No. 1-13163
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
FORM 10/A
GENERAL FORM FOR
REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
TRICON GLOBAL RESTAURANTS, INC.
Incorporated in North Carolina
1441 Gardiner Lane
Louisville, Kentucky 40213
(502) 456-8300
(Address of Principal Executive Offices)
13-3951308
(I.R.S. Employer Identification No.)
-------------------------
Securities to be registered pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
Common Stock, New York Stock Exchange
(without par value)
Securities to be registered pursuant to Section 12(g) of the Act: None
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<PAGE> i
EXPLANATORY NOTE
This amended Form 10 Registration Statement has been prepared on a
prospective basis on the assumption that, among other things, the Distribution
(as hereinafter defined) and the related transactions contemplated to occur
prior to or contemporaneously with the Distribution will be consummated as
contemplated by the Information Statement which is a part of this amended
Registration Statement. There can be no assurance, however, that any or all of
such transactions will occur or will occur as so contemplated. Any significant
modifications or variations in the transactions contemplated will be reflected
in a further amendment or supplement to this amended Registration Statement.
<PAGE> ii
CROSS REFERENCE
TRICON GLOBAL RESTAURANTS, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
Item 1. Business.
The information required by this item is contained under the sections
entitled "Introduction," "Business of TRICON," "Selected Combined Financial
Data," "Management's Discussion and Analysis," "Combined Financial Statements"
and "Condensed Combined Financial Statements" in the Information Statement dated
_____ __, 1997 attached hereto as Annex A (the "Information Statement") and such
sections are incorporated herein by reference.
Item 2. Financial Information.
The information required by this item is contained under the sections
entitled "Selected Combined Financial Data" and "Management's Discussion and
Analysis" in the Information Statement and such sections are incorporated herein
by reference.
Item 3. Properties.
The information required by this item is contained under the section
entitled "Business of TRICON - Other" in the Information Statement and such
section is incorporated herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained under the sections
entitled "Management of TRICON - Board Compensation and Benefits," "Management
of TRICON - Stock Ownership of Executive Officers and Directors," and "New
Stock-Based and Incentive Plans of TRICON" in the Information Statement and such
sections are incorporated herein by reference.
Item 5. Directors and Executive Officers.
The information required by this item is contained under the sections
entitled "Management of TRICON - Directors" and "Management of TRICON -
Executive Officers" in the Information Statement and such sections are
incorporated herein by reference.
<PAGE> iii
Item 6. Executive Compensation.
The information required by this item is contained under the sections
entitled "Management of TRICON - Board Compensation and Benefits," "Executive
Compensation" and "New Stock-Based and Incentive Plans of TRICON" in the
Information Statement and such sections are incorporated herein by reference.
Item 7. Certain Relationships and Related Transactions.
The information required by this item is contained under the sections
entitled "The Distribution - Results of the Distribution," and "The Distribution
- - Relationship between PepsiCo and TRICON after the Distribution" in the
Information Statement and such sections are incorporated herein by reference.
Item 8. Legal Proceedings.
The information required by this item is contained under the section
entitled "Business of TRICON - Other" in the Information Statement and such
section is incorporated herein by reference.
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters.
The information required by this item is contained under the sections
entitled "Management of TRICON - Stock Ownership of Executive Officers and
Directors," and "Description of TRICON Capital Stock" in the Information
Statement and such sections are incorporated herein by reference.
Item 10. Recent Sales of Unregistered Securities.
On May 30, 1997, as part of its original incorporation, TRICON issued
100 shares of its Common Stock, for a total consideration of $5.00, to PepsiCo,
which is and will be TRICON's sole shareholder until the Distribution has been
completed as of the Distribution Date as defined and described in the section
"The Distribution" of the Information Statement, which section is incorporated
herein by reference. Subsequent to the Distribution, PepsiCo will hold no equity
interest in TRICON. However, immediately after the Distribution Date, TRICON
shares will be owned by PepsiCo's pension trust on behalf of PepsiCo's
employees.
Item 11. Description of Registrant's Securities to be Registered.
The information required by this item is contained under the section
entitled "Description of TRICON Capital Stock" in the Information Statement and
such section is incorporated herein by reference. Reference is also made to the
Restated Articles of Incorporation and Bylaws of TRICON Global Restaurants, Inc.
which are set forth as Exhibits 3.01 and 3.02 hereto.
Item 12. Indemnification of Directors and Officers.
The information required by this item is contained under the section
entitled "Indemnification of Directors" in the Information Statement and such
section is incorporated herein by reference.
<PAGE> iv
Item 13. Financial Statements and other Supplementary Data.
The information required by this item is contained under the sections
entitled "Combined Financial Statements," "Condensed Combined Financial
Statements" and "Pro Forma Condensed Combined Financial Statements" on pages F-1
through F-34 of the Information Statement and such sections are incorporated
herein by reference.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements.
The information required by this item is contained in the "Index to
Financial Statements" on Page F-1 of the Information Statement and such
information is incorporated herein by reference.
(b) Exhibits.
The following documents are filed as exhibits hereto:
Exhibit
No. Description Page No.
2.01* Form of Separation Agreement .....................................
3.01* Restated Articles of Incorporation ...............................
3.02* Bylaws ...........................................................
10.01 Form of Tax Separation Agreement .................................
10.02* Form of Employee Programs Agreement ..............................
10.03* Form of Telecommunications, Software and Computing
Services Agreement................................................
10.04* Employment Agreement between TRICON Global Restaurants, Inc. and
Andrall E. Pearson................................................
10.05* Sales and Distribution Agreement between PFS,
Pizza Hut, Taco Bell and KFC......................................
21.01* Active Subsidiaries of TRICON as of October 6, 1997...............
27.01* Financial Data Schedule For Year-End 1996.........................
27.02* Financial Data Schedule For Second Quarter 1997...................
* Previously filed.
<PAGE> v
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRICON GLOBAL RESTAURANTS, INC.
August 27, 1997 By ANDRALL E. PEARSON
----------------------------
Andrall E. Pearson
Chairman of the Board
<PAGE>
Dear PepsiCo Shareholder:
Great news! As you may know, in January we announced our intent to spin off our
restaurant business to shareholders as an independent public company. Under a
plan approved by our Board of Directors, you will become owner of one share of
that new restaurant company, TRICON Global Restaurants, Inc., for every 10
shares of PepsiCo you own on September 19, 1997. The spin off will not change
the number of PepsiCo shares you hold.
The reason for the spin off is focus. Today we operate in an environment far
more competitive than even a few years ago. And the best performing companies
are those that devote all their energy to what they do best.
So we concluded that separating restaurants (KFC, Pizza Hut and Taco Bell) from
packaged goods (Pepsi-Cola and Frito-Lay) would better enable both of these
excellent businesses to grow and prosper.
At the end of the day on October 6 TRICON Global Restaurants, Inc. - comprising
KFC, Pizza Hut and Taco Bell - will become a separate company. It will be the
world's second-largest restaurant company in sales, with three powerful brands,
and the largest restaurant system in units on Earth. The "new" PepsiCo will be a
$20 billion packaged goods powerhouse focused on the vast global growth
opportunity of Pepsi-Cola and Frito-Lay.
This Information Statement contains details on TRICON and the spin off. However
if you have questions, please feel free to call BankBoston, our transfer agent,
at (800) 226-0083.
Best Regards,
(Roger Enrico)
<PAGE>
Dear Shareholder:
We'd like to welcome you as a "founder" of TRICON Global Restaurants, Inc., our
new restaurant company that will become publicly-owned as of October 6. You'll
become an owner of one share of TRICON common stock for every 10 shares of
PepsiCo stock you own on September 19, 1997. TRICON's common stock will be
traded under the ticker "YUM" on the New York Stock Exchange.
While our public ownership is new, our company is not. With over 29,000 KFC,
Pizza Hut and Taco Bell restaurants around the globe, we'll be the world's
largest restaurant system in terms of units. We'll have over $10 billion in
revenue, $20 billion in systemwide sales and more than 500,000 restaurant
professionals serving billions of customers worldwide.
This is a very exciting time in our history. We're about to chart a new course
in our journey to become the defining restaurant company...one that delights our
customers, honors our employees and rewards our shareholders. Our three
restaurant concepts are the dominant industry leaders in chicken, pizza and
Mexican-style food. There are tremendous domestic and international growth
opportunities for our brands at breakfast, lunch, dinner and snack occasions. We
also hope to leverage our scale to improve efficiencies and maximize returns.
As shareholders of TRICON, we will all become founders of this new company. Our
vision is to put a "YUM" on people's faces around the world...by creating a
special eating experience that causes our customers to smile and earns their
lifelong loyalty. We hope to do that with "food they crave," "comeback value"
and "customer focused teams." We believe that no restaurant competitor is in a
better position to deliver on that promise than we are, and we're committed to
making it happen.
Congratulations again on becoming one of the founders of TRICON!
Best regards,
Andrall E. Pearson David C. Novak
Chairman and CEO Vice-Chairman and President
<PAGE>
ANNEX A
SUBJECT TO COMPLETION DATED AUGUST 27, 1997
INFORMATION STATEMENT
TRICON GLOBAL RESTAURANTS, INC.
Common Stock
(without par value)
This Information Statement is being furnished by PepsiCo, Inc.
("PepsiCo") in connection with the distribution (the "Distribution") to holders
of record of PepsiCo Capital Stock at the close of business on September 19,
1997 of one share of common stock, without par value (the "Common Stock"), of
TRICON Global Restaurants, Inc. ("TRICON" or the "Company"), for every ten
shares of PepsiCo Capital Stock held of record as of that date. Fractional
shares, other than those held by participants in certain PepsiCo plans, will be
aggregated into whole shares of TRICON Common Stock and sold on the open market
by the Distribution Agent (as hereinafter defined), with the proceeds thereof
distributed to holders who would otherwise be entitled to receive such
fractional shares. See "The Distribution - Manner of Effecting the
Distribution."
The Company is a wholly-owned subsidiary of PepsiCo. As a result of
transactions entered into in connection with the Distribution, as of 11:59:59
E.D.T. on October 6, 1997 (the "Distribution Date"), TRICON will own
substantially all of the businesses and assets of, and will be responsible for
substantially all of the liabilities associated with, PepsiCo's core restaurant
businesses.
The Distribution will be effective on the Distribution Date. No
consideration will be paid by PepsiCo's shareholders for shares of TRICON Common
Stock. There is no current public market for the TRICON Common Stock, although
it is expected that a "when issued" trading market will develop prior to the
Record Date (as hereinafter defined). Application has been made to list the
TRICON Common Stock on the New York Stock Exchange (the "NYSE").
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THIS
DISTRIBUTION. NO PROXIES ARE BEING SOLICITED, AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMIS-
SION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS INFORMATION
STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is _____, 1997.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Summary...............................................................................4
Introduction..........................................................................9
Business of TRICON...................................................................10
Concepts..........................................................................10
Operating Structure...............................................................12
Human Resources and Management....................................................13
Industry Overview.................................................................14
Competitive Advantages............................................................19
Other.............................................................................22
Selected Combined Financial Data....................................................24
Financing............................................................................30
Commercial Paper Program..........................................................30
Bank Credit Facilities............................................................30
Long-Term Debt....................................................................30
Derivative Instruments............................................................31
The Distribution.....................................................................31
Reasons for the Distribution......................................................31
Manner of Effecting the Distribution..............................................31
Results of the Distribution.......................................................32
Relationship between PepsiCo and TRICON after the Distribution....................32
Certain U.S. Federal Income Tax Consequences of the Distribution..................34
Management of TRICON.................................................................35
Directors.........................................................................35
Board Compensation and Benefits...................................................38
Committees of the Board...........................................................38
Executive Officers................................................................39
Senior Operating Management.......................................................40
Stock Ownership of Executive Officers and Directors...............................41
Executive Compensation...............................................................42
Summary Compensation Table........................................................42
PepsiCo Option Grants in Last Fiscal Year.........................................43
Aggregated PepsiCo Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values.............................................44
Pension Plan Table................................................................44
Employment Agreement..............................................................45
New Stock-Based and Incentive Plans of TRICON........................................45
TRICON Long-Term Incentive Plan...................................................45
TRICON Executive Incentive Compensation Plan......................................46
Successor Plans...................................................................46
PepsiCo Stock Option and Performance Share Conversion................................47
Description of TRICON Capital Stock..................................................48
TRICON Common Stock...............................................................49
TRICON Preferred Stock............................................................49
<PAGE> 3
Dividends.........................................................................49
Transfer Agent and Registrar......................................................49
Listing and Trading of TRICON Common Stock........................................49
North Carolina Law - Share Acquisitions..............................................50
Indemnification of Directors.........................................................50
1998 Annual Meeting and Shareholder Proposals........................................51
Available Information................................................................52
Management's Discussion and Analysis.................................................52
Glossary.............................................................................70
Index to Defined Terms...............................................................71
Index to Financial Statements.......................................................F-1
</TABLE>
<PAGE> 4
INFORMATION STATEMENT
This Information Statement is being furnished solely to provide information
to shareholders of PepsiCo who will receive shares of TRICON Common Stock in the
Distribution. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of PepsiCo or TRICON. The
information contained in this Information Statement is believed to be accurate
as of the date set forth on its cover. Changes may occur after that date, and
neither PepsiCo nor TRICON will update the information except in the normal
course of their respective public disclosures.
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SUMMARY
This summary is qualified by the more detailed information set forth
elsewhere in this Information Statement, which should be read in its entirety.
Unless the context otherwise requires, (i) references in this Information
Statement to PepsiCo shall include PepsiCo's subsidiaries, (ii) references to
TRICON or the Company shall include TRICON's subsidiaries, and (iii) references
to TRICON or the Company prior to the Distribution Date shall refer to the core
restaurant businesses, KFC, Pizza Hut and Taco Bell, as operated by PepsiCo.
<TABLE>
<CAPTION>
THE DISTRIBUTION
<S> <C>
Distributing Company............................. PepsiCo, Inc.
TRICON Global Restaurants, Inc................... TRICON Global Restaurants, Inc., a North Carolina
corporation, is the world's largest quick service
restaurant business in terms of the number of
units, with more than 29,000 KFC, Pizza Hut and
Taco Bell system units generating over $20 billion
in annual worldwide system sales.
Distribution Ratio............................... One share of TRICON Common Stock for every ten
shares of PepsiCo Capital Stock. Fractional shares,
other than those held by participants in certain
PepsiCo plans, will be aggregated into whole shares
of TRICON Common Stock and sold on the open market
by the Distribution Agent, with the proceeds
thereof distributed to holders who would otherwise
be entitled to receive such fractional shares. See
"The Distribution - Manner of Effecting the
Distribution." No payment need be made by PepsiCo
shareholders for the shares of TRICON Common Stock
to be received by them, nor will they be required
to surrender or exchange
<PAGE> 5
PepsiCo Capital Stock in order to receive TRICON
Common Stock.
Shares to be Distributed......................... Approximately 152 million shares of TRICON Common
Stock, based on the number of shares of PepsiCo Capital
Stock outstanding as of July 11, 1997. PepsiCo will
retain no ownership in TRICON. However, immediately
after the Distribution Date, TRICON shares will be owned
by PepsiCo's pension trust on behalf of PepsiCo's
employees.
Conditions to the Distribution................... The Distribution is subject to a number of
conditions, including (i) a favorable ruling of the
Internal Revenue Service concerning the tax-free
nature of the Distribution, (ii) appropriate stock
market conditions for the Distribution, (iii)
various regulatory approvals, and (iv) approval by
PepsiCo's Board of Directors of the final terms of
the Distribution, including, without limitation,
the formal declaration of a dividend to PepsiCo's
shareholders and other specific actions necessary
to the Distribution. The conditions in clauses (i),
(ii) and (iv) above have been satisfied. The only
significant pending regulatory approval is the Commission's
declaration of the effectiveness of the Form 10, and
the PepsiCo Board of Directors does not intend to waive
this condition. The PepsiCo Board of Directors may amend,
modify or abandon the Distribution at any time prior to
the Distribution Date.
Trading Market and Symbol........................ There is currently no public market for the TRICON
Common Stock. Application has been made to
list the TRICON Common Stock on the NYSE under
the symbol "YUM". It is presently anticipated that
the TRICON Common Stock will be approved for
listing on the NYSE prior to the Distribution Date,
and trading is expected to commence on a
"when issued" basis prior to the Record Date.
Record Date...................................... September 19, 1997.
Distribution Agent............................... BankBoston, N.A.
<PAGE> 6
Distribution Date................................ October 6, 1997. PepsiCo will transfer shares of
TRICON to the Distribution Agent for the benefit of
the record holders of PepsiCo Capital Stock at the
close of business on the Record Date. TRICON
will participate in the Direct Registration System
to effect the Distribution, and shares of TRICON
Common Stock will be distributed to PepsiCo share-
holders in book-entry form. Commencing on or about
the Distribution Date, the Distribution Agent will
begin mailing account statements reflecting ownership
of shares of TRICON Common Stock to such holders of
record of PepsiCo Capital Stock. See "The Distribution-
Manner of Effecting the Distribution."
Tax Consequences................................. PepsiCo received a ruling from the Internal
Revenue Service to the effect that the Distribution
will be tax free to PepsiCo and its shareholders
for U.S. Federal income tax purposes. See "The
Distribution - Certain U.S. Federal Income
Tax Consequences of the Distribution" for a more
detailed description of the Federal income tax
consequences of the Distribution.
Reasons for the Distribution..................... PepsiCo's management and Board of Directors have
concluded that the Distribution is in the best
interests of PepsiCo and its shareholders. They
believe that the Distribution will (i) help to
alleviate competitive barriers to expanding
PepsiCo's fountain beverage business, (ii) allow
PepsiCo to focus its attention on its packaged
goods businesses, Pepsi-Cola and Frito-Lay, by
creating a separate company focused on PepsiCo's
core restaurant businesses, and (iii) permit
PepsiCo and TRICON to offer management incentives
more directly tied to the performance of their
respective businesses. PepsiCo management also believes
that a separate restaurant company with strategies,
organizational goals and employee incentives more
narrowly focused will be best able to maximize its
financial performance.
<PAGE> 7
Relationship between PepsiCo and
TRICON after the Distribution.................... After the Distribution, PepsiCo will have no
ownership interest in TRICON, and TRICON will be
an independent publicly-owned company. However,
immediately after the Distribution Date, TRICON shares
will be owned by PepsiCo's pension trust on behalf of
PepsiCo's employees. PepsiCo and TRICON have entered,
and will enter, into certain agreements governing their
relationship subsequent to the Distribution.
The agreements provide for each party to make
certain services, records and personnel available
to the other. They also provide for
allocation of assets, liabilities and
responsibilities between them with respect to
employee benefits and compensation and for
allocation of tax and certain other liabilities
between them for periods prior to and after the
Distribution.
TRICON Dividend Policy........................... The payment and level of cash dividends by TRICON
after the Distribution will be subject to the
discretion of the TRICON Board of Directors.
Dividend decisions will be based on a number of
factors including TRICON's operating results and
financial requirements on a stand-alone basis
as well as credit agreement and legal restrictions
relating thereto. See "Description of TRICON Capital
Stock - Dividends."
Principal Office of TRICON...................... 1441 Gardiner Lane
Louisville, KY 40213
(502) 456 - 8300
</TABLE>
SHAREHOLDERS WITH QUESTIONS MAY CALL:
For questions relating to the Distribution and delivery of TRICON stock
certificates, call BankBoston, N.A. at:
(800) 226-0083
For other questions, call PepsiCo's Manager, Shareholder Relations at:
(914) 253-3055
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<PAGE> 8
NO PERSON IS AUTHORIZED BY PEPSICO OR TRICON TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED.
<PAGE> 9
INTRODUCTION
TRICON Global Restaurants, Inc., a North Carolina corporation originally
organized in May 1997, is currently a wholly-owned subsidiary of PepsiCo, Inc.
The management and Board of Directors of PepsiCo, after careful review and
analysis, have concluded that the Distribution is in the best interests of
PepsiCo and its shareholders. They believe that the Distribution will (i) help
to alleviate competitive barriers to expanding PepsiCo's fountain beverage
business, (ii) allow PepsiCo to focus its attention on its packaged goods
businesses, Pepsi-Cola and Frito-Lay, by creating a separate company focused on
PepsiCo's core restaurant businesses, and (iii) permit PepsiCo and TRICON to
offer management incentives more directly tied to the performance of their
respective businesses. PepsiCo management also believes that a separate
restaurant company with strategies, organizational goals and employee incentives
more narrowly focused will be best able to maximize its financial performance.
To effect the Distribution, PepsiCo will distribute all the outstanding Common
Stock of TRICON to PepsiCo shareholders.
Merrill Lynch & Co. ("Merrill Lynch") has served as financial advisor to
PepsiCo's management in connection with the Distribution. Merrill Lynch will
receive customary fees including expenses for its services as financial advisor.
PepsiCo has also agreed to indemnify Merrill Lynch against certain liabilities
and expenses in connection with its services as financial advisor. In addition,
Merrill Lynch and its affiliates have acted, and may in the future act, as an
underwriter for, and have participated as members of underwriting syndicates
with respect to, offerings of PepsiCo securities, and Merrill Lynch has effected
securities transactions for Pepsico and performed financial advisory services in
connection with certain acquisitions and dispositions by PepsiCo. Merrill Lynch
has received fees from PepsiCo in the past for these services. Merrill Lynch may
in the future serve as an underwriter of TRICON securities.
Upon completion of the Distribution, TRICON will be the world's
largest quick service restaurant ("QSR") company based on units, with more than
29,000 units in 95 countries and territories. TRICON will use three of the most
recognized restaurant concepts, Pizza Hut, Taco Bell and KFC, to sell its
products through a system of both Company-operated and franchised units. In
1996, TRICON's worldwide system sales exceeded $20 billion. As one of only two
major global players, TRICON will have the advantage of significant scale in
activities ranging from purchasing to technology. In addition, the Company has a
solid track record of operating innovation, strong cash generation capabilities
and clear areas of growth potential.
TRICON's business, including background on the concepts, its operating
systems, management and its strategy for managing the refranchising of the store
portfolio, is described below, followed by a discussion of the industry and how
TRICON fits into the industry today, and then by a discussion of the competitive
advantages available to TRICON. See "Business of TRICON."
From time to time, in both written and oral statements, TRICON and
PepsiCo may discuss expectations regarding TRICON's future performance. These
"forward-looking statements" are based on currently available competitive,
financial and economic data and TRICON's operating plans. They are also
inherently uncertain and
<PAGE> 10
investors must recognize that actual results could turn out to be significantly
different than what was expected. Among the many factors that can cause actual
results to differ are economic and political conditions in the countries and
territories where TRICON operates, the impact of such conditions on consumer
spending, pricing pressures resulting from competitive discounting, new product
and concept development by other food industry competitors, and fluctuations in
commodity prices.
BUSINESS OF TRICON
Concepts
The TRICON organization is currently made up of four operating
divisions organized around its three core concepts, KFC, Pizza Hut and Taco
Bell. KFC is based in Louisville, Kentucky; Pizza Hut and TRICON Restaurants
International ("TRICON International") are headquartered in Dallas, Texas; and
Taco Bell is based in Irvine, California.
Each of TRICON's four operating divisions is engaged in the operation,
development, franchising and licensing of a system of both traditional and
non-traditional QSR units. Non-traditional units include express units and
kiosks which have a more limited menu and operate in non-traditional locations
like airports, gas and convenience stores, stadiums, amusement parks and
colleges, where a full-scale traditional outlet would not be practical or
efficient. In addition, there are approximately 367 units housing more than one
concept ("2n1s"). Of these, approximately 354 units offer both the full KFC menu
and a limited menu of Taco Bell products, and approximately 13 units offer both
the full KFC menu and a limited menu of Pizza Hut products.
In each concept, consumers can either dine in or carry out food. In
addition, Taco Bell and KFC offer a drive-through option in many stores. Pizza
Hut and, on a much more limited basis, KFC offer delivery service.
Each concept has proprietary menu items and emphasizes the preparation
of food with high quality ingredients as well as unique recipes and special
seasonings to provide appealing, tasty and attractive food at competitive
prices.
KFC
KFC operates in 74 countries and territories throughout the world under
the name "Kentucky Fried Chicken" and/or "KFC." It was founded in Corbin,
Kentucky by Colonel Harland D. Sanders, an early developer of the quick service
food business and a pioneer of the restaurant franchise concept. The Colonel
perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in
1939 and signed up his first franchisee in 1952. By the time KFC was acquired by
PepsiCo in 1986, it had grown to approximately 6,600 units in 55 countries and
territories.
KFC restaurants offer fried chicken products and some also offer
non-fried chicken-on-the-bone products, with the principal entree items sold in
pieces under the names Original Recipe, Extra Tasty Crispy and Tender Roast.
Other principal entree items include Chunky Chicken Pot Pies, Colonel's Crispy
Strips, and various chicken
<PAGE> 11
sandwiches. KFC restaurants also offer a variety of side items, such as
biscuits, mashed potatoes and gravy, cole slaw and corn, as well as desserts and
non-alcoholic beverages. Their decor is characterized by the image of the
Colonel and distinctive packaging includes the "Bucket" of chicken.
In 1996, KFC's worldwide system sales of over $8 billion grew faster
than the industry average even though the number of restaurants in its global
system did not materially increase. This growth was largely due to the impact of
new products as shown by the fact that same store sales in Company-operated
stores in the U.S. increased 6%. In 1995, same store sales for Company-operated
stores in the U.S. were also strong, increasing 7%. For the first half of 1997,
KFC same store sales growth for Company-operated units in the U.S. was
consistently positive resulting in a 4% growth rate for the 24 week period.
Average U.S. system-wide sales per traditional unit in 1996 were $775,000.
Pizza Hut
Pizza Hut operates in 84 countries and territories throughout the world
under the name "Pizza Hut" and features a variety of pizzas with different
toppings as well as pasta, salads, sandwiches and other food items and
beverages. The distinctive decor features a bright red roof.
The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas,
and within a year, the first franchise unit was opened. By 1977, when Pizza Hut
was acquired by PepsiCo, its U.S. restaurant system had grown to nearly 3,200
units. Today, Pizza Hut is the largest restaurant chain in the world
specializing in the sale of ready-to-eat pizza products. As of year-end 1996,
the concept had grown to more than 12,300 units.
In 1996, worldwide system sales exceeded $7.4 billion; however, U.S.
same store sales at Company-operated units decreased 4% reflecting fewer
transactions. In contrast, U.S. same store sales at Company-operated units had
increased a solid 4% in 1995 driven by the introduction of new products, such as
Stuffed Crust Pizza. In the first half of 1997, same store sales at
Company-operated units in the U.S. declined 7% at Pizza Hut. This reflects an 8%
decline in the first quarter and a 5% decline in the second. In the first four
weeks of the third quarter, however, same store sales were once again achieving
positive growth over the prior year. Average U.S. system-wide sales per unit in
1996 were $620,000.
For ten of the last twelve years, Pizza Hut was named Best Pizza Chain
in America in the "Choice in Chains" national consumer survey published annually
by RESTAURANTS & INSTITUTIONS MAGAZINE. Also, the January 1997 CONSUMER REPORTS
named Pizza Hut as the best pizza chain in America.
Taco Bell
Taco Bell operates under the name "Taco Bell" and specializes in Mexican
style food products, including various types of tacos and burritos, salads,
nachos and other related items. The first Taco Bell restaurant was opened in
1962 by Glen Bell in Downey, California, and in 1964 the first Taco Bell
franchise was sold. By 1978, when it was acquired by PepsiCo, the Taco Bell
system had grown to approximately 1,000 units.
<PAGE> 12
Today, Taco Bell dominates the U.S. Mexican QSR segment. Taco Bell units feature
a distinctive bell logo on their signage.
By year-end 1996, there were more than 6,800 Taco Bell units in 17
countries and territories, with system-wide sales of $4.7 billion. After several
years of having achieved above industry average growth rates, U.S. same store
sales at Company-operated Taco Bell units declined 2% and 4% in 1996 and 1995,
respectively, as a result of lower transaction counts. For each of the first two
quarters of 1997, however, same store sales growth for Company-operated units in
the U.S. was positive resulting in a 3% growth rate for the entire 24 week
period. Average U.S. system-wide sales per unit in 1996 were $886,000.
Operating Structure
For all three of its concepts, TRICON structures its sales operations
in two primary ways. The units are either owned and operated by the Company or
they are owned and operated by independent franchisees which can range in size
from individuals owning just a few units to large publicly-traded companies. In
addition, TRICON has established international joint ventures between itself and
third parties. As of year-end 1996, 44% of TRICON's worldwide units were
operated by the Company and joint ventures in which the Company participates,
45% by franchisees, and 11% by licensees.
[GRAPHIC OMITTED] Pie chart showing the following:
TRICON's Worldwide System Units by Ownership
as of Year-End 1996 (1)
- --------------------------
Company & Joint Venture 44%
Franchise 45%
License 11%
Company-
Operated
and Joint
Venture Franchised Licensed Total
--------- ---------- -------- ------
KFC 3,624 6,078 161 9,863
Pizza Hut 6,477 4,700 1,211 12,388
Taco Bell 2,782 2,288 1,775 6,845
------ ------ ----- ------
Total 12,883 13,066 3,147 29,096
(1) Includes traditional and non-traditional units.
<PAGE> 13
Although the margins on the franchise side of the business are
significantly higher than on the Company-operated side of the business, the
owner-operator can also enjoy significant upside opportunities when average
sales per store are growing. TRICON believes that one of the key factors in
driving up average sales per store is the ability of the restaurant general
manager (the "RGM"), whether a TRICON employee or a franchisee, to remain close
to his customer and his restaurant crew.
In order to ensure that RGMs can achieve this, there are two important
initiatives underway at TRICON. The first is a program to sell selected
Company-operated restaurants to franchisees ("refranchising"). Two years ago it
was determined that there was a need to rebalance the system more toward
franchisees. As of year-end 1996, over 900 stores had been refranchised as a
part of that program, the large majority to franchisees that were already in the
TRICON system. The second initiative, called "RGM is No. 1", is a program to
focus the Company-operated system to more consciously support the effort of the
RGM. See "Business of TRICON - Human Resources and Management."
It is critical to TRICON to maintain strong and open relationships
with its franchisees and their representatives. To this end, TRICON invests a
significant amount of time working with the franchisee community and their
representative organizations on all aspects of the business, ranging from new
products to new equipment to new management techniques. As the Company continues
to refranchise Company-operated units and franchisees play a larger and larger
role in the growth of the business, it is expected that these activities will
continue to grow in importance.
Human Resources and Management
Led by Andrall Pearson and David Novak, TRICON has a strong management
team with a proven track record in the food service industry. Mr. Pearson most
recently served as an operating partner of Clayton Dubilier & Rice where he
played an important role in the performance improvement of a number of portfolio
companies. From 1985 to 1993 Mr. Pearson was a tenured professor at Harvard
Business School and from 1971 to 1984 he was President and Chief Operating
Officer of PepsiCo where he was instrumental in acquiring and expanding the
Pizza Hut and Taco Bell restaurant chains.
David Novak most recently served as Group President and Chief Executive
Officer of KFC and Pizza Hut where he led a significant turnaround of KFC which
has now had ten consecutive quarters of same store sales growth at
Company-operated units. See "Management of TRICON - Executive Officers" and
"Management of TRICON - Senior Operating Management" for a description of the
experience of other members of the TRICON management team.
TRICON believes that high quality, customer-focused restaurant
management is critical to its long-term success. It also believes that its
leadership position, strong results-oriented and recognition culture, and
various training and incentive programs help attract and retain highly motivated
RGM's who are committed to providing superior customer satisfaction and
outstanding business results. The Company believes that having a high quality
restaurant manager in a unit for a meaningful tenure is probably the single
largest factor in a unit's achieving excellent results in the areas of sales,
profits and overall guest satisfaction.
<PAGE> 14
The Company's restaurant management structure varies by concept and unit
size. Generally, each restaurant is led by an RGM, together with one or more
additional assistant managers, depending on the operating complexity and sales
volume of the restaurant. Each restaurant usually has between 10 and 35 hourly
employees, most of whom work part-time. The Company's four operating divisions
each issue detailed manuals covering all aspects of their respective operations,
including food handling and product preparation procedures, safety and quality
issues, equipment maintenance, facility standards and accounting procedures. The
restaurant management teams are responsible for the day-to-day operation of each
unit and for ensuring compliance with operating standards. RGMs report to area
managers, who are each responsible for approximately nine to eleven restaurants.
The Company's restaurants are visited from time to time by various higher level
supervisors within their respective organizations to help ensure adherence to
system standards.
RGMs are required to attend and complete their respective division's
training programs. These programs consist of initial training, as well as
additional continuing development and training programs that may be offered or
required from time to time. Initial manager training programs generally last at
least six weeks, and emphasize leadership, business management, supervisory
skills (including training, coaching, and recruiting), product preparation and
production, safety, quality control, customer service, labor management, and
equipment maintenance.
At year-end 1996, TRICON employed approximately 335,000 persons,
approximately 245,000 of whom were part-time employees. Approximately 75% of
TRICON's employees are employed in the United States. The Company believes that
it provides working conditions and compensation that compare favorably with
those of its principal competitors. Employees, other than restaurant management
and corporate management, are paid on an hourly basis. Less than 1% of TRICON's
U.S. employees are covered by collective bargaining agreements. TRICON's
non-U.S. employees are subject to numerous labor council relationships which
vary due to the diverse cultures in which the Company operates. The Company
considers its employee relations to be good.
Industry Overview
Worldwide
The food service industry is defined as food fully prepared away from
home. The categories included within this industry are QSRs, full service
restaurants, other commercial restaurants (including cafeterias) and
non-commercial restaurants such as those in schools and hospitals. In 1996, the
QSR segment of the industry, which is the one in which TRICON operates, was
estimated to be $160 billion.
TRICON is the world's leading restaurant company in units and second in
system-wide sales. Based on the number of units, TRICON's worldwide system is
about 40% larger than McDonald's and more than three times the size of Burger
King's. In 1996, TRICON's worldwide system sales exceeded $20 billion,
accounting for 13% of the estimated $160 billion global QSR market. In addition,
TRICON's brands are leaders in units and sales in their respective food
categories.
<PAGE> 15
[GRAPHIC OMITTED] Bar chart with the following points:
Largest Worldwide Restaurant Systems
as of Year-End 1996
- ------------------------------------
Units
TRICON................29,096
McDonald's............21,022
Subway................12,516
Burger King........... 7,874
Wendy's............... 6,343
Dairy Queen........... 5,665
Domino's.............. 5,460
Little Caesars........ 4,881
Source: Technomic
Worldwide Quick Service Restaurant Sales
as of Year-End 1996
- -----------------------------------------------
TRICON 13%
McDonald's 20%
Other 67%
Source: Technomic; PepsiCo; Euromonitor
United States
In the U.S., one of the most important factors affecting the food
service industry has been consumers' growing desire for meals that are quick,
easy and convenient, which often means food prepared and consumed outside of the
home. According to McKinsey & Company, Inc., in the U.S. today almost 45 cents
of the consumer's food dollar goes to meals prepared and served ready-to-eat
away from home, up from 38 cents ten years ago. By year-end 1996, the food
service industry had reached $321 billion in sales. The QSR segment of the food
service industry has been growing rapidly, with a ten year compound annual
growth rate of more than 6%. The main driver of growth over the last two years
has been new unit expansion, primarily on the part of the major chains, which
increased at a rate of 4% annually.
