ERP system
implementation, and higher advertising and media expense.
Reported international operating losses increased $4.0 million to $4.2
million in the third quarter of 1999. This increase was principally attributable
to operating losses of the acquired international territories. On a comparable
basis, international operating losses increased by $0.9 million from the third
quarter of 1998, primarily due to approximately $2.0 million of higher duties,
which are not expected to continue.
Net interest expense increased $10.3 million to $19.4 million. The
increase was due principally to an increase in average quarterly outstanding net
debt due to the acquisitions of domestic and Central European territories from
PepsiCo and related share repurchases.
Other expense, net, increased to $2.1 million in the third quarter of 1999
compared with $2.0 million in the third quarter of 1998, principally due to
higher foreign currency translation losses, partially offset by the termination
of the management fee paid to PepsiCo and reduced real estate taxes on
non-operating land.
RESULTS OF OPERATIONS
1999 NINE MONTHS COMPARED WITH 1998 NINE MONTHS
See "Results of Operations - 1999 Third Quarter Compared with 1998 Third
Quarter" for discussion of the basis used below for determining comparable
results of operations.
Sales for the first nine months of 1999 and first nine months of 1998 are
summarized below (in millions):
<TABLE>
<CAPTION>
Reported Comparable
------------------------ % ------------------------ %
1999 1998 Change 1999 1998 Change
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $1,440.1 $ 1,165.9 23.5 $ 1,645.7 $ 1,606.3 2.5
International 134.0 67.4 98.8 188.7 192.6 -2.0
-------- --------- --------- ---------
Total Sales $1,574.1 $ 1,233.3 27.6 $ 1,834.4 $ 1,798.9 2.0
======== ========= ========= =========
</TABLE>
Reported domestic sales increased $274.2 million, or 23.5 percent, in the
first nine months of 1999 compared with the same period of 1998, reflecting
sales contributed by the acquired territories and improved pricing. Reported
volume including foodservice, in 8-ounce equivalent cases, increased 21.0
percent, primarily reflecting volume contributed by the acquired territories.
On a comparable basis, domestic sales increased $39.4 million, or 2.5
percent, reflecting a 0.5 percent increase in 8-ounce equivalent case volume,
including foodservice, and the balance from improved pricing.
Reported international sales increased significantly in the first nine
months of 1999, principally due to sales contributed by the newly acquired
Central European territories. On a comparable basis, sales decreased by $3.9
million to $188.7 million, primarily reflecting lower sales in Poland and
Slovakia, as increases in local currency net selling prices were offset by
year-over-year currency depreciation.
The consolidated gross profit margin on a reported basis increased from
40.6 percent of sales to 42.2 percent of sales, due to improved domestic pricing
combined with decreased packaging costs, and higher international margins
primarily attributable to improvements in Poland and the Baltics.
Reported SG&A expenses, excluding first quarter 1999 charges related to
the settlement of insurance, severance and legal matters, represented 30.3
percent of sales in the first nine months of 1999, compared with 26.4 percent in
the comparable period of 1998. This increase is due, in part, to the higher cost
structure in the acquired territories, as well as higher depreciation and other
field operating expenses to support the Company's cold drink initiative, which
was not fully staffed until the latter part of the third quarter of 1998, and
higher advertising and media expenses. In addition, incremental Year 2000
expenses, together with the ERP system implementation in the first nine months
of 1999, amounted to approximately $2.4 million. Amortization expense increased
due to the transaction with PepsiCo.
See "Results of Operations - 1999 Third Quarter Compared with 1998 Third
Quarter" for discussion of special charges incurred in the third quarter of
1999.
In the second quarter of 1999, Pepsi General recorded a special charge of
$23.4 million, which included $18.6 million ($11.4 million after tax) for staff
reduction costs and non-cash asset write-downs, principally related to the
acquisition of the domestic and international territories from PepsiCo. In
addition, the Company announced it will seek the sale of the Baltics operations
to a third party and wrote down its investment by $4.8 million to the expected
net realizable value.
As a result of the actions taken resulting in the special charges of $27.9
million, the Company expects to realize approximately $18-20 million in annual
pretax savings, resulting principally from reductions in employee related costs.
Such savings will not be fully realized until the Year 2000. In fiscal 1998 and
the first nine months of 1999, the Baltics had sales of $5.4 million and $5.3
million, respectively, and incurred operating losses of $3.5 million and $1.1
million, respectively.
