No. 1-13163
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
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.
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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.
** Filed with this amendment.
<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 20, 1997 By ANDRALL E. PEARSON
----------------------------
Andrall E. Pearson
Chairman of the Board
<PAGE>
ANNEX A
SUBJECT TO COMPLETION DATED AUGUST 20, 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...............................40
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 SEC'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 will enter
into certain agreements governing their
relationship subsequent to the Distribution.
The agreements will provide for each party to make
certain services, records and personnel available
to the other. They will 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 it's 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 SEC'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
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 will enter into a Separation Agreement (the
"Separation Agreement"), which will provide 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 will provide 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 will enter 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 will agree 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 will 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 will enter 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 will agree 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. It is anticipated that additional persons will agree
prior to the
<PAGE> 36
Distribution Date to serve as Directors. These Directors will hold office until
the first annual meeting of 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 Food Services, 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
<PAGE> 37
served as Chairman and CEO of Rokher-J, Inc., which participates in 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.
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 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
<PAGE> 38
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.
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.
<PAGE> 39
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 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
<PAGE> 40
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.
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
<PAGE> 41
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-
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
(17 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 58,771 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 $70,000 until his
retirement in April 1996.
(2) The options listed in this column are PepsiCo options and do not
reflect the adjustments discussed in the section entitled "PepsiCo Stock Option
and Performance Share Conversion."
<PAGE> 43
<TABLE>
<CAPTION>
PepsiCo Option Grants in Last Fiscal Year (1)
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation for
Individual Grants Option Term
- ------------------------------------------------------------------------------ ---------------------------------------
Number of % of Total
Securities Options
Under- Granted to Exercise
lying Employees in or Base
Options Fiscal Price Expiration
Name Granted (#) Year ($/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
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.
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-10, 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) $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.
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).
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 profit $ (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). 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) 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 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 40% 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.
** Filed with this amendment.
Exhibit 2.01
SEPARATION AGREEMENT
SEPARATION AGREEMENT, dated as of _______ ___, 1997 (as amended,
supplemented or otherwise modified, this "Agreement"), by and between PepsiCo,
Inc., a North Carolina corporation ("PepsiCo"), and TRICON Global Restaurants,
Inc., a North Carolina corporation ("TRICON") and, as of the date hereof, a
wholly-owned subsidiary of PepsiCo.
W I T N E S S E T H:
WHEREAS, PepsiCo has engaged in the restaurant business through various
of its subsidiaries and affiliates (PepsiCo and its subsidiaries and affiliates
(other than the members of the TRICON Group (as such term is hereinafter
defined)) are collectively referred to herein as the "PepsiCo Group");
WHEREAS, PepsiCo has decided to consolidate the assets and operations of
its worldwide KFC, Pizza Hut and Taco Bell businesses (collectively, the
"Restaurant Businesses") into TRICON and TRICON's subsidiaries and affiliates
(TRICON and its subsidiaries and affiliates are collectively referred to herein
as the "TRICON Group"), and to distribute the Common Stock of TRICON on a
ten-for-one basis to the holders of PepsiCo Capital Stock (the "Distribution");
and
WHEREAS, on or before October 6, 1997 (the "Distribution Date"), PepsiCo
will transfer to the Agent (as such term is hereinafter defined), for the
benefit of the holders of record of PepsiCo Capital Stock at the close of
business on September 19, 1997 (the "Record Date"), without any consideration
being paid by such holders, the shares of TRICON Common Stock then owned by
PepsiCo;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the Parties (as such term is defined in Section 16 hereof) hereby agree
as follows:
Section 1. The Distribution. On or prior to the Distribution Date,
PepsiCo will transfer to BankBoston, N.A., as distribution agent (the "Agent"),
for the benefit of holders of record of PepsiCo Capital Stock at the close of
business on the Record Date, the shares of TRICON Common Stock then owned by
PepsiCo, together with an irrevocable voting rights proxy in favor of the Agent.
Prior to the Distribution Date, the Parties shall take such action with respect
to the TRICON Common Stock as is required to complete the Distribution on the
basis of one share of TRICON Common Stock for every ten shares of PepsiCo
Capital Stock outstanding at the close of business on the Record Date. PepsiCo
shall instruct the Agent to distribute such TRICON shares to the holders of
record of PepsiCo Capital Stock at the close of business on the Record Date. All
of the shares of TRICON so issued shall be fully paid and nonassessable. The
Distribution shall be effective as of 11:59:59 p.m. on the Distribution Date.
Section 2. Governance Documents. TRICON shall take all action necessary
such that, on the Distribution Date, the Restated Articles of Incorporation and
Bylaws of TRICON, and all benefit plans of TRICON, shall be substantially in the
forms filed with the Securities and Exchange Commission as exhibits to the Form
10 relating to the Distribution (as amended, supplemented or otherwise modified,
the "Form 10").
Section 3. Books, Records, Services and Access to Information. (a)
Except as otherwise provided in the attachments hereto, for a period of up to
twelve months from and after the Distribution Date (or such shorter period as
set forth on Schedule A hereto), each Party shall make available to the other,
during normal business hours and in a manner which will not unreasonably
interfere with such Party's business, the services set forth on Schedule A
hereto (collectively "Transitional Services") to the extent that the same are
reasonably required to assist in effecting an orderly transition following the
Distribution. Except as otherwise provided in the attachments hereto, the
initial terms upon which Transitional Services shall be provided to TRICON or
PepsiCo, as the case may be, are set forth on Schedule A hereto.
(b) From and after the Distribution Date, PepsiCo shall afford TRICON
and its authorized employees and representatives reasonable access (including
access to persons or firms possessing relevant information and records) and
reasonable duplicating rights during normal business hours to, or, at PepsiCo's
option, copies of, all records, books, contracts, instruments, data and other
information (collectively, "Information") within the PepsiCo Group's possession
relating to any member of the TRICON Group, insofar as such access or copies are
reasonably required by TRICON.
(c) TRICON shall afford to PepsiCo and its authorized employees and
representatives reasonable access (including access to persons or firms
possessing relevant information and records) and reasonable duplicating rights
during normal business hours to, or, at TRICON's option, copies of, all
Information within the TRICON Group's possession relating to any member of the
PepsiCo Group, insofar as such access or copies are reasonably required by
PepsiCo.
(d) Within 45 days after the Distribution Date, each of PepsiCo and
TRICON shall provide the other with such indices or descriptions of Information
as it may maintain relating to the other or the other's subsidiaries or
affiliates. Information may be required under this Section 3, without
limitation, for audit, accounting, claims, litigation and tax purposes, as well
as for purposes of fulfilling disclosure and reporting obligations. In lieu of
retaining any specific Information, either Party may, in writing, offer to
deliver such Information to the other Party. If such offer is not accepted
within 90 days, the Information so offered shall be retained or destroyed in
accordance with PepsiCo's Record Retention Policy. If such offer is accepted,
the Party accepting delivery shall pay the reasonable out-of-pocket costs of the
delivery. Each Party shall maintain the Information in accordance with the
manner it treats similar material relating to its ongoing business.
(e) At all times from and after the Distribution Date, each Party will
use its reasonable best efforts to make available to the other, upon written
request, its officers, directors, employees and agents as witnesses to the
extent that the same may reasonably be required in connection with any legal,
administrative or other proceedings in which the requesting Party may from time
to time be involved.