[GRAPHIC OMITTED] Pie Chart showing the following:
1996 U.S. Food Service Industry System Sales:
- --------------------------------------------
Quick Service Restaurants 32%
Full Service Restaurants 29%
Non-Commercial 25%
Other Commercial 14%
Source: Technomic
As a result of new unit expansion in excess of population growth, the
number of QSR restaurants has increased from 1 for every 1,672 people in 1986 to
1 for every 1,343 people in 1996. Consumer demand as measured by eating
occasions has not
<PAGE> 16
kept pace with unit expansion which has resulted in pressure on same store
sales. The competitive QSR segment of the food service industry has therefore
become increasingly challenging and store level margins are being pressured, not
only from the lack of sales growth, but also from increasing commodity costs and
higher wage rates due to low unemployment and increased minimum wages.
In the United States, TRICON is the largest restaurant company in
terms of number of units. It has over 20,000 system-wide units located in all 50
states. As of year-end 1996, the composition by concept was 25% KFC, 43% Pizza
Hut and 32% Taco Bell. Over the past five years, TRICON's units in the U.S. and
U.S. system-wide sales have both grown at a compound annual growth rate of 6%.
[GRAPHIC OMITTED] Pie chart showing the following:
TRICON's U.S. System Units by Concept
as of Year-End 1996
--------------------------
Pizza Hut 43%
Taco Bell 32%
KFC 25%
The following table ranks the 10 largest QSR chains by 1996 United
States system-wide sales. Pizza Hut, Taco Bell, and KFC rank 3,4, and 6,
respectively. Together, they are number two with over $13 billion in system-wide
sales.
<TABLE>
<CAPTION>
1996 1996 System
1996 System System Sales Per Unit
Rank Restaurant Chain Concept Sales ($MM) Units (1) ($M) (1) (2)
- ---- ---------------- ------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
1 McDonald's Sandwich 16,370 12,094 1,354
2 Burger King Sandwich 7,485 7,057 1,061
3 Pizza Hut Pizza 4,900 8,755 560
4 Taco Bell Mexican 4,600 6,642 693
5 Wendy's Sandwich 4,284 4,369 981
6 KFC Chicken 3,900 5,079 768
7 Hardee's Sandwich 2,989 3,225 927
8 Subway Sandwich 2,700 10,848 249
9 Dairy Queen Ice Cream 2,603 5,035 517
10 Domino's Pizza 2,300 4,300 535
Source: 1996 Technomic Top 100 and PepsiCo
</TABLE>
(1) TRICON numbers include traditional and non-traditional units where
applicable.
<PAGE> 17
(2) Excluding sales from non-traditional units, 1996 system sales per
unit at Pizza Hut, Taco Bell and KFC were $620,000, $886,000 and $775,000
respectively.
International
Outside the United States, sales in the QSR segment of the food
service industry are estimated to be $62 billion. Industry conditions vary by
country, with many local restaurants and fast food options present, but on
average competition is less than in the United States as internationally branded
competition is generally limited to McDonald's and, in certain markets,
Domino's, Wendy's and Burger King.
In addition, branded QSR units per population in most countries are
generally well below that of the United States.
[GRAPHIC OMITTED] Bar chart showing the following points:
TRICON Units per Million People
as of Year-End 1996
Selected Countries
- -------------------------------
Units
United States....... 78
Australia........... 47
Singapore........... 29
Canada.............. 19
UK.................. 14
Japan............... 10
South Korea......... 5
Thailand............ 4
Mexico.............. 3
France.............. 2
Germany............. 2
Brazil.............. 1
Argentina........... 1
Poland.............. 1
China............... 0
India............... 0
Russia.............. 0
Source: PepsiCo; 1996 World Almanac
Reflecting the broad geographic consumer appeal of TRICON's concepts,
over 35% of TRICON International's restaurants are located in Asia Pacific,
followed by the Americas (Canada, the Caribbean, Latin America and South
America) with 29%, Europe with 19% and the South Pacific with 16%.
<PAGE> 18
TRICON International System Units
as of Year-End 1996 (1)
[GRAPHIC OMITTED] Pie charts showing the following:
Concept
- -------
KFC 56%
Pizza Hut 42%
Taco Bell 2%
Ownership
- ---------
Franchise/Licensed 59%
Company 29%
Joint Venture 12%
Region
- ------
Asia Pacific 36%
Americas 29%
Europe 19%
S. Pacific 16%
<TABLE>
<CAPTION>
Joint Franchised Countries
Company Venture and Licensed Total and Territories
------- ------- ------------ ----- ---------------
<S> <C> <C> <C> <C> <C>
KFC 1,235 432 3,117 4,784 73
Pizza Hut 1,183 575 1,875 3,633 83
Taco Bell 95 -- 108 203 16
----- ----- ----- -----
Total 2,513 1,007 5,100 8,620 94
(1) Includes traditional and non-traditional units.
</TABLE>
Since late 1994, the international operations of TRICON's three
restaurant concepts have been consolidated into a separate international
division to improve focus and scale. TRICON International has redirected its
focus to generate more system growth through franchisees and concentrate its
development of Company-operated stores in those markets with sufficient scale.
TRICON International has developed new global systems and tools designed to
improve marketing, operations consistency, product delivery, market planning and
development, franchise support, and store-level team building capability.
<PAGE> 19
Competitive Advantages
Global Scale
Powerful Concepts in Growing Food Categories. KFC, Pizza Hut and Taco
Bell are three of the most recognized restaurant concepts, each having
significant value. Each is the U.S. leader in units and sales in its respective
food category. TRICON believes that the near universal appeal of chicken and the
enormous variety of pizzas provide a strong foundation for global concept
expansion, and the emerging trend towards Mexican-style foods may provide
additional growth opportunities.
Worldwide Capabilities. TRICON has global scale and capabilities in
marketing, advertising, purchasing, research and development ("R&D"), and site
selection. TRICON believes that its worldwide network of Company and franchise
operations provides a strong foundation from which to expand in existing
markets, enter new markets, launch new products and marketing campaigns and
introduce new concepts. In many countries and regions TRICON has the scale to
use extensive television advertising, an important factor in increasing brand
awareness. TRICON's scale enables it to negotiate superior marketing promotions
and real estate transactions compared to many of its competitors.
Purchasing/Distribution. The Company is a substantial purchaser of a
number of food products, and it believes its scale purchasing capabilities
provide it with competitive advantages, such as it's ability to ensure a
consistent supply of high quality food, ingredients and other supplies at
competitive prices to all of its restaurant concepts. To ensure reliable
sources, in 1996, the Company consolidated most of its worldwide food and supply
procurement activities under a new organization called SmartSourcing, which
sources, negotiates and buys specified food and supplies from hundreds of
suppliers in over 70 countries and territories. The SmartSourcing staff develops
long-term relationships or partnerships with key vendors. They monitor market
trends and seek to identify and capitalize on purchasing opportunities that will
enhance the Company's competitive position. The principal products purchased
include beef, cheese, chicken products, cooking oils, corn, flour, lettuce,
pinto beans, pork, seasonings, tomato products, and paper and packaging
materials.
To ensure the wholesomeness of all food products, suppliers are required
to meet or exceed strict quality control standards. Competitive bids, long-term
contracts and long-term vendor relationships have been used to ensure
availability of products. TRICON has also entered into commodity futures
contracts traded on national exchanges with the objective of reducing food
costs. While such hedging activity has historically been done on a limited
basis, hedging activity could increase in the future if TRICON believes it would
result in lower total costs. The Company has not experienced any significant
continuous shortages of supplies. Prices paid for these supplies may be subject
to fluctuation; when prices increase, the Company may be able to pass on such
increases to its customers, although there is no assurance this can be done in
the future.
Many food products, paper and packaging supplies, and equipment used
in the operation of the Company's restaurants, have been distributed to
individual Company-operated units by PFS, which had been PepsiCo's restaurant
distributor operation. PFS
<PAGE> 20
also sold and distributed these same items to many franchised and licensed units
that operate in the three restaurant systems, though principally to Pizza Hut
and Taco Bell franchised/licensed units in the United States. In May 1997, KFC,
Pizza Hut and Taco Bell entered into a five year Sales and Distribution
Agreement with PFS to purchase the majority of their food and supplies for
Company-operated stores, subject to PFS maintaining certain quality and
performance levels. The Sales and Distribution Agreement became effective upon
the closing of the sale by PepsiCo of the assets and business of PFS to
AmeriServe Food Distribution, Inc. ("AmeriServe"), a subsidiary of Holberg
Industries, Inc., pursuant to a definitive agreement dated as of May 23, 1997,
as amended. KFC, Pizza Hut and Taco Bell have also entered into multi-year
agreements with Pepsi-Cola Company regarding the sale of Pepsi-Cola beverage
products at U.S. Company-operated units. See "The Distribution - Relationship
Between PepsiCo and TRICON after the Distribution."
Management Information Systems. TRICON considers itself a leader in
the utilization of technology to help manage its restaurants. Systems targeted
at improving financial controls, cost management, product inventory, consumer
service and employee effectiveness have been implemented in all Company-operated
units. In the U.S., communication networks transmit critical business data to
and from the Company-operated units. These networks provide timely information
on daily business activity. The Company uses proprietary software as well as
purchased software to simplify the restaurants' processes and administrative
requirements. The leveraging of technology allows the RGMs to focus on customers
and operations.
Proven Operating Record
Core Competence in Marketing. TRICON has strong marketing teams and
strong agencies as its partners. In 1996, TRICON and its franchisees invested
more than $745 million in the U.S. and more than $310 million in international
markets in advertising and marketing programs.
TRICON believes that it has developed significant advertising
capabilities, and has been able to generate substantial interest in and
excitement around its brands. Many of the Company's advertising campaigns have
been recognized in the past with awards acknowledging their creativity,
execution or achievements in creating or maintaining brand awareness. The
Company's size enables it to be a leading advertiser in the food service
industry, which it can leverage to achieve efficiency of national network
television advertising, supplemented with local market television advertising.
TRICON's four operating divisions implement periodic promotions as they deem
appropriate or desirable in order to maintain and increase their sales and unit
profits. They also rely on radio, newspaper and other print advertising,
in-store point of purchase advertising, and direct mail and newspaper couponing
programs, to attract customers and encourage the purchase of their products. The
Company has developed and utilizes sophisticated marketing research techniques
to measure customer satisfaction and consumer trends.
Quality Assurance. The Quality Assurance Departments at each of TRICON's
four operating divisions help ensure that the systems' restaurants provide high
quality, wholesome food products in clean and safe environments. The systems'
restaurants
<PAGE> 21
are required to buy food supplies, ingredients, seasonings, and equipment only
from approved suppliers, who are required to meet or exceed system standards
designed to ensure product quality, safety and consistency. From time to time,
the Quality Assurance Departments inspect the facilities of their suppliers and
request samples for testing and other quality control monitoring and measures.
Many of these suppliers, such as poultry producers, are also subject to some
government inspection. In addition, representatives of the Quality Assurance
Departments visit restaurants from time to time to ensure that food is properly
stored, handled and prepared in accordance with prescribed standards and
specifications, as well as to provide training in food safety and sanitation
measures to the restaurant operators. The Quality Assurance Departments are also
responsible for remaining current on issues related to food safety, and
interacting with regulatory agencies as may be required or desirable on these
matters.
Strong Free Cash Flow
TRICON has generated significant free cash flow through its operations
and global refranchising program under which it sells Company-operated
restaurants to current and new franchisees. Since the strategy began in
mid-1995, TRICON refranchised 264 and 640 units in 1995 and 1996, respectively.
In June 1997, TRICON International sold 77 KFCs, 43 Pizza Huts and two joint KFC
and Pizza Hut delivery/carryout units in New Zealand in an initial public
offering. As a result of TRICON's refranchising activity, coupled with new
points of distribution added by franchisees and licensees and the program to
upgrade the asset portfolio by closing under-performing stores, the Company's
overall ownership of total system units (i.e. Company-operated and joint venture
units in which the Company participates) declined six percentage points in two
years from 50% at year-end 1994 to 44% at year-end 1996. The refranchising
program is expected to continue. However, the continuation of the program
depends on the Company's ability to find qualified franchisees to purchase
Company-operated restaurants at prices considered by the Company to be
appropriate.
TRICON's operations generated free cash flow of almost $465 million in
1996, allowing it to increase its rate of investment in the following: product
innovation and quality; improved operating platforms leading to improved
service; store-level human resources including recruiting and training; testing
alternative modes of distribution; and creative marketing programs. See
"Management's Discussion and Analysis."
United States Growth Opportunities
TRICON believes it has many opportunities to achieve same store sales
growth at Company-operated units in its U.S. business due to the following:
Daypart Expansion. TRICON's strengths in market research and R&D,
combined with underdeveloped dayparts in all three core concepts give it an
opportunity to increase the average sales per unit. According to CREST, in 1996
in the U.S. almost two-thirds of KFC and approximately three-quarters of Pizza
Hut Company-operated store sales occurred during the dinner occasion. At Taco
Bell approximately half of U.S. Company-operated store sales occurred during the
lunch occasion, with about 44% occurring at dinner and the remainder during
snacking hours.
<PAGE> 22
Channel Expansion. TRICON's products, especially chicken and pizza, are
well suited to delivery because their relatively long holding times allow them
to be delivered hot and ready to eat. Today, Pizza Hut has a well-developed
delivery system and almost 500 KFC units currently offer some delivery services.
In addition, the Company believes there is opportunity to innovate with respect
to the type of unit that best meets consumer needs. Some of the alternative
channels that are being developed include non-traditional units such as Taco
Bell Express in venues like shopping malls, food courts, airports, gas and
convenience stores and schools.
International Growth Opportunities
Underdeveloped Presence in Many Countries. Although TRICON has
established a presence in many countries, the majority of those countries are
still underpenetrated considering not only population size and growth but also
in terms of per capita purchasing power. TRICON has demonstrated considerable
success in Asian emerging markets with some of the largest stores in the world
on a sales per store basis being operated by it in China. In countries which are
more developed, the ratio of stores per million people is still far below that
found in the U.S. and there is still tremendous opportunity to leverage an
increasing demand for convenient, fully prepared foods.
Scale Advantages. TRICON has the ability to leverage not only the scale
advantages of purchasing and R&D but also the experience of its U.S. business to
quickly identify new product opportunities for local markets. As of year-end
1996, TRICON's international system-wide sales accounted for approximately 11%
of all international QSR sales.
Other
Properties
As of year-end 1996, KFC, Pizza Hut and Taco Bell owned approximately 3,200
and leased approximately 6,200 restaurants, delivery/carryout units and other
food service units in the United States; and TRICON International owned
approximately 1,000 and leased approximately 1,500 additional units outside the
United States. KFC, Pizza Hut and Taco Bell restaurants in the United States
which are not owned are generally leased for initial terms of 15 or 20 years,
and generally have renewal options, while Pizza Hut delivery/carryout units in
the United States generally are leased for significantly shorter initial terms
with short renewal options. Joint ventures in which KFC, Pizza Hut or Taco Bell
are partners and other consolidated entities own or lease approximately 1,000
restaurants or units outside the United States. TRICON leases Pizza Hut's
corporate headquarters in Dallas, Texas. Taco Bell leases its corporate
headquarters in Irvine, California and KFC owns its corporate headquarters and a
research facility in Louisville, Kentucky. In addition, TRICON owns major office
facilities in Wichita, Kansas and leases an office facility for accounting
services in Albuquerque, New Mexico.
<PAGE> 23
Competition
The overall food service industry and the QSR segment are intensely
competitive with respect to food quality, price, service, convenience,
restaurant location and concept. The restaurant business is often affected by
changes in consumer tastes; national, regional or local economic conditions;
demographic trends; traffic patterns; the type, number and location of competing
restaurants; and disposable purchasing power. TRICON competes within each market
with national and regional chains as well as locally-owned restaurants, not only
for customers, but also for management and hourly personnel and suitable real
estate sites. For additional information on competition, see "Business of TRICON
- - Industry Overview."
Trademarks
TRICON regards its Kentucky Fried Chicken (Registered Trademark), KFC
(Registered Trademark), Pizza Hut (Registered Trademark) and Taco Bell
(Registered Trademark) trademarks as having significant value and as being
important in marketing to consumers. The Company's policy is to pursue
registration of its important trademarks whenever possible and to oppose
vigorously any infringement of its trademarks. The use of the foregoing
trademarks by franchisees and licensees has been authorized in KFC, Pizza Hut
and Taco Bell franchise and license agreements. Under current law and with
proper use, the Company's rights in its trademarks can last indefinitely.
Government Regulation
United States. TRICON is subject to various Federal, state and local
laws affecting its business. Each of the Company's restaurants must comply with
licensing and regulation by a number of governmental authorities, which include
health, sanitation, safety and fire agencies in the state or municipality in
which the restaurant is located. To date, the Company has not been significantly
affected by any difficulty, delay or failure to obtain required licenses or
approvals.
A small portion of Pizza Hut's net sales are attributable to the sale of
beer and wine. A license is required for each site that sells alcoholic
beverages (in most cases, on an annual basis) and licenses may be revoked or
suspended for cause at any time. Regulations governing the sale of alcoholic
beverages relate to many aspects of restaurant operations, including the minimum
age of patrons and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and dispensing of alcoholic
beverages. The failure of a restaurant which sells alcoholic beverages to obtain
or retain these licenses may adversely affect such restaurant's operations.
The Company is also subject to Federal and state minimum wage laws
governing such matters as overtime, tip credits and working conditions. Since
the bulk of the Company's employees are paid on an hourly basis at rates related
to the Federal minimum wage, increases in the minimum wage could significantly
increase the Company's labor costs.
The Company is also subject to Federal and state child labor laws which,
among other things, prohibit the use of certain "hazardous equipment" by
employees 18 years
<PAGE> 24
of age or younger. The Company has not to date been materially adversely
affected by such laws.
The Company is subject to Federal and state environmental regulations,
but these rules have not had a material effect on the Company's operations. The
Company continues to monitor its facilities for compliance with the Americans
With Disabilities Act ("ADA") in order to conform to its requirements. Under the
ADA, the Company could be required to expend funds to modify its restaurants to
better provide service to, or make reasonable accommodation for the employment
of, disabled persons.
International. Internationally, the Company's restaurants are subject
to national and local laws and regulations which are similar to those affecting
the Company's domestic restaurants, including laws and regulations concerning
labor, health, sanitation and safety. The international restaurants are also
subject to tariffs and regulations on imported commodities and equipment and
laws regulating foreign investment.
Worldwide compliance with environmental regulations has not had a
material adverse effect on the Company's earnings, capital expenditures or
competitive position.
Legal Proceedings
The Company is subject to various claims and contingencies related to
lawsuits, taxes, real estate, the environment and other matters arising out of
the normal course of business. Management believes that the ultimate liability,
if any, in excess of amounts already provided for, is not likely to have a
material adverse effect on the Company's annual results of operations or
financial condition.
Sale of Non-Core Concepts
In late 1996, TRICON set a strategy to focus human and financial
resources on growing the sales and profitability of its three core QSR concepts
- - KFC, Pizza Hut and Taco Bell. The non-core restaurant businesses of Hot 'n Now
("HNN"), East Side Mario's ("ESM") and Chevys Mexican Restaurants ("Chevys")
were sold in 1997, and two other non-core restaurant businesses, D'Angelo
Sandwich Shops ("D'Angelo") and California Pizza Kitchen ("CPK"), are expected
to be sold prior to the Distribution Date. These five "non-core" chains
represented approximately 4% of TRICON's worldwide sales at Company-operated
units in 1996. See "Combined Financial Statements."
SELECTED COMBINED FINANCIAL DATA
For purposes of the following selected combined financial data, TRICON
includes the worldwide operations of KFC, Pizza Hut and Taco Bell (its core
business), and its non-core U.S. businesses through their respectice dates of
disposal.
The following selected combined financial data of TRICON should be read
in conjunction with, and is qualified in its entirety by reference to, the
audited Combined Financial Statements and the unaudited Condensed Combined
Financial Statements and the related notes thereto included on pages F-2 to
F-29.
<PAGE> 25
The pro forma selected financial data set forth below is derived from
the unaudited Pro Forma Condensed Combined Financial Information included on
pages F-30 to F-34. The pro forma data does not purport to represent what
TRICON's financial position or results of operations would have been had it
operated as a separate, independent company nor does it give effect to any
events other than those discussed in the related notes. The pro forma data also
does not purport to project TRICON's financial position or results of operations
as of any future date or for any future period.
The capital structure that existed when the Company's businesses
operated as part of PepsiCo is not relevant because it does not reflect TRICON's
expected future capital structure as a separate, independent company.
Accordingly, per share data for earnings and cash dividends declared has not
been presented except for pro forma earnings per share for the year-ended
December 28, 1996 and the 24 weeks ended June 14, 1997, which was based on 155
million shares and equivalents.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Selected Combined Financial Data (Page 1 of 5)
(in millions except per share data, unaudited)
TRICON Global Restaurants, Inc.
- ------------------------------------------------------------------------------------------------
Pro forma
1996(a) 1996(b)(c) 1995(c) 1994(c)(d)(e)
- ------------------------------------------- ------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Summary of Operations
Revenues................................ $9,838 10,232 10,250 9,565
Income/(loss) before cumulative effect
of accounting changes................. $ 131 (53) (132) 119
Cumulative effect of accounting
changes (h)........................... $ - - - (1)
Net income/(loss) (i)................... $ 131 (53) (132) 118
Earnings per share (j)............... $ 0.85 N.R. N.R. N.R.
Balance Sheet
Total assets............................ N.R. $ 6,520 6,908 7,387
Long-term debt (k)...................... N.R. $ 231 260 267
Investments by and advances
from PepsiCo.......................... N.R. $ 4,266 4,604 4,962
N.R. - Not Required
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Selected Combined Financial Data (Page 2 of 5)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
- ----------------------------------------------------------------------------------------
1993(f) 1992
- ------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Summary of Operations
Revenues........................................... $ 8,462 7,335
Income before cumulative effect of
accounting changes............................... $ 238 245
Cumulative effect of accounting
changes (h)...................................... $ - (19)
Net income (i)..................................... $ 238 226
Balance Sheet
Total assets....................................... $ 6,526 5,086
Long-term debt (k)................................. $ 290 257
Investments by and advances from
PepsiCo ......................................... $ 4,366 3,506
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Selected Combined Financial Data (Page 3 of 5)
(in millions except per share data, unaudited)
TRICON Global Restaurants, Inc.
- -----------------------------------------------------------------------------------------
24 Weeks Ended(g)
--------------------------
Pro forma
6/14/97(a) 6/14/97 6/15/96
- -------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Summary of Operations
Revenues....................................... $ 4,399 4,590 4,655
Net income (i)................................. $ 176 173 106
Earnings per share (j)......................... $ 1.14 N.R. N.R.
Balance Sheet
Total assets................................... $ 5,976 6,107 N.R.
Long-term debt (k)............................. $ 4,674 186 N.R.
Investments by and advances from
PepsiCo ..................................... $ - 3,825 N.R.
N.R. - Not Required
</TABLE>
<PAGE> 28
- -------------------------------------------------------------------------------
Selected Combined Financial Data (Page 4 of 5)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
- -------------------------------------------------------------------------------
(a) Reflects the following pro forma adjustments:
1. Elimination of TRICON's non-core U.S. businesses disposed of or
expected to be disposed of in 1997;
2. Expected debt to be issued to fund repayment of certain amounts due to
PepsiCo and a dividend to PepsiCo;
3. Record TRICON's equity and shares outstanding; and
4. Adjust interest expense to reflect expected debt outstanding as of the
Distribution Date.
(b) Included unusual charges of $246 ($189 after-tax) related to the decision
to dispose of TRICON's non-core U.S. businesses. See Note 3 to the audited
Combined Financial Statements on page F-11. Also included the benefit of
reduced depreciation and amortization expense for the first three quarters
of 1996 of $40 ($26 after-tax) as a result of the initial impact of
adopting Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," at the beginning of the fourth quarter of 1995.
See (c) below.
(c) Included net facility actions:
1996 1995 1994
---- ---- ----
Refranchising gains $139 $ 93 $ -
Store closure costs (40) (38) (10)
SFAS 121 impairment charges (62) (457)
----- ---- -----
Net gain/(loss) $ 37 $(402) $(10)
===== ====== =====
After-tax gain/(loss) $ 21 $(295) $ (6)
===== ====== =====
The initial, non-cash impairment charge of $457 ($324 after-tax) in 1995
was due to the adoption of SFAS 121 at the beginning of the fourth
quarter. As a result of the reduced carrying amount of restaurants to be
held and used in the business, depreciation and amortization expense for
the fourth quarter of 1995 was reduced by $17 ($12 after-tax). See Note
3 to the audited Combined Financial Statements on page F-11.
(d) Included a benefit of changing to a preferable method for calculating
the market-related value of pension plan assets used in determining the
return-on-asset component of annual pension expense, which reduced
full-year pension expense in 1994 by $5 ($3 after-tax).
(e) Fiscal year 1994 consisted of 53 weeks. Normally, fiscal years consist
of 52 weeks; however, because the fiscal year ends on the last Saturday
in December, a week is added every 5 or 6 years. The fifty-third week
increased 1994 revenues by $172 and earnings by approximately $23 ($14
after-tax).
(f) Included a $7 charge to increase net deferred tax liabilities as of the
beginning of 1993 for a 1% statutory income tax rate increase due to 1993
U.S. Federal tax legislation.
<PAGE> 29
- --------------------------------------------------------------------------------
Selected Combined Financial Data (Page 5 of 5)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
- --------------------------------------------------------------------------------
(g) Included unusual charges of $39 ($22 after-tax) in 1997 and $26 ($17
after-tax) in 1996 related to the disposal of TRICON's non-core U.S.
businesses. Also included net facility actions:
24 Weeks Ended
-------------------------
6/14/97 6/15/96
------- -------
Refranchising gains $153 $ 88
Store closure costs (29) (4)
Recurring SFAS 121 impairment charges (39) (18)
----- -----
Net gain $ 85 $ 66
===== =====
After-tax gain $ 56 $ 37
===== =====
After-tax gain - Full Year* $ 87 $ 41
===== =====
* Because TRICON allocates its income tax expense to interim periods
based on a forecasted full-year effective tax rate, the tax
attributes associated with these net facility actions will continue
to be recognized in TRICON's tax expense over the balance of the
year. Accordingly, the after-tax gain recognized in the 24 weeks
ended 1997 and 1996 is lower than the full-year amount.
The 1997 full-year after-tax gain reflects the tax free gain from
the refranchising of TRICON's restaurants in New Zealand to a new,
independent publicly-traded company.
(h) Represented the cumulative effect of adopting in 1994 Statement of
Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting
for Postemployment Benefits," and changing to a preferable method for
calculating the market-related value of pension plan assets used in
determining the return-on-asset component of annual pension expense and the
cumulative net unrecognized gain or loss subject to amortization (see Notes
13 and 11 to the audited Combined Financial Statements on page F-16) and
adopting in 1992 Statement of Financial Accounting Standards No. 106 (SFAS
106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions" which reduced earnings by $31 ($19 after-tax).
(i) For the historical results of operations net income included interest
expense based upon PepsiCo's weighted average borrowing rate applied to the
average balance of investments by and advances from PepsiCo to TRICON and
interest on its external third-party debt.
(j) Pro forma shares and equivalents of 155 million used to compute earnings
per share was based on 152 million shares of TRICON common stock adjusted
for the dilutive effect of stock options. The 152 million shares reflected
an estimate of the shares to be issued at the Distribution Date based on a
distribution ratio of one share of TRICON Common Stock for every ten shares
of PepsiCo Capital Stock.
(k) Long-term debt represented external third-party debt.
<PAGE> 30
FINANCING
PepsiCo's general practice has been to incur debt at the parent company
level rather than the subsidiary level, even when the funds obtained from such
borrowings have been used in the businesses of its subsidiaries, except in the
case of capital leases, assumed debt of acquired businesses and certain
international third party debt which generally have been incurred at the
subsidiary level. Accordingly, the financing requirements of the restaurant
businesses generally have been funded through intercompany accounts with
PepsiCo.
Prior to the Distribution, TRICON will incur approximately $4.5 billion
of debt obligations. Substantially all of the proceeds of such debt obligations
will be transferred to PepsiCo as repayment of certain amounts due to PepsiCo
from TRICON and a dividend. The remainder of any investment in TRICON by PepsiCo
will be reclassified from "Investment by and advances from PepsiCo" to "Common
Stock and surplus" on the TRICON balance sheet. This remainder will be
contributed by PepsiCo to its shareholders in the form of TRICON Common Stock.
PepsiCo will retain no equity interest in TRICON. However, immediately after the
Distribution Date, TRICON shares will be owned by PepsiCo's pension trust on
behalf of PepsiCo's employees.
TRICON has no assurance that, as an independent company, it will be able
to obtain financing upon terms as favorable as those historically experienced by
PepsiCo.
Commercial Paper Program
TRICON is planning to establish a commercial paper program at such time
as TRICON's management believes its credit rating supports such a program.
Borrowings under this program may be used to finance a base level of floating
rate debt and seasonal borrowing needs.
Bank Credit Facilities
TRICON is planning to establish a senior, unsecured five-year term loan
facility in the aggregate amount of $2 billion and a senior, unsecured five-year
revolving credit and multicurrency competitive advance facility in the aggregate
amount of $3.5 billion. A portion of the latter facility will be available in
the form of letters of credit. Interest rates are expected to be based on the
London interbank offered rate ("LIBOR"). The facilities are expected to have a
quarterly facility fee as well as a semi-annual administrative fee. The
covenants in the facilities will be carefully negotiated with respect to
TRICON's debt and investment requirements. TRICON believes it will have adequate
flexibility under the covenants and that they should not impose material
restrictions on TRICON's operations.
Long-Term Debt
TRICON's management may refinance a portion of the bank borrowings with
long-term financing when market conditions are deemed appropriate following the
Distribution. TRICON may file a shelf registration statement with the Securities
and Exchange Commission providing for the issuance of debt securities with
various terms, conditions and maturities. Interest rates would be expected to be
based on market
<PAGE> 31
conditions at the time of the offerings. The covenants in the indenture under
which such debt securities would be issued would be carefully negotiated with
respect to TRICON's debt and investment requirements.
Derivative Instruments
TRICON is currently planning to enter into agreements with a selected
number of creditworthy financial institutions which will enable TRICON to enter
into interest rate swap agreements in order to reduce its interest rate
exposure. TRICON will likely use interest rate swaps to fix the interest rate on
50% to 80% of the amounts outstanding under its bank facilities.
THE DISTRIBUTION
Reasons for the Distribution
PepsiCo's management has proposed the Distribution to achieve three
specific business objectives: (i) to alleviate competitive barriers to expanding
its fountain beverage business; (ii) to allow PepsiCo to focus its attention on
its packaged goods businesses, Pepsi-Cola and Frito-Lay; and (iii) to permit
PepsiCo and TRICON to offer management incentives more directly tied to the
performance of their respective businesses. PepsiCo is distributing the shares
of TRICON to its shareholders based on its belief that the restaurant
businesses, on the one hand, and PepsiCo's packaged goods businesses, on the
other hand, represent different business propositions. They involve
fundamentally different growth opportunities, financial returns, investment
requirements, operating systems and people dynamics. PepsiCo also believes that
corporations perform optimally when business strategy, organization and employee
incentives are more narrowly focused.
Accordingly, PepsiCo has concluded that the long-term interests of both
businesses are best served through the creation of two separate, independent and
focused corporations, TRICON focused on restaurants and a "new PepsiCo" focused
on packaged goods.
Manner of Effecting the Distribution
On or before the Distribution Date, PepsiCo will transfer to BankBoston,
N.A., as Distribution agent (the "Distribution Agent"), for the benefit of
holders of record of PepsiCo Capital Stock at the close of business on September
19, 1997 (the "Record Date"), all shares of TRICON Common Stock then owned by
PepsiCo.
The Distribution will be made to holders of record of PepsiCo Capital
Stock at the close of business on the Record Date, without any consideration
being paid by such holders, on the basis of one share of TRICON Common Stock for
every ten shares of PepsiCo Capital Stock held on the Record Date. TRICON will
participate in the Direct Registration System to effect the Distribution, and
shares of TRICON Common Stock will be distributed to PepsiCo shareholders in
book-entry form. Commencing on or about the Distribution Date, the Distribution
Agent will begin mailing account statements reflecting ownership of shares of
TRICON Common Stock to such holders of record of PepsiCo Capital Stock. Any
TRICON shareholders that would like to receive a
<PAGE> 32
certificate representing their shares may contact the Distribution Agent. The
shares of TRICON Common Stock will be fully paid and nonassessable and the
holders thereof will not be entitled to preemptive rights. See "Description of
TRICON Capital Stock - TRICON Common Stock."
No fractional shares will be distributed as part of the Distribution,
other than fractional shares which will be credited to the accounts of
participants in certain PepsiCo plans as described below. The Distribution Agent
will aggregate fractional shares, other than those held by participants in such
plans, into whole shares of TRICON Common Stock and sell them on the open market
at prevailing prices on behalf of holders who would otherwise be entitled to
receive such fractional share interests. Any such persons entitled to receive at
least $0.01 will receive a cash payment for their portion of the total sale
proceeds. Any persons entitled to receive less than $0.01 will have their
fractional shares canceled.
Distribution of TRICON Common Stock with respect to PepsiCo Capital
Stock held in the PepsiCo Capital Stock Purchase Plan, the PepsiCo SaveUp Plan
(formerly 401(k) or Long-Term Savings), the PepsiCo Dividend Reinvestment Plan
and the PepsiCo Employees' Stock Ownership Plan will be credited to
participants' accounts. Fractional shares will be credited with respect to each
of these plans other than the PepsiCo Dividend Reinvestment Plan. Fractional
shares with respect to the PepsiCo Dividend Reinvestment Plan will be cashed out
as described in the previous paragraph.
The Distribution is subject to a number of conditions, including (i) a
favorable ruling of the Internal Revenue Service concerning the tax-free nature
of the Distribution, (ii) appropriate stock market conditions for the
Distribution, (iii) various regulatory approvals, and (iv) approval by PepsiCo's
Board of Directors of the final terms of the Distribution, including, without
limitation, the formal declaration of a dividend to PepsiCo's shareholders and
other specific actions necessary to the Distribution. The conditions in clauses
(i), (ii) and (iv) above have been satisfied. The only significant pending
regulatory approval is the Commission's declaration of the effectiveness of the
Form 10, and the PepsiCo Board of Directors does not intend to waive this
condition.
The PepsiCo Board of Directors may amend, modify or abandon the
Distribution at any time prior to the Distribution Date.
Results of the Distribution
Subsequent to the Distribution, which will be effective at 11:59:59
p.m. E.D.T. on the Distribution Date, TRICON will operate as an independent
restaurant company, and PepsiCo will continue to conduct its packaged goods
businesses.
Relationship between PepsiCo and TRICON after the Distribution
After the Distribution, PepsiCo will have no ownership interest in
TRICON, and TRICON will be an independent, publicly-owned company. However,
immediately after the Distribution Date, TRICON shares will be owned by
PepsiCo's pension trust on behalf of PepsiCo's employees. TRICON and PepsiCo
have entered, and will enter, into certain agreements, described below,
governing their relationship subsequent to the Distribution and providing for
the allocation of tax and certain other liabilities and
<PAGE> 33
obligations arising from periods prior to and after the Distribution. Copies of
the forms of such agreements are filed as exhibits to the Registration Statement
of which this Information Statement is a part. The following summarizes the
material terms of such agreements, but is qualified by reference to the text of
such agreements.
