<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
WHITMAN CORPORATION
(Exact name of registrant as specified in its charter)
Date of Report (Date of earliest event reported):
April 22, 1999
Delaware
(State or other jurisdiction of incorporation)
001-4710 36-6076573
(Commission File Number) (IRS Employer Identification No.)
3501 Algonquin Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(314) 291-2000
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
--------
4. Form of Supplemental Indenture between Whitman Corporation and the
First National Bank of Chicago, as trustee
23. Consent of KPMG LLP
99.1 New Whitman Unaudited Pro Forma Combined Financial Information
99.2 Pepsico Bottling Operations Combined Financial Statements
<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: April 22, 1999 By: /s/ William B. Moore
____________________________
William B. Moore
Senior Vice President, Secretary and
General Counsel
<PAGE>
EXHIBIT 4
THE FIRST NATIONAL BANK OF CHICAGO,
as Trustee
_________________________
FIRST SUPPLEMENTAL INDENTURE
dated as of May ___, 1999
to
INDENTURE
dated as of January 15, 1993
_________________________
WHITMAN CORPORATION
<PAGE>
THIS FIRST SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") is made
and dated as of May __, 1999 by and between Whitman Corporation, a Delaware
corporation formerly known as Heartland Territories Holdings, Inc. ("New
Whitman"), and The First National Bank of Chicago, a national banking
association organized and existing under the laws of the United States (the
"Trustee"). Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Indenture (as defined below).
WHEREAS, Whitman Corporation, a corporation organized and existing under
the laws of the State of Delaware, ("Old Whitman") and Trustee entered into an
Indenture dated as of January 15, 1993, pursuant to which Old Whitman issued
debt securities in the form of unsecured notes (the "Securities");
WHEREAS, as of the date hereof, $__________ aggregate principal amount of
the Securities are outstanding;
WHEREAS, pursuant to an Amended and Restated Contribution and Merger
Agreement dated as of March 18, 1999 among Old Whitman, PepsiCo, Inc., a North
Carolina corporation ("PepsiCo"), and Heartland Territories Holdings, Inc., a
Delaware corporation and wholly owned subsidiary of PepsiCo ("Heartland"), Old
Whitman has been merged (the "Merger") with and into Heartland, with Heartland
surviving as New Whitman, and New Whitman has assumed various liabilities and
obligations of Old Whitman, including those under the Indenture and with respect
to the Securities;
WHEREAS, in connection with the Merger and in accordance with Section
10.01(a) of the Indenture, the parties desire to enter into this Supplemental
Indenture, without the consent of the holders of the outstanding Securities, in
order to evidence the succession under the Indenture of New Whitman to Old
Whitman and the assumption by New Whitman of the covenants, agreements and
obligations of Old Whitman contained in the Indenture;
WHEREAS, Old Whitman has delivered to the Trustee the Certified Board
Resolution and Opinion of Counsel required by Sections 10.01 and 11.03 of the
Indenture.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, New Whitman and the Trustee agree as follows:
1. Assumption of Obligations. In accordance with Section 11.01 of the
Indenture, New Whitman hereby expressly assumes the due and punctual payment of
the principal of (and premium, if any) and any interest on all the Securities,
according to their tenor, and the due and punctual performance and observance of
all of the covenants and conditions of the Indenture to be performed by Old
Whitman.
2. Succession. In accordance with Section 11.02 of the Indenture, New
Whitman hereby succeeds to and is substituted for Old Whitman, with the same
effect as if New Whitman were a party to the Indenture.
3. Effect of Supplemental Indenture. In accordance with Section 10.03 of
the Indenture, the Indenture is hereby deemed to be modified and amended by this
Supplemental Indenture with respect to the Securities and the respective rights,
limitations of rights, obligations,
<PAGE>
duties and immunities under the Indenture of the Trustee, Old Whitman and the
Holders of Securities shall be determined, exercised and enforced under the
Indenture, as supplemented by this Supplemental Indenture, and all the terms and
conditions of this Supplemental Indenture shall be and are hereby deemed to be
part of the terms and conditions of the Indenture for any and all purposes. As
supplemented by this Supplemental Indenture, the Indenture is in all respects
ratified and confirmed and the Indenture and this Supplemental Indenture shall
be read, taken and construed as one and the same instrument. From and after the
date of this Supplemental Indenture, all references in the Indenture to this
"Indenture" shall refer to the Indenture as supplemented hereby.
4. Notation of Changes. In accordance with Section 10.04 of the
Indenture, Securities authenticated and delivered after the execution of this
Supplemental Indenture in exchange for or in lieu of any Securities outstanding
shall, if required by the Trustee, bear a legend as follows:
"Pursuant to a First Supplemental Indenture dated as of May __, 1999
(the "Supplemental Indenture") between Whitman Corporation, a Delaware
corporation formerly known as Heartland Territories Holdings, Inc.
("New Whitman"), and the Trustee, New Whitman has expressly assumed
all the obligations under this Security and of the Indenture expressed
therein to be performed by Whitman Corporation, a Delaware corporation
which merged into New Whitman on May __, 1999. Copies of the
Supplemental Indenture are on file with the Trustee."
5. Acceptance by Trustee. The Trustee accepts the amendment of the
Indenture effected by this Supplemental Indenture and agrees to perform the
Indenture as supplemented hereby, but only upon the terms and conditions set
forth in the Indenture.
6. Governing Law. This Supplemental Indenture shall be deemed to be a
contract under the laws of the State of Illinois, and for all purposes shall be
governed by and construed in accordance with the laws of such State.
7. Counterparts. This Supplemental Indenture may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which shall constitute one and the same instrument.
8. Notices. New Whitman and Old Whitman have the same principal business
address so any required notices or demands under the Indenture shall be
delivered or sent to New Whitman at the address set forth in Section 14.03 of
the Indenture.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
WHITMAN CORPORATION
By:____________________________
Name:
Title:
Attest:
___________________________
Secretary
[CORPORATE SEAL]
THE FIRST NATIONAL BANK OF
CHICAGO, as Trustee
By:____________________________
Name:
Title:
Attest:
__________________________
Secretary
[CORPORATE SEAL]
<PAGE>
EXHIBIT 23
CONSENT OF KPMG LLP
We consent to incorporation by reference in Registration Statement (Nos.
333-16355 and 33-52809) on Form S-3 of our report dated February 19, 1999,
relating to the combined balance sheets of PepsiCo Bottling Operations as of
December 26, 1998 and December 27, 1997 and the related combined statements of
operations, cash flows and shareholder's equity and accumulated other
comprehensive loss for each of the years in the three-year period ended December
26, 1998, which report appears in this Current Report on Form 8-K.
/s/ KPMG LLP
KPMG LLP
New York, New York
April 22, 1999
<PAGE>
EXHIBIT 99.1
NEW WHITMAN
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
accompanying notes of Whitman contained in Whitman's 1998 Form 10-K/A.
Information about the franchise territories acquired from PepsiCo should be
read in conjunction with the selected combined financial information and the
information included under the caption "Management's Discussion and Analysis of
Operations, Cash Flows and Liquidity and Capital Resources of the PepsiCo
Bottling Operations" appearing on pages 60 to 65 of our proxy statement dated
April 19, 1999, which is incorporated by reference into this prospectus
supplement and the combined financial statements of the PepsiCo Bottling
Operations appearing on pages F-9 to F-24.
