SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-04710
WHITMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-6076573
- ------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3501 Algonquin Road, Rolling Meadows, Illinois 60008
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 818-5000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /x/ NO / /
As of April 30, 1998, the Registrant had 87,684,780 outstanding shares
(excluding treasury shares) of common stock, without par value, the Registrant's
only class of common stock.
<PAGE>
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
WHITMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
First Quarter
--------------------------------------
1999 1998
---------- ----------
(in millions, except per share data)
<S> <C> <C>
Sales $ 374.8 $ 348.5
Cost of goods sold 219.7 206.3
---------- ----------
Gross profit 155.1 142.2
Selling, general and administrative expenses 120.0 103.0
Amortization expense 3.9 3.9
---------- ----------
Operating income 31.2 35.3
Interest expense, net (Note 7) (11.3) (9.3)
Other income (expense), net (Note 3) 6.6 (4.9)
---------- ----------
Income before income taxes 26.5 21.1
Income taxes 8.3 9.5
---------- ----------
Income from continuing operations before minority interest 18.2 11.6
Minority interest 3.9 3.5
---------- ----------
Income from continuing operations 14.3 8.1
Loss from discontinued operations after taxes (Note 4) -- (0.5)
Extraordinary loss on early extinguishment of debt after taxes (Note 5) -- (18.3)
---------- ----------
Net income (loss) $ 14.3 $ (10.7)
========== ==========
Weighted average common shares:
Basic 96.1 101.0
Incremental effect of stock options 1.5 1.7
---------- ----------
Diluted 97.6 102.7
========== ==========
Income (loss) per share - basic:
Continuing operations $ 0.15 $ 0.08
Discontinued operations -- (0.01)
Extraordinary loss on early extinguishment of debt -- (0.18)
---------- ----------
Net income (loss) $ 0.15 $ (0.11)
========== ==========
Income (loss) per share - diluted:
Continuing operations $ 0.15 $ 0.08
Discontinued operations -- --
Extraordinary loss on early extinguishment of debt -- (0.18)
---------- ----------
Net income (loss) $ 0.15 $ (0.10)
========== ==========
Cash dividends per share $ 0.05 $ 0.05
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WHITMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
End of End of
First Quarter Fiscal Year
1999 1998
------------- -------------
(in millions)
<S> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $ 122.3 $ 147.6
Receivables 165.1 170.7
Inventories 73.5 80.0
Other current assets 37.6 30.8
------------ ------------
Total current assets 398.5 429.1
Investments 153.5 160.0
Property (at cost) 960.8 1,006.5
Accumulated depreciation and amortization (491.3) (507.2)
------------ ------------
Net property 469.5 499.3
------------ ------------
Goodwill, net 394.1 447.0
Other assets 33.6 33.9
------------ ------------
Total assets $ 1,449.2 $ 1,569.3
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current maturities of long-term debt $ 150.0 $ --
Accounts and dividends payable 145.9 133.0
Other current liabilities 73.7 100.2
------------ ------------
Total current liabilities 369.6 233.2
------------ ------------
Long-term debt 580.2 603.6
Deferred income taxes 94.3 99.1
Other liabilities 63.1 73.3
Minority interest 237.2 233.7
Shareholders' equity:
Common stock (without par, 250.0 million shares authorized;
113.3 million shares issued) 499.8 499.8
Retained income 104.1 94.3
Accumulated other comprehensive loss:
Cumulative translation adjustment (13.2) (12.0)
Unrealized investment gain 2.1 3.4
------------ ------------
Accumulated other comprehensive loss (11.1) (8.6)
------------ ------------
Treasury stock (24.3 million shares at April 3, 1999 and 12.3 million
shares at January 2, 1999) (488.0) (259.1)
------------ ------------
Total shareholders' equity 104.8 326.4
------------ ------------
Total liabilities and shareholders' equity $ 1,449.2 $ 1,569.3
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WHITMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
First Quarter
-----------------------------
1999 1998
----------- -----------
(in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 14.3 $ 8.1
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 20.8 19.1
Deferred income taxes (3.2) 1.4
Gain on sale of franchises (8.0) --
Cash outlays related to 1997 special charges (3.9) (4.0)
Other 3.1 3.6
Changes in assets and liabilities, exclusive of acquisitions:
Decrease in receivables 3.1 3.2
Decrease (increase) in inventories 0.9 (8.3)
Increase in payables 15.7 14.8
Net change in other assets and liabilities (38.5) (8.0)
----------- -----------
Net cash provided by continuing operations 4.3 29.9
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of franchises, net of cash divested 113.6 --
Dividends from and settlement of intercompany indebtedness with
Hussmann and Midas prior to spin-offs -- 434.3
Capital investments, net (36.1) (19.9)
Net activity with joint ventures 1.2 2.1
Purchases of investments -- (3.8)
Proceeds from sales of investments 2.2 4.6
----------- -----------
Net cash provided by investing activities 80.9 417.3
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt 126.5 --
Repayment of long-term debt -- (311.2)
Common dividends (4.6) (5.0)
Treasury stock purchases (230.0) (18.3)
Issuance of common stock 1.1 10.7
----------- -----------
Net cash used in financing activities (107.0) (323.8)
----------- -----------
Net cash used in discontinued operations (3.1) (5.4)
Effect of exchange rate changes on cash and equivalents (0.4) (0.1)
----------- -----------
Change in cash and equivalents (25.3) 117.9
Cash and equivalents at beginning of quarter 147.6 52.4
----------- -----------
Cash and equivalents at end of quarter $ 122.3 $ 170.3
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein have been
prepared by Whitman Corporation ("Whitman" or the "Company") without
audit. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission, although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended January 2, 1999. In the
opinion of management, the information furnished herein reflects all
adjustments (consisting only of normal, recurring adjustments) necessary
for a fair statement of results for the interim periods presented. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
2. Effective at the end of 1998, the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the
Saturday closest to December 31. The Company's first quarter of 1999
commenced January 3, 1999 and ended April 3, 1999, while the Company's
first quarter of 1998 commenced January 1, 1998 and ended March 31, 1998.