(f) Except as otherwise specifically provided for herein, a Party
providing Information, Transitional Services or witnesses to the other hereunder
shall be entitled to receive from the recipient, upon the presentation of
appropriate invoices therefor, payments for such amounts relating to supplies,
disbursements, and such other costs and out-of-pocket expenses as are provided
for on Schedule A hereto, or which may be reasonably incurred in providing such
Information, Transitional Services or witnesses. Invoices shall be due and
payable within thirty (30) days of receipt. Interest shall accrue on any unpaid
amount at the rate of eight percent (8%) per annum.
(g) PepsiCo shall arrange for the transportation of existing corporate
records in its possession relating exclusively to the Restaurant Businesses,
including original corporate minute books, stock ledgers and certificates, and
corporate seals of each corporation included in the group of which TRICON is the
parent corporation, and all active agreements, deeds to real property, active
litigation files and filings with foreign governments, if any, to TRICON's
address set forth in Section 23 hereof. PepsiCo shall provide TRICON with lists
of trademarks, patents and copyrights of TRICON and its subsidiaries.
Section 4. Confidentiality. Each member of the PepsiCo Group and the
TRICON Group shall hold, and cause each of their respective officers, employees,
agents, consultants and advisors to hold, in strict confidence, all non-public
Information concerning the other Party furnished it by such other Party or its
representatives pursuant to this Agreement, unless compelled to disclose such
Information by judicial or administrative process or, in the opinion of counsel,
by other requirements of law (in which case such Party shall promptly notify the
other Party so that the other Party may seek a protective or other appropriate
remedy); and each Party shall not release or disclose such Information to any
other person, except its auditors, attorneys, financial advisors, bankers and
other consultants and advisors who shall be bound by the provisions of this
Section 4. Each Party shall be deemed to have satisfied its obligations
hereunder with respect to confidential Information supplied by the other Party
if it exercises the same care as it does with respect to preserving the
confidentiality of its own similar information.
Section 5. Indemnification. (a) Effective on the Distribution Date,
TRICON agrees to indemnify and hold harmless each member of the PepsiCo Group
and each of their respective officers, directors, employees and agents from and
against any and all losses, liabilities, claims, suits, damages, costs and
expenses (including, without limitation, reasonable attorneys' fees and any and
all expenses reasonably incurred in investigating, preparing or defending
against any pending or seriously threatened litigation or claim) (collectively,
"Losses") arising out of or related in any manner to any item set forth on
Schedule B hereto. Similarly, effective on the Distribution Date, except as
otherwise provided in the attachments hereto, PepsiCo agrees to indemnify and
hold harmless each member of the TRICON Group and each of their respective
officers, directors, employees and agents from and against any and all Losses
arising out of or related in any manner to any item set forth on Schedule C
hereto.
(b) If any action is brought or any claim is made against a Party or
person in respect of which indemnity may be sought pursuant to subsection 5(a)
above (the "Indemnitee"), the Indemnitee shall, within ten days after the
receipt of information indicating that an action or claim is likely, notify in
writing the Party from whom indemnification is sought (the "Indemnitor") of the
institution of the action or the making of the claim, and the Indemnitor shall
have the right, and at the request of the Indemnitee, shall have the obligation,
to assume the defense of the action or claim, including the employment of
counsel. If the Indemnitor assumes the defense of the action or claim, the
Indemnitor shall be entitled to settle the action or claim on behalf of the
Indemnitee without the prior written consent of the Indemnitee unless such
settlement would materially affect the ongoing business or employment of the
Indemnitee.
(c) The Indemnitee shall have the right to employ its own counsel, but
the fees and expenses of that counsel shall be the responsibility of the
Indemnitee unless (i) the employment of that counsel shall have been authorized
in writing by the Indemnitor in connection with the defense of the action or
claim; (ii) the Indemnitor shall not have employed counsel to have charge of the
defense of such action or claim; or (iii) such Indemnitee shall have reasonably
concluded that there may be defenses available to it which are different from or
additional to those available to the Indemnitor (in which case the Indemnitor
shall not have the right to direct any different defense of the action or claim
on behalf of the Indemnitee). The Indemnitee shall, in any event, be kept fully
informed of the defense of any such action or claim. Except as expressly
provided above, in the event that the Indemnitor shall not previously have
assumed the defense of an action or claim, at such time as the Indemnitor does
assume the defense of the action or claim, the Indemnitor shall not thereafter
be liable to any Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in investigating, preparing or defending against such action or
claim.
(d) Anything in this Section 5 to the contrary notwithstanding, the
Indemnitor shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that if after due
notice the Indemnitor refuses to defend a claim or action, the Indemnitee shall
have the right to defend and/or settle such claim or action, and the Indemnitee
shall not be precluded from making a claim against the Indemnitor for reasonable
expenses and liabilities resulting from such defense and/or settlement in
accordance with this Section 5.
(e) Notwithstanding the foregoing provisions of this Section 5, there
may be particular actions or claims which reasonably could result in both
Parties being liable to the other under the indemnification provisions of this
Agreement. In such events, the Parties shall endeavor, acting reasonably and in
good faith, to agree upon a manner of conducting the defense and settlement of
the action or claim with a view to minimizing the legal expenses and associated
costs that might otherwise be incurred by the Parties, such as, by way of
illustration only, agreeing to use the same legal counsel.
(f) The indemnification provisions of this Section 5 shall not inure to
the benefit of any third party. By way of illustration only, an insurer who
would otherwise be obligated to pay any claim shall not be relieved of the
responsibility with respect thereto, or, solely by virtue of the indemnification
provisions hereof, have any subrogation rights with respect thereto, it being
expressly understood and agreed that no insurer or any other third party shall
be entitled to a "windfall" (i.e., a benefit they would not be entitled to
receive in the absence of the indemnification provisions) by virtue of these
indemnification provisions.
Section 6. Taxes. PepsiCo and TRICON have entered into a Tax Separation
Agreement, substantially in the form attached hereto as Attachment 1 (as
amended, supplemented or otherwise modified, the "Tax Agreement"), regarding
their respective rights and obligations with respect to taxes of the TRICON
Group for all periods through the Distribution Date and certain other
tax-related matters. In the event of a conflict between the terms of the Tax
Agreement and the terms of this Agreement, the terms of the Tax Agreement shall
govern.
Section 7. Employee Benefits. PepsiCo and TRICON have entered into an
Employee Programs Agreement, substantially in the form attached hereto as
Attachment 2 (as amended, supplemented or otherwise modified, 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. In the event of a conflict between
the Employee Programs Agreement and the terms of this Agreement, the terms of
the Employee Programs Agreement shall govern.
Section 8. Telecommunications, Software and Computing Services. PepsiCo
and TRICON have entered into a Telecommunications, Software and Computing
Services Agreement, substantially in the form attached hereto as Attachment 3
(as amended, supplemented or otherwise modified, the "T,S&C Agreement"), setting
forth the arrangements between the Parties with respect to internal software,
third party agreements, telecommunications services and computing services. In
the event of a conflict between the T,S&C Agreement and the terms of this
Agreement, the terms of the T,S&C Agreement shall govern.
