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1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 1, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File Number 001-15019
WHITMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-6167838
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3501 Algonquin Road, Rolling Meadows, Illinois 60008
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 818-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Preferred Stock, $0.01 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 25, 2000, the aggregate market value of the registrant's
common stock held by non-affiliates was $1,710.8 million. The number of shares
of common stock outstanding at that date was 138,246,262 shares.
Information required by Part III of this document is incorporated by
reference to specified portions of the registrant's proxy statement to be
distributed in connection with its 2000 Annual Meeting of Shareholders.
PART I
Item 1. Business.
General
Whitman Corporation ("Whitman" or the "Company") through its principal
operating company, Pepsi-Cola General Bottlers, Inc. ("Pepsi General"),
manufactures, packages, sells and distributes carbonated and non-carbonated
Pepsi-Cola beverages and a variety of other non-alcoholic beverages in the
United States and Central Europe.
The Company was previously engaged in the refrigeration systems and
equipment business conducted through Hussmann International, Inc. ("Hussmann")
and in the automotive services business through Midas, Inc. ("Midas"). On
January 30, 1998, the Company distributed to shareholders all of the common
stock of Hussmann and Midas in tax-free spin-offs.
On January 25, 1999, Whitman announced that its Board of Directors approved
a new business relationship with PepsiCo, Inc. ("PepsiCo") including the
Contribution and Merger Agreement (the "Agreement"), which was approved by
Whitman's shareholders on May 20, 1999. See Note 2, New Business Relationship
with PepsiCo and Other Acquisitions, to the Consolidated Financial Statements.
As part of the Agreement, Pepsi General sold its franchises in Marion, Virginia;
Princeton, West Virginia and the St. Petersburg area of Russia to PepsiCo.
Territories acquired by or contributed to Pepsi General included domestic
franchises in Cleveland, Ohio; Dayton, Ohio; Indianapolis, Indiana; St. Louis,
Missouri and southern Indiana, and international franchises in Hungary, the
Czech Republic, Slovakia and the balance of Poland. The new business
relationship has resulted in PepsiCo holding 54,794,115 shares of Whitman common
stock, representing 39.4 percent of Whitman's outstanding common stock at fiscal
year end 1999.
Pepsi General accounts for about 17 percent of all Pepsi-Cola products sold
in the U.S. It serves a significant portion of a ten state region, primarily in
the Midwest, with a population of approximately 35 million people. In addition,
Pepsi General serves a population of approximately 65 million people in its
territories in Poland, Hungary, the Czech Republic and the Republic of Slovakia.
Pepsi General sells a variety of brands that Pepsi General bottles under
licenses from PepsiCo or PepsiCo joint ventures. In some territories, Pepsi
General manufactures, packages, sells and distributes products under brands
licensed by companies other than PepsiCo. In addition, on December 1, 1999,
Pepsi General acquired the Toma brands in the Czech Republic. See "Products and
Packaging."
While Pepsi General manages all phases of its operations, including pricing
of its products, Pepsi General and PepsiCo exchange production, marketing and
distribution information, benefiting both companies' respective efforts to lower
costs, improve productivity and increase product sales.
The owners of beverage brands either manufacture and sell products
themselves or appoint bottlers to sell, distribute and, in some cases,
manufacture these products under license. Brand owners, such as PepsiCo,
generally own both the beverage trademarks and the secret formulas for the
concentrates, which they also manufacture and sell to their licensed bottlers.
Brand owners also develop new products and packaging for use by their bottlers.
Brand owners develop national marketing, promotion and advertising programs to
support their brands and brand image, and coordinate selling efforts with
respect to national fountain, supermarket and mass merchandising accounts. They
also provide local marketing support to their bottlers.
Bottlers, such as Pepsi General, are generally responsible for
manufacturing, packaging, selling and distributing products under the brand
names they license from brand owners in their exclusive territories. For
carbonated soft drink products, the bottler combines soft drink concentrate with
sweeteners and carbonated water and packages this mixture in bottles or cans.
Bottlers may also have licenses to manufacture syrup for sale to fountain
accounts. Under these licenses, bottlers combine soft drink concentrate with
sweeteners to manufacture syrup for delivery to fountain customers. For
non-carbonated beverages, the bottler either manufactures and packages the
beverages or purchases the beverages in finished form and sells them through its
distribution system.
The primary distribution channels for the retail sale of carbonated soft
drink products are supermarkets, mass merchandisers, vending machines,
convenience stores, gas stations, fountain channels, such as restaurants or
cafeterias, and other channels, such as small groceries, drug stores and
educational institutions. The largest channel in the United States is
supermarkets, but Pepsi General's fastest growing channels have been mass
merchandisers; the cold drink channel, which includes sales through vending
machines, coolers and fountain equipment; and convenience stores and gas
stations.
1
Depending upon the size of the bottler and the particular market, a bottler
delivers products through these channels using either a direct-to-store delivery
system or a warehouse distribution system. In its exclusive territories, each
bottler is responsible for selling products and providing timely service to its
existing customers and identifying and obtaining new customers. Bottlers are
also responsible for local advertising and marketing, as well as the execution
in their territories of national and regional selling programs instituted by
brand owners. The bottling business is capital intensive. Manufacturing
operations require specialized high-speed equipment, and distribution requires
extensive placement of fountain equipment and cold drink vending machines and
coolers, as well as investment in trucks and warehouse facilities.
Products and Packaging
Pepsi General's portfolio of beverage products includes some of the best
recognized trademarks in the world. Pepsi General's three largest brands in
terms of volume are Pepsi-Cola, Diet Pepsi and Mountain Dew. While the majority
of Pepsi General's volume is derived from brands licensed from PepsiCo and
PepsiCo joint ventures, Pepsi General also sells and distributes brands licensed
from others. Pepsi General's principal beverage brands are listed below:
Domestic Operations
- -----------------------------------------------------------------------------------------------------------------------
Brands Licensed from PepsiCo
Brands Licensed from PepsiCo Joint Ventures Brands Licensed from Others
- ------------------------------- ------------------------------ -------------------------------
Pepsi-Cola Lipton Iced Teas Dr Pepper
Diet Pepsi Starbucks Frappuccino Hawaiian Punch
Mountain Dew Ocean Spray
Diet Mountain Dew Citrus Hill
Caffeine Free Pepsi 7Up
Caffeine Free Diet Pepsi Avalon
Pepsi One Sunny Delight
Wild Cherry Pepsi Juice Tyme
Slice Seagram's
Mug Nesbitt Lemonade
Aquafina
All Sport
Storm
International Operations
- -----------------------------------------------------------------------------------------------------------------------
Brands Owned and Distributed
Brands Licensed from PepsiCo by Pepsi General Brands Licensed from Others
- ------------------------------- ------------------------------- -------------------------------
Pepsi-Cola Toma (carbonated soft drinks, Schweppes Tonic
Pepsi Max juices and waters) Schweppes Soda
Pepsi Light Schweppes Lemon Soda
Mirinda Schweppes Orange
7Up Schweppes Water
7Up Light Dr Pepper
Canada Dry Ginger Ale
Wesser Fruit Juices
Hortex Fruit Juices
Rauch Fruit Juices
Lipton Iced Teas
Pepsi General's beverages are available in different package types,
including two-liter bottles; multi-pack and single serve offerings of one-liter,
20-ounce and 24-ounce bottles; and multi-packs of 6, 12, and 24 cans. Syrup is
also sold in larger packages for fountain use.
Territories
Pepsi General currently has the exclusive right to manufacture, sell and
distribute Pepsi-Cola beverages in all or a portion of ten Midwestern states,
Poland, Hungary, the Czech Republic and the Republic of Slovakia.
2
Sales, Marketing and Distribution
Pepsi General's business is seasonal and subject to weather conditions,
which have a significant impact on sales. Pepsi General's sales and marketing
approach varies by region and channel to respond to the unique local competitive
environment. In the United States, the channels with larger stores can
accommodate a number of beverage suppliers and, therefore, marketing efforts
tend to focus on increasing the amount of shelf space and the number of displays
in any given outlet. In locations where Pepsi General's products are purchased
for immediate consumption, marketing efforts are aimed not only at securing the
account but also on providing equipment that facilitates the sale of cold
product, such as vending machines, visi-coolers and fountain equipment.
Package mix is an important consideration in the development of Pepsi
General's marketing plans. Although some packages are more expensive to produce,
in certain channels those packages may have higher and more stable selling
prices. For example, a packaged product that is sold cold for immediate
consumption generally has better margins than a product sold to take home. This
cold drink channel includes vending machines and coolers. The full service
vending channel has the highest gross margin of any distribution channel,
because it eliminates the middleman and enables Pepsi General to establish the
retail price. Pepsi General owns a majority of the vending machines used to
dispense its products and will continue to invest extensively in vending
machines in the near term, specifically those dispensing product in 20-ounce
polyethylene ("PET") bottles.
In the United States, Pepsi General distributes directly to a majority of
customers in Pepsi General's licensed territories through a direct-to-store
distribution system. Pepsi General's sales force is key to its selling efforts
because they interact continually with Pepsi General's customers to promote and
sell their products. A large part of a Pepsi General route salesperson's
compensation is made up of commissions based on volumes. Although route
salespeople are responsible for selling to their customers, in some markets and
channels, Pepsi General uses a pre-sell system, where Pepsi General calls
accounts in advance to determine how much product and promotional material to
deliver.
In the United States, this direct-to-store distribution system is used for
all packaged goods and some fountain accounts. Pepsi General has the exclusive
right to sell and deliver fountain syrup to local customers in its territories.
Pepsi General has a number of managers who are responsible for calling on
prospective fountain accounts, developing relationships, selling accounts and
interacting with accounts on an ongoing basis. Pepsi General also serves as
PepsiCo's exclusive delivery agent in Pepsi General's territories for PepsiCo's
national fountain account customers that request direct-to-store delivery. Pepsi
General is also the exclusive equipment service agent for all of PepsiCo's
national account customers in Pepsi General's territories.
In international markets, Pepsi General uses both direct-to-store
distribution systems and third party distributors. In the less developed
international markets, small retail outlets play a larger role and represent a
large percentage of the market. However, with the emergence of larger, more
sophisticated retailers in Central Europe, the percentage of total soft drinks
sold to supermarkets and other larger accounts is increasing.
Franchise Agreements
Pepsi General's franchise agreements with PepsiCo give Pepsi General
exclusive rights to produce, market and distribute Pepsi-Cola products in
authorized containers and to use the related trade names and trademarks in the
specified territories. These agreements require Pepsi General, among other
things, to purchase its concentrate requirements solely from PepsiCo, at prices
established by PepsiCo, and to promote diligently the sale and distribution of
Pepsi brand products.
Pepsi franchise agreements in the United States are issued in perpetuity,
subject to termination only upon failure to comply with their terms. Pepsi
General has similar arrangements with other companies whose brands it produces
and distributes. Effective upon the completion of the Agreement with PepsiCo,
the franchise agreements outside the United States are granted in perpetuity,
subject to certain performance criteria.
Advertising
Pepsi General obtains the benefits of national advertising campaigns
conducted by PepsiCo and the other beverage companies whose products it sells.
Pepsi General supplements PepsiCo's national ad campaign by purchasing
advertising in its local markets, including the use of television, radio, print
and billboards. Pepsi General also makes extensive use of in-store point-of-sale
displays to reinforce the national and local advertising and to stimulate
demand.
3
Raw Materials and Manufacturing
Expenditures for concentrate and packaging constitute Pepsi General's
largest individual raw material costs. Pepsi General buys various soft drink
concentrates from PepsiCo and other soft drink companies and mixes them in Pepsi
General's plants with other ingredients, including carbon dioxide and
sweeteners. Artificial sweeteners are included in the concentrates Pepsi General
purchases for diet soft drinks. The product is then bottled in a variety of
containers ranging from 12-ounce cans to two-liter plastic bottles to various
glass packages, depending on market requirements.
In addition to concentrates, Pepsi General purchases sweeteners, glass and
plastic bottles, cans, closures, syrup containers, other packaging materials and
carbon dioxide. Pepsi General purchases all raw materials and supplies, other
than concentrates, from multiple suppliers.
A portion of Pepsi General's contractual cost of cans, plastic bottles and
fructose is subject to price fluctuations based on commodity price changes in
aluminum, resin and corn, respectively. From time to time, the Company uses
derivative financial instruments to hedge the price risk associated with
anticipated purchases of cans. See Item 7A, Quantitative and Qualitative
Disclosures about Market Risks.
The inability of suppliers to deliver concentrates or other products to
Pepsi General could adversely affect operating results. None of the raw
materials or supplies currently in use are in short supply, although factors
outside of the control of Pepsi General could adversely impact the future
availability of these supplies.
Competition
The carbonated soft drink business is highly competitive. Pepsi General's
principal competitors are bottlers who produce, package, sell and distribute
Coca-Cola carbonated soft drink products. In addition to Coca-Cola bottlers,
Pepsi General competes with bottlers and distributors of nationally advertised
and marketed carbonated soft drink products, bottlers and distributors of
regionally advertised and marketed carbonated soft drink products, as well as
bottlers of private label carbonated soft drink products sold in chain stores.
In 1999 the carbonated soft drink products of PepsiCo represented approximately
31 percent of total carbonated soft drink sales in the United States. Pepsi
General estimates that in each United States territory in which Pepsi General
operates, between 65% and 85% of soft drink sales from supermarkets, drug stores
and mass merchandisers are accounted for by Pepsi General and Coca-Cola
bottlers. The industry competes primarily on the basis of advertising to create
brand awareness, price and price promotions, retail space management, customer
service, consumer points of access, new products, packaging innovations and
distribution methods. Pepsi General believes that brand recognition is a primary
factor affecting Pepsi General's competitive position.
Employees
The Company employed approximately 11,700 people worldwide as of fiscal
year end 1999. This included approximately 7,800 active employees in its
domestic operations and approximately 3,900 people employed in its international
operations. Employment levels are subject to seasonal variations. The Company is
a party to collective bargaining agreements covering approximately 4,500
employees. Ten agreements covering approximately 360 employees will be
renegotiated in 2000. The Company regards its employee relations as generally
satisfactory.
Government Regulation
Pepsi General's operations and properties are subject to regulation by
various federal, state and local governmental entities and agencies as well as
foreign government entities. As a producer of food products, Pepsi General is
subject to production, packaging, quality, labeling and distribution standards
in each of the countries where Pepsi General has operations, including, in the
United States, those of the Federal Food, Drug and Cosmetic Act. The operations
of Pepsi General's production and distribution facilities are subject to various
federal, state and local environmental laws and workplace regulations both in
the United States and abroad. These laws and regulations include, in the United
States, the Occupational Safety and Health Act, the Unfair Labor Standards Act,
the Clean Air Act, the Clean Water Act and laws relating to the maintenance of
fuel storage tanks. Pepsi General believes that its current legal and
environmental compliance programs adequately address these concerns and that
Pepsi General is in substantial compliance with applicable laws and regulations.
4
Environmental Matters
The Company maintains a continuous program to facilitate compliance with
federal, state and local laws and regulations relating to the discharge or
emission of materials into, and other laws and regulations relating to the
protection of, the environment. The capital costs of such compliance, including
the costs of the modification of existing plants and the installation of new
manufacturing processes incorporating pollution control technology, are not
material.
Under the agreement pursuant to which Whitman sold Pneumo Abex Corporation
in 1988 and a subsequent settlement agreement entered into with Pneumo Abex in
September, 1991, Whitman has assumed indemnification obligations for certain
environmental liabilities of Pneumo Abex, net of any insurance recoveries.
Pneumo Abex has been and is subject to a number of federal, state and local
environmental cleanup proceedings, including proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") at
off-site locations involving other major corporations which have also been named
as potentially responsible parties ("PRPs"). Pneumo Abex also has been and is
subject to private claims and several lawsuits for remediation of properties
currently or previously owned by Pneumo Abex, and Whitman is subject to some of
these suits.