3. On January 25, 1999, the Company announced that its Board of Directors had
approved a new business relationship with PepsiCo, Inc. ("PepsiCo"). As
part of the Contribution and Merger Agreement (the "Agreement") with
PepsiCo and Heartland Territories Holdings, Inc. ("New Whitman"), PepsiCo
will contribute certain assets of several domestic franchise territories
to New Whitman and the Company will merge into New Whitman. Contributed
territories include Cleveland, Ohio, Dayton, Ohio, Indianapolis, Indiana,
St. Louis, Missouri and southern Indiana. The Agreement is subject to
approval of shareholders at the special shareholder meeting scheduled for
May 20, 1999. In addition, the Agreement provides for Pepsi-Cola General
Bottlers, Inc. ("Pepsi General") to sell to PepsiCo its operations in
Marion, Virginia, Princeton, West Virginia and the St. Petersburg area of
Russia. Pepsi General will acquire PepsiCo's international operations in
Hungary, the Czech Republic, Slovakia and the balance of Poland. New
Whitman will incur debt obligations of approximately $300 million and will
issue 54 million shares of common stock to PepsiCo in exchange for the
contributed territories and the elimination of PepsiCo's 20 percent
minority interest in Pepsi General. In addition, the Company agreed to
repurchase up to 16 million shares, or $400 million of its common stock,
whichever is less, during the 12 month period following the close of the
transaction. The Company repurchased approximately 12.1 million shares of
its common stock in the first quarter of 1999, at a total cost of $230.0
million, and has purchased an additional 1.3 million shares subsequent to
the end of the first quarter of 1999. PepsiCo has agreed that such
repurchases may be used to reduce New Whitman's repurchase commitment.
On March 19, 1999, Pepsi General completed the sale to PepsiCo of the
franchises in Marion, Virginia and Princeton, West Virginia. The sale of
the franchise in Russia was completed on March 31, 1999. The Company
recorded a pretax gain of $11.4 million, which is reflected in other
income (expense), net, on the Condensed Consolidated Statements of Income.
The net gain after tax and minority interest of $8.0 million increased
basic earnings per share by $0.08. During the second quarter of 1999, the
Company expects to receive the domestic and international territories it
will acquire from PepsiCo upon consummation of the Merger of Whitman and
New Whitman contemplated by the Agreement. This acquisition will be
accounted for by the purchase method. Accordingly, the results of
operations of the territories to be acquired will be included with those
of New Whitman for periods subsequent to the date of acquisition.
4. On January 30, 1998, the Company established Hussmann International, Inc.
("Hussmann") and Midas, Inc. ("Midas") as independent publicly-held
companies through tax-free distributions (spin-offs) to Whitman
shareholders. Whitman retained Pepsi General as its principal operating
company. The financial information of Hussmann and Midas is reflected as
discontinued operations. The first quarter 1998 loss from discontinued
operations included income tax provisions of $0.1 million.
5. In January, 1998, Whitman made a tender offer for any and all of its
outstanding 7.625% and 8.25% notes maturing June 15, 2015, and February
15, 2007, respectively. In connection with the tender offer, Whitman
repurchased 7.625% and 8.25% notes with principal amounts of $91.0 million
and $88.5 million, respectively. The Company paid total premiums in
connection with the tender offer of $26.4 million and the remaining
unamortized discount and issue costs related to repurchased notes were
$2.1 million. The Company also repaid a term loan and notes with principal
amounts of $50.0 million scheduled to mature in 1998 and 1999, notes due
in 2002 with principal amounts of $50.0 million and industrial revenue
bonds of $5.0 million due 2013. Costs associated with these repayments and
the remaining unamortized issue costs were not significant. The Company
recorded an extraordinary charge of $18.3 million, net of income tax
benefits of $10.4 million, in the first quarter of 1998 related to these
early extiguishments of debt.
6. The Company's comprehensive income (loss) was as follows:
First Quarter
-------------------
1999 1998
------ ------
(in millions)
Net income (loss) $ 14.3 $(10.7)
Foreign currency translation adjustment (1.2) 2.0
Unrealized (losses) gains on securities (1.3) 0.9
------ ------
Comprehensive income (loss) $ 11.8 $ (7.8)
====== ======
Unrealized (losses) gains on securities are presented net of tax (benefit)
expense of ($0.7) million and $0.4 million, respectively.
7. Interest expense, net, is comprised of the following:
First Quarter
-------------------
1999 1998
------ ------
(in millions)
Interest expense $(12.0) $(12.6)
Interest income from Hussmann and Midas -- 1.6
Interest income 0.7 1.7
------ ------
Interest expense, net $(11.3) $ (9.3)
====== ======
Interest income from Hussmann and Midas related to intercompany loans and
advances. The related interest expense recorded by Hussmann and Midas is
included in loss from discontinued operations after taxes.