Separation Agreement
PepsiCo and TRICON have entered into a Separation Agreement (the
"Separation Agreement"), which provides for, among other things, certain
services, records and personnel which PepsiCo and TRICON will make available to
each other after the Distribution Date. To facilitate an orderly transition,
PepsiCo may continue to provide, for up to 12 months, certain services to
TRICON, with the related costs and expenses being paid by TRICON. TRICON will
nonetheless have to utilize additional personnel to perform certain services
previously provided by PepsiCo, such as treasury management and investor
relations. The Separation Agreement also provides for the assumption by TRICON
of liabilities relating to PepsiCo's restaurant businesses and the
indemnification of PepsiCo with respect to such liabilities. At June 14, 1997,
there were approximately $2.35 billion of liabilities reflected on TRICON's
balance sheet. The Separation Agreement provides that, prior to the
Distribution, TRICON will pay to PepsiCo $4.5 billion as repayment of certain
amounts due to PepsiCo from TRICON and a dividend.
Tax Separation Agreement
PepsiCo and TRICON have entered into a Tax Separation Agreement (the
"Tax Separation Agreement"), on behalf of themselves and their respective
consolidated groups, that reflects each party's rights and obligations with
respect to payments and refunds of taxes that are attributable to periods
beginning prior to and including the Distribution Date and taxes resulting from
transactions effected in connection with the Distribution. The Tax Separation
Agreement also expresses each party's intention with respect to certain tax
attributes of TRICON after the Distribution. The Tax Separation Agreement
provides for payments between the two companies for certain tax adjustments made
after the Distribution that cover pre-Distribution tax liabilities. Other
provisions cover the handling of audits, settlements, stock options, elections,
accounting methods and return filing in cases where both companies have an
interest in the results of these activities.
Pursuant to the Tax Separation Agreement, TRICON has agreed to refrain
from engaging in certain transactions for two years following the Distribution
Date without the prior written consent of PepsiCo. Transactions subject to this
restriction include, among other things, the liquidation, merger or
consolidation with another company, certain issuances and redemptions of TRICON
Common Stock, the granting of stock options, the sale, refranchising,
distribution or other disposition of assets in a manner that would adversely
affect the tax consequences of the Distribution or any transaction effected in
connection with the Distribution, and the discontinuation of certain businesses.
<PAGE> 34
Employee Programs Agreement
PepsiCo and TRICON have entered into an Employee Programs Agreement (the
"Employee Programs Agreement"), which allocates assets, liabilities and
responsibilities between them with respect to certain employee compensation and
benefit plans and programs and certain other related matters.
Telecommunications, Software and Computing Services Agreement
PepsiCo and TRICON will also enter into a Telecommunications, Software
and Computing Services Agreement (the "TS&C Agreement") setting forth the
arrangements between the parties with respect to internal software, third-party
agreements, telecommunications services and computing services.
Beverage Agreements
KFC, Pizza Hut and Taco Bell have each entered into a multi-year
agreement with Pepsi-Cola Company regarding the sale of Pepsi-Cola beverage
products at U.S. Company-operated units.
Certain Letters of Credit, Guarantees and Contingent Liabilities
Pursuant to the Separation Agreement, TRICON has agreed to use its best
efforts to release, terminate or replace, prior to the Distribution Date, all
letters of credit, guarantees and contingent liabilities relating to PepsiCo's
restaurant businesses under which PepsiCo is liable. Nevertheless, after the
Distribution Date, PepsiCo may remain liable on certain of such letters of
credit, guarantees and contingent liabilities which were not able to be
released, terminated or replaced prior to the Distribution Date. Pursuant to the
Separation Agreement, from and after the Distribution Date TRICON will pay a fee
to PepsiCo with respect to any such letters of credit, guarantees and contingent
liabilities until such time as they are released, terminated or replaced by a
qualified letter of credit with a maximum drawing amount equal to the full
amount of all remaining obligations and foreseeable claims under such letters of
credit, guarantees and contingent liabilities. At all times TRICON will be
required to indemnify PepsiCo with respect to such letters of credit, guarantees
and contingent liabilities.
Certain U.S. Federal Income Tax Consequences of the Distribution
PepsiCo has received a ruling from the Internal Revenue Service to the
effect that the Distribution will qualify as a tax-free Distribution under
Sections 355 and 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), and, accordingly, that (i) except as described below with respect to
fractional shares, PepsiCo's shareholders will not recognize income, gain or
loss upon the receipt of shares of TRICON Common Stock; (ii) the aggregate tax
basis of the shares of PepsiCo Capital Stock and TRICON Common Stock (including
any fractional share interests to which a PepsiCo shareholder is entitled) held
by a PepsiCo shareholder after the Distribution will be the same as the tax
basis of the shares of PepsiCo Capital Stock held by such shareholder
immediately before the Distribution, and will be allocated between the shares of
TRICON Common Stock and PepsiCo Capital Stock in proportion to their relative
fair market values on the Distribution Date; (iii) the holding period of the
shares of TRICON Common Stock
<PAGE> 35
received by a PepsiCo shareholder (including any fractional share interests to
which a PepsiCo shareholder is entitled) will include the holding period of the
shares of PepsiCo Capital Stock with respect to which the Distribution was made,
provided that the shares of PepsiCo Capital Stock are held as a capital asset by
such shareholder on the Distribution Date; and (iv) cash received in lieu of
fractional share interests in TRICON Common Stock will give rise to gain or loss
equal to the difference between the amount of cash received and the tax basis
allocable to such fractional share interests. Such gain or loss will be capital
gain or loss if the shares of PepsiCo Capital Stock are held as a capital asset
on the Distribution Date.
U.S. Treasury regulations require each PepsiCo shareholder that
receives shares of TRICON Common Stock in the Distribution to attach to the
holder's U.S. Federal income tax return for the year in which such stock is
received a detailed statement setting forth such data as may be appropriate in
order to show the applicability of Section 355 of the Code to the Distribution.
Within a reasonable time after the Distribution, PepsiCo will provide each
PepsiCo shareholder of record as of the Record Date with the information
necessary to comply with that requirement, and will provide information
regarding the allocation of basis described in clause (ii) above.
The foregoing is a summary of the material U.S. Federal income tax
consequences of the Distribution under the law in effect as of the date of this
Information Statement. IT DOES NOT PURPORT TO COVER ALL INCOME TAX CONSEQUENCES
AND MAY NOT APPLY TO SHAREHOLDERS WHO ACQUIRED THEIR PEPSICO SHARES IN
CONNECTION WITH A GRANT OF SHARES AS COMPENSATION, WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL
TREATMENT UNDER THE CODE. All PepsiCo shareholders should consult their own tax
advisors regarding the appropriate income tax treatment of their receipt of
TRICON Common Stock, including the application of Federal, state, local and
foreign tax laws, and the effect of possible changes in tax law that may affect
the tax consequences described above.
MANAGEMENT OF TRICON
Directors
TRICON's Restated Articles of Incorporation provide that the number of
Directors may be altered from time to time, by resolution adopted by the
Company's Board of Directors. However, the number of Directors may not be less
than three nor more than fifteen.
Provided that the number of Directors equals or exceeds the number
required under North Carolina Law to stagger the terms of directors (currently
nine), from and after the Company's 1997 annual shareholders' meeting, the Board
of Directors shall be divided into three classes, to serve respectively until
the annual meetings in 1998, 1999 and 2000, and until their successors shall be
elected and shall qualify. Thereafter, their successors shall be elected for
three year terms and until their successors shall be elected and shall qualify.
The following individuals have agreed to serve as Directors of TRICON
following the Distribution. These Directors will hold office until the first
annual meeting of
<PAGE> 36
TRICON's shareholders after the Distribution, which is expected to be held in
May, 1998.
Andrall E. Pearson, age 72, has been elected a Director and Chairman of
the Board of TRICON, and will be elected Chief Executive Officer prior to the
Distribution Date. Prior thereto, Mr. Pearson served as an operating partner of
Clayton, Dubilier & Rice, a leveraged buy-out firm. He was PepsiCo's President
and Chief Operating Officer from 1971 through 1984 and served on PepsiCo's Board
of Directors for 26 years, retiring in April 1996. From 1985 to 1993 he was a
tenured professor at Harvard Business School. Mr. Pearson is Chairman of the
Board of Alliant FoodService, Inc. and a director of Kinko's, Inc., May
Department Stores Company and Travelers Group.
David C. Novak, age 44, will be elected a Director, Vice Chairman of the
Board and President of TRICON prior to the Distribution Date. Prior thereto, Mr.
Novak served as Group President and Chief Executive Officer, KFC and Pizza Hut,
a position he has held since August 1996. Mr. Novak joined Pizza Hut in 1986 as
Senior Vice President, Marketing. In 1990, he became Executive Vice President,
Marketing and National Sales, for Pepsi-Cola Company. In 1992 he became Chief
Operating Officer, Pepsi-Cola North America. In 1994 he became President and
Chief Executive Officer of KFC North America.
D. Ronald Daniel, age 67, will be elected to TRICON's Board of Directors
effective on the Distribution Date. Mr. Daniel has been a director of McKinsey &
Company since 1968. He joined McKinsey & Company in 1957 and held various
positions with the firm, including Managing Director from 1976 to 1988. Mr.
Daniel is a member of the Board of WNET/Thirteen, New York's public television
station.
James Dimon, age 41, will be elected to TRICON's Board of Directors
effective on the Distribution Date. Mr. Dimon is President, Chief Operating
Officer and a director of Travelers Group. He was appointed President in 1991,
and became Chief Operating Officer in 1993. Previously he had been Executive
Vice President and Chief Financial Officer of Primerica Corporation, the
predecessor company of Travelers Group. He is also Chairman and Chief Executive
Officer of Smith Barney Inc., a subsidiary of Travelers Group, and has held this
position since 1996.
Massimo Ferragamo, age 39, will be elected to TRICON's Board of
Directors effective on the Distribution Date. Mr. Ferragamo is President and
Vice Chairman of Moda Imports, Inc., a subsidiary of Salvatore Ferragamo Italia,
which controls sales and distribution of Ferragamo products in North America.
Mr. Ferragamo has held this position since 1985.
Robert Holland, Jr., age 56, will be elected to TRICON's Board of
Directors effective on the Distribution Date. Mr. Holland is the owner and Chief
Executive Officer of WorkPlace Integrators, Michigan's largest Steelcase office
furniture dealer. Prior to his current position, he was President and Chief
Executive Officer of Ben & Jerry's Homemade, Inc. from 1995 through 1996. From
1981 to 1984 and from 1991 to 1995, Mr. Holland served as Chairman and CEO of
Rokher-J, Inc., which participates in
<PAGE> 37
business development projects and provides strategy development assistance to
senior management of major corporations. From 1984 to 1987, he was Chairman and
Chief Executive Officer of City Marketing, a beverage distribution company in
Detroit, Michigan. From 1987 to 1990, he was Vice President, and from 1990 to
1994 he was Chairman, of Gilreath Manufacturing, Inc., a full-service custom
plastic injection molding company. Mr. Holland is a director of Mutual of New
York, TruMark Inc., Frontier Corporation, A C Nielsen Corporation and Olin
Corporation.
Sidney Kohl, age 66, will be elected to TRICON's Board of Directors
effective on the Distribution Date. Mr. Kohl, along with other family members,
developed Kohl's Food Stores, Wisconsin's largest supermarket chain, and Kohl's
Department Stores, now a national (New York Stock Exchange) department store
chain. He served as President and then Chairman when the two entities were sold
in 1972. He was a developer and managing partner of two regional malls in
Milwaukee, and is/was the developer, owner and manager of other substantial
commercial and residential property. Mr. Kohl serves on the Board of Kinko's,
Inc. and Alliant FoodService, Inc. (formerly Kraft Food Service).
Kenneth G. Langone, age 61, will be elected to TRICON's Board of
Directors effective on the Distribution Date. Mr. Langone is the founder, and,
since 1974, has been Chairman of the Board, Chief Executive Officer and
President, of Invemed Associates, Inc., a New York Stock Exchange firm engaged
in investment banking and brokerage. He is a founder of Home Depot, Inc., and
has been a director since 1978. He is also a director of DBT Online, Inc., St.
Jude Medical, Inc., Unifi, Inc. and United States Satellite Broadcasting Co.
Jackie Trujillo, age 61, will be elected to TRICON's Board of Directors
effective on the Distribution Date. Ms. Trujillo is Chairman of the Board of
Harman Management Corporation, one of KFC's largest franchisees. She joined the
KFC organization in 1953 and held various positions, becoming Executive Vice
President of Operations in 1983, with responsibility for operations of KFC
restaurants in Utah, Colorado, Washington and Northern California. In 1987, she
became Executive Vice Chairman of Harman Management Corporation, assuming her
present position in 1995.
Robert J. Ulrich, age 54, will be elected to TRICON's Board of Directors
effective on the Distribution Date. Mr. Ulrich is Chairman and Chief Executive
Officer of Dayton Hudson Corporation and Target Stores. He became President of
Dayton Hudson Department Store Company in 1984, and President of Target Stores
in late 1984. He became Chairman and Chief Executive Officer of Target Stores in
1987, and assumed his additional present position at Dayton Hudson Corporation
in 1994. Mr. Ulrich is also a director of Dayton Hudson Corporation.
Jeanette S. Wagner, age 68, will be elected to TRICON's Board of
Directors effective on the Distribution Date. Ms. Wagner is President of Estee
Lauder International, Inc., the largest subsidiary of The Estee Lauder Companies
Inc. Ms. Wagner's career at Estee Lauder has included marketing and general
management assignments domestically and
<PAGE> 38
internationally. She assumed her present position in 1986. Ms. Wagner is also a
director of American Greetings Corp. and Stride Rite Corporation.
John L. Weinberg, age 72, will be elected to TRICON's Board of Directors
effective on the Distribution Date. Mr. Weinberg is Senior Chairman of Goldman,
Sachs & Co., a position he has held since 1990. Mr. Weinberg has served as an
investment banker with Goldman, Sachs & Co. since 1950. He became a Partner in
1956, Senior Partner and Co-Chairman of the Management Committee in 1976, and
was Senior Partner and Chairman of the Management Committee from 1984 until
1990. He is a director of Champion International Corporation, Knight-Ridder,
Inc. and Providian Financial Corp.
Board Compensation and Benefits
Employee Directors will not receive additional compensation for serving
on the Board of Directors. Non-employee Directors will receive an annual cash
retainer of $50,000 and an annual grant of options to buy $50,000 worth of
TRICON Common Stock. Non-employee Directors will also receive a one-time stock
grant of $25,000 upon joining the Board, payment of which will be deferred until
termination from the Board. Directors may also defer payment of their retainers.
Deferrals may not be made for less than one year. For the first year only,
non-employee Directors will receive a Board meeting fee of $1,500 for each Board
meeting in excess of eight during such year and a Committee meeting fee of
$1,000 for each Committee meeting in excess of eight during such year. TRICON
will also pay the premiums on directors' and officers' liability and business
travel accident insurance policies covering the Directors.
Committees of the Board
It is anticipated that TRICON will establish Audit, Compensation and
Nominating Committees of the Board. It is also anticipated that all members will
be non-employee Directors.
Audit Committee. The Audit Committee will: (i) recommend to the Board
the selection, retention or termination of TRICON's independent auditors; (ii)
approve the level of non-audit services provided by the independent auditors;
(iii) review the scope and results of the work of TRICON's internal auditors;
(iv) review the scope and approve the estimated cost of the annual audit; (v)
review the annual financial statements and the results of the audit with
management and the independent auditors; (vi) review with management and the
independent auditors the adequacy of TRICON's system of internal accounting
controls; (vii) review with management and the independent auditors the
significant recommendations made by the auditors with respect to changes in
accounting procedures and internal accounting controls; and (viii) report to the
Board on the results of its review and make such recommendations as it may deem
appropriate.
Compensation Committee. The Compensation Committee will: (i) administer
TRICON's Long-Term Incentive Plan, Executive Incentive Compensation Plan and
related plans; (ii) approve, or refer to the Board of Directors for approval,
changes in such plans and the compensation programs to which they relate; and
(iii) review and approve the compensation of senior executives of TRICON.
<PAGE> 39
Nominating Committee. The Nominating Committee will: (i) identify
suitable candidates for Board membership; (ii) propose to the Board a slate of
directors for election by the shareholders at each annual meeting; and (iii)
propose candidates to fill vacancies on the Board based on qualifications it
determines to be appropriate.
Executive Officers
In addition to Messrs. Pearson and Novak (see "Management of TRICON -
Directors"), the following persons are expected to serve as executive officers
of TRICON as of the Distribution Date:
Peter A. Bassi, age 48, will be elected President, International
Restaurants prior to the Distribution Date. Prior thereto, Mr. Bassi served as
Executive Vice President, Asia, of PepsiCo Restaurants International, a position
he assumed in 1996. He joined Pepsi-Cola Company in 1972, and served in various
management positions at Frito-Lay, Pizza Hut and PepsiCo Food Service
International. He served as Senior Vice President, Finance and Chief Financial
Officer at Taco Bell Corp. from 1987 to 1994. From 1995 to 1996 he served as
Senior Vice President and Chief Financial Officer at PepsiCo Restaurants
International.
Robert C. Lowes, age 51, has been elected Chief Financial Officer of
TRICON. Mr. Lowes is the former Chief Executive Officer of Burger King, a
subsidiary of Grand Metropolitan, a food and consumer products company. Before
becoming Burger King's Chief Executive Officer, Mr. Lowes held several positions
with Grand Metropolitan, including Deputy Chief Financial Officer, Chief
Financial Officer of its Food Sector, and Chief Executive Officer of its
European Foods division. Mr. Lowes joined Grand Metropolitan from Philip Morris
and General Foods, where he served in a number of senior finance capacities,
including Vice President, Controller of Philip Morris, and Group Vice President
and Chief Financial Officer at Oscar Mayer.
Jeffrey A. Moody, age 39, will be elected President and Chief Concept
Officer, KFC U.S.A., prior to the Distribution Date. Prior thereto, Mr. Moody
served as Senior Vice President, Operations, for PepsiCo Restaurants
International, a position he assumed in 1996. Previously, he was Vice President,
Operations for PepsiCo Restaurants International. Mr. Moody joined Pizza Hut in
1987, and held various management positions prior to those mentioned above.
Michael S. Rawlings, age 42, will be elected President and Chief Concept
Officer, Pizza Hut U.S.A., prior to the Distribution Date. Prior thereto, Mr.
Rawlings served as Chairman, President and Chief Executive Officer of DDB
Needham Worldwide Dallas Group, a position he held following the merger of
Tracy-Locke, Inc. into DDB Needham in 1992. Previously, Mr. Rawlings was General
Manager and Chief Operating Officer of Tracy-Locke, Inc., a position he assumed
in 1989.
Peter C. Waller, age 43, will be elected President and Chief Concept
Officer, Taco Bell U.S.A., prior to the Distribution Date. Prior thereto, Mr.
Waller served as Senior Vice President of Marketing of Taco Bell, a position he
assumed in the beginning of 1996, following 18 months as a Senior Vice President
of Marketing for KFC-USA. He
<PAGE> 40
joined PepsiCo in 1990 as Managing Director for Western Europe, and subsequently
spent two years as Regional Marketing Director for KFC for the South Pacific and
South Africa.
Sandra S. Wijnberg, age 41, has been elected Treasurer of TRICON. Prior
thereto, she served as Senior Vice President of Finance and Chief Financial
Officer of KFC, a position she held since 1996. Ms. Wijnberg joined PepsiCo in
1994, and served as Vice President, Corporate Finance and Assistant Treasurer
until joining KFC. She was previously a Principal, Investment Banking Division,
of Morgan Stanley & Co., and, prior to that, was an Associate, Corporate
Finance, at Shearson Lehman Brothers.
Senior Operating Management
Jonathan D. Blum, age 39, will be elected Senior Vice President, Public
Affairs, of TRICON prior to the Distribution Date. Prior thereto, Mr. Blum
served as Vice President of Public Affairs for Taco Bell Corp., a position he
has held since joining Taco Bell in 1993.
Thomas E. Davin, age 39, will be elected Chief Operating Officer, Taco
Bell U.S.A. prior to the Distribution Date. Prior thereto, Mr. Davin served as
Vice President, Operations Services, a position he assumed in 1996. Mr. Davin
joined PepsiCo in 1991 as Director, Mergers and Acquisitions. He served as a
Zone Vice President at Taco Bell from 1993 to 1996.
Gregg Dedrick, age 38, will be elected Chief People Officer of TRICON
prior to the Distribution Date. Prior thereto, Mr. Dedrick served as Senior Vice
President, Human Resources, for Pizza Hut and KFC, a position he assumed in
1996. Mr. Dedrick joined Pepsi-Cola Company in 1981 and held various
personnel-related positions with Pepsi-Cola from 1981 to 1994. In 1994 he became
Vice President, Human Resources, Pizza Hut, and in 1995 he became Senior Vice
President Human Resources, KFC.
Aylwin B. Lewis, age 43, will be elected Chief Operating Officer, Pizza
Hut U.S.A., prior to the Distribution Date. Prior thereto, Mr. Lewis served as
Senior Vice President, Operations, a position he assumed in 1996. Mr. Lewis
joined KFC in 1991 as a Regional General Manager. He served in various positions
at KFC, including Senior Director of Franchising and Vice President of
Restaurant Support Services, becoming Division Vice President, Operations in
1993, and Senior Vice President, New Concepts, in 1995.
Charles E. Rawley, age 47, is Chief Operating Officer, KFC U.S.A., and
will continue to hold that position at the Distribution Date. Mr. Rawley joined
KFC in 1985 as a Director of Operations. He served as Vice President of
Operations for the Southwest, West, Northeast, and Mid-Atlantic Divisions from
1988 to 1994 when he became Senior Vice President, Concept Development. Mr.
Rawley assumed his current position in 1995.
<PAGE> 41
Stock Ownership of Executive Officers and Directors
The following table sets forth information concerning the TRICON Common
Stock that is expected to be beneficially owned by each of TRICON's proposed
directors, by each of the five named executive officers of TRICON and by all
directors and executive officers as a group. The projections are based upon the
number of shares of PepsiCo Capital Stock held by the individuals and the group
at August 15, 1997, and do not include any options granted under PepsiCo plans.
Effective on the Distribution Date, certain executive officers of TRICON will
have certain PepsiCo stock options converted into options to acquire TRICON
Common Stock. See "PepsiCo Stock Option and Performance Share Conversion." In
addition, certain executive officers of TRICON will be granted options to
acquire TRICON Common Stock on or about the Distribution Date. These converted
options and new grants are not reflected in this table. None of the following
persons will hold in excess of 1% of TRICON Common Stock.
Beneficial Owner Projected Number
of Shares
Andrall E. Pearson................................... 15,403
David C. Novak....................................... 246
R. Ronald Daniel..................................... -0-
James Dimon......................................... -0-
Massimo Ferragamo.................................... -0-
Robert Holland, Jr. ................................ -0-
Sidney Kohl.......................................... -0-
Kenneth G. Langone................................... -0-
Jackie Trujillo...................................... 480(1)
Robert J. Ulrich..................................... -0-
Jeanette S. Wagner................................... -0-
John L. Weinberg..................................... 12,100
Peter A. Bassi....................................... 3
Peter C. Waller...................................... -0-
Sandra S. Wijnberg...................................... -0-
All Directors and Executive Officers as a Group
(18 persons) 28,662
___________
(1) Ms. Trujillo shares voting and investment power with respect to 4,800
shares of PepsiCo Capital Stock with other members of the Board of Trustees
of Harman Cafes Employee Profit Sharing Trust.
<PAGE> 42
EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation
-------------------------------------------------------------------------
Awards Payouts
-----------------------------
Securities
Other Annual Underlying Long-Term All Other
Name and Principal Compensation Options (#) Incentive Plan Compensation
Position (1) Year Salary ($) Bonus ($) ($) (2) Payouts ($) ($)
- ------------------- ----- -------- --------- ---------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrall E. Pearson 1996 -- -- -- -- -- --
Chairman of the
Board and Chief
Executive Officer
David C. Novak 1996 433,650 515,200 9,068 888,861 0 0
Vice Chairman of the
Board and President
Peter A. Bassi 1996 316,150 297,210 8,840 114,130 0 0
President, International
Restaurants
Peter C. Waller 1996 230,860 114,180 7,384 111,125 0 0
President and Chief
Concept Officer, Taco
Bell U.S.A.
Sandra S. Wijnberg 1996 224,660 132,190 109,677(3) 64,126 0 0
Treasurer
- ---------------
</TABLE>
(1) The principal position set forth for each named executive officer
reflects their position as of the Distribution Date. Compensation disclosed in
this table was paid by certain of TRICON's subsidiaries during the relevant
periods. Messrs. Pearson, Lowes and Rawlings were not previously employed by
TRICON or its subsidiaries (see "Management of TRICON - Executive Officers" for
biographies of named executive officers). Mr. Pearson served as a Director of
PepsiCo in 1994, 1995 and 1996, and received an annual retainer of $70,000 and
an annual stock grant with a value of $30,000 on the grant date in 1994 and
1995. In 1996, Mr. Pearson received an annual retainer of $70,000 until his
retirement in April 1996.
(2) The options listed in this column are PepsiCo options and do not
reflect the adjustments discussed in the section entitled "PepsiCo Stock Option
and Performance Share Conversion."
(3) Included in this amount is $26,776 in country club expense.
<PAGE> 43
<TABLE>
<CAPTION>
PepsiCo Option Grants in Last Fiscal Year (1)
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation for
Individual Grants Option Term
- ------------------------------------------------------------------------------ ---------------------------------------
Number of % of Total
Securities Options
Under- Granted to Exercise
lying Employees in or Base
Options Fiscal Price Expiration
Name Granted (#) Year ($/Share) Date 5% ($)(2) 10% ($)(2)
- ------------------- --------- ------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
David C. Novak 1,749(3) 0.003 35.50 6/30/06 39,048 98,955
300,000(6) 0.590 29.46875 1/25/06 5,559,822 14,089,679
300,000(7) 0.590 29.46875 1/25/11 9,538,399 28,088,860
190,032(4) 0.374 29.46875 1/25/06 3,521,813 8,924,967
68,572(4) 0.135 28.4375 1/25/06 1,075,099 2,648,020
17,804(5) 0.035 28.4375 1/27/04 206,115 480,337
10,704(5) 0.021 28.03125 1/27/04 143,259 343,130
Peter A. Bassi 1,194(3) 0.002 35.50 6/30/06 26,657 67,554
11,840(4) 0.023 31.6875 1/25/06 228,540 575,027
6,080(5) 0.012 31.6875 1/27/04 88,536 210,600
95,016(4) 0.187 29.46875 1/25/06 1,760,907 4,462,483
Peter C. Waller 765(3) 0.001 35.50 6/30/06 17,079 43,282
95,016(4) 0.187 29.46875 1/25/06 1,760,907 4,462,483
15,344(5) 0.030 28.03125 1/27/04 205,359 491,871
Sandra S. Wijnberg 9,844(4) 0.019 35.56250 1/25/06 206,419 515,677
2,744(5) 0.005 35.56250 1/27/04 43,117 101,861
634(3) 0.001 35.50 6/30/06 14,155 35,870
50,904(4) 0.100 29.46875 1/25/06 943,391 2,390,737
- ----------
</TABLE>
(1) See "PepsiCo Stock Option and Performance Share Conversion" for a
discussion of the treatment of these options as a result of the Distribution.
The options listed in this table do not reflect the adjustments discussed in
such section.
(2) The 5% and 10% rates of appreciation were set by the Securities and
Exchange Commission and are not intended to forecast future appreciation, if
any, of PepsiCo's stock. If PepsiCo's stock does not increase in value, then the
option grants described in the table will be valueless.
(3) Twenty percent of these options becomes exercisable one year after
the grant date, July 1, 1996, and an additional twenty percent becomes
exercisable each year thereafter.
(4) These options become exercisable on February 1, 2000.
(5) These options become exercisable on February 1, 1998.
(6) These options become exercisable on January 25, 2001.
<PAGE> 44
(7) These options become exercisable on January 25, 2006.
<TABLE>
Aggregated PepsiCo Option Exercises in Last Fiscal
Year
and Fiscal Year-End Option Values (1)
<CAPTION>
Shares Ac- Number of Securities Under-
quired on Value lying Unexercised Options at Value of Unexercised In-the-
Name Exercise(#) Realized Fiscal Year-End Money Options at FY-End(2)
- -------------------- ----------- -------------- --------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David C. Novak 60,000 $1,594,551 342,152 1,062,806 $6,036,052 $2,011,962
Peter A. Bassi 53,100 1,390,173 212,598 215,598 3,554,777 1,005,862
Peter C. Waller 0 0 41,526 169,747 493,177 736,550
Sandra S. Wijnberg 0 0 19,144 118,822 247,423 714,574
- ----------
</TABLE>
(1) See "PepsiCo Stock Option and Performance Share Conversion"
regarding the effect of the Distribution on PepsiCo stock options. The options
listed in this table do not reflect the adjustments discussed in such section.
(2) The closing price of PepsiCo Capital Stock on December 27, 1996,
the last trading day prior to PepsiCo's fiscal year-end, was $29.625.
Pension Plan Table
Many of TRICON's salaried employees have been participants in PepsiCo's
Salaried Employees Retirement Plan and PepsiCo's Pension Equalization Plan. On
or prior to the Distribution Date, the Company and its participating
subsidiaries intend to adopt a TRICON Salaried Employees Retirement Plan and
TRICON Pension Equalization Plan on terms substantially similar to the
comparable PepsiCo plans. The annual benefits payable under these two pension
plans to employees with five or more years of service at age 65 are, for the
first ten years of credited service, 30% of the employee's highest consecutive
five-year average annual earnings plus an additional 1% of the employee's
highest consecutive five-year average annual earnings for each additional year
of credited service over ten years, less .43% of final average earnings not to
exceed Social Security covered compensation multiplied by years of service (not
to exceed 35 years).
Under the TRICON plans, when an executive retires at the normal
retirement age (65), the approximate annual benefits payable after January 1,
1997 for the following pay classifications and years of service are expected to
be:
<PAGE> 45
<TABLE>
<CAPTION>
Remuneration Years of Service
- ------------------ -------------- -------------- -------------- -------------- --------------
25 30 35 40 45
- ------------------ -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$250,000 $109,280 $121,130 $132,990 $145,490 $160,790
$500,000 $221,780 $246,130 $270,490 $295,490 $329,540
$750,000 $334,280 $371,130 $407,990 $445,490 $498,290
$1,000,000 $446,780 $496,130 $545,490 $595,490 $667,040
$1,250,000 $559,280 $621,130 $682,990 $745,490 $835,790
</TABLE>
The pay covered by the pension plans referred to above is based on the
salary and bonus shown in the Summary Compensation Table on page 42 for each of
the named executive officers. The years of credited service as of January 1,
1997 for the following named executive officers are: David C. Novak, 10 years;
Peter A. Bassi, 24 years; Peter C. Waller, 6 years; and Sandra S. Wijnberg, 2
years.
Employment Agreement
The Company has entered into an employment agreement with Mr. Pearson
under which he will serve as Chairman of the Board and Chief Executive Officer
of TRICON until July 1, 2000. The agreement provides for an annual salary of
$900,000; and annual incentive compensation awards to be determined by the
TRICON Board of Directors. However, the bonus for 1997 (payable in 1998) will be
$450,000. TRICON will also pay Mr. Pearson, by year-end 1997, a one-time bonus
of $850,000. In addition, TRICON will make a $1,000,000 retirement payment to
Mr. Pearson at the end of his employment term. As soon as practicable after the
Distribution Date, Mr. Pearson will be granted options to purchase 1,050,000
shares of TRICON Common Stock. The exercise price of these options will be based
on the closing price of TRICON Common Stock for the fifth through the twentieth
trading days after the Distribution. One third of the options will vest on each
of July 1, 1998, July 1, 1999 and July 1, 2000. They will be exercisable for a
period of ten years from the grant date.
NEW STOCK-BASED AND INCENTIVE PLANS OF TRICON
TRICON Long-Term Incentive Plan
Generally. The TRICON Long-Term Incentive Plan (the "TRICON LTIP") is
expected to be approved prior to the Distribution Date by the TRICON Board of
Directors and by PepsiCo as the sole shareholder of TRICON. The TRICON LTIP is
expected to provide for the grant of various types of long-term incentive awards
to key employees, consistent with the objectives and limitations of the TRICON
LTIP. These awards may include non-qualified options to purchase shares of
TRICON Common Stock, performance units, incentive stock options, stock
appreciation rights and restricted stock grants. The term of the TRICON LTIP is
expected to be ten years.
Administration. The TRICON LTIP is expected to vest broad powers in the
Compensation Committee (the "Compensation Committee") of TRICON's Board of
Directors to administer and interpret the TRICON LTIP. The Compensation
Committee's powers are expected to include authority, within the limitations set
forth in the TRICON LTIP, to select the persons to be granted awards, to
determine terms and conditions of awards, including but not limited to the type,
size and term of awards, to determine the time when awards will be granted and
any conditions for receiving awards, to establish objectives and conditions for
earning awards, to determine whether
<PAGE> 46
such conditions have been met and whether payment of an award will be made at
the end of an award period, or at the time of exercise, or deferred, to
determine whether payment of an award should be reduced or eliminated, and to
determine whether such awards should be intended to qualify, regardless of their
amount, as deductible for U.S. Federal income tax purposes. The TRICON LTIP is
also expected to generally vest broad powers in the Compensation Committee to
amend and terminate the TRICON LTIP.
Eligibility. Key employees of TRICON and its divisions, subsidiaries and
affiliates are expected to be eligible to be granted awards under the TRICON
LTIP. The Compensation Committee may also grant awards to employees of a joint
venture or other business in which TRICON has a substantial investment, and may
make awards to non-executive employees who are in a position to contribute to
the success of TRICON.
TRICON Executive Incentive Compensation Plan
Generally. TRICON's Executive Incentive Compensation Plan (the "TRICON
Incentive Plan") is expected to be approved prior to the Distribution Date by
the TRICON Board of Directors and by PepsiCo as the sole shareholder of TRICON.
The TRICON Incentive Plan is expected to provide for officers of TRICON and its
divisions and subsidiaries to be granted annual cash incentive awards consistent
with the objectives and limitations of the TRICON Incentive Plan. The term of
the TRICON Incentive Plan is expected to be ten years.
Administration. The TRICON Incentive Plan is expected to vest broad
powers in the Compensation Committee to administer and interpret the TRICON
Incentive Plan. The Compensation Committee's powers are expected to include
authority, within the limitations set forth in the TRICON Incentive Plan, to
select the persons to be granted awards, to determine the time when awards will
be granted, to determine and certify whether objectives and conditions for
earning awards have been met, to determine whether payment of an award will be
made at the end of an award period or deferred, and to determine whether an
award or payment of an award should be reduced or eliminated. The TRICON
Incentive Plan is also expected to generally vest broad powers in the
Compensation Committee to amend and terminate the TRICON Incentive Plan.
Eligibility. At the discretion of the Compensation Committee, executive
officers of TRICON are expected to be granted, and other officers of TRICON, its
divisions and subsidiaries may be granted, annual incentive awards under the
TRICON Incentive Plan.