There is significant uncertainty in assessing the total cost of remediating
a given site and in determining any individual party's share in that cost. This
is due to the fact that the Pneumo Abex liabilities are at different stages in
terms of their ultimate resolution, and any assessment and determination are
inherently speculative during the early stages, depending upon a number of
variables beyond the control of any party. Additionally, the settlement of
governmental proceedings or private claims for remediation invariably involves
negotiations within broad cost ranges of possible remediation alternatives.
Furthermore, there are significant timing considerations in that a portion of
the expense incurred by Pneumo Abex, and any resulting obligation of Whitman to
indemnify Pneumo Abex, may not be expended for a number of years.
In 1992, the United States Environmental Protection Agency ("EPA") issued a
Record of Decision ("ROD") under the provisions of CERCLA setting forth the
scope of expected remedial action at a Pneumo Abex facility in Portsmouth,
Virginia. The EPA had estimated that the cost of the remedial action necessary
to comply with an Amended ROD, issued in 1994, would total $31 million. In
January, 1996, Pneumo Abex executed a Consent Decree with the EPA agreeing to
implement remediation of areas associated with the former Portsmouth facility
operations. The Company expects to have substantially completed this remediation
effort in 2001. Additionally, in a lawsuit brought against other PRPs that did
not execute the Consent Decree, Pneumo Abex and Whitman recovered approximately
$3.1 million in settlements relating to response costs at the Portsmouth site.
These recoveries were recorded prior to 1999.
Management believes that potential insurance recoveries will defray a
portion of the expenses involved in meeting Pneumo Abex environmental
liabilities. In November, 1992, Jensen-Kelly Corporation, a Pneumo Abex
subsidiary, Pneumo Abex and certain other of its affiliates, and Whitman and
certain of its affiliates, filed a lawsuit against numerous insurance companies
in the Superior Court of California, Los Angeles County, seeking damages and
declaratory relief for insurance coverage and defense costs for environmental
claims. In 1997 and 1998, Whitman and Pneumo Abex achieved settlements with
several carriers, and although optimistic it will receive additional recoveries,
Whitman is otherwise unable to predict the outcome of this litigation.
The Company has contingent liabilities from various pending claims and
litigation on a number of matters, including indemnification claims under
agreements with previously sold subsidiaries for products liability and toxic
torts. The ultimate liability for these claims cannot be determined. In the
opinion of management, based upon information currently available, the ultimate
resolution of these claims and litigation, including potential environmental
exposures, and considering amounts already accrued, should not have a material
effect on the Company's financial condition, although amounts recorded in a
given period could be material to the results of operations or cash flows for
that period.
5
Forward-Looking Statements
This annual report on Form 10-K contains certain forward-looking
information that reflects management's expectations, estimates and assumptions,
based on information available at the time this Form 10-K 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; costs of
legal proceedings; outcomes of environmental claims and litigation, 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 2. Properties.
Pepsi General's domestic manufacturing facilities include 3 bottling
plants, 8 combination bottling/canning plants and 3 canning plants with a total
manufacturing capacity of approximately 833,000 square feet. International
manufacturing facilities include two owned plants in Poland, three owned plants
in Hungary, two owned plants and one leased plant in the Czech Republic, and one
owned plant in the Republic of Slovakia. In addition, Pepsi General operates 69
distribution facilities in the U.S. and 39 distribution facilities in Central
Europe. Thirty-seven of the distribution facilities are leased and less than ten
percent of Pepsi General's domestic production is from its one leased domestic
plant. The Company believes all facilities are adequately equipped and
maintained and capacity is sufficient for its current needs. Pepsi General
currently operates a fleet of approximately 4,500 vehicles in the U.S. and
approximately 1,900 vehicles internationally to service and support its
distribution system.
In addition, Whitman owns various industrial and commercial real estate
properties in the United States. Whitman also owns a leasing company, which
leases approximately 2,000 railcars, comprised of locomotives, flatcars and
hopper cars, to the Illinois Central Railroad Company.
Item 3. Legal Proceedings.
Whitman and its subsidiaries are defendants in numerous lawsuits in the
ordinary course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on Whitman's financial condition,
although amounts recorded in any given period could be material to the results
of operations or cash flows for that period.
See also "Environmental Matters" in Item 1.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of the Company is listed and traded on the New York,
Chicago and Pacific stock exchanges. The table below sets forth the reported
high and low sales prices as reported for New York Stock Exchange Composite
Transactions for Whitman common stock and indicates the Whitman dividends for
each quarterly period for the fiscal years 1999 and 1998.
Common Stock
---------------------------------------
High Low Dividend
----------- ----------- -----------
1999:
-----------
1st quarter $ 24.938 $ 16.375 $ 0.05
2nd quarter 18.688 15.188 0.01
3rd quarter 19.563 14.000 0.01
4th quarter 15.063 12.188 0.01
1998:
-----------
1st quarter $ 26.625 $ 15.563 $ 0.05
2nd quarter 23.750 19.000 0.05
3rd quarter 23.375 14.875 0.05
4th quarter 25.438 15.375 0.05
The table above reflects the high and low stock prices for Whitman common
stock prior to and subsequent to the spin-offs of Hussmann and Midas, which
occurred on January 30, 1998, and prior to and subsequent to the consummation of
the transactions contemplated by the Agreement, which occurred on May 20, 1999.
There were 14,539 shareholders of record as of fiscal year end 1999.
7
Item 6. Selected Financial Data.
The following table presents summary operating results and other
information of Whitman, and should be read along with Management's Discussion
and Analysis of Financial Condition and Results of Operations, the Consolidated
Financial Statements and accompanying notes included elsewhere in this Form
10-K.
The following were recorded during the periods presented:
o In 1999, the Company recorded special charges of $27.9 million related to
staff reduction costs and non-cash asset write-downs, principally related
to the acquisition of the domestic and international territories from
PepsiCo (see Note 5, Special Charges, to the Consolidated Financial
Statements). These charges reduced domestic and international operating
income by $7.3 million and $20.6 million, respectively.
o In 1999, the Company entered into a contract for the sale of property in
downtown Chicago and recorded a charge of $56.3 million ($35.9 million
after tax) to reduce the book value of the property. This pretax charge is
reflected in "other expense, net."
o In 1999, the Company recorded a pretax gain of $13.3 million ($7.8 million
after tax and minority interest), related to the sale of franchises in
Marion, Virginia; Princeton, West Virginia and the St. Petersburg area of
Russia. This pretax gain is reflected in "other expense, net."
o Loss from discontinued operations after taxes of $51.7 million in 1999
includes after tax amounts related to a second quarter $12 million
settlement of environmental litigation filed against Pneumo Abex, a former
subsidiary of the Company, as well as second quarter and fourth quarter
increases of $30.8 million and $39.0 million, respectively, in accruals
related to the indemnification obligation to Pneumo Abex, primarily for
environmental matters.
o In 1998, the Company recorded an extraordinary loss, net of income tax
benefits of $10.4 million, resulting from the early extinguishment of debt
(see Note 4, Extraordinary Loss on Early Extinguishment of Debt, to the
Consolidated Financial Statements).
o In 1997, the Company recorded special charges of $49.3 million ($31.6
million after tax and minority interest) related to the restructuring of
Pepsi General's organization, the severance of essentially all of the
Whitman Corporate management and staff, and expenses associated with the
spin-offs of Hussmann and Midas (see Note 5, Special Charges, to the
Consolidated Financial Statements). These charges reduced domestic and
international operating income by $45.6 million and $3.7 million,
respectively.
o In 1997, Hussmann and Midas, which are classified as discontinued
operations, recorded special charges with an after-tax cost of $93.4
million (see Note 3, Discontinued Operations, to the Consolidated Financial
Statements).
o In 1996, the Company recorded an $8.7 million charge, principally for asset
write-downs at Pepsi General's joint venture in Poland, which is included
in "other expense, net."
8
Whitman Corporation
SELECTED FINANCIAL DATA
(in millions, except per share and employee data)
For the fiscal years 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OPERATING RESULTS:
Sales:
Domestic $ 1,951.4 $ 1,534.0 $ 1,445.3 $ 1,436.4 $ 1,400.8
International 186.8 83.5 93.5 50.3 34.8
---------- ---------- ---------- ---------- ----------
Total $ 2,138.2 $ 1,617.5 $ 1,538.8 $ 1,486.7 $ 1,435.6
========== ========== ========== ========== ==========
Operating income:
Domestic $ 228.3 $ 221.0 $ 148.9 $ 206.9 $ 192.4
International (46.8) (17.2) (18.7) (12.1) (11.3)
---------- ---------- ---------- ---------- ----------
Total operating income 181.5 203.8 130.2 194.8 181.1
Interest expense, net (63.9) (36.1) (42.3) (41.5) (47.6)
Other expense, net (46.0) (15.5) (18.0) (25.6) (15.3)
---------- ---------- ---------- ---------- ----------
Income before income taxes 71.6 152.2 69.9 127.7 118.2
Income taxes 22.1 69.7 37.9 61.1 52.8
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before minority interest 49.5 82.5 32.0 66.6 65.4
Minority interest 6.6 20.0 16.2 18.8 18.6
---------- ---------- ---------- ---------- ----------
Income from continuing operations 42.9 62.5 15.8 47.8 46.8
Income (loss) from discontinued operations (51.7) (0.5) (11.7) 91.6 86.7
Extraordinary loss on early extinguishment of
debt after taxes -- (18.3) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (8.8) $ 43.7 $ 4.1 $ 139.4 $ 133.5
========== ========== ========== ========== ==========
Cash dividends per share $ 0.08 $ 0.20 $ 0.45 $ 0.41 $ 0.37
========== ========== ========== ========== ==========
Weighted average common shares:
Basic 123.3 101.1 101.6 104.8 104.9
Incremental effect of stock options 0.9 1.8 1.3 1.2 1.1
---------- ---------- ---------- ---------- ----------
Diluted 124.2 102.9 102.9 106.0 106.0
========== ========== ========== ========== ==========
Income (loss) per share - basic:
Continuing operations $ 0.35 $ 0.62 $ 0.16 $ 0.46 $ 0.44
Discontinued operations (0.42) (0.01) (0.12) 0.87 0.83
Extraordinary loss on early debt extinguishment -- (0.18) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (0.07) $ 0.43 $ 0.04 $ 1.33 $ 1.27
========== ========== ========== ========== ==========
Income (loss) per share - diluted:
Continuing operations $ 0.35 $ 0.61 $ 0.15 $ 0.45 $ 0.44
Discontinued operations (0.42) (0.01) (0.11) 0.87 0.82
Extraordinary loss on early debt extinguishment -- (0.18) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (0.07) $ 0.42 $ 0.04 $ 1.32 $ 1.26
========== ========== ========== ========== ==========
OTHER INFORMATION:
Total assets $ 2,864.3 $ 1,569.3 $ 2,029.7 $ 2,080.6 $ 2,050.5
Long-term debt $ 809.0 $ 603.6 $ 604.7 $ 821.7 $ 810.3
Capital investments $ 165.4 $ 159.1 $ 83.4 $ 87.2 $ 111.1
Depreciation and amortization $ 126.6 $ 77.7 $ 73.8 $ 75.2 $ 70.6
Number of employees 11,700 6,526 6,381 5,863 5,739
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Operating Results - 1999 compared with 1998
For a description of the Company's major products and its principal
markets, reference is made to Part I, Item 1, Business, and to Note 17, Segment
Reporting, to the Consolidated Financial Statements.
Due to the 1999 transaction with PepsiCo that resulted in the divestiture
of certain of the Company's operations, as well as the acquisition of
significant domestic and Central European territories from PepsiCo (as more
fully described in Note 2, New Business Relationship with PepsiCo and Other
Acquisitions, to the Consolidated Financial Statements), the Company believes
that comparable results provide a better indication of current operating trends
than reported results.
Comparable operating results exclude results of territories divested and
include results of territories acquired from PepsiCo as if such transactions
occurred as of the beginning of 1998. With respect to the following discussion
of sales volumes and sales dollars only, adjustment has been made for the change
in the Company's reporting calendar; no such adjustment for this reporting
calendar change has been made to the comparable amounts presented for operating
income. In addition, comparable operating results exclude an additional week of
operating activity in the acquired domestic territories resulting from
conforming their reporting calendar to Whitman's fiscal year end; the operating
results contributed by Toma Holding, a.s. ("Toma"), a leading soft drink company
in the Czech Republic, which was acquired on December 1, 1999; $27.9 million of
special charges incurred in the second and third quarters of 1999; $4.5 million
of charges incurred in the first quarter of 1999 related to the settlement of
insurance, severance and legal matters; and the impact of eliminating the
two-month reporting lag in consolidating international results.
Sales
Sales for 1999 and 1998 are summarized below (in millions):
Reported % Comparable %
---------------------- ---------------------
1999 1998 Change 1999 1998 Change
-------- --------- ------ -------- -------- ------
Domestic $1,951.4 $1,534.0 27.2 $2,147.2 $2,056.6 4.4
International 186.8 83.5 123.7 238.2 242.2 (1.7)
-------- -------- -------- --------
Total Sales $2,138.2 $1,617.5 32.2 $2,385.4 $2,298.8 3.8
======== ======== ======== ========
On a reported basis, domestic sales increased $417.4 million, or 27.2
percent, in 1999 compared to 1998, primarily reflecting sales contributed by the
acquired territories and improved pricing.
On a comparable basis, domestic sales increased $90.6 million, or 4.4
percent, reflecting a 3.4 percent improvement in pricing and a 1.0 percent
increase in 8-ounce equivalent case volume. The vending and mass merchandising
channels showed strong growth, as did the brands Mountain Dew, Aquafina and Dr
Pepper. Also contributing to the 1999 growth was volume associated with Pepsi
One, which was introduced in late 1998. Growth of 20-ounce PET package sales
continued, aided by the increased investment in the cold drink channel, through
investment in vending equipment and coolers.
Reported international sales increased significantly due to sales
contributed by the newly acquired Central European territories. On a comparable
basis, sales decreased by $4.0 million, or 1.7 percent, reflecting
year-over-year currency depreciation, partially offset by a 0.8 percent increase
in 8-ounce equivalent case volume.
Gross Profit
The consolidated gross profit margin on a reported basis increased to 41.6
percent of sales in 1999, compared with 40.1 percent of sales in 1998. This
increase principally reflected a 0.7 percentage point improvement in domestic
margins, driven by higher net selling prices and favorable channel mix,
partially offset by lower margin channel and package mix of the acquired
domestic territories. In addition, international margins were higher due to
improvements in Poland, as well as the absence, during most of 1999, of lower
margin sales associated with the Russian operations, which were sold in March,
1999.
10
Selling, General and Administrative Expenses
Reported selling, general and administrative ("SG&A") expenses represented
30.4 percent of sales in 1999, compared with 26.6 percent in 1998. This increase
is due, in part, to higher depreciation expense as a result of increases in
capital spending; higher 1999 field operating expenses to support the Company's
cold drink initiative; the higher cost structure in the acquired territories;
incremental Year 2000 system remediation costs; costs to integrate the
territories acquired in 1999; higher insurance expense; and strike costs
incurred in 1999. Amortization expense increased by $13.7 million due to the
transaction with PepsiCo.
Special Charges
In 1999, the Company recorded special charges of $27.9 million ($19.0
million after tax), including $9.6 million of staff reduction costs, principally
related to the acquisition of the domestic and international territories from
PepsiCo; $7.6 million of non-cash asset write-downs associated with the exit of
the plastic returnable package in the Company's existing international
territories; $5.9 million of other asset write-downs principally related to the
acquisition of the international territories from PepsiCo; and a $4.8 million
write-down of Pepsi General's investment in its Baltics operations resulting
from the Company's decision to seek the sale of these operations to a third
party.