8. Net cash provided by operating activities reflected cash payments and
receipts for interest and income taxes as follows:
First Quarter
-------------------
1999 1998
------ ------
(in millions)
Interest paid $ 20.0 $ 26.2
Interest received 1.4 2.5
Income taxes paid, net of refunds 7.1 1.9
The increase in income taxes paid in the first quarter of 1999 versus the
comparable period in 1998 was due primarily to the impact of the tax
benefits arising from the extraordinary loss recorded during the first
quarter of 1998 (see Note 5).
9. As of the end of first quarter 1999, the components of inventory were
approximately: raw materials and supplies - 45 percent and finished goods
- 55 percent.
10. In 1997, the Company recorded special charges totaling $49.3 million.
Pepsi General recorded special charges of $14.8 million to consolidate the
number of its domestic divisions, including reductions in staffing levels,
and to write-down certain assets in its domestic and international
operations. Special charges of $34.5 million were recorded for the Whitman
corporate office, principally relating to the severance of essentially all
of the Whitman corporate management and staff and for expenses associated
with the spin-offs.
The following table summarizes the remaining accrued liabilities
associated with the special charges at the end of fiscal 1998,
expenditures through the end of the first quarter of 1999, and the
remaining accrued liabilities at the end of the first quarter of 1999 (in
millions):
<TABLE>
<CAPTION>
Pepsi Whitman
General Corporate Total
------- --------- -----
<S> <C> <C> <C>
Accrued liabilities at end of fiscal 1998
(all employee-related costs) $ 1.5 $ 13.0 $ 14.5
Expenditures for employee related costs (1.5) (2.4) (3.9)
------- ------- -------
Accrued liabilities at end of first quarter of 1999 $ -- $ 10.6 $ 10.6
======= ======= =======
</TABLE>
Employee related costs include severance payments for the management and
staff affected by the changes in organizational structure, as well as
other headcount reduction programs. The total number of employees affected
was approximately 125 at Pepsi General and essentially all employees at
Whitman Corporate. During the first quarter of 1999, approximately three
positions were eliminated and approximately fifteen positions are yet to
be eliminated.
The accrued liabilities remaining at the end of the first quarter of 1999
are comprised of deferred severance payments and certain employee
benefits. Substantially all of the amounts accrued are expected to be paid
in 1999 and are classified as other current liabilities.
11. The Company continues to be subject to certain indemnification obligations
under agreements with previously sold subsidiaries for potential
environmental liabilities. There is significant uncertainty in assessing
the Company's share of the potential liability for such claims. The
assessment and determination for cleanup at the various sites involved is
inherently difficult to estimate, and the Company's share of related costs
is subject to various factors, including possible insurance recoveries and
the allocation of liabilities among many other potentially responsible and
financially viable parties.
At the end of the first quarter of 1999, the Company had accruals of $18.6
million to cover these potential liabilities, including $8.0 million
classified as current liabilities. Such amounts are determined using
estimated undiscounted future cash requirements, and have not been reduced
by potential future insurance recoveries.
These estimated liabilities include expenses for the remediation of
identified sites, payments to third parties for claims and expenses, and
the expenses of on-going evaluation and litigation. The estimates are
based upon current technology and remediation techniques, and do not take
into consideration any inflationary trends upon such claims or expenses,
nor do they reflect the possible benefits of continuing improvements in
remediation methods. The accruals also do not provide for any claims for
environmental liabilities or other potential issues which may be filed
against the Company in the future.
The Company also has other contingent liabilities from various pending
claims and litigation on a number of matters, including indemnification
claims under agreements with previously sold subsidiaries for product
liability and toxic torts. The ultimate liability for these claims, if
any, cannot be determined. In the opinion of management, and based upon
information currently available, the ultimate resolution of these claims
and litigation, including potential environmental exposures, and
considering amounts already accrued, will not have a material effect on
the Company's financial condition or the results of operations. Additional
claims and liabilities may develop and may result in additional charges to
income, principally through discontinued operations. Existing
environmental liabilities associated with the Company's continuing
operations are not material.
12. During the first quarter of 1999, the Company entered into several
derivative financial instruments to reduce the Company's exposure to
adverse fluctuations in interest rates and commodity prices. These
financial instruments were "over-the-counter" instruments and were
designated at their inception as hedges of underlying exposures. The
Company does not enter into derivative financial instruments for trading
purposes.
In March, 1999, the Company entered into forward contracts with an
aggregate notional amount of $150 million to fix the interest rate on the
April, 1999 issuance of $150 million of 6.375 percent notes due in 2009.
In April, 1999, the Company entered into further contracts with an
aggregate notional amount of $150 million to fix the interest rate on the
April, 1999 issuance of $150 million of 6.0 percent notes due in 2004. All
such contracts were settled upon issuance of the notes, resulting in net
proceeds of $0.4 million.
During the first quarter of 1999, the Company entered into several swap
contracts to hedge future fluctuations in aluminum prices. Each contract
hedges price fluctuations on a portion of the Company's aluminum can
requirements over a specified future six-month period. Because of the high
correlation between aluminum commodity prices and the Company's cost of
aluminum cans, the Company considers these hedges to be highly effective.
As of the end of the first quarter of 1999, the Company has hedged a
portion of its future domestic aluminum requirements extending into the
year 2000. Hedging gains and losses on these contracts as of the end of
the first quarter of 1999 were not significant and will be recognized in
income upon sale of the inventory containing the aluminum being hedged.