Section 9. Transfer of Entities, Operations, Assets and Liabilities. (a)
Except as set forth on Schedule D hereto, prior to the Distribution Date,
PepsiCo and TRICON shall use reasonable efforts to cause the entities,
operations, assets and corresponding liabilities of the Restaurant Businesses to
be included as part of the TRICON Group. Both Parties agree to take such action
as may be necessary or appropriate, prior to the Distribution Date, to cause all
such restaurant-related assets and liabilities (including, without limitation,
all agreements relating thereto), except as provided on Schedule D hereto, to be
properly conveyed or assigned to TRICON or the appropriate subsidiary or
affiliate of TRICON. Except as otherwise provided in this Agreement (including,
without limitation, the Schedules and Attachments hereto), PepsiCo shall bear
the reasonable costs of such conveyances.
(b) Except as expressly provided herein, TRICON agrees to assume and pay
all contracts, obligations and liabilities of each member of the PepsiCo Group
associated in any way with the Restaurant Businesses and/or the Casual Dining
Businesses (as such term is hereinafter defined), whether accrued, absolute,
contingent or otherwise, and whether due or to become due, including, without
limitation, all obligations of any member of the PepsiCo Group acting as a
guarantor of obligations associated in any way with any of the Restaurant
Businesses and/or the Casual Dining Businesses, and all obligations under leases
and other executory contracts and liabilities, whether arising as a result of
the transactions contemplated hereby, existing on the date hereof, or based on
facts or actions arising on or prior to the Distribution Date, whether or not
such obligations shall have been disclosed herein, and whether or not reflected
on the opening balance sheet of the TRICON Group prepared pursuant to Section 13
hereof (the "Opening Balance Sheet"). For purposes of this Agreement, the term
"Casual Dining Businesses" shall mean California Pizza Kitchen, Chevys Mexican
Restaurants, Chimayo Grill, D'Angelo Sandwich Shops, East Side Mario's and Hot
`n Now.
(c) In the event that the transfer of all such assets and liabilities is
not accomplished by the Distribution Date, the Parties agree that TRICON shall
have de facto control and equitable ownership of the entities, operations and
assets, and de facto responsibility for the obligations and liabilities,
intended to be transferred to the TRICON Group; provided, however, that if any
uncompleted steps financially affect either PepsiCo or TRICON, the Parties agree
to use their respective best efforts to equitably resolve any such financial
impact.
(d) This Section 9 shall not inure to the benefit of any third party.
Section 10. Letters of Credit, Guarantees and Contingent Liabilities.
(a) TRICON shall use its best efforts to cause the beneficiaries of all of the
PepsiCo Group's letters of credit, guarantees and other contingent liabilities
relating to any of the Restaurant Businesses or the Casual Dining Businesses
(including, without limitation, commercial letters of credit, financing
guarantees, performance guarantees, lease guarantees, comfort letters, insurance
and workers' compensation liabilities, and the letters of credit, guarantees and
other contingent liabilities identified on Schedule E hereto) (collectively, the
"Restaurant Contingent Liabilities") which will not have expired on or prior to
the Distribution Date, to release and terminate all such Restaurant Contingent
Liabilities on or prior to the Distribution Date and, where necessary or
appropriate, to accept substitute letters of credit, guarantees or contingent
liabilities issued for the account of TRICON or to post sufficient cash
collateral on behalf of TRICON. TRICON hereby agrees to provide to PepsiCo,
prior to the Distribution Date, a schedule (the "PHI Contingent Liability
Schedule") listing all of Pizza Hut, Inc.'s letters of credit, guarantees and
other contingent liabilities relating to any of the Restaurant Businesses or the
Casual Dining Businesses which have not been released, terminated or replaced
with a Qualified Letter of Credit (as such term is hereinafter defined). The PHI
Contingent Liability Schedule shall supplement, and be incorporated by reference
into, Schedule E hereto. From and after the Distribution Date, TRICON will pay a
fee based upon the maximum exposure related to any Restaurant Contingent
Liabilities which were not released, terminated or replaced prior to the
Distribution Date. Such fee will be structured as follows: (i) for the first
year following the Distribution Date, the fee will be consistent with the
pricing of TRICON's senior credit facility as in effect from time to time and
will be expressed as a percentage of the value of the underlying exposure, and
(ii) thereafter, the fee will be equal to the current market value, as
determined by The Chase Manhattan Bank, for replacing all such Restaurant
Contingent Liabilities that have not yet been released, terminated or replaced
by a Qualified Letter of Credit. Such fee shall be payable monthly in advance
until such time as each such Restaurant Contingent Liability has been released,
terminated or replaced by a Qualified Letter of Credit (as such term is
hereinafter defined). Notwithstanding the foregoing, TRICON shall at all times
indemnify and hold harmless each member of the PepsiCo Group from and against
all losses, liabilities and obligations incurred with respect to such Restaurant
Contingent Liabilities. Without limiting the foregoing, TRICON shall, upon
demand, reimburse PepsiCo within ten days for any amounts actually paid by any
member of the PepsiCo Group with respect to any such Restaurant Contingent
Liabilities.
(b) For purposes of this Agreement, the term "Qualified Letter of
Credit" shall mean an irrevocable, transferable letter of credit issued to
PepsiCo or its relevant subsidiary or affiliate by a bank that is an A Credit
(as such term is hereinafter defined), substantially in the form attached as
Schedule F hereto, with a term extending to the last possible expiration date of
the Restaurant Contingent Liabilities covered thereby and with a maximum drawing
amount that shall equal the full amount of all remaining obligations and
foreseeable claims under the Restaurant Contingent Liabilities covered thereby
(assuming the exercise of all extension options with respect to the underlying
obligations). In the event of any change in the law regarding letters of credit
generally that affects the language in a Qualified Letter of Credit, TRICON
shall, at the request of PepsiCo, provide a new Qualified Letter of Credit
containing modifying language as approved by PepsiCo. The language contained in
the form of letter of credit attached as Schedule F hereto shall be deemed to be
approved by PepsiCo. For purposes of this Agreement, the term "A Credit" shall
mean a corporation or banking association whose long-term debt obligations are
rated A+ or A1 or better by Standard & Poor's or by Moody's, respectively, or
their successors in interest that are "nationally recognized statistical rating
organizations."
(c) TRICON agrees that no member of the TRICON Group shall modify, amend
or extend (including, without limitation, pursuant to any existing option to
extend) any of the leases for property of the TRICON Group which have been
guaranteed by a member of the PepsiCo Group (including, without limitation, the
leases identified on Schedule G hereto) (collectively, the "Leases") so as to
increase or in any way enlarge the duration of any of the obligations or
liabilities of any member of the PepsiCo Group pursuant to those guarantees
without first obtaining the prior written approval of PepsiCo, which approval
may be withheld by PepsiCo in its sole discretion. TRICON hereby agrees to
provide to PepsiCo, prior to the Distribution Date, a schedule (the "PHI Lease
Schedule") listing each lease for property of the TRICON Group which has been
guaranteed by Pizza Hut, Inc. The PHI Lease Schedule shall supplement, and be
incorporated by reference into, Schedule G hereto. TRICON further agrees that no
member of the TRICON Group shall default under or breach any of the Leases so as
to cause or give rise to any claims, actions, suits or proceedings against any
member of the PepsiCo Group arising out of such guarantees, and hereby agrees to
indemnify and hold harmless each member of the PepsiCo Group from and against
all such liabilities, costs and expenses (including, without limitation,
reasonable attorneys' fees and any and all expenses reasonably incurred in
investigating, preparing or defending against any pending or seriously
threatened litigation or claim) associated therewith in accordance with Section
5 hereof. TRICON shall immediately notify PepsiCo, in writing, of any allegation
or claim asserted by any person or entity which might give rise to any liability
or obligation of any member of the PepsiCo Group under any such guarantee.