During 1999, the Company paid employee related costs for severance and
employee benefits of $5.3 million. The $9.6 million of staff reduction costs
resulted in the elimination of approximately 310 positions, of which
approximately 27 positions are yet to be eliminated as of fiscal year-end 1999.
Asset write-downs of $18.3 million were recorded in 1999. As of fiscal year end
1999, $4.3 million of accrued liabilities remain to cover deferred severance
payments and certain employee benefits. The Company has classified the accruals
as other current liabilities because it expects to pay a significant portion of
such costs in 2000.
As a result of the actions taken resulting in the special charges of $27.9
million, the Company expects to realize approximately $18-20 million in annual
pretax savings, resulting principally from reductions in employee related costs.
Such savings will not be fully realized until the year 2000. In 1999 and 1998,
the Baltics had sales of $6.1 million and $5.4 million, respectively, and
incurred operating losses of $1.8 million and $3.5 million, respectively.
Operating Income
Reported % Comparable %
---------------------- ---------------------
1999 1998 Change 1999 1998 Change
-------- --------- ------ -------- -------- ------
Domestic $ 228.3 $ 221.0 3.3 $ 244.3 $ 241.8 1.0
International (46.8) (17.2) * (36.6) (42.3) 13.5
-------- -------- -------- --------
Total Operating Income $ 181.5 $ 203.8 (10.9) $ 207.7 $ 199.5 4.1
======== ======== ======== ========
* Not meaningful.
In 1999, reported domestic operating income increased $7.3 million, or 3.3
percent, reflecting operating income contributed by the acquired territories,
partially offset by special charges and higher SG&A and amortization expenses.
On a comparable basis, domestic operating income increased $2.5 million, or
1.0 percent. The domestic operating margin of 11.4 percent in 1999 was 0.5
percentage points lower than a year ago, reflecting, in part, increased
depreciation and field operating expenses to support the cold drink initiative;
incremental year 2000 remediation expenses and integration costs; higher
insurance expense and strike costs. These factors were partially offset by
higher average net selling prices in 1999.
Reported international operating losses in 1999 include $20.6 million of
special charges resulting principally from the transaction with PepsiCo.
Excluding these charges, reported operating losses increased $9.0 million, or
52.3 percent, to $26.2 million in 1999. This increase was principally
attributable to operating losses of the acquired international territories. On a
comparable basis, international operating losses decreased by $5.7 million from
1998, primarily due to improvements in Poland and the Czech Republic, and
savings realized from the consolidation of international headquarters locations.
Poland's 1999 results improved primarily due to a mix shift to more PET
packaging and cost savings realized as the Company began to combine the three
separate companies that existed prior to the transaction with PepsiCo. The final
consolidation of the operations in Poland will be completed upon receipt of
governmental approval to merge the companies. Improved results in the Czech
Republic were principally due to higher volumes and increased contract sales.
11
Interest and Other Expenses
Net interest expense increased $27.8 million to $63.9 million. The increase
was due principally to an increase in average outstanding net debt due to the
acquisitions of domestic and Central European territories from PepsiCo and
related share repurchases.
Other expense, net in 1999 includes a $56.3 million charge recorded in the
second quarter to reduce the book value of non-operating real estate, as well as
a $13.3 million gain on the sale of the Company's territories in Marion,
Virginia; Princeton, West Virginia and the St. Petersburg area of Russia. Absent
these items, other expense, net decreased to $3.0 million in 1999 compared to
$15.5 million in 1998, due primarily to the termination of the management fee
paid to PepsiCo and reduced real estate taxes on non-operating land.
Discontinued Operations
Loss from discontinued operations after taxes of $51.7 million in 1999
includes after tax amounts related to a second quarter $12 million settlement of
environmental litigation filed against Pneumo Abex, a former subsidiary of the
Company, as well as second quarter and fourth quarter increases of $30.8 million
and $39.0 million, respectively, in accruals related to the indemnification
obligation to Pneumo Abex, primarily for environmental matters.
The spin-offs of Hussmann and Midas occurred on January 30, 1998. Prior to
the spin-offs, Hussmann and Midas paid Whitman a total of $434.3 million to
settle intercompany indebtedness and pay special dividends. Whitman did not
record any gain or loss on the spin-offs. The distribution of the Hussmann and
Midas common stock reduced Whitman shareholders' equity by $233.3 million.
The results of operations of Hussmann and Midas through the spin-off date
are classified as discontinued operations. On a combined basis, they previously
had reported sales of $1,692.6 million in 1997, which have been excluded from
Whitman's consolidated sales.
Whitman's consolidated statements of income included an after tax loss from
discontinued operations of $11.7 million in 1997, which included the results of
operations of Hussmann and Midas, as well as charges of $4.2 million relating to
settlements with the IRS for the years 1988 through 1991, which related to other
previously discontinued operations.
Included in the 1997 results of operations for Hussmann and Midas were
special charges of $123.9 million, or $93.4 million after tax. The special
charges at Hussmann primarily related to the write-off of goodwill in its U.K.
operations ($26.0 million), a restructuring of the U.K. operations ($23.2
million) and a reorganization of certain manufacturing operations in the U.S.
($7.1 million). The special charges at Midas principally related to its decision
to franchise or close substantially all company-operated stores in the U.S.
($35.5 million), to record one-time charges for a special product return program
and changes in the U.S. franchisee advertising program ($12.2 million), to
record severance benefits ($7.4 million) and to reflect the impairment of
certain assets ($12.5 million). Detailed information about the charges was
included in the special information statement that was provided to Whitman
shareholders immediately prior to the spin-offs. Hussmann and Midas retained the
responsibility to carry out the programs covered by their special charges, as
well as the related balance sheet accruals. Summarized information about the
special charges and the effects of the IRS settlements is contained in Note 3,
Discontinued Operations, to the Consolidated Financial Statements.
Environmental Liabilities
Environmental liabilities are discussed further in Part I, Item 1,
Business; Note 16, Environmental and Other Contingencies, to the Consolidated
Financial Statements; and within "Discontinued Operations" above.
12
Operating Results - 1998 compared with 1997
The discussion below reflects the reclassification of certain revenues and
expenses to conform prior periods to the current year presentation. This 1998
comparison to 1997 is based on reported results; accordingly, the effects of the
1999 PepsiCo transaction are excluded.
Sales
Sales increased by $78.7 million, or 5.1 percent, in 1998 to $1,617.5
million.
Domestic sales increased by $88.7 million, or 6.1 percent, in 1998 to
$1,534.0 million. This increase reflects improvements in mix, pricing and
volumes. The average domestic net selling price per raw case rose 2.6 percent
and volume, in raw cases, grew 3.5 percent over 1997. In 8-ounce equivalent
cases, volume, including foodservice, increased 5.3 percent in 1998 to 444.5
million cases. Sales growth was driven principally by the convenience/gas
station channel, the vending channel, and the fountain channel. Volume growth
was led primarily by improved demand for the Mountain Dew, Dr Pepper, and Lipton
Tea brands. Also contributing to the increased volume was double digit growth in
the water brands Aquafina and Avalon, and the strong performance of Pepsi brand
product sales, which included the introduction of Pepsi One and Storm. In 1998,
the Company began reporting volume on an 8-ounce equivalent basis, as well as
raw cases, to better reflect the impact of package mix shift towards the
20/24-ounce PET packages. The 20-ounce PET package growth benefited from a
significant increase in vending machine placements during 1998.
International sales decreased by $10.0 million to $83.5 million,
principally reflecting a $12.5 million decline in contract sales and the adverse
effects of the economic crisis in Russia. Sales for Russia in the fourth quarter
of 1998, which were reported on a two-month lag, were $2.5 million compared to
$8.0 million in the comparable period of 1997. However, 1998 included a full
twelve months of sales for Russia compared to ten months in the previous year,
which partially offset the lower contract sales and economic downturn. In
addition, Poland's sales were adversely impacted by unusually cold weather,
which depressed industry sales, partially offset by sales growth resulting from
a product mix shift to more PET packaging and favorable results from newly
introduced juice products.
Gross Profit
The Company's consolidated gross profit increased by $33.3 million, or 5.4
percent, to $649.0 million. The consolidated gross profit margin increased to
40.1 percent of sales in 1998 from 40.0 percent in 1997. This increase
principally reflected an increase in the international gross profit margin of
2.6 percentage points to 27.7 percent from 25.1 percent in 1997, due to higher
margins in Poland resulting from a product mix shift to more PET packaging.
However, partially offsetting this improvement was the economic downturn in
Russia, which slowed demand and lowered gross margins as the sales volume was
insufficient to absorb fixed manufacturing overhead. The domestic gross profit
margin of 40.8 percent was 0.2 percentage points lower than 1997, with higher
costs for concentrate, fructose and packaging partially offset by increased net
selling prices.
Selling, General and Administrative Expenses
S,G&A expenses increased by $9.1 million, or 2.2 percent, and represented
26.6 percent of sales, compared with 27.3 percent in 1997. This lower percentage
reflected, among other items, increases in various forms of support from PepsiCo
and the reduction in corporate headquarters' management and staff. Furthermore,
the 1997 S,G&A included a $2.7 million charge recorded by Pepsi General in the
second quarter of 1997 for reductions in administrative overhead.
Special Charges
During 1997, the Company recorded special charges of $49.3 million,
including $9.1 million related to reductions in Pepsi General staffing levels
due to the consolidation of the number of its domestic divisions; $4.7 million
related to write-downs of certain assets in Pepsi General's domestic and
international operations; $1.0 million of other costs related to the
consolidation of Pepsi General's divisions; $27.0 million related to the
severance of essentially all of the Whitman corporate management and staff; $0.7
million related to write-downs of certain Whitman corporate assets; and $6.8
million related to spin-off related and other costs.
13
The Company paid employee related costs for severance and employee benefits
of $6.2 million, $18.1 million and $3.5 million in 1999, 1998 and 1997,
respectively. The total number of employees affected was approximately 125 at
Pepsi General and essentially all employees at Whitman Corporate. All but 11
positions have been eliminated by reason of these programs as of fiscal year end
1999. Asset write-downs of $5.4 million were recorded in 1997 and $1.5 million
and $6.3 million of spin-off related and other costs were paid in 1997 and 1998,
respectively. As of fiscal year end 1999, accrued liabilities of $8.3 million
remained to cover deferred severance payments and certain employee benefits,
which were paid during January, 2000 to the remaining 11 employees. See Note 5,
Special Charges, to the Consolidated Financial Statements.
At the time the special charges were recorded in 1997, the Company
anticipated that corporate expenses would be reduced by approximately $7.0
million on an annualized basis, but indicated the estimated cost reductions
would not be fully realized in the first year. In 1998, the cost reduction goal
was substantially achieved, as corporate administrative expenses declined from
1997 by $5.9 million.
In addition to the special charges of $49.3 million recorded by continuing
operations, Midas and Hussmann recorded special charges of $123.9 million, or
$93.4 million after tax, as discussed within "Discontinued Operations" above.
Operating Income
Operating income increased by $73.6 million, or 56.5 percent, to $203.8
million. The increase was primarily the result of special charges incurred
during the third and fourth quarters of 1997 totaling $49.3 million (see Note 5,
Special Charges, to the Consolidated Financial Statements), as well as improved
operating results in the domestic operations.
Domestic operating income was up $72.1 million in 1998, or 48.4 percent,
from the previous year to $221.0 million. Included in the 1997 results were
special charges of $45.6 million, primarily related to the consolidation of
Pepsi General's divisions, the elimination of essentially all of the Whitman
Corporate management and staff and for expenses associated with the spin-offs.
Excluding special charges recorded in 1997, domestic operating income increased
$26.5 million, or 13.6 percent. The improvement in operating income was due in
part to higher volumes, mix shift towards the higher margin 20/24-ounce PET
packages, a $5.9 million reduction in Whitman Corporate expenses and the effects
of the $2.7 million charge recorded in the second quarter of 1997. Excluding the
impact of the charges in 1997, domestic operating margins increased 0.8
percentage points from 1997 to 14.4 percent in 1998. The improved operating
margins reflected a favorable shift in product mix to the high margin PET
packages, more favorable channel mix and a reduction in Whitman Corporate
expenses.
International operating losses were $17.2 million in 1998 compared to $18.7
million in 1997, which included $3.7 million of special charges. Excluding these
special charges, international operating losses increased by $2.2 million. This
increase was caused primarily by the financial crisis in Russia, partially
offset by improved results in Poland attributable primarily to increased sales
of product in PET packages.
Interest and Other Expenses
Net interest expense decreased $6.2 million to $36.1 million, primarily due
to the repayment of debt using funds received from Hussmann and Midas
immediately prior to the spin-off transactions. Cash in excess of debt
repayments was invested in short-term instruments, resulting in higher interest
income in 1998 compared with 1997. Decreases in net interest expense were
partially offset by the decrease in interest income on loans and advances to
Hussmann and Midas, which were repaid in conjunction with the spin-off
transactions.
Other expense, net, decreased $2.5 million to $15.5 million in 1998. The
improvement was due, in part, to losses from asset sales and retirements
included in 1997 and the elimination of preferred dividends (see Note 14, Pepsi
General Non-Voting Preferred Stock, to the Consolidated Financial Statements).
14
Liquidity and Capital Resources
Net cash provided by continuing operations increased by $12.0 million to
$181.8 million in 1999. This increase is due primarily to higher operating cash
flow, partially offset by increased income tax payments in 1999 and the timing
of payments of various other liabilities.
Investing activities during 1999 included $112.0 million of net proceeds
received from the sale of the Marion, Princeton and Russia franchise
territories, as well as $134.6 million of net cash paid for certain assets of
domestic franchises contributed by PepsiCo, the Central European franchises
acquired from PepsiCo, and the acquisition of Toma. Investing activities in 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 $160.9 million, net of
proceeds from dispositions, in its operations during 1999 compared with $155.4
million in the previous year. It is expected that capital spending in 2000,
excluding potential acquisitions, will be higher than 1999 reported levels due
to a full year of spending in the territories acquired in 1999.
Purchases and sales of investments include activity related to the
Company's insurance subsidiary, which provides certain levels of insurance for
Pepsi General, as well as for Hussmann and Midas up to the date of their
spin-offs. Funds are invested by the insurance subsidiary and proceeds from the
sale of investments are used by the insurance subsidiary to pay claims and other
expenses. A substantial portion of such investments are reinvested as they
mature. As of fiscal year end 1999, funds held by the Company's insurance
subsidiary were invested primarily in cash and equivalents totaling $66.0
million. Also included in the sales of investments are miscellaneous land sales
associated with the Company's non-operating real estate subsidiaries.
The Company's total debt increased $578.7 million to $1,182.3 million at
fiscal year end 1999, from $603.6 million as of fiscal year end 1998. This
increase is primarily attributable to the April, 1999 issuance of $150 million
of 6.0 percent notes due in 2004 and $150 million of 6.375 percent notes due in
2009, as well as commercial paper issued to fund the August 31, 1999 repayment
of the $241.8 million of notes payable to PepsiCo, which were assumed as part of
the Agreement with PepsiCo. The Company repurchased approximately 16.1 million
shares and 2.0 million shares of its common stock for $290.1 million and $37.7
million in 1999 and 1998, respectively. The Company paid dividends of $8.8
million in 1999, based on quarterly cash dividend rates of $0.05 in the first
quarter and $0.01 in the last three quarters, compared with $20.2 million in
1998, based on a quarterly cash dividend rate of $0.05 per common share. The
issuance of common stock, including treasury shares, for the exercise of stock
options resulted in cash inflows of $3.2 million in 1999, compared with $21.4
million in 1998.
The Company has a five-year revolving credit agreement with maximum
borrowings of $500 million. In addition, the Company has $500 million available
under its commercial paper program. 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 $279.7 million
as of fiscal year end 1999. The Company believes that with its existing
operating cash flows, available lines of credit and the potential for additional
debt and equity offerings, the Company will have sufficient resources to fund
its future growth and expansion.