13. Basic earnings per share are based upon the weighted-average number of
common shares outstanding. Diluted earnings per share assume the exercise
of all options which are dilutive, whether exercisable or not. The
dilutive effects of stock options are measured under the treasury stock
method.
Options to purchase 2,556,300 shares at a weighted-average price of $22.55
per share that were outstanding at the end of the first quarter of 1999
were not included in the computation of diluted EPS because the exercise
price was greater than the average market price of the common shares
during the quarter. All options outstanding at the end of the first
quarter of 1998 were dilutive and were therefore included in the
computation of diluted EPS.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations decreased by $25.6 million to
$4.3 million in the first quarter of 1999. Income from continuing operations in
the first quarter of 1999 increased by $6.2 million, which included the $8.0
million net gain from the sale of the Company's operations in Marion, Princeton
and Russia. Decreases in primary working capital (defined as receivables and
inventories less payables) provided net additional cash of $19.7 million in the
first quarter of 1999 compared with $9.7 million in the prior year, primarily
due to a build-up of raw materials in the first quarter of 1998 in advance of
anticipated price increases. The net change in other assets and liabilities
required net cash of $38.5 million in the first quarter of 1999 compared with
$8.0 million in the comparable period of 1998. This decrease in cash was
primarily due to the following factors: the extraordinary loss recorded in the
first quarter of 1998 provided a current tax benefit of $10.4 million; accrued
salaries and wages decreased due to the timing of payroll to employees,
contributions to benefit plans and withholding tax payments, due in part to a
shift in the timing of the Company's quarter-end from 1998 (see Note 2 to the
Condensed Consolidated Financial Statements); reductions in reserves at the
Company's insurance subsidiary due to claim payments associated with coverage
for previously discontinued operations; and payments made to customers to
discontinue Pepsi General's shell deposit programs.
Investing activities in the first quarter of 1999 included $113.6 million
of net proceeds received from the sale of the Marion, Princeton and Russia
franchise territories. Investing activities in the first quarter of 1998
included $434.3 million received in January, 1998, from Hussmann and Midas prior
to their spin-offs to settle intercompany indebtedness and to pay special
dividends. The Company made capital investments of $36.1 million, net of
proceeds from dispositions, in its operations in the first quarter of 1999
compared with $19.9 million in the first quarter of 1998, with increased
spending principally attributable to additional vending machines placed in the
market and increased spending on fleet vehicles to support the Company's growth.
Cash received, net of investments made, from the Company's joint venture in
Poland was $1.2 million in the first quarter of 1999 compared to $2.1 million in
the first quarter of 1998.
Purchases and sales of investments principally relate to the Company's
insurance subsidiary, which provides certain levels of insurance for Pepsi
General and the discontinued operations of Hussmann and Midas up to the date of
the spin-offs. Funds are invested by the insurance subsidiary and proceeds from
the sale of investments are used by the insurance subsidiary to pay claims and
other expenses. A substantial portion of such investments are reinvested as they
mature. In December, 1998, the Company repaid a loan, including accrued
interest, from its insurance subsidiary. These funds were invested in cash and
equivalents. Total cash and equivalents held by the insurance subsidiary at the
end of the first quarter of 1999 amounted to $68.5 million.
The Company's total debt increased $126.6 million to $730.2 million at the
end of the first quarter of 1999, from $603.6 million at the end of fiscal 1998.
The Company repurchased approximately 12.1 million shares and 1.0 million shares
of its common stock for $230.0 million and $18.3 million in the first quarters
of 1999 and 1998, respectively. Through May 12, 1999 the Company has repurchased
approximately 13.4 million shares of its common stock in 1999, at a total cost
of $251.9 million. Shares repurchased in 1999 have been funded primarily by
using available cash and the proceeds from the sale of the Marion, Princeton and
Russia franchise territories. The Company paid dividends of $4.6 million in the
first quarter of 1999, based on a cash dividend rate of $0.05 per common share,
compared with $5.0 million in the first quarter of 1998, based on the same
dividend rate. The issuance of common stock, including treasury shares, for the
exercise of stock options resulted in cash inflows of $1.1 million in the first
quarter of 1999, compared with $10.7 million in the first quarter of 1998.
In March 1999, the Company signed a five-year revolving credit agreement
with maximum borrowings of $500 million. In April 1999, the Company increased
its commercial paper program to $500 million. The revolving credit facility acts
as a back-up for the commercial paper program; accordingly, the Company has a
total of $500 million available under the commercial paper program and revolving
credit facility combined. Total commercial paper borrowings were $150 million at
the end of the first quarter of 1999. In addition, on April 30, 1999, the
Company issued $150 million of 6.0 percent notes due in 2004 and $150 million of
6.375 percent notes due in 2009. The Company believes that with its existing
operating cash flows and expected operating cash flows from newly acquired
territories from PepsiCo, available lines of credit, and the potential for
additional debt and equity offerings, New Whitman will have sufficient resources
to fund its future growth and expansion, including potential domestic franchise
acquisitions.