The pro forma combined balance sheet gives effect to the following items
assuming they occurred as of Whitman's 1998 fiscal year end:
. The sale by Pepsi General of its bottling operations and the respective
assets and liabilities of the franchise territories located in Marion,
Virginia, Princeton, West Virginia, and the St. Petersburg area of
Russia to PepsiCo in exchange for $117.8 million.
. The acquisition by New Whitman of the bottling operations and the
respective assets and liabilities of the franchise territories located
in Cleveland, Ohio, Dayton, Ohio, Indianapolis, Indiana, St. Louis,
Missouri, southern Indiana, Hungary, the Czech Republic, Slovakia and
the balance of Poland, referred to as the PepsiCo Bottling Operations,
from PepsiCo for 54 million shares of New Whitman common stock, $176.0
million in cash, $241.8 million of debt and the transfer of PepsiCo's
20% minority interest in Pepsi General.
. The repurchase of up to 16 million shares, or $400 million of common
stock, whichever is less, of Whitman/New Whitman common stock.
The pro forma combined statement of operations gives effect to the following
transactions assuming they occurred at the beginning of Whitman's 1998 fiscal
year:
. The sale by Pepsi General of its bottling operations and the respective
assets and liabilities of the franchise territories located in Marion,
Virginia, Princeton, West Virginia, and the St. Petersburg area of
Russia to PepsiCo and removal of their respective 1998 operating
results.
. The acquisition by New Whitman of the PepsiCo Bottling Operations from
PepsiCo and the inclusion of their respective 1998 operating results,
including amortization of goodwill associated with the purchase.
. The recognition of interest and debt issuance costs associated with debt
incurred in the acquisition of the PepsiCo Bottling Operations from
PepsiCo and debt incurred related to the repurchase of 16 million shares
of Whitman/New Whitman common stock.
. The elimination of interest expense allocated to the PepsiCo Bottling
Operations by PepsiCo on debt that will not be assumed by New Whitman.
. The elimination of corporate charges paid to PepsiCo by Pepsi General,
which by agreement will not continue.
. The elimination of PepsiCo's 20% minority interest in Pepsi General.
The acquisition of the PepsiCo Bottling Operations territories is accounted
for under the purchase method. Pro forma earnings per share is based upon an
assumed 139.1 million shares outstanding after completing all transactions.
<PAGE>
NEW WHITMAN
PRO FORMA COMBINED BALANCE SHEET
(Unaudited and in Millions)
<TABLE>
<CAPTION>
Fiscal Year End 1998
------------------------------------------------------------
Pepsico
Pepsi Bottling
General Operations
Whitman Franchise Franchise New
Corporation Territories Territories Pro Forma Whitman
as Reported Sold(A) Acquired Adjustments Pro Forma
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents.. $ 147.6 $ (1.5) $ 6.1 $ (6.1)(C) $ 146.1
Receivables, net...... 170.7 (8.8) 74.4 -- 236.3
Inventories........... 80.0 (6.8) 29.3 -- 102.5
Other current assets.. 30.8 (0.9) 5.2 -- 35.1
-------- ------- ------ -------- --------
Total current
assets............. 429.1 (18.0) 115.0 (6.1) 520.0
-------- ------- ------ -------- --------
Investments............. 160.0 -- 37.2 -- 197.2
Property, net........... 499.3 (46.4) 274.0 23.4 (C) 750.3
Intangibles, net........ 447.0 (49.4) 370.0 (370.0)(C)
1,005.3 (C) 1,402.9
Other assets............ 33.9 (1.4) 5.0 -- 37.5
-------- ------- ------ -------- --------
Total assets........ $1,569.3 $(115.2) $801.2 $ 652.6 $2,907.9
======== ======= ====== ======== ========
LIABILITIES AND EQUITY:
Current liabilities:
Short-term debt....... $ -- $ -- $ 22.8 $ (22.8)(C) $ --
Other current
liabilities.......... 233.2 (7.9) 92.9 1.9 (B)
18.7 (C) 338.8
-------- ------- ------ -------- --------
Total current
liabilities........ 233.2 (7.9) 115.7 (2.2) 338.8
-------- ------- ------ -------- --------
Long-term debt.......... 603.6 -- -- (115.5)(B)
417.8 (C)
294.8 (D) 1,200.7
Deferred income taxes... 99.1 (2.7) 9.5 -- 105.9
Other liabilities....... 73.3 (0.8) 14.6 -- 87.1
Minority interest....... 233.7 -- -- (233.7)(C) --
Net equity of operations
to be sold............. -- (103.8) -- 103.8 (B) --
Shareholders' equity.... 326.4 -- 661.4 9.8 (B)
(661.4)(C)
1,134.0 (C)
(294.8)(D) 1,175.4
-------- ------- ------ -------- --------
Total liabilities
and equity......... $1,569.3 $(115.2) $801.2 $ 652.6 $2,907.9
======== ======= ====== ======== ========
</TABLE>
See accompanying notes to pro forma combined financial information.
<PAGE>
NEW WHITMAN
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Unaudited and in Millions, Except Per Share Data)
<TABLE>
<CAPTION>
Fiscal Year 1998
----------------------------------------------------------
PepsiCo
Pepsi Bottling
General Operations
Whitman Franchise Franchise New
Corporation Territories Territories Pro Forma Whitman
as Reported Sold Acquired Adjustments Pro Forma
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Sales................... $1,635.0 $(77.5) $722.1 $ -- $2,279.6
Cost of goods sold...... 1,024.5 (52.6) 440.2 (0.1)(F) 1,412.0
-------- ------ ------ ----- --------
Gross profit.......... 610.5 (24.9) 281.9 0.1 867.6
Selling, general and
administrative
expenses............... 391.1 (21.7) 249.9 -- (E)
1.8 (F) 621.1
Allocated division and
PepsiCo corporate
costs.................. -- -- 19.7 -- (E) 19.7
Amortization expense.... 15.6 (1.6) 14.2 (14.2)(G)
25.1 (G) 39.1
-------- ------ ------ ----- --------
Operating income
(loss)............... 203.8 (1.6) (1.9) (12.6) 187.7
Interest expense, net... (36.1) 1.8 (4.8) (37.0)(H)
4.8 (I) (71.3)
Interest expense
allocated by PepsiCo... -- -- (46.1) 46.1 (I) --
Other expense, net...... (15.5) 2.3 (0.8) 9.2 (J) (4.8)
-------- ------ ------ ----- --------
Income (loss) before
income taxes......... 152.2 2.5 (53.6) 10.5 111.6
Income taxes............ 69.7 1.1 (4.3) 8.6 (K) 75.1
-------- ------ ------ ----- --------
Income (loss) from
continuing operations
before minority
interest............. 82.5 1.4 (49.3) 1.9 36.5
Minority interest....... 20.0 0.3 -- (20.3)(L) --
-------- ------ ------ ----- --------
Income (loss) from
continuing operations.. $ 62.5 $ 1.1 $(49.3) $22.2 $ 36.5
======== ====== ====== ===== ========
Weighted Average Common
Shares:
Basic................... 101.1 38.0 (M) 139.1
Incremental effect of
stock options.......... 1.8 -- 1.8
-------- ----- --------
Diluted................. 102.9 38.0 140.9
======== ===== ========
Income from Continuing
Operations Per Share:
Basic................... $ 0.62 $ 0.26
Diluted................. $ 0.61 $ 0.26
</TABLE>
See accompanying notes to pro forma combined financial information.