Year 2000 System Compliance
The Year 2000 ("Y2K") issue related to computer applications being designed
using only two digits, rather than four, to represent a year. As a result, many
suspected that computer applications could fail or create erroneous results by
recognizing "00" as the year 1900 rather than the year 2000.
The Y2K activities, tests, remediations and upgrades that were performed by
the Company in advance of the year 2000 have proven successful in preventing
business disruptions of any kind. All of the Company's Information Technology
("IT") and non-IT systems were Y2K compliant prior to the year 2000. As of March
15, 2000, the Company is not aware of any business disruption or impact arising
from Y2K non-compliance by the Company, its major suppliers and customers, or
governmental entities.
Through the end of 1999, the Company expensed approximately $2.6 million of
incremental costs to ensure Y2K compliance.
15
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
The Company is subject to various market risks, including risks from
changes in commodity prices, interest rates and currency 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 price
fluctuations for a portion of its aluminum requirements. 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 contractual cost of aluminum cans,
the Company considers these hedges to be highly effective. As of fiscal year end
1999, the Company has hedged a portion of its future domestic aluminum
requirements.
Interest Rates
During 1999, the risk from changes in interest rates was not material to
the Company's operations because a significant portion of the Company's debt
issues were fixed rate obligations. The Company's floating rate exposure relates
to changes in the six month LIBOR rate and the overnight Federal Funds rate.
Assuming consistent levels of floating rate debt with those held by the Company
as of fiscal year end 1999, a 50 basis point (0.5 percent) change in each of
these rates would have an impact of approximately $1.5 million on the Company's
annual interest expense related to its floating rate obligations. In possible
future issuances of debt, the Company may be subject to additional floating rate
interest exposure and may manage those exposures using interest rate swaps. In
1999, the Company had short-term investments throughout a majority of the year,
principally invested in money market funds and commercial paper, which were most
closely tied to overnight Federal Funds rates. Assuming a change of 50 basis
points in the rate of interest associated with the Company's short-term
investments, interest income would have changed by approximately $0.2 million.
Currency Exchange Rates
Because the Company operates international franchise territories, it is
subject to exposure resulting from changes in currency exchange rates. Currency
exchange rates are influenced by a variety of economic factors including local
inflation, growth, interest rates and governmental actions, as well as other
factors. The Company currently does not hedge the translation risks of
investments in its international operations. Any positive cash flows generated
have been reinvested in the operations, excluding repayments of intercompany
loans from the manufacturing operations in Poland.
Non-U.S. operations represent less than 10 percent 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 1999, the
impact on reported operating income would have been approximately $2.2 million.
This estimate does not take into account the possibility that rates can move in
opposite directions and that gains in one category may or may not be offset by
losses from another category. The economy in Russia was considered highly
inflationary for accounting purposes with all transactions being recorded at
historical costs in U.S. dollars. All gains and losses due to foreign exchange
transactions from the Russian operations, which were sold in the first quarter
of 1999, are included in the consolidated results of operations.
Item 8. Financial Statements and Supplementary Data.
See Index to Financial Information on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
16
PART III
Item 10. Directors and Executive Officers of the Registrant.
Whitman incorporates by reference the information contained under the
captions "Proposal 1: Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in its definitive proxy statement dated March
15, 2000, filed pursuant to Section 14(a) of the Securities Exchange Act of
1934, as amended.
The executive officers of Whitman and their ages as of March 1, 2000 were
as follows:
Age Position
--- -------------------------------------
Bruce S. Chelberg.............65 Chairman and Chief Executive Officer
Larry D. Young................45 President and Chief Operating Officer
Martin M. Ellen...............46 Senior Vice President and Chief
Financial Officer
Lawrence J. Pilon.............51 Senior Vice President-Administration
Charles H. Connolly...........65 Senior Vice President-Corporate
Affairs and Investor Relations
Steven R. Andrews.............47 Senior Vice President, Secretary
and General Counsel
Except as described below, all of the executive officers of Whitman have
held positions which are the same or which involve substantially similar
functions as indicated above during the past five years.
Mr. Young has been with the Company since 1984. He served as Vice President
and Managing Director of the Company's operations in Poland in 1996 and later
that year became President of Pepsi General's European Operations. He became
Executive Vice President and Chief Operating Officer of Pepsi General in 1998.
In February, 2000, Whitman's Board of Directors elected Mr. Young to the
position of President and Chief Operating Officer.
Mr. Ellen joined Whitman Corporation as Senior Vice President and Chief
Financial Officer in October, 1998. Prior to joining Whitman, Mr. Ellen served
as a founding member of Casas, Ellen & White LLC, a venture management firm,
from May, 1998 through September, 1998; he served as Executive Vice President
and Chief Financial Officer of PrimeCare International Inc. from October, 1996
through May, 1998; and he served as Vice President-Finance for Caremark
International, Inc. from August, 1994 through October, 1996.
Prior to his appointment as Senior Vice President - Administration, Mr.
Pilon served as Senior Vice President - Human Resources of the Company.
Mr. Andrews joined the Company as Senior Vice President, Secretary and
General Counsel in May, 1999. Prior to joining the Company, Mr. Andrews was the
acting President and Chief Executive Officer of Multigraphics, Inc. in Mt.
Prospect, Illinois (formerly AM International, Inc.), a distributor and service
provider to the U.S. graphic arts market. Prior to that, he had served since
1994 as Multigraphics, Inc.'s Vice President, General Counsel and Secretary.
Item 11. Executive Compensation.
Whitman incorporates by reference the information contained under the
captions "Executive Compensation" and "Director Compensation" in its definitive
proxy statement dated March 15, 2000, filed pursuant to Section 14(a) of the
Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Whitman incorporates by reference the information contained under the
captions "Our Largest Shareholders" and "Shares Held by Our Directors and
Executive Officers" in its definitive proxy statement dated March 15, 2000,
filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as
amended.
Item 13. Certain Relationships and Related Transactions.
Whitman incorporates by reference the information contained under the
caption "Certain Relationships and Related Transactions" in its definitive proxy
statement dated March 15, 2000, filed pursuant to Section 14(a) of the
Securities Exchange Act of 1934, as amended.
17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) See Index to Financial Information on page F-1 and Exhibit Index on
page i.
(b) Through January 1, 2000, no reports on Form 8-K were filed subsequent
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 2, 1999.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 15th day of
March, 2000.
WHITMAN CORPORATION
By: /s/ MARTIN M. ELLEN
--------------------
Martin M. Ellen
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on the 15th day of March, 2000.
Signature Title
--------- -----
* Bruce S. Chelberg Chairman and Chief
----------------------------- Executive Officer and Director
BRUCE S. CHELBERG (principal executive officer)
/s/ Martin M. Ellen Senior Vice President and Chief Financial
----------------------------- Officer
MARTIN M. ELLEN (principal financial and accounting officer)
* Herbert M. Baum Director
-----------------------------
HERBERT M. BAUM
* Richard G. Cline Director *By: /s/ MARTIN M. ELLEN
----------------------------- -------------------
RICHARD G. CLINE Martin M. Ellen
Attorney-in-Fact
* Pierre S. du Pont Director March 15, 2000
-----------------------------
PIERRE S. DU PONT
* Archie R. Dykes Director
-----------------------------
ARCHIE R. DYKES
Director
-----------------------------
CHARLES W. GAILLARD
* Jarobin Gilbert, Jr. Director
-----------------------------
JAROBIN GILBERT, JR.
* Victoria B. Jackson Director
-----------------------------
VICTORIA B. JACKSON
Director
-----------------------------
CHARLES S. LOCKE
* Robert F. Sharpe, Jr. Director
-----------------------------
ROBERT F. SHARPE, JR.
* Karl M. von der Heyden Director
-----------------------------
KARL M. VON DER HEYDEN
19
WHITMAN CORPORATION AND SUBSIDIARIES
----------------------
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR 1999
WHITMAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
Page
----
Statement of Financial Responsibility F-2
Independent Auditors' Report F-3
Consolidated Statements of Income for the fiscal years 1999, 1998
and 1997 F-4
Consolidated Balance Sheets as of fiscal year end 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the fiscal years 1999,
1998 and 1997 F-7
Consolidated Statements of Shareholders' Equity for the fiscal
years 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules:
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the financial statements or
related notes.
F-1
STATEMENT OF FINANCIAL RESPONSIBILITY
The consolidated financial statements of Whitman Corporation and
subsidiaries have been prepared by management, which is responsible for their
integrity and content. These statements have been prepared in accordance with
generally accepted accounting principles and include amounts which reflect
certain estimates and judgments made by management. Actual results could differ
from these estimates.
The Board of Directors, acting through the Audit Committee of the Board,
has responsibility for determining that management fulfills its duties in
connection with the preparation of these consolidated financial statements. The
Audit Committee meets periodically and privately with the independent auditors
and with the internal auditors to review matters relating to the quality of the
financial reporting of the Company, the related internal controls and the scope
and results of their audits. The Committee also meets with management and the
internal auditors to review the affairs of the Company.
To meet management's responsibility for the fair and objective reporting of
the results of operations and financial condition, the Company maintains systems
of internal controls and procedures to provide reasonable assurance of the
reliability of its accounting records. These systems include written policies
and procedures, a program of internal audit and the careful selection and
training of its financial staff.
The Company's independent auditors, KPMG LLP, are engaged to audit the
consolidated financial statements of the Company and to issue their report
thereon. Their audit has been conducted in accordance with generally accepted
auditing standards. Their report appears on page F-3.
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
of Whitman Corporation:
We have audited the accompanying consolidated balance sheets of Whitman
Corporation and subsidiaries as of the end of fiscal years 1999 and 1998, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the fiscal years 1999, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Whitman
Corporation and subsidiaries as of the end of fiscal years 1999 and 1998 and the
results of their operations and their cash flows for each of the fiscal years
1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
February 1, 2000
F-3
Whitman Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except for per share data)
Fiscal years 1999 1998 1997
----------- ----------- -----------
Sales $ 2,138.2 $ 1,617.5 $ 1,538.8
Cost of goods sold 1,248.7 968.5 923.1
----------- ----------- -----------
Gross profit 889.5 649.0 615.7
Selling, general and administrative expenses 650.8 429.6 420.5
Amortization expense 29.3 15.6 15.7
Special charges 27.9 -- 49.3
----------- ----------- -----------
Operating income 181.5 203.8 130.2
Interest expense, net (63.9) (36.1) (42.3)
Other expense, net (Notes 1 and 2) (46.0) (15.5) (18.0)
----------- ----------- -----------
Income before income taxes 71.6 152.2 69.9
Income taxes 22.1 69.7 37.9
----------- ----------- -----------
Income from continuing operations before minority interest 49.5 82.5 32.0
Minority interest 6.6 20.0 16.2
----------- ----------- -----------
Income from continuing operations 42.9 62.5 15.8
Loss from discontinued operations after taxes (51.7) (0.5) (11.7)
Extraordinary loss on early extinguishment of debt after taxes -- (18.3) --
----------- ----------- -----------
Net income (loss) $ (8.8) $ 43.7 $ 4.1
=========== =========== ===========
Weighted average common shares:
Basic 123.3 101.1 101.6
Incremental effect of stock options 0.9 1.8 1.3
----------- ----------- -----------
Diluted 124.2 102.9 102.9
=========== =========== ===========
Income (loss) per share - basic:
Continuing operations $ 0.35 $ 0.62 $ 0.16
Discontinued operations (0.42) (0.01) (0.12)
Extraordinary loss on early extinguishment of debt -- (0.18) --
----------- ----------- -----------
Net income (loss) $ (0.07) $ 0.43 $ 0.04
=========== =========== ===========
Income (loss) per share - diluted:
Continuing operations $ 0.35 $ 0.61 $ 0.15
Discontinued operations (0.42) (0.01) (0.11)
Extraordinary loss on early extinguishment of debt -- (0.18) --
----------- ----------- -----------
Net income (loss) $ (0.07) $ 0.42 $ 0.04
=========== =========== ===========
Cash dividends per share $ 0.08 $ 0.20 $ 0.45
=========== =========== ===========
The following notes are an integral part of these statements.
F-4
Whitman Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in millions)
As of fiscal year end 1999 1998
----------- -----------
ASSETS:
Current assets:
Cash and equivalents $ 114.5 $ 147.6
Receivables, net of allowance of $8.2 million - 1999 and $3.2 million - 1998 265.1 170.7
Inventories:
Raw materials and supplies 54.2 38.3
Finished goods 57.9 41.7
----------- -----------
Total inventories 112.1 80.0
----------- -----------
Other current assets 46.3 30.8
----------- -----------
Total current assets 538.0 429.1
----------- -----------
Investments 47.9 160.0
Property (at cost):
Land 30.6 22.0
Buildings and improvements 253.7 183.3
Machinery and equipment 1,100.2 801.2
----------- -----------
Total property 1,384.5 1,006.5
Accumulated depreciation and amortization (552.8) (507.2)
----------- -----------
Net property 831.7 499.3
----------- -----------
Intangible assets, net of accumulated amortization of $168.0 million - 1999
and $155.5 million - 1998 1,416.3 447.0
Other assets 30.4 33.9
----------- -----------
Total assets $ 2,864.3 $ 1,569.3
=========== ===========
The following notes are an integral part of these statements.
F-5
Whitman Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
As of fiscal year end 1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current maturities of long-term debt $ 373.3 $ --
Accounts and dividends payable 192.2 133.0
Income taxes payable 2.5 6.9
Accrued expenses:
Salaries and wages 36.6 28.0
Interest 16.8 15.1
Other 117.7 50.2
----------- -----------
Total current liabilities 739.1 233.2
----------- -----------
Long-term debt 809.0 603.6
Deferred income taxes 71.1 99.1
Other liabilities 102.9 73.3
Minority interest -- 233.7
Shareholders' equity:
Preferred stock ($0.01 par value, 12.5 million shares authorized; no shares issued) -- --
Common stock ($0.01 par value, 350.0 million shares authorized; 167.3 million
shares issued - 1999 and 113.3 million shares issued - 1998) 1,634.4 499.8
Retained income 76.7 94.3
Accumulated other comprehensive loss:
Cumulative translation adjustment (24.4) (12.0)
Unrealized investment gain 2.1 3.4
----------- -----------
Accumulated other comprehensive loss (22.3) (8.6)
----------- -----------
Treasury stock (28.2 million shares - 1999 and 12.3 million shares - 1998) (546.6) (259.1)
----------- -----------
Total shareholders' equity 1,142.2 326.4
----------- -----------
Total liabilities and shareholders' equity $ 2,864.3 $ 1,569.3
=========== ===========
The following notes are an integral part of these statements.