RESULTS OF OPERATIONS
1999 FIRST QUARTER COMPARED WITH 1998 FIRST QUARTER
Sales increased 7.5 percent to $374.8 million in the first quarter of
1999, as summarized below:
First Quarter
--------------------- %
1999 1998 Change
------ ------ ------
(in millions)
Domestic $361.3 $332.7 8.6
International 13.5 15.8 -14.6
------ ------
Total Sales $374.8 $348.5 7.5
====== ======
Domestic sales increased $28.6 million in the first quarter of 1999
compared with the same period of 1998. This increase reflected improved pricing
and increased volumes. The average domestic net selling price per raw case rose
2.4 percent, split evenly between pricing and package mix, and volume, in raw
cases, grew 6.0 percent over the first quarter of 1998. In 8-ounce equivalent
cases, volume, including foodservice, increased 6.4 percent. The increase in
volume was due, in part, to the Easter and Passover holiday sales being in the
first quarter of 1999. Sales results from these holidays were included in the
second quarter of 1998. Sales growth was driven by the vending channel, the
fountain channel and the supermarket channel. Volume growth was led primarily by
improved demand for the Mountain Dew, Dr Pepper and Lipton Tea brands. Also
contributing to increased volume was continued strong growth in the water brands
Aquafina and Avalon, and sales of Pepsi One, which was introduced in the fourth
quarter of 1998. Growth of 20-ounce non-returnable ("NR") package sales
continued, aided by the significant number of vending machine placements in
1998.
International sales decreased by $2.3 million to $13.5 million in the
first quarter of 1999 versus the same period of 1998. The decrease resulted
primarily from lower sales in Russia. The Company's operations in Russia were
sold on March 31, 1999.
Consolidated gross profit improved 9.1 percent to $155.1 million,
primarily due to the increase in revenues. The gross profit margin increased to
41.4 percent of sales in the first quarter of 1999, compared with 40.8 percent
of sales in the comparable period of 1998. Domestically, increased pricing and
lower packaging costs drove higher domestic margins, partially offset by
increased costs of concentrate and fructose. These increases, however, were
partially offset by a deterioration in international margins, primarily in
Russia.
Selling, general and administrative ("S,G&A") expenses increased $17.0
million, or 16.5 percent, to $120.0 million. This increase is principally
attributable to increased sales volumes and $4.5 million of charges recorded in
the first quarter of 1999. These charges related to the settlement of insurance,
severance and legal matters. Excluding these charges, S,G&A expenses represented
30.8 percent of sales in the first quarter of 1999, compared with 29.6 percent
in the comparable period of 1998. This increase is due, in part, to higher
depreciation and other costs to support the Company's shift towards the vending
and fountain channels, which began in 1998. In addition, incremental Year 2000
costs and expenses associated with the integrated enterprise-wide resource
planning ("ERP") system implementation in the first quarter of 1999 amounted to
approximately $1 million.
Operating results for the Company's two geographic segments are summarized
below:
First Quarter
--------------------- %
1999 1998 Change
------ ------ ------
(in millions)
Domestic $ 38.6 $ 41.2 -6.3
International (7.4) (5.9) -25.4
------ ------
Total Operating Income $ 31.2 $ 35.3 -11.6
====== ======
In the first quarter of 1999, domestic operating income decreased $2.6
million, or 6.3 percent. This decrease was due primarily to $4.5 million of
charges recorded in the first quarter of 1999, as previously described.
Excluding these charges, domestic operating income was $43.1 million in the
first quarter of 1999, up $1.9 million, or 4.6 percent, from the comparable
period of last year. Excluding the charges, domestic operating margins decreased
0.5 percentage points to 11.9 percent in the first quarter of 1999. The decrease
in domestic margins reflected an increase in depreciation and other costs to
support the Company's shift towards the vending and fountain channels.
The increase in international operating losses from last year was
principally attributable to the Company's operations in Russia. Because results
for international operations are reported on a two-month lag, the Company
reported five months of losses for its Russian operations up to the date of sale
to PepsiCo, compared with three months reported in the first quarter of 1998.
This resulted in additional operating losses of $1.4 million in the first
quarter of 1999.
Net interest expense increased $2.0 million to $11.3 million. The increase
was due principally to the loss of interest income received from Midas and
Hussmann in the first quarter of 1998. In addition, interest income declined due
to the use of a portion of the Company's cash and equivalents to repurchase
shares of its common stock in the first quarter of 1999. Interest expense
declined due to the lower average outstanding debt levels in the first quarter
of 1999.
The Company reported other income, net, of $6.6 million in the first
quarter of 1999 compared with other expense, net, of $4.9 million in the first
quarter of 1998. The change was primarily due to the $11.4 million pre-tax gain
related to the sale of the Company's operations in Marion, Princeton and Russia.
See Note 3 to the Condensed Consolidated Financial Statements.
YEAR 2000 READINESS
The Year 2000 ("Y2K") issue relates to computer applications being designed
using only two digits, rather than four, to represent a year. As a result,
computer applications could fail or create erroneous results by recognizing "00"
as the year 1900 rather than the year 2000. The Company considers Y2K readiness
as the ability to manage and process date-related information without materially
abnormal or incorrect outcomes beyond January 1, 2000.
Beginning in 1997, the Company initiated a company-wide effort to address
the Y2K issues that affect its operations and to minimize service interruptions.
This effort consists of five phases: (1) inventory, (2) assessment, (3)
remediation, (4) testing and (5) developing contingency plans. The contingency
plans will include addressing issues associated with any non-compliant suppliers
and key customers in order to minimize the potential material adverse effects of
any Y2K problems. During 1998, the Company designated one of its senior managers
as its Vice President - Y2K Planning and Compliance. This position is
responsible for coordinating all facets of the Company's Y2K initiative,
including coordinating efforts and responsibilities between corporate
Information Technology ("IT") and non-IT personnel and local division management
to identify, evaluate and implement changes to centralized and non-centralized
computer systems, applications and equipment necessary to achieve Y2K readiness.