<PAGE>
NEW WHITMAN
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(A) To record the removal of the net equity of the franchise territories to be
sold.
(B) To record the sale of Pepsi General franchise territories to PepsiCo by
removing the net equity of the franchise territories to be sold and
adjusting for the following:
. The reduction of Whitman debt by $115.5 million, using the sale proceeds
of $117.8 million reduced by transaction costs of $2.3 million. Cash
proceeds from the sale will be used immediately to repay existing
borrowings.
. The increase in shareholders' equity, resulting from the gain on the
sale of the franchise territories estimated to be $9.8 million, after
tax.
The consideration to be received from PepsiCo is subject to adjustments
based on changes in the working capital accounts of the franchise
territories sold. However, such adjustments are not expected to be
significant. The gain on sale has not been reflected in the pro forma
combined statement of operations for fiscal year 1998. Instead, the actual
gain on sale will be recorded at the time of the sale in fiscal 1999.
(C) To record the transactions related to the acquisition of the PepsiCo
Bottling Operations franchise territories and the minority interest in
Pepsi General previously held by PepsiCo, as follows (in millions):
<TABLE>
<S> <C>
Acquisition costs:
Issuance of 54 million shares of common stock................... $1,134.0
Issuance of long-term debt...................................... 417.8
Accrual of estimated transaction costs.......................... 18.7
--------
Total acquisition costs....................................... 1,570.5
--------
Allocation of acquisition costs:
Net assets of the PepsiCo Bottling Operations franchise
territories.................................................... 661.4
Less: intangible assets of the PepsiCo Bottling Operations
franchise territories.......................................... (370.0)
--------
Net tangible assets of the PepsiCo Bottling Operations
franchise territories........................................ 291.4
Recorded value of PepsiCo's minority interest in Pepsi General.. 233.7
Payoff by PepsiCo of short-term debt of the PepsiCo Bottling
Operations franchise territories............................... 22.8
Less: cash balances of the PepsiCo Bottling Operations franchise
territories remaining with PepsiCo............................... (6.1)
--------
Total allocation of acquisition costs......................... 541.8
--------
Excess of acquisition costs over recorded values of assets and
liabilities...................................................... $1,028.7
========
Allocation of acquisition costs over recorded values:
Fair value of property in excess of its recorded value, net..... $ 23.4
Intangible assets............................................... 1,005.3
--------
Total allocation of acquisition costs over recorded values.... $1,028.7
========
</TABLE>
Additional information about the acquisition costs and allocation of those
costs is as follows:
. The shares to be issued by New Whitman were valued at $21 per share,
based on the average closing market price of Whitman common stock as
reported on the NYSE during the three-day period immediately before and
after the January 25, 1999 announcement of the original merger agreement
between Whitman and PepsiCo.
. The long-term debt to be issued of $417.8 million will be used to make a
cash payment of $176.0 million to PepsiCo payable when the transactions
are closed and subsequent payments under notes payable to PepsiCo of
$241.8 million.
<PAGE>
. The accrual of estimated transaction costs is primarily attributable to
the $15.0 million financial advisory fee payable to Credit Suisse/First
Boston with the remainder associated with legal, accounting and other
advisory fees and expenses directly associated with the transaction. A
portion of these fees and expenses have been allocated to the sale of
the Pepsi General franchise territories.
. The portion of the excess purchase cost allocated to property is based
on preliminary appraisals. The allocation is subject to refinement when
the final appraisals are completed after the transactions are closed.
Whitman anticipates that the final appraisals will not differ
significantly from the preliminary appraisals.
. The remainder of the excess purchase cost has been allocated to
intangibles, which are comprised of the franchise rights acquired and
goodwill. No portion of the excess purchase cost has been allocated to
the other assets acquired or liabilities assumed. Whitman believes that
the fair values of those other assets and liabilities will approximate
their carrying values.
. The consideration to be paid to PepsiCo is subject to adjustments based
on changes in the working capital accounts of the PepsiCo Bottling
Operations franchise territories. However, such adjustments are not
expected to be significant.
(D) To record the repurchase of 16 million shares of Whitman/New Whitman
common stock, pursuant to the merger agreement, and to record the issuance
of debt to finance the repurchases (in millions):
<TABLE>
<S> <C>
Repurchase of 12.9 million shares through April 12, 1999............. $243.3
Additional repurchases of 3.1 million shares......................... 51.5
------
Debt issued to fund repurchases.................................... $294.8
======
</TABLE>
The merger agreement provides that during the 12 months following the
closing of the merger, New Whitman will repurchase up to 16 million shares
of New Whitman common stock. PepsiCo has agreed that shares repurchased by
Whitman after February 5, 1999 and prior to the closing may be used to
reduce New Whitman's repurchase obligation. New Whitman need not complete
the remaining repurchases if the New Whitman board of directors determines
in good faith that they are impractical or inadvisable.
The repurchase cost of the remaining 3.1 million shares is based on an
assumed average price of $16.62 per share, which approximates the average
price of the shares repurchased in the five business days ending on April
7, 1999. An increase or decrease in the repurchase cost of $1 per share on
the remaining 3.1 million shares would change the amount of debt issued to
fund repurchases by $3.1 million. The change in debt would change pro forma
interest expense by $0.2 million on an annual basis or $0.1 million after
tax.
(E) Adjustments have not been made to give effect to the potential reduction
in administrative expenses that may be realized by New Whitman due to
facility consolidations and other cost savings initiatives, because the
amount of such potential savings cannot be estimated with an adequate
level of certainty.
(F) To adjust depreciation expense based on the preliminary appraisals of
property, plant and equipment (Note C).
The increase in depreciation expense is based upon the following
adjustments to property, plant and equipment and estimated remaining useful
lives:
<TABLE>
<CAPTION>
Range of
Adjustment useful lives
---------- --------------
<S> <C> <C>
Land................................................ $ 0.9
Buildings and improvements.......................... (0.8) 13 to 22 years
Machinery and equipment............................. 23.3 1 to 14 years
-----
Total............................................. 23.4
=====
</TABLE>
<PAGE>
(G) To reflect the amortization of intangible assets acquired, the following
entries were made:
. The elimination of amortization expense recorded by the PepsiCo Bottling
Operations franchise territories.
. The recording of $25.1 million of amortization expense on intangible
assets of $1,005.3 million, related to the PepsiCo Bottling Operations
franchise territories, using a forty-year amortization period. The
principal factors considered in determining the use of a 40 year
amortization period include: (1) the franchise agreements with PepsiCo
are granted in perpetuity and provide the exclusive right to manufacture
and sell PepsiCo branded products within the territories prescribed in
the agreements, and (2) the existing and projected cash flows are
adequate to support the carrying values of the intangible assets to be
recorded.