F-6
Whitman Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Fiscal years 1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 42.9 $ 62.5 $ 15.8
Adjustments to reconcile to net cash provided by operating activities
of continuing operations:
Depreciation and amortization 126.6 77.7 73.8
Deferred income taxes (44.5) 23.7 9.2
Gain on sale of franchises (7.8) -- --
Special charges and real estate impairment 84.2 -- 49.3
Cash outlays related to special charges (11.5) (24.4) (2.4)
Other 7.2 13.4 16.5
Changes in assets and liabilities, exclusive of acquisitions and divestitures:
Increase in receivables (44.5) (39.0) (5.8)
Decrease (increase) in inventories 9.6 (10.1) (2.4)
Increase (decrease) in payables 22.6 40.5 (5.6)
Net change in other assets and liabilities (3.0) 25.5 4.5
----------- ----------- -----------
Net cash provided by operating activities of continuing operations 181.8 169.8 152.9
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of franchises, net of cash divested 112.0 -- --
Franchises and companies acquired, net of cash acquired (134.6) -- (20.2)
Dividends from and settlement of intercompany indebtedness with
Hussmann and Midas prior to spin-offs -- 434.3 --
Capital investments (165.4) (159.1) (83.4)
Proceeds from sales of property 4.5 3.7 1.9
Cash from (investments in) joint ventures 1.2 3.7 (2.2)
Purchases of investments -- (18.2) (38.8)
Proceeds from sales of investments 7.0 19.4 57.1
----------- ----------- -----------
Net cash (used in) provided by investing activities (175.3) 283.8 (85.6)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term debt (14.4) (1.5) --
Proceeds from issuance of long-term debt 298.0 -- 75.0
Repayment of long-term debt -- (311.2) (95.5)
Issuance of common stock 3.2 21.4 11.8
Treasury stock purchases (290.1) (37.7) (82.1)
Cash dividends (8.8) (20.2) (45.6)
----------- ----------- -----------
Net cash used in financing activities (12.1) (349.2) (136.4)
----------- ----------- -----------
Net cash (used in) provided by discontinued operations (26.1) (8.7) 117.3
Effects of exchange rate changes on cash and equivalents (1.4) (0.5) (0.5)
----------- ----------- -----------
Change in cash and equivalents (33.1) 95.2 47.7
Cash and equivalents at beginning of year 147.6 52.4 4.7
----------- ----------- -----------
Cash and equivalents at end of year $ 114.5 $ 147.6 $ 52.4
=========== =========== ===========
The following notes are an integral part of these statements.
F-7
Whitman Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in millions)
Accumulated
Common Stock Other Treasury Stock Total
----------------------- Retained Comprehensive ---------------------- Shareholders'
Shares Amount Income Loss Shares Amount Equity
----------- -------- -------- -------- ---------- --------- ---------
As of fiscal year end 1996 110,595,793 $ 456.3 $ 402.0 $ (56.0) (8,008,374) $ (160.1) $ 642.2
----------- -------- -------- -------- ---------- --------- ---------
Comprehensive loss:
Net income 4.1 4.1
Other comprehensive loss:
Translation adjustments (21.0) (21.0)
Unrealized investment loss (net of
tax benefit of $0.9 million) (1.6) (1.6)
---------
Other comprehensive loss (22.6)
---------
Comprehensive loss (18.5)
---------
Treasury stock purchases (3,323,200) (82.1) (82.1)
Stock compensation plans 1,123,903 21.9 2.9 (63,743) (1.5) 23.3
Common stock issued for
outstanding Pepsi General
non-voting preferred stock 794,115 20.4 20.4
Dividends declared (45.6) (45.6)
----------- -------- -------- -------- ---------- --------- ---------
As of fiscal year end 1997 111,719,696 478.2 363.4 (78.6) (10,601,202) (223.3) 539.7
----------- -------- -------- -------- ---------- --------- ---------
Comprehensive income:
Net income 43.7 43.7
Other comprehensive income:
Translation adjustments 2.6 2.6
Unrealized investment gain (net of
tax expense of $1.7 million) 3.2 3.2
---------
Other comprehensive income 5.8
---------
Comprehensive income 49.5
Treasury stock purchases (1,969,849) (37.7) (37.7)
Stock compensation plans 1,555,134 23.9 2.6 290,635 1.9 28.4
Special dividend distribution of Hussmann
and Midas common stock (2.3) (295.2) 64.2 (233.3)
Dividends declared (20.2) (20.2)
----------- -------- -------- -------- ---------- --------- ---------
As of fiscal year end 1998 113,274,830 499.8 94.3 (8.6) (12,280,416) (259.1) 326.4
----------- -------- -------- -------- ---------- --------- ---------
Comprehensive loss:
Net loss (8.8) (8.8)
Other comprehensive loss:
Translation adjustments (12.4) (12.4)
Unrealized investment loss (net of
tax benefit of $0.7 million) (1.3) (1.3)
---------
Other comprehensive loss (13.7)
---------
Comprehensive loss (22.5)
Treasury stock purchases (16,134,500) (290.1) (290.1)
Common stock issued for acquisitions 54,000,000 1,134.0 1,134.0
Stock compensation plans 0.6 237,146 2.6 3.2
Dividends declared (8.8) (8.8)
----------- -------- -------- -------- ---------- --------- ---------
As of fiscal year end 1999 167,274,830 $1,634.4 $ 76.7 $ (22.3) (28,177,770) $ (546.6) $ 1,142.2
=========== ======== ======== ======== ========== ========= =========
The following notes are an integral part of these statements.
F-8
Whitman Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
results of operations of the former Whitman Corporation ("Old Whitman"), which
was merged with and into Heartland Territories Holdings, Inc. ("Heartland") on
May 20, 1999 (the "Merger"), following which Heartland changed its name to
Whitman Corporation ("New Whitman"). Unless the context dictates otherwise, the
use of the terms "Whitman" or "the Company" herein shall include the results of
operations of both Old Whitman and New Whitman. Such results include all of the
Company's subsidiaries, including its principal operating company, Pepsi-Cola
General Bottlers, Inc. and its subsidiaries ("Pepsi General"). The Company's
financial statements classify the results of operations of Hussmann
International, Inc. ("Hussmann") and Midas, Inc. ("Midas") as discontinued
operations. Accordingly, all amounts included in the Notes to Consolidated
Financial Statements pertain to continuing operations except where otherwise
noted. See further discussion in Note 3 - "Discontinued Operations."
FISCAL YEAR. 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 1999 fiscal year commenced
January 3, 1999 and ended January 1, 2000, and the Company's 1998 fiscal year
commenced January 1, 1998 and ended January 2, 1999. In the second quarter of
1999, the Company eliminated the two-month reporting lag in consolidating
results of its existing international territories, resulting in additional sales
of $11.6 million and operating losses of $0.6 million.
CASH AND EQUIVALENTS. Cash and equivalents consist of deposits with banks and
financial institutions which are unrestricted as to withdrawal or use, and which
have original maturities of three months or less.
INVENTORIES. Inventories are valued at the lower of cost (principally determined
on the average method) or net realizable value.
INVESTMENTS. Investments include real estate held for sale, principally at
Illinois Center, a large single location. This mixed use development is located
on the Chicago lakefront. In the second quarter of 1999, the Company entered
into an agreement for the sale of property at Illinois Center and recorded a
charge of $56.3 million ($35.9 million after tax) to reduce the book value of
the property. This charge is reflected in other expense, net, on the
Consolidated Statements of Income. The close of the sale is subject to
completion of due diligence and certain other conditions. All other investments
in real estate are carried at cost, which management believes is lower than net
realizable value. When real estate is sold, the net proceeds are deducted from
the carrying value. Prior to 1999, investments also included Pepsi General's
minority interest in a manufacturing joint venture in Poland. These
manufacturing operations are now wholly-owned by Pepsi General.
DERIVATIVE FINANCIAL INSTRUMENTS. Due to fluctuations in the market prices for
aluminum, the Company uses derivative financial instruments to hedge the price
risk associated with anticipated aluminum can purchases, the prices of which are
indexed to aluminum market prices. Realized gains and losses on aluminum hedge
contracts are deferred until the related finished products are sold.
PROPERTY. Depreciation is computed on the straight-line method. When property is
sold or retired, the cost and accumulated depreciation are eliminated from the
accounts and gains or losses are recorded in other expense, net. Expenditures
for maintenance and repairs are expensed as incurred. The approximate ranges of
annual depreciation rates are 2.5 percent to 6.7 percent for buildings and
improvements and 8 percent to 20 percent for machinery and equipment.
INTANGIBLE ASSETS. Intangible assets principally represent franchise rights,
which are the excess of cost over fair market values of net tangible and
identifiable intangible assets of acquired businesses. Such amounts generally
are being amortized on a straight-line basis over 40 years. The principal
factors considered in determining the use of a 40 year amortization period
include: 1) the franchise agreements with PepsiCo are granted in perpetuity and
provide the exclusive right to manufacture and sell PepsiCo branded products
within the territories prescribed in the agreements, and 2) the existing and
projected cash flows are adequate to support the carrying values of intangible
assets. Intangible assets associated with international operations are not
significant.
CARRYING VALUES OF LONG-LIVED ASSETS. The Company evaluates the carrying values
of its long-lived assets, including intangible assets, by reviewing undiscounted
cash flows by operating unit. Such evaluations are performed whenever events and
circumstances indicate that the carrying value of an asset may not be
recoverable. If the sum of the projected undiscounted cash flows over the
estimated remaining lives of the related assets does not exceed the carrying
value, the carrying value would be adjusted for the difference between the fair
value, based on projected discounted cash flows, and the carrying value.
F-9
REVENUE RECOGNITION. Revenue is recognized when title to a product is
transferred to the customer. Payments made to third parties as commissions
related to vending activity are recorded as a reduction of revenues.
BOTTLER INCENTIVES. PepsiCo and other brand owners, at their sole discretion,
provide Pepsi General with various forms of marketing support. This marketing
support is intended to cover a variety of programs and initiatives, including
direct marketplace support, capital equipment-related programs and shared media
and advertising support. Based on the objectives of the programs and
initiatives, domestic marketing support is recorded as an adjustment to net
sales or a reduction of selling, general and administrative expenses. Direct
marketplace support is primarily the funding of sales discounts and similar
programs by PepsiCo and other brand owners and is recorded as an adjustment to
net sales. Capital equipment-related program funding is designed to support
marketing equipment programs and is recorded within selling, general and
administrative expenses. Shared media and advertising support is recorded as a
reduction to advertising and marketing expense within selling, general and
administrative expenses. International support is primarily recorded as a
reduction in cost of goods sold. There are no conditions or other requirements
which could result in repayment of marketing support received.
ADVERTISING AND MARKETING COSTS. Pepsi General is involved in a variety of
programs to promote its products. Advertising and marketing costs are expensed
in the year incurred. Certain advertising and marketing costs incurred by the
Company are reimbursed by PepsiCo and other brand owners in the form of
marketing support. Advertising and marketing expenses were $32.2 million, $24.2
million and $23.3 million in 1999, 1998 and 1997, respectively. These amounts
are net of support of $37.7 million, $22.0 million and $19.1 million in 1999,
1998 and 1997, respectively.
STOCK-BASED COMPENSATION. The Company uses the intrinsic value method of
accounting for its stock-based compensation arrangements.
INCOME (LOSS) PER SHARE. 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 3,757,844 shares, 111,000 shares and 2,272,500 shares at an
average price of $20.83, $20.83 and $25.33 per share that were outstanding at
the end of fiscal 1999, 1998 and 1997, respectively, were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of the common shares.
RECLASSFICATIONS. Certain prior year amounts have been reclassified to conform
to the current year presentation.
F-10
2. New Business Relationship with PepsiCo and Other Acquisitions
A. Background
On January 25, 1999, Old Whitman announced that its Board of Directors had
approved a new business relationship with PepsiCo, Inc. ("PepsiCo"). The new
relationship was approved by Old Whitman's shareholders on May 20, 1999. As a
part of the Amended and Restated Contribution and Merger Agreement (the
"Agreement") with PepsiCo and New Whitman, on May 20, 1999 PepsiCo contributed
certain assets of several domestic franchise territories to New Whitman and Old
Whitman merged into New Whitman. Contributed territories included Cleveland,
Ohio; Dayton, Ohio; Indianapolis, Indiana; St. Louis, Missouri and southern
Indiana. Pepsi General, a majority-owned subsidiary of Old Whitman prior to the
Merger and a wholly owned subsidiary of the Company following the Merger,
acquired PepsiCo's international operations in Hungary, the Czech Republic,
Slovakia and the balance of Poland on May 31, 1999. In exchange for the
territories acquired/contributed from PepsiCo and the elimination of PepsiCo's
20 percent minority interest in Pepsi General, New Whitman issued 54 million
shares of common stock to PepsiCo. Together with shares previously owned,
PepsiCo holds 39.4 percent of the Company's outstanding common stock as of
fiscal year end 1999. In addition, New Whitman paid PepsiCo cash totaling $133.7
million, assumed bank debt of $42.3 million, and assumed $241.8 million of notes
payable to PepsiCo, which were refinanced on August 31, 1999 through the
issuance of commercial paper. As part of the Agreement, the Company agreed to
repurchase up to 16 million shares, or $400 million of its common stock,
whichever was less, during the 12-month period following the close of the
transaction. Through January 1, 2000, the Company repurchased approximately 16.1
million shares of its common stock at a total cost of $290.1 million, which
satisfied New Whitman's repurchase commitment.
The Agreement provided for Pepsi General to sell to PepsiCo its operations
in Marion, Virginia; Princeton, West Virginia and the St. Petersburg area of
Russia. On March 19, 1999, Pepsi General completed the sale to PepsiCo of the
franchises in Marion, Virginia and Princeton, West Virginia. The sale of the
franchise in Russia was completed on March 31, 1999. Initial proceeds from these
sales were $117.8 million and the Company recorded a pretax gain of $11.4
million in the second quarter of 1999. In the fourth quarter of 1999, certain
post-closing transaction adjustments resulted in a $1.9 million increase in the
pretax gain. The adjusted $13.3 million pretax gain is reflected in other
expense, net, on the Consolidated Statements of Income. The adjusted gain, after
taxes and minority interest, was $7.8 million. Total adjusted cash proceeds on
these sales, net of cash divested and taxes, were $112.0 million.
Details of the acquired franchises are as follows (in millions):
Fair value of assets acquired, including
intangible assets of $1,032.4 million $ 1,424.9
Liabilities assumed (169.9)
---------
Cost of acquisition 1,255.0
Common stock issued to PepsiCo (54.0 million shares) (1,134.0)
Assumed notes payable to PepsiCo (241.8)
Elimination of PepsiCo's 20 percent minority
interest in Pepsi General 243.2
Cash and equivalents acquired (6.8)
---------
Net cash paid for acquired territories $ 115.6
=========
The acquisitions of the domestic and Central European territories have been
accounted for under the purchase method; accordingly, the results of operations
of the acquired territories have been included in the Company's consolidated
financial statements since the dates of acquisition. The excess of the aggregate
purchase price over the fair value of net assets acquired is being amortized on
a straight-line basis over 40 years. The principal factors considered in
determining the use of a 40-year amortization period include: 1) the franchise
agreements with PepsiCo are granted in perpetuity and provide the exclusive
right to manufacture and sell PepsiCo branded products within the territories
prescribed in the agreements, and 2) the existing and projected cash flows are
adequate to support the carrying values of intangible assets.
In connection with the acquisition of the Central European franchises from
PepsiCo, the Company wrote down $23.7 million of certain assets in the new
territories, including equipment and other assets related to plastic returnable
bottles to reflect the exit of that package. In addition, the Company recorded
$1.1 million of liabilities for certain employees who were terminated as a
result of the acquisition. These items resulted in an increase in intangible
assets related to the acquisition.
F-11
B. Pro Forma Financial Information (unaudited)
The pro forma condensed consolidated results of operations presented below
for 1999 and 1998 assume the following:
o The territories described above were acquired and divested as of January 1,
1998.
o The 16 million share repurchase commitment was completed as of January 1,
1998.
o The effective tax rate, excluding special charges and non-recurring items,
was approximately 48 percent in 1998, consistent with the 1999 effective
rate.
Additionally, the pro forma financial information presented below includes
the additional week of operating activity in the acquired domestic
territories resulting from conforming their reporting calendar to Whitman's
fiscal year end, as well as the operating results contributed by Toma
Holding, a.s. ("Toma"). However, the pro forma information excludes sales
of $11.6 million and operating losses of $0.6 million attributable to
eliminating the two-month reporting lag in consolidating results of the
existing international territories (unaudited and in millions, except per
share data):
1999 1998
--------- --------
Sales $ 2,398.5 $2,298.8
Income from continuing operations 31.7 64.4
Net income (loss) (20.0) 45.6
Income from continuing operations per share-basic 0.23 0.46
Income from continuing operations per share-diluted 0.23 0.46
Net income (loss) per share-basic (0.14) 0.33
Net income (loss) per share-diluted (0.14) 0.32
The above pro forma results are for informational purposes only and may not
be indicative of actual results that would have occurred had the transactions
described taken place on January 1, 1998.