Operating income for the first nine months of 1999 and first nine months
of 1998 is summarized below (in millions):
<TABLE>
<CAPTION>
Reported Comparable
------------------------ % ------------------------ %
1999 1998 Change 1999 1998 Change
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 173.0 $ 174.0 -0.6 $ 189.9 $ 194.8 -2.5
International (36.3) (11.0) N/M (25.8) (31.0) 16.8
--------- --------- --------- ---------
Total Operating
Income $ 136.7 $ 163.0 -16.1 $ 164.1 $ 163.8 0.2
========= ========= ========= =========
</TABLE>
Reported 1999 domestic operating income was $173.0 million; excluding
one-time charges it was $184.8 million. Excluding one-time charges, the 6.2
percent increase reflects operating income contributed by the acquired
territories, partially offset by reduced operating income in existing
territories due to higher costs incurred to support the Company's cold drink
initiative, incremental Year 2000 remediation expenses, together with the ERP
system implementation, higher advertising and media expenses, and increased
amortization expense of $7.2 million.
On a comparable basis, domestic operating income decreased $4.9 million,
or 2.5 percent, in the first nine months of 1999. The domestic operating margin
for the first nine months of 1999, at 11.5 percent, was 1.1 percentage points
lower than the comparable period of 1998, reflecting increased costs to support
the cold drink initiative, incremental Year 2000 remediation and ERP system
implementation expenses, and higher advertising and media expenses.
Included in international losses for the first nine months of 1999 are
$20.6 million of special charges recorded in the second quarter of 1999 (see
Note 6 to the Condensed Consolidated Financial Statements). Excluding these
charges, reported operating losses increased $4.7 million to $15.7 million in
the first nine months of 1999. This increase is due primarily to the additional
operating losses from the newly acquired territories. On a comparable basis,
operating losses for the first nine months of 1999 decreased by $5.2 million
from the first nine months of 1998, due to improvements across most territories.
Net interest expense increased $18.0 million to $44.9 million. This
increase was due principally to an increase in average outstanding net debt due
to the acquisitions of domestic and Central European territories and to the
related share repurchases, as well as the loss of interest income received from
Midas and Hussmann in the first quarter of 1998.
Other expense, net, of $49.9 million in the first nine months of 1999
includes the $56.3 million write-down of non-operating real estate and the $11.4
million pre-tax gain related to the sale of the Company's operations in Marion,
Princeton, and Russia. Absent these items, non-operating expense was $5.0
million in the first nine months of 1999, compared to 12.1 million in the first
nine months of 1998. This decrease is due, in part, to the termination of the
management fee paid to PepsiCo and reduced real estate taxes on non-operating
land, partially offset by increased foreign currency translation losses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased by $10.3 million to
$118.5 million in the first nine months of 1999. This increase is due primarily
to higher operating cash flow, partially offset by increased income tax payments
in 1999; claims payments made by the Company's insurance subsidiary, including
claims for coverage associated with previously discontinued operations; and
higher payments of various liabilities.
Investing activities in the first nine months of 1999 included $113.6
million of net proceeds received from the sale of the Marion, Princeton and
Russia franchise territories, as well as $105.7 million of net cash paid for
certain assets of the domestic franchises and for the purchase of the Central
European franchises acquired from PepsiCo. Investing activities in the first
nine months of 1998 included $434.3 million received in January, 1998, from
Hussmann and Midas prior to their spin-offs to settle intercompany indebtedness
and to pay special dividends. The Company made capital investments of $126.5
million, net of proceeds from dispositions, in its operations in the first nine
months of 1999 compared with $103.4 million in the first nine months of 1998.
The increased spending was principally attributable to investment in the cold
drink initiative, spending by the newly acquired territories, and increased
spending on fleet vehicles. Cash received, net of investments made, from the
Company's joint venture in Poland was $1.2 million in the first nine months of
1999 compared to $3.2 million in the first nine months of 1998.
Purchases and sales of investments includes activity related to the
Company's insurance subsidiary, which provides certain levels of insurance for
Pepsi General, as well as Hussmann and Midas up to the date of their spin-offs.
Funds are invested by the insurance subsidiary and proceeds from the sale of
investments are used by the insurance subsidiary to pay claims and other
expenses. A substantial portion of such investments are reinvested as they
mature. Also included in the sales of investments are miscellaneous land sales
associated with the Company's non-operating real estate subsidiaries.