Section 11. Insurance. (a) All policies of liability, fire, workers'
compensation and other forms of insurance maintained by the PepsiCo Group
insuring the products, properties, assets and/or operations of the TRICON Group
shall continue in full force and effect up to and through the Distribution Date,
and except as set forth on Schedule H hereto, shall be terminated effective
11:59:59 p.m. on the Distribution Date. Any refunds of prepaid premiums with
respect to such terminated insurance shall be for PepsiCo's account. PepsiCo
shall be responsible for obtaining such initial insurance coverage for TRICON
from and after the Distribution Date in such amounts as are agreed upon by the
Parties. TRICON shall be liable for payment of all premiums with respect to such
initial insurance coverage and all subsequent coverage which TRICON thereafter
elects to obtain. For purposes of this Section, insurance coverage does not
include any insurance for plans described in the Employee Programs Agreement,
but does include ERISA fidelity bonds and/or fiduciary insurance.
(b) With respect to any insurance programs relating to the TRICON Group
(including, without limitation, any casualty insurance programs such as public
and products liability insurance, insured or self-insured workers' compensation
insurance and automobile liability insurance), TRICON shall be liable for
payment of all claims arising out of incidents, known or unknown, reported or
unreported, which occur prior to, on or after the Distribution Date. Any
reserves under these insurance programs relating to the TRICON Group for periods
ending prior to, on or after the Distribution Date shall be for the account of
TRICON. Such reserves shall be included as liabilities of TRICON, and any charge
or credit to the reserves shall be for TRICON's account.
Section 12. Banking and Other Arrangements. The responsibility for bank
accounts used exclusively by the TRICON Group shall be transferred from PepsiCo
to TRICON on or prior to the Distribution Date. Normal procedures will be
followed for receipts and disbursements funding prior to the Distribution Date
as set forth on Schedule I hereto.
Section 13. Procedures for Closing and Delivery of Books and Balance
Sheet and Payment of Certain Amounts to PepsiCo. Financial statements of TRICON
as of the Distribution Date, which shall be summaries of the combined accounting
ledgers of the TRICON Group as of the close of the tenth accounting period of
the 1997 fiscal year, and which shall include an Opening Balance Sheet, shall be
prepared by PepsiCo within 45 days after the Distribution Date and reviewed and
agreed to by TRICON within 15 days after such financial statements are prepared.
Each Party shall bear its own expenses in connection with the preparation and
review of such financial statements. PepsiCo and TRICON agree that the
principles for determining the Opening Balance Sheet are as follows:
(a) Total Assets shall be determined through the normal reporting
process using U.S. generally accepted accounting principles ("GAAP") as applied
on a basis substantially consistent with the basis used in the preparation of
the financial statements of TRICON presented in the Form 10 and standard PepsiCo
definitions and accounting practice, consistently applied.
(b) Non-Interest Bearing Liabilities shall be determined through the
normal reporting process using GAAP as applied on a basis substantially
consistent with the basis used in the preparation of the financial statements of
TRICON presented in the Form 10 and standard PepsiCo definitions and accounting
practice, consistently applied. Accrued tax liabilities shall be treated in
accordance with the provisions of the Tax Agreement.
(c) Net Assets is the sum of total assets less non-interest bearing
liabilities. Net Assets shall be determined in accordance with the following
capitalization procedure:
(i) Short and Long-Term Debt shall be determined through the normal
reporting process using GAAP as applied on a basis substantially
consistent with the basis used in the preparation of the financial
statements of TRICON presented in the Form 10 and standard PepsiCo
definitions and accounting practice, consistently applied. The Opening
Balance Sheet will reflect $4.5 billion of debt obligations to be
incurred by TRICON on or prior to the Distribution Date. All of the
proceeds of such debt obligations will be transferred to PepsiCo prior
to the Distribution Date as repayment of certain amounts due to
PepsiCo from the TRICON Group and a dividend.
(ii) Stockholders' Equity of TRICON will equal the difference between the
total Net Assets less the Short and Long-Term Debt on TRICON's Opening
Balance Sheet as of the Distribution Date.
Any amounts due PepsiCo by the TRICON Group related to intercompany
accounts (other than those accounts which are defined as intercompany trade
receivables and payables in accordance with PepsiCo financial policies) or other
promissory notes in excess of the amount set forth in (i) immediately above,
which will cover repayment of certain amounts due to PepsiCo from the TRICON
Group, will be capitalized by PepsiCo.
Section 14. Operation Until Closing. TRICON agrees, on behalf of itself
and each member of the TRICON Group, that through the Distribution Date the
Restaurant Businesses shall be operated in the ordinary course of business,
consistent with past practice.
Section 15. De-Identification. As soon as practicable after the
Distribution Date, and in no event later than 120 days after such Date, TRICON
shall eliminate all exterior and interior signage and other identification in
its possession or control, and cease using any letterhead, which identifies
TRICON or any other entity within the TRICON Group as a subsidiary or affiliate
of PepsiCo.
Section 16. Parties. As used in this Agreement, the term "Parties" shall
include the PepsiCo Group and its successors, and the TRICON Group and its
successors. Each of PepsiCo and TRICON agrees that it shall cause each of its
subsidiaries and affiliates to comply fully with the terms of this Agreement.
Section 17. Expenses. Except as set forth on Schedule J hereto or as
otherwise provided in this Agreement (including, without limitation, the
Schedules and Attachments hereto), all expenses in connection with the
Distribution shall be borne by PepsiCo and all expenses in connection with the
ongoing operations and/or businesses of the TRICON Group shall be borne by
TRICON.
Section 18. Tax Gross-Up. If any amount paid by any member of the
PepsiCo Group or 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 the TRICON Group or the PepsiCo Group, respectively, then PepsiCo or TRICON,
as appropriate, shall indemnify the other Party and hold it harmless from and
against 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. Capitalized terms used in this
Section 18 but not otherwise defined in this Agreement shall have the meanings
assigned to such terms in the Tax Agreement.
Section 19. Survival. All of the provisions of this Agreement shall
survive the Distribution Date.
Section 20. Other Provisions. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina, may not be
assigned by either Party without the written consent of the other, and shall
bind and inure to the benefit of the Parties hereto and their respective
successors and permitted assignees. This Agreement may not be amended,
supplemented or otherwise modified except by an agreement in writing signed by
PepsiCo and TRICON. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
Section 21. Arbitration. (a) Except as otherwise provided in the
attachments hereto, any controversy or claim arising out of or relating to this
Agreement, or the breach hereof, shall be settled by arbitration in accordance
with the then prevailing Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") as such rules may be modified herein.
(b) An award rendered in connection with an arbitration pursuant to this
Section shall be final and binding and judgment upon such an award may be
entered and enforced in any court of competent jurisdiction.
(c) The forum for arbitration under this Section shall be agreed upon by
the Parties, or, failing such agreement, shall be New York, New York.