Successor Plans
On or prior to the Distribution Date, the Company intends to adopt plans
with terms substantially similar to the PepsiCo Stock Option Incentive Plan (the
"PepsiCo SOIP") and the PepsiCo SharePower Stock Option Plan ("PepsiCo
SharePower") for the purpose of continuing TRICON stock options which were
converted from options granted under such PepsiCo plans. See "PepsiCo Stock
Option and Performance Share Conversion." It has not yet been determined whether
any new grants will be made under these plans. TRICON stock options and
performance share units ("PSUs") which were converted from options or PSUs, as
the case may be, awarded under the
<PAGE> 47
PepsiCo Long-Term Incentive Plan ("PepsiCo LTIP") will be considered to have
been awarded under the TRICON LTIP described above.
PEPSICO STOCK OPTION AND PERFORMANCE SHARE CONVERSION
Effective on the Distribution Date, holders of outstanding options to
purchase PepsiCo Capital Stock and holders of unvested PepsiCo PSUs will have
their interests adjusted as described below. The Compensation Committee of
PepsiCo's Board of Directors has approved formulas to adjust the exercise price
and award size of PepsiCo stock options and PSUs pursuant to the terms and
provisions of each such grant and the relevant plan. TRICON employees who hold
PepsiCo awards will receive either an award of TRICON stock options or PSUs or
an adjusted PepsiCo award, in accordance with the formulas described below. The
adjustment formulas are intended to maintain the value of the outstanding
PepsiCo stock options at the time of adjustment.
Stock Options. Employees of TRICON who received PepsiCo stock options in
connection with the 1996 grants and any 1997 grants under the PepsiCo LTIP and
the PepsiCo SOIP, and employees of TRICON who received PepsiCo stock options
under PepsiCo SharePower which have not become exercisable prior to the
Distribution Date, shall have such PepsiCo stock options entirely converted into
TRICON stock options. For these converted options, the exercise price of each
such TRICON stock option shall equal the exercise price of the corresponding
PepsiCo stock option prior to the Distribution, multiplied by a factor (the
"TRICON Stock Conversion Ratio") where the numerator is the composite volume
weighted average price of the TRICON Common Stock for the trading days during a
pricing period to be determined at a future date (the "Per Share TRICON Stock
Price") and the denominator is the composite volume weighted average price of
PepsiCo Capital Stock trading with TRICON for the trading days during the
pricing period (the "Per Share Pre-Split PepsiCo Stock Price"). The number of
shares of TRICON Common Stock subject to each such TRICON stock option shall
equal the number of shares subject to the corresponding PepsiCo stock option
prior to the Distribution divided by the TRICON Stock Conversion Ratio. All
other terms of such TRICON stock options shall be the same as the terms of the
PepsiCo stock options from which they were converted.
Employees of TRICON who received PepsiCo stock options in connection
with grants made prior to 1996 under the PepsiCo LTIP and the PepsiCo SOIP, and
employees of TRICON who received PepsiCo stock options under PepsiCo SharePower
which have become exercisable prior to the Distribution Date, shall retain such
options to purchase PepsiCo Capital Stock, subject to the following adjustments
to the exercise price and number of shares subject to each such option (each, an
"Adjusted PepsiCo Stock Option"). The exercise price of each Adjusted PepsiCo
Stock Option shall be determined by multiplying the PepsiCo stock option
exercise price prior to the Distribution by a factor (the "PepsiCo Stock
Conversion Ratio") where the numerator is the composite volume weighted average
price of PepsiCo Capital Stock trading without TRICON for the trading days
during the pricing period (the "Per Share Post-Split PepsiCo Stock Price") and
the denominator is the Per Share Pre-Split PepsiCo Stock Price. The number of
shares of PepsiCo Capital Stock subject to each Adjusted PepsiCo Stock Option
shall equal the number of shares subject to such PepsiCo stock option prior to
the Distribution divided by the PepsiCo Stock Conversion Ratio. All other
<PAGE> 48
terms of the Adjusted PepsiCo Stock Options shall be the same as the terms of
the pre-adjustment PepsiCo stock options.
Employees of PepsiCo who will continue to be employed by PepsiCo after
the Distribution Date and hold any PepsiCo stock options, and holders of any
PepsiCo stock options who retire or have retired from PepsiCo on or prior to the
Distribution Date, regardless of whether such holder has retired from PepsiCo's
packaged goods or restaurant businesses and regardless of whether such options
were granted under the PepsiCo LTIP, the PepsiCo SOIP, PepsiCo SharePower or
otherwise, shall retain such options to purchase PepsiCo Capital Stock, subject
to the adjustments to the exercise price and number of shares subject to each
such option described in the previous paragraph. All other terms of such
Adjusted PepsiCo Stock Options shall be the same as the terms of the
pre-adjustment PepsiCo stock options.
Performance Share Units. Performance share units awarded in 1994 will
remain unchanged for employees of TRICON and post-split PepsiCo. These awards
will continue to earn out against the pre-established earnings per share target
("EPS") and are expected to be paid out on schedule in 1998. EPS results will be
measured on a consolidated basis (including the restaurant businesses) through
the end of 1997, provided that forecasted restaurant earnings will be used for
the period between the Distribution Date and year-end in the EPS calculation.
Performance share units awarded in 1996 will have their target EPS
adjusted, but vesting, the measurement period and the payout date of such awards
will remain unchanged for employees of TRICON and post-split PepsiCo. For TRICON
employees, the TRICON Board of Directors is expected to determine the
appropriate four year cumulative EPS target for such awards based on TRICON's
business plans. For employees of post-split PepsiCo, the current four year EPS
target will be adjusted to reflect the exclusion of the restaurant businesses
while maintaining the original annual growth rate amounts.
DESCRIPTION OF TRICON CAPITAL STOCK
Under TRICON's Restated Articles of Incorporation (the "TRICON
Articles"), which have been filed as an exhibit to the Registration Statement of
which this Information Statement forms a part, TRICON's authorized Capital Stock
consists of 1,000,000,000 shares, without par value, of which 750,000,000 shall
be Common Stock and 250,000,000 shall be preferred stock ("Preferred Stock").
Based on 1.53 billion shares of PepsiCo Capital Stock outstanding as of July 11,
1997, estimates of the number of shares of PepsiCo Capital Stock which will be
(i) repurchased by PepsiCo prior to the Distribution Date and (ii) issued upon
the exercise of options prior to the Distribution Date, and a distribution ratio
of one share of TRICON Common Stock for every ten shares of PepsiCo Capital
Stock, it is expected that approximately 152 million shares of TRICON Common
Stock will be distributed to holders of PepsiCo Capital Stock. No Preferred
Stock will be distributed to PepsiCo shareholders in connection with the
Distribution.
<PAGE> 49
TRICON Common Stock
The holders of TRICON Common Stock will be entitled to one vote for each
share on all matters voted on by shareholders, including the election of
directors. Except as provided with respect to any series of Preferred Stock
authorized by TRICON's Board of Directors, the exclusive voting power with
respect to all matters to be voted on by shareholders shall be vested in the
holders of Common Stock. The TRICON Articles do not provide for cumulative
voting in the election of directors. The holders of TRICON Common Stock will be
entitled to such dividends as may be declared from time to time by the TRICON
Board from funds available therefor, and upon liquidation will be entitled to
receive, pro rata, all the net assets of TRICON available for distribution to
such holders. All of the shares of TRICON Common Stock distributed by PepsiCo
will be fully paid and nonassessable. The holders of TRICON Common Stock will
have no preemptive right to subscribe for or purchase any securities of any kind
or class of TRICON.
TRICON Preferred Stock
Under the TRICON Articles, the Company's Board of Directors is
empowered, subject to limitations prescribed by North Carolina law, to amend the
TRICON Articles to authorize the issuance of Preferred Stock. The Preferred
Stock may be divided into two or more series, with such preferences, limitations
and relative rights as the Board may determine. However, no holder of Preferred
Stock shall be authorized or entitled to receive upon an involuntary liquidation
of the Company an amount in excess of $100 per share of Preferred Stock.
Dividends
The payment and level of cash dividends, if any, declared by TRICON
after the Distribution will be subject to the discretion of the TRICON Board.
Dividend decisions will be based on a number of factors, including TRICON's
operating results and financial requirements on a stand-alone basis as well as
credit agreement and legal restrictions relating thereto.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the TRICON Common Stock will be
BankBoston,N.A., P.O. Box 9155, Boston, MA 02205-9155, (800) 226-0083.
Listing and Trading of TRICON Common Stock
Prior to the date hereof, there has not been any established trading
market for TRICON Common Stock. Application is expected to be made to list the
TRICON Common Stock on the NYSE under the symbol "YUM." It is presently
anticipated that the TRICON Common Stock will be approved for listing on the
NYSE prior to the Distribution Date, and trading is expected to commence on a
"when issued" basis prior to the Record Date. The term "when issued" indicates a
conditional transaction in a security authorized for issuance but not as yet
actually issued. All "when issued" transactions are on an "if" basis, to be
settled if and when the actual security is issued and the NYSE directs that the
transactions are to be settled.
<PAGE> 50
There can be no assurance as to the prices at which the TRICON Common
Stock will trade before, on or after the Distribution Date. Until the TRICON
Common Stock is fully distributed and an orderly trading market develops in the
TRICON Common Stock, the price at which such stock trades may fluctuate
significantly and may be lower or higher than the respective price that would be
expected for a fully distributed issue. Prices for the TRICON Common Stock will
be determined in the marketplace and may be influenced by many factors,
including (i) the depth and liquidity of the market for TRICON Common Stock,
(ii) developments affecting TRICON's business, (iii) investor perception of
TRICON, and (iv) general economic and market conditions. As of August 15, 1997,
there were 222,345 record holders of PepsiCo Capital Stock, which approximates
the number of prospective record holders of TRICON Common Stock.
Shares of TRICON Common Stock distributed in the Distribution will be
freely transferable, except for securities received by persons who may be deemed
to be affiliates of TRICON ("Affiliates") under the Securities Act of 1933, as
amended (the "Securities Act"). Affiliates would generally include individuals
or entities that control, are controlled by, or are under common control with
TRICON and will include certain officers and Directors of TRICON. Persons who
are Affiliates of TRICON will be permitted to sell their shares of TRICON Common
Stock only pursuant to an effective registration statement under the Securities
Act or an exemption from the registration requirements of the Securities Act.
NORTH CAROLINA LAW - SHARE ACQUISITIONS
North Carolina law includes two provisions relating to changes in
control of a public company as a result of share acquisitions. The first is The
North Carolina Control Share Acquisition Act, which requires an acquiror to
obtain the favorable vote of a company's other shareholders before it is allowed
to vote shares acquired in excess of certain statutory percentages. As permitted
by the Act, the TRICON Articles provide that this Act shall not be applicable to
TRICON. The second is The North Carolina Shareholder Protection Act, which
establishes minimum safeguards for a company's public shareholders in the event
another entity first acquires more than 20% of the stock and then wishes to
accomplish a second-step combination of the two businesses. Such safeguards
relate to the minimum value to be paid to the company's remaining shareholders
in any such business combination; preservation of board of directors
representation for the publicly-owned shares and of the dividend rate;
limitations on certain intercorporate transactions prior to the consummation of
such business combination; and requirements as to disclosure to remaining
shareholders in connection with any such proposed business combination. Unless
these minimum safeguards are observed, any such business combination would
require the affirmative vote of the holders of 95% of the voting shares of a
corporation.
INDEMNIFICATION OF DIRECTORS
A provision of the TRICON Articles (the "Provision") provides that to
the full extent from time to time permitted by law, no Director shall be
personally liable in any action for monetary damages for breach of any duty as a
Director, whether such action is brought by or in the right of the Company or
otherwise. Neither the amendment nor repeal of the Provision, nor adoption of
any provision of the TRICON Articles which is
<PAGE> 51
inconsistent with the Provision, shall eliminate or reduce the protection
afforded by the Provision with respect to any matter which occurred, or any
cause of action, suit or claim which, but for the Provision would have accrued
or arisen, prior to such amendment, repeal or adoption.
While the TRICON Articles provide Directors with protection from awards
for monetary damages for breaches of their duty of care, they do not eliminate
such duty. Accordingly, the TRICON Articles will have no effect on the
availability of equitable remedies such as an injunction or recission based on a
Director's breach of his or her duty of care.
The TRICON Articles provide that the Company shall, to the fullest
extent from time to time permitted by law, indemnify its Directors and officers
against all liabilities and expenses in any suit or proceeding, whether civil,
criminal, administrative or investigative, and whether or not brought by or on
behalf of the Company, including all appeals therefrom, arising out of their
status as such or their activities in any of the foregoing capacities, unless
the activities of the person to be indemnified were at the time taken known or
believed by him to be clearly in conflict with the best interests of the
Company. The Company shall likewise and to the same extent indemnify any person
who, at the request of the Company, is or was serving as a Director, officer,
partner, trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or as a trustee or
administrator under any employee benefit plan. The right to be indemnified shall
include, without limitation, the right of a Director or officer to be paid
expenses in advance of the final disposition of any proceeding upon receipt of
an undertaking to repay such amount unless it shall ultimately be determined
that he or she is entitled to be indemnified. A person entitled to
indemnification shall also be paid reasonable costs, expenses and attorneys'
fees (including expenses) in connection with the enforcement of rights to the
indemnification granted. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled and shall not be limited by the provisions of the North Carolina
Business Corporation Act or any successor statute. The Board of Directors may
take such action as it deems necessary or desirable to carry out the foregoing
indemnification provisions, including adopting procedures for determining and
enforcing the rights guaranteed thereby, and the Board of Directors is expressly
empowered to adopt, approve and amend from time to time such Bylaws, resolutions
or contracts implementing such provisions or such further indemnification
arrangement as may be permitted by law. Neither the amendment or repeal of the
foregoing indemnification provisions, nor the adoption of any provision of the
TRICON Articles inconsistent with the foregoing indemnification provisions,
shall eliminate or reduce any rights to indemnification afforded by the
foregoing indemnification provisions to any person with respect to their status
or any activities in their official capacities prior to such amendment, repeal
or adoption.
1998 ANNUAL MEETING AND SHAREHOLDER PROPOSALS
TRICON's first annual shareholders meeting after the Distribution is
expected to be held on May 13, 1998. If a shareholder wishes to have a proposal
considered at the 1998 meeting and included in the Proxy Statement for that
meeting, the proposal must be received by TRICON in writing on or before
November 30, 1997.
<PAGE> 52
AVAILABLE INFORMATION
When this Form 10 becomes effective, TRICON will be subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance therewith, will file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Copies of the Form 10, including the exhibits thereto, and the reports, proxy
statements and other information filed by TRICON with the Commission can then be
inspected and copied at the public reference facilities of the Commission, 450
Fifth Street N.W., Room 1024, Washington D.C. 20549 and at the Commission's
Regional Offices: 7 World Trade Center, 13th floor, New York, NY 10048 and 500
West Madison Street, Suite 1400, Chicago, IL 60661. Copies of such material can
be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street N.W, Room 1024, Washington D.C. 20549. Copies may
also be obtained from the Commission's Web Site (http://www.sec.gov). Following
the listing of TRICON Common Stock on the NYSE, TRICON will be required to file
with that exchange copies of such reports, proxy statements and other
information which then can be inspected at the offices of such exchange at 20
Broad Street, New York, NY 10005.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis
for Fiscal Years Ended December 28 1996, December 30, 1995
and December 31, 1994
For purposes of this Management's Discussion and Analysis,
TRICON includes the worldwide operations of KFC, Pizza Hut and
Taco Bell (its core businesses)and the non-core U.S. businesses
held for disposal: CPK, Chevys, D'Angelo, ESM and HNN.
The following Management's Discussion and Analysis
should be read in conjunction with the audited Combined
Financial Statements on pages F-2 - F-24 and the Cautionary
Statements on page 69. The audited Combined Financial
Statements included herein may not necessarily be indicative
of the results of operations, financial position and cash
flows of TRICON in the future or had it operated as a
separate, independent company during the periods presented.
The audited Combined Financial Statements included herein do
not reflect any changes that may occur in the financing and
operations of TRICON as a result of the Distribution.
This Management's Discussion and Analysis is presented in
five sections. The first section discusses TRICON's
ownership strategy and portfolio management (pages 52-53). The
second section analyzes the combined results of operations
and provides a perspective on operations outside of the
United States (pages 53-59). The third and fourth sections
address TRICON's combined cash flows (pages 59-61) and
financial condition (page 61), respectively. The final
section summarizes TRICON's use of derivatives (page 62).
Ownership Strategy and Portfolio Management
TRICON continues to execute the initiatives started two
years ago to reduce its percentage ownership of total system
units by selling Company-operated restaurants to
<PAGE> 53
existing and new franchisees and closing underperforming units.
Although these initiatives reduce reported revenues, the
refranchising initiative is intended to improve returns by
eliminating the capital investment in units while generating
franchise fees. In addition, margins and cash flows benefit from
the one-time impact of refranchising gains and the ongoing impact
of closing underperforming Company-operated units. As a result of
these initiatives, coupled with net new points of
distribution by TRICON's franchisees and licensees, TRICON's
overall ownership percentage (including joint venture units)
of its core businesses' total system units declined by 2 percentage
points to 48% at year-end 1995 and 4 percentage points to 44% at
year-end 1996, both driven by declines in the U.S. TRICON
refranchised 264 and 640 Company-operated units in 1995
and 1996, respectively. Total system units grew 6% and 4% in
1995 and 1996, respectively, driven by net new points of
distribution by TRICON's franchisees and licensees. At year-
end 1995 and 1996 TRICON had 293 and 296 Company-operated
non-core U.S. restaurants, respectively.
Results of Operations
The table in Note 3 on page F-11 summarizes significant
items impacting comparability.
Revenues declined $18 million in 1996. Company-
operated restaurants revenues decreased $75 million or 1%.
The decrease was driven by volume declines, partially due to
lapping the strong volume increases in the second quarter of
1995 because of the successful introduction of Stuffed Crust
Pizza in the U.S., and the unfavorable impact of fewer net
Company-operated units. These declines were partially
offset by higher effective net pricing and the consolidation
of CPK at the end of the second quarter of 1996 (see Note 16
on page F-20). The $57 million or 13% increase in franchise
and license fees primarily reflected new franchise and license
units and the continuing franchise fees from refranchised
restaurants.
In 1996, same store sales for Company-operated units
increased 6% at KFC U.S. due primarily to the impact of new
products such as Tender Roast Chicken, Colonel's Crispy
Strips and Chunky Chicken Pot Pies. Same store sales for
Company-operated units decreased 4% and 2% at Pizza Hut U.S.
and Taco Bell U.S., respectively, reflecting fewer customer
transaction counts.
Revenues increased $685 million or 7% in 1995. The
fifty-third week in 1994 (see Note 3 on page F-11) reduced
the 1995 revenue growth rate by approximately 2 percentage
points.Company-operated restaurants revenues grew $643 million
or 7%. The growth reflected net additional Company-operated
units and higher effective net pricing, partially offset by
a decline in volume. Franchise and license fees increased
$42 million or 11%, primarily driven by the net new points
of distribution by TRICON's franchisees and licensees.
In 1995, same store sales for Company-operated units
increased 4% and 7% at Pizza Hut U.S. and KFC U.S.,
respectively, driven by new product offerings. Same store
sales for Company-operated units declined 4% at Taco Bell
U.S. due to fewer customer transaction counts. Same store
sales growth has been adjusted to exclude the impact of the
fifty-third week in 1994 (see Note 3 on page F-11).
<PAGE> 54
Company-Operated Restaurant Margins and Profit
($ in millions) 1996 1995 1994
Revenues from Company-
operated restaurants 100.0% 100.0% 100.0%
Food and paper 33.0% 33.1% 32.8%
Payroll and employee benefits 28.7% 28.4% 28.8%
Occupancy and other operating
expenses 27.8% 27.6% 27.4%
Margins 10.5% 10.9% 11.0%
Profit $1,019 $1,074 $1,012
__________________________________________________________________________
In 1996, Company-operated restaurant margins declined
.4 percentage points. The decline primarily reflected an increase
in operating costs as a percent of revenues due to lower
revenues caused by decreased customer transaction counts in
Pizza Hut U.S. and Taco Bell U.S. (i.e., "deleveraging"). The
margin decline was moderated by the fact that higher
effective net pricing exceeded increases in the costs of
labor, food (led by cheese) and occupancy and other
operating expenses. The increased labor costs reflected
increases in wage rates and benefits as well as increased
staffing due to TRICON's customer service improvement
initiatives. Increased occupancy and other operating
expenses included higher refurbishment expenses at Pizza Hut
U.S.
Company-operated restaurant margins declined .1 percentage
point in 1995. The deleveraging effect of reduced revenues at
Taco Bell U.S. due to decreased customer transaction counts
coupled with increased occupancy and other operating
expenses, were substantially offset by reduced food costs
(led by beef), labor efficiencies resulting from reduced
restaurant management staffing and higher effective net pricing.
General, administrative and other expenses ("G&A")
comprises general and administrative expenses, other income
and expense and equity income or loss from investments in
unconsolidated affiliates. The $75 million or 9% growth in
G&A in 1996 reflected increased spending, led by multiple
U.S. initiatives to improve customer service and to support
international growth. Customer service initiatives included
expanding the number and training of personnel supervising
the restaurant managers, as well as project spending against
market-related programs. These increased expenses were
offset by equity income in 1996 compared to losses in 1995,
due in part to the absence of CPK's losses as a result of
its consolidation in 1996 (see Note 16 on page F-20). In
1995, G&A grew $42 million or 5% primarily reflecting a $17
million charge in 1995 to move Pizza Hut's headquarters from
Wichita to Dallas, spending to support U.S. field
operations and international development. Included in G&A
is an allocated amount reflecting TRICON's share of overhead
costs related to PepsiCo's shared administrative expenses of
$53 million, $52 million and $50 million in 1996, 1995 and
1994, respectively. The amounts allocated to TRICON were
based on the ratio of TRICON's revenues to PepsiCo's
revenues. They are not necessarily indicative of the
expenses that TRICON would have incurred for these services
had it been a separate, independent company.
<PAGE> 55
Net facility actions
($ in millions) 1996 1995 1994
Refranchising gains* $(139) $(93) $ -
Store closure costs 40 38 10
SFAS 121 impairment
charges 62 457 -
Net (gains)/losses from
facility actions $ (37) $402 $10
After-tax $ (21) $295 $ 6
* Included initial franchise fees of $22 and $8 in 1996 and 1995,
respectively.
___________________________________________________________________________
Net gains and losses from facility actions result from
TRICON executing its initiatives to refranchise units and
close underperforming units, and its impairment evaluations
for restaurants to be used in the business under SFAS 121.
TRICON early adopted SFAS 121 as of the beginning of the
fourth quarter of 1995. The initial, noncash charge of $457
million in 1995, $120 million of which related to the non-
core U.S. businesses, resulted from TRICON evaluating and
measuring impairment of restaurants to be used in the
business at the individual restaurant level. Previously,
impairment was evaluated and measured if a restaurant
concept was incurring operating losses and was expected to
incur operating losses in the future. Because of the strong
operating profit history or prospects for each concept, no
impairment evaluation had been required in 1994. The
recurring SFAS 121 impairment charge in 1996 resulted from
the semi-annual impairment evaluations of each restaurant to
be used in the business that either initially met TRICON's
"two-year history of operating losses" impairment indicator
or was previously evaluated for impairment and, due to
changes in circumstances, a current forecast of future cash
flows would be expected to be significantly lower than the
forecast used in the prior evaluation.
Unusual disposal charges of $246 million ($189 million
after-tax) in 1996 were associated with a fourth quarter
decision to dispose of TRICON's remaining non-core U.S.
businesses, CPK, Chevys, D'Angelo and ESM, and a first
quarter decision to dispose of the operating assets of HNN.
These charges were on top of the $120 million of impairment
charges incurred for these businesses in 1995.
The additional impairment charges recognized in 1996
reflect both a different assessment of the future prospects
of the businesses compared to 1995 and the different
requirements under SFAS 121 for determining impairment for
assets to be sold (1996 basis) compared to assets to be held
and used in the business (1995 basis). For an asset to be
disposed of, SFAS 121 requires the asset be recorded at the
lower of its carrying amount or fair market value, i.e., the
amount a third party would be willing to pay, less costs to
sell. For an asset to be held and used, an asset can not be
impaired when the related estimated nominal, undiscounted
future cash flows, before interest and income taxes, are
equal to or greater than the carrying amount of the asset.
Thus, an asset to be held and used cannot be impaired even
though its estimated future cash flows may not provide a
normal return on TRICON's investment.
<PAGE> 56
Reported operating profit increased $120 million in
1996. Ongoing operating profit, which was adjusted to
exclude the unusual disposal charges in 1996 and the initial
impact of adopting SFAS 121 in 1995 (see Note 3 on page F-
11), decreased $91 million or 13%. The decline reflected
the increased G&A expenses and reduced profit from Company-
operated restaurants, partially offset by increased profit
from franchise and license fees.
Reported operating profit decreased $330 million in
1995. Ongoing operating profit, which was adjusted to
exclude the initial impact of adopting SFAS 121 in 1995 (see
Note 3 on page F-11), grew $127 million or 22%. The fifty-
third week in 1994 (see Note 3 on page F-11) reduced the
ongoing operating profit growth rate by approximately 5
percentage points. The increase was due to net refranchising
gains in 1995, compared to store closure costs in 1994, higher
profits from Company-operated restaurants and increased
franchise and license fees. These improvements were
partially offset by increased G&A expenses.
Interest expense, net
% Growth Rates
($ in millions) 1996 1995 1994 1996 1995
PepsiCo allocation $(275) $(316) $(300) (13) 5
External debt (35) (52) (49) (33) 6
Interest expense (310) (368) (349) (16) 5
Interest income 10 13 8 (23) 63
Interest expense, net $(300) $(355) $(341) (15) 4
___________________________________________________________________________
TRICON's operations have been financed through its
operating cash flows, refranchising of restaurants and
investments by and advances from PepsiCo. TRICON's interest
expense includes an allocation of PepsiCo's interest expense
(PepsiCo's weighted average interest rate applied to the
average balance of investments by and advances from PepsiCo
to TRICON) and interest expense on its external debt.
TRICON's external debt is primarily limited to capital lease
obligations associated with real estate and, to a much
lesser extent, assumed debt of acquired businesses and
international third-party debt. TRICON is expected to have
a capital structure different from the capital structure in
the Combined Financial Statements (see Pro Forma Condensed
Combined Balance Sheet on page F-32) and accordingly,
interest expense is not necessarily indicative of the
interest expense that TRICON would have incurred as a
separate, independent company or will incur in future
periods.
Interest expense, net declined 15% in 1996 primarily
reflecting a lower average balance of net investments by and
advances from PepsiCo, coupled with PepsiCo having a lower
weighted average interest rate. Interest expense, net in
1995 increased 4%, reflecting an increase in PepsiCo's
weighted average interest rate, coupled with a higher
average balance of investments by and advances from PepsiCo.
<PAGE> 57
Income Taxes
($ in millions) 1996 1995 1994
Reported
Income Taxes $ 125 $ 29 $ 122
Effective Tax Rate 173.6% (28.2)% 50.6%
Ongoing*
Income Taxes $ 182 $ 162 $ 122
Effective Tax Rate 57.2% 45.8% 50.6%
* Adjusted to exclude the effects of the unusual disposal
charges in 1996 and the initial impact of adopting SFAS
121 in 1995 (See Note 3 on page F-11).
___________________________________________________________________________
The 1996, 1995 and 1994 reported effective tax rates
were 173.6%, (28.2%) and 50.6%, respectively. The following
reconciles the U.S. Federal statutory tax rate to TRICON's
ongoing effective rate:
1996 1995 1994
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal
tax benefit 2.2% 2.1% 4.9%
Foreign and U.S. tax effects
attributable to foreign
operations 17.0% 7.1% 11.3%
Other, net 3.0% 1.6% (0.6)%
Ongoing effective tax rate 57.2% 45.8% 50.6%
The 1996 ongoing effective tax rate increased 11.4 percentage
points to 57.2% while the 1995 ongoing effective tax rate
declined 4.8 percentage points to 45.8%. 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 of the related foreign tax credit for U.S.
income tax purposes, and losses of foreign operations for
which no tax benefit could be currently recognized.
The increase in the 1996 ongoing effective tax rate
related to an increase in tax effects attributable to
foreign operations, due in part to adjustments related to
prior tax years, and the establishment of a valuation
allowance due to a change in judgment as to the expected
realization of certain foreign deferred tax assets resulting
from a larger than expected net operating loss during 1996
and forecasted continuing operating losses for the next
several years in a foreign jurisdiction.
The decrease in the 1995 ongoing effective tax rate
principally reflected a reduction in tax effects
attributable to foreign operations and reduced state income
taxes.
Income tax expense was calculated as if TRICON filed
separate income tax returns. As PepsiCo manages its tax
position on a consolidated basis, which takes into
<PAGE> 58
account the results of all of its businesses, TRICON's effective
tax rate in the future could vary from its historical effective
tax rates. TRICON's future effective tax rate will largely
depend on its structure and tax strategies as a separate,
independent company.
(Loss)/Income Before Cumulative Effect of Accounting Changes
% Growth Rates
($ in millions) 1996 1995 1994 1996 1995
Reported $(53) $(132) $119 (60) NM
Ongoing* $136 $ 192 $119 (29) 61
NM - Not Meaningful
* Adjusted to exclude the unusual disposal charges in 1996
and the initial impact of adopting SFAS 121 in 1995 (see
Note 3 on page F-11).
____________________________________________________________________________
International Operations
% Growth Rates
($ in millions) 1996 1995 1994 1996 1995
Revenues $2,308 $2,087 $1,794 11 16
Operating Profit*
Reported $ 144 $ (26) $ 79 NM NM
Ongoing** $ 144 $ 111 $ 79 30 41
NM - Not Meaningful
* Includes equity income/(loss) but excludes foreign exchange gains/(losses).
** Adjusted to exclude the initial impact of adopting SFAS 121 in 1995 (see
Note 3 on page F-11).
___________________________________________________________________________
In 1996, TRICON's international business represented
about 20% of its revenues and its ongoing operating profits.
As currency exchange rates change, translation of the income
statements of TRICON's international operations into U.S.
dollars could affect year-over-year comparability of
operating results. To the extent that translation effects
are material, they are discussed herein.
International Operations Review
1996 vs. 1995
Revenues increased $221 million driven by the favorable
impact of net additional Company-operated units, higher
effective net pricing and increased volumes.
<PAGE> 59
Reported operating profit increased $170 million.
Ongoing operating profit increased $33 million reflecting
increased franchise and license fees due to new unit
activity, net additional Company-operated units, increased
volumes and profits from net facility actions compared to
losses in 1995 (see below). These benefits were partially
offset by increased administrative costs for systems
initiatives and standardization of operational processes to
support growth.
Net Facility Actions
($ in millions) 1996 1995
Refranchising gains $(5) $(4)
Store closure costs (5) 12
Recurring SFAS 121
impairment charges 8 -
Net (gains)/losses from facility actions $(2) $ 8
1995 vs. 1994
Revenues increased $293 million or 16%.
The fifty-third week in 1994 (see Note 3 on page F-11)
reduced the 1995 revenue growth rate by approximately 2
percentage points. The revenue increase primarily reflected
additional Company-operated units.
Reported operating profit decreased $105 million.
Ongoing operating profit increased $32 million or 41%. The
fifty-third week in 1994 (see Note 3 on page F-11) reduced
the ongoing operating profit growth rate by approximately 7
percentage points. The increased ongoing operating profit
reflected additional Company-operated units, increased franchise
and license fees primarily from net new units and a net
favorable currency translation impact. These gains were
partially offset by increased administrative expenses and $8
million of net facility losses in 1995. A reduction in
volume was substantially offset by higher prices, which
exceeded increased costs.
Combined Cash Flows
TRICON's capital investments and acquisitions have been
financed by cash flow from operations, refranchising of
restaurants, or investments by and advances from PepsiCo.
Under PepsiCo's centralized cash management system, PepsiCo
deposits to TRICON's bank accounts sufficient cash to meet
TRICON's daily obligations and withdraws excess funds from
those accounts. These transactions are included in
investments by and advances from PepsiCo in the Combined
Balance Sheet.
The debt levels prior to the Distribution are not
indicative of the debt levels of TRICON as a separate,
independent entity. As an independent company, TRICON
expects to obtain initial debt funding of approximately $4.5
billion through a $2 billion senior, unsecured five-year term
loan facility and $2.5 billion under a senior, unsecured five-
year $3.5 billion revolving credit facility. A portion of
the latter facility will be available in the form of letters
of credit. Interest rates are expected to be based on LIBOR.
The facilities are expected to have a quarterly facility fee as well
as a semi-annual administrative fee. TRICON expects to use
substantially all of the initial debt proceeds to settle certain
amounts due to PepsiCo from TRICON and to declare and
<PAGE> 60
pay a dividend to PepsiCo just prior to the Distribution.
Management believes that cash flows from its refranchising
initiatives and from its operating activities in excess of capital
spending will be sufficient to fund its debt payments and future
growth.
Combined cash flow activity in 1996 reflected cash
flows from operating activities of $713 million which,
coupled with cash inflows from refranchising of restaurants
of $355 million, funded capital spending of $620 million and
reduced investments by and advances from PepsiCo by $285
million and third-party debt by $137 million.
Net cash provided by operating activities decreased
$100 million or 12% to $713 million in 1996. The decrease
was due to reduced income before noncash charges and credits
of $76 million and lower working capital cash inflows of $24
million. The decline in working capital cash inflows was
primarily due to an unfavorable swing in income taxes
payable partially offset by faster growth in accounts
payable and other current liabilities and a favorable swing
in inventories. The change in accounts payable and other
current liabilities was primarily due to timing of payments.
Net cash provided by operating activities in 1995
declined $81 million or 9% versus 1994 to $813 million. The
decline primarily reflected lower working capital cash
inflows in 1995 of $113 million partially offset by
increased income before noncash charges and credits of $32
million. The decline in working capital cash inflows was
primarily due to a slower rate of growth in accounts payable
and other current liabilities in 1995 partially offset by a
favorable swing in income taxes payable. The change in
accounts payable and other current liabilities primarily
reflected timing of payments and a reduced level of
purchases.
Net cash used for investing activities decreased $348
million or 58% to $249 million in 1996 and $667 million or
53% to $597 million in 1995. The 1996 decline was
principally due to increased proceeds from refranchising of
restaurants, coupled with reduced capital spending and the
absence of acquisitions. The 1995 decline was primarily due
to reduced capital spending and acquisitions, proceeds from
1995 refranchisings and reduced loans to unconsolidated
affiliates, which are classified in other, net.
The decreased capital spending of $81 million in 1996
and $337 million in 1995 primarily reflected a slow down of
new unit development by TRICON as part of its initiative to
reduce its percentage ownership of total system units.
Capital spending outside of the U.S. represented 26% of
total capital spending in 1996 and 1995 and 32% in 1994.
Net cash used for financing activities almost doubled
in 1996 to $422 million primarily reflecting debt payments
in 1996 compared to proceeds in 1995 and a greater decline
in investments by and advances from PepsiCo. Net cash used
for financing activities of $218 million in 1995 compared to
a cash inflow of $388 million in 1994. This change was
primarily due to a swing in investments by and advances from
PepsiCo.