(H) To record the net increase in interest expense based on the net increase in
long-term debt, as follows (in millions):
<TABLE>
<S> <C>
Debt incurred by New Whitman to fund payments to PepsiCo (Note C).. $ 417.8
Debt incurred for share repurchases (Note D)....................... 294.8
Less: net cash proceeds from sale of Pepsi General franchise
territories (Note B).............................................. (115.5)
-------
Net increase in long-term debt................................... $ 597.1
=======
Interest at an assumed effective rate of 6.2%...................... $ 37.0
=======
</TABLE>
The effective interest rate assumed in the pro forma adjustment of 6.2
percent is based upon rates available to Whitman/New Whitman under its
existing commercial paper program and rates expected through additional
public debt offerings.
A change in the interest rate of 1/8 of a percentage point would have the
effect of changing interest expense $0.7 million or $0.4 million after tax.
(I) To eliminate the interest expense, net, of $4.8 million recorded by the
PepsiCo Bottling Operations and interest expense of $46.1 million allocated
by PepsiCo to the PepsiCo Bottling Operations. The underlying debt will not
be assumed by New Whitman.
(J) To eliminate the corporate charge paid by Pepsi General to PepsiCo. Whitman
and PepsiCo have agreed to terminate this charge once the transactions are
closed.
(K) To record the estimated tax impact of the pro forma adjustments, using an
incremental tax rate of 40%, determined as follows:
<TABLE>
<S> <C>
Pretax income of pro forma adjustments................................ $10.5
Plus: additional non-deductible intangible amortization............... 10.9
-----
Total............................................................... 21.4
Incremental tax rate.................................................. X 40%
-----
Pro forma tax adjustment.............................................. $ 8.6
=====
</TABLE>
(L) To eliminate PepsiCo's 20% minority interest in the earnings of Pepsi
General, due to the transfer of that minority interest to New Whitman.
(M) To record the net increase in weighted average common shares outstanding,
giving effect to the issuance of 54 million shares to PepsiCo (Note C) less
the 16 million shares to be acquired pursuant to the merger agreement (Note
D).
<PAGE>
EBITDA is defined as income before income taxes plus the sum of interest,
depreciation and amortization. Information concerning EBITDA has been included
below because it is expected to be used by some investors as a measure of
operating performance and of the ability to service potential debt. EBITDA is
not required by GAAP and, accordingly, should not be considered an alternative
to income from continuing operations or any other measure of performance
required by GAAP. It also should not be used as a measure of cash flow or
liquidity under GAAP. Following is a summary of historical and pro forma
EBITDA, and depreciation and amortization for 1998 (in millions):
<TABLE>
<CAPTION>
Depreciation
and
EBITDA Amortization
------ ------------
<S> <C> <C>
Whitman Corporation as reported............................ $266.0 $ 77.7
Pepsi General franchise territories sold................... (5.3) (6.0)
PepsiCo Bottling Operations franchise territories.......... 62.1 64.8
Pro forma adjustments...................................... 15.2 18.6
------ ------
New Whitman--pro forma basis............................... $338.0 $155.1
====== ======
</TABLE>
<PAGE>
EXHIBIT 99.2
PEPSICO BOTTLING OPERATIONS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders of
PepsiCo, Inc.:
We have audited the accompanying combined balance sheets of PepsiCo Bottling
Operations ("PBO") as of December 26, 1998 and December 27, 1997 and the
related combined statements of operations, cash flows and shareholder's equity
and accumulated other comprehensive loss for each of the years in the three-
year period ended December 26, 1998. These combined financial statements are
the responsibility of PBO's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of PBO as of December
26, 1998 and December 27, 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 26, 1998,
in conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
February 19, 1999
<PAGE>
PEPSICO BOTTLING OPERATIONS
COMBINED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Net Sales
United States........................................ $541.9 $517.4 $507.0
Central Europe....................................... 180.2 186.3 219.5
------ ------ ------
722.1 703.7 726.5
------ ------ ------
Cost of Sales
United States........................................ 321.3 304.2 300.2
Central Europe....................................... 118.9 126.3 148.7
------ ------ ------
440.2 430.5 448.9
------ ------ ------
Gross Profit........................................... 281.9 273.2 277.6
Selling, Delivery and Administrative Expenses
United States........................................ 171.6 170.9 169.9
Central Europe....................................... 92.5 104.6 126.8
Allocated division and PepsiCo corporate costs....... 19.7 19.8 18.8
------ ------ ------
283.8 295.3 315.5
------ ------ ------
Operating Loss......................................... (1.9) (22.1) (37.9)
Other Expense
Interest expense:
External........................................... 4.8 5.1 7.7
PepsiCo allocation................................. 46.1 46.6 48.1
------ ------ ------
50.9 51.7 55.8
Foreign exchange losses.............................. 0.8 14.4 1.9
------ ------ ------
Total other expense.............................. 51.7 66.1 57.7
------ ------ ------
Loss Before Income Taxes............................... (53.6) (88.2) (95.6)
Income tax benefit................................... 4.3 7.0 9.3
------ ------ ------
Net Loss............................................... $(49.3) $(81.2) $(86.3)
====== ====== ======
</TABLE>
See accompanying Notes to Combined Financial Statements.
<PAGE>
PEPSICO BOTTLING OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
(In Millions)
<S> <C> <C> <C>
Cash Flows--Operations
Net loss............................................. $(49.3) $(81.2) $ (86.3)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation....................................... 50.6 53.5 55.9
Amortization....................................... 14.2 14.4 14.6
Deferred income taxes.............................. (4.3) (7.0) (9.3)
Other noncash charges and credits, net............. -- 5.4 --
Equity in (income) loss of affiliate............... (2.8) (4.9) 9.4
Changes in operating working capital:
Trade accounts receivable, net................... (4.7) 5.6 8.9
Inventories...................................... 0.8 5.6 10.4
Prepaid expenses and other current assets........ 2.8 0.5 5.8
Accounts payable and other current liabilities... (2.7) 7.7 8.3
Trade accounts payable to PepsiCo................ 5.1 (0.5) (6.1)
------ ------ -------
Net change in operating working capital............ 1.3 18.9 27.3
------ ------ -------
Net Cash Provided by (Used for) Operations........... 9.7 (0.9) 11.6
------ ------ -------
Cash Flows--Investing Activities
Capital expenditures................................. (54.8) (57.6) (108.7)
Investments in and advances to affiliates............ -- (1.4) (7.9)
Proceeds from sales of property, plant and equipment. 5.4 6.3 9.8
Other, net........................................... (2.2) (0.6) 4.4
------ ------ -------
Net Cash Used for Investing Activities............... (51.6) (53.3) (102.4)
------ ------ -------
Cash Flows--Financing Activities
Short-term borrowings--three months or less, net..... 7.5 (22.9) (30.8)
Proceeds from issuance of long-term debt............. -- -- 4.0
Payments on long-term debt........................... -- (10.5) (0.6)
Net investment by PepsiCo............................ 16.9 101.0 123.4
------ ------ -------
Net Cash Provided by Financing Activities............ 24.4 67.6 96.0
------ ------ -------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents......................................... 0.4 (1.8) (0.5)
------ ------ -------
Net Increase/(Decrease) in Cash and Cash Equivalents. (17.1) 11.6 4.7
Cash and Cash Equivalents--Beginning of Year......... 23.2 11.6 6.9
------ ------ -------
Cash and Cash Equivalents--End of Year............... $ 6.1 $ 23.2 $ 11.6
====== ====== =======
</TABLE>
See accompanying Notes to Combined Financial Statements.