(d) Arbitration shall be conducted by a single arbitrator selected
jointly by PepsiCo and TRICON. If within 30 days after a demand for arbitration
is made, PepsiCo and TRICON are unable to agree on a single arbitrator, three
arbitrators shall be appointed. Within 30 days after such inability to agree,
PepsiCo and TRICON shall each select one arbitrator and those two arbitrators
shall then select a third arbitrator unaffiliated with either Party. In
connection with the selection of the third arbitrator, consideration shall be
given to familiarity with corporate divestiture transactions and experience in
dispute resolution between parties, as a judge or otherwise. If the arbitrators
selected by PepsiCo and TRICON cannot agree on the third arbitrator within such
30 day period, they shall promptly thereafter discuss the qualifications of such
third arbitrator with the AAA prior to selection of such arbitrator, which
selection shall be in accordance with the Commercial Arbitration Rules of the
AAA.
(e) If an arbitrator cannot continue to serve, a successor to an
arbitrator selected by PepsiCo or TRICON, as the case may be, also shall be
selected by the same Party, and a successor to the neutral arbitrator shall be
selected as specified in subsection (d) of this Section. A full rehearing will
be held only if the neutral arbitrator is unable to continue to serve or if the
remaining arbitrators unanimously agree that such a rehearing is appropriate.
(f) The arbitrator or arbitrators shall be guided, but not bound, by the
Federal Rules of Evidence and by the procedural rules, including discovery
provisions, of the Federal Rules of Civil Procedure. Any discovery shall be
limited to information directly relevant to the controversy or claim in
arbitration.
Section 22. Limitation on Subsequent Activities. PepsiCo agrees, without
any separately bargained for consideration, but rather as an integral part of
the transfer of the Restaurant Businesses to the TRICON Group and the
Distribution provided for in this Agreement, that it shall not directly, through
a subsidiary or affiliate, or otherwise, through October 1, 2000, open anywhere
in the United States or Canada a restaurant substantially identical to the
restaurant concepts operated by the TRICON Group at the opening of business on
the day following the Distribution Date. PepsiCo acknowledges that the remedy at
law for any breach of the foregoing covenant would be inadequate and in the
event of any such breach TRICON shall be entitled to injunctive relief.
Section 23. Notices. Any notice, demand, claim or other communication
under this Agreement shall be in writing and shall be deemed to have been given
(i) upon the delivery thereof if delivered personally (including, without
limitation, by courier), (ii) three days after being sent by certified mail,
return receipt requested, postage prepaid, or (iii) upon receipt of confirmation
of a telecopy transmission, in each case 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:
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577-1444
Telecopy No.: (914) 253-3123
Attention: General Counsel
If to TRICON:
TRICON Global Restaurants, Inc.
1441 Gardiner Lane
Louisville, KY 40213
Telecopy No.: (502) 456-8300
Attention: General Counsel
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be duly executed as of the date and year first above written.
PepsiCo, Inc.
By _____________________________
[Name and Title]
TRICON Global Restaurants, Inc.
By _____________________________
[Name and Title]
<PAGE>
INDEX TO SCHEDULES AND ATTACHMENTS
SCHEDULES
Schedule A - Transitional Services
Schedule B - TRICON Indemnification Obligations
Schedule C - PepsiCo Indemnification Obligations
Schedule D - Restaurant Entities, Operations, Assets and Liabilities not
being Transferred to the TRICON Group
Schedule E - Letters of Credit, Guarantees and Other Contingent
Liabilities Issued by the PepsiCo Group
Schedule F - Form of Qualified Letter of Credit
Schedule G - Restaurant Leases which have been Guaranteed by the PepsiCo
Group
Schedule H - Restaurant Insurance which will not be Terminated as of the
Distribution Date
Schedule I - Restaurant Funding Structure Prior to the Distribution Date
Schedule J - Expenses
ATTACHMENTS
Attachment 1 - Tax Separation Agreement
Attachment 2 - Employee Programs Agreement
Attachment 3 - Telecommunications, Software and Computing Services Agreement
<PAGE>
Schedule A
<TABLE>
TRANSITIONAL SERVICES
<CAPTION>
<S> <C> <C> <C>
Expected
Department Date Service Cost Estimate or
Providing Service Services Provided to TRICON Will Terminate Billing Procedure
- -------------------- ---------------------------------- ----------------- -----------------------
Treasury - Global Cash Desk and Operations training 10/31/97 T&E Expenses will be
Cash Management for all software packages and daily charged to TRICON
and Operations transactional activity
- -------------------- ---------------------------------- ----------------- -----------------------
Guarantee Tracking 10/31/97 N/A
- -------------------- ---------------------------------- ----------------- -----------------------
</TABLE>
<PAGE>
SCHEDULE B
TRICON INDEMNIFICATION OBLIGATIONS
Items with respect to which TRICON will indemnify the PepsiCo Group in
accordance with Section 5 of this Separation Agreement:
(1) All Losses arising out of or related in any manner to any of the
Restaurant Businesses, as such businesses have been conducted in the past, are
currently conducted or may in the future be conducted, whether or not such
Losses are asserted prior to the Distribution Date and whether or not such
Losses are based upon PepsiCo or any of its subsidiaries or affiliates being a
direct party to a transaction or agreement.
(2) All Losses arising out of or related in any manner to any of the
Casual Dining Businesses and/or any other restaurant business in which PepsiCo
or any of its subsidiaries or affiliates has been involved, as such businesses
were conducted by any member of the PepsiCo Group or the TRICON Group, whether
or not such Losses are asserted prior to the Distribution Date and whether or
not such Losses are based upon PepsiCo or any of its subsidiaries or affiliates
being a direct party to a transaction or agreement.
(3) All Losses arising out of or related in any manner to any letters of
credit, guarantees or contingent liabilities relating to (i) any of the
Restaurant Businesses, the Casual Dining Businesses and/or any other restaurant
business in which PepsiCo or any of its subsidiaries or affiliates has been
involved, or (ii) any obligations of any member of the TRICON Group (including,
without limitation, commercial letters of credit, financing guarantees,
performance guarantees, lease guarantees, comfort letters, and insurance and
workers' compensation liabilities), whether or not such Losses are asserted
prior to the Distribution Date.
(4) All Losses arising out of or related in any manner to (i) the
Borrower Receivable Purchase and Sale Agreement, dated as of December 13, 1995,
among Taco Bell Corp., as Seller, Corporate Asset Funding Company, Inc., as
Investor, and Citicorp North America, Inc., as Investor Agent, or (ii) the
Parent Undertaking Agreement, dated as of December 13, 1995, related thereto.
(5) All Losses arising out of or related in any manner to (i) the
Commitment Letter, dated August __, 1997 (the "Commitment Letter"), among
TRICON, PepsiCo, The Chase Manhattan Bank, Chase Securities Inc., Citibank,
N.A., Citicorp Securities, Inc., Morgan Guaranty Trust Company of New York, J.P.
Morgan Securities, Inc., Nationsbank, N.A., and Nationsbank Capital Markets,
Inc., (ii) the Summary of Terms and Conditions referred to therein (the "Term
Sheet"), and/or (iii) any of the credit facilities referred to in the Commitment
Letter and/or the Term Sheet.
<PAGE>
Schedule C
PEPSICO INDEMNIFICATION OBLIGATIONS
Items with respect to which PepsiCo will indemnify the TRICON Group in
accordance with Section 5 of this Separation Agreement:
(1) All Losses arising out of or related in any manner to either of the
Pepsi-Cola or Frito-Lay businesses as such businesses have been conducted in the
past, are currently conducted or may in the future be conducted, whether or not
such Losses are asserted prior to the Distribution Date.