<PAGE> 61
Free cash flow is the key internal measure used to
evaluate cash flow that investors may want to consider as an
indication of cash available for debt repayment and to fund
additional investments. Free cash flow is not a measure
defined by generally accepted accounting principles. This
measure is provided as a supplement, and not as an
alternative to cash flows from operating, investing and
financing activities as defined by generally accepted
accounting principles.
($ in millions) 1996 1995 1994
Net cash provided by
operating activities $ 713 $ 813 $ 894
Investing activities
Capital spending (620) (701) (1,038)
Refranchising of
restaurants 355 165 -
Sales of property,
plant & equipment 45 43 21
Other, net (29) (38) (134)
$ 464 $ 282 $ (257)
In 1996, free cash flow increased $182 million or 65%
to $464 million. The increase reflected the higher proceeds
from refranchising of restaurants and lower capital
spending, partially offset by reduced cash flow from
operating activities. In 1995, the favorable free cash flow
swing of $539 million was due primarily to lower capital
spending, 1995 refranchising of restaurants and the reduced
loans to unconsolidated affiliates, which are classified in
other, net. These cash inflows were partially offset by
reduced cash flow from operating activities.
Combined Financial Condition
Assets at year-end 1996 decreased $388 million or 6% to
$6.5 billion. The decline reflected the impact of the
unusual disposal charges of $246 million (see Note 3 on page
F-11). The increase in prepaid expenses, deferred income
taxes and other current assets principally reflected a
reclassification of the reduced carrying amount (which
reflects estimated fair market value) of the non-core U.S.
restaurant assets which are held for disposal and a related
increase in current deferred income tax assets.
TRICON's negative operating working capital position,
which reflects the cash sales nature of TRICON's operations,
effectively provides additional capital for investment.
Operating working capital, which excludes short-term
investments and short-term borrowings, was a negative $445
million and negative $831 million at year-end 1996 and 1995,
respectively. The $386 million decrease in negative working
capital in 1996 primarily reflected the reclassification of
the non-core U.S. restaurant assets held for disposal to
other current assets and the increase in current deferred
income taxes.
See the Pro Forma Condensed Combined Balance Sheet on
page F-32, which gives effect to TRICON's anticipated
capital structure.
<PAGE> 62
Derivative Instruments
TRICON's policy prohibits the use of derivative
instruments for trading purposes and TRICON has procedures
in place to monitor and control their use.
TRICON's use of derivative instruments is currently
limited to commodity futures contracts traded on national
exchanges, which are entered into with the objective of
reducing food costs. While such hedging activity has
historically been limited, hedging activity could increase
in the future if TRICON believes it would result in lower
total costs. Open contracts and deferred gains and losses
at year-end 1996 and 1995, as well as gains and losses
recognized as part of cost of sales in 1996, 1995 and 1994,
were not significant.
Management's Discussion and Analysis
for the 12 and 24 Weeks Ended June 14, 1997 and June 15, 1996
The following Management's Discussion and Analysis
should be read in conjunction with the unaudited Condensed
Combined Financial Statements on pages F-25 - F-29 and the
Cautionary Statements on page 69. For purposes of this
Management's Discussion and Analysis, TRICON includes the
worldwide operations of KFC, Pizza Hut and Taco Bell, its
core businesses. In addition, the U.S. information includes
TRICON's non-core businesses consisting of Chevys, ESM, and
HNN through their respective dates of disposal, and CPK and
D'Angelo, which are held for disposal.
Ownership Initiatives
As a result of TRICON's initiative to refranchise units
and close underperforming units, coupled with net new points
of distribution by TRICON's franchisees and licensees,
TRICON's overall ownership percentage (including joint
venture units) of its core businesses' total system units
since year-end 1996 declined 2% to 42% at June 14, 1997,
driven by declines in the U.S. TRICON refranchised
261 and 355 Company-operated units in the quarter and year-to-date,
respectively. Total system units declined less than half a
percentage point from the end of 1996. At June 14, 1997 and
December 28, 1996 TRICON had 166 and 296 Company-operated non-core
U.S. restaurants, respectively.
Results of Operations
Revenues decreased $29 million in the quarter and $65
million year-to-date, or 1% for both periods. Company-
operated restaurants revenue decreased $57 million or 3% in
the quarter and $105 million or 2% year-to-date. The
declines primarily reflected fewer net Company-operated units as
a result of TRICON's initiatives to reduce its ownership of
the restaurant system. In addition, the decrease in sales
was the result of transaction declines primarily due to
lapping a high level of transactions in 1996 because of the
successful introduction of Triple Decker Pizza. These
declines were partially offset by higher effective net
pricing and increased revenue from TRICON's non-core U.S.
businesses of $14 million and $50 million for the quarter
and year-to-date, respectively. The non-core increase was
primarily a result of the consolidation of CPK at the end of
the second quarter of 1996. The $28 million or 25% increase
in the quarter and $40 million or 19% increase year-to-date
in franchise and license fee
<PAGE> 63
revenues included $19 million of initial fees under a special KFC
franchise renewal program, which will continue into the third
quarter. Including the initial franchise renewal fees expected to be
received in the third quarter, 96% of KFC's franchisees are
expected to renew their franchise agreements during 1997,
covering the next 20 years. In addition, TRICON continues
to benefit from net new points of distribution by TRICON's
franchisees and licensees and the continuing franchise fees
from refranchised restaurants.
TRICON measures same store sales for U.S. Company-
operated units. Same store sales at Pizza Hut decreased 5%
for the quarter and 7% year-to-date reflecting fewer
customer transaction counts and in the quarter, reduced
pricing. At Taco Bell, same store sales increased 2% for
the quarter and 3% year-to-date reflecting mix shifts into
higher-priced products such as Border Select Combos, Grilled
Steak Tacos and Fajita Wraps and higher pricing taken in
late 1996. The year-to-date same store sales growth
benefited from the very successful first quarter Star Wars
promotion. Same store sales at KFC increased 3% for the
quarter and 4% year-to-date due to a higher average guest
check, reflecting both pricing and new products, as well as
increased customer transactions.
Company-Operated Restaurant Margins and Profit
12 Weeks Ended 24 Weeks Ended
($ in millions) 6/14/97 6/15/96 6/14/97 6/15/96
Revenues from Company-
operated restaurants 100.0% 100.0% 100.0% 100.0%
Food and paper 32.5% 32.6% 32.4% 32.7%
Payroll and employee
benefit 28.1% 28.3% 28.9% 28.7%
Occupancy and other
operating expenses 26.8% 27.3% 26.8% 27.6%
Margins 12.6% 11.8% 11.9% 11.0%
Profit $ 280 $ 268 $ 514 $ 487
___________________________________________________________________________
Company-operated restaurant margins increased almost 1
percentage point in the quarter and year-to-date primarily due
to higher effective pricing in excess of cost increases and the
favorable effects of net facility actions. These margin
improvements were partially offset by an increase in
operating costs as a percent of revenues due to the effects
of decreased customer transaction counts at Pizza Hut U.S.
and Taco Bell U.S. The effects of the increase in the
minimum wage were partially offset by favorable recurring
actuarial adjustments to prior years' casualty claim
liabilities.
General, administrative and other expenses grew
$5 million in the quarter and $8 million year-to-date, or 2%
for both periods. G&A comprises general and administrative
expenses, other income and expense and equity income or loss
from investments in unconsolidated affiliates. Included in
G&A is an allocated amount reflecting TRICON's share of
overhead costs related to PepsiCo's shared administrative
expenses (see below). The amounts allocated to TRICON were
based on the ratio of TRICON's revenues to PepsiCo's
revenues. They are not necessarily indicative of the
<PAGE> 64
expenses that TRICON would have incurred had it been a
separate, independent company.
Allocated G&A
($ in millions) 1997 1996 B/(W)
12 weeks ended $12 $12 $ -
24 weeks ended $24 $21 $(3)
Excluding the allocated G&A, G&A increased $5 million
or 2% in the quarter and $5 million or 1% year-to-date.
These increases reflected increased field spending, the
effect of consolidating CPK and increased foreign exchange
losses, partially offset by equity income from TRICON's
investments in unconsolidated affiliates in 1997 compared to
losses in 1996. Increased field spending primarily
reflected continued customer service improvement
initiatives. The favorable swing in equity income primarily
reflected the absence of CPK's losses due to its
consolidation.
Net facility actions
12 Weeks Ended 24 Weeks Ended
($ in millions) 6/14/97 6/15/96 6/14/97 6/15/96
Refranchising gains* $(137) $(42) $(153) $(88)
Store closure costs 25 4 29 4
SFAS 121 recurring impair-
ment charges 39 18 39 18
Net gains from facility
actions (73) (20) (85) (66)
After-tax net gains $ (53) $(11) $ (56) $(37)
After-tax net gains -
Full-Year** $ (79) $(13) $ (87) $(41)
* Included initial franchise fees of $9 and $4 for the 12
weeks ended 6/14/97 and 6/15/96, respectively, and $12
and $9 for the 24 weeks ended 6/14/97 and 6/15/96,
respectively.
** Because TRICON allocates its income tax expense to
interim periods based on a forecasted full-year
effective tax rate, the tax attributes associated with
these net facility actions will continue to be
recognized in TRICON's tax expense over the balance of
the year. Accordingly, the after-tax gain recognized
in the 12 and 24 week periods is lower than the full-
year amount.
The 1997 full-year after-tax gain reflects the tax free
gain from the refranchising of TRICON's restaurants in
New Zealand to a new, independent publicly-traded
company.
__________________________________________________________________________
Unusual disposal charges of $39 million ($22 million
after-tax) in the second quarter of 1997 and $26 million
($17 million after-tax) in the first quarter of 1996 related
to disposal of the non-core U.S. businesses. The 1997
charge adjusted the carrying amount of the non-core U.S.
businesses to their estimated fair market value based on the
actual selling price of three businesses and current
negotiations with probable
<PAGE> 65
buyers for the two remaining businesses. The 1996 charge
adjusted the carrying amount of HNN, a non-core U.S. business,
based upon a first quarter 1996 decision to dispose of its
operating assets. The adjustment was based on internal estimates.
Reported operating profit increased $49 million or 27%
in the quarter and $65 million or 20% year-to-date. Ongoing
operating profit, which was adjusted to exclude the unusual
disposal charges, increased $88 million or 48% in the
quarter and $78 million or 22% year-to-date. The increase
in ongoing operating profit in the quarter primarily
reflected the higher gains from net facility actions and the
increased franchise and license fees, primarily driven by
the initial KFC franchise renewal fees. The year-to-date
gain was led by the increased franchise and license fees and
profit growth from Company-operated restaurants.
Interest Expense, net
12 Weeks Ended 24 Weeks Ended
% %
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
PepsiCo allocation $(58) $(63) (8) $(118) $(130) (9)
External debt (9) (8) 13 (17) (17) -
Interest expense $(67) $(71) (6) $(135) $(147) (8)
Interest income 2 2 - 4 4 -
Interest expense, net $(65) $(69) (6) $(131) $(143) (8)
______________________________________________________________________________
TRICON's operations have been financed through its
operating cash flows, refranchising of restaurants and
investments by and advances from PepsiCo. TRICON's interest
expense includes an allocation of PepsiCo's interest expense
(PepsiCo's weighted average interest rate applied to the
average balance of investments by and advances from PepsiCo
to TRICON) and interest expense on its external debt.
TRICON's external debt is primarily limited to capital lease
obligations associated with real estate and, to a much
lesser extent, assumed debt of acquired businesses and
international third-party debt. TRICON is expected to have
a capital structure different from the capital structure in
the Condensed Combined Financial Statements (see Pro Forma
Condensed Combined Balance Sheet on page F-32) and
accordingly, the interest expense is not necessarily
indicative of the interest expense that TRICON would have
incurred as a separate, independent company or will incur in
future periods. Interest expense, net declined 6% and 8% in
the quarter and year-to-date, respectively, reflecting a
lower average balance of net investments by and advances
from PepsiCo.
Income Taxes
The 1997 reported effective tax rates of 27.5% in the
quarter and 34.2% year-to-date decreased 14.6 percentage points
and 8.8 percentage points over 1996, respectively. The 1997
ongoing effective tax rates of 30.4% in the quarter and 35.3%
year-to-date decreased 12.2 percentage points and 7.5 percentage
points compared to the 1996 ongoing effective tax rates. The
decline in the ongoing effective tax rate was primarily due to the
tax free gain from the refranchising of TRICON's restaurants in New
<PAGE> 66
Zealand to a new, independent publicly-traded company in
which TRICON has no ownership interest. Excluding the New
Zealand gain, TRICON's ongoing effective tax rate would have
been 39.9% and 42.6% in the quarter and year-to-date,
respectively.
Income tax expense was calculated as if TRICON filed
separate income tax returns. As PepsiCo manages its tax
position on a consolidated basis, which takes into account
the results of all of its businesses, TRICON's effective tax
rate in the future could vary from its historical effective
tax rates. TRICON's future effective tax rate will largely
depend on its structure and tax strategies as a separate,
independent company.
Net Income
12 Weeks Ended 24 Weeks Ended
% %
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Reported $121 $66 83 $173 $106 63
Ongoing* $143 $66 NM $195 $123 59
NM - Not Meaningful
* Adjusted to exclude the effect of the unusual disposal
charges described on page 64 - 65.
____________________________________________________________________________
International Operations
12 Weeks Ended 24 Weeks Ended
% %
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Revenues $555 $526 6 $1,069 $1,023 4
Operating profit* $ 99 $ 26 NM $ 142 $ 60 NM
NM - Not Meaningful
* Includes equity income/(loss) but excludes foreign exchange gains/(losses).
_______________________________________________________________________________
Revenues increased $29 million for the quarter and $46
million year-to-date. The growth was driven by net
additional Company-operated units and higher effective net
pricing. These gains were partially offset by the effects
of unfavorable currency translation and year-to-date, one
less four-week accounting period for Canada and Korea in the
first quarter of 1997. Canada and Korea conformed their
reporting cycle to facilitate the quarterly closing process.
Operating profit increased $73 million and $82 million
for the quarter and year-to-date, respectively. The profit
growth primarily reflected increased net gains from facility
actions as summarized below, driven by the refranchising of
TRICON's restaurants in New Zealand.
<PAGE> 67
The positive impact of the higher effective net
pricing, the net additional Company-operated units and
higher franchise fees was partially offset by higher store
operating costs, reflecting increased incentive-based
compensation.
Net Facility Actions
12 Weeks Ended 24 Weeks Ended
($ in millions) 6/14/97 6/15/96 Change 6/14/97 6/15/96 Change
Refranchising gains $(89) $(89) $(89) $(2) $(87)
Store closure costs 22 22 23 (2) 25
Recurring impairment
charges 1 $ 2 (1) 1 2 (1)
Net (gains)/losses
from facility actions $(66) $ 2 $(68) $(65) $(2) $(63)
Combined Cash Flows
TRICON's capital investments and acquisitions have been
financed by cash flow from operations, refranchising of
restaurants, or investments by and advances from PepsiCo.
Under PepsiCo's centralized cash management system, PepsiCo
deposits to TRICON's bank accounts sufficient cash to meet
TRICON's daily obligations and withdraws excess funds from
those accounts. These transactions are included in
investments by and advances from PepsiCo in the Condensed
Combined Balance Sheet.
The debt levels prior to the Distribution are not
indicative of the debt levels of TRICON as a separate,
independent company. As an independent company, TRICON
expects to obtain initial debt funding of approximately $4.5
billion through a $2 billion senior, unsecured five-year term
loan facility and $2.5 billion under a senior, unsecured five-
year $3.5 billion revolving credit facility. A portion of
the latter facility will be available in the form of letters
of credit. Interest rates are expected to be based on
LIBOR. The facilities are expected to have a quarterly
facility fee as well as a semi-annual administrative fee.
TRICON expects to use substantially all of the initial debt
proceeds to settle certain amounts due to PepsiCo from TRICON
and to declare and pay a dividend to PepsiCo just prior to the
Distribution. Management believes that cash flows from its
refranchising initiatives and from its operating activities
in excess of capital spending will be sufficient to fund its
debt payments and future growth.
Combined cash flow activity in 1997 primarily reflected
a greater reduction in investments by and advances from
PepsiCo of $388 million and reduced cash inflows from
operating activities of $64 million, partially offset by
increased cash proceeds from refranchising of restaurants of
$184 million, a favorable swing in net debt activities of
$126 million, as well as proceeds of $91 million from the
sale of non-core businesses.
Net cash provided by operating activities decreased $64
million to $231 million in 1997. The decrease was due to
increased working capital cash outflows of $63 million. The
increased working capital cash outflows primarily reflected
an unfavorable swing in accounts payable and other current
liabilities and increased cash outflows related to prepaid
expenses, deferred income taxes and other current assets.
<PAGE> 68
These cash outflows were partially offset by a favorable
swing in income taxes payable. The unfavorable swing in
accounts payable and other current liabilities was primarily
due to the absence of casualty insurance liabilities in 1997
resulting from a change to premium-based insurance in 1997
compared to being largely self-insured in 1996. The
increase in prepaid expenses, deferred income taxes and
other current assets reflected a 1997 premium deposit for
U.S. casualty insurance. A comparable premium deposit was
not made in 1996 because TRICON was largely self-insured.
Net cash provided by investing activities increased
$297 million to $315 million primarily reflecting increased
proceeds from refranchising of restaurants, proceeds from
the sale of non-core businesses and reduced capital
spending.
Net cash used for financing activities increased $262
million to $572 million in 1997. This reflected a greater
reduction in investments by and advances from PepsiCo,
partially offset by the favorable swing in net debt
activities in 1997.
Free cash flow is the key internal measure used to
evaluate cash flow that investors may want to consider as an
indication of cash available for debt repayment and to fund
additional investments. Free cash flow is not a measure
defined by generally accepted accounting principles. This
measure is provided as a supplement, and not as an
alternative to cash flows from operating, investing and
financing activities as defined by generally accepted
accounting principles.
24 Weeks Ended
($ in millions) 6/14/97 6/15/96
Net cash provided by
operating activities $ 231 $ 295
Investing activities
Capital spending (175) (206)
Refranchising of restaurants 384 200
Sale of non-core businesses 91 -
Sales of property, plant
and equipment 34 11
Other, net (19) 13
$ 546 $ 313
The increase in free cash flow primarily reflected the
increased proceeds from refranchising of restaurants, the
sale of non-core businesses in 1997 and reduced capital
spending. These cash increases were partially offset by
reduced cash provided by operating activities.
Combined Financial Condition
TRICON's negative operating working capital position,
which reflects the cash sales nature of TRICON's restaurant
operations, effectively provides additional capital for
investment. Operating working capital, which excludes short-
term investments and short-term borrowings, was a negative
$403 million and $445 million for 1997 and 1996,
respectively.
<PAGE> 69
The $42 million decrease primarily reflected a decline
in accounts payable and other current liabilities and an
increase in inventories partially offset by reduced cash and
cash equivalents and increased income taxes payable. The
lower accounts payable and other current liabilities was due
to a reduction in days payable outstanding and the sale of
non-core businesses, as well as lower insurance accruals
reflecting TRICON's 1997 decision to change to premium-based
U.S. casualty insurance coverage compared to self-insuring
in 1996.
Prepaid expenses, deferred income taxes and other
current assets declined slightly reflecting the sale of
three non-core U.S. businesses held for disposal and a
further reduction in the carrying amount of the two non-core
businesses to be sold. These were partially offset by a
reclassification of amounts to prepaid taxes and the 1997
premium deposit for U.S. casualty insurance.
The declines in Property, Plant and Equipment and
Intangible Assets included the effects of facility actions,
in addition to depreciation and amortization in excess of
capital spending.
See the Pro Forma Condensed Combined Balance Sheet on
page F-32, which gives effect to TRICON's anticipated
capital structure.
Cautionary Statements
From time to time, in both written reports and oral
statements, PepsiCo and TRICON may discuss expectations
regarding TRICON's future performance. These "forward-looking
statements" are based on currently available competitive,
financial and economic data and TRICON's operating plans.
They are also inherently uncertain and investors must
recognize that events could turn out to be significantly
different than what was expected. In addition, as discussed
in Management's Discussion and Analysis:
- - TRICON's ability to execute its refranchising initiatives
(pages 52-53 and 62) is subject to the continued interest and
ability of existing and new franchisees to purchase
TRICON's restaurants at prices TRICON considers
appropriate.
- - TRICON has never operated as a separate, independent
entity and as a result, future performance will be
impacted significantly by actions of a newly-formed
management team and the implementation of its strategic
objectives.
<PAGE> 70
GLOSSARY
CONCEPTS - TRICON restaurant concepts, including the
franchise business and Company-operated restaurants of
KFC, Pizza Hut and Taco Bell and the non-core U.S.
businesses of California Pizza Kitchen, Chevys
Mexican Restaurants, D'Angelo Sandwich Shops, East Side
Mario's and Hot 'n Now.
CONTINUING FRANCHISE AND LICENSE FEES - Fees paid to
franchisor/licensor by franchisee/licensee based upon a
percentage of the franchisee/licensee's sales.
CORE RESTAURANT BUSINESSES - TRICON's worldwide KFC, Pizza
Hut and Taco Bell businesses.
EFFECTIVE NET PRICING - The change in sales or
operating profit due to price increases/decreases and
the effect of product and country mix. It is not
generally practicable to separate price changes from
the effect of mix.
EQUITY INCOME/(LOSS) - TRICON's share of earnings or
losses from its investments in unconsolidated
affiliates.
FRANCHISE RENEWAL FEE - A fee paid by a franchisee to
the franchisor upon renewal of an existing franchise
agreement.
INITIAL FRANCHISE/LICENSE FEE - One time fee paid to
franchisor/licensor by franchisee/licensee upon opening
of the unit.
LICENSING - Similar to a franchise arrangement except
that the contractual period is shorter, rights are not
as broad, it may not require an initial fee and the
continuing fees are generally at a higher rate.
Licensing is used for non-traditional points of
distribution, e.g., airports, schools, gas and
convenience stores, hotels and stadiums. In general,
licensing arrangements do not require payment of a
marketing fee to the national marketing fund.
NET FACILITY ACTIONS - The net gain/(loss) from
refranchising gains (including initial franchise fees),
store closure costs and SFAS 121 impairment charges for
restaurants to be used in the businesses.
NET REFRANCHISING GAINS/(LOSSES) - Gains/losses from
refranchising (including initial franchise fees) net of
store closure costs.
NON-CORE U.S. BUSINESSES - California Pizza Kitchen,
Chevys Mexican Restaurants, D'Angelo Sandwich Shops,
East Side Mario's and Hot 'n Now businesses in the U.S.
which were or are expected to be sold in 1997.
POINTS OF DISTRIBUTION - Traditional restaurant
facilities, including dine-in, delivery and take-out,
and non-traditional sites such as airports, gas and
convenience stores and schools.
REFRANCHISING GAINS - Gains arising from the sale of
Company-operated restaurants to franchisees, including
initial franchise fees.
RESTAURANTS, UNITS, STORES - Terms are interchangeable.
SAME STORE SALES - The average sales per store
calculated using U.S. Company-operated stores that have
been open for the past twelve months.
STORE CLOSURE COSTS - The cost of writing-down the
carrying amount of a Company-operated restaurant's
assets to estimated fair market value less costs of
disposal, and the net present value of any remaining
operating lease payments after the estimated closure
dates net of estimated sub-lease income.
SYSTEM-WIDE SALES - The combined sales of
Company-operated, joint ventured, franchised and
licensed units.
VOLUME - Measured by the year-over-year change in
customer transaction counts of Company-operated units.
<PAGE> 71
INDEX TO DEFINED TERMS
2n1s..............................................................10
ADA...............................................................24
Adjusted PepsiCo Stock Option.....................................47
Affiliates........................................................50
AmeriServe........................................................20
Chevys............................................................24
Code..............................................................34
Commission........................................................52
Common Stock.......................................................1
Company............................................................1
Compensation Committee............................................45
CPK...............................................................24
D'Angelo..........................................................24
deleveraging......................................................54
Distribution.......................................................1
Distribution Agent................................................31
Distribution Date..................................................1
Employee Programs Agreement.......................................34
EPS...............................................................48
ESM...............................................................24
G&A...............................................................54
HNN...............................................................24
LIBOR.............................................................30
Merrill Lynch......................................................9
NYSE...............................................................1
PepsiCo............................................................1
PepsiCo LTIP......................................................47
PepsiCo SharePower................................................46
PepsiCo SOIP......................................................46
PepsiCo Stock Conversion Ratio....................................47
Per Share Post-Split PepsiCo Stock Price..........................47
Per Share Pre-Split PepsiCo Stock Price...........................47
Per Share TRICON Stock Price......................................47
Preferred Stock...................................................48
Provision.........................................................50
PSUs..............................................................46
QSR................................................................9
R&D...............................................................19
Record Date.......................................................31
refranchising.....................................................13
RGM...............................................................13
Securities Act....................................................50
Separation Agreement..............................................33
Tax Separation Agreement..........................................33
TRICON.............................................................1
TRICON Articles...................................................48
TRICON Incentive Plan.............................................46
TRICON International..............................................10
TRICON LTIP.......................................................45
TRICON Stock Conversion Ratio.....................................47
TS&C Agreement....................................................34
when issued.......................................................49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Reference
Combined Financial Statements
Report of Independent Auditors F-2
Combined Statement of Operations -
fiscal years ended December 28, 1996
December 30, 1995 and December 31, 1994 F-3
Combined Statement of Cash Flows -
fiscal years ended December 28, 1996,
December 30, 1995 and December 31, 1994 F-4 - F-5
Combined Balance Sheet - December 28, 1996
and December 30, 1995 F-6
Combined Statement of Shareholders' Equity -
fiscal years ended December 28, 1996,
December 30, 1995 and December 31, 1994 F-7
Notes to Combined Financial Statements F-8 - F-24
Condensed Combined Financial Statements
Condensed Combined Statement of Operations -
12 and 24 weeks ended June 14, 1997 and
June 15, 1996 (unaudited) F-25
Condensed Combined Statement of Cash Flows -
24 weeks ended June 14,1997 and
June 15, 1996 (unaudited) F-26 - F-27
Condensed Combined Balance Sheet -
June 14, 1997 (unaudited) and December 28, 1996 F-28
Notes to Unaudited Condensed Combined
Financial Statements F-29
Pro Forma Condensed Combined Financial Statements
Pro Forma Condensed Combined Statement of Operations -
fiscal year ended December 28, 1996 (unaudited) F-30
Pro Forma Condensed Combined Statement of Operations -
24 weeks ended June 14, 1997 (unaudited) F-31
Pro Forma Condensed Combined Balance Sheet -
June 14, 1997 (unaudited) F-32
Notes to Unaudited Pro Forma Condensed Combined
Financial Statements F-33 - F-34
All other financial statements and schedules have been omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the above listed financial statements or the notes thereto.
F-1
Report of Independent Auditors
Board of Directors and Shareholders
TRICON Global Restaurants, Inc.
We have audited the accompanying combined balance sheet of TRICON Global
Restaurants, Inc. ("TRICON") as of December 28, 1996 and December 30, 1995
and the related combined statements of operations, cash flows and
shareholder's equity for each of the years in the three-year period ended
December 28, 1996. These combined financial statements are the
responsibility of TRICON's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of TRICON
as of December 28, 1996 and December 30, 1995, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 28, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the combined financial statements, TRICON in
1995 adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." As discussed in Notes 11 and 13 to the combined financial statements,
TRICON in 1994 changed its method for calculating the market-related value
of pension plan assets used in the determination of pension expense and
adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits," respectively.
KPMG Peat Marwick LLP
New York, New York
June 30, 1997
F-2
___________________________________________________________________________
Combined Statement of Operations
(in millions)
TRICON Global Restaurants, Inc.
Fiscal years ended December 28, 1996, December 30, 1995
and December 31, 1994
1996 1995 1994
(52 Weeks) (52 Weeks) (53 Weeks)
___________________________________________________________________________
REVENUES
Company-operated restaurants $ 9,738 $ 9,813 $ 9,170
Franchise and license fees 494 437 395
10,232 10,250 9,565
Costs and Expenses, net
Company-operated restaurants
Food and paper 3,215 3,242 3,009
Payroll and employee benefits 2,793 2,784 2,642
Occupancy and other operating
expenses 2,711 2,713 2,507
8,719 8,739 8,158
General, administrative and
other expenses 932 857 815
Net facility actions (37) 402 10
Unusual disposal charges 246 - -
Total costs and expenses 9,860 9,998 8,983
Operating Profit 372 252 582
Interest expense, net 300 355 341
Income/(Loss) Before Income Taxes and
Cumulative Effect of Accounting
Changes 72 (103) 241
Income Taxes 125 29 122
(Loss)/Income Before Cumulative Effect
of Accounting Changes (53) (132) 119
Cumulative Effect of Accounting Changes
Postemployment benefits (net of income
tax benefit of $3) - - (4)
Pension assets (net of income tax
expense of $2) - - 3
Net(Loss)/Income $ (53) $ (132) $ 118
____________________________________________________________________________
See accompanying Notes to Combined Financial Statements.
____________________________________________________________________________
F-3
___________________________________________________________________________
Combined Statement of Cash Flows (page 1 of 2)
(in millions)
TRICON Global Restaurants, Inc.
Fiscal years ended December 28, 1996, December 30, 1995
and December 31, 1994
1996 1995 1994
(52 Weeks) (52 Weeks) (53 Weeks)
___________________________________________________________________________
Cash Flows - Operating Activities
(Loss)/income before cumulative effect
of accounting changes $ (53) $ (132) $ 119
Adjustments to reconcile (loss)/income
before cumulative effect of
accounting changes to net cash
provided by operating activities
Depreciation and amortization 621 671 622
Impairment charges 62 457 -
Noncash portion of unusual
disposal charges 235 - -
Deferred income taxes (150) (233) (68)
Other noncash charges and
credits, net (15) 13 71
Changes in operating working capital,
excluding effects of acquisitions
Accounts and notes receivable (16) (12) (5)
Inventories 27 (22) (12)
Prepaid expenses, deferred income
taxes and other current assets (2) 10 (30)
Accounts payable and other
current liabilities 85 25 228
Income taxes payable (81) 36 (31)
Net change in operating
working capital 13 37 150
Net Cash Provided by Operating
Activities 713 813 894
Cash Flows - Investing Activities
Capital spending (620) (701) (1,038)
Acquisitions and investments
in unconsolidated affiliates - (66) (113)
Refranchising of restaurants 355 165 -
Sales of property, plant
and equipment 45 43 21
Other, net (29) (38) (134)
Net Cash Used for Investing
Activities (249) (597) (1,264)
___________________________________________________________________________
(Continued on following page)
F-4
___________________________________________________________________________
Combined Statement of Cash Flows (page 2 of 2)
(in millions)
TRICON Global Restaurants, Inc.
Fiscal years ended December 28, 1996, December 30, 1995
and December 31, 1994
1996 1995 1994
(52 Weeks) (52 Weeks) (53 Weeks)
___________________________________________________________________________
Cash Flows - Financing Activities
(Decrease)/increase in investments by
and advances from PepsiCo (285) (226) 453
Payments of long-term debt (57) (17) (71)
Short-term borrowings-three months or
less, net (80) 25 6
Net Cash (Used for)/Provided by
Financing Activities (422) (218) 388
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 1 (2) 1
Net Increase/(Decrease) in Cash
and Cash Equivalents 43 (4) 19
Cash and Cash Equivalents
- Beginning of Year 94 98 79
Cash and Cash Equivalents
- End of Year $ 137 $ 94 $ 98
___________________________________________________________________________
Supplemental Cash Flow Information
Cash Flow Data
Interest paid $ 34 48 55
Income taxes paid $ 325 253 266
Schedule of Noncash Investing and
Financing Activity
Liabilities assumed in connection
with acquisitions $ 26 17 112
PepsiCo stock issued in connection
with acquisitions $ - - 25
___________________________________________________________________________
See accompanying Notes to Combined Financial Statements.
___________________________________________________________________________
F-5
___________________________________________________________________________
Combined Balance Sheet
(in millions)
TRICON Global Restaurants, Inc.
December 28, 1996 and December 30, 1995
1996 1995
___________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents $ 137 $ 94
Short-term investments, at cost 50 11
187 105
Accounts and notes receivable, less allowance
$9 in 1996 and $6 in 1995 125 121
Inventories 88 127
Prepaid expenses, deferred income taxes and
other current assets 562 161
Total Current Assets 962 514
Property, Plant and Equipment, net 4,050 4,448
Intangible Assets, net 1,100 1,386
Investments in Unconsolidated Affiliates 228 382
Other Assets 180 178
Total Assets $6,520 $6,908
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable and other current
liabilities $1,200 $1,099
Income taxes payable 157 235
Short-term borrowings 59 144
Total Current Liabilities 1,416 1,478
Long-term Debt 231 260
Other Liabilities 434 325
Deferred Income Taxes 200 270
Shareholder's Equity
Investments by and advances from PepsiCo 4,266 4,604
Currency translation adjustment (27) (29)
Total Shareholder's Equity 4,239 4,575
Total Liabilities and
Shareholder's Equity $6,520 $6,908
__________________________________________________________________________
See accompanying Notes to Combined Financial Statements.
__________________________________________________________________________
F-6
Combined Statement of Shareholder's Equity
(in millions)
TRICON Global Restaurants, Inc.
Fiscal years ended December 28, 1996, December 30, 1995
and December 31, 1994
Investments
by and ad- Currency
vances from Translation
PepsiCo Adjustment Total
Shareholder's Equity,
December 25, 1993 $4,366 $ 12 $4,378
1994 Net income 118 - 118
Currency translation adjustment - 28 28
Net investments by and advances
from PepsiCo 478 - 478
Shareholder's Equity,
December 31, 1994 $4,962 $ 40 $5,002
1995 Net loss (132) - (132)
Currency translation adjustment - (69) (69)
Net investments by and advances
from PepsiCo (226) - (226)
Shareholder's Equity,
December 30, 1995 $4,604 $ (29) $4,575
1996 Net loss (53) - (53)
Currency translation adjustment - 2 2
Net investments by and advances
from PepsiCo (285) - (285)
Shareholder's Equity,
December 28, 1996 $4,266 $ (27) $4,239
See accompanying Notes to Combined Financial Statements.
F-7
Notes to Combined Financial Statements
(tabular dollars in millions)
Note 1 - PepsiCo, Inc.'s Proposed Spin-Off of its Restaurant Businesses
In 1997, the Board of Directors of PepsiCo, Inc. ("PepsiCo") approved
the spin-off of its core restaurant businesses to its shareholders as an
independent, publicly-traded company (the "Distribution"). The
Distribution is subject to a tax ruling by the Internal Revenue Service
that would allow it to be tax-free to shareholders subject to U.S. Federal
income taxes, various regulatory approvals, appropriate stock market
conditions and approval of a definitive plan by PepsiCo's Board of
Directors. TRICON Global Restaurants, Inc. ("TRICON"), the new company, is
composed of the worldwide operations of Pizza Hut, Taco Bell and KFC and
the non-core U.S. businesses held for disposal (see Note 3 on page F-11).
Immediately following the Distribution, PepsiCo will no longer have a
financial investment in TRICON. However, TRICON shares will be owned by
PepsiCo's pension trust on behalf of PepsiCo's employees. PepsiCo will
remain liable on certain existing contingent liabilities relating to
TRICON's businesses which were not able to be released, terminated or
replaced prior to the Distribution Date ("unreleased contingent
liabilities"). After the Distribution, TRICON will pay a fee to PepsiCo
for any unreleased contingent liabilities until they are released or
replaced by a qualified letter of credit. TRICON will also fully indemnify
PepsiCo for any payments made under the unreleased contingent liabilities.