The Company's total debt increased $531.3 million to $1,134.9 million at
October 2, 1999, from $603.6 million at January 2, 1999. This increase is
primarily attributable to the April, 1999 issuance of $150 million of 6.0
percent notes due in 2004 and $150 million of 6.375 percent notes due in 2009,
as well as commercial paper issued to fund the August 31, 1999 repayment of the
$241.8 million of notes payable to PepsiCo. The Company repurchased
approximately 14.0 million shares and 2.0 million shares of its common stock for
$261.1 million and $37.7 million in the first nine months of 1999 and 1998,
respectively. The Company paid dividends of $7.4 million in the first nine
months of 1999, based on quarterly cash dividend rates of $0.05, $0.01 and $0.01
per common share in the first, second and third quarters of 1999, respectively,
compared with $15.2 million in the first nine months of 1998, based on a
quarterly cash dividend rate of $0.05 per common share. The issuance of common
stock, including treasury shares, for the exercise of stock options resulted in
cash inflows of $2.5 million in the first nine months of 1999, compared with
$20.0 million in the first nine months of 1998.
The Company has a five-year revolving credit agreement with maximum
borrowings of $500 million. In April 1999, the Company increased its commercial
paper program to $500 million. The revolving credit facility acts as a back-up
for the commercial paper program; accordingly, the Company has a total of $500
million available under the commercial paper program and revolving credit
facility combined. Total commercial paper borrowings were $248.5 million at
October 2, 1999. The Company believes that with its existing operating cash
flows, available lines of credit, and the potential for additional debt and
equity offerings, the Company will have sufficient resources to fund its future
growth and expansion, including potential domestic franchise acquisitions.
YEAR 2000 READINESS
The Year 2000 ("Y2K") issue relates to computer applications being designed
using only two digits, rather than four, to represent a year. As a result,
computer applications could fail or create erroneous results by recognizing "00"
as the year 1900 rather than the year 2000. The Company considers Y2K readiness
as the ability to manage and process date-related information without materially
abnormal or incorrect outcomes beyond January 1, 2000.
Beginning in 1997, the Company initiated a company-wide effort to address
the Y2K issues that affect its operations and to minimize service interruptions.
This effort consists of five phases: (1) inventory, (2) assessment, (3)
remediation, (4) testing and (5) developing contingency plans. The contingency
plans include addressing issues associated with any non-compliant suppliers and
key customers in order to minimize the potential material adverse effects of any
Y2K problems. During 1998, the Company designated one of its senior managers as
its Vice President - Y2K Planning and Compliance. This position is responsible
for coordinating all facets of the Company's Y2K initiative, including
coordinating efforts and responsibilities between corporate Information
Technology ("IT") and non-IT personnel and local division management to
identify, evaluate and implement changes to centralized and non-centralized
computer systems, applications and equipment necessary to achieve Y2K readiness.
Local management has identified and evaluated major areas of potential business
impact, including critical suppliers and customers, to enable proper monitoring
of Y2K conversion efforts on a centralized basis.
In the first quarter of 1998, the Company began implementation of an ERP
system. The ERP system addressed the Company's financial applications during the
first phase of implementation and will address manufacturing and distribution
systems during the second phase. The ERP project was begun with the goal of
expanding existing system capacity for future growth and improving processing
efficiencies, as well as addressing any Y2K compliance issues associated with
the Company's existing systems. The first phase of the ERP implementation was
implemented during January, 1999, except for the asset management and accounts
receivable modules. The asset management module was implemented during the first
quarter of 1999. The accounts receivable module was implemented in October,
1999. Phase two of the ERP project is expected to be completed during late 1999
and first half of the Year 2000. The stages of the second phase targeted for
completion in the Year 2000 do not involve any Y2K compliance issues. In
conjunction with the implementation of the ERP system, certain hardware and
software components have been or will be upgraded to expand existing capacity.
Through the first nine months of 1999, costs incurred in the ERP implementation
totaled approximately $17.2 million. Implementation costs for the entire ERP
project currently are expected to be $25 million to $30 million. These costs
have been, and will be, funded through operating cash flows. A majority of the
costs, as they relate to purchased hardware, software and the implementation
thereof, will be capitalized.
The Company has conducted an inventory of its IT systems and has corrected
substantially all of those critical-path systems that were found to have
date-related deficiencies, excluding the financial systems addressed by phase
one of the ERP implementation. In the case of non-IT systems (i.e., including
embedded chip technology), the Company conducted an inventory of its facilities,
which was completed, for the most part, by the end of 1998. Correction of
date-deficient systems and equipment was virtually complete by the end of the
second quarter of 1999. The Company is also surveying selected third parties,
including its principal suppliers and customers, as well as governmental
entities, to determine the status of their Y2K compliance programs.