Local management has identified and evaluated major areas of potential business
impact, including critical suppliers and customers, to enable proper monitoring
of Y2K conversion efforts on a centralized basis.
In the first quarter of 1998, the Company began implementation of an ERP
system. The ERP system will address the Company's financial applications during
the first phase of implementation and address manufacturing and distribution
systems during the second phase. The ERP project was begun with the goal of
expanding existing system capacity for future growth and improving processing
efficiencies, as well as addressing any Y2K compliance issues associated with
the Company's existing systems. The first phase of the ERP implementation was
implemented during January, 1999, except for the asset management and accounts
receivable modules. The asset management module was implemented during the first
quarter of 1999. The accounts receivable module will be implemented during the
third or fourth quarter of 1999. The Company is currently assessing its existing
accounts receivable system for Y2K compliance in the event the accounts
receivable module is not implemented until the year 2000. The remediation and
testing phases for this system are targeted for completion in September, 1999.
Phase two of the ERP project is expected to be completed during the latter half
of 1999 and first half of the Year 2000. The stages of the second phase targeted
for completion in the Year 2000 do not involve any Y2K compliance issues. In
conjunction with the implementation of the ERP system, certain hardware and
software components have been or will be upgraded to expand existing capacity.
Through the first quarter of 1999, costs incurred in the ERP implementation
totaled approximately $12.1 million. Implementation costs for the entire ERP
project currently are expected to be $25 million to $30 million. These costs
have been, and will be, funded through operating cash flows. A majority of the
costs, as they relate to purchased hardware, software and the implementation
thereof, will be capitalized.
The Company has conducted an inventory of its IT systems and has corrected
substantially all of those critical-path systems that were found to have
date-related deficiencies, excluding the financial systems addressed by phase
one of the ERP implementation. In the case of non-IT systems (i.e., including
embedded chip technology), the Company conducted an inventory of its facilities,
which was completed, for the most part, by the end of 1998. Correction of
date-deficient systems and equipment is occurring simultaneously with the
completion and evaluation of this inventory. The Company is also surveying
selected third parties, including its principal suppliers and customers, as well
as governmental entities, to determine the status of their Y2K compliance
programs.
The inventory, assessment, remediation and testing phases of the Y2K
project are in progress. As part of the Company's testing phase, it intends to
conduct verification testing of selected mainframe/network component upgrades
received from suppliers. In addition, selected critical components are scheduled
to undergo testing in a controlled environment that replicates the current
mainframe/network configuration to simulate the turn of the century and leap
year dates. In the event these efforts do not address all potential systems
problems, the Company is beginning the process of developing contingency plans
to ensure that it will be able to operate the critical areas of its business.
This process includes developing alternative plans to engage in business
activities with customers and suppliers should they or the Company not be Y2K
compliant, including resorting to paper records of certain transactions
presently handled electronically. Development of overall contingency plans has
been deferred due to the pending acquisition of territories from PepsiCo. Once
the territories are acquired, contingency plans will be developed for both
international and domestic operations, and will be finalized for New Whitman in
the third quarter of 1999. The ultimate implementation of contingency plans, if
necessary, would be expected during the fourth quarter of 1999.
The Company is continuing its effort to address Y2K readiness at its
operations which were sold to PepsiCo in the first quarter of 1999. Likewise,
PepsiCo will continue its Y2K project at the territories to be acquired in the
second quarter of 1999. The Company has been informed that PepsiCo's project, as
it relates to their bottling operations, is similar in scope and progress to the
Company's project.
The Company's critical IT systems, except as specifically noted elsewhere,
were Y2K compliant at the end of the first quarter of 1999. It is expected the
Company's non-IT systems and equipment will be compliant by June, 1999.
Compliance by the aforementioned target dates is subject to additional
evaluation, remediation and testing efforts. Incremental costs, over and above
the aforementioned ERP system project spending, related to the Y2K project are
being expensed as incurred and funded through operating cash flows. Through the
first quarter of 1999, the Company had expensed nearly $1.0 million of such
incremental costs. Total incremental costs to ensure Y2K compliance are
estimated to be $2 million to $5 million, with the majority of the costs being
incurred in 1999. This expectation assumes that the Company will not be
obligated to incur significant Y2K-related costs on behalf of its customers or
suppliers. The projection of Y2K-related costs is based on numerous assumptions
and estimates; consequently, actual costs could be materially greater than
anticipated. Plans will continue to be monitored for completion. Incomplete or
untimely resolution of the Y2K issue by the Company, by critically important
suppliers and customers of the Company, or by governmental entities, could have
a materially adverse impact on the Company's business operations or financial
condition in the future.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking
information that reflects management's expectations, estimates and assumptions,
based on information available at the time this Form 10-Q was prepared. When
used in this document, the words "anticipate," "believe," "estimate," "expect,"
"plan", "intend" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements involve risks,
uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements, including, but not limited to, the following: competition, including
product and pricing pressures; changing trends in consumer tastes; changes in
the Company's relationship and/or support programs with PepsiCo and other brand
owners; market acceptance of new product offerings; weather conditions; cost and
availability of raw materials; availability of capital; labor and employee
benefit costs; unfavorable interest rate and currency fluctuations; unexpected
costs associated with Year 2000 conversions or the business risks associated
with potential Year 2000 non-compliance by the Company, customers and/or
suppliers; costs of legal proceedings; and general economic, business and
political conditions in the countries and territories where the Company
operates.