TRICON expects to obtain initial debt funding and use substantially
all of the proceeds to settle certain amounts due to PepsiCo from TRICON
and to declare and pay a dividend to PepsiCo just prior to the
Distribution. In addition, TRICON and PepsiCo will enter into several
agreements providing for the separation of the companies and governing
various relationships between TRICON and PepsiCo, including a Separation
Agreement, Tax Separation Agreement, Employee Programs Agreement and
Telecommunications, Software and Computing Services Agreement.
The Combined Financial Statements included herein may not necessarily
be indicative of the results of operations, financial position and cash
flows of TRICON in the future or had it operated as a separate, independent
company during the periods presented. The Combined Financial Statements
included herein do not reflect any changes that may occur in the financing
and operations of TRICON as a result of the Distribution.
Note 2 - Summary of Significant Accounting Policies
The preparation of the Combined Financial Statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Basis of Combination and Preparation. The accompanying Combined
Financial Statements of TRICON include the results of operations and assets
and liabilities directly related to TRICON's operations. TRICON's
intercompany accounts and transactions have been eliminated. Investments
in unconsolidated affiliates in which TRICON exercises significant
F-8
influence but not control are accounted for by the equity method and
TRICON's share of the net income or loss of its unconsolidated affiliates
is included in general, administrative and other expenses in the Combined
Statement of Operations.
TRICON was allocated $53 million, $52 million and $50 million of
overhead costs related to PepsiCo's shared administrative functions in
1996, 1995 and 1994, respectively. The allocation was based on TRICON's
revenue as a percent of PepsiCo's total revenue and the allocated costs are
included in general, administrative and other expenses in the Combined
Statement of Operations. Management believes that such allocation
methodology is reasonable. The expenses allocated to TRICON for these
services are not necessarily indicative of the expenses that would have
been incurred if TRICON had been a separate, independent entity and had
otherwise managed these functions. Subsequent to the Distribution, TRICON
will be required to manage these functions and will be responsible for the
expenses associated with the management of a public corporation.
TRICON's operations have been financed through its operating cash
flows, refranchising of restaurants and investments by and advances from
PepsiCo. TRICON's interest expense includes an allocation of PepsiCo's
interest expense (PepsiCo's weighted average interest rate applied to the
average balance of investments by and advances from PepsiCo to TRICON) and
interest expense on its external debt. TRICON was allocated $275 million,
$316 million and $300 million of interest expense reflecting PepsiCo's
average interest rates of 6.2%, 6.6% and 6.4% in 1996, 1995 and 1994,
respectively. TRICON's external debt is primarily limited to capital lease
obligations associated with real estate and, to a much lesser extent,
assumed debt of acquired businesses and international third-party debt.
TRICON is expected to have a capital structure different from the capital
structure in the Combined Financial Statements and accordingly, interest
expense is not necessarily indicative of the interest expense that TRICON
would have incurred as a separate, independent company.
Income tax expense was calculated as if TRICON filed separate income
tax returns. As PepsiCo manages its tax position on a consolidated basis,
which takes into account the results of all of its businesses, TRICON's
effective tax rate in the future could vary from its historical effective
tax rates. TRICON's future effective tax rate will largely depend on its
structure and tax strategies as a separate, independent company.
Fiscal Year. TRICON's fiscal year ends on the last Saturday in
December and, as a result, a fifty-third week is added every five or six
years. The fiscal year ending December 31, 1994 consisted of 53 weeks.
Direct Marketing Costs. Direct marketing costs are reported in
occupancy and other operating expenses in the Combined Statement of
Operations and include costs of advertising and other marketing activities.
Direct marketing costs are charged to expense ratably in relation to
revenues over the year in which incurred. Advertising expenses were $571
million, $570 million and $556 million in 1996, 1995 and 1994,
respectively.
Research and Development Expenses. Research and development expenses,
which are expensed as incurred, were $20 million, $17 million and $22
million in 1996, 1995 and 1994, respectively.
Stock-Based Employee Compensation. TRICON measures stock-based
employee compensation cost in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related
interpretations. Accordingly, compensation cost for PepsiCo stock option
F-9
grants to TRICON employees is measured as the excess of the quoted market
price of PepsiCo's capital stock at the grant date over the amount the
employee must pay for the stock. PepsiCo's policy is to grant stock
options at fair market value at the date of grant.
Derivative Instruments. Gains and losses on futures contracts that
are designated and are effective as hedges of future commodity purchases
are deferred and included in the cost of the related raw materials when
purchased. Changes in the value of futures contracts that TRICON uses to
hedge commodity purchases are highly correlated to the changes in the value
of the purchased commodity. If the degree of correlation between the
futures contracts and the purchase contracts were to diminish such that the
two were no longer considered highly correlated, subsequent changes in the
value of the futures contracts would be recognized in income.
Cash Equivalents. Cash equivalents represent funds temporarily
invested (with original maturities not exceeding three months) as part of
managing day-to-day operating cash receipts and disbursements.
Inventories. Inventories are valued at the lower of cost (computed on
the first-in, first-out method) or net realizable value.
Property, Plant and Equipment. Property, plant and equipment (PP&E)
are stated at cost, except for PP&E that have been impaired, for which the
carrying amount is reduced to estimated fair market value. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets as follows: 5 to 25 years for buildings and improvements and 3 to
20 years for machinery and equipment. Depreciation expense was $521
million, $555 million, and $519 million in 1996, 1995 and 1994,
respectively.
Intangible Assets. Intangible assets are amortized on a straight-line
basis as follows: 20 years for reacquired franchise rights, 3 to 34 years
for trademarks and other identifiable intangibles and 20 years for
goodwill. Amortization expense was $95 million, $109 million and $103
million in 1996, 1995 and 1994, respectively.
Recoverability of Long-Lived Assets to be Held and Used in the
Business. TRICON reviews its long-lived assets related to each restaurant
to be held and used in the business semi-annually for impairment, or
whenever events or changes in circumstances indicate that the carrying
amount of a restaurant may not be recoverable. TRICON evaluates
restaurants using a "two-year history of operating losses" as its primary
indicator of potential impairment. An impaired restaurant is written down
to its estimated fair market value based on the best information available.
TRICON generally measures estimated fair market value by discounting
estimated future cash flows. Considerable management judgment is necessary
to estimate discounted future cash flows. Accordingly, actual results
could vary significantly from such estimates.
TRICON's methodology for determining and measuring impairment of its
investments in unconsolidated affiliates and enterprise-level goodwill was
changed in 1996 to conform with the methodology it uses for its restaurants
except (a) the recognition test for an investment in an unconsolidated
affiliate compares the investment to a forecast of TRICON's share of the
unconsolidated affiliate's undiscounted cash flows including interest and
taxes, compared to undiscounted cash flows before interest and taxes used
for restaurants and (b) enterprise-level goodwill is evaluated at a country
level instead of by individual restaurant. The change in methodology had
no impact in 1996.
Pre-opening Costs. Costs associated with opening a new restaurant are
expensed as incurred.
F-10
Refranchising Gains. Refranchising gains include gains on sales of
Company-operated restaurants to new and existing franchisees and the
related initial franchise fees. Gains on restaurant refranchisings are
recognized when the sale transaction closes, the franchisee has a minimum
amount of the purchase price in at-risk equity and TRICON is satisfied that
the franchisee can meet its financial obligations. Otherwise,
refranchising gains are deferred until those criteria have been met.
Store Closure Costs. Store closure costs are recognized when a
decision is made to close a restaurant within the next twelve months.
Store closure costs include the cost of writing-down the carrying
amount of a restaurant's assets to estimated fair market value less costs
of disposal, and the net present value of any remaining operating lease
payments after the expected closure date net of estimated sub-lease income.
Franchise and License Fees. Franchise and license agreements are
executed for each point of distribution and provide the terms of the
arrangement between TRICON and the franchisee/licensee. The franchise and
certain license agreements require the franchisee/licensee to pay an
initial, non-refundable fee. The agreements also require continuing fees
based upon a percentage of sales. Subject to franchisor approval, a
franchise agreement may be renewed upon expiration.
Initial fees are recognized as revenue when TRICON has substantially
performed all initial services required by the franchising/licensing
agreement, which is generally upon opening. Continuing fees are recognized
as earned with an appropriate provision for estimated uncollectible
amounts. Renewal fees are recognized in earnings when a renewal agreement
becomes effective.
Territorial franchise agreements stipulate the area, number of
restaurants and the time frame for development in exchange for a
territorial franchise fee. These fees are amortized on a straight line
basis over the life of the territory agreement.
Direct costs incurred to secure and perform the required services
under the franchise and license agreements, which are not material, are
charged to expense as incurred.
Note 3 - Items Affecting Comparability of Income Before Cumulative
Effect of Accounting Changes
1996 1995 1994
Pre- After- Pre- After- Pre- After-
Tax Tax Tax Tax Tax Tax
Disposal of non-core U.S.
businesses $246 $189 - - - -
Net facility actions $(37) $(21) $402 $295 $10 $ 6
Reduced depreciation and
amortization $(40) $(26) $(17) $(12) - -
Fifty-third week - - - - $(23) $(14)
___________________________________________________________________________
The non-core U.S. businesses charge of $246 million was a result of a
fourth quarter 1996 decision to dispose of TRICON's remaining non-core U.S.
businesses: California Pizza Kitchen ("CPK"), Chevys, D'Angelo Sandwich
F-11
Shops ("D'Angelo"), and East Side Mario's ("ESM") and a first quarter 1996
decision to dispose of the operating assets of Hot 'n Now ("HNN"). The
charge represented a reduction of the carrying amounts of the non-core U.S.
businesses to estimated fair market value, less costs to sell. The
estimated fair market value was determined by using estimated selling
prices, based primarily upon the opinion of an investment banking firm
retained to assist in the selling activity. The remaining carrying amount
of the non-core U.S. restaurant assets of $333 million was included in
prepaid expenses, deferred income taxes and other current assets in the
1996 Combined Balance Sheet. The non-core U.S. businesses contributed $394
million, $297 million and $281 million to revenues in 1996, 1995 and 1994,
respectively. Excluding the unusual disposal charges in 1996 and the $120
million initial impact of adopting Statement of Financial Accounting
Standard No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" in 1995, the non-core
U.S. businesses incurred losses of $15 million ($12 million after-tax), $45
million ($37 million after-tax) and $42 million ($35 million after-tax) in
1996, 1995 and 1994, respectively.
Net facility actions reflected TRICON's initiatives to reduce its
percentage ownership of total system units by selling Company-operated
restaurants to new and existing franchisees and closing underperforming
stores, and impairment charges under SFAS 121:
1996 1995 1994
U.S.
Refranchising gains* $(134) $ (89) $ -
Store closure costs 45 26 10
SFAS 121 impairment charges 54 320 -
(Gains)/losses from
net facility actions $ (35) $ 257 $ 10
International
Refranchising gains $ (5) $ (4) -
Store closure costs (5) 12 -
SFAS 121 impairment charges 8 137 -
(Gains)/losses from
net facility actions $ (2) $ 145 -
Worldwide
Refranchising gains* $(139) $ (93) $ -
Store closure costs 40 38 10
SFAS 121 impairment charges 62 457 -
(Gains)/losses from
net facility actions $ (37) $ 402 $ 10
* Included initial franchise fees for both the U.S. and Worldwide of $22
million in 1996 and $8 million in 1995. See Note 4 on page F-13.
TRICON early adopted SFAS 121 as of the beginning of the fourth
quarter of 1995. The initial, noncash charge of $457 million ($324 million
after-tax), $120 million ($82 million after-tax) of which related to non-
core U.S. businesses, resulted from TRICON evaluating and measuring
impairment of restaurants to be used in the business at the individual
restaurant level. Previously, impairment was evaluated and
F-12
measured if a restaurant concept was incurring operating losses and was
expected to incur operating losses in the future. Because of the strong
operating profit history or prospects for each concept, no impairment
evaluation had been required in 1994.
As a result of the reduced carrying amount of restaurants due to the
adoption of SFAS 121, depreciation and amortization expense was reduced by
$40 million for the first three quarters of 1996 and by $17 million for the
fourth quarter of 1995.
The recurring SFAS 121 impairment charge in 1996 resulted from the
semi-annual impairment evaluations of each restaurant to be used in the
business that either initially met the "two-year history of operating
losses" impairment indicator or was previously evaluated for impairment
and, due to changes in circumstances, a current forecast of future cash
flows would be expected to be significantly lower than the forecast used in
the prior evaluation.
The fifty-third week in 1994 increased 1994 revenues and operating
profit by an estimated $172 million and $23 million, respectively.
Note 4 - Franchise and License Fees
Franchise and certain license arrangements for TRICON's traditional and non-
traditional points of distribution, respectively, provide for initial fees.
The agreements also require continuing fees based upon a percentage of
sales. Initial franchise fees from refranchising activities arise from an
initiative adopted by TRICON in late 1994 to reduce its percentage
ownership of total system units by selling Company-operated units to new
and existing franchisees. As disclosed in Note 2 on page F-9, initial
franchise fees from the refranchising activities are included as part of
refranchising gains.
1996 1995 1994
Initial fees $ 43 $ 28 $ 18
Initial franchise fees from
refranchising activities (22) (8) -
21 20 18
Continuing fees 473 417 377
$494 $437 $395
Note 5 - Property, Plant and Equipment, net
1996 1995
___________________________________________________________________________
Land $ 933 $ 990
Buildings and improvements 3,394 3,452
Capital leases, primarily
buildings 206 309
Machinery and equipment 2,319 2,370
6,852 7,121
Accumulated depreciation (2,802) (2,673)
$4,050 $4,448
___________________________________________________________________________
F-13
Note 6 - Intangible Assets, net
1996 1995
___________________________________________________________________________
Reacquired franchise rights $ 767 $ 817
Trademarks and other
identifiable intangibles 190 214
Goodwill 143 355
$1,100 $1,386
___________________________________________________________________________
Identifiable intangible assets primarily arose from the allocation of
purchase prices of businesses acquired. Amounts assigned to such
identifiable intangibles were based on independent appraisals or internal
estimates. Goodwill represents the residual purchase price after
allocation to all identifiable net assets.
Accumulated amortization, included in the amounts above, was $603
million and $521 million at year-end 1996 and 1995, respectively.
Note 7 - Accounts Payable and Other Current Liabilities
1996 1995
__________________________________________________________________________
Accounts payable $ 526 $ 516
Accrued compensation and benefits 261 243
Other accrued taxes 121 94
Other current liabilities 292 246
$1,200 $1,099
__________________________________________________________________________
Note 8 - Short-term Borrowings and Long-term Debt
1996 1995
___________________________________________________________________________
Short-term Borrowings
Current maturities of long-term
debt issuances $26 $ 27
Other due 1997 33 117
$59 $144
___________________________________________________________________________
___________________________________________________________________________
Long-term Debt
Capital lease obligations
(see Note 9 on page F-15) $222 $246
Other, due 1997-2010 (8.2% and 8.1%) 35 41
257 287
Less current maturites of long-term
debt issuances (26) (27)
$231 $260
___________________________________________________________________________
Interest expense includes an allocation of a portion of PepsiCo's interest
expense. See Note 2 on page F-8.
F-14
Note 9 - Leases
TRICON has noncancellable commitments under both capital and long-term
operating leases, primarily for Company-operated restaurants. Capital and
operating lease commitments expire at various dates through 2087 and, in
many cases, provide for rent escalations and renewal options. Most leases
require payment of related executory costs, which include property taxes,
maintenance and insurance.
Future minimum commitments and sublease receivables under
noncancelable leases are set forth below:
Commitments Sublease Receivables
Capital Operating Direct Operating
Financing
1997 $ 39 $ 258 $ 3 $ 14
1998 37 225 3 13
1999 34 194 2 11
2000 32 168 2 10
2001 30 150 2 8
Later years 231 930 17 44
$403 $1,925 $ 29 $100
________________________________________________________________________
At year-end 1996, the present value of minimum payments under capital
leases was $222 million, after deducting $181 million representing imputed
interest.
The details of rental expense and income are set forth below:
1996 1995 1994
Rental expense
Minimum $299 $309 $303
Contingent 25 27 32
$324 $336 $335
Minimum rental income $ 16 $ 8 $ 12
___________________________________________________________________________
Contingent rentals are based on sales in excess of levels stipulated
in the lease agreements.
Note 10 - Financial Instruments
Derivative Instruments
TRICON's policy prohibits the use of derivative instruments for trading
purposes and TRICON has procedures in place to monitor and control their
use.
TRICON's use of derivative instruments is currently limited to
commodity futures contracts traded on national exchanges, which are entered
into with the objective of reducing food costs. Open contracts and
deferred gains and losses at year-end 1996 and 1995, as well as gains and
losses recognized as part of cost of sales in 1996, 1995 and 1994 were not
significant.
F-15
Fair Value
Except for guarantees issued by TRICON, the carrying amounts of TRICON's
financial instruments approximated market value. The fair value of
guarantees issued by TRICON was $13 million in 1996 and $1 million in 1995
compared to a carrying amount of $0 for both years. The fair values were
estimated using market quotes and calculations based on market rates.
Note 11 - Pension Plans
U.S. employees participate in PepsiCo sponsored noncontributory defined
benefit pension plans which cover substantially all full-time salaried
employees, as well as certain hourly employees. Benefits generally are
based on years of service and compensation or stated amounts for each year
of service. All plans but one are funded and contributions are made in
amounts not less than minimum statutory funding requirements nor more than
the maximum amount that can be deducted for U.S. income tax purposes.
It is intended that TRICON will assume the existing defined benefit
pension plan obligations for TRICON's U.S. employees as of the Distribution
Date and trust assets from the funded plans will be transferred based upon
actuarial determinations in accordance with regulatory requirements.
Net periodic U.S. pension expense allocated to TRICON was $10 million
in 1996, $5 million in 1995 and $5 million in 1994. Net periodic pension
expense for the defined benefit pension plans for TRICON's foreign
operations was not significant. TRICON will assume the foreign defined
benefit pension plan obligations as of the Distribution Date. Any related
assets will be transferred.
In 1994, PepsiCo changed the method for calculating the market-related
value of plan assets used in determining the return-on-assets component of
net periodic pension cost and the cumulative net unrecognized gain or loss
subject to amortization. This change resulted in a noncash benefit in 1994
for TRICON of $5 million ($3 million after-tax) representing the cumulative
effect of the change related to TRICON for years prior to 1994.
Note 12 - Postretirement Benefits Other Than Pensions
TRICON provides postretirement health care benefits to eligible retired
employees and their dependents, principally in the U.S. Salaried retirees
who have 10 years of service and attain age 55 are eligible to participate
in the postretirement benefit plans. The plans are not funded and since
1994 have included retiree cost sharing. Postretirement benefit expense
was $3 million in 1996, $2 million in 1995 and $3 million in 1994.
Note 13 - Postemployment Benefits Other Than to Retirees
Effective the beginning of 1994, TRICON adopted Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for
Postemployment Benefits." The principal effect to TRICON resulted from
accruing disability medical benefits to be provided to employees upon the
occurrence of an event. Previously, these benefits were expensed when
incurred. The cumulative effect charge upon adoption of SFAS 112, which
relates to years prior to 1994, was $7 million ($4 million after-tax).
F-16
Note 14 - Employee Stock Option Plans
TRICON employees were granted stock options under PepsiCo's three long-
term incentive plans - the SharePower Stock Option Plan ("SharePower"), the
Long-Term Incentive Plan ("LTIP"), and the Stock Option Incentive Plan
("SOIP"). Prior to 1997, SharePower options were granted annually to
essentially all full-time employees. SharePower options generally become
exercisable ratably over 5 years from the grant date and must be exercised
within 10 years from the grant date. Most LTIP options were granted every
other year to senior management employees. Most of these options become
exercisable after 4 years and must be exercised within 10 years from the
grant date. In addition, the LTIP allows for grants of performance share
units ("PSU"s). The maximum value of a PSU is fixed at the value of a
share of PepsiCo stock at the grant date and vests in 4 years from the
grant date. Payment of PSUs are made in cash and/or stock and the payment
amount is determined based on the attainment of prescribed performance
goals. Amounts expensed for PSUs for TRICON employees were $.9 million in
1996, $.6 million in 1995 and $1.8 million in 1994. SOIP options are for
middle-management employees and, prior to 1997, were granted annually.
SOIP options are exercisable after one year and must be exercised within 10
years after their grant date. The total number of options granted to
TRICON employees under the PepsiCo stock option plans was 13.4 million in
1996, 7.2 million in 1995 and 14.1 million in 1994.
Immediately following the Distribution, nonvested SharePower stock
options and 1996 and 1997 option grants under LTIP and SOIP held by TRICON
employees will be replaced with TRICON stock option awards. The TRICON
awards will have the same ratio of the exercise price per option to the
market value per share, the same aggregate difference between market value
and exercise price and the same vesting provisions, option periods and
other terms and conditions as the PepsiCo options they replace. Vested
SharePower options and options granted under LTIP and SOIP before 1996 held
by TRICON employees will remain as PepsiCo stock options. The number of
options and exercise prices will be adjusted to compensate for the market
value of TRICON shares distributed to PepsiCo shareholders. At December
28, 1996, there were approximately 38 million PepsiCo stock options held by
TRICON employees. That amount includes an aggregate of approximately 16
million options that are subject to replacement with TRICON stock option
awards. TRICON cannot currently determine the number of shares of its
common stock that will be subject to substitute awards after the
Distribution.
TRICON adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," but continues to measure stock-based compensation cost in
accordance with Accounting Principles Board Opinion No. 25 and its related
interpretations. If TRICON had measured compensation cost for the PepsiCo
stock options granted to its employees in 1996 and 1995 under the fair
value based method prescribed by SFAS 123, the net loss would have been
changed to the pro forma amounts set forth below:
1996 1995
Net Loss
Reported $53 $132
Pro forma $70 $136
F-17
The fair value of PepsiCo stock options granted to TRICON employees
used to compute pro forma net income disclosures were estimated on the date
of grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions used by PepsiCo:
1996 1995
Risk free interest rate 6.0% 6.2%
Expected life 6 years 5 years
Expected volatility 20% 20%
Expected dividend yield 1.5% 1.75%
The weighted-average fair value of PepsiCo stock options granted to
TRICON employees during 1996 was $8.87 and during 1995 was $5.54.
The pro forma amounts above are not necessarily representative of the
effects of stock-based awards on future pro forma net income because
(1)future grants of employee stock options by TRICON management may not be
comparable to awards made to employees while TRICON was a part of PepsiCo,
(2) the assumptions used to compute the fair value of any stock option
awards will be specific to TRICON and therefore may not be comparable to
the PepsiCo assumptions used and (3) they exclude the pro forma
compensation expense related to unvested stock options granted before 1995.
Note 15 - Income Taxes
The details of the provision for income taxes on income before cumulative
effect of accounting changes are set forth below:
1996 1995 1994
___________________________________________________________________________
Current: Federal $ 154 $179 $134
Foreign 93 59 31
State 28 24 25
275 262 190
Deferred: Federal (127) (168) (50)
Foreign (5) (55) (7)
State (18) (10) (11)
(150) (233) (68)
$ 125 $ 29 $122
___________________________________________________________________________
U.S. and foreign income before income taxes and cumulative effect of
accounting changes are set forth below:
1996 1995 1994
___________________________________________________________________________
U.S. $(21) $ 72 $285
Foreign 93 (175) (44)
$ 72 $(103) $241
___________________________________________________________________________
F-18
A reconciliation of income taxes calculated at the U.S. Federal tax
statutory rate to TRICON's provision for income taxes is set forth below:
1996 1995 1994
___________________________________________________________________________
Income taxes computed at the U.S.
Federal statutory rate of 35% $ 25 $(36) $ 84
State income tax, net of Federal
tax benefit 7 7 12
Foreign and U.S. tax effects
attributable to foreign
operations 49 26 27
Adjustment to the beginning-of-
the-year foreign deferred tax
assets valuation allowance 5 (1) -
Effect of unusual disposal charges 28 - -
Initial impact of adopting SFAS 121 - 28 -
Nondeductible amortization of
U.S. goodwill 9 11 4
Federal tax credits (2) (8) (14)
Equity (income)/loss of CPK 1 8 7
Other, net 3 (6) 2
Total income taxes $125 $ 29 $122
Effective income tax rate 173.6% (28.2)% 50.6%
The details of the 1996 and 1995 deferred tax liabilities (assets)
are set forth below:
1996 1995
___________________________________________________________________________
Intangible assets and property,
plant and equipment $ 222 $ 392
Other 43 3
Gross deferred tax liabilities $ 265 $ 395
Net operating loss carryforwards $(111) $ (89)
Employee benefits (56) (46)
Casualty claims (69) (47)
Various liabilities and other (132) (134)
Gross deferred tax assets (368) (316)
Deferred tax assets valuation
allowance 138 82
Net deferred tax assets (230) (234)
Net deferred tax liability $ 35 $ 161
Included in
Prepaid expenses, deferred income
taxes and other current assets $(165) $(109)
Deferred income taxes 200 270
$ 35 $ 161
The valuation allowance related to deferred tax assets increased by
$56 million in 1996 primarily due to additions related to current year
operating losses and temporary differences in a number of foreign and state
jurisdictions.
F-19
The determination of the unrecognized deferred tax liability for
temporary differences related to investments in foreign subsidiaries and
foreign corporate joint ventures that are essentially permanent in duration
is not practicable.
Net operating loss carryforwards totaling $374 million at year-end
1996 are available to reduce future tax of certain subsidiaries and are
related to a number of foreign and state jurisdictions. Of these
carryforwards, $4 million expire in 1997, $316 million expire at various
times between 1998 and 2010 and $54 million may be carried forward
indefinitely.
Note 16 - Business Segments
TRICON is engaged principally in developing, operating, franchising and
licensing the worldwide Pizza Hut, Taco Bell and KFC concepts. TRICON
also operates other non-core U.S. concepts, including CPK, Chevys,
D'Angelo, ESM and HNN, which were held for disposal at the end of 1996 (see
Note 3 on page F-11).
Pizza Hut, Taco Bell and KFC operate throughout the U.S. and in 83, 16
and 73 countries and territories outside the U.S., respectively. Principal
international markets include Australia, Canada, Japan, Korea, Mexico, New
Zealand, Spain and the U.K. At year-end 1996, TRICON has investments in
several unconsolidated affiliates outside the U.S. which operate KFC and
Pizza Hut restaurants, the most significant of which are located in Japan
and the U.K.
TRICON year-end investments in unconsolidated affiliates totaled $228
million in 1996 and $382 million in 1995. The decrease in 1996 reflected
the consolidation of CPK, previously an unconsolidated equity investment,
at the end of the second quarter of 1996. CPK was consolidated as a result
of PepsiCo obtaining majority control of CPK's Board of Directors at the
end of the second quarter of 1996.
F-20
___________________________________________________________________________
GEOGRAPHIC AREAS
___________________________________________________________________________
Revenues
1996 1995 1994
International $ 2,308 $ 2,087 $1,794
United States 7,924 8,163 7,771
$10,232 $10,250 $9,565
___________________________________________________________________________
Operating Profit/(Loss)
1996(a) 1995(a) 1994
International 126 (26) 66
United States 286 354 578
Equity income/(loss) and
foreign exchange 13 (24) (12)
Allocation of PepsiCo shared
corporate expenses (53) (52) (50)
$ 372 $ 252 $ 582
___________________________________________________________________________
Identifiable Assets
1996 1995 1994
International $ 1,726 $ 1,643 $1,780
United States 4,566 4,883 5,211
Investments in Unconsolidated
Affiliates 228 382 396
$ 6,520 $ 6,908 $7,387
___________________________________________________________________________
Depreciation and Amortization
1996 1995 1994
International $ 149 $ 152 $ 116
United States 472 519 506
$ 621 $ 671 $ 622
___________________________________________________________________________
Capital Spending
1996 1995 1994
International $ 161 $ 184 $ 335
United States 466 530 714
$ 627 $ 714 $1,049
___________________________________________________________________________
(a) The unusual disposal charge in 1996 of $246 in the United States and
the initial impact of adopting SFAS 121 in 1995 of $457 (United States
- $305, International - $135 and equity income/(loss) - 17) reduced
combined operating profit (see Note 3 on page F-11).
F-21
Note 17 - Related Party Transactions
TRICON purchases beverage products from the Pepsi-Cola Company and
equipment, food and paper from PepsiCo Food Systems (PFS), both operating
divisions of PepsiCo. The amounts purchased in 1996, 1995 and 1994 were
$2.5 billion, $2.7 billion and $2.6 billion, respectively. In May 1997,
TRICON entered into a five-year Sales and Distribution Agreement with PFS
to purchase the majority of its food and supplies for Company-operated
stores, subject to PFS maintaining certain quality and service performance
levels. The Sales and Distribution Agreement becomes effective upon the
closing of the sale by PepsiCo of the assets and business of PFS to
AmeriServe Food Distribution, Inc. ("AmeriServe"), pursuant to a definitive
agreement dated as of May 23, 1997.
KFC, Pizza Hut and Taco Bell are each expected to enter into a multi-
year agreement with Pepsi-Cola regarding the sale of Pepsi-Cola's brands of
beverage products to TRICON's U.S. Company-operated units.
PepsiCo will remain liable on certain existing contingent liabilities
relating to TRICON's businesses which were not able to be released,
terminated or replaced prior to the Distribution Date ("unreleased
contingent liabilities"). After the Distribution, TRICON will pay a fee to
PepsiCo for any unreleased contingent liabilities until they are released
or replaced by a qualified letter of credit. TRICON will also fully
indemnify PepsiCo for any payments made under the unreleased contingent
liabilities.
In contemplation of the Distribution, TRICON and PepsiCo will enter
into certain agreements providing for the separation of the companies. See
Note 1 on page F-8.
Note 18 - Contingencies
TRICON is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, in
excess of amounts already recognized arising from such claims or
contingencies is not likely to have a material adverse effect on TRICON's
annual results of operations or financial condition. TRICON was directly
or indirectly contingently liable under guarantees for $150 million and $77
million at year-end 1996 and 1995, respectively. At year-end 1996, $74
million represented contingent liabilities to lessors as a result of TRICON
assigning its interest in and obligations under real estate leases as a
condition to the refranchising of Company-operated restaurants. The $74
million represented the present value of the minimum payments of the
assigned leases, excluding any renewal option periods, discounted at
PepsiCo's pre-tax cost of debt. PepsiCo's pre-tax cost of debt is not
necessarily indicative of TRICON's pre-tax cost of debt as a separate,
independent company. On a nominal basis, the contingent liability
resulting from the assigned leases was $115 million. The balance of the
contingent liabilities primarily reflected guarantees to support financial
arrangements of certain unconsolidated affiliates and other restaurant
franchisees.
F-22
Note 19 - Selected Quarterly Financial Data
(unaudited)
First Quarter
(12 Weeks)
1996(a) 1995(a)
___________________________________________________________________________
Revenues:
Company-operated restaurants $ 2,171 2,090
Franchise and license fees $ 102 90
Operating profit related to:
Company-operated restaurants $ 219 189
Franchise and license fees $ 99 88
Unusual disposal charges(b) $ 26 -
Operating profit $ 146 114
Net income $ 40 16
___________________________________________________________________________
Second Quarter
(12 Weeks)
1996(a) 1995(a)
___________________________________________________________________________
Revenues:
Company-operated restaurants $ 2,271 2,329
Franchise and license fees $ 111 101
Operating profit related to:
Company-operated restaurants $ 268 257
Franchise and license fees $ 108 98
Operating profit $ 183 146
Net income $ 66 36
___________________________________________________________________________
Third Quarter
(12 Weeks)
1996(a) 1995(a)
___________________________________________________________________________
Revenues:
Company-operated restaurants $ 2,329 2,383
Franchise and license fees $ 119 106
Operating profit related to:
Company-operated restaurants $ 259 295
Franchise and license fees $ 113 103
Operating profit $ 196 207
Net income $ 60 64
___________________________________________________________________________
Fourth Quarter
(16 Weeks)
1996(a) 1995(a)
___________________________________________________________________________
Revenues:
Company-operated restaurants $ 2,967 3,011
Franchise and license fees $ 162 140
Operating profit related to:
Company-operated restaurants $ 273 333
Franchise and license fees $ 158 136
Unusual disposal charges(b) $ 220 -
Operating loss $ (153) (215)
Net loss $ (219) (248)
___________________________________________________________________________
F-23
(unaudited)
Full Year
(52 Weeks)
1996(a) 1995(a)
Revenues:
Company-operated restaurants $ 9,738 9,813
Franchise and license fees $ 494 437
Operating profit related to:
Company-operated restaurants $ 1,019 1,074
Franchise and license fees $ 478 425
Unusual disposal charges(b) $ 246 -
Operating profit $ 372 252
Net loss $ (53) (132)
___________________________________________________________________________
Notes:
(a) Operating profit included certain items affecting comparability as
summarized below. Net facility actions represent the net gains/(losses)
from sales of restaurants to new and existing franchisees, closing other
restaurants and SFAS 121 impairment charges for restaurants to be used in
the business. The SFAS 121 impairment charges represent the ongoing
application of SFAS 121 in 1996 and the initial impact of adopting it in
1995 (see Note 3 on page F-11). The depreciation and amortization reduction
for the first three quarters of 1996 arose from the adoption of SFAS 121 at
the beginning of the fourth quarter of 1995, which reduced the carrying amount
of certain restaurants to be held and used in the business.
1996 1995
Pre- After- Pre- After-
Tax Tax Tax Tax
Net facility actions
(gains/(losses))
First quarter $ 46 $28 $ 3 $ 2
Second quarter 20 13 - -
Third quarter 25 15 (3) (2)
Fourth quarter (54) (35) (402) (295)
Full year $ 37 $21 $(402) $(295)
Depreciation and amorti-
zation reduction
First quarter $ 13 $ 9
Second quarter 16 11
Third quarter 11 6
Full year $ 40 $26
(b) Included unusual disposal charges in 1996 (see Note 3 on page F-11) as
follows:
Pre- After-
Tax Tax
First quarter $ 26 $ 17
Fourth quarter 220 172
Full year $246 $189
F-24
Condensed Combined Statement of Operations
(in millions, unaudited)
TRICON Global Restaurants, Inc.
12 and 24 weeks ended June 14, 1997 and June 15, 1996
____________________________________________________________________________
12 Weeks Ended 24 Weeks Ended
6/14/97 6/15/96 6/14/97 6/15/96
REVENUES
Company-operated restaurants $2,214 $2,271 $4,337 $4,442
Franchise and license fees 139 111 253 213
2,353 2,382 4,590 4,655
Costs and Expenses, net
Company-operated restaurants
Food and paper 720 741 1,404 1,455
Payroll and employee benefits 622 641 1,255 1,275
Occupancy and other operating
expenses 592 621 1,164 1,225
1,934 2,003 3,823 3,955
General, administrative and other
expenses 221 216 419 411
Net facility actions (73) (20) (85) (66)
Unusual disposal charges 39 - 39 26
Total costs and expenses 2,121 2,199 4,196 4,326
Operating Profit 232 183 394 329
Interest expense, net 65 69 131 143
Income Before Income Taxes 167 114 263 186
Income Taxes 46 48 90 80
Net Income $ 121 $ 66 $ 173 $ 106
____________________________________________________________________________
See accompanying Notes to Unaudited Condensed Combined Financial Statements.