The inventory, assessment and remediation phases of the Y2K project are
complete. As part of the Company's testing phase, it is conducting verification
testing of selected mainframe/network component upgrades received from
suppliers. In addition, selected critical components are undergoing testing in a
controlled environment that replicates the current mainframe/network
configuration to simulate the turn of the century and leap year dates. In the
event these efforts do not address all potential systems problems, the Company
is continuing the process of developing contingency plans to ensure that it will
be able to operate the critical areas of its business. This process includes
developing alternative plans to engage in business activities with customers and
suppliers should they or the Company not be Y2K compliant, including resorting
to paper records of certain transactions presently handled electronically.
Contingency plans for both international and domestic operations were
substantially finalized in the third quarter of 1999. The ultimate
implementation of contingency plans, if necessary, would be expected during the
fourth quarter of 1999.
The Company is continuing its effort to address Y2K readiness at its
operations which were sold to PepsiCo in the first quarter of 1999. Likewise,
PepsiCo continued its Y2K project at the territories acquired in the second
quarter of 1999. The Company has been informed that PepsiCo's project, as it
relates to their bottling operations, is similar in scope and progress to the
Company's project.
The Company's critical IT systems, except as specifically noted elsewhere,
were Y2K compliant at the end of the first quarter of 1999. Virtually all of the
Company's non-IT systems and equipment were compliant by September, 1999.
Incremental costs, over and above the aforementioned ERP system project
spending, related to the Y2K project are being expensed as incurred and funded
through operating cash flows. Through the third quarter of 1999, the Company had
expensed approximately $2 million of such incremental costs. Total incremental
costs to ensure Y2K compliance are estimated to be $3 million to $4 million,
with the majority of the costs being incurred in 1999. This expectation assumes
that the Company will not be obligated to incur significant Y2K-related costs on
behalf of its customers or suppliers. The projection of Y2K-related costs is
based on numerous assumptions and estimates; consequently, actual costs could be
materially greater than anticipated. Plans will continue to be monitored for
completion. Incomplete or untimely resolution of the Y2K issue by the Company,
by critically important suppliers and customers of the Company, or by
governmental entities, could have a materially adverse impact on the Company's
business operations or financial condition in the future.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking
information that reflects management's expectations, estimates and assumptions,
based on information available at the time this Form 10-Q was prepared. When
used in this document, the words "anticipate," "believe," "estimate," "expect,"
"plan", "intend" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements involve risks,
uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements, including, but not limited to, the following: competition, including
product and pricing pressures; changing trends in consumer tastes; changes in
the Company's relationship and/or support programs with PepsiCo and other brand
owners; market acceptance of new product offerings; weather conditions; cost and
availability of raw materials; availability of capital; labor and employee
benefit costs; unfavorable interest rate and currency fluctuations; unexpected
costs associated with Year 2000 conversions or the business risks associated
with potential Year 2000 non-compliance by the Company, customers and/or
suppliers; costs of legal proceedings; and general economic, business and
political conditions in the countries and territories where the Company
operates.
These events and uncertainties are difficult or impossible to predict
accurately and many are beyond the Company's control. The Company assumes no
obligation to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
CURRENT AND PENDING ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivatives and for hedging activities. As issued, SFAS
No. 133 was effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. In June 1999, SFAS No. 137 was issued, effectively
deferring the date of required adoption of SFAS No. 133 to fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company is studying the
statement to determine its effects, if any, on the consolidated financial
position or results of operations. The Company will adopt SFAS No. 133, as
required, in fiscal year 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to various market risks, including risks from
changes in commodity prices, interest rates and current exchange rates.
Commodity Prices
The risk from commodity price changes correlates to Pepsi General's
ability to recover higher product costs through price increases to customers,
which may be limited due to the competitive pricing environment that exists in
the soft drink business. In 1999, the Company began to use swap contracts to
hedge against price fluctuations for a portion of its aluminum requirements. See
Note 15 to the Condensed Consolidated Financial Statements. Costs for other raw
material requirements are managed by entering into firm commitments for
materials used.
