FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 20, 1999 (12 weeks)
------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-15019
HEARTLAND TERRITORIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-6167838
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
700 Anderson Hill Road, Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
914-253-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES NO X
Number of shares of Capital Stock outstanding as of April 16, 1999:
54,000,000
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PEPSICO BOTTLING OPERATIONS
(The Predecessor to
HEARTLAND TERRITORIES HOLDINGS, INC. - See Note 1)
INDEX
Page No.
Part I Financial Information
Condensed Combined Statements of Operations -
12 Weeks Ended March 20, 1999 and March 21, 1998 2
Condensed Combined Statements of Cash Flows -
12 Weeks Ended March 20, 1999 and March 21, 1998 3
Condensed Combined Balance Sheets -
March 20, 1999 and December 26, 1998 4
Notes to Condensed Combined Financial Statements 5-7
Management's Discussion and Analysis of Operations,
Cash Flows, Liquidity and Capital Resources
and Year 2000 8-12
Independent Accountants' Review Report 13
Part II Other Information and Signatures 14-23
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PART I - FINANCIAL INFORMATION
PEPSICO BOTTLING OPERATIONS
(The Predecessor to
HEARTLAND TERRITORIES HOLDINGS, INC. - See Note 1)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(in millions, unaudited)
12 Weeks Ended
3/20/99 3/21/98
Net Sales
United States........................... $108.0 $109.7
Central Europe.......................... 21.6 21.5
------ ------
129.6 131.2
Cost of Sales
United States........................... 62.1 62.5
Central Europe.......................... 14.1 14.8
------ ------
76.2 77.3
Gross Profit.............................. 53.4 53.9
Selling, Delivery and Administrative Expenses
United States........................... 39.7 38.7
Central Europe.......................... 17.2 13.8
Allocated division and PepsiCo corporate
costs................................... 3.9 3.8
------ ------
60.8 56.3
Operating Loss............................ (7.4) (2.4)
Other Expense
Interest expense:
External............................. 1.2 0.6
PepsiCo allocation................... 10.4 11.2
------ ------
11.6 11.8
Foreign exchange losses/(gains)......... 1.4 (.1)
------ ------
Total other expense............. 13.0 11.7
------ ------
Loss Before Income Taxes.................. (20.4) (14.1)
Income tax benefit...................... .4 2.2
------ ------
Net Loss.................................. $(20.0) $(11.9)
====== ======
See accompanying Notes to Condensed Combined Financial Statements.
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PEPSICO BOTTLING OPERATIONS
(The Predecessor to
HEARTLAND TERRITORIES HOLDINGS, INC. - See Note 1)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
12 Weeks Ended
3/20/99 3/21/98
Cash Flows -- Operations
Net Cash Used for Operations.............. $(4.8) $(5.7)
----- -----
Cash Flows -- Investing Activities
Capital expenditures...................... (5.4) (6.0)
----- -----
Net Cash Used for Investing Activities.... (5.4) (6.0)
----- -----
Cash Flows-- Financing Activities
Short-term borrowings-- three months
or less, net.............................. 21.3 11.1
Net investment by PepsiCo................. (13.1) (7.8)
----- -----
Net Cash Provided by Financing Activities. 8.2 3.3
----- -----
Net Decrease in Cash and Cash Equivalents. (2.0) (8.4)
Cash and Cash Equivalents-- Beginning of Year 6.1 23.2
----- -----
Cash and Cash Equivalents-- End of Period. $ 4.1 $14.8
===== =====
See accompanying Notes to Condensed Combined Financial Statements.
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PEPSICO BOTTLING OPERATIONS
(The Predecessor to
HEARTLAND TERRITORIES HOLDINGS, INC. - See Note 1)
CONDENSED COMBINED BALANCE SHEETS
(in millions)
3/20/99 12/26/98
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents...................... $ 4.1 $ 6.1
Trade accounts receivable, less allowance
of $4.9 at 3/99 and $5.1 at 12/98.............. 73.2 74.4
Inventories
Raw materials and supplies................... 8.1 13.3
Finished goods............................... 25.3 16.0
------ ------
33.4 29.3
Prepaid expenses and other current assets...... 10.8 5.2
------ ------
Total Current Assets................. 121.5 115.0
Property, plant and equipment, net.............. 258.2 274.0
Intangible assets, net......................... 366.3 370.0
Other assets................................... 44.0 42.2
------ ------
Total Assets......................... $790.0 $801.2
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable and other current liabilities. $ 83.5 $ 87.1
Short-term borrowings.......................... 44.1 22.8
Trade accounts payable to PepsiCo.............. - 5.8
------ ------
Total Current Liabilities............ 127.6 115.7
Other liabilities.............................. 12.2 14.6
Deferred income taxes.......................... 10.0 9.5
------ ------
Total Liabilities.................... 149.8 139.8
------ ------
Shareholder's Equity
Net investment by PepsiCo...................... 700.7 713.8
Accumulated other comprehensive loss........... (60.5) (52.4)
------ ------
Total Shareholder's Equity........... 640.2 661.4
------ ------
Total Liabilities and Shareholder's
Equity............................... $790.0 $801.2
====== ======
See accompanying Notes to Condensed Combined Financial Statements.