____________________________________________________________________________
F-25
___________________________________________________________________________
Condensed Combined Statement of Cash Flows (page 1 of 2)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
24 Weeks ended June 14, 1997 and June 15, 1996
1997 1996
___________________________________________________________________________
Cash Flows - Operating Activities
Net income $ 173 $ 106
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 257 288
Unusual disposal charges 39 26
Deferred income taxes (36) (15)
Other noncash charges and
credits, net (60) (31)
Changes in operating working capital,
excluding effects of acquisitions and
dispositions
Accounts and notes receivable 4 (8)
Inventories (18) 4
Prepaid expenses, deferred income
taxes and other current assets (88) (38)
Accounts payable and other
current liabilities (69) 12
Income taxes payable 29 (49)
Net change in operating
working capital (142) (79)
Net Cash Provided by Operating
Activities 231 295
Cash Flows - Investing Activities
Capital spending (175) (206)
Refranchising of restaurants 384 200
Sale of non-core businesses 91 -
Sales of property, plant
and equipment 34 11
Other, net (19) 13
Net Cash Provided by Investing
Activities 315 18
___________________________________________________________________________
(Continued on following page)
F-26
___________________________________________________________________________
Condensed Combined Statement of Cash Flows (page 2 of 2)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
24 Weeks ended June 14, 1997 and June 15, 1996
1997 1996
___________________________________________________________________________
Cash Flows - Financing Activities
Short-term borrowings-three months
or less, net 52 (55)
Net proceeds from long-term debt (10) (29)
Decrease in investments by and
advances from PepsiCo (614) (226)
Net Cash Used for Financing
Activities (572) (310)
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (1) (4)
Net Decrease in Cash
and Cash Equivalents (27) (1)
Cash and Cash Equivalents
- Beginning of Year 137 94
Cash and Cash Equivalents
- End of Quarter $ 110 $ 93
___________________________________________________________________________
Supplemental Cash Flow Information
Cash Flow Data
Interest paid $ 14 $ 16
Income taxes paid $ 59 $173
___________________________________________________________________________
See accompanying Notes to Unaudited Condensed Combined Financial
Statements.
___________________________________________________________________________
F-27
_____________________________________________________________________________
Condensed Combined Balance Sheet
(in millions)
TRICON Global Restaurants, Inc.
June 14, 1997 and December 28, 1996
6/14/97 (unaudited) 12/28/96
Historical Pro Forma
_____________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents $ 110 $ 137
Short-term investments, at cost 47 50
157 187
Accounts and notes receivable,
less allowance:
$12 in 1997 and $9 in 1996 131 125
Inventories 103 88
Prepaid expenses, deferred income taxes
and other current assets 559 562
Total Current Assets 950 962
Property, Plant and Equipment, net 3,780 4,050
Intangible Assets, net 982 1,100
Investments in Unconsolidated Affiliates 223 228
Other Assets 172 180
Total Assets $6,107 $6,520
LIABILITIES AND SHAREHOLDER'S EQUITY/
(DEFICIT)
Current Liabilities
Accounts payable and other current
liabilities $1,121 $1,200
Income taxes payable 185 157
Short-term borrowings 107 59
Total Current Liabilities 1,413 1,416
Long-term Debt 186 231
Other Liabilities 455 434
Deferred Income Taxes 295 200
Shareholder's Equity/Deficit
Investments by and advances from PepsiCo 3,825 $(675) 4,266
Currency translation adjustment (67) (67) (27)
Total Shareholder's Equity/(Deficit) 3,758 $(742) 4,239
Total Liabilities and
Shareholder's Equity/(Deficit) $6,107 $6,520
____________________________________________________________________________
See accompanying Notes to Unaudited Condensed Combined Financial
Statements.
___________________________________________________________________________
F-28
12 and 24 Weeks ended June 14, 1997 and June 15, 1996
Notes to Unaudited Condensed Combined Financial Statements
1. The Condensed Combined Balance sheet at June 14, 1997 and the Condensed
Combined Statements of Operations and Cash Flows for the 12 and 24
weeks ended June 14, 1997 and June 15, 1996 have not been audited, but
have been prepared in conformity with the accounting principles applied
in the TRICON audited combined financial statements for the year ended
December 28, 1996. In the opinion of management, this information
includes all material adjustments necessary for a fair presentation.
The results for the 12 and 24 weeks are not necessarily indicative of
the results expected for the year.
2. During the first half of 1997, TRICON sold ESM, Chevys and HNN for $105
million, composed of $91 million in cash and a $14 million note.
3. TRICON recorded an unusual charge of $39 million ($22 million after-tax) in
the second quarter of 1997 to adjust the carrying amounts of the non-core
U.S. businesses and $26 million ($17 million after-tax) related to the first
quarter 1996 decision to dispose of HNN's operating assets. The adjustment
was based on the actual selling prices of the three businesses and current
negotiations with probable buyers for the two remaining businesses, CPK and
D'Angelo. As of June 14, 1997, the carrying amount of the assets held for
disposal was $131 million. We anticipate that CPK and D'Angelo will be sold
by the end of 1997.
Excluding the unusual charges of $39 million and $26 million described above,
the non-core U.S. businesses sold or held for disposal contributed the
following:
12 Weeks Ended 24 Weeks Ended_
($ in millions) 6/14/97 6/15/96 6/14/97 6/15/96
Net Revenues $88 $74 $191 $141
Net Income/(Loss) $ 4 $(2) $ 6 $ (7)
4. Included in net facility actions were recurring impairment charges of
$39 million ($25 million after-tax) and $18 million ($12 million after-
tax) in the second quarter of 1997 and 1996 to reduce the carrying
amounts of certain restaurants to be held and used. These charges
resulted from the semi-annual impairment evaluation of all restaurants
that either initially met the "two-year history of operating losses"
impairment indicator that is used to identify potentially impaired
restaurants or were previously evaluated for impairment and, due to
changes in circumstances, a current forecast of future cash flows would
be expected to be significantly lower than the forecast used in the
prior evaluation.
5. The unaudited pro forma shareholder's equity/(deficit) gives effect to
a $4.5 billion cash distribution to PepsiCo in repayment of certain
amounts due and a dividend.
6. On August 14, 1997 PepsiCo, Inc. ("PepsiCo") announced its Board of
Directors approved a formal plan to spin-off TRICON to shareholders.
PepsiCo also announced that it received a ruling from the Internal Revenue
Service that the spin-off would be tax free to PepsiCo and its shareholders.
F-29
_____________________________________________________________________________
Pro Forma Condensed Combined Statement of Operations
(in millions except per share amounts, unaudited)
TRICON Global Restaurants, Inc.
Fiscal year ended December 28, 1996
Pro Forma Pro Forma
1996 Adjustments 1996
_____________________________________________________________________________
REVENUES
Company-operated restaurants $9,738 $(391)(a) $9,347
Franchise and license fees 494 (3)(a) 491
10,232 (394)(a) 9,838
Costs and Expenses, net
Company-operated restaurants
Food and paper 3,215 (123)(a) 3,092
Payroll and employee benefits 2,793 (130)(a) 2,663
Occupancy and other operating
expenses 2,711 (112)(a) 2,599
8,719 (365) 8,354
General, administrative and
other expenses 932 (39)(a) 893
Net facility actions (37) - (37)
Unusual disposal charges 246 (246)(a) -
Total costs and expenses 9,860 (650)(a) 9,210
Operating Profit 372 256 (a) 628
Interest expense, net 300 (5)(a) 320
25 (b)
Income Before Income Taxes 72 236 308
Income Taxes 125 52 (c) 177
Net (Loss)/Income $ (53) $ 184 $ 131
Pro Forma Net Income Per Share $ - $ 0.85
Pro Forma shares and
equivalents (d) - 155
____________________________________________________________________________
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
____________________________________________________________________________
F-30
_____________________________________________________________________________
Pro Forma Condensed Combined Statement of Operations
(in millions except per share amounts, unaudited)
TRICON Global Restaurants, Inc.
24 Weeks ended June 14, 1997
Pro Forma Pro Forma
1997 Adjustments 1997
_____________________________________________________________________________
REVENUES
Company-operated restaurants $4,337 $ (190)(a) $4,147
Franchise and license fees 253 (1)(a) 252
4,590 (191)(a) 4,399
Costs and Expenses, net
Company-operated restaurants
Food and paper 1,404 (58)(a) 1,346
Payroll and employee benefits 1,255 (66)(a) 1,189
Occupancy and other operating
expenses 1,164 (41)(a) 1,123
3,823 (165)(a) 3,658
General, administrative and other
expenses 419 (16)(a) 403
Net facility actions (85) - (85)
Unusual disposal charges 39 (39) -
Total costs and expenses 4,196 (220)(a) 3,976
Operating Profit 394 29 (a) 423
Interest expense, net 131 (2)(a) 149
20 (b)
Income Before Income Taxes 263 11 274
Income Taxes 90 8 (c) 98
Net Income $ 173 $ 3 $ 176
Pro Forma Net Income Per Share $ 1.14
Pro Forma shares and
equivalents(d) 155
____________________________________________________________________________
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
____________________________________________________________________________
F-31
____________________________________________________________________________
Pro Forma Condensed Combined Balance Sheet
(in millions except per share amount, unaudited)
TRICON Global Restaurants, Inc.
June 14, 1997
Pro Forma Pro Forma
1997 Adjustments 1997
____________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents $ 110 $ - $ 110
Short-term investments, at cost 47 - 47
157 - 157
Accounts and notes receivable, less
allowance: $12 131 - 131
Inventories 103 - 103
Prepaid expenses, deferred income taxes
and other current assets 559 (131)(a) 428
Total Current Assets 950 (131) 819
Property, Plant and Equipment, net 3,780 - 3,780
Intangible Assets, net 982 - 982
Investments in Unconsolidated Affiliates 223 - 223
Other Assets 172 - 172
Total Assets $6,107 $ (131) $5,976
LIABILITIES AND SHAREHOLDERS' EQUITY/
(DEFICIT)
Current Liabilities
Accounts payable and other current
liabilities $1,121 $ (24)(a) $1,097
Income taxes payable 185 (7)(b) 178
Short-term borrowings 107 - 107
Total Current Liabilities 1,413 (31) 1,382
Long-term Debt 186 (12)(a) 4,674
- 4,500 (b) -
Other Liabilities 455 - 455
Deferred Income Taxes 295 5 (a) 300
Shareholder's Equity/(Deficit)
Investments by and advances from PepsiCo 3,825 (100)(a) -
(4,500)(b)
775 (c)
Preferred stock, no par value.
authorized 250 shares - - -
Common stock, no par value,
authorized 750 shares, issued 152 shares - - (c) -
Capital deficit - (768)(c) (768)
Currency translation adjustment (67) - (67)
Total Shareholder's Equity/(Deficit) 3,758 (4,593) (835)
Total Liabilities and
Shareholder's Equity/(Deficit) $6,107 $ (131) $5,976
____________________________________________________________________________
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
____________________________________________________________________________
F-32
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
The historical combined financial statements reflect periods during which
TRICON did not operate as a separate, independent Company; certain
estimates, assumptions and allocations were made in preparing such
financial statements. Therefore such historical combined financial
statements do not necessarily reflect the combined results of operations or
financial position that would have existed had TRICON been a separate,
independent company.
The Pro Forma Condensed Combined Financial Statements should be read
in conjunction with the historical combined financial statements of TRICON
and the notes thereto contained in this Information Statement. The pro
forma condensed combined financial information is presented for
informational purposes only and does not purport to reflect the results of
operations or financial position of TRICON or the results of operations or
financial position that would have occurred had TRICON been operated as a
separate, independent company.
Note 1 - The pro forma adjustments to the accompanying historical combined
statements of operations for the fiscal year ended December 28, 1996 and
for the 24 weeks ended June 14, 1997 were:
(a) To eliminate the effect of TRICON's non-core U.S. businesses composed
of CPK, Chevys, D'Angelo, ESM and HNN. TRICON has disposed of or
expects to dispose of these businesses in 1997.
(b) To record the net effect of eliminating the PepsiCo interest expense
allocation and recording interest expense based on $4.5 billion of
external debt TRICON expects to incur prior to the Distribution Date.
TRICON's interest expense was calculated using a weighted average
expected borrowing rate of 6.67%. The weighted average borrowing rate
assumed approximately 60% of the borrowings were effectively converted
to fixed rate debt through interest rate swaps, with the balance
indexed to LIBOR. TRICON's actual borrowing rate may vary based upon
TRICON's credit rating, changes in market rates and potential long-
term debt issuances. A 1/8 percentage point change in the assumed
financing rate would change interest expense by $5.6 million annually
and $2.6 million for the 24 weeks ended June 14, 1997.
(c) To reflect the estimated tax impact for the pro forma adjustments (a)
and (b).
(d) Pro Forma shares and equivalents used to compute pro forma net income
per share was based upon 152 million shares of TRICON common stock
adjusted for the dilutive effect of TRICON stock options. The 152
million shares reflected an estimate of the shares to be issued at the
Distribution Date based on a distribution ratio of one share of TRICON
stock for every 10 shares of PepsiCo stock.
Note 2 - The pro forma adjustments to the accompanying historical combined
balance sheet at June 14, 1997 were:
(a) To eliminate the effect of TRICON's non-core U.S. businesses held for
disposal, composed of CPK and D'Angelo. TRICON expects to dispose of
these businesses in 1997.
(b) To record the estimated $4.5 billion of external debt TRICON expects
to incur prior to the Distribution Date to fund a $4.5 billion cash
F-33
distribution to PepsiCo in repayment of certain amounts due and a
dividend. TRICON plans to establish a $2 billion senior, unsecured
five-year term loan facility and $2.5 billion under a senior,
unsecured five-year revolving credit facility. Interest rates are
expected to be based on LIBOR. Income taxes payable reflects the
estimated tax impact of interest expense described in Note 1(b) above.
(c) To record the issuance of 152 million shares of TRICON common stock
with no par value (at a distribution ratio of one share of TRICON
stock for every 10 shares of PepsiCo stock held on the Record Date)
and the elimination of PepsiCo's investment.
F-34
<PAGE>
EXHIBIT INDEX
2.01* Form of Separation Agreement .....................................
3.01* Restated Articles of Incorporation ...............................
3.02* Bylaws ...........................................................
10.01 Form of Tax Separation Agreement .................................
10.02* Form of Employee Programs Agreement ..............................
10.03* Form of Telecommunications, Software and Computing
Services Agreement................................................
10.04* Employment Agreement between TRICON Global Restaurants, Inc. and
Andrall E. Pearson................................................
10.05* Sales and Distribution Agreement between PFS,
Pizza Hut, Taco Bell and KFC......................................
21.01* Active Subsidiaries of TRICON as of October 6, 1997...............
27.01* Financial Data Schedule For Year-End 1996.........................
27.02* Financial Data Schedule For Second Quarter 1997...................
* Previously filed.
Exhibit 10.01
TAX SEPARATION AGREEMENT
between
PEPSICO, INC.,
on behalf of itself
and the members
of the PEPSICO GROUP
and
TRICON GLOBAL RESTAURANTS, INC.,
on behalf of itself
and the members
of the TRICON GROUP
<PAGE>
TAX SEPARATION AGREEMENT
This Agreement is entered into as of the 26th day of August, 1997
between PepsiCo, Inc. ("PepsiCo"), a North Carolina corporation, on behalf of
itself and the members of the PepsiCo Group, and TRICON Global Restaurants, Inc.
("TRICON"), a North Carolina corporation, on behalf of itself and the members of
the TRICON Group.
W I T N E S S E T H:
WHEREAS, pursuant to the tax laws of various jurisdictions,
certain members of the TRICON Group, as defined below, presently file certain
tax returns on an affiliated, consolidated, combined, unitary, fiscal unity or
other group basis (including as permitted by Section 1501 of the Internal
Revenue Code of 1986, as amended (the "Code")) with certain members of the
PepsiCo Group, as defined below (each such group, a "Consolidated Group");
WHEREAS, PepsiCo and TRICON intend to enter into a Separation
Agreement dated as of August 26, 1997 (the "Separation Agreement"), providing
for the distribution by PepsiCo to its shareholders of all of the common stock
of TRICON that is held by PepsiCo (the "Distribution") and certain other
matters;
WHEREAS, PepsiCo and TRICON desire to set forth their agreement
on the rights and obligations of PepsiCo, TRICON and the members of the PepsiCo
Group and the TRICON Group, respectively, with respect to the handling and
allocation of federal, state, local and foreign Taxes incurred in Taxable
periods beginning prior to the Distribution Date, Taxes resulting from
transactions effected in connection with the Distribution including but not
limited to the distribution of certain borrowing proceeds by TRICON to PepsiCo
(the "Restructuring") and various other Tax matters;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties agree as follows:
1. Definitions
(a) As used in this Agreement:
"Affiliate" of any Person shall mean (i) any individual,
corporation, partnership or other entity directly or indirectly owning more than
50 percent (by vote or value) of, owned more than 50 percent (by vote or value)
by, or under more than 50 percent (by vote or value) common ownership with, such
Person, and (ii) any entity that is entitled to the benefit of any Tax Asset of
such Person under applicable law, any entity with any Tax Asset to which such
Person is entitled to the benefit of under applicable law, or any entity which
is entitled or required to transfer or assign income, revenues, receipts, or
gains to such Person under applicable law.
"After-Tax Amount" shall mean an additional amount necessary to
reflect the hypothetical Tax consequences of the receipt or accrual of any
payment, using the maximum statutory rate (or rates, in the case of an item that
affects more than one Tax) applicable to the recipient of such payment for the
relevant year, reflecting for example, the effect of the deductions available
for interest paid or accrued and for Taxes such as state and local income Taxes.
"Consolidated Group" shall have the meaning ascribed to it in the
first "whereas" clause in this Agreement; provided, however, that "Consolidated
Group" shall also include (i) PepsiCo or any Affiliate of PepsiCo that filed (or
will file) any Pre-Distribution Period Returns that reflect the income, assets
or operations of a Restaurant Business and (ii) any Affiliate of TRICON that
filed (or will file) any Pre-Distribution Period Returns that reflect the
income, assets or operations of a Non-Restaurant Business.
"Distribution" shall mean the distribution by PepsiCo of all of
the common stock of TRICON that is held by PepsiCo to PepsiCo's shareholders
pursuant to the Separation Agreement.
"Distribution Date" shall mean the date on which the
Distribution shall be effected.
"Federal Tax" shall mean any Tax imposed under Subtitle A of the
Code and any related penalty imposed under Subtitle F of the Code.
"Final Determination" shall mean (i) with respect to Federal
Taxes, (A) a "determination" as defined in Section 1313(a) of the Code, or (B)
the date of acceptance by or on behalf of the IRS of Form 870-AD (or any
successor form thereto), as a final resolution of Tax liability for any Taxable
period, except that a Form 870-AD (or successor form thereto) that reserves the
right of the taxpayer to file a claim for refund or the right of the IRS to
assert a further deficiency shall not constitute a Final Determination with
respect to the item or items so reserved; (ii) with respect to Taxes other than
Federal Taxes, any final determination of liability in respect of a Tax that,
under applicable law, is not subject to further appeal, review or modification
through proceedings or otherwise; (iii) with respect to any Tax, any final
disposition by reason of the expiration of the applicable statute of
limitations; or (iv) with respect to any Tax, the payment of Tax by PepsiCo,
TRICON, or any member of the PepsiCo Group or the TRICON Group, whichever is
responsible for payment of such Tax under applicable law, with respect to any
item disallowed or adjusted by a Taxing Authority, provided that the provisions
of Section 8 hereof have been complied with, or, if such section is
inapplicable, that the party responsible under the terms of this Agreement for
such Tax is notified by the party paying such Tax that it has determined that no
action should be taken to recoup such disallowed item, and the other party
agrees with such determination.
"IRS" shall mean the Internal Revenue Service.
"LIBOR" shall be determined on the basis of the offered rates for
deposits in U.S. Dollars for a period of 30 days which appear on the Reuters
Screen LIBO Page as of 11:00 a.m., London time. If at least two rates appear on
the Reuters Screen LIBO Page, the rate will be the arithmetic mean of such
rates.
"Non-Restaurant Business" shall mean any business other than a
Restaurant Business.
"PepsiCo Group" shall mean, with respect to any Taxable period,
PepsiCo and its Affiliates (including their predecessors and successors) at any
time prior to the Distribution other than those Affiliates comprising the TRICON
Group.
"PepsiCo Tax Liability" shall mean, with respect to any
Consolidated Group and any Taxable period, the PepsiCo Group's share of the Tax
liability of such Consolidated Group, computed as if the relevant members of the
PepsiCo Group were not and never were part of such Consolidated Group, but
rather were a separate affiliated group of corporations filing a similar group
Return (provided, however, that transactions with any member of the TRICON Group
included in such Consolidated Group shall not be taken into account until the
first Taxable period in which such transaction is required to be taken into
account for Tax purposes under applicable law). Such computation shall be made
(A) without regard to the income, deductions (including net operating loss and
capital loss deductions) and credits in any year of any member of the TRICON
Group, except to the extent that a payment was made to any member of the TRICON
Group with respect thereto, (B) by taking account of any Tax Asset of the
PepsiCo Group, (C) with regard to net operating loss and capital loss
carryforwards and carrybacks and minimum Tax credits from earlier years of the
PepsiCo Group and without reduction for any such losses, carryforwards,
carrybacks or credits used by any member of the TRICON Group, (D) by applying
the maximum applicable statutory Tax rate in effect under applicable law during
the relevant year, and (E) reflecting the positions, elections and accounting
methods used by the Consolidated Group in preparing the relevant Return for the
Consolidated Group. Notwithstanding anything to the contrary in this Agreement,
any gain recognized upon the disposition of PepsiCo Food Systems shall be
treated as a PepsiCo Tax Liability.
"PepsiCo Vice President, Tax" shall include any successor
position or title.
"Person" shall have the meaning ascribed to it in Section
7701(a)(1) of the Code.
"Post-Distribution Period" shall mean any taxable period (or
portion thereof) beginning after the close of business on the Distribution Date.
"Pre-Distribution Period" shall mean any Taxable period ending on
or before the close of business on the Distribution Date; provided that if a
Taxable period ending after the Distribution Date contains any days which fall
prior to or on the Distribution Date, any portion of such Taxable period up to
and including the Distribution Date shall also be included in the
Pre-Distribution Period.
"Prime" shall mean the rate announced from time to time as
"prime" by Chase Manhattan Bank as its prime rate with respect to the applicable
currency.
"Restaurant Business" shall mean any business activity associated
with the operation, development, franchising and licensing of restaurants
(including the casual dining restaurants and PepsiCo Food Systems), as
determined by the PepsiCo Vice President, Tax in accordance with past practice.
"Restructuring" shall have the meaning ascribed to it in the
third "whereas" clause in this Agreement; provided, however, that
"Restructuring" shall exclude any normal business operations (including
refranchising and the disposition of any aircraft).
"Return" shall mean any Tax return, statement, report, form,
election, claim or surrender (including estimated Tax returns and reports,
extension requests and forms, and information returns and reports) required to
be filed with any Taxing Authority.
"Tax" (and the correlative meaning, "Taxes," "Taxing" and
"Taxable") shall mean (A) any tax imposed under Subtitle A of the Code, or any
net income, gross income, gross receipts, alternative or add-on minimum, sales,
use, business and occupation, value-added, trade, goods and services, ad
valorem, franchise, profits, license, business royalty, withholding, payroll,
employment, capital, excise, transfer, recording, severance, stamp, occupation,
premium, property, asset, real estate acquisition, environmental, custom duty,
or other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and any penalty, addition to tax or
additional amount imposed by a Taxing Authority; (B) any liability of a member
of the PepsiCo Group or the TRICON Group, as the case may be, for the payment of
any amounts of the type described in clause (A) for any Taxable period resulting
from such member being a part of a Consolidated Group pursuant to the
application of Treasury Regulation Section 1.1502-6 or any similar provision
applicable under state, local or foreign law; or (C) any liability of a member
of the PepsiCo Group or the TRICON Group for the payment of any amounts
described in clause (A) as a result of any express or implied obligation to
indemnify any other party.
"Tax Asset" shall mean any net operating loss, net capital loss,
investment Tax credit, foreign Tax credit, target jobs Tax credit, low income
housing credit, research and experimentation credit, charitable deduction, or
any other loss, credit or Tax attribute, including additions to basis of
property and attributes which reduce or offset value-added Tax liability, which
could reduce any Tax (domestic or foreign), including, without limitation,
deductions, credits, or alternative minimum net operating loss carryforwards
related to alternative minimum Taxes.
"Tax Packages" shall mean one or more packages of information
that are (i) reasonably necessary for the purpose of preparing Returns of any
Consolidated Group with respect to a Pre-Distribution Period and (ii) completed
in all material respects in accordance with the standards that PepsiCo has
established for its subsidiaries with respect to the relevant Pre-Distribution
Period.
"Tax Proceeding" shall mean any Tax audit, dispute or proceeding
(whether administrative or judicial).
"Taxing Authority" shall mean any governmental authority
(domestic or foreign), including, without limitation, any state, municipality,
political subdivision or governmental agency, responsible for the imposition of
any Tax.
"TRICON Group" shall mean TRICON and its Affiliates immediately
after the Distribution Date, including any predecessors thereto; provided,
however, that for purposes of determining whether an entity is a member of the
TRICON Group, a transfer of beneficial ownership of an entity shall be treated
as a transfer of title, regardless of whether title has actually passed;
provided further, that to the extent that PepsiCo or an Affiliate of PepsiCo or
an Affiliate of TRICON conducted both a Restaurant Business and a Non-Restaurant
Business, the Restaurant Business shall be treated for purposes of this
Agreement as a separate corporation that is a member of the TRICON Group and the
Non-Restaurant Business shall be treated for purposes of this Agreement as a
separate corporation that is a member of the PepsiCo Group; provided further,
that if with respect to any Pre-Distribution Period (or portion thereof) any
Affiliate of PepsiCo was involved solely in the conduct of a Restaurant
Business, such member shall be treated as a member of the TRICON Group for such
Pre-Distribution Period (or portion thereof); and provided further, that if with
respect to any Pre-Distribution Period (or portion thereof) any Affiliate of
TRICON was not involved in the conduct of a Restaurant Business, such member
shall not be treated as a member of the TRICON Group for such Pre-Distribution
Period (or portion thereof).
"TRICON Tax Liability" shall mean, with respect to any
Consolidated Group and any Taxable period, the TRICON Group's share of the Tax
liability of such Consolidated Group, computed as if the relevant members of the
TRICON Group were not and never were part of such Consolidated Group, but rather
were a separate affiliated group of corporations filing a similar group Return
(provided, however, that transactions with any member of the PepsiCo Group
included in such Consolidated Group shall not be taken into account until the
first Taxable period in which such transaction is required to be taken into
account for Tax purposes under applicable law). Such computation shall be made
(A) without regard to the income, deductions (including net operating loss and
capital loss deductions) and credits in any year of any member of the PepsiCo
Group, except to the extent that a payment was made to any member of the PepsiCo
Group with respect thereto, (B) by taking account of any Tax Asset of the TRICON
Group, including net operating loss and capital loss carryforwards and
carrybacks and minimum Tax credits from earlier years of the TRICON Group except
to the extent that such losses, carryforwards, carrybacks or credits have been
used by any member of the PepsiCo Group for purposes of computing the PepsiCo
Tax Liability, (C) by applying the maximum applicable statutory Tax rate in
effect under applicable law during the relevant year, and (D) reflecting the
positions, elections and accounting methods used by the Consolidated Group in
preparing the relevant Return for the Consolidated Group. Notwithstanding the
foregoing, in the jurisdictions of the United Kingdom, Canada, Australia, Mexico
and New Zealand, the TRICON Tax Liability shall be determined in accordance with
PepsiCo's past policy for the sharing of Tax liabilities and losses and other
Tax benefits. For purposes of the preceding sentence, in the event of any
adjustment that increases the Tax liability of the relevant Consolidated Group
in any of those jurisdictions, such increase shall be allocated proportionately
among the legal entities impacted by such adjustment.
(b) Any term used in this Agreement which is not defined in this
Agreement shall, to the extent the context requires, have the meaning assigned
to it in the Code or the applicable Treasury regulations thereunder (as
interpreted in administrative pronouncements and judicial decisions) or in
comparable provisions of applicable law.
2. Administrative and Compliance Matters.
(a) Sole Tax Sharing Agreement. Any and all existing Tax sharing
agreements or arrangements, written or unwritten, between any member of the
PepsiCo Group and any member of the TRICON Group shall be or shall have been
terminated as of the date of this Agreement. As of the date of this Agreement,
neither the members of the TRICON Group nor the members of the PepsiCo Group
shall have any further rights or liabilities thereunder, and this Agreement
shall be the sole Tax sharing agreement between the members of the TRICON Group
and the members of the PepsiCo Group. Notwithstanding the foregoing, if any such
termination is not binding on any Taxing Authority, the TRICON Group shall hold
the affected member of the PepsiCo Group harmless against any adverse effect
which would have been avoided if such termination had been given effect by such
Taxing Authority.
(b) Designation of Agent. TRICON and each member of the TRICON
Group, and PepsiCo and each member of the PepsiCo Group, as the case may be, in
each case with respect to any Consolidated Group of which such Person is a
member, hereby irrevocably authorize PepsiCo or TRICON, as the case may be, and
consistent with past practice and applicable law, to designate a member of the
PepsiCo Group or the TRICON Group, as appropriate, or a successor of such
member, as its agent, coordinator, and administrator, for the purpose of taking
any and all actions (including the execution of waivers of applicable statutes
of limitation) necessary or incidental to the filing of any Return, any amended
Return, or any claim for refund (even where an item or Tax Asset giving rise to
an amended Return or refund claim arises in a Post-Distribution Period), credit
or offset of Tax or any other proceedings, and for the purpose of making
payments to, or collecting refunds from, any Taxing Authority, in each case
relating only to any Pre-Distribution Period. Such designated member of the
PepsiCo Group or the TRICON Group, as the case may be, as agent, covenants to
TRICON or PepsiCo, respectively, that it shall be responsible to see that all
such administrative matters relating thereto shall be handled promptly and
appropriately.
(c) Pre-Distribution Period Returns. With respect to a
Consolidated Group, the member of the PepsiCo Group or the TRICON Group, as
applicable, that is required by applicable law to file the Returns for all
Pre-Distribution Periods will prepare such Returns with the assistance of the
TRICON Group or the PepsiCo Group, respectively. With respect to each
Consolidated Group, either a member of the PepsiCo Group or a member of the
TRICON Group, as consistent with past practice and applicable law, will file the
Pre-Distribution Period Returns for such Consolidated Group. PepsiCo and the
members of the PepsiCo Group shall have the right with respect to any
Consolidated Group Returns to determine (x) the manner in which such returns,
documents or statements shall be prepared and filed, including, without
limitation, the manner in which any item of income, gain, loss, deduction or
credit shall be reported; provided, however, that such returns, documents or
statements shall be prepared in accordance with past practice (unless such past
practice is no longer permissible under the Code or other applicable law), (y)
whether any extensions should be requested, and (z) subject to the third and
fourth sentences of the definition of TRICON Tax Liability, the elections,
including claims and surrenders for U.K. group relief and any similar foreign
offsetting procedures, that will be made by any member of the PepsiCo Group or
the TRICON Group. In addition, with respect to all Pre-Distribution Periods,
except as provided in Section 8(b), PepsiCo and the members of the PepsiCo Group
shall have the right to (i) contest, compromise or settle any adjustment or
deficiency proposed, asserted or assessed as a result of any audit of any
consolidated return filed by the PepsiCo Group or the TRICON Group, (ii) file,
prosecute, compromise or settle any claim for refund, (iii) determine whether
any refunds to which the PepsiCo Group may be entitled shall be received by way
of refund or credited against the tax liability of the PepsiCo Group and (iv)
determine whether a deposit will be made with a Taxing Authority to stop the
running of interest. With respect to the 1997 Tax year, TRICON and the members
of the TRICON Group shall prepare and deliver to PepsiCo all Tax Packages no
later than the due date prescribed for the members of the PepsiCo Group.
3. Tax Sharing.
(a) General. For each Taxable period of each Consolidated Group
during which income, profits, gains, net worth, receipts, sales, loss or credit
against Tax of at least one member of each of the TRICON Group and the PepsiCo
Group are includible in a Return of such Consolidated Group, the TRICON Group or
the PepsiCo Group, as appropriate, shall pay, as provided in this Section 3, to
the PepsiCo Group or the TRICON Group, respectively, an amount equal to the
TRICON Tax Liability or the PepsiCo Tax Liability, as appropriate, for such
Taxable period, if any. Any Return filed by an entity described in clause (i) of
the definition of Consolidated Group shall be treated as required to be filed by
the PepsiCo Group and any payment made prior to the Distribution with respect to
such Return shall be treated as having been made by the PepsiCo Group. Any
Return filed by an entity described in clause (ii) of the definition of
Consolidated Group shall be treated as required to be filed by the TRICON Group
and any payment made prior to the Distribution with respect to such Return shall
be treated as having been made by the TRICON Group.
(b) Estimated Payments. Not later than 3 days after a member of
the PepsiCo Group or a member of the TRICON Group, as the case may be, makes an
estimated Tax payment with respect to a Taxable period of a Consolidated Group,
whether or not such payment is made prior to the Distribution, the PepsiCo Group
shall (i) in good faith determine the amount of the TRICON Tax Liability or the
PepsiCo Tax Liability, as appropriate, pursuant to this Agreement and (ii)
deliver a written statement to TRICON reflecting the determination described
above. Not later than three days after receipt of such statement, the TRICON
Group shall pay to the PepsiCo Group or the PepsiCo Group shall pay to the
TRICON Group, as appropriate, the amount so determined in accordance with
Section 9 hereof.
(c) Payment of Taxes at Year-End.
(i) Not later than 5 business days before a member of the PepsiCo
Group or a member of the TRICON Group, as the case may be, is required to file a
Return (after taking extensions into account) with respect to any Consolidated
Group for which payments are to be made under this Agreement, whether or not
such Return is filed prior to the Distribution, the PepsiCo Group shall deliver
to the TRICON Group a written statement setting forth the difference between (x)
the TRICON Tax Liability or the PepsiCo Tax Liability, as appropriate, for such
Return, and (y) the aggregate amount of payments with respect to the TRICON Tax
Liability or the PepsiCo Tax Liability, as appropriate, for such year made
pursuant to Section 3(b) or otherwise, including estimated Tax payments made by
way of intercompany account transfers. Not later than the date such Return is
required to be filed, the TRICON Group shall pay to the PepsiCo Group or the
PepsiCo Group shall pay to the TRICON Group, as appropriate, in accordance with
Section 9 hereof, an amount equal to such difference, if any; provided, however,
that to the extent such payment is to be made to the TRICON Group and is
attributable to a claim for refund of Taxes previously paid to a Taxing
Authority, the PepsiCo Group will not be required to make such payment to the
TRICON Group.