Interest Rates
In the first nine months of 1999, the risk from changes in interest rates
was not material to the Company's operations because a significant portion of
the Company's debt issues were fixed rate obligations. The Company's floating
rate exposure relates to changes in the six month LIBOR rate and the overnight
Federal Funds rate. Assuming consistent levels of floating rate debt with those
held by the Company on October 2, 1999, a 50 basis point (0.5 percent) change in
each of these rates would have an impact of approximately $1.2 million on the
Company's annual interest expense related to its floating rate obligations. In
possible future issuances of debt, the Company may be subject to additional
floating rate interest exposure and may manage those exposures using interest
rate swaps. In the first nine months of 1999, the Company had short-term
investments, principally invested in money market funds and commercial paper,
which were most closely tied to overnight Federal Funds rates. Assuming a change
of 50 basis points in the rate of interest associated with the Company's
short-term investments, interest income would have changed by approximately $0.2
million.
Currency Exchange Rates
Because the Company operates international franchise territories, it is
subject to exposure resulting from changes in currency exchange rates. Currency
exchange rates are influenced by a variety of economic factors including local
inflation, growth, interest rates and governmental actions, as well as other
factors. The Company currently does not hedge the translation risks of
investments in its international operations. Any positive cash flows generated
have been reinvested in the operations, excluding loan repayments from the
manufacturing operations in Poland.
Non-U.S. operations do not represent a significant portion of the
Company's total operations. Changes in currency exchange rates impact the
translation of the results of the international operations from their local
currencies into U.S. dollars. If the currency exchange rates had changed by 5
percent in the first nine months of 1999, the impact on reported operating
income would have been approximately $0.6 million. This estimate does not take
into account the possibility that rates can move in opposite directions and that
gains in one category may or may not be offset by losses from another category.
The economy in Russia was considered highly inflationary for accounting purposes
with all transactions being recorded at historical costs in U.S. dollars. All
gains and losses due to foreign exchange transactions from the Russia
operations, which were sold in the first quarter of 1999, are included in the
consolidated results of operations.
PART II - OTHER INFORMATION
Item 5. Other Information
The Company's 2000 annual meeting of stockholders is expected to be
held on Thursday, May 4, 2000. Pursuant to rules of the Securities
and Exchange Commission ("SEC"), in order to be considered for
inclusion in the Company's proxy statement for the 2000 annual
meeting, a stockholder proposal must be received by the Company a
reasonable time before the Company begins to print and mail the proxy
statement for the 2000 annual meeting. The Company expects to mail
its 2000 proxy statement on or about March 27, 2000.
In addition, regardless of whether a stockholder proposal is set
forth in the Company's 2000 proxy statement as a matter to be
considered by stockholders, the Company's by-laws establish an
advance notice procedure for stockholder proposals to be brought
before any annual meeting of stockholders, including proposed
nominations of persons for election to the Board of Directors.
Stockholders at the 2000 annual meeting may consider a proposal or
nomination brought by a stockholder of record on the record date to
be established for the 2000 annual meeting who is entitled to vote at
the 2000 annual meeting and who has given the Company timely written
notice, in proper form, of the stockholder's proposal or nomination.
A stockholder proposal or nomination intended to be brought before
the 2000 annual meeting must be received by the Company's corporate
secretary on or after Friday, February 4, 2000 and on or prior to
Monday, March 6, 2000. If a timely and proper stockholder proposal is
received by the Company's corporate secretary, the proposal is not
set forth in the 2000 proxy statement as described in the preceding
paragraph, and the proposal is properly presented at the 2000 annual
meeting, the Company may exercise discretionary authority when voting
on the proposal if in the 2000 proxy statement the Company advises
stockholders on the nature of the proposal and how the Company
intends to vote on the proposal, unless the stockholder satisfies
certain SEC requirements, including mailing a separate proxy
statement to the Company's stockholders. All proposals and
nominations should be directed to Steven R. Andrews, Senior Vice
President, General Counsel and Secretary, Whitman Corporation, 3501
Algonquin Road, Rolling Meadows, Illinois 60008.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12. Statement of Calculation of Ratio
of Earnings to Fixed Charges Filed Herewith
27. Financial Data Schedules for the first
nine months of 1999 and 1998 Filed Herewith
99. 1998 Pro Forma Selected Quarterly Financial
Information Filed Herewith
(b) Reports on Form 8-K.
On July 28, 1999, the Company filed an amendment to the current
report filed on May 20, 1999 to indicate that Heartland Territories
Holdings, Inc. ("New Whitman") is the successor to the former Whitman
Corporation ("Old Whitman") under Rule 12g(3)(a) of the Securities
Act of 1934, as amended. Old Whitman merged on May 20, 1999 into New
Whitman, with New Whitman as the surviving corporation and with New
Whitman acquiring all assets of Old Whitman. Simultaneously with the
merger, the name of Heartland Territories Holdings, Inc. was changed
to "Whitman Corporation."