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PEPSICO BOTTLING OPERATIONS
(The Predecessor to
HEARTLAND TERRITORIES HOLDINGS, INC. - See Note 1)
(unaudited)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Basis of Presentation
The Condensed Combined Balance Sheet at March 20, 1999 and the Condensed
Combined Statements of Operations and Cash Flows for the 12 weeks ended March
20, 1999 and March 21, 1998 have not been audited. These combined financial
statements have been prepared in conformity with the accounting principles
included in the registration statement on Form S-4 filed on April 19, 1999. In
our opinion, this information includes all material adjustments, which are of a
normal and recurring nature, necessary for a fair presentation.
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 the "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 and in certain countries in Central Europe: the Czech Republic, Slovakia,
Poland and Hungary. Pursuant to the Amended and Restated Contribution and
Merger Agreement (the "Merger Agreement") dated as of March 18, 1999 among
Whitman Corporation, PepsiCo and Heartland Territories Holdings, Inc. on
April 2, 1999, the domestic assets of PBO were transferred by PepsiCo to
Heartland Territories Holdings, Inc., the registrant, and a dormant
subsidiary of PepsiCo along with PepsiCo's 20% minority interest in Whitman'
operating subsidiary. Pepsi-Cola General Bottlers, Inc. and on May 31, 1999,
the remaining assests of PBO were transferred by PepsiCo to Heartland
Territories Holdings, Inc.. Accordingly, the accompanying financial
statements reflect the combined results of operations, cash flows and net
assets of PBO,the predecessor business to Heartland Territories Holdings, Inc.
See Note 5 for subsequent events. The financial information in these financial
statements is not necessarily indicative of the results expected for the year
or that would have been obtained if PBO had been a separate stand-alone entity.
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.
PBO was allocated $3.9 million and $3.8 million of overhead costs related to
divisional headquarters and PepsiCo corporate administrative functions in the
twelve weeks ended March 20, 1999 and March 21, 1998, 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.
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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 $10.4 million and $11.2 million of interest expense reflecting an
average PepsiCo interest rate of 6.4% in the twelve weeks ended March 20, 1999
and March 21, 1998. The interest expense is not necessarily indicative of
interest costs that would have been incurred if PBO had been a separate
independent entity.
(2) Seasonality of Business
The results for the first quarter are not necessarily indicative of the
results that may be expected for the full year primarily due to business
seasonality. The seasonality of our operating results arises from higher sales
in the second and third quarters versus the first and fourth quarters of the
year, combined with the impact of certain costs, such as depreciation,
amortization and interest, which are not significantly impacted by business
seasonality.
(3) Comprehensive Loss
12 Weeks Ended
(In millions) 3/20/99 3/21/98
Net Loss........................................... $(20.0) $(11.9)
Currency translation adjustment.................... (8.1) (.3)
------- -------
Comprehensive Loss................................. $(28.1) $(12.2)
======= =======
(4) 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 segment
information is presented in 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. Net sales are based upon the location
of where product was sold.
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12 Weeks Ended
(In millions) 3/20/99 3/21/98
Net Sales
United States................ $108.0 $109.7
Central Europe............... 21.6 21.5
------ ------
$129.6 $131.2
Operating profit (loss)
United States................ $ 6.2 $ 8.5
United States allocated overhead (2.6) (2.8)
------ ------
3.6 5.7
Central Europe............... (9.7) (7.1)
Central Europe allocated overhead (1.3) (1.0)
------ ------
(11.0) (8.1)
------ ------
$ (7.4) $ (2.4)
====== ======
3/20/99 12/26/98
Total Assets
United States................ $ 591.2 $ 580.9
Central Europe............... 198.8 220.3
------- -------
$ 790.0 $ 801.2
======= =======
(5) Subsequent Events
Pursuant to the Merger Agreement, PepsiCo consolidated the domestic PBO
bottling territories and other assets, including the 20% stake PepsiCo held in
Whitman Corporation's Pepsi-Cola General Bottlers subsidiary, in a new bottling
company referred to as "Heartland Territories Holdings, Inc," and Whitman
Corporation merged with and into Heartland Territories Holdings, Inc. The merger
transaction was approved by the shareholders of Whitman and closed on May 20,
1999. Upon consummation of the merger transactions, Heartland Territories
Holdings, Inc. changed its name to "Whitman Corporation" referred to as "New
Whitman." Following the merger, PepsiCo transferred the remainder of the PBO
operations and assets.
New Whitman assumed liabilities associated with PepsiCo's
domestic operations and acquired PepsiCo's international operations for cash. As
a result of these transactions, PepsiCo received 54 million shares of common
stock in New Whitman, giving PepsiCo a noncontrolling ownership interest of
approximately 38% of New Whitman.
As prescribed by generally accepted accounting principles, Whitman is the
acquiring enterprise with respect to PBO and PBO is deemed to be the acquired
enterprise. Accordingly, as a result of the closing of the merger transaction on
May 20, 1999, Whitman will apply the purchase method of accounting to its
acquisition of PBO. The results of operations of PBO will be included in the
financial statements of New Whitman from the date of acquisition. See unaudited
Pro Forma Combined Financial Information for New Whitman on pages 14-21.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS,
CASH FLOWS AND LIQUIDITY AND CAPITAL RESOURCES OF
PBO
Cautionary Statement
In this report, the management of the PepsiCo Bottling Operations discusses
expectations regarding the PepsiCo Bottling Operations' future performance and
Year 2000 risks. The management of the PepsiCo Bottling Operations based these
"forward-looking statements" on currently available competitive, financial and
economic data and its operating plans. Refer to additional risks related to
forward looking statements contained in the registration statement filed on Form
S-4 for the year end December 26, 1998. They are also inherently uncertain, and
investors must recognize that events could turn out to be significantly
different from expectations.
General
The PepsiCo Bottling Operations includes the operating results of bottling
operations predominantly located in the midwestern part of the United States and
the bottling operations in the Czech Republic, Slovakia, Hungary and Poland,
which is referred to in this discussion as "Central Europe."
The standard volume measure is raw cases. The term raw cases refers to the
actual physical number of cases regardless of the volume contained in these
cases.
In the discussions below, the year-over-year dollar change in raw cases is
referred to as volume. Price changes over the prior year and the impact of
product, package and country sales mix changes are referred to as effective net
pricing.
Results of Operations
Net Sales
12 Weeks Ended
3/20/99 3/21/98 % B/(W) Change
($ in millions)
United States $108.0 $109.7 (1.5)
Central Europe 21.6 21.5 .5
------ ------
$129.6 $131.2 (1.2)
====== ======
Worldwide net sales decreased $1.6 million. The decrease in the United States
of $1.7 million was driven by a lower effective net pricing and a decline in
volume. The increase in net sales in Central Europe of $.1 million was due to
higher effective net pricing substantially offset by the effect of weaker
currencies in Hungary and lower volume. Excluding the impact of weaker foreign
currencies, net sales growth in Central Europe would have been 3.8%.
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Volume
Worldwide raw cases decreased 1.2%, with the United States declining .7% and
Central Europe declining 2.7%. The United States raw case decline was led by
mid-single-digit volume declines by brands PEPSI and DIET PEPSI partially offset
by the introduction of PEPSI ONE. The Central Europe raw case decrease was
driven by mid-single-digit decline in Czech Republic, Slovakia and Hungary
partially offset by a single-digit increase in Poland.
Operating Income (Loss)
12 Weeks Ended
3/20/99 3/21/98 % B/(W) Change
($ in millions)
United States $ 6.2 $ 8.5 (31.8)
Central Europe ( 9.7) (7.1) (36.6)
Allocated overhead ( 3.9) (3.8) (2.6)
------ ------
$ (7.4) $ (2.4) NM
====== ======
NM - Not Meaningful.
Operating income (loss) includes net sales less cost of sales and selling,
delivery and administrative expenses, which is referred to as SD&A. SD&A
comprises selling and delivery expenses, which is referred to as S&D,
advertising and marketing, which is referred to as A&M, general and
administrative expenses, which is referred to as G&A, other income and expense,
and equity income or loss from investments in unconsolidated affiliates. Also
included is allocated overhead, which reflects Heartland Territories Holdings,
Inc.'s share of Pepsi-Cola's and PepsiCo administrative costs. The allocations
were based on a specific identification of these administrative costs to the
PepsiCo Bottling Operations and, to the extent that such identification was not
practicable, based upon the percentage of the PepsiCo Bottling Operations' sales
volume to PepsiCo's related sales volume. The management of the PepsiCo Bottling
Operations believes that such allocation methodology is reasonable. The expenses
allocated to the PepsiCo Bottling Operations are not necessarily indicative of
the expenses that the PepsiCo Bottling Operations would have incurred had it
been a separate, independent entity.
Operating income in the United States decreased $2.3 million reflecting the
decline in effective net pricing and volume and higher S&D due to an increase in
the labor rate. SD&A expenses increased while sales and raw cases declined.
Central Europe's operating loss increased $2.6 million. The increase in losses
was due to higher equity losses in the Poland joint venture and A&M partially
offset by the higher effective net pricing and lower G&A.
Interest Expense
12 Weeks Ended
3/20/99 3/21/98 % B/(W) Change
($ in millions)
PepsiCo allocation $(10.4) $(11.2) 7.1
External debt (1.2) (0.6) 100.0
------ ------
Interest expense $(11.6) $(11.8) 1.7
====== ======
The PepsiCo Bottling Operations have been financed through its cash flows from
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operations and from advances from PepsiCo. The allocation of PepsiCo's interest
expense was based on PepsiCo's weighted average interest rate applied to the
average balance of advances from PepsiCo. Subsequent to the merger transaction
with Whitman, the PepsiCo Bottling Operations are expected to have a capital
structure different from the capital structure in the financial statements, and
accordingly, interest expense is not indicative of the interest expense that the
PepsiCo Bottling Operations would have incurred as a separate, independent
entity or will incur in future periods as part of New Whitman.
Interest expense overall was essentially unchanged from the previous year. A
decline in the interest allocated by PepsiCo was primarily offset by an increase
in external interest expense, used principally to fund the international
operations.
Foreign Exchange Losses/(Gains)
The change in foreign exchange losses/(gains) of $1.5 million was primarily
driven by a loss in 1999 as compared to a foreign exchange gain in 1998
primarily in the Czech Republic.
Income Tax Benefit
12 Weeks Ended
3/20/99 3/21/98
($ in millions)
Income tax benefit $0.4 $2.2
The PepsiCo Bottling Operations' income tax benefit is low in comparison to
the loss before income taxes. This occurred because the PepsiCo Bottling
Operations cannot recognize full tax benefits on the current losses generated by
the Central Europe operations since management believes that it is more likely
than not that such deferred tax assets will not be realized. The year-over-year
decline in the benefit was primarily due to a shift in tax losses from the
United States to Central Europe.
Cash Flows
The PepsiCo Bottling Operations is operated and managed as part of a division
of PepsiCo and subsequent to the merger transaction with Whitman, is expected to
have a capital structure different from the capital structure in the condensed
combined financial statements. Therefore the cash flow discussion below may not
be indicative of cash flows of a separate, independent entity nor will it be
indicative of cash flows in future periods.
Cash and cash equivalents decreased $2.0 million in 1999 compared to $8.4
million in 1998. The change of $6.4 million was primarily due to an increase in
short-term borrowings used to repay an intercompany loan in Poland.
Year 2000
Many computerized systems and microprocessors that are embedded in a variety
of products used by the PepsiCo Bottling Operations have the potential for
operational
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problems if they lack the ability to handle the transition to the Year 2000. The
management of the PepsiCo Bottling Operations has established teams to identify
and correct Year 2000 issues. The management of the PepsiCo Bottling Operations
has engaged IBM to help set testing strategy and complete some of the offsite
remediation. Information technology systems with non-compliant code are expected
to be modified or replaced with systems that are Year 2000 compliant. Similar
actions are being taken with respect to systems embedded in manufacturing and
other facilities. The teams are also charged with investigating the Year 2000
readiness of suppliers, customers and other third parties and with developing
contingency plans where necessary.
Key information technology systems have been inventoried and assessed for
compliance, and detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are well underway with
approximately 85% of the systems already compliant. This percentage is expected
to increase to approximately 95% by the end of the second quarter of 1999 with
compliance planned by the fourth quarter of 1999. Inventories and assessments of
systems embedded in manufacturing and other facilities have been completed and
remediation activities are underway with a mid-year 1999 target completion date.
Independent consultants are monitoring progress against remediation programs and
performing testing at certain key locations. In addition, the progress of the
programs is also monitored by senior management and the board of directors.
The PepsiCo Bottling Operations' most significant exposure arises from its
dependence on high volume transaction processing systems, particularly for
production scheduling, inventory cost accounting, purchasing, customer billing
and collection, and payroll. The management of the PepsiCo Bottling Operations
anticipates that any necessary corrective actions to these applications will be
completed by the end of the second quarter of 1999.
The management of the PepsiCo Bottling Operations has contacted the key
suppliers that are critical to the production processes. The management of the
PepsiCo Bottling Operations is in the process of visiting suppliers identified
as presenting the greatest impact if not compliant. These suppliers have been
selected either because of the dependence on them or because of concerns
regarding their remediation plans. The management of the PepsiCo Bottling
Operations has not identified any key suppliers who will not be Year 2000
compliant. Contingency plans will be developed for the non-compliance of key
suppliers during 1999. The management of the PepsiCo Bottling Operations has
also contacted significant customers and PepsiCo joint venture partners who
manufacture certain LIPTON and STARBUCKS products, that the PepsiCo Bottling
Operations sell, and have begun to survey their Year 2000 remediation programs.
Risk assessments and contingency plans, where necessary, will be finalized in
the second quarter of 1999.
Costs directly related to Year 2000 issues are estimated to be $6.9 million
from 1998 to 2000, of which $4.2 million or 61% has been spent. Approximately
39% of the total estimated spending represents costs to modify existing systems,
which includes the inventory, assessment, remediation, testing and rollout
phases. The remaining 61% represents spending for the development of, and
testing rollout of new systems to replace or rewrite older, non-compliant
applications. This estimate assumes that the PepsiCo Bottling Operations will
not incur significant Year 2000 related costs on behalf of its suppliers,
customers, or other third parties. These costs will not necessarily increase the
normal level of spending on information technology due to the deferral of other
projects to enable them to focus on Year 2000 remediations.
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Contingency plans for Year 2000 related interruptions are being developed and
will include, but not be limited to, the development of emergency backup and
recovery procedures, remediation of existing systems parallel with installation
of new systems, replacement of electronic applications with manual processes,
identification of alternate suppliers and an increase in raw material and
finished goods inventory levels. All plans are expected to be completed by the
end of the second quarter in 1999.
In light of the foregoing, the management of the PepsiCo Bottling Operations
does not currently anticipate that it will experience a significant disruption
to their business as a result of the Year 2000 issue. The most likely potential
risk is a temporary inability of suppliers to provide supplies of raw materials
or of customers to pay on a timely basis. The PepsiCo Bottling Operations
typically experiences below average sales volume in January due to the
seasonality of its products. Consequently, the management of the PepsiCo
Bottling Operations believes that in a worst case scenario any supply disruption
can be minimized by drawing down inventories or increasing production at
unaffected plants with some increase in distribution costs. The PepsiCo Bottling
Operations is testing electronic billing and payment systems during 1999 as part
of its overall Year 2000 strategy and will work with customers that experience
disruptions that might impact payment to the PepsiCo Bottling Operations.
The PepsiCo Bottling Operations' Year 2000 efforts are ongoing and its
overall plan, as well as the consideration of contingency plans, will continue
to evolve as new information becomes available. While the management of the
PepsiCo Bottling Operations anticipates no major interruption of its business
activities, that will depend, in part, on the ability of third parties to be
Year 2000 compliant. Although the PepsiCo Bottling Operations has implemented
the actions described above to address third party issues, it has no direct
ability to ensure compliance action by those parties. Accordingly, while the
PepsiCo Bottling Operations believes its actions in this regard should have the
effect of lessening Year 2000 risks, it is unable to eliminate such risks or to
estimate the ultimate effect of Year 2000 risks on the PepsiCo Bottling
Operations' operating results.
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Independent Accountants' Review Report
The Board of Directors and Shareholders of
PepsiCo, Inc.
We have reviewed the accompanying condensed combined balance sheet of the
PepsiCo Bottling Operations as of March 20, 1999 and the related condensed
combined statements of operations and cash flows for the twelve weeks ended
March 20, 1999 and March 21, 1998. These condensed combined financial statements
are the responsibility of the PepsiCo Bottling Operations' management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed combined financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the combined balance sheet of PBO as of December 26, 1998, and the
related combined statements of operations, cash flows and accumulated other
comprehensive loss for the fifty-two week period then ended not presented
herein; and in our report dated February 19, 1999, we expressed an unqualified
opinion on those combined financial statements. In our opinion, the information
set forth in the accompanying condensed combined balance sheet as of December
26, 1998, is fairly presented, in all material respects, in relation to the
combined balance sheet from which it has been derived.
KPMG LLP
New York, New York
June 3, 1999
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PART II - OTHER INFORMATION AND SIGNATAURES
Item 5. Other Information
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined financial information should be read in
conjunction with the "Management Discussion and Analysis of Financial Condition
and Results of Operations" and condensed consolidated financial statements and
accompanying notes of Whitman contained in Whitman's Form 10-Q for the quarterly
period ended April 3, 1999, dated May 17, 1999 as well as the "Management
Discussion and Analysis of Liquidity and Capital Resources and Results of
Operations" of the PepsiCo Bottling Operations included elsewhere in this Form
10-Q. Whitman's Quarterly Report on Form 10-Q dated May 17, 1999 is incorporated
by reference in this Form 10-Q.
On March 19, 1999, Whitman completed the sale to PepsiCo of its franchises in
Marion, Virginia and Princeton, West Virginia. The sale of Whitman's franchise
in Russia was completed on March 31, 1999. Whitman recorded a pretax gain of
$11.4 million, or $8.0 million after tax and minority interest, which is
included as other income (expense), net, in Whitman's reported results in the
pro forma combined statement of operations.
The pro forma combined balance sheet gives effect to the following items
assuming they occurred at the end of Whitman's first quarter of 1999:
o 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 Whitman's
principal operating subsidiary, Pepsi-Cola General Bottlers, Inc.
("Pepsi General").
o 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 first
quarter of 1999:
o The sale by Whitman of Pepsi General's 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 first quarter 1999 operating results.
-14-
<PAGE>
o The acquisition by New Whitman of the PepsiCo Bottling Operations from
PepsiCo and the inclusion of their respective first quarter 1999 operating
results, including amortization of goodwill associated with the purchase.
o 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.
o The elimination of interest expense allocated to the PepsiCo Bottling
Operations by PepsiCo on debt that will not be assumed by New Whitman.
o The elimination of corporate charges paid to PepsiCo by Pepsi General, which
by agreement will not continue.
o 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.
-15-
<PAGE>
NEW WHITMAN
PRO FORMA COMBINED BALANCE SHEET
(in millions, unaudited)
End of First Quarter of 1999
PepsiCo
Bottling
Whitman Operations
Corporation Franchise New
As Territories Pro Forma Whitman
Reported Acquired Adjustments Pro Forma
ASSETS:
Current Assets:
Cash and equivalents $ 122.3 $ 4.1 $ (4.1)(A) $ 122.3
Receivables, net 165.1 73.2 -- 238.3
Inventories 73.5 33.4 -- 106.9
Other current assets 37.6 10.8 -- 48.4
-------- -------- ------- --------
Total current assets 398.5 121.5 (4.1) 515.9
-------- -------- ------- --------
Property, net 469.5 258.2 23.4 (A) 751.1
Intangibles, net 394.1 366.3 (366.3)(A)
996.0 (A) 1,390.1
Other assets 187.1 44.0 -- 231.1
-------- -------- ------- --------
Total Assets $1,449.2 $ 790.0 $ 649.0 $2,888.2
======== ======== ======= ========
LIABILITIES AND EQUITY:
Current Liabilities:
Short-term debt $ 150.0 $ 44.1 $ (44.1)(A) 150.0
Other current liabilities 219.6 83.5 $ 18.7 (A) 321.8
-------- -------- --------
Total Current Liabilities 369.6 127.6 (25.4) 471.8
-------- -------- ------- --------
Long-term debt 580.2 -- 417.8 (A)
67.7 (B) 1,065.7
Deferred income taxes 94.3 10.0 -- 104.3
Other liabilities 63.1 12.2 -- 75.3
Minority interest 237.2 -- (237.2)(A) --
Shareholders' Equity 104.8 640.2 (640.2)(A)
1,134.0 (A)
(67.7)(B) 1,171.1
-------- -------- ------- --------
Total Liabilities and Equity $1,449.2 $ 790.0 $ 649.0 $2,888.2
======== ======== ======= ========
See accompanying Notes to Pro Forma Combined Financial Information.
-16-
<PAGE>
<TABLE>
<CAPTION>
NEW WHITMAN
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in millions, except per share data,)
First Quarter of 1999
PepsiCo
Pepsi Bottling
Whitman General Operations
Corporation Franchise Franchise New
As Territories Territories Pro Forma Whitman
Reported Sold Acquired Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
Sales $ 374.8 $ (12.7) $ 129.6 $ -- $ 491.7
Cost of goods sold 219.7 (8.8) 76.2 -- 287.1
-------- -------- -------- ------ -------
Gross profit 155.1 (3.9) 53.4 -- 204.6
Selling, general and
administrative
expenses 120.0 (6.3) 53.7 -- (C)
0.4 (D) 167.8
Allocated division and PepsiCo
corporate costs -- -- 3.9 -- (C) 3.9
Amortization expense 3.9 (0.4) 3.2 (3.2)(E)
6.2 (E) 9.7
------- ------- ------- ------ -------
Operating income (loss) 31.2 2.8 (7.4) (3.4) 23.2
Interest expense, net (11.3) 0.6 (1.2) (7.5)(F)
1.2 (G) (18.2)
Interest expense allocated by
PepsiCo -- -- (10.4) 10.4 (G) --
Other income (expense), net 6.6 1.0 (1.4) 2.3 (H) 8.5
------- ------- ------- ------ -------
Income (loss) before income
taxes 26.5 4.4 (20.4) 3.0 13.5
Income taxes 8.3 2.0 (0.4) 2.4 (I) 12.3
------- ------- ------- ------ -------
Income (loss) from continuing
operations before minority
interest 18.2 2.4 (20.0) .6 1.2
Minority interest 3.9 0.5 -- (4.4)(J) --
-------- -------- ------- ------- -------
Income (loss) from continuing
operations $ 14.3 $ 1.9 $ (20.0) $ 5.0 $ 1.2
======== ======== ======== ======= =======
Weighted average common shares:
Basic 96.1 38.0 (K) 134.1
Incremental effect of stock
options 1.5 -- 1.5
-------- ------- -------
Diluted 97.6 38.0 135.6
======== ======= =======
Income from continuing
operations per share:
Basic $ 0.15 $ 0.01
Diluted $ 0.15 $ 0.01
See accompanying Notes to Pro Forma Combined Financial Information.
</TABLE>
-17-
<PAGE>
New Whitman
Notes to Pro Forma Combined Financial Information
(A) 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 1,570.0
--------
Allocation of acquisition costs:
Net assets of the PepsiCo Bottling Operations franchise
territories 640.2
Less: intangible assets of the PepsiCo Bottling
Operations franchise territories (366.3)
Net tangible assets of the PepsiCo Bottling Operations
franchise territories 273.9
Recorded value of PepsiCo's minority interest in
Pepsi General 237.2
Payoff by PepsiCo of short-term debt of the PepsiCo
Bottling Operations franchise territories 44.1
Less: cash balances of the PepsiCo Bottling Operations
franchise territories remaining with PepsiCo (4.1)
-------
Total allocation of acquisition costs 551.1
-------
Excess of acquisition costs over recorded values of assets
and liabilities $1,019.4
========
Allocation of acquisition costs over recorded values:
Fair value of property in excess of its recorded
value, net $ 23.4
Intangible assets 996.0
--------
Total allocation of acquisition costs over recorded
values $1,019.4
========
Additional information about the acquisition costs and allocation of those
costs is as follows:
o The shares to be issued by New Whitman in connection with the merger
transaction were valued at $21 per share, based on the average closing
market price of Whitman common stock as reported on the New York Stock
Exchange during the three day period immediately before and after the
January 25, 1999 announcement of the original merger agreement between
Whitman and PepsiCo.
o 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.
o 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 was allocated to the sale of the
Pepsi General franchise territories and is included in Whitman's
reported current liabilities.
-18-
<PAGE>
o 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.
o 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.
o 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.
(B) 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 13.4 million shares through May 28, 1999 $ 251.9
Additional repurchases of 2.6 million shares 45.8
Total cash required to repurchase shares 297.7
First quarter 1999 repurchases reflected in Whitman
as reported (230.0)
-------
Debt issued to fund repurchases $ 67.7
========
The merger agreement provides that during the twelve months following the
closing of the merger, New Whitman will purchase 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 2.6 million shares is based on an
assumed average price of $17.60 per share, which approximates the average
price of the shares repurchased in the five business days ending on May
21, 1999. An increase or decrease in the repurchase cost of $1 per share
on the remaining 2.6 million shares would change the amount of debt issued
to fund repurchases by $2.6 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.
(C) 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.
-19-
<PAGE>
(D) To adjust depreciation expense based on the preliminary appraisals of
property, plant and equipment (Note A). The increase in depreciation
expense is based upon the following adjustments to property, plant and
equipment and estimated remaining lives:
Range of
Adjustment Remaining Lives
Land $ .9
Building and improvements (.8) 13 to 22 years
Machinery and equipment 23.3 1 to 14 years
-------
Total $ 23.4
=======
(E) To reflect the amortization of intangible assets acquired, the following
entries were made:
o The elimination of amortization expense recorded by the PepsiCo
Bottling Operations franchise territories.
o The recording of $6.2 million of quarterly amortization expense on
intangible assets of $996.0 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.
(F) 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 A) $417.8
Debt incurred for share repurchases (Note B) 67.7
------
Net increase in long-term debt $485.5
======
Quarterly interest at an assumed effective rate of 6.2% $ 7.5
======
The net cash proceeds from the sale of Pepsi General franchise territories
were used to repay existing borrowings. 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 obtained on public debt offerings of $150 million of 6.0
percent notes and $150 million of 6.375 percent notes in April, 1999.
A change in the interest rate of 1/8 of a percentage point would have the
effect of changing interest expense $.6 million or $.4 million after tax.
-20-
<PAGE>
(G) To eliminate the interest expense, net, of $1.2 million recorded by the
PepsiCo Bottling Operations and interest expense of $10.4 million
allocated by PepsiCo to the PepsiCo Bottling Operations. The underlying
debt will not be assumed by New Whitman.
(H) 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.
(I) To record the estimated tax impact of the pro forma adjustments, using an
incremental tax rate of 40%, determined as follows (in millions):
Pretax income of pro forma adjustments $ 3.0
Plus: additional non-deductible intangible amortization 3.0
-----
Total 6.0
Incremental tax rate x 40%
-----
Pro forma tax adjustment $ 2.4
======
(J) To eliminate PepsiCo's 20% minority interest in the earnings of Pepsi
General, due to the transfer of that minority interest to New Whitman.
(K) To record the net increase in weighted average common shares outstanding,
giving effect to the issuance of 54 million shares to PepsiCo (Note A)
less the 16 million shares to be acquired pursuant to the merger agreement
(Note B).
-21-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
See Index to Exhibits on page 24.
(b) Reports on Form 8-K
-------------------
None.
-22-
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
Heartland Territories Holdings, Inc.
(Name Changed to Whitman Corporation
on May 20, 1999)
--------------------------------------
(Registrant)
Date: June 3, 1999 Martin M. Ellen
-------------------------
Senior Vice President and
Chief Financial Officer
-23-
<PAGE>
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
Exhibit 27 Financial Data Schedule 12 weeks ended March 20, 1999
-24-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This Schedule Contains Summary Financial Information
Extracted from PepsiCo Bottling Operations
(The Predecessor to Heartland Territories Holdings, Inc.)
Condensed Combined Financial Statements for the 12 Weeks
Ended March 20, 1999 and is Qualified in its Entirety by
Reference to such Financial Statements
</LEGEND>
<CIK> 0001084230
<NAME> Heartland Territories Holdings, Inc.
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-25-1999
<PERIOD-END> Mar-20-1999
<PERIOD-TYPE> 3-MOS
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 78
<ALLOWANCES> 5
<INVENTORY> 33
<CURRENT-ASSETS> 122
<PP&E> 486
<DEPRECIATION> 228
<TOTAL-ASSETS> 790
<CURRENT-LIABILITIES> 128
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 640
<TOTAL-LIABILITY-AND-EQUITY> 790
<SALES> 130
<TOTAL-REVENUES> 130
<CGS> 76
<TOTAL-COSTS> 76
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (204)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