(ii) With respect to each Return described in Section 3(a) above
and previously filed by a Consolidated Group, and for which the TRICON Tax
Liability or the PepsiCo Tax Liability, as the case may be, has not been
satisfied in full or for which the TRICON Group has not paid the PepsiCo Group
in full for a benefit derived from the use of a Tax Asset of the PepsiCo Group,
the TRICON Group shall pay to the PepsiCo Group or the PepsiCo Group shall pay
to the TRICON Group, as appropriate, within 30 days of demand therefor, the
amount in respect of such Return as determined by the PepsiCo Vice President,
Tax.
(d) Certain Other Matters.
(i) With respect to each Consolidated Group, the TRICON Group
shall pay to the PepsiCo Group the actual benefit received by such Consolidated
Group from the use of any Tax Asset of the PepsiCo Group or any Tax Asset
attributable to the Restaurant Business which is reattributed to PepsiCo
pursuant to Treasury Regulation ss.1.1502-20(g) or any comparable provision of
applicable law, or in the event that California Pizza Kitchen ("CPK") is a
member of the TRICON Group, the use of any Pre-Distribution Period Tax Asset of
CPK (the "CPK Tax Asset"), including, without limitation, any Tax Asset that is
reattributed to TRICON pursuant to Treasury Regulation Section 1.1502-20(g),
whether arising in a Pre-Distribution Period or a Post-Distribution Period.
TRICON agrees that if CPK is a member of the TRICON Group, any disposition of
CPK will be effected as a stock transfer and an election shall be made to
reattribute the net operating losses attributable to CPK to TRICON pursuant to
Treasury Regulation Section 1.1502-20(g). Such benefit shall be considered equal
to the excess of the amount of Tax that would have been payable to a Taxing
Authority (or of the Tax refund that would have been receivable) by such
Consolidated Group in the absence of such Tax Asset over the amount of Tax
actually payable to a Taxing Authority (or of the Tax refund actually
receivable) by such Consolidated Group. Payment of the amount of such benefit
shall be made within 30 days of the receipt by any member of the TRICON Group of
any refund, credit or other offset attributable thereto from the relevant Taxing
Authority and the future Returns of the PepsiCo Group shall be adjusted to
reflect such use. Notwithstanding the definition of TRICON Tax Liability or any
other provision in this Agreement, any loss recognized upon any disposition of
the casual dining restaurants or any disposition of assets thereof shall be
treated as a Tax Asset of the PepsiCo Group.
(ii) If, subsequent to the payment by the TRICON Group to the
PepsiCo Group of any amount referred to in Section 3(d)(i) above, there shall be
(A) a Final Determination which results in a disallowance or a reduction of the
Tax Asset so used or (B) a reduction in the amount of the benefit realized by
the TRICON Group from such Tax Asset as a result of a Final Determination or the
use by the TRICON Group of a Tax Asset of a member of the TRICON Group, the
PepsiCo Group shall repay to the TRICON Group the amount which would not have
been payable to the PepsiCo Group pursuant to Section 3(d)(i) had the amount of
the benefit been determined in light of such event. In addition, the PepsiCo
Group shall hold each member of the TRICON Group harmless for any penalty or
interest payable by any member of the TRICON Group as a result of any such event
referred to in the preceding sentence, unless such event is attributable to any
action of any member of the TRICON Group. Any amounts payable under this Section
3(d)(ii) shall be paid by the PepsiCo Group within 30 days after receipt of
written notice from the TRICON Group.
(e) Treatment of Adjustments.
(i) Except as provided in clause (iii) below if any adjustment is
made in, or if a Taxing Authority assesses any deficiency with respect to, a
Return of a Consolidated Group filed by a member of the TRICON Group which would
have increased the PepsiCo Tax Liability under Section 3(c)(i), then within 30
days after a Final Determination of the adjustment, the PepsiCo Group shall pay
to the TRICON Group the difference between all payments actually made under
Section 3(c)(i) and all payments that would have been made under Section 3(c)(i)
taking such adjustment into account.
(ii) If any adjustment is made in, or if a Taxing Authority
assesses any deficiency with respect to, a Return of a Consolidated Group filed
by a member of the PepsiCo Group which would have increased the TRICON Tax
Liability under Section 3(c)(i), then within 30 days after any member of the
PepsiCo Group makes a payment to a Taxing Authority or makes a deposit with a
Taxing Authority to stop the running of interest with respect to such
adjustment, the TRICON Group shall pay to the PepsiCo Group the difference
between all payments actually made under Section 3(c)(i) and all payments that
would have been made under Section 3(c)(i) taking such adjustment into account.
(iii) If any adjustment made in, or any deficiency assessed with
respect to, a Return of a Consolidated Group results in a reduction in the
amount of the benefit realized by the PepsiCo Group from a Tax Asset of the
TRICON Group (whether or not the TRICON Group was paid in respect of such
benefit), the TRICON Group shall, within 30 days after receipt of written notice
from the PepsiCo Group, pay to the PepsiCo Group the amount of such reduction.
In addition, the TRICON Group shall hold each member of the PepsiCo Group
harmless for any penalty or interest payable by any member of the TRICON Group
as a result of any such reduction.
(iv) Any refunds or credits of Tax (including a return of a
deposit described in Section 3(e)(ii)) received by a member of the TRICON Group
relating to a Pre-Distribution Period, shall be paid by such member of the
TRICON Group to the PepsiCo Group within 30 days of receipt; provided that no
such payment shall be required to the extent such refund or credit is
attributable to (x) a Tax Asset of the PepsiCo Group for which payment has
previously been made by the TRICON Group, or (y) an adjustment for which payment
in respect thereof has previously been made pursuant to Section 3(e)(i) or
3(e)(ii).
4. Certain Representations and Covenants.
(a) (i) TRICON Representations. TRICON and each member of the
TRICON Group represent that as of the date hereof, and covenants that on the
Distribution Date, there is no plan or intention (A) to liquidate TRICON or to
merge or consolidate TRICON, or any member of the TRICON Group conducting an
active trade or business relied upon in connection with the Restructuring or the
Distribution, with any other person subsequent to the Distribution, (B) to sell,
refranchise or otherwise dispose of any asset, or close any restaurant unit, of
TRICON or any member of the TRICON Group subsequent to the Distribution, in a
manner that would result in any increased Tax liability or reduction of any Tax
Asset of the PepsiCo Group or any member thereof, (C) to take any action
inconsistent with the information and representations furnished to the IRS or
any other Taxing Authority in connection with the request for a private letter
ruling (or any comparable pronouncement by a Taxing Authority under applicable
law) with respect to the Distribution or the Restructuring, regardless of
whether such information and representations were included in the ruling or
pronouncement issued by the IRS or other Taxing Authority, (D) to enter into any
negotiations, agreements, or arrangements with respect to transactions or events
(including stock issuances, pursuant to the exercise of options or otherwise,
option grants, the adoption of, or authorization of shares under, a stock option
plan, capital contributions, or acquisitions, but not including the
Distribution) which, if treated as consummated before the proposed distribution,
would result in PepsiCo not having "control" of TRICON within the meaning of
sections 355(a)(1)(A) and 368(c) of the Code at the time of the Distribution,
(E) to make any change in equity structure that would result in PepsiCo not
having such "control" (except for the Distribution), (F) to repurchase stock of
TRICON in a manner contrary to the requirements of Revenue Procedure 96-30 or in
a manner contrary to the representations made in connection with the request for
a private letter ruling with respect to the Distribution, (G) to take any action
that contravenes any existing gain recognition agreement or other agreement with
a Taxing Authority to which any member of the TRICON Group or the PepsiCo Group
is a party or (H) to enter into any negotiations, agreements, or arrangements
with respect to transactions or events (including stock issuances, pursuant to
the exercise of options or otherwise, option grants, the adoption of, or
authorization of shares under, a stock option plan, capital contributions, or
acquisitions, but not including the Distribution) which may cause the
Distribution to be treated as part of a plan pursuant to which one or more
Persons acquire directly or indirectly TRICON stock representing a "50-percent
or greater interest" within the meaning of Section 355(d)(4) of the Code.
(ii) TRICON and PepsiCo Representations. Each of TRICON, PepsiCo
and the members of the TRICON Group and the PepsiCo Group, respectively,
represents that as of the date hereof, and covenants that on the Distribution
Date, neither TRICON, PepsiCo nor the members of the TRICON Group or PepsiCo
Group, respectively (as applicable), is aware of any present plan or intention
by the current shareholders of PepsiCo to sell, exchange, transfer by gift, or
otherwise dispose of any of their stock in, or securities of, PepsiCo or TRICON
subsequent to the Distribution. In making this representation, the parties
hereto recognize that the shares of PepsiCo are, and the shares of TRICON will
be, listed on certain stock exchanges and regular public trading in such shares
can be expected.
(b) TRICON Covenants. TRICON covenants to PepsiCo that, without
the prior written consent of the PepsiCo Vice President, Tax, (i) during the
two-year period following the Distribution Date neither TRICON, nor any member
of the TRICON Group conducting an active trade or business relied upon in
connection with the Restructuring or the Distribution, will liquidate, merge or
consolidate with any other person, (ii) during the two-year period following the
Distribution Date TRICON will not sell, refranchise exchange, distribute or
otherwise dispose of its assets or those of any member of the TRICON Group, or
close any of its restaurant units or those of any member of the TRICON Group, in
a manner that would result in any increased Tax liability or reduction of any
Tax Asset of the PepsiCo Group or any member thereof, (iii) following the
Distribution, TRICON will, for a minimum of two years, continue the active
conduct of the historic business conducted by TRICON throughout the five year
period prior to the Distribution, (iv) TRICON will not, nor will it permit any
member of the TRICON Group to, take any action inconsistent with the information
and representations furnished to the IRS or any other Taxing Authority in
connection with the request for a private letter ruling (or any comparable
pronouncement by a Taxing Authority under applicable law) with respect to the
Distribution or the Restructuring, regardless of whether such information and
representations were included in the ruling or pronouncement issued by the IRS
or other Taxing Authority, (v) TRICON will not take any action that contravenes
any existing gain recognition agreement or other agreement with a Taxing
Authority to which any member of the TRICON Group or the PepsiCo Group is a
party, (vi) TRICON will not repurchase stock of TRICON in a manner contrary to
the requirements of Revenue Procedure 96-30 or in a manner contrary to the
representations made in connection with the request for a private letter ruling
with respect to the Distribution, (vii) on or after the Distribution Date TRICON
will not, nor will it permit any member of the TRICON Group to, make or change
any accounting method, amend any Return or take any Tax position on any Return,
take any other action, omit to take any action or enter into any transaction
that results in any increased Tax liability or reduction of any Tax Asset of the
PepsiCo Group or any member thereof in respect of any Pre-Distribution Period,
and (viii) during the applicable period provided in Section 355(e)(2)(B) of the
Code with respect to the Distribution, it will not enter into any transaction or
make any change in its equity structure (including stock issuances, pursuant to
the exercise of options or otherwise, option grants, the adoption of, or
authorization of shares under, a stock option plan, capital contributions, or
acquisitions, but not including the Distribution) which may cause the
Distribution to be treated as part of a plan pursuant to which one or more
Persons acquire directly or indirectly TRICON stock representing a "50-percent
or greater interest" within the meaning of Section 355(d)(4) of the Code. TRICON
also covenants to PepsiCo that during the two-year period following the
Distribution Date, TRICON will not enter into any transaction affecting, or that
could affect, the ownership of the equity interests in TRICON, or make any
change in its equity structure (including stock issuances, pursuant to the
exercise of options or otherwise, the adoption of, or authorization of shares
under, a stock option plan, capital contributions, or acquisitions, but not
including the Distribution) unless TRICON provides the PepsiCo Vice President,
Tax with written notification of such transaction, and the PepsiCo Vice
President, Tax consents to such transaction; provided, however, that if such
consent is not given, the PepsiCo Vice President, Tax agrees to seek an
unqualified opinion of counsel from counsel chosen by the PepsiCo Vice
President, Tax, that such transaction or change in equity structure, together
with any prior transactions or changes in equity structure (including stock
issuances, pursuant to the exercise of options or otherwise, option grants, the
adoption of, or authorization of shares under, a stock option plan, capital
contributions, or acquisitions, but not including the Distribution), if treated
as consummated before the Distribution, would not result in PepsiCo not having
"control" of TRICON within the meaning of Sections 355(a)(1)(A) and 368(c) of
the Code at the time of the Distribution. Upon the receipt of such opinion,
TRICON shall be entitled to enter into such transaction or make such change in
its equity structure. If such an opinion is not obtained, TRICON shall not be
entitled to enter into such transaction or make such change in its equity
structure. The PepsiCo Vice President, Tax agrees that either (i) consent or
(ii) an opinion of counsel will be delivered to TRICON within 15 days of
TRICON's written notification to PepsiCo of such transaction. TRICON covenants
to PepsiCo that during the two-year period following the Distribution Date,
TRICON will not issue any stock options with with respect to shares that have
not been authorized. In no event will TRICON enter into any transaction or make
any change in equity structure (including stock issuances, pursuant to the
exercise of options or otherwise, option grants, the adoption of, or
authorization of shares under, a stock option plan, capital contributions, or
acquisitions, but not including the Distribution) during the two year period
following the Distribution which, if treated as consummated before the
Distribution, result in PepsiCo not having "control" of TRICON within the
meaning of Sections 355(a)(a)(A) and 368(c) of the Code at the time of
Distributtion. For purposes of the preceding sentence, any option authorized
under a stock option plan will be treated as having been granted. TRICON shall
provide to PepsiCo, on the first business day of every month, commencing on
November 3, 1997, a certificate describing any transaction or change in equity
structure described in the second sentence of this Section 4(b) and any option
grants which occurred during the preceding month. TRICON agrees that PepsiCo is
to have no liability for any tax resulting from any action referred to in this
Section 4(b) and agrees to indemnify and hold harmless the PepsiCo Group against
any such tax. TRICON shall also bear all costs incurred by PepsiCo in connection
with obtaining any opinion of counsel or in connection with PepsiCo's
determination of whether or not to grant any written consent required under this
Section 4(b).
(c) Deductions and Certain Taxes Related to Options. The PepsiCo
Vice President, Tax shall determine whether the PepsiCo Group or the TRICON
Group shall file Returns claiming (x) the Tax deductions attributable to the
exercise of options to purchase stock of PepsiCo which are held by employees or
former employees of the TRICON Group and (y) any other similar compensation
related Tax deductions. If it is determined that the PepsiCo Group shall claim
all such Tax deductions, (i) the PepsiCo Group shall be entitled to any such Tax
Deductions, (ii) the Returns of the PepsiCo Group and the TRICON Group shall
reflect the entitlement of the PepsiCo Group to such deductions, (iii) to the
extent any such deductions are disallowed because a Taxing Authority determines
that TRICON should have claimed such deductions, the TRICON Group shall pay to
the PepsiCo Group an amount equal to the Tax paid by the PepsiCo Group as a
result of such disallowance, (iv) within 1 day of the exercise of any option
described in clause (x) of the preceding sentence, or within 1 day of any other
event that would result in a compensation related Tax deduction, as the case may
be, the TRICON Group will pay to the PepsiCo Group an amount equal to the
liability of the PepsiCo Group under the Federal Insurance Contributions Act,
the Federal Unemployment Tax Act or any state employment tax law in connection
with the exercise of such an option, except to the extent such Tax is withheld
from a payment to the employee and remitted to a Taxing Authority on the
employee's behalf. If it is determined that the TRICON Group shall claim all
such Tax deductions, (i) the Returns of the PepsiCo Group and the TRICON Group
shall reflect such determination, (ii) not later than 3 days prior to the due
date of any Tax Return, TRICON shall notify the PepsiCo Vice President, Tax of
the amount of Tax deductions it intends to claim with respect to such options or
other compensation related Tax deductions, (iii) the TRICON Group shall pay to
the PepsiCo Group an amount equal to the product of the amount of the related
deductions and the sum of the PepsiCo Group's applicable statutory federal Tax
rate and state and local Tax rate net of any federal Tax benefit attributable to
state and local Taxes for the relevant Tax period, as determined by the PepsiCo
Vice President, Tax, and such payment, with respect to each such deduction,
shall be made not later than 3 days prior to the due date of the estimated Tax
payment immediately following when any member of the TRICON Group becomes
entitled to any refund, credit or other offset attributable to such deduction,
(iv) TRICON and each member of the TRICON Group will indemnify the PepsiCo Group
against any Tax liability of the PepsiCo Group under the Federal Insurance
Contributions Act or the Federal Unemployment Tax Act incurred in connection
with the exercise of such an option or the occurrence of any other event
resulting in a compensation related Tax deduction, as the case may be, except to
the extent such Tax is withheld from a payment to the employee and remitted to a
Taxing Authority on the employee's behalf, and (v) to the extent such deduction
is disallowed because a Taxing Authority determines that PepsiCo should have
claimed such deduction, the PepsiCo Group will file an amended Return claiming
such deduction, and the PepsiCo Group shall pay to the TRICON Group the actual
benefit received by the PepsiCo Group in respect of such deduction to the extent
that TRICON has previously made a payment to PepsiCo pursuant to the immediately
preceding clause (iii) attributable to such deduction. For purposes of the
immediately preceding clause (i), the PepsiCo Vice President, Tax will have the
right to determine the amount of such Tax deductions attributable to the
exercise of such options or other compensation related Tax deductions that will
be claimed by the TRICON Group on any Tax Return; provided, however, that
PepsiCo will indemnify TRICON and the members of the TRICON Group against any
Tax liability for any disallowed deductions to the extent the amount of
deductions claimed on any Tax return exceeds the amount of deductions in the
notice described in the immediately preceding clause (ii) provided that TRICON
has previously made a payment to PepsiCo pursuant to the immediately preceding
clause (iii) attributable to such deductions. For purposes of the immediately
preceding clause (v), such benefit shall be considered equal to the excess of
the amount of Tax that would have been payable to a Taxing Authority (or of the
Tax refund that would have been receivable) by the PepsiCo Group in the absence
of such deduction over the amount of Tax actually payable to a Taxing Authority
(or of the Tax refund actually receivable) by the PepsiCo Group. Payment of the
amount of such benefit shall be made within 30 days of the receipt by any member
of the PepsiCo Group of any refund, credit or other offset attributable thereto
from the relevant Taxing Authority.
5. Indemnities.
(a) TRICON Indemnity. TRICON and each member of the TRICON Group
will jointly and severally indemnify PepsiCo and the members of the PepsiCo
Group that were members of a Consolidated Group that included such TRICON
Affiliate against and hold them harmless from:
(i) any Tax liability of the TRICON Group and any Tax liability
attributable to the Restructuring except for any Tax liability described in
Section 5(b)(ii);
(ii) any liability or damage resulting from a breach by TRICON or
any member of the TRICON Group of any representation or covenant made by TRICON
herein;
(iii) any Tax liability resulting from the Distribution and
attributable to any action of TRICON or any member of the TRICON Group, without
regard to whether the PepsiCo Vice President, Tax has consented to such action;
(iv) any Tax liability resulting from the recapture, pursuant to
Section 904(f) of the Code, of an overall foreign loss for a Pre-Distribution
Period to the extent that the PepsiCo Vice President, Tax determines that such
loss is attributable to operations of the Restaurant Business in a
Pre-Distribution Period; and
(v) all liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and attorneys' fees and
expenses), losses, damages, assessments, settlements or judgments arising out of
or incident to the imposition, assessment or assertion of any Tax liability or
damage described in (i), (ii), (iii), or (iv) including those incurred in the
contest in good faith in appropriate proceedings relating to the imposition,
assessment or assertion of any such Tax, liability or damage.
(b) PepsiCo Indemnity. PepsiCo and each member of the PepsiCo
Group will jointly and severally indemnify TRICON and the members of the TRICON
Group that were members of a Consolidated Group that included such PepsiCo
Affiliate against and hold them harmless from:
(i) any Tax Liability of the PepsiCo Group and any Tax liability
resulting from the Distribution, other than any such liabilities described in
Section 5(a);
(ii) with respect to the Restructuring, any Tax liability
attributable to the distribution of certain borrowing proceeds by TRICON to
PepsiCo desccribed in Section 13 of the Separation Agreement and any current
Taxes attributable to the Restructuring and shown as due on any Return for the
period up to and including the Distribution Date and filed within 12 months of
the Distribution Date; provided, however, that PepsiCo shall have complete
discretion in determining the amount of such Tax liabilities to be shown on such
Returns;
(iii) any liability or damage resulting from a breach by PepsiCo
or any member of the PepsiCo Group of any representation or covenant made by
PepsiCo herein; and
(iv) all liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and attorneys' fees and
expenses), losses, damages, assessments, settlements or judgments arising out of
or incident to the imposition, assessment or assertion of any Tax liability or
damage described in (i) or (ii) including those incurred in the contest in good
faith in appropriate proceedings relating to the imposition, assessment or
assertion of any such Tax, liability or damage.
If a member of the PepsiCo Group ceases to be an Affiliate of PepsiCo as a
result of a sale of its stock to a third party (whether or not treated as a sale
or exchange of stock for Tax purposes), such member of the PepsiCo Group shall
be released from its obligations under this Agreement upon such sale and neither
PepsiCo nor any member of the PepsiCo Group shall have any obligation to
indemnify TRICON or any member of the TRICON Group under Section 5(b)(iii) for
any liability or damage attributable to actions taken by such Affiliate after
such sale.
(c) Discharge of Indemnity. TRICON, PepsiCo and the members of
the TRICON Group and PepsiCo Group, respectively, shall discharge their
obligations under Sections 5(a) and 5(b) hereof, respectively, by paying the
relevant amount within 30 days of demand therefor. The PepsiCo Group shall be
entitled to make such a demand at any time after a member of the PepsiCo Group
makes a payment or deposit in respect of a Tax for which any member of the
TRICON Group has an obligation under Section 5(a). The TRICON Group shall be
entitled to make such a demand at any time after a Final Determination of an
obligation of any member of the PepsiCo Group under Section 5(b). Any such
demand shall include a statement showing the amount due under Section 5(a) or
5(b), as the case may be. Calculation mechanics relating to items described in
Section 5(a)(i) and 5(b)(i) are set forth in Section 3(c). Notwithstanding the
foregoing, if either TRICON, PepsiCo or any member of the TRICON Group or
PepsiCo Group disputes in good faith the fact or the amount of its obligation
under Section 5(a) or Section 5(b), then no payment of the amount in dispute
shall be required until any such good faith dispute is resolved in accordance
with Section 16 hereof; provided, however, that any amount not paid within 30
days of demand therefor shall bear interest as provided in Section 9.
(d) Tax Benefits. If an indemnification obligation of any member
of the PepsiCo Group or any member of the TRICON Group, as the case may be,
under this Section 5 with respect to a Consolidated Group arises in respect of
an adjustment that makes allowable to a member of the TRICON Group or a member
of the PepsiCo Group, respectively, any deduction, amortization, exclusion from
income or other allowance (a "Tax Benefit") which would not, but for such
adjustment, be allowable, then any payment by any member of the PepsiCo Group or
any member of the TRICON Group, respectively, pursuant to this Section 5 shall
be an amount equal to (x) the amount otherwise due but for this subsection (d),
minus (y) the present value of the product of the Tax Benefit multiplied (i) by
the maximum applicable federal, foreign or state, as the case may be, corporate
tax rate in effect at the time such Tax Benefit becomes allowable to a member of
the TRICON Group or a member of the PepsiCo Group (as the case may be) or (ii)
in the case of a credit, by 100 percent. The present value of such product shall
be determined by discounting such product from the time the Tax Benefit becomes
allowable at a rate equal to Prime.
(e) For purposes of this Section 5, in the case of Taxes that are
imposed on a periodic basis and are payable for a Tax period that includes (but
does not end on) the Distribution Date, the portion of such Tax related to the
portion of such Tax period ending on the Distribution Date shall (x) in the case
of any Taxes other than Taxes based upon or related to income, sales, gross
receipts, wages, capital expenditures or expenses, be deemed to be the amount of
such Tax for the entire Tax period multiplied by a fraction the numerator of
which is the number of days in the Tax period ending on the Distribution Date
and the denominator of which is the number of days in the entire Tax period, and
(y) in the case of any Tax based upon or related to income, sales, gross
receipts, wages, capital expenditures or expenses, be deemed equal to the amount
which would be payable if the relevant Tax period ended on the Distribution
Date.
6. Guarantees. PepsiCo or TRICON, as the case may be, shall guarantee the
obligations of each member of the PepsiCo Group or the TRICON Group,
respectively, under this Agreement.
7. Communication and Cooperation.
(a) Consult and Cooperate. TRICON and PepsiCo shall consult and
cooperate (and shall cause each member of the TRICON Group or the PepsiCo Group,
respectively, to cooperate) fully at such time and to the extent reasonably
requested by the other party in connection with all matters subject to this
Agreement. Such cooperation shall include, without limitation,
(i) the retention and provision on reasonable request of any and
all information including all books, records, documentation or other
information pertaining to Tax matters relating to the PepsiCo Group and
the TRICON Group, any necessary explanations of information, and access
to personnel, until one year after the expiration of the applicable
statute of limitation (giving effect to any extension, waiver, or
mitigation thereof);
(ii) the execution of any document that may be necessary or
helpful in connection with any required Return or in connection with any
audit, proceeding, suit or action; and
(iii) the use of the parties' best efforts to obtain any
documentation from a governmental authority or a third party that may be
necessary or helpful in connection with the foregoing.
(b) Provide Information. PepsiCo and TRICON shall keep each
other fully informed with respect to any material development relating to the
matters subject to this Agreement.
(c) Tax Attribute Matters. PepsiCo and TRICON shall promptly
advise each other with respect to any proposed Tax adjustments relating to a
Consolidated Group, which are the subject of an audit or investigation, or are
the subject of any proceeding or litigation, and which may affect any Tax
liability or any Tax attribute of PepsiCo, TRICON, the PepsiCo Group, the TRICON
Group or any member of the TRICON Group or the PepsiCo Group (including, but not
limited to, basis in an asset or the amount of earnings and profits).
8. Audits and Contest.
(a) Notwithstanding anything in this Agreement to the contrary,
PepsiCo shall have full control over all matters relating to any Return or any
Tax Proceeding relating to any Tax matters of at least one member of the PepsiCo
Group. TRICON may, at its own expense, participate in any such Tax Proceeding.
Except as provided in Section 8(b), PepsiCo shall have absolute discretion with
respect to any decisions to be made, or the nature of any action to be taken,
with respect to any matter described in the preceding sentence.
(b)(i) No settlement of any Tax Proceeding relating to any matter
which would cause a payment obligation under Sections 5(a) or 5(b) shall be
accepted or entered into by or on behalf of the party entitled to receive a
payment under either Section 5(a) or 5(b), whichever is applicable, unless the
party ultimately responsible for such payment under either Section 5(a) or 5(b),
whichever is applicable (the "Indemnitor"), consents thereto in writing (which
consent shall not be unreasonably withheld or delayed); provided, however, that,
notwithstanding anything to the contrary in this Agreement, PepsiCo may settle
any Tax Proceeding if it determines, in its sole judgment, that TRICON is not
cooperating in such Tax Proceeding. If the Indemnitor does not respond to the
indemnified party's request for consent within 30 days, the Indemnitor will be
deemed to have consented to the settlement.
(ii) Upon request, during the course of any Tax Proceeding
relating to a Tax liability or damage described in Section 5(a), TRICON shall
from time to time furnish PepsiCo with evidence reasonably satisfactory to
PepsiCo of TRICON's ability to pay the amount for which it is responsible
pursuant to Sectioin 5(a). If at any time during such Tax Proceeding PepsiCo
determines that TRICON could not pay such amount, then TRICON shall be required
to furnish a guarantee or performance bond satisfactory to PepsiCo in an amount
equal to the amount for which TRICON is responsible pursuant to Secton 5(a). If
TRICON fails to furnish such guarantee or bond, PepsiCo may settle the Tax
proceeding without TRICON's consent, and TRICON shall remain obligated to
indemnify PepsiCo pursuant to Section 5(a).
(iii) Notwithstanding anything to the contrary in this Agreement,
in the event a Tax Proceeding involves an issue that is common to both the
PepsiCo Group and the TRICON Group, including but not limited to the pending
litigation regarding Section 1253 of the Code, PepsiCo shall use its best
efforts to settle such issues on behalf of the PepsiCo Group and the TRICON
Group on a consistent basis.
(iv) Nothwithstanding anything to the contrary in this Agreement,
with respect to any Tax Proceeding involving issues solely related to a TRICON
Tax liability, TRICON shall have control over such Tax Proceeding.
(v) With respect to any Tax Proceeding that relates to a TRICON
Tax liability, PepsiCo agrees to act in good faith on behalf of TRICON and the
members of the TRICON Group in settling such Tax Proceeding.
(c) The indemnified party agrees to give notice to the Indemnitor
of the assertion of any claim, or the commencement of any suit, action or
proceeding in respect of which indemnity may be sought hereunder within 30 days
of such assertion or commencement, or such earlier time that would allow the
Indemnitor to timely respond to such claim, suit action or proceeding.
(d) With respect to Returns relating to Taxes solely attributable
to the TRICON Group, TRICON and the members of the TRICON Group shall have full
control over all matters relating to any Tax Proceeding in connection therewith.
TRICON and the members of the TRICON Group shall have absolute discretion with
respect to any decisions to be made, or the nature of any action to be taken,
with respect to any matter described in the preceding sentence.
9. Payments. All payments to be made hereunder shall be made in immediately
available funds. Except as otherwise provided, all payments required to be made
pursuant to this Agreement will be due 30 days after the receipt of notice of
such payment or, where no notice is required, 30 days after the fixing of
liability or the resolution of a dispute. Payments shall be deemed made when
received. Any payment that is not made by the PepsiCo Group when due shall bear
interest at LIBOR minus 10 basis points, as quoted from time to time, for each
day until paid. Any payment that is not made by the TRICON Group when due shall
bear interest at LIBOR plus 75 basis points, as quoted from time to time, for
each day until paid. If, pursuant to a Final Determination, any amount paid by
PepsiCo or the members of the PepsiCo Group or TRICON or the members of the
TRICON Group, as the case may be, pursuant to this Agreement results in any
increased Tax liability or reduction of any Tax Asset of TRICON or any member of
the TRICON Group or PepsiCo or any member of the PepsiCo Group, respectively,
then PepsiCo or TRICON, as appropriate, shall indemnify the other party and hold
it harmless from any interest or penalty attributable to such increased Tax
liability or the reduction of such Tax Asset and shall pay to the other party,
in addition to amounts otherwise owed, the After-Tax Amount. With respect to any
payment required to be made under this Agreement, the PepsiCo Vice President,
Tax has the right to designate, by written notice to TRICON, which member of the
TRICON Group or the PepsiCo Group, as the case may be, will make or receive such
payment and in which currency such payment will be made.
10. Notices. Any notice, demand, claim, or other communication under this
Agreement shall be in writing and shall be deemed to have been given upon the
delivery or mailing thereof, as the case may be, if delivered personally or sent
by certified mail, return receipt requested, postage prepaid, to the parties at
the following addresses (or at such other address as a party may specify by
notice to the other):
If to PepsiCo or the PepsiCo Group, to:
Matthew McKenna
Vice President, Tax
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, New York 10577-1444
If to TRICON or the TRICON Group, to:
Steve Feilmeier
Vice President, Tax
TRICON Global Restaurants, Inc.
1441 Gardiner Lane
Louisville, KY 40213
11. Costs and Expenses.
(i) Except as expressly set forth in this Agreement, each party
shall bear its own costs and expenses incurred pursuant to this Agreement. For
purposes of this Agreement, costs and expenses shall include, but not be limited
to, reasonable attorney fees, accountant fees and other related professional
fees and disbursements. Notwithstanding anything to the contrary in this
Agreement, the TRICON Group will be responsible for its allocable portion, as
determined by the PepsiCo Vice President, Tax, of (i) all costs and expenses
attributable to filing any Return that reflects the income, assets or operations
of the TRICON Group and any Return required to be filed in connection with the
Restructuring, and (ii) all costs and expenses incurred by PepsiCo in complying
with the provisions of Section 7 of this Agreement.
(ii) With respect to all Tax Proceedings, including pending
litigation with any Taxing Authority, costs shall be allocated in good faith by
the PepsiCo Vice President, Tax. Each party hereto shall be liable for its
allocable portion of such costs as provided in Section 5.
12. Effectiveness; Termination and Survival. This Agreement shall become
effective upon the consummation of the Distribution. All rights and obligations
arising hereunder with respect to a Pre-Distribution Tax Period shall survive
until they are fully effectuated or performed and, provided, further, that
notwithstanding anything in this Agreement to the contrary, this Agreement shall
remain in effect and its provisions shall survive for one year after the full
period of all applicable statutes of limitation (giving effect to any extension,
waiver or mitigation thereof) and, with respect to any claim hereunder initiated
prior to the end of such period, until such claim has been satisfied or
otherwise resolved.
13. Section Headings. The headings contained in this Agreement are inserted for
convenience only and shall not constitute a part hereof or in any way affect the
meaning or interpretation of this Agreement.
14. Entire Agreement; Amendments and Waivers.
(a) Entire Agreement. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein. No alteration, amendment, modification, or waiver of any of the terms of
this Agreement shall be valid unless made by an instrument signed by an
authorized officer of each of PepsiCo and TRICON, or in the case of a waiver, by
the party against whom the waiver is to be effective.
(b) Amendments and Waivers. No failure or delay by any party in
exercising any right, power or privilege hereunder shall operate as a waiver
hereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any right, power or privilege. This
Agreement shall not be waived, amended or otherwise modified except in writing,
duly executed by all of the parties hereto.
15. Governing Law and Interpretation. This Agreement shall be construed and
enforced in accordance with the laws of the State of North Carolina without
giving effect to laws and principles relating to conflicts of law.
16. Dispute Resolution. If the parties hereto are unable to resolve any
disagreement or dispute relating to this Agreement, including but not limited to
whether a transaction is part of the Restructuring and whether a Tax liability
is a PepsiCo Tax Liability or a TRICON Tax Liability, such dispute shall be
resolved in good faith by the PepsiCo Vice President, Tax.
17. Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same Agreement.
18. Assignments; Third Party Beneficiaries. Except as provided below, this
Agreement shall be binding upon and shall inure only to the benefit of the
parties hereto and their respective successors and assigns, by merger,
acquisition of assets or otherwise (including but not limited to any successor
of a party hereto succeeding to the Tax attributes of such party under
applicable law). This Agreement is not intended to benefit any person other than
the parties hereto and such successors and assigns, and no such other person
shall be a third party beneficiary hereof. If, during the period beginning on
the Distribution Date and ending upon the expiration of the survival period set
forth in Section 12, any corporation becomes an Affiliate of TRICON, such
Affiliate shall be bound by the terms of this Agreement and TRICON shall provide
evidence to PepsiCo of such Affiliate's agreement to be bound by the terms of
this Agreement.
19. Authorization, etc. Each of the parties hereto hereby represents and
warrants that it has the power and authority to execute, deliver and perform
this Agreement, that this Agreement has been duly authorized by all necessary
corporate action on the part of such party, that this Agreement constitutes a
legal, valid and binding obligation of each such party, and that the execution,
delivery and performance of this Agreement by such party does not contravene or
conflict with any provision or law or of its charter or bylaws or any agreement,
instrument or order binding on such party.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first written above.
PepsiCo on its own behalf and on behalf of the members of
the PepsiCo Group.
By:__________________________
Karl M. von der Heyden
Chief Financial Officer
TRICON on its own behalf and on behalf of the members of
the TRICON Group.
By:__________________________
Andrall E. Pearson
Chairman of the Board