<PAGE>
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: November 16, 1999 By: /s/ MARTIN M. ELLEN
----------------- ------------------------
Martin M. Ellen
Senior Vice President and Chief Financial
Officer
(As Chief Accounting Officer and Duly
Authorized Officer of Whitman Corporation
EXHIBIT 12
WHITMAN CORPORATION
STATEMENT OF CALCULATION
OF RATIO OF EARNINGS TO FIXED CHARGES
(in Millions, Except Ratios)
<TABLE>
<CAPTION>
Nine Months Fiscal Years
---------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income from Continuing
Operations before Taxes $ 41.9 $ 124.0 $ 152.2 $ 69.9 $ 127.7 $ 118.2 $ 80.3
Fixed Charges 51.6 39.0 51.5 75.6 74.4 76.7 72.2
--------- --------- --------- --------- --------- --------- ---------
Earnings as Adjusted $ 93.5 $ 163.0 $ 203.7 $ 145.5 $ 202.1 $ 194.9 $ 152.5
========= ========= ========= ========= ========= ========= =========
Fixed Charges:
Interest Expense $ 47.6 $ 35.1 $ 46.4 $ 69.0 $ 68.2 $ 70.3 $ 67.0
Preferred Stock Dividend Requirements
Of Majority Owned Subsidiary -- -- -- 1.7 1.5 1.4 1.1
Portion of Rents Representative
of Interest Factor 4.0 3.9 5.1 4.9 4.7 5.0 4.1
--------- --------- --------- --------- --------- --------- ---------
Fixed Charges $ 51.6 $ 39.0 $ 51.5 $ 75.6 $ 74.4 $ 76.7 $ 72.2
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings to
Fixed Charges* 1.8x 4.2x 4.0x 1.9x 2.7x 2.5x 2.1x
========= ========= ========= ========= ========= ========= =========
</TABLE>
* Intercompany interest income from Hussmann and Midas was $1.6 million for
the first nine months of 1998 and was $1.6 million, $23.1 million, $23.7
million, $21.8 million and $20.6 million for the fiscal years 1998, 1997,
1996, 1995 and 1994, respectively. Such amounts are included in income from
continuing operations before taxes. If this intercompany interest income
had reduced interest expense, thereby reducing fixed charges and earnings
as adjusted, the ratio of earnings to fixed charges for the first nine
months of 1998 and for the fiscal years 1998, 1997, 1996, 1995 and 1994
would have been 4.3x, 4.1x, 2.3x, 3.5x, 3.2x and 2.6x, respectively.
Whitman Corporation recorded special charges of $49.3 million during the
third and fourth quarters of 1997. Excluding these special charges, the
ratio of earnings to fixed charges for fiscal 1997 would have been 2.6x. If
the fixed charges for 1997 were adjusted for the intercompany interest
income noted above, the ratio of earnings to fixed charges would have been
3.3x.
Whitman Corporation recorded special charges of $84.2 million and a pretax
gain on the sale of operations in Marion, Virginia, Princeton, West
Virginia and the St. Petersburg area of Russia of $11.4 million during the
first nine months of 1999. Excluding these non-recurring items, the ratio
of earnings to fixed charges for the first nine months of 1999 would have
been 3.2x.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WHITMAN
CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001084230
<NAME> WHITMAN CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JAN-01-2000 JAN-02-1999
<PERIOD-END> OCT-02-1999 SEP-30-1998
<CASH> 116,500 0
<SECURITIES> 0 0
<RECEIVABLES> 257,000 0
<ALLOWANCES> 4,400 0
<INVENTORY> 106,700 0
<CURRENT-ASSETS> 515,600 0
<PP&E> 1,375,900 0
<DEPRECIATION> 533,600 0
<TOTAL-ASSETS> 2,846,000 0
<CURRENT-LIABILITIES> 707,100 0
<BONDS> 803,000 0
0 0
0 0
<COMMON> 1,633,800 0
<OTHER-SE> (443,700) 0
<TOTAL-LIABILITY-AND-EQUITY> 2,846,000 0
<SALES> 1,574,100 1,233,300
<TOTAL-REVENUES> 1,574,100 1,233,300
<CGS> 909,800 732,500
<TOTAL-COSTS> 1,437,400 <F1> 1,070,300 <F6>
<OTHER-EXPENSES> 49,900 12,100
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 44,900 <F2> 26,900 <F7>
<INCOME-PRETAX> 41,900 124,000
<INCOME-TAX> 6,900 56,800
<INCOME-CONTINUING> 28,400 <F3> 50,700 <F8>
<DISCONTINUED> (27,200) (500)
<EXTRAORDINARY> 0 (18,300)
<CHANGES> 0 0
<NET-INCOME> 1,200 31,900
<EPS-BASIC> 0.01 <F4> 0.32 <F9>
<EPS-DILUTED> 0.01 <F5> 0.31 <F10>
<FN>
<F1>
TOTAL COSTS INCLUDE COST OF GOODS SOLD, SG&A EXPENSES, SPECIAL CHARGES AND
AMORTIZATION EXPENSE OF $909,800, $480,700 $27,900 AND $19,000, RESPECTIVELY.