C. Other Acquisitions
On December 1, 1999, the Company acquired Toma, a leading soft drink
company in the Czech Republic. This acquisition was accounted for as a purchase;
accordingly, Toma's operating results are included in the Company's consolidated
financial statements since the date of acquisition. The effect of this
acquisition, had it been made as of the beginning of 1999, would not have been
significant to the Company's operating results. There were no other significant
acquisitions during 1999, 1998 or 1997.
3. Discontinued Operations
Loss from discontinued operations in 1999 includes after tax amounts
related to a second quarter $12 million settlement of environmental litigation
filed against Pneumo Abex, a former subsidiary of the Company, as well as second
quarter and fourth quarter increases of $30.8 million and $39.0 million,
respectively, in accruals for other environmental matters related to Pneumo
Abex.
On January 30, 1998, the Company established Hussmann and Midas as
independent publicly-held companies through tax-free distributions (spin-offs)
to Whitman shareholders. Prior to the spin-offs, Hussmann and Midas paid Whitman
$240.0 million and $194.3 million, respectively, to settle intercompany
indebtedness and to pay special dividends. The spin-offs resulted in a reduction
of shareholders' equity of $233.3 million. Included in this amount is the
elimination of $64.2 million of accumulated other comprehensive loss
representing cumulative translation adjustments of Hussmann and Midas as of the
date of the spin-offs.
Included in the 1997 loss from discontinued operations for Hussmann and
Midas were special charges of $123.9 million, or $93.4 million after tax. The
special charges at Hussmann primarily related to the write-off of goodwill in
its U.K. operations ($26.0 million), a restructuring of the U.K. operations
($23.2 million) and a reorganization of certain manufacturing operations in the
U.S. ($7.1 million). The special charges at Midas principally related to its
decision to franchise or close substantially all company-operated stores in the
U.S. ($35.5 million), to record one-time charges for a special product return
program and changes in the U.S. franchisee advertising program ($12.2 million),
to record severance benefits ($7.4 million) and to reflect the impairment of
certain assets ($12.5 million).
F-12
The results of tax settlements with the IRS in 1997 for the years 1988
through 1991, which related to other previously discontinued operations,
amounted to net additional tax expense of $2.9 million, which was recorded in
the third quarter of 1997. During the fourth quarter of 1997, the Company
recorded $1.3 million of additional tax expense resulting from the refinement of
deferred tax balances related to other previously discontinued operations.
Combined financial information for discontinued operations in 1999, 1998
and 1997 is shown below (in millions):
1999 1998 1997
----------- ----------- -----------
Sales and revenues of Hussmann and Midas $ -- $ 109.6 $ 1,692.6
=========== =========== ===========
Loss from discontinued operations:
Hussmann and Midas $ -- $ (0.5) $ (7.5)
Previously discontinued operations (51.7) -- (4.2)
----------- ----------- -----------
Loss from discontinued operations $ (51.7) $ (0.5) $ (11.7)
=========== =========== ===========
Losses from discontinued operations have been reduced by income tax
benefits of $30.1 million and $39.1 million in 1999 and 1997, respectively, and
increased by income taxes of $0.1 million in 1998.
4. Extraordinary Loss on Early Extinguishment of Debt
In January, 1998, Whitman made a tender offer for any and all of its
outstanding 7.625% and 8.25% notes maturing June 15, 2015, and February 15,
2007, respectively. In connection with the tender offer, Whitman repurchased
7.625% and 8.25% notes with principal amounts of $91.0 million and $88.5
million, respectively. The Company paid total premiums in connection with the
tender offer of $26.4 million and the remaining unamortized discount and issue
costs related to repurchased notes were $2.1 million. The Company also repaid a
term loan and notes with principal amounts of $50.0 million scheduled to mature
in 1998 and 1999, notes due in 2002 with principal amounts of $50.0 million and
industrial revenue bonds of $5.0 million due 2013. Costs associated with these
repayments and the remaining unamortized issue costs were not significant. The
Company recorded an extraordinary charge of $18.3 million, net of income tax
benefits of $10.4 million, in the first quarter of 1998 related to these early
extinguishments of debt.
5. Special Charges
In the third quarter of 1999, Pepsi General recorded a special charge of
$4.5 million ($2.8 million after tax) for staff reduction costs in certain
domestic markets.
In the second quarter of 1999, Pepsi General recorded a special charge of
$23.4 million, which included $18.6 million ($11.4 million after tax) for staff
reduction costs and non-cash asset write-downs, principally related to the
acquisition of the domestic and international territories from PepsiCo. In
addition, the Company announced it would seek the sale of the Baltics operations
to a third party and recorded a write-down of the Company's investment by $4.8
million, which is included in special charges.
In 1997, the Company recorded special charges totaling $49.3 million,
consisting of $14.8 million recorded by Pepsi General to consolidate a number of
its domestic divisions, including reductions in staffing levels, and to
write-down certain assets in its domestic and international operations, and
$34.5 million recorded by Whitman relating to the severance of essentially all
of the Whitman corporate management and staff and for expenses associated with
the spin-offs.
F-13
The following table summarizes the activity associated with special charges
recorded during 1999 and 1997 (in millions):
1997 Charges
-------------------------
Pepsi Whitman 1999
General Corporate Charges Total
---------- ----------- -------- ---------
Special Charges:
Employee related costs $ 9.1 $ 27.0 $ 36.1
Asset write-downs 4.7 0.7 5.4
Spin-off related costs and other 1.0 6.8 7.8
---------- ----------- ---------
Total 14.8 34.5 49.3
---------- ----------- ---------
Expenditures and asset write-downs:
Employee related costs (0.9) (2.6) (3.5)
Asset write-downs (4.7) (0.7) (5.4)
Spin-off related costs and other -- (1.5) (1.5)
---------- ----------- ---------
Total (5.6) (4.8) (10.4)
---------- ----------- ---------
Accrued liabilities as of fiscal year end 1997 9.2 29.7 38.9
---------- ----------- ---------
Expenditures:
Employee related costs (6.7) (11.4) (18.1)
Spin-off related costs and other (1.0) (5.3) (6.3)
---------- ----------- ---------
Total (7.7) (16.7) (24.4)
---------- ----------- ---------
Accrued liabilities as of fiscal year end 1998 1.5 13.0 14.5
---------- ----------- ---------
Special charges:
Asset write-downs associated with exit
of plastic returnable bottle package in
existing international territories -- -- $ 7.6 7.6
Other asset write-downs -- -- 5.9 5.9
Employee related costs -- -- 9.6 9.6
Write-down of Baltics operations -- -- 4.8 4.8
---------- ----------- -------- ---------
Total -- -- 27.9 27.9
---------- ----------- -------- ---------
Expenditures and asset write-downs:
Asset write-downs -- -- (18.3) (18.3)
Expenditures for employee related costs (1.5) (4.7) (5.3) (11.5)
---------- ----------- -------- ---------
Total (1.5) (4.7) (23.6) (29.8)
---------- ----------- -------- ---------
Accrued liabilities as of fiscal year end 1999
(all employee related costs) $ -- $ 8.3 $ 4.3 $ 12.6
========== =========== ======== =========
Employee related costs of $9.6 million recorded in the 1999 special charges
include severance payments for management and staff affected by the
consolidation of international headquarters and operations in Poland and
management changes in certain domestic markets. Employee related costs recorded
in the 1997 special charges include severance payments for the management and
staff affected by changes in the organizational structure, as well as other
headcount reduction programs. The 1997 charges affected approximately 125
positions at Pepsi General and essentially all employees at Whitman Corporate,
of which 11 positions are yet to be eliminated as of fiscal year end 1999.
During January, 2000, the remaining balance of the 1997 Whitman corporate
charges was paid. The charges recorded in 1999 resulted in the elimination of
approximately 310 positions, of which approximately 27 positions are yet to be
eliminated as of fiscal year end 1999.
The accrued liabilities remaining as of fiscal year end 1999 are comprised
of deferred severance payments and certain employee benefits. The Company
expects to pay a significant portion of the $12.6 million of employee related
costs, using cash from operations, during the next twelve months; accordingly,
such amounts are classified as other current liabilities.
F-14
6. Interest Expense, Net
Interest expense, net, consisted of the following (in millions):
1999 1998 1997
----------- ----------- ----------
Interest expense $ (67.1) $ (46.4) $ (69.0)
Interest income from Hussmann and Midas -- 1.6 23.1
Other interest income 3.2 8.7 3.6
----------- ----------- ----------
Interest expense, net $ (63.9) $ (36.1) $ (42.3)
=========== =========== ==========
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.
The loans and advances to Hussmann and Midas were repaid to Whitman prior
to the spin-offs of Hussmann and Midas on January 30, 1998. See Note 3 -
"Discontinued Operations."
7. Income Taxes
Income taxes (benefits) related to continuing operations consisted of the
following (in millions):
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ 34.9 $ 38.2 $ 33.3
State and local 7.2 7.3 7.2
----------- ----------- -----------
Total current 42.1 45.5 40.5
----------- ----------- -----------
Deferred:
Federal (19.4) 22.0 (3.2)
Non-U.S. 1.5 (0.6) (0.7)
State and local (2.1) 2.8 1.3
----------- ----------- -----------
Total deferred (20.0) 24.2 (2.6)
----------- ----------- -----------
Total income taxes $ 22.1 $ 69.7 $ 37.9
=========== =========== ===========
As a result of the Central European territory acquisitions, the Company
assessed certain previous tax positions related to its international operations
and eliminated $19.8 million of deferred tax liabilities recorded in prior
periods. Beginning in the second quarter of 1999, the Company no longer defers
the U.S. tax benefits on international losses. The following table reconciles
the income tax provision for continuing operations at the U.S. federal statutory
rate to the Company's actual income tax provision on continuing operations
(dollars in millions):
1999 1998 1997
------------------ ----------------- -----------------
Amount % Amount % Amount %
-------- ---- -------- ---- ------- ----
Income taxes computed at the U.S. federal statutory rate
on income from continuing operations before special
charges and credits $ 48.3 35.0 $ 53.3 35.0 $ 24.5 35.0
State income taxes, net of federal income tax benefit 6.0 4.3 6.6 4.3 5.6 8.0
Non-U.S. losses 0.4 0.3 6.6 4.3 6.5 9.3
Non-deductible portion of amortization-intangible assets 9.2 6.7 4.4 2.9 4.3 6.2
Other items, net 2.1 1.5 (1.2) (0.7) (3.0) (4.3)
--------- ---- -------- ---- -------- ----
Income tax on continuing operations, excluding
non-recurring items $ 66.0 47.8 $ 69.7 45.8 $ 37.9 54.2
Tax benefit of special charges and elimination of
deferred tax liabilities recorded in prior periods (43.9) -- --
--------- -------- --------
$ 22.1 $ 69.7 $ 37.9
========= ======== ========
In 1998 and 1997, the Company settled Federal income tax audits with the
IRS for the year 1992 and the years 1988 through 1991, respectively. Accruals no
longer required were credited to income and are reflected in "other items, net"
in the table above.
F-15
Deferred income taxes are attributable to temporary differences which exist
between the financial statement bases and tax bases of certain assets and
liabilities. As of fiscal year end 1999 and 1998, deferred income taxes are
attributable to (in millions):
1999 1998
----------- -----------
Deferred tax assets:
Provision for special charges and previously sold businesses $ 37.8 $ 13.5
Lease transactions 10.5 13.0
Unrealized losses on investments 7.3 6.6
Pension and postretirement benefits 11.4 6.2
Deferred compensation 5.3 4.8
Other 8.8 14.2
----------- -----------
Net deferred tax assets 81.1 58.3
----------- -----------
Deferred tax liabilities:
Property (79.3) (67.3)
Non-U.S. branch activity (0.8) (30.4)
Intangible assets (12.0) (9.2)
Deferred state taxes (6.2) (8.4)
Other (28.0) (29.3)
----------- -----------
Total deferred tax liabilities (126.3) (144.6)
----------- -----------
Net deferred tax liability $ (45.2) $ (86.3)
=========== ===========
Net deferred tax asset (liability) included in:
Other current assets $ 25.9 $ 12.8
Deferred income taxes (71.1) (99.1)
----------- -----------
Net deferred tax liability $ (45.2) $ (86.3)
=========== ===========
There currently is no undistributed non-U.S. income because Pepsi General's
international operations have accumulated pretax losses. Pretax losses from
international operations were $45.3 million, $20.6 million and $20.4 million in
1999, 1998 and 1997, respectively.
8. Debt
Long-term debt as of fiscal year end 1999 and 1998 consisted of the
following (in millions):
1999 1998
----------- -----------
6.0% notes due 2004 $ 150.0 $ --
6.375% notes due 2009 150.0 --
6.25% to 6.90% notes due 2000 and 2005 136.5 136.5
7.5% notes due 2003 125.0 125.0
7.29% and 7.44% notes due 2026 ($100 million and $25 million
due 2004 and 2008, respectively, at option of note holder) 125.0 125.0
6.5% notes due 2006 100.0 100.0
7.5% notes due 2001 75.0 75.0
Various other debt 26.4 44.1
----------- -----------
Total debt 887.9 605.6
Less: Amount classified as short-term debt 75.5 --
Unamortized discount 3.4 2.0
----------- -----------
Total long-term debt $ 809.0 $ 603.6
=========== ===========
F-16
The Company maintains a $500 million commercial paper program and also has
$500 million available under a contractual revolving credit facility 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. The interest rates on the revolving credit facility,
expiring in 2004, are based primarily on the London Interbank Offered Rate
("LIBOR"). There were no borrowings under the revolving credit facility as of
either fiscal year end 1999 or 1998. The weighted-average borrowings under the
commercial paper program during 1999 were $128.0 million and were not
significant during 1998. The Company believes it is in compliance with all
covenants under its debt agreements.
During January, 1998, the Company extinguished certain indebtedness. See
Note 4 - "Extraordinary Loss on Early Extinguishment of Debt."
The amounts of long-term debt, excluding obligations under capital leases,
are scheduled to mature as follows:
Fiscal Amount
Year (in millions)
------ ------------
2000 $ 75.5
2001 $ 75.0
2002 --
2003 $ 125.0
2004 $ 250.0
The fair market value of the Company's floating rate debt as of fiscal year
end 1999 approximated its carrying value. The Company's fixed rate debt had a
carrying value of $886.3 million and an estimated fair market value of $857.2
million as of fiscal year end 1999. The fair market value of the fixed rate debt
was based upon quotes from financial institutions for instruments with similar
characteristics or upon discounting future cash flows.
9. Financial Instruments
During 1999, the Company used several derivative financial instruments to
reduce the Company's exposure to adverse fluctuations in 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 use
derivative financial instruments for trading purposes.
During 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 contractual cost of aluminum cans, the Company
considers these hedges to be highly effective. As of fiscal year end 1999, the
Company has hedged a portion of its future domestic aluminum requirements.
Deferred hedging gains and losses on these contracts as of fiscal year end 1999
were not significant and will be recognized in income upon sale of the inventory
containing the aluminum being hedged.
As of fiscal year end 1999, the Company had $296.0 million in floating rate
debt. The Company's floating rate exposure on this debt relates primarily to
changes in the six month LIBOR rate and the overnight Federal Funds rate.
Assuming consistent levels of floating rate debt with those held by the Company
as of fiscal year end 1999, a 50 basis point (0.50 percent) change in each of
these rates would have an impact of approximately $1.5 million on the Company's
annual interest expense related to its floating rate obligations.