(2) All losses arising out of or related in any manner to any contingent
liabilities relating to (i) either of the Pepsi-Cola or Frito-Lay businesses, or
(ii) any obligations of any member of the PepsiCo Group, whether or not such
losses are asserted prior to the Distribution Date.
<PAGE>
Schedule D
RESTAURANT ENTITIES, OPERATIONS, ASSETS AND LIABILITIES
NOT BEING TRANSFERRED TO THE TRICON GROUP
Entities
Pizza Hut, Inc., a Delaware corporation
Bell Taco Funding Syndicate, an Australian partnership (financing vehicle)
PFS de Mexico S.A.de C.V., a corporation organized under the laws of Mexico
Kentucky Fried Chicken Nederland, B.V., a corporation organized under the laws
of the Netherlands
Operations
None
Assets
None
Liabilities
None
<PAGE>
Schedule E
LETTERS OF CREDIT, GUARANTEES AND OTHER CONTINGENT LIABILITIES ISSUED BY THE
PEPSICO GROUP
To Be Completed Prior to Execution
of this Agreement
<PAGE>
Schedule F
<TABLE>
<CAPTION>
FORM OF QUALIFIED LETTER OF CREDIT
<S> <C>
Date XXXXXXXX
- ---------------------------------- --------------------------------- ---------------------------------
Irrevocable Standby Our No.
Letter of Credit
XXXXXX
- ---------------------------------- -------------------------------------------------------------------
Advising Bank Applicant
- ---------------------------------- -------------------------------------------------------------------
Beneficiary Amount
XXXXXXX*****
[PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577-1444]
-------------------------------------------------------------------
Expiry
XXXXXXX*****
- ---------------------------------- -------------------------------------------------------------------
</TABLE>
Gentlemen: We hereby issue in your favor our Irrevocable Standby Letter of
Credit No. XXXXX in an amount not to exceed in the aggregate US $XXXXXXX,
effective immediately, and expiring at the office of [Insert name and address of
bank], Attention: ____________________________ at our close of business on
XXXXXX.
This Letter of Credit is being issued to secure your obligations under those
letter(s) of credit, guarantee(s) and/or other contingent liabilit(ies) which
are listed on the attached Schedule 1, which Schedule forms and integral part of
this Letter of Credit.
Funds under this Letter of Credit are available for drawing on any Business Day
subject to presentation, at the Bank's office at the address set forth below of
the following documents:
1) A sight draft substantially in the form of Annex 1 hereto;
2) A drawing certificate executed by one of the beneficiary's officials and
substantially in the form of Annex 2 hereto, appropriately completed;
and
3) The original of this Letter of Credit and any amendments thereto.
Such demand shall be dated no later than the date of presentation and shall be
made by delivery as indicated below in the paragraph covering notices. As used
herein, "Business Day" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in the State of ____________ are authorized or
required by law or order to be closed.
Partial drawings are permitted.
It is a condition of this Letter of Credit that it shall be reduced
automatically and without amendment, from time to time in the following manner:
A) By any amount claimed by you under this Letter of Credit; or
B) Upon our receipt of a written statement signed by an officer of PepsiCo,
Inc. stating that our Letter of Credit can be reduced by a stated
amount, as a result of a cancellation of letter(s) of credit,
guarantee(s) or other contingent liabilit(ies) set forth on Schedule 1.
It is further a condition of this Letter of Credit that it shall be
automatically extended for an additional period of one year from the expiration
date hereof or any future expiration date, unless at least sixty (60) days prior
to such date we send you written notice by certified mail, returned receipt
requested mail or hand delivery that we elect not to renew this Letter of Credit
for any such additional period.
All notices, demands, presentations and other communications (collectively,
"Notices") to us in respect of this Letter of Credit shall be addressed and
delivered as follows: [Insert name and address of bank], Attention:
_______________________.
All Notices to you in respect of this Letter of Credit shall be addressed and
delivered as follows: PepsiCo, Inc., 700 Anderson Hill Road, Purchase, NY
10577-1444, Attention: XXXXX, or such other address as you may from time to time
designate by written notice to us.
All Notices in respect of this Letter of Credit shall be effective upon receipt.
Any and all banking charges associated with this Letter of Credit are for the
account of TRICON Global Restaurants, Inc.
This Letter of Credit sets forth in full the terms of our undertaking. Such
undertaking shall not in any way be modified, amended or amplified by reference
to any document or instrument referred to herein or in which this Letter of
Credit is referred to or to which this Letter of Credit relates and any such
reference shall not be deemed to incorporate herein by reference any document or
instrument.
We hereby undertake to promptly honor your sight drafts(s) drawn on us,
indicating our Letter of Credit No. XXXXX, for all or any part of this Letter of
Credit if presented at the office of [Insert name and address of bank],
Attention: _____________________ on or before the expiration date or any
automatically extended expiry date.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision) International Chamber of Commerce
Publication No. 500.
Should you have an occasion to communicate with us regarding this credit, kindly
direct your communication to the Attention of our ___________ Department, (___)
___-____, making specific reference to our Letter of Credit No. XXXXX.
- --------------------------
Authorized Signature
<PAGE>
Schedule 1
to
Irrevocable Standby Letter of Credit
No. XXXXX
L/C, Guarantee or
Contingent Obligation
Number Beneficiary Amount Expiry Date
<PAGE>
Annex 1
to
Irrevocable Standby Letter of Credit
No. XXXXX
Form of Sight Draft
[Insert date]
US$
Pay to the order of the undersigned the amount of $__________ drawn on [Insert
name of bank] as issuer of Irrevocable Standby Letter of Credit No. XXXXX, dated
XXXXX, to Account No._______, [Insert name of bank].
PepsiCo, Inc.
By:__________________________
Title:
<PAGE>
Annex 2
to
Irrevocable Standby Letter of Credit
No. XXXXX
Drawing Certificate
[Insert name of bank]
[Insert address of bank]
Attention: _______________________
Gentlemen:
The undersigned individual, a duly authorized officer of PepsiCo, Inc.,
hereby certifies as follows with respect to that certain Letter of Credit No.
XXXXX ("L/C") dated XXXXXX issued by [Insert name and address of bank] in favor
of PepsiCo, Inc.:
The amount of this drawing represents funds due PepsiCo, Inc. as
reimbursement for the drawing(s) under the following letter(s) of
credit, guarantee(s) or other contingent liabilit(ies) set forth on
Schedule "1" to Letter of Credit No. XXXXX and PepsiCo, Inc. is entitled
to receive the amount of the sight draft accompanying this certificate:
L/C, Guarantee or
Contingent Obligation
Number Beneficiary Amount Expiry Date
[Insert relevant information]
In witness whereof, the beneficiary has executed and delivered this
Certificate as of the ___ day of ---------, ----.
PepsiCo, Inc.