<F2>
INTEREST EXPENSE, NET, INCLUDES INTEREST EXPENSE AND INTEREST INCOME OF $47,600
AND $2,700, RESPECTIVELY.
<F3>
INCOME FROM CONTINUING OPERATIONS IS REDUCED BY MINORITY INTEREST OF $6,600.
<F4>
BASIC INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.24
DISCONTINUED OPERATIONS (0.23)
NET INCOME $ 0.01
<F5>
DILUTED INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.24
DISCONTINUED OPERATIONS (0.23)
NET INCOME $ 0.01
<F6>
TOTAL COSTS INCLUDE COSTS OF GOODS SOLD, SG&A EXPENSES AND AMORTIZATION EXPENSE
OF $732,500, $326,000 AND $11,800, RESPECTIVELY.
<F7>
INTEREST EXPENSE, NET, INCLUDES INTEREST EXPENSE, INTEREST INCOME FROM HUSSMANN
INTERNATIONAL, INC. ("HUSSMANN") AND MIDAS, INC. ("MIDAS") AND OTHER INTEREST
INCOME OF $35,100, $1,600 AND $6,600, RESPECTIVELY. INTEREST INCOME FROM
HUSSMANN AND MIDAS RELATED TO INTERCOMPANY LOANS AND ADVANCES. THE RELATED
INTEREST EXPENSE RECORDED BY HUSSMANN AND MIDAS IS INCLUDED IN INCOME FROM
DISCONTINUED OPERATIONS AFTER TAXES.
<F8>
INCOME FROM CONTINUING OPERATIONS IS REDUCED BY MINORITY INTEREST OF $16,500.
<F9>
BASIC INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.50
EXTRAORDINARY LOSS (0.18)
NET INCOME $ 0.32
<F10>
DILUTED INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.49
EXTRAORDINARY LOSS (0.18)
NET INCOME 0.31
</FN>
</TABLE>
EXHIBIT 99
WHITMAN CORPORATION
1998 PRO FORMA SELECTED FINANCIAL INFORMATION
(UNAUDITED AND IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma 1998 (1)
---------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales:
Domestic (3) $ 433.6 $ 506.1 $ 612.4 $ 487.2 $ 2,039.3
International (3) 44.0 74.0 73.7 48.6 240.3
----------- ----------- ----------- ----------- -----------
Total (3) $ 477.6 $ 580.1 $ 686.1 $ 535.8 $ 2,279.6
=========== =========== =========== =========== ===========
Operating income:
Domestic $ 50.8 $ 74.4 $ 99.0 $ 56.7 $ 280.9
International (18.8) (8.9) (3.3) (11.3) (42.3)
Amortization expense 9.8 9.8 9.8 9.7 39.1
----------- ----------- ----------- ----------- -----------
Total 22.2 55.7 85.9 35.7 199.5
PepsiCo overhead charges, net (4) (2.8) (2.8) (3.4) (2.8) (11.8)
----------- ----------- ----------- ----------- -----------
Total $ 19.4 $ 52.9 $ 82.5 $ 32.9 $ 187.7
=========== =========== =========== =========== ===========
Income from continuing operations (3) $ 1.3 $ 12.4 $ 19.5 $ 3.3 $ 36.5
=========== =========== =========== =========== ===========
Income per share - basic (3) $ 0.01 $ 0.09 $ 0.14 $ 0.02 $ 0.26
=========== ========== =========== =========== ===========
Income per share - diluted (3) $ 0.01 $ 0.09 $ 0.14 $ 0.02 $ 0.26
=========== =========== =========== =========== ===========
EBITDA (2):
Domestic $ 66.4 $ 89.4 $ 118.2 $ 81.1 $ 355.1
International (8.2) 1.0 4.2 (2.3) (5.3)
----------- ----------- ----------- ----------- -----------
Total 58.2 90.4 122.4 78.8 349.8
PepsiCo overhead charges, net (4) (2.8) (2.8) (3.4) (2.8) (11.8)
----------- ----------- ----------- ----------- -----------
Total $ 55.4 $ 87.6 $ 119.0 $ 76.0 $ 338.0
=========== =========== =========== =========== ===========
</TABLE>
See notes accompanying this selected financial information.