F-17
10. Pension and Other Postretirement Plans
COMPANY-SPONSORED DEFINED BENEFIT PENSION PLANS. Most of the Company's U.S.
employees are covered under various defined benefit pension plans sponsored
and/or funded by the Company. Plans covering salaried employees provide pension
benefits based on years of service and generally are limited to a maximum of 20
percent of the employees' average annual compensation during the five years
preceding retirement. Plans covering hourly employees generally provide benefits
of stated amounts for each year of service. Plan assets are invested primarily
in common stocks, corporate bonds and government securities.
In connection with the 1999 transaction with PepsiCo (see Note 2 - "New
Business Relationship with PepsiCo and Other Acquisitions"), substantially all
of the active U.S. employees formerly employed by PepsiCo in the acquired
territories are now covered under the plans sponsored and funded by the Company.
Except as negotiated through new union contracts for hourly employees, each
employee's years of service under the PepsiCo plans will count toward their
benefit formula under the Company's plans; however, Whitman has not yet
determined whether the Company will assume PepsiCo's obligations under the
PepsiCo plans, along with the related plan assets. This determination will be
completed in 2000.
Net periodic pension cost for 1999, 1998 and 1997 included the following
components (in millions):
1999 1998 1997
--------- --------- ---------
Service cost $ 5.1 $ 3.5 $ 3.4
Interest cost 7.0 6.6 6.5
Expected return on plan assets (8.6) (8.0) (7.2)
Amortization of actuarial loss -- (0.3) 0.1
Amortization of transition asset (0.2) (0.2) (0.2)
Amortization of prior service cost 1.0 0.9 0.8
--------- --------- ---------
Net periodic pension cost $ 4.3 $ 2.5 $ 3.4
========= ========= =========
The following tables outline the changes in benefit obligations and fair
values of plan assets for the Company's pension plans and reconciles the pension
plans' funded status to the amounts recognized in the Company's balance sheets
as of fiscal year end 1999 and 1998 (in millions):
1999 1998
--------- ---------
Benefit obligation at beginning of year $ 106.3 $ 98.5
Service cost 5.1 3.5
Interest cost 7.0 6.6
Amendments 1.8 0.1
Actuarial (gain) loss (10.8) 3.7
Acquisition 1.0 --
Benefits paid (5.9) (6.1)
--------- ---------
Benefit obligation at end of year 104.5 106.3
--------- ---------
Fair value of plan assets at beginning of year 101.9 103.0
Actual return on plan assets 18.7 3.3
Employer contributions 0.5 1.7
Benefits paid (5.9) (6.1)
--------- ---------
Fair value of plan assets at end of year 115.2 101.9
Funded status 10.7 (4.4)
Unrecognized net actuarial gain (21.4) (0.4)
Unrecognized prior service cost 4.9 4.2
Unrecognized transition asset (0.4) (0.6)
--------- ---------
Net amount recognized $ (6.2) $ (1.2)
========= =========
Net amounts recognized in the balance sheets consist of:
1999 1998
--------- ---------
Prepaid pension cost $ -- $ 2.4
Accrued pension liability (6.2) (6.1)
Intangible asset -- 2.5
--------- ---------
Net amount recognized $ (6.2) $ (1.2)
========= =========
F-18
The Company uses September 30 as the measurement date for plan assets and
obligations. Pension costs are funded in amounts not less than minimum levels
required by regulation. The principal economic assumptions used in the
determination of net periodic pension cost and benefit obligations were as
follows:
Net periodic pension cost: 1999 1998 1997
-------------------------- ---------- ---------- ----------
Discount rates 6.5% 7.0% 7.5%
Expected long-term rates of return on assets 9.5% 9.5% 9.5%
Rates of increase in future compensation levels 4.0% 4.5% 5.0%
Benefit obligation: 1999 1998
------------------- ---------- ----------
Discount rates 7.5% 6.5%
Rates of increase in future compensation levels 5.0% 4.0%
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $30.0 million, $28.5 million and $25.0 million as
of fiscal year end 1999 and $29.4 million, $27.5 million and $22.2 million as of
fiscal year end 1998.
COMPANY-SPONSORED DEFINED CONTRIBUTION PLANS. Substantially all U.S. salaried
employees and certain U.S. hourly employees participate in voluntary,
contributory defined contribution plans to which the Company makes partial
matching contributions. Company contributions to these plans amounted to $6.1
million, $5.1 million and $5.6 million in 1999, 1998 and 1997, respectively.
MULTI-EMPLOYER PENSION PLANS. The Company's subsidiaries participate in a number
of multi-employer pension plans, which provide benefits to certain union
employee groups of the Company. Amounts contributed to the plans totaled $3.9
million, $3.1 million and $2.8 million in 1999, 1998 and 1997, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS. The Company provides substantially
all former U.S. salaried employees who retired prior to July 1, 1989 and certain
other employees in the U.S., including certain employees in the territories
acquired from PepsiCo (See Note 2 - "New Business Relationship with PepsiCo and
Other Acquisitions"), with certain life and health care benefits. U.S. salaried
employees retiring after July 1, 1989, except covered employees in the
territories acquired from PepsiCo, generally are required to pay the full cost
of these benefits. Effective January 1, 2000, non-union hourly employees are
also eligible for coverage under these plans, but are also required to pay the
full cost of the benefits. Eligibility for these benefits varies with the
employee's classification prior to retirement. Benefits are provided through
insurance contracts or welfare trust funds. The insured plans generally are
financed by monthly insurance premiums and are based upon the prior year's
experience. Benefits paid from the welfare trust are financed by monthly
deposits which approximate the amount of current claims and expenses. The
Company has the right to modify or terminate these benefits.
Net periodic cost of post-retirement benefits other than pensions for 1999,
1998 and 1997 amounted to $0.6 million, $0.1 million and $0.2 million,
respectively. The Company's post-retirement life and health benefits are not
funded. The unfunded accrued post-retirement benefits amounted to $24.3 million
as of fiscal year end 1999 and $15.3 million as of fiscal year end 1998.
MULTI-EMPLOYER POST-RETIREMENT MEDICAL AND LIFE INSURANCE. The Company's
subsidiaries participate in a number of multi-employer plans which provide
health care and survivor benefits to union employees during their working lives
and after retirement. Portions of the benefit contributions, which cannot be
disaggregated, relate to post-retirement benefits for plan participants. Total
amounts charged against income and contributed to the plans (including benefit
coverage during their working lives) amounted to $4.9 million, $5.1 million and
$4.0 million in 1999, 1998 and 1997, respectively.
F-19
11. Leases
As of fiscal year end 1999, annual minimum rental payments required under
capital leases and operating leases that have initial noncancelable terms in
excess of one year were as follows (in millions):
Capital Operating
Leases Leases
------- -------
2000 $ 2.5 $ 11.4
2001 2.5 7.9
2002 1.4 4.7
2003 1.2 3.5
2004 0.5 1.6
Thereafter 0.9 4.4
------- -------
Total minimum lease payments 9.0 $ 33.5
=======
Less imputed interest (2.0)
-------
Present value of minimum lease payments $ 7.0
=======
Total rent expense applicable to operating leases amounted to $19.1
million, $15.3 million and $14.7 million in 1999, 1998 and 1997, respectively. A
majority of the Company's leases provide that the Company pays taxes,
maintenance, insurance and certain other operating expenses.
12. Stock Options and Shares Reserved
The Company's Stock Incentive Plan (the "Plan"), originally approved by
shareholders in 1982 and subsequently amended from time to time, provides for
granting incentive stock options, nonqualified stock options, related stock
appreciation rights (SARs), restricted stock awards, and performance awards or
any combination of the foregoing. Generally, outstanding nonqualified stock
options are exercisable during a ten-year period beginning one to three years
after the date of grant. All options were granted at fair market value at the
date of grant. There are currently no outstanding stock appreciation rights.
In connection with the transaction with PepsiCo (See Note 2 - "New Business
Relationship with PepsiCo and Other Acquisitions"), all shares granted prior to
1999 were vested in full during 1999.
In January, 1998, the Company issued 92,400 options to certain Whitman and
Pepsi General employees to purchase Whitman common stock at a price of $25.03
per share. The Black-Scholes valuation for these options was $5.64. In addition,
the Company issued 319,700 options to employees of Hussmann and Midas. As a
result of the spin-offs, options to purchase Whitman common stock held by
Hussmann and Midas employees were forfeited and new options to purchase shares
of the separate companies were issued to employees of each respective company.
The total number of options forfeited, including options granted in January,
1998, were 3,041,268, of which 889,793 were exercisable. The remaining option
agreements were modified to adjust the number of shares and relevant exercise
prices pursuant to an IRS formula.
No cash or other consideration was issued to employees and the aggregate
intrinsic value of each option immediately after the spin-offs was not greater
than the aggregate intrinsic value of each option immediately before the
spin-offs. Further, the ratio of the exercise price for each option to the
market value per share was not reduced, and the vesting provisions and option
period of each original grant remained the same. Accordingly, no new measurement
date was established relative to the forfeited options.
F-20
Changes in options outstanding are summarized as follows:
Options Outstanding
--------------------------------------------------------------------------------
Range of Weighted-Average
Options Exercise Prices Exercise Price
------- --------------- ----------------
Balance, fiscal year end 1996 6,807,087 $11.23 - $25.31 $18.15
Granted 2,244,300 23.06 - 27.81 23.13
Exercised or surrendered (912,426) 11.23 - 25.31 10.80
Recaptured or terminated (123,734) 18.25 - 25.31 12.43
----------
Balance, fiscal year end 1997 8,015,227 11.23 - 27.81 19.81
Activity prior to the spin-offs:
Granted 412,100 25.03 - 25.99 25.40
Exercised or surrendered (590,471) 11.23 - 25.31 13.66
Recaptured or terminated (3,041,268) 11.23 - 26.22 22.36
Adjustment due to the spin-offs 2,850,486
----------
Balance, upon the spin-offs 7,646,074 7.04 - 17.44 11.89
Activity subsequent to the spin-offs:
Granted 957,600 15.84 - 22.66 17.30
Exercised or surrendered (1,487,026) 7.04 - 15.88 10.31
Recaptured or terminated (234,727) 11.45 - 19.53 15.11
----------
Balance, fiscal year end 1998 6,881,921 7.04 - 22.66 13.21
Granted 3,744,600 13.91 - 22.63 20.76
Exercised or surrendered (231,416) 7.04 - 16.13 10.61
Recaptured or terminated (154,489) 14.46 - 22.63 21.58
----------
Balance, fiscal year end 1999 10,240,616 7.04 - 22.66 15.90
==========
The number of options exercisable as of fiscal year end 1999 was 7,010,916,
with a weighted-average exercise price of $13.79, compared with options
exercisable of 4,768,922 as of fiscal year end 1998 and 4,442,759 as of fiscal
year end 1997 with weighted-average exercise prices of $11.97 and $16.76,
respectively. As of fiscal year end 1999, there were 1,157,622 shares available
for future grants. The following table summarizes information regarding stock
options outstanding and exercisable as of fiscal year end 1999:
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------------------------
Weighted-Average Weighted-
Range of Options Remaining Life Average Exercise Options Weighted-Average
Exercise Prices Outstanding (in years) Price Exercisable Exercise Price
- ----------------------- ------------------ ------------------ ------------------- --------------------- ----------------------
$7.04 - $12.19 2,460,866 3.4 $ 9.26 2,460,866 $ 9.26
$13.91 - $18.06 5,178,750 7.6 15.82 3,895,450 15.36
$19.53 - $22.66 2,601,000 9.0 22.36 654,600 21.55
---------- ---------
Total Options 10,240,616 7.0 15.90 7,010,916 13.79
========== =========
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" requires, among other items, the Company to disclose
either in the Consolidated Statements of Income or in the Notes to the
Consolidated Financial Statements an estimate of the cost of stock options
granted to employees. The Company has elected to continue to account for stock
options granted to employees in accordance with the intrinsic value method under
Accounting Principles Board Opinion No. 25. However, using the Black-Scholes
model and the following assumptions, the weighted-average estimated fair values
at the dates of grant of options in 1998 (prior to the spin-offs of Hussmann and
Midas) and 1997 were $5.64 and $5.62, respectively. The weighted-average
estimated fair values of options granted in 1999 and 1998 subsequent to the
spin-offs was $6.43 and $5.01, respectively.
Option Granted After Spin-Offs Options Granted Before Spin-Offs
------------------------------ --------------------------------
1999 1998 1998 1997
------ ------ ------ ------
Risk-free interest rate 5.0% 4.7% 5.3% 6.2%
Expected dividend yield 0.9% 1.0% 1.9% 1.7%
Expected volatility 27.8% 27.2% 19.8% 16.0%
Estimated lives of options (in years) 5.0 5.0 5.0 5.0
F-21
Based upon the above assumptions, the Company's pro forma net income (loss)
and income (loss) per share would have been:
1999 1998 1997
------- ------- -------
Pro forma net income (loss) (in millions):
Income from continuing operations $ 37.3 $ 59.8 $ 13.5
Income (loss) from discontinued operations (51.7) 2.4 (14.5)
Extraordinary loss on early extinguishment of debt -- (18.3) --
------- ------- -------
Net income (loss) $ (14.4) $ 43.9 $ (1.0)
======= ======= =======
Pro forma income (loss) per share - basic:
Continuing operations $ 0.30 $ 0.59 $ 0.13
Discontinued operations (0.42) 0.02 (0.14)
Extraordinary loss on early extinguishment of debt -- (0.18) --
------- ------- -------
Net income (loss) $ (0.12) $ 0.43 $ (0.01)
======= ======= =======
Pro forma income (loss) per share - diluted:
Continuing operations $ 0.30 $ 0.58 $ 0.13
Discontinued operations (0.42) 0.02 (0.14)
Extraordinary loss on early extinguishment of debt -- (0.18) --
------- ------- -------
Net income (loss) $ (0.12) $ 0.42 $ (0.01)
======= ======= =======
Options granted vest equally each year over a three year period. As a
result, the estimated costs indicated above for 1998 and 1997 reflect only a
partial vesting of such options and do not consider the pro forma costs for
options granted before 1995. If full vesting were assumed, the estimated pro
forma compensation costs for each year would have been higher than indicated
above.
The Company granted 233,600 restricted shares of stock at a
weighted-average fair value (at the date of grant) of $23.06 in 1997 to key
members of management. No restricted shares were granted in 1999 or 1998.
Holders of restricted shares of Whitman common stock received shares of Hussmann
and Midas in the spin-offs, free of restrictions. A total of 132,707 Whitman
restricted shares were forfeited by Hussmann and Midas executives, which were
subsequently replaced by restricted shares of equivalent value in each
respective company.
The Company recognized compensation expense in S,G&A of $0.7 million and
$2.8 million in 1998 and 1997, respectively, which included $0.3 million in 1998
associated with the dividend of Hussmann and Midas shares. Compensation expense
recorded in discontinued operations related to these grants was $0.7 million and
$2.7 million in 1998 and 1997, respectively, which included $1.3 million in 1998
related to the dividend of Hussmann and Midas shares, offset by the recapture of
previously recorded expense of $0.6 million related to forfeited Whitman shares.
At fiscal year end 1998, holders of 82,871 restricted shares of Whitman common
stock received their shares free of restrictions, which resulted in a charge of
$0.3 million in 1998. Accordingly, the Company recorded no compensation expense
related to restricted shares in 1999.
F-22
13. Shareholder Rights Plan and Preferred Stock
On May 20, 1999, the Company adopted a Shareholder Rights Plan and declared
a dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock, par value $0.01 per share, of the Company.