By: _____________________
Title:
<PAGE>
Schedule G
RESTAURANT LEASES WHICH HAVE BEEN
GUARANTEED BY THE PEPSICO GROUP
- --------------------------------------------------------------------------------
Guarantee Maturity Effective
Lessee Number Seq Date Date Lessor
- --------------------------------------------------------------------------------
KFC of California 211 1 10/28/11 10/28/91 Solomon Real Estate
- 20 Hempstead Ave., Hempstead, NY, Nassau County
- 210 E. Main St, Montauk Hwy, Bayshore, NY, Suffolk, County
- 479 N. Main St., Freeport, NY, Nassau County
- 1164 Jericho Tnpk, Commack (Smithtown, NY), Suffolk County
- 508 E. Main St., Patchogue, NY, Suffok County
- 5002 Hempstead Tnpk, Farmingdale, NY, Nassau County
- 155 W. Suffolk Ave., Central Islip, NY, Suffolk County
- 1453 Forest Park Ave., Staten Island, NY, Richmond, NY
- 56 Glen Cove Rd., Greenvale, NY, Nassau County
- 221 Jericho Tnpk, Huntington, NY, Suffolk County
- 705 Old Country Road, Westbury, LI, Nassau County
- 910 Broadway, Amityville, NY, Suffolk County
- 1617 Deer Park Ave., Deer Park, NY, Suffolk County
- 1550 Straight Path, Nyandanch, NY, Suffolk County
Nudelmacher GmbH 1260 3 10/21/97 10/21/96 Volksbank Ludwigsburg
eG
- -Friedrich-Ebert-Str. 120, 45473 Mulheim, Germany
Pizza Hut of Cincinnati 87 1 6/30/04 1/25/90 NEK Partners
- - 8341 Beechmont Ave., Anderson Township, Hamilton County, Ohio
Pizza Hut of Cincinnati 203 1 3/25/05 2/1/92 Anthony J. Nickert
and Joan A. Nickert
Pizza Hut of Cincinnati 90 1 3/31/09 1/25/90 Patrician Center
Associates
- - K Mart, Edgewood, KY
Pizza Hut of Cincinnati 86 1 3/31/14 1/25/90 NEK Partners
- - Eight Mile Rd., Anderson Township, Hamilton County, Ohio
<PAGE>
- --------------------------------------------------------------------------------
Guarantee Maturity Effective
Lessee Number Seq Date Date Lessor
- --------------------------------------------------------------------------------
Pizza Hut of Cincinnati 91 1 8/31/14 1/25/90 NEK Partners
- - Sharon Rd., Sharronville, Hamilton County, OH 45241
Pizza Hut of Cincinnati 85 1 3/31/15 1/25/90 NEK Partners
- - 9115 Winton Rd., Cincinnati, Ohio 45231
- - 1190 Ohio Pike, Amelia, Ohio 45102
Pizza Hut of Cincinnati 94 1 3/31/15 1/25/90 A.J.N/S.D.K. Realty
- - 108 Brookwood Ave., Hamilton, Ohio 45150
- - 9920 Colerain Ave., Cincinnati, Ohio 45239
Pizza Hut of Cincinnati 93 1 3/31/15 1/25/90 NEK Partners
- - 801 Main St., Milford, Ohio
Pizza Hut of Cincinnati 89 1 3/31/15 1/25/90 NEK Partners
- - 5444 North Bend Rd., Cincinnati, Ohio 45231
Pizza Hut of Cincinnati 96 1 3/31/15 1/25/90 Anthony J. Nickert
and Joan A. Nickert
- - 12037 Sheraton Lane, Springdale, Ohio
Pizza Hut of Cincinnati 95 1 3/31/15 1/25/90 A.J.N/S.D.K. Realty
- - 1709 Monmouth St., New Port, KY 41071
- - 1571 West Galbrath Rd., Cincinnati, Ohio 45239
- - 3061 Dixie Highway, Edgewood, KY 41017
- - 5365 Ridge Rd., Cincinnati, Ohio 45214
- - 8365 Colerain Ave., Cincinnati, Ohio 45231
Pizza Hut of Cincinnati 92 1 8/31/20 1/25/90 NEK Partners
- - Zayre Plaza, Fort Wright, KY
Pizza Hut, Inc. 1083 1 12/31/99 2/15/94 Norwest Bank
PRI 1265 4 10/21/97 10/21/96 Dresdner Bank A.G.
- - 4330 Mulheim An Der Ruhr 3, Leineweber Strasse, Germany
<PAGE>
- --------------------------------------------------------------------------------
Guarantee Maturity Effective
Lessee Number Seq Date Date Lessor
- --------------------------------------------------------------------------------
Taco Bell Corp. 401 1 2/15/99 3/15/79 First National Realty
- - Hilltop Plaza, Bolingbrook, IL
<PAGE>
Schedule H
RESTAURANT INSURANCE WHICH WILL NOT BE
TERMINATED AS OF THE DISTRIBUTION DATE
Insured Policy Type Insurance Company Policy Number Policy Term
- --------- ----------- ------------------- --------------- -----------
Taco Bell Contaminated National Union Fire 649-6350 2/1/97-2/28/98
Products Insurance
Taco Bell Surety Bond Travelers/Aetna 86S100605626 Continuous
KFC Surety Bond Federal Insurance All Surety Bonds Continuous
Pizza Hut Surety Bond Firemans Fund All Surety Bonds Continuous
<PAGE>
Schedule I
RESTAURANT FUNDING STRUCTURE
PRIOR TO THE DISTRIBUTION DATE
[Graphic material omitted] Organizational chart evidencing restaurant funding
structure prior to the Distribution Date:
Current Funding Structure:
PepsiCo funds all restaurant disbursements and collects all restaurant
sales via the following mechanisms:
1. Cash is automatically collected from restaurant depository accounts
into a Concentration Account for each concept. Money is then moved automatically
to PepsiCo's Master Concentration Account via PepsiCo's cash concentration
system and drawdown wires.
2. Cash required to fund payroll and accounts payable disbursements on
behalf of the restaurants is funded by wire transfer from PepsiCo's Master
Concentration Account into a PepsiCo Master Disbursement Funding Account on a
daily basis. The PepsiCo Master Disbursement Funding Account will then
automatically fund checks which have been written off restaurant controlled
disbursement accounts.
Funding Structure Just Prior to Distribution Date (on or about 9/22/97):
PepsiCo funds all restaurant disbursements and collects all restaurant
sales via the following mechanisms:
1. Cash is automatically collected from restaurant depository accounts
into a Concentration Account for each concept. Money is then moved automatically
to TRICON's Master Concentration Account via PepsiCo's cash concentration system
and drawdown wires and then automatically to PepsiCo's Master Concentration
Account via zero balance accounts.
2. Cash required to fund payroll and accounts payable disbursements on
behalf of the restaurants is moved automatically to TRICON's Master
Concentration Account via zero balance accounts and then is funded by wire
transfer from TRICON's Master Concentration Account into a TRICON Master
Disbursement Funding Account on a daily basis. The TRICON Master Disbursement
Funding Account will then automatically fund checks which have been written off
restaurant controlled disbursement accounts.
Anticipated Funding Structure Post Distribution Date:
TRICON funds all restaurant disbursements and collects all restaurant
sales via the following mechanisms:
1. Cash is automatically collected from restaurant depository accounts
into a Concentration Account for each concept. Money is then moved automatically
to TRICON's Master Concentration Account via ACH Debits and drawdown wires.
2. Cash required to fund payroll and accounts payable disbursements on
behalf of the restaurants is funded by wire transfer from TRICON's Master
Concentration Account into a TRICON Master Disbursement Funding Account on a
daily basis. The TRICON Master Disbursement Funding Account will then
automatically fund checks which have been written off restaurant controlled
disbursement accounts.
<PAGE>
Schedule J
EXPENSES
TRICON shall bear the following expenses in connection with the
Distribution:
1. The fees in connection with the TRICON bank credit facilities.
2. Special management incentive arrangements (the Stay/Performance bonuses)
for the management of KFC, Pizza Hut, Taco Bell and PRI which are
incremental to the regular division bonuses.