These events and uncertainties are difficult or impossible to predict
accurately and many are beyond the Company's control. The Company assumes no
obligation to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to various market risks, including risks from
changes in commodity prices, interest rates and current exchange rates.
Commodity Prices
The risk from commodity price changes correlates to Pepsi General's
ability to recover higher product costs through price increases to customers,
which may be limited due to the competitive pricing environment that exists in
the soft drink business. In 1999, the Company began to use swap contracts to
hedge against price fluctuations for a portion of its aluminum requirements. See
Note 12 to the Condensed Consolidated Financial Statements. Costs for other raw
material requirements are managed by entering into firm commitments for
materials used.
Interest Rates
In the first quarter of 1999, the risk from changes in interest rates was
not material to the Company's operations because a significant portion of the
Company's debt issues were fixed rate obligations. Substantially all of the
Company's floating rate exposure related to changes in the six month LIBOR rate.
A 50 basis point (0.5 percent) change in the six month LIBOR rate would have had
an insignificant impact on the Company's first quarter 1999 interest expense
related to its floating rate obligations. Upon completing the transactions with
PepsiCo, it is expected the Company may be subject to additional floating rate
interest exposure and may manage those exposures using interest rate swaps. Thus
far in 1999, the Company has entered into contracts to fix interest rates on
$300 million of notes issued by the Company on April 30, 1999. See Note 12 to
the Condensed Consolidated Financial Statements. In the first quarter of 1999,
the Company had short-term investments throughout the quarter, principally
invested in money market funds and commercial paper, which were most closely
tied to three-month Treasury-bill rates. Assuming a change of 50 basis points in
the rate of interest associated with the Company's short-term investments,
interest income would have changed by less than $0.1 million.
Currency Exchange Rates
Because the Company operates international franchise territories, it is
subject to exposure resulting from changes in currency exchange rates. Currency
exchange rates are established based on a variety of economic factors including
local inflation, growth, interest rates and governmental actions, as well as
other factors. The Company currently does not hedge the translation risks of
investments in its international operations. Any positive cash flows generated
have been reinvested in the operations, excluding loan repayments from the
manufacturing joint venture in Poland.
Non-U.S. operations do not represent a significant portion of the
Company's total operations. Changes in currency exchange rates impact the
translation of the results of the international operations from their local
currencies into U.S. dollars. If the currency exchange rates had changed by 5
percent in the first quarter of 1999, the impact on reported operating income
would have been approximately $0.2 million. The economy in Russia was considered
highly inflationary for accounting purposes with all transactions being recorded
at historical costs in U.S. dollars. All gains and losses in Russia from foreign
exchange transactions are included in the consolidated results of operations.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a). Exhibits.
12. Statement of Calculation of Ratio of Earnings to Fixed Charges.
27. Financial Data Schedules for the first quarters of 1999 and
1998.
(b). Reports on Form 8-K.
The Company filed a current report on January 29, 1999, during the
first quarter of 1999. The current report discussed, under Item 5,
the Agreement entered into with PepsiCo and New Whitman, pursuant to
which, among other things, PepsiCo will contribute certain assets to
New Whitman and the Company will merge with and into New Whitman.
Included as an exhibit to this current report under Item 7 was the
Agreement, dated as of January 25, 1999, entered into by and among
the Company, PepsiCo and New Whitman. The current report also
discussed, under Item 8, the change in the Company's fiscal year
from a calendar year to a 52/53 week fiscal year ending on the
Saturday nearest each December 31.
The Company also filed a current report on February 5, 1999, which,
under Item 5, described an agreement entered into by the Company and
PepsiCo whereby common shares of the Company's stock purchased by
the Company in 1999 prior to the closing of the Agreement may be
used to reduce New Whitman's repurchase commitment under the
Agreement. Included as an exhibit to this current report under Item
7 was the form of letter agreement, dated February 5, 1999, between
the Company and PepsiCo.
<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: May 17, 1999 By: /s/ MARTIN M. ELLEN
-------------------
Martin M. Ellen
Senior Vice President and Chief Financial Officer
(As Chief Accounting Officer and Duly Authorized
Officer of Whitman Corporation)
EXHIBIT 12
WHITMAN CORPORATION
STATEMENT OF CALCULATION
OF RATIO OF EARNINGS TO FIXED CHARGES
(in Millions, Except Ratios)
<TABLE>
<CAPTION>
First Quarter Fiscal Years
-------------------- -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income from Continuing
Operations before Taxes $ 26.5 $ 21.1 $ 152.2 $ 69.9 $ 127.7 $ 118.2 $ 80.3
Fixed Charges 13.3 13.9 51.5 75.6 74.4 76.7 72.2
-------- -------- -------- -------- -------- -------- --------
Earnings as Adjusted $ 39.8 $ 35.0 $ 203.7 $ 145.5 $ 202.1 $ 194.9 $ 152.5
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest Expense $ 12.0 $ 12.6 $ 46.4 $ 69.0 $ 68.2 $ 70.3 $ 67.0
Preferred Stock Dividend Requirements
Of Majority Owned Subsidiary -- -- -- 1.7 1.5 1.4 1.1
Portion of Rents Representative
of Interest Factor 1.3 1.3 5.1 4.9 4.7 5.0 4.1
-------- -------- -------- -------- -------- -------- --------
Fixed Charges $ 13.3 $ 13.9 $ 51.5 $ 75.6 $ 74.4 $ 76.7 $ 72.2
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges* 3.0x 2.5x 4.0x 1.9x 2.7x 2.5x 2.1x
======== ======== ======== ======== ======== ======== ========
</TABLE>
* Intercompany interest income from Hussmann and Midas was $1.6 million for
the first quarter of 1998 and was $1.6 million, $23.1 million, $23.7
million, $21.8 million and $20.6 million for the fiscal years 1998, 1997,
1996, 1995 and 1994, respectively. Such amounts are included in income from
continuing operations before taxes. If this intercompany interest income
had reduced interest expense, thereby reducing fixed charges and earnings
as adjusted, the ratio of earnings to fixed charges for the first quarter
of 1998 and for the fiscal years 1998, 1997, 1996, 1995 and 1994 would have
been 2.7x, 4.1x, 2.3x, 3.5x, 3.2x and 2.6x, respectively.