<PAGE>
PEPSICO BOTTLING OPERATIONS
COMBINED BALANCE SHEETS
December 26, 1998 and December 27, 1997
<TABLE>
<CAPTION>
1998 1997
------ ------
(In Millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................................... $ 6.1 $ 23.2
Trade accounts receivable, less allowance of $5.1 and $4.7 in
1998 and 1997, respectively................................... 74.4 70.0
Inventories.................................................... 29.3 29.5
Prepaid expenses and other current assets...................... 5.2 6.6
------ ------
Total Current Assets....................................... 115.0 129.3
Property, plant and equipment, net............................. 274.0 271.3
Intangible assets, net......................................... 370.0 418.7
Other assets................................................... 42.2 37.8
------ ------
Total Assets............................................... $801.2 $857.1
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable and other current liabilities................. $ 87.1 $122.6
Short-term borrowings.......................................... 22.8 15.6
Trade accounts payable to PepsiCo.............................. 5.8 2.3
------ ------
Total Current Liabilities.................................. 115.7 140.5
Other liabilities.............................................. 14.6 11.6
Deferred income taxes.......................................... 9.5 13.8
------ ------
Total Liabilities.......................................... 139.8 165.9
------ ------
Shareholder's Equity
Net investment by PepsiCo...................................... 713.8 746.8
Accumulated other comprehensive loss........................... (52.4) (55.6)
------ ------
Total Shareholder's Equity................................. 661.4 691.2
------ ------
Total Liabilities and Shareholder's Equity................. $801.2 $857.1
====== ======
</TABLE>
See accompanying Notes to Combined Financial Statements.
<PAGE>
PEPSICO BOTTLING OPERATIONS
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Fiscal Years Ended December 26, 1998, December 27, 1997
and December 28, 1996
<TABLE>
<CAPTION>
Accumulated
Total Net Other
Shareholder's Investment Comprehensive
Equity by Pepsico Loss
------------- ---------- -------------
(In Millions)
<S> <C> <C> <C>
Balance at December 30, 1995............. $676.6 $703.2 $(26.6)
Comprehensive loss:
Net loss............................... (86.3) (86.3)
Currency translation adjustment........ (13.2) (13.2)
------
Total comprehensive loss................. (99.5)
------
Net investment by PepsiCo................ 122.7 122.7
------ ------ ------
Balance at December 28, 1996............. $699.8 $739.6 $(39.8)
Comprehensive loss:
Net loss............................... (81.2) (81.2)
Currency translation adjustment........ (15.8) (15.8)
------
Total comprehensive loss................. (97.0)
------
Net investment by PepsiCo................ 88.4 88.4
------ ------ ------
Balance at December 27, 1997............. $691.2 $746.8 $(55.6)
Comprehensive loss:
Net loss............................... (49.3) (49.3)
Currency translation adjustment........ 3.2 3.2
------
Total comprehensive loss................. (46.1)
------
Net investment by PepsiCo................ 16.3 16.3
------ ------ ------
Balance at December 26, 1998............. $661.4 $713.8 $(52.4)
====== ====== ======
</TABLE>
See accompanying Notes to Combined Financial Statements.
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Tabular Dollars in Millions)
Note 1--Business Description
The accompanying financial statements reflect the combined results of
operations, cash flows and net assets of certain direct and indirect wholly-
owned bottling operations of PepsiCo, Inc. ("PepsiCo"). These bottling
operations (herein referred to as "PepsiCo Bottling Operations" or "PBO")
present the carved-out operating results and financial position of PepsiCo's
bottling operations predominantly located in the midwestern part of the United
States (the "Heartland") and in certain countries in Central Europe: the Czech
Republic, Slovakia, Poland and Hungary. The financial information in these
financial statements is not necessarily indicative of results that would have
been obtained if PBO had been a separate stand-alone entity.
PBO produces and distributes Pepsi, Diet Pepsi, Mountain Dew and other
brands of carbonated soft drinks and other non-alcoholic beverages.
Approximately 88% of PBO's 1998 net sales were derived from the distribution of
PepsiCo products.
Note 2--Summary of Significant Accounting Policies
The preparation of Combined Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net sales and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation
The accompanying Combined Financial Statements include the results of
operations and assets and liabilities directly related to PBO operations. All
intercompany amounts and transactions have been eliminated in combination.
PBO was allocated $19.7 million, $19.8 million and $18.8 million of overhead
costs related to divisional headquarters and PepsiCo corporate administrative
functions in 1998, 1997 and 1996, respectively. The allocations were based on
the specific identification of administrative costs where practicable and, to
the extent that specific identification was not practicable, based upon PBO's
sales volume as a percentage of PepsiCo's related total sales volume. Such
allocated costs are included in selling, delivery and administrative expenses
in the Combined Statements of Operations. Management believes that such
allocation methodology is reasonable. The expenses allocated to PBO for these
services are not necessarily indicative of the expenses that would have been
incurred if PBO had been a separate stand-alone entity.
PBO's operations have been financed through its operating cash flows and net
investment by PepsiCo. PBO's interest expense includes an allocation of
PepsiCo's interest expense based on PepsiCo's weighted average interest rate
applied to the average balance of net investment by PepsiCo to PBO. PBO was
allocated $46.1 million, $46.6 million and $48.1 million of interest expense
reflecting PepsiCo's average interest rates of 6.4%, 6.2% and 6.2% in 1998,
1997 and 1996, respectively. The interest expense is not necessarily indicative
of interest costs that would have been incurred if PBO had been a separate
independent entity.
Deferred taxes result from temporary differences between the financial bases
and tax bases of PBO's assets and liabilities. Deferred tax assets and
liabilities are adjusted for changes in tax rates and tax laws in the period
that such changes are enacted. Gross potential deferred tax assets are reduced
by a valuation allowance to the extent that it is not "more likely than not"
that such deferred tax assets will be realized.
Historically, PBO results have been included in the consolidated income tax
returns of PepsiCo. PepsiCo manages its tax position on a consolidated basis
which takes into account the results of all of its businesses and
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
global tax strategies. The income taxes in the Combined Financial Statements
are computed as if PBO had actually filed separate tax returns and as such, do
not include the tax benefits that may have been recognized by PepsiCo by
utilizing global tax strategies.
Income taxes payable or receivable and allocations from PepsiCo of corporate
overhead and interest costs have been deemed to have been paid by PBO to
PepsiCo, in cash, in the period in which the cost was incurred or the income
taxes were recorded. Cash paid for external interest was $4.8 million, $5.1
million and $7.7 million, for 1998, 1997 and 1996, respectively. There were no
cash payments made for income taxes in 1998, 1997 and 1996.
Fiscal Year
PBO's fiscal year ends on the last Saturday in December and, as a result, a
fifty-third week is added every five or six years. The fiscal years ending
1998, 1997 and 1996 each consisted of fifty-two weeks.
Revenue Recognition
PBO recognizes revenue when goods are delivered to customers. Sales terms
generally do not allow a right of return.
Advertising and Marketing Costs
PBO is involved in a variety of programs to promote its products.