Exhibit 3.01
RESTATED ARTICLES OF INCORPORATION
OF
TRICON Global Restaurants, Inc.
FIRST: The name of the corporation is TRICON Global Restaurants, Inc.,
hereinafter referred to as the "Corporation".
SECOND: The Corporation shall have authority to issue 1,000,000,000
shares, without par value, of which 750,000,000 shall be Common Shares, and of
which 250,000,000 shares shall be Preferred Shares, with the following powers,
preferences and rights, and qualifications, limitations and restrictions:
(a) Except as otherwise provided by law, each Common Share shall have
one vote, and, except as otherwise provided in respect of any series of
Preferred Shares hereafter classified or reclassified, the exclusive voting
power for all purposes shall be vested in the holders of the Common Shares. In
the event of any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, the holders of the Common Shares shall be
entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any series
of Preferred Shares hereafter classified or reclassified having a preference on
distribution in the liquidation, dissolution or winding up of the Corporation
shall be entitled, to share ratably in the remaining net assets of the
Corporation.
(b) The Board of Directors is authorized, subject to limitations
prescribed by the North Carolina Business Corporation Act ("NCBCA") and these
Articles of Incorporation, to adopt and file from time to time articles of
amendment that authorize the issuance of Preferred Shares which may be divided
into two or more series with such preferences, limitations, and relative rights
as the Board of Directors may determine; provided, however, that no holder of
any Preferred Share shall be authorized or entitled to receive upon the
involuntary liquidation of the Corporation an amount in excess of $100.00 per
Preferred Share.
THIRD: The address of the registered office of the Corporation in the
State of North Carolina is 225 Hillsborough Street, Raleigh, Wake County, North
Carolina 27603; and the name of its initial registered agent at such address is
CT Corporation System.
FOURTH: No holder of any share of the Corporation, whether now or
hereinafter authorized, shall have any preemptive right to subscribe for or to
purchase any shares or other securities of the Corporation, nor have any right
to cumulate his votes for the election of Directors. At all meetings of the
Shareholders of the Corporation, a quorum being present, all matters (other than
the election of Directors) shall be decided by the vote of the holders of a
majority of the stock of the Corporation, present in person or by proxy, and
entitled to vote thereat.
FIFTH: The following provisions are intended for the management of the
business and for the regulation of the affairs of the Corporation, and it is
expressly provided that the same are intended to be in furtherance and not in
limitation of the powers conferred by statute:
(a) The Board of Directors shall have the exclusive power and authority
to direct management of the business and affairs of the Corporation and shall
exercise all corporate powers, and possess all authority, necessary or
appropriate to carry out the intent of this provision, and which are customarily
exercised by the board of directors of a public company. In furtherance of the
foregoing, but without limitation, the Board of Directors shall have the
exclusive power and authority to: (a) elect all executive officers of the
Corporation as the Board may deem necessary or desirable from time to time, to
serve at the pleasure of the Board; (b) fix the compensation of such officers;
(c) fix the compensation of Directors; and (d) determine the time and place of
all meetings of the Board of Directors and Shareholders of the Corporation. A
scheduled meeting of Shareholders may be postponed by the Board of Directors by
public notice given at or prior to the time of the meeting.
(b) The number of Directors constituting the Board of Directors shall
not be less than three nor more than fifteen, as may be fixed from time to time
by resolution duly adopted by the Board of Directors. Provided that the number
of members of the Board of Directors equals or exceeds the number required under
the NCBCA to stagger the terms of Directors, from and after the first annual
Shareholders' meeting, the Board of Directors shall be divided into three
classes, as nearly equal in number as may be possible, to serve respectively
until the annual meetings in 1998, 1999, and 2000 in the classes designated by
the shareholder of the Corporation at the 1997 Annual Meeting, and until their
successors shall be elected and shall qualify, and thereafter the successors
shall be elected to serve for terms of three years and until their successors
shall be elected and shall qualify. In the event of any increase or decrease in
the number of Directors, the additional or eliminated directorships shall be so
classified or chosen such that all classes of Directors shall remain or become
equal in number, as nearly as may be possible.
(c) A vacancy occurring on the Board of Directors, including, without
limitation, a vacancy resulting from an increase in the number of Directors or
from the failure by Shareholders of the Corporation to elect the full authorized
number of Directors, may only be filled by a majority of the remaining Directors
or by the sole remaining Director in office. In the event of the death,
resignation, retirement, removal or disqualification of a Director during his
elected term of office, his successor shall serve until the next Shareholders'
meeting at which Directors are elected. Directors may be removed from office
only for cause.
(d) The Board of Directors may adopt, amend or repeal the Corporation's
Bylaws, in whole or in part, including amendment or repeal of any Bylaw adopted
by the Shareholders of the Corporation.
(e) The Corporation may in its Bylaws confer upon Directors powers
additional to the foregoing and the powers and authorities conferred upon them
by statute.
(f) The Corporation reserves the right to amend, alter, change, or
repeal any provision herein contained, in the manner now or hereafter prescribed
by law, and all the rights conferred upon Shareholders hereunder are granted,
and are to be held and enjoyed, subject to such rights of amendment, alteration,
change or repeal.
(g) The only qualifications for Directors of the Corporation shall be
those set forth in these Articles of Incorporation. Directors need not be
residents of the State of North Carolina or Shareholders of the Corporation.
(h) The Board of Directors may create and make appointments to one or
more committees of the Board comprised exclusively of Directors who will serve
at the pleasure of the Board and who may have and exercise such powers of the
Board in directing the management of the business and affairs of the Corporation
as the Board may delegate, in its sole discretion, consistent with the
provisions of the NCBCA and these Articles of Incorporation. The Board of
Directors may not delegate its authority over the expenditure of funds of the
Corporation except to a committee of the Board and except to one or more
officers of the Corporation elected by the Board. No committee comprised of
persons other than members of the Board of Directors shall possess or exercise
any authority in the management of the business and affairs of the Corporation.
SIXTH: (a) The Corporation 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 proceedings, whether civil, criminal,
administrative or investigative, and whether or not brought by or on behalf of
the Corporation, including all appeals therefrom, arising our 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 such Director or officer to be clearly in conflict with the best
interests of the Corporation. The Corporation shall likewise and to the same
extent indemnify any person who, at the request of the Corporation, 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.
(b) The right to be indemnified hereunder shall include, without
limitation, the right of a Director or officer to be paid expenses in advance of
the final disposition of any proceedings upon receipt of an undertaking to repay
such amount unless it shall ultimately be determined that he or she is entitled
to be indemnified hereunder.
(c) A person entitled to indemnification hereunder shall also be paid
reasonable costs, expenses and attorneys' fees (including expenses) in
connection with the enforcement of rights to the indemnification granted
hereunder.
(d) 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 Section 55-8-51 of the NCBCA or any
successor statute.
(e) The Board of Directors may take such action as it deems necessary or
desirable to carry out these indemnification provisions, including adopting
procedures for determining and enforcing the rights guaranteed hereunder, 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.
(f) Neither the amendment or repeal of this Article, nor the adoption of
any provision of these Articles of Incorporation inconsistent with this Article,
shall eliminate or reduce any right to indemnification afforded by this Article
to any person with respect to their status or any activities in their official
capacities prior to such amendment, repeal