<PAGE>
Notes to Pro Forma Selected Financial Information:
(1) The unaudited pro forma selected financial information contained in this
exhibit should be read in conjunction with the Company's Annual Report on
Form 10-K/A for the fiscal year ended January 2, 1999, the proxy
statement/prospectus dated April 19, 1999, and the Company's Quarterly
Reports on Form 10-Q for the quarters ended April 3, 1999 and July 3,
1999. This pro forma selected financial information gives effect to the
following transactions assuming they occurred at the beginning of Whitman
Corporation's 1998 fiscal year:
- The March, 1999, sales 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 May, 1999, acquisitions of the domestic and international
territories 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 domestic and international
territories from PepsiCo. This pro forma presentation also assumes
that debt, together with related interest, was incurred for the
repurchase of 16 million shares of Whitman Corporation common stock,
which was part of the PepsiCo transaction.
- The elimination of interest expense allocated to the acquired
territories by PepsiCo on debt that was not assumed by Whitman.
- The elimination of corporate charges previously paid to PepsiCo by
Pepsi General prior to the transaction.
- The elimination of PepsiCo's 20% minority interest in Pepsi General.
- The acquisition of the acquired territories from PepsiCo 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.
(2) EBITDA is defined as income before income taxes plus the sum of interest,
depreciation and amortization. Information concerning EBITDA has been
presented because it is expected to be used by certain investors as a
measure of operating performance and a measure of the ability to service
potential debt. EBITDA is not required by Generally Accepted Accounting
Principles ("GAAP") and, accordingly, should not be considered an
alternative to income from continuing operations or any other measure of
performance required by GAAP. Additionally, it should not be used as a
measure of cash flow or liquidity under GAAP.
(3) Pro forma financial information for the fiscal year 1998 was included in
the Company's Annual Report on Form 10-K/A for the fiscal year ended
January 2, 1999 and in the proxy statement/prospectus dated April 19,
1999. Based on certain events that have occurred in 1999, there is an
impact on the comparability of the previous pro forma results for 1998
when compared to 1999. These events include: a change in the Company's
reporting calendar to a 52/53 week fiscal year ending on the Saturday
closest to December 31; certain differences in account classifications in
the 1999 current year's presentation; the discontinuation of the
management fee allocation by PepsiCo to the acquired territories; the
payment by Whitman of fees to PepsiCo, or its designee, for support
services related to the acquired domestic territories; and a change in
the effective tax rate reflecting tax benefits associated with the
foreign losses. The impact of the change in the Company's reporting
calendar has only been reflected in sales, while no change has been
reflected in income from continuing operations or income per share for
the calendar change. The impact had these events occurred effective
January 1, 1998 would result in the following pro forma selected
financial information for 1998:
<TABLE>
<CAPTION>
Pro Forma 1998
---------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales:
Domestic $ 447.3 $ 548.2 $ 610.8 $ 476.0 $ 2,082.3
International 44.0 74.0 74.6 49.7 242.3
----------- ----------- ----------- ----------- -----------
Total $ 491.3 $ 622.2 $ 685.4 $ 525.7 $ 2,324.6
=========== =========== =========== =========== ===========
Income from continuing operations $ 3.5 $ 21.2 $ 32.9 $ 6.8 $ 64.4
=========== =========== =========== =========== ===========
Income per share - basic $ 0.03 $ 0.15 $ 0.24 $ 0.05 $ 0.46
=========== =========== =========== =========== ===========
Income per share - diluted $ 0.02 $ 0.15 $ 0.23 $ 0.05 $ 0.46
=========== =========== =========== =========== ===========
</TABLE>
(4) PepsiCo overhead charges, net, represent the PepsiCo overhead charges
originally allocated to the acquired U.S. and international territories,
offset by costs for support services incurred by New Whitman related to
the acquired U.S.
territories.