The dividend was paid on June 11, 1999 to the shareholders of record on that
date. Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock, par
value $0.01 per share, of the Company at a price of $61.25 per one one-hundredth
of a share of such Preferred Stock, subject to adjustment. The Rights will
become exercisable if someone buys 15 percent or more of the Company's common
stock or following the commencement of, or announcement of an intention to
commence, a tender or exchange offer to acquire 15 percent or more of the
Company's common stock. In addition, if someone buys 15 percent or more of the
Company's common stock, each right will entitle its holder (other than that
buyer) to purchase, at the Right's $61.25 purchase price, a number of shares of
the Company's common stock having a market value of twice the Right's $61.25
exercise price. If the Company is acquired in a merger, each Right will entitle
its holder to purchase, at the Right's $61.25 purchase price, a number of the
acquiring company's common shares having a market value at the time of twice the
Right's exercise price.
Prior to the acquisition of 15 percent or more of the Company's stock, the
Rights can be redeemed by the Board of Directors for one cent per Right. The
Company's Board of Directors also is authorized to reduce the threshold to 10
percent. The Rights will expire on May 20, 2009. The Rights do not have voting
or dividend rights, and until they become exercisable, they have no dilutive
effect on the per-share earnings of the Company.
The Company has 12.5 million authorized shares of Preferred Stock. There is
no Preferred Stock issued or outstanding.
14. Pepsi General Non-Voting Preferred Stock
In December, 1997, Whitman issued 794,115 shares of its common stock valued
at $20.4 million to an affiliate of PepsiCo in exchange for 2,025 shares of
non-voting preferred stock of Pepsi General (including accrued dividends). The
non-voting preferred stock held by PepsiCo had been classified as a component of
minority interest. The accounting treatment was for Whitman to record the 2,025
shares of non-voting preferred stock as an investment in its subsidiary, Pepsi
General, which is eliminated in consolidation. There was no gain or loss on this
transaction.
15. Supplemental Cash Flow Information
Net cash provided by continuing operations reflects cash payments and cash
receipts as follows (in millions):
1999 1998 1997
--------- --------- ---------
Interest paid $ 64.4 $ 51.4 $ 68.8
Interest received 3.8 8.3 3.3
Income taxes paid 37.5 23.3 53.8
Income tax refunds 1.0 1.3 11.2
The Company also received interest from Hussmann and Midas related to their
intercompany account balances. Net interest received from Hussmann and Midas was
$1.6 million and $23.1 million in 1998 and 1997, respectively.
F-23
16. Environmental and Other Contingencies
The Company is subject to certain indemnification obligations under
agreements with previously sold subsidiaries, including 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 speculative during the early
stages, 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.
The Company's largest environmental exposure has been and continues to be
the remedial action required at a facility in Portsmouth, Virginia for which the
Company has an indemnity obligation. This is a superfund site which the U.S.
Environmental Protection Agency required be remediated. Through 1999, the
Company had spent an estimated $31.4 million (net of $3.1 million of recoveries
from other responsible parties) for remediation of the Portsmouth site
(consisting principally of soil treatment and removal) and has accrued and
expects to incur an estimated $7.2 million to complete the remediation over the
next one to two years.
Although the Company has indemnification obligations for environmental
liabilities at a number of other sites, including several superfund sites, it is
not anticipated that the expense involved at any specific site would have a
material effect on the Company. In the case of the other superfund sites, the
volumetric contribution for which the Company has an obligation has in most
cases been estimated and other large, financially viable parties are responsible
for all or most of the remainder.
As of fiscal year end 1999, the Company had $65.1 million accrued to cover
potential environmental liabilities, including $28.0 million classified as
current liabilities, which excludes possible insurance recoveries and is
determined on an undiscounted cash flow basis. Based on the latest evaluations
from outside advisors and consultants, the Company believes the upper end of the
range for its potential future environmental liabilities is approximately $22
million higher than the current accrued balance. Whitman has determined that
there is no amount within the range of possible liabilities that appears to be a
better estimate than any other amount within the range and the minimum amount
within the range has been accrued. The Company expects a significant portion of
the accrual will be disbursed during the next four years. The Company has in the
past successfully negotiated settlements with insurance companies and other
responsible parties related to these environmental liabilities, including
recoveries of $0.5 million in 1999. Receivables of $7.5 million from these
settlements were included as assets on the Company's balance sheet as of fiscal
year end 1999.
The estimated liabilities include expenses for the remediation of
identified sites, payments to third parties for claims and expenses, and the
expenses of on-going evaluations and litigation. The estimates are based upon
the judgments of outside consultants and experts and their evaluations of the
characteristics and parameters of the sites, including results from field
inspections, test borings and water flows. Their estimates are based upon the
use of 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 occur in the future.
The Company has contingent liabilities from various pending claims and
litigation on a number of matters, including indemnification claims under
agreements with previously sold subsidiaries for products liability and toxic
torts. The ultimate liability for these claims cannot be determined. In the
opinion of management, based upon information currently available, the ultimate
resolution of these claims and litigation, including potential environmental
exposures, and considering amounts already accrued, should not have a material
effect on the Company's financial condition, although amounts recorded in a
given period could be material to the results of operations or cash flows for
that period.
Existing environmental liabilities associated with the Company's continuing
operations are not material.
F-24
17. Segment Reporting
Selected financial information related to the Company's business segments
is shown below (in millions):
Sales Operating Income
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Domestic $1,951.4 $1,534.0 $1,445.3 $ 228.3 $ 221.0 $ 148.9
International 186.8 83.5 93.5 (46.8) (17.2) (18.7)
-------- -------- -------- -------- -------- --------
Total $2,138.2 $1,617.5 $1,538.8 181.5 203.8 130.2
======== ======== ========
Interest expense, net (63.9) (36.1) (42.3)
Other expense, net ` (46.0) (15.5) (18.0)
-------- -------- --------
Pretax income $ 71.6 $ 152.2 $ 69.9
======== ======== ========
Capital Depreciation
Investments and Amortization
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Domestic $ 145.9 $ 132.8 $ 71.6 $ 99.3 $ 68.3 $ 65.5
International 19.5 26.3 11.8 24.9 7.0 5.9
-------- -------- -------- -------- -------- --------
Total operating 165.4 159.1 83.4 124.2 75.3 71.4
Non-operating -- -- -- 2.4 2.4 ` 2.4
-------- -------- -------- -------- ------- --------
Total $ 165.4 $ 159.1 $ 83.4 $ 126.6 $ 77.7 $ 73.8
======== ======== ======== ======== ======== ========
Assets Long-Lived Assets
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Domestic $2,419.7 $1,182.0 $2,016.5 $ 894.5
International 268.9 142.3 201.7 66.4
-------- -------- -------- --------
Total operating 2,688.6 1,324.3 2,218.2 960.9
Non-operating 175.7 245.0 77.7 145.4
-------- -------- -------- --------
Total $2,864.3 $1,569.3 $2,295.9 $1,106.3
======== ======== ======== ========
Operating income is exclusive of net interest expense, other miscellaneous
income and expense items, and income taxes. In 1999, the Company recorded
special charges of $27.9 million (see Note 5 - "Special Charges"). These charges
reduced the reported operating income for domestic and international operations
by $7.3 million and $20.6 million, respectively, in 1999. During the third and
fourth quarters of 1997, the Company recorded special charges of $49.3 million
(see Note 5 - "Special Charges"). These charges reduced the reported operating
income for domestic and international operations by $45.6 million and $3.7
million, respectively, in 1997. Foreign currency losses were $1.7 million in
1998, including $1.4 million associated with the Russia operations, which were
sold in March, 1999. Such losses are included in other expense, net. Foreign
currency gains or losses in 1999 and 1997 were not significant. There were no
sales between geographical areas or export sales. Sales to any single customer
and sales to domestic or non-U.S. governments were individually less than ten
percent of consolidated sales.
Non-operating assets are principally cash and equivalents, investments,
property and miscellaneous other assets, including $30.4 million, $91.6 million
and $92.1 million of real estate investments as of fiscal year end 1999, 1998
and 1997, respectively. Long-lived assets represent net property, investments
and net intangible assets.
F-25
18. Transactions with PepsiCo
Pepsi General is a licensed producer and distributor of PepsiCo carbonated
soft drinks and other non-alcoholic beverages. Pepsi General purchases
concentrate from PepsiCo to be used in the production of these carbonated soft
drinks and other non-alcoholic beverages.
PepsiCo and Pepsi General share a business objective of increasing
availability and consumption of PepsiCo's brands. Accordingly, PepsiCo provides
Pepsi General with various forms of marketing support to promote PepsiCo's
brands. This support covers a variety of initiatives, including market place
support, marketing programs, marketing equipment and related program support and
shared media expense. PepsiCo and Pepsi General each record their share of the
cost of marketing programs in their financial statements. Based on the
objectives of the programs and initiatives, domestic marketing support is
recorded as an adjustment to net sales or as a reduction of selling, general and
administrative expenses. There are no conditions or requirements which could
result in the repayment of any support payments received by Pepsi General.
Pepsi General manufactures and distributes fountain products and provides
fountain equipment service to PepsiCo customers in certain territories in
accordance with various agreements. There are other products which Pepsi General
produces and/or distributes through various arrangements with PepsiCo or
partners of PepsiCo. Pepsi General purchases concentrate from the Lipton Tea
Partnership and finished goods from the North American Coffee Partnership. Pepsi
General pays a royalty fee to PepsiCo for the use of the Aquafina trademark.
The Consolidated Statements of Income include the following income and
(expense) transactions with PepsiCo:
1999 1998 1997
----------- ------------ ------------
Net sales $ 39.8 $ 33.7 $ 35.2
Cost of goods sold (384.8) (288.3) (266.9)
Selling, general and administrative expenses 43.9 41.3 23.1
F-26
19. Selected Quarterly Financial Data
(unaudited and in millions, except for earnings per share)
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
---------- --------- --------- --------- ---------
1999:
- ----
Sales $ 370.3 $ 505.2 $ 680.5 $ 582.2 $ 2,138.2
---------- --------- --------- --------- ---------
Gross profit $ 150.6 $ 207.1 $ 288.5 $ 243.3 $ 889.5
---------- --------- --------- --------- ---------
Income (loss) from continuing operations $ 14.3 $ (10.3) $ 24.4 $ 14.5 $ 42.9
Loss from discontinued operations -- (27.2) -- (24.5) (51.7)
---------- --------- --------- --------- ---------
Net income (loss) $ 14.3 $ (37.5) $ 24.4 $ (10.0) $ (8.8)
========== ========= ========= ========= =========
Weighted average common shares:
Basic 96.1 114.9 141.7 140.5 123.3
Incremental effect of stock options 1.5 -- 0.9 0.5 0.9
---------- --------- --------- --------- ---------
Diluted 97.6 114.9 142.6 141.0 124.2
========== ========= ========= ========= =========
Income (loss) per share - basic:
Continuing operations $ 0.15 $ (0.09) $ 0.17 $ 0.10 $ 0.35
Discontinued operations -- (0.24) -- (0.17) (0.42)
---------- --------- --------- --------- ---------
Net income (loss) $ 0.15 $ (0.33) $ 0.17 $ (0.07) $ (0.07)
========== ========= ========= ========= =========
Income (loss) per share - diluted:
Continuing operations $ 0.15 $ (0.09) $ 0.17 $ 0.10 $ 0.35
Discontinued operations -- (0.24) -- (0.17) (0.42)
---------- --------- --------- --------- ---------
Net income (loss) $ 0.15 $ (0.33) $ 0.17 $ (0.07) $ (0.07)
========== ========= ========= ========= =========
1998:
- -----
Sales $ 346.2 $ 407.3 $ 470.8 $ 393.2 $ 1,617.5
---------- --------- --------- --------- ---------
Gross profit $ 139.9 $ 165.0 $ 186.9 $ 157.2 $ 649.0
---------- --------- --------- --------- ---------
Income from continuing operations $ 8.1 $ 16.4 $ 26.2 $ 11.8 $ 62.5
Loss from discontinued operations (0.5) -- -- -- (0.5)
Extraordinary loss on early extinguishment of debt (18.3) -- -- -- (18.3)
---------- --------- --------- --------- ---------
Net income (loss) $ (10.7) $ 16.4 $ 26.2 $ 11.8 $ 43.7
========== ========= ========= ========= =========
Weighted average common shares:
Basic 101.0 101.4 101.2 100.9 101.1
Incremental effect of stock options 1.7 1.8 1.5 1.7 1.8
---------- --------- --------- --------- ---------
Diluted 102.7 103.2 102.7 102.6 102.9
========== ========= ========= ========= =========
Income (loss) per share - basic:
Continuing operations $ 0.08 $ 0.16 $ 0.26 $ 0.12 $ 0.62
Discontinued operations (0.01) -- -- -- (0.01)
Extraordinary loss on early extinguishment of debt (0.18) -- -- -- (0.18)
---------- --------- --------- --------- ---------
Net income (loss) $ (0.11) $ 0.16 $ 0.26 $ 0.12 $ 0.43
========== ========= ========= ========= =========
Income (loss) per share - diluted:
Continuing operations $ 0.08 $ 0.16 $ 0.26 $ 0.12 $ 0.61
Discontinued operations -- -- -- -- (0.01)
Extraordinary loss on early extinguishment of debt (0.18) -- -- -- (0.18)
---------- --------- --------- --------- ---------
Net income (loss) $ (0.10) $ 0.16 $ 0.26 $ 0.12 $ 0.42
========== ========= ========= ========= =========
The sum of earnings per share for the quarters may not equal the fiscal
year amount due to rounding or to changes in the average shares outstanding
during the period.
Due to the loss from continuing operations in the second quarter of 1999,
no potential common shares were included in the computation of average diluted
shares. The effect of potential common shares, assuming they were not
anti-dilutive, would have resulted in 115.8 million average diluted shares.
Certain amounts have been reclassified to conform to the current
presentation.
F-27
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------- ----------------------
(3)a# Certificate of Incorporation as Amended and Restated on May 20, 1999.
(3)b# By-Laws, as Amended and Restated on May 20, 1999.
(4)# First Supplemental Indenture dated as of May 20, 1999, between Whitman
Corporation and The First National Bank of Chicago, Trustee, to the
Indenture dated as of January 15, 1993.
(10)a# **Revised Stock Incentive Plan, as Adopted May 20, 1999.
(10)b# **Form of Nonqualified Stock Option Agreement as Amended May 20, 1999.
(10)c# **Form of Change in Control Agreement dated May 21, 1999.
(10)d# **Deferred Compensation Plan for Directors, as Adopted May 20, 1999.
(10)e# **1982 Stock Option, Restricted Stock Award and Performance Award Plan
(as amended through June 16, 1989).
(10)f# **Amendment No. 2 to 1982 Stock Option, Restricted Stock Award and
Performance Award Plan made as of September 1, 1992.
(10)g# **Form of Nonqualified Stock Option Agreement.
(10)h# **Amendment to 1982 Stock Option, Restricted Stock Award and
Performance Award Plan made as of February 19, 1993.
(10)i# **Management Incentive Compensation Plan.
(10)j# **Long Term Performance Compensation Program.
(10)k# **Whitman Corporation Executive Retirement Plan, as Amended and
Restated Effective January 1, 1998.
(10)l# **Pepsi-Cola General Bottlers, Inc. Executive Retirement Plan, as
Amended and Restated Effective January 1, 1998.
(10)m **Employment Extension Agreement dated as of January 1, 2000 between
the Registrant and Bruce S. Chelberg.
(10)n **Employment Extension Agreement dated as of January 1, 2000 between
the Registrant and Lawrence J. Pilon.
(10)o **Employment Extension Agreement dated as of January 1, 2000 between
the Registrant and Charles H. Connolly.
(10)p## **Whitman Corporation Master Retirement Savings Plan.
(12) Statement of Calculation of Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Auditors.
(24) Powers of Attorney.
(27) Financial Data Schedule.
Exhibit Reference Explanations
** Exhibit constitutes a management contract or compensatory plan,
contract or arrangement described under Item 601(b) (10) (iii) (A) of
Regulation S-K.
# Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999 under the indicated Exhibit
number.
## Incorporated by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-8 filed with the Commission on May 21,
1999.
i