Prior to the Spin-off, our operations were financed through operating cash flows, proceeds from refranchising activities and investment by and advances from PepsiCo. At the Spin-off date, we borrowed $4.55 billion under a bank credit agreement to replace the financing previously provided by PepsiCo and, additionally, to fund a dividend to PepsiCo. See Notes 2 and 9 to the Consolidated Financial Statements. For periods prior to the Spin-off, our interest expense included PepsiCo's allocation of its interest expense (PepsiCos weighted average interest rate applied to the average balance of investments by and advances from PepsiCo) and interest on our external debt, including capital leases. We believe such allocated interest expense is not indicative of the interest expense that we would have incurred as an independent, publicly owned company or will incur in future periods. Subsequent to the Spin-off date, our interest costs consist primarily of interest expense related to our bank credit agreement, Unsecured Notes and other external debt. Most of the other external debt existed at the Spin-off date.
Our net interest expense decreased approximately $4 million in 1998. The decline was due to an increase in interest income, partially offset by a slight increase in interest expense. The increase in interest income was driven by higher average international investment balances. The slight increase in interest expense was primarily due to higher average outstanding debt balances.
Interest expense decreased in 1997 primarily
due to the lower outstanding amount of PepsiCo-provided financing. This impact was
partially offset by the higher interest rate on our bank credit agreement, as compared to
the PepsiCo rate used in the allocation process, and also higher outstanding debt levels.
For periods prior to the Spin-off in 1997, income tax expense was calculated, to the extent possible, as if we filed income tax returns separate from PepsiCo. As PepsiCo managed its tax position on a consolidated basis, which takes into account the results of all its businesses, our effective tax rate in the future could vary significantly from historical effective tax rates calculated for periods prior to the Spin-off.
The following reconciles the U.S. Federal statutory tax rate to our ongoing effective rate:
The 1998 ongoing effective tax rate decreased 3.8 points to 42.1%. The decrease in the 1998 ongoing effective tax rate was primarily due to favorable adjustments related to prior years.
The 1997 ongoing effective tax rate decreased 11.6 points to 45.9%. The decrease in the 1997 ongoing effective tax rate was primarily due to the decrease in taxes attributable to foreign operations, partially offset by an increase in state taxes. The foreign decrease was due to the absence of the adjustment recorded in 1996 to establish a valuation allowance. The increase in state tax was primarily due to an increase in the provision related to prior tax years.
The effective tax rate attributable to foreign operations varied from year-to-year but in each year was higher than the U.S. Federal statutory tax rate. This was primarily due to foreign tax rate differentials, including foreign withholding tax paid without benefit the related foreign tax credit for U.S. income tax purposes and losses of foreign operations for which no tax benefit could currently be recognized.