Advertising and marketing costs included in selling, delivery and
administrative expenses are expensed in the year incurred. Advertising and
marketing costs were $38.5 million, $39.7 million and $38.9 million, in 1998,
1997 and 1996, respectively.
Bottler Incentives
PepsiCo and other brand owners, at their sole discretion, provide PBO with
various forms of marketing support. This marketing support covers a variety of
programs and initiatives, including direct marketplace support, capital
equipment funding and shared media and advertising support. Based on the
objectives of the programs and initiatives, marketing support is recorded as an
adjustment to net sales or a reduction of selling, delivery and administrative
expenses. Direct marketplace support is primarily funding by PepsiCo and other
brand owners of sales discounts and similar programs and is recorded as an
adjustment to net sales. Capital equipment funding is designed to support the
purchase and placement of marketing equipment and is recorded within selling,
delivery and administrative expenses. Shared media and advertising support is
recorded as a reduction to advertising and marketing expense within selling,
delivery and administrative expenses. There are no conditions or other
requirements which could result in a repayment of any support payments received
by PBO.
The total amount of bottler incentives received from PepsiCo and other brand
owners in the form of marketing support amounted to $51 million, $56 million,
and $59 million for 1998, 1997 and 1996, respectively. Of these amounts, $15
million, $15 million and $15 million for 1998, 1997 and 1996 were recorded in
net sales and the remainder was recorded in selling, delivery and
administrative expenses. The amount of bottler incentives received from PepsiCo
was approximately 97% of total bottler incentives in each of the three years,
with the balance received from the other brand owners.
Stock-Based Employee Compensation
PBO measures stock-based compensation cost in accordance with Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees", and its related interpretations. PepsiCo's policy is to grant stock
options at fair market value at the date of grant.
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Derivative Financial Instruments
PBO did not utilize any derivative financial instruments during 1998, 1997
and 1996.
Cash Equivalents
Cash equivalents represent funds temporarily invested with original
maturities not exceeding three months.
Inventories
Inventories are valued at the lower of cost (computed on the first-in,
first-out method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment ("PP&E") is stated at cost. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets as follows: 20 to 33 years for buildings and improvements and 3 to 10
years for machinery and equipment.
Intangible Assets
Intangible assets, which are primarily franchise rights and goodwill are
both amortized on a straight-line basis over a period of generally 40 years.
Recoverability of Long-Lived Assets
PBO reviews all long-lived assets, including intangible assets, when facts
and circumstances indicate that the carrying value of the asset may not be
recoverable.
An impaired asset is written down to its estimated fair value based on the
best information available. Estimated fair value is generally based on either
appraised value or measured by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future
cash flows. Accordingly, actual results could vary significantly from such
estimates.
Foreign Currency Transactions
Foreign exchange gains and losses reflect (1) transaction gains and losses
and (2) when a country is considered highly inflationary, the translation
gains and losses arising from the remeasurement into United States dollars of
the net monetary assets of the businesses in that country. Transaction gains
and losses arise from foreign exchange differences on monetary assets and
liabilities that are denominated in currencies other than the business'
functional currency. Amounts recorded as transaction losses were $0.8 million,
$12.2 million and $0.2 million in 1998, 1997 and 1996, respectively. Poland
was considered a highly inflationary economy in 1996 and 1997, and
accordingly, translation losses from the remeasurement into United States
dollars of the net monetary assets related to Poland were $2.2 million and
$1.7 million in 1997 and 1996, respectively.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for the reporting and
display of net income and other gains and losses affecting shareholders'
equity that are
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
excluded from net income. The only components of other comprehensive loss are
net loss and the foreign currency translation component of shareholder's
equity. These financial statements reflect the adoption of SFAS 130. Other
items of comprehensive income or loss are reported in the Combined Statements
of Shareholder's Equity and Accumulated Other Comprehensive Loss.
In June 1997, the FASB issued Statement of Financial Accounting Standard
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. SFAS 131 requires that the definition of
operating segments align with the measurements used internally to assess
performance. SFAS 131 is a disclosure standard and its adoption will not impact
PBO's financial condition or results of operations. These financial statements
reflect the adoption of SFAS 131.
In June 1998, the FASB issued Statement of Financial Accounting Standard
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. PBO is currently assessing the effects of adopting
SFAS 133, and has not yet made a determination of the impact of its financial
position or results of operations. SFAS 133 will be effective for PBO's first
quarter of fiscal year 2000.
Note 3--Inventories
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Raw materials and supplies...................................... $ 13.3 $ 14.3
Finished goods.................................................. 16.0 15.2
------ ------
$29.3 $29.5
====== ======
</TABLE>
Note 4--Property, Plant and Equipment, Net
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Land...................................................... $ 7.9 $ 7.6
Buildings and improvements................................ 83.6 82.5
Machinery and equipment................................... 398.0 371.6
Other..................................................... 12.7 4.8
-------- ---------
502.2 466.5
Accumulated depreciation.................................. (228.2) (195.2)
-------- ---------
$274.0 $271.3
======== =========
</TABLE>
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 5--Intangible Assets, Net
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Franchise rights and other identifiable intangibles....... $ 384.4 $ 384.4
Goodwill.................................................. 127.6 161.8
512.0 546.2
Accumulated amortization.................................. (142.0) (127.5)
-------- --------
$370.0 $418.7
======== ========
</TABLE>
Identifiable intangible assets principally arise from the allocation of the
purchase price of businesses acquired and consist primarily of territorial
franchise rights. Amounts assigned to such identifiable intangibles were based
on their estimated fair value at the date of acquisition. Goodwill represents
the residual purchase price after allocation to all identifiable net assets.
In the fourth quarter of 1998, a disputed claim was settled with the
Internal Revenue Service relating to the deductibility of the amortization of
acquired franchise rights. The settlement resulted in the reduction of goodwill
and income taxes payable by $34.0 million.
Note 6--Accounts Payable and Other Current Liabilities
<TABLE>
<CAPTION>
1998 1997
----- ------
<S> <C> <C>
Accounts payable.................................................. $30.6 $ 25.2
Income taxes...................................................... -- 34.0
Accrued compensation and benefits................................. 16.5 15.0
Accrued advertising............................................... 15.1 19.0
Other current liabilities......................................... 24.9 29.4
----- ------
$87.1 $122.6
===== ======
</TABLE>
Note 7--Short-Term Borrowings
Short-term borrowings on the Combined Balance Sheets primarily represent
loans from financial institutions and bank overdrafts. Interest rates on these
borrowings ranged from 4.0% to 18.2% in 1998 and between 4.0% to 24.3% in 1997.
Note 8--Pension Plans
United States employees of PBO participate in PepsiCo sponsored
noncontributory defined benefit pension plans which cover substantially all
full-time salaried employees, as well as certain hourly employees. Benefits
generally are based on years of service and compensation or stated amounts for
each year of service. All plans but one are funded and contributions are made
in amounts not less than minimum statutory funding requirements nor more than
the maximum amount that can be deducted for United States income tax purposes.
Net periodic United States pension expense allocated from PepsiCo's plans to
PBO was $1.0 million in 1998, 1997 and 1996. There are no defined benefit
pension plans for PBO's foreign operations.
Note 9--Financial Instruments and Risk Management
Foreign Exchange Risk
As currency exchange rates change, translation of the statements of
operations of our international business into United States dollars affects
year-over-year comparability. PBO has not historically hedged
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
translation risks because cash flows from international operations have
generally been reinvested locally, nor historically has PBO entered into hedges
to minimize the volatility of reported earnings.
Fair Value of Financial Instruments
The carrying amount of PBO's financial instruments approximates fair value
due to the short maturity of PBO's financial instruments and since interest
rates approximate fair value for long-term debt. PBO does not use any financial
instruments for trading or speculative purposes.
Note 10--Employee Stock Option Plans
PBO employees were granted stock options under PepsiCo's three long-term
incentive plans--the SharePower Stock Option Plan ("SharePower"), the Long-Term
Incentive Plan ("LTIP"), and the Stock Option Incentive Plan ("SOIP").
Prior to 1997, SharePower options were granted annually to essentially all
full-time employees. SharePower options generally become exercisable ratably
over 5 years from the grant date and must be exercised within 10 years from the
grant date. There were no SharePower options granted in 1997. All SharePower
options granted in 1998 become exercisable in 3 years from the grant date and
must be exercised within 10 years from the grant date.
Most LTIP options were granted every other year to senior management
employees. Most of these options become exercisable after 4 years and must be
exercised within 10 years from the grant date. In addition, the LTIP allows for
grants of performance share units ("PSUs"). The maximum value of a PSU is fixed
at the value of a share of PepsiCo stock at the grant date and vests 4 years
from the grant date. Payment of PSUs are made in cash and/or stock and the
payment amount is determined based on the attainment of prescribed performance
goals. There were no amounts expensed for PSUs for PBO employees.
In 1998 the LTIP was modified. Under the revised program, executives are
granted stock options which vest over a three-year period and must be exercised
within 10 years from the grant date. In addition to these option grants,
executives may receive an additional grant or cash based upon the achievement
of PepsiCo performance objectives over three years. PBO accrues compensation
expense for the cash portion of the LTIP grant.
SOIP options are granted to middle-management employees and, prior to 1997,
were granted annually. SOIP options are exercisable after one year and must be
exercised within 10 years after their grant date. In 1998, the SOIP was
combined with the LTIP.
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The amounts presented below represent options granted under PepsiCo employee
stock option plans. The pro forma amounts below are not necessarily
representative of the effects of stock-based awards on future pro forma net
income because (1) future grants of employee stock options to PBO management
may not be comparable to awards made to employees while PBO was a part of
PepsiCo, and (2) the assumptions used to compute the fair value of any stock
option awards may not be comparable to the PepsiCo assumptions used.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
(Options in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,872 $19.39 2,220 $20.35 2,298 $17.91
Granted............... 613 36.50 -- -- 331 33.31
Exercised............. (496) 17.88 (340) 16.16 (271) 15.11
Forfeited............. (81) 28.60 (141) 24.21 (138) 21.12
PepsiCo
modification(a).... -- -- 133 -- -- --
----- ------ ----- ------ ----- ------
Outstanding at end of
year................... 1,908 $24.87 1,872 $19.39 2,220 $20.35
===== ====== ===== ====== ===== ======
Exercisable at end of
year................... 991 $17.83 1,180 $16.85 1,089 $15.99
===== ====== ===== ====== ===== ======
Weighted average fair
value of options
granted during the
year................... $ 9.71 $ -- $ 8.90
====== ====== ======
</TABLE>
- --------
(a) In 1997, PepsiCo spun off its restaurant businesses to its shareholders.
Immediately following this spin-off, the number of options exercisable for
PepsiCo capital stock was increased and their exercise prices were
decreased to preserve the economic value of those options that existed just
prior to the spin-off for the holders of PepsiCo stock options.
Stock options outstanding at December 26, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted Avg.
Range of Remaining Weighted Avg. Weighted Avg.
Exercise Price Options Contractual Life Exercise Price Options Exercise Price
-------------- ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 8.17 to $16.37 563 3.77 years $13.94 521 $13.90
$16.87 to $36.50 1,345 7.46 $29.43 470 $22.16
----- ---
1,908 6.37 $24.87 991 $17.83
===== ===
</TABLE>
PBO adopted the disclosure provisions of Statement of Financial Accounting
Standards 123 "Accounting for Stock-Based Compensation," ("SFAS 123") but
continues to measure stock-based compensation cost in accordance with APB
Opinion No. 25 and its related interpretations. If PBO had measured
compensation cost for the PepsiCo stock options granted to its employees in
1998, 1997 and 1996 under the fair value based method prescribed by SFAS 123,
the net loss would have been changed to the pro forma amounts set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net loss:
Reported........................................ $(49.3) $(81.2) $(86.3)
Pro forma....................................... $(50.7) $(82.4) $(86.8)
</TABLE>
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The fair value of PepsiCo stock options granted to PBO employees used to
compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions used by PepsiCo:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate........................... 4.7% 5.8% 6.0%
Expected life..................................... 5 years 3 years 6 years
Expected volatility............................... 23% 20% 20%
Expected dividend yield........................... 1.14% 1.32% 1.5%
</TABLE>
Note 11--Income Taxes
The details of the income tax benefit are set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ -- $ --
Foreign............................................ -- -- --
State.............................................. -- -- --
----- ----- -----
$ -- $ -- $ --
===== ===== =====
Deferred:
Federal............................................ $(3.7) $(6.3) $(8.3)
Foreign............................................ -- -- --
State.............................................. (0.6) (0.7) (1.0)
----- ----- -----
$(4.3) $(7.0) $(9.3)
===== ===== =====
</TABLE>
United States and foreign loss before income taxes are set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States..................................... $(11.4) $(17.7) $(23.4)
Foreign........................................... (42.2) (70.5) (72.2)
------ ------ ------
Total............................................. (53.6) $(88.2) $(95.6)
====== ====== ======
</TABLE>
A reconciliation of income tax benefit calculated at the United States
federal statutory rate to PBO's effective tax benefit rate is set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Income tax benefit computed at the United States
federal statutory rate............................. 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit........ 0.7 0.5 0.7
Effect of foreign tax rate differences.............. (9.0) (5.6) (5.6)
Valuation allowance--foreign........................ (13.0) (18.3) (15.3)
Nondeductible amortization of a portion of United
States intangible assets........................... (2.8) (1.7) (1.6)
Nondeductible expenses.............................. (2.8) (2.0) (3.4)
----- ----- -----
Effective income tax benefit rate................... 8.1% 7.9% 9.8%
===== ===== =====
</TABLE>
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Deferred tax liabilities and assets are attributable to temporary
differences between the financial statement bases and tax bases of certain
assets and liabilities and to net operating loss carryforwards, as set forth
below:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Intangible assets and property, plant and equipment...... $118.2 $106.5
Other.................................................... 3.2 2.8
------ ------
Gross deferred tax liabilities........................... 121.4 109.3
------ ------
Net operating loss carryforwards......................... 171.8 153.9
Allowance for doubtful accounts.......................... 1.2 1.1
Various liabilities and other............................ 4.3 7.0
------ ------
Gross deferred tax assets................................ 177.3 162.0
Deferred tax asset valuation allowance................... (64.2) (65.3)
Net deferred tax assets.................................. 113.1 96.7
------ ------
Net deferred income liability............................ $ 8.3 $ 12.6
====== ======
Portion recorded in:
Prepaid expenses and other current assets.............. $ (1.2) $ (1.2)
Deferred income taxes.................................. 9.5 13.8
------ ------
$ 8.3 $ 12.6
====== ======
</TABLE>
Net operating loss carryforwards are primarily generated by allocations of
interest and corporate overhead from PepsiCo as if PBO had operated on a stand-
alone basis and had actually filed a separate income tax return. The valuation
allowance related to deferred tax assets decreased by $1.1 million in 1998
primarily due to additions related to current year operating losses offset by
temporary differences in a number of foreign and state jurisdictions.
Net operating loss carryforwards totaling $125.7 million at year-end 1998
are available to reduce future taxes and are related to a number of foreign
jurisdictions. These carryforwards expire at various times between 1999 and
2005.
Note 12--Transactions with PepsiCo
PBO is a licensed producer and distributor of carbonated soft drinks and
other non-alcoholic beverages on behalf of PepsiCo. In addition, PBO has the
following relationships with PepsiCo.
PBO purchases concentrate from PepsiCo to be used in the production of
carbonated soft drinks and other non-alcoholic beverages.
PepsiCo and PBO share a business objective of increasing availability and
consumption of PepsiCo's brands. Accordingly, PepsiCo provides PBO with various
forms of marketing support to promote PepsiCo's brands. This support covers a
variety of programs and initiatives, including direct marketplace support,
marketing programs, capital equipment funding and shared media and advertising
expense. PepsiCo and PBO each record their share of the cost of marketing
programs in their financial statements. Based on the objectives of the programs
and initiatives, marketing support is recorded as an adjustment to net sales or
a reduction of selling, delivery and administrative expense.
PBO manufactures and distributes fountain products and provides fountain
equipment service to PepsiCo customers in certain territories in accordance
with the master bottling agreement. There are other products which PBO produces
and/or distributes through various arrangements with PepsiCo or partners of
PepsiCo.
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
PBO purchases finished goods and concentrate from the Lipton Tea Partnership
and finished goods from the North American Coffee Partnership. PBO pays a
royalty fee to PepsiCo for the use of the Aquafina trademark.
PepsiCo provides certain administrative support to PBO, including collection
of trade receivables, development and maintenance of information systems, and
insurance coverage.
The Combined Statements of Operations include the following income and
(expense) transactions with PepsiCo:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net sales.................................. $ 13.9 $ 13.6 $ 13.4
Cost of goods sold......................... $(68.8) $(66.3) $(60.7)
Selling, delivery and administrative
expenses.................................. $ 43.2 $ 49.0 $ 51.8
</TABLE>
There are no minimum fees or payments that PBO is required to make to
PepsiCo, nor is PBO obligated to PepsiCo under any minimum purchase
requirements. There are no conditions or other requirements that could result
in the repayment of any marketing support payments received by PBO from
PepsiCo.
Note 13--Contingencies
PBO is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, in excess of
amounts already recognized arising from such claims or contingencies is not
likely to have a material adverse effect on PBO's annual results of operations,
financial condition or liquidity.
Note 14--Business Segments
In 1998, PBO adopted Statement of Financial Accounting Standards No. 131
Disclosures about Segments of a Business Enterprise and Related Information.
PBO operates in one industry segment which is the manufacture, sale and
distribution of carbonated soft drinks and other ready-to-drink beverages. The
prior year's segment information presented has been restated to present our two
reportable operating segments which are based on geographic area: United States
and Central Europe. The relevant measure of profitability that is used to
evaluate the performance of the operating segments is operating profit before
allocation of corporate overhead charges. There are no significant intra-
segment transactions. Revenues are based upon the location of where product was
sold.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net Sales
United States................................. $ 541.9 $517.4 $507.0
Central Europe................................ 180.2 186.3 219.5
------- ------ ------
$ 722.1 $703.7 $726.5
======= ====== ======
Operating profit (loss)
United States................................. $ 49.0 $ 42.3 $ 36.9
United States allocated overhead.............. (14.0) (13.4) (12.2)
------- ------ ------
35.0 28.9 24.7
Central Europe................................ (31.2) (44.6) (56.0)
Central Europe allocated overhead............. (5.7) (6.4) (6.6)
------- ------ ------
(36.9) (51.0) (62.6)
------- ------ ------
$ (1.9) $(22.1) $(37.9)
======= ====== ======
</TABLE>
<PAGE>
PEPSICO BOTTLING OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Amortization of Intangible Assets
United States..................................... $ 13.9 $ 14.1 $ 14.1
Central Europe.................................... .3 .3 .5
------ ------ ------
$ 14.2 $ 14.4 $ 14.6
====== ====== ======
Depreciation Expense
United States..................................... $ 22.7 $ 22.5 $ 22.8
Central Europe.................................... 27.9 31.0 33.1
------ ------ ------
$ 50.6 $ 53.5 $ 55.9
====== ====== ======
Capital Spending
United States..................................... $ 30.4 $ 25.6 $ 29.1
Central Europe.................................... 24.4 32.0 79.6
------ ------ ------
$ 54.8 $ 57.6 $108.7
====== ====== ======
Total Assets
United States..................................... $580.9 $619.6 $628.5
Central Europe.................................... 220.3 237.5 289.3
------ ------ ------
801.2 857.1 917.8
====== ====== ======
Long-lived Assets
United States..................................... $507.4 $548.4 $560.1
Central Europe.................................... 178.8 179.4 225.6
------ ------ ------
$686.2 $727.8 $785.7
====== ====== ======
</TABLE>
Other assets on the Combined Balance Sheets include a $37.2 million, $34.6
million and $28.3 million investment in a Polish joint venture at December 26,
1998, December 27, 1997 and December 28, 1996, respectively. PBO's equity
income or loss in such joint venture was $2.8 million and $4.9 million equity
income in 1998 and 1997 and $9.4 million equity loss in 1996.
Note 15--Subsequent Events (Unaudited)
On January 25, 1999, the Board of Directors of Whitman Corporation
("Whitman") approved an agreement in which PepsiCo will consolidate certain of
its bottling territories and other assets with Whitman's existing bottling
businesses to create a new bottling company referred to as "New Whitman."
PepsiCo will transfer to the new company a number of bottling operations,
including territories in Illinois, Indiana, Missouri and Ohio in the United
States as well as in the Czech Republic, Slovakia, Hungary and Poland. PepsiCo
also will transfer to the new company the 20% stake it currently holds in
Whitman's Pepsi-Cola General Bottlers subsidiary. The agreement specified that
Whitman will transfer to PepsiCo operations in: Marion, Virginia; Princeton,
West Virginia and St. Petersburg, Russia.
New Whitman will assume liabilities associated with PepsiCo's United States
operations and will acquire PepsiCo's international operations for cash,
resulting in net proceeds to PepsiCo of $300 million. In addition, PepsiCo will
receive 54 million shares of common stock in New Whitman, giving PepsiCo
immediate ownership of approximately 35% of New Whitman.
The merger transaction is subject to the approval of the shareholders of
Whitman.
On March 19, 1999, Whitman sold its bottling operations located in Marion,
Virginia and Princeton, West Virginia along with related transportation assets
to PepsiCo for $97.8 million in cash.