Whitman Corporation recorded special charges of $49.3 million during the
third and fourth quarters of 1997. Excluding these special charges, the
ratio of earnings to fixed charges for fiscal 1997 would have been 2.6x. If
the fixed charges for 1997 were adjusted for the intercompany interest
income noted above, the ratio of earnings to fixed charges would have been
3.3x.
Whitman Corporation also recorded a pretax gain of $11.4 million during the
first quarter of 1999 relating to the sale to PepsiCo of operations in
Marion, Virginia, Princeton, West Virginia and the St. Petersburg area of
Russia. Excluding the gain, the ratio of earnings to fixed charges for the
first quarter of 1999 would have been 2.1x.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WHITMAN
CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000049573
<NAME> WHITMAN CORPORATION
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-01-2000 JAN-02-1999
<PERIOD-END> APR-03-1999 MAR-31-1998
<CASH> 122,300 0
<SECURITIES> 0 0
<RECEIVABLES> 167,200 0
<ALLOWANCES> 2,100 0
<INVENTORY> 73,500 0
<CURRENT-ASSETS> 37,600 0
<PP&E> 960,800 0
<DEPRECIATION> 491,300 0
<TOTAL-ASSETS> 1,449,200 0
<CURRENT-LIABILITIES> 369,600 0
<BONDS> 580,200 0
0 0
0 0
<COMMON> 499,800 0
<OTHER-SE> (395,000) 0
<TOTAL-LIABILITY-AND-EQUITY> 1,449,200 0
<SALES> 374,800 348,500
<TOTAL-REVENUES> 374,800 348,500
<CGS> 219,700 206,300
<TOTAL-COSTS> 343,600<F1> 313,200<F4>
<OTHER-EXPENSES> (6,600) 4,900
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,300<F2> 9,300<F5>
<INCOME-PRETAX> 26,500 21,100
<INCOME-TAX> 8,300 9,500
<INCOME-CONTINUING> 14,300<F3> 8,100<F6>
<DISCONTINUED> 0 (500)
<EXTRAORDINARY> 0 (18,300)
<CHANGES> 0 0
<NET-INCOME> 14,300 (10,700)
<EPS-PRIMARY> 0.15 (0.11)<F7>
<EPS-DILUTED> 0.15 (0.10)<F8>
<FN>
<F1>
TOTAL COSTS INCLUDE COSTS OF GOODS SOLD, S,G&A EXPENSES AND AMORTIZATION EXPENSE
OF $219,700, $120,000 AND $3,900, RESPECTIVELY.
<F2>
INTEREST EXPENSE, NET, INCLUDES INTEREST EXPENSE AND INTEREST INCOME OF $12,000
AND $700, RESPECTIVELY.
<F3>
INCOME FROM CONTINUING OPERATIONS IS REDUCED BY MINORITY INTEREST OF $3,900.
<F4>
TOTAL COSTS INCLUDE COSTS OF GOODS SOLD, S,G&A EXPENSES AND AMORTIZATION EXPENSE
OF $206,300, $103,000 AND $3,900, RESPECTIVELY.
<F5>
INTEREST EXPENSE, NET, INCLUDES INTEREST EXPENSE, INTEREST INCOME FROM
HUSSMANN INTERNATIONAL, INC. ("HUSSMANN") AND MIDAS, INC. ("MIDAS") AND OTHER
INTEREST INCOME OF $12,600, $1,600 AND $1,700, RESPECTIVELY. INTEREST INCOME FROM
HUSSMANN AND MIDAS RELATED TO INTERCOMPANY LOANS AND ADVANCES. THE RELATED
INTEREST EXPENSE RECORDED BY HUSSMANN AND MIDAS IS INCLUDED IN INCOME FROM
DISCONTINUED OPERATIONS AFTER TAXES.
<F6>
INCOME FROM CONTINUING OPERATIONS IS REDUCED BY MINORITY INTEREST OF $3,500.
<F7>
BASIC INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.08
DISCONTINUED OPERATIONS <0.01>
EXTRAORDINARY LOSS <0.18>
NET INCOME $ <0.11>
<F8>
DILUTED INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.08
DISCONTINUED OPERATIONS 0.00
EXTRAORDINARY LOSS <0.18>
NET INCOME $ <0.10>
</FN>
</TABLE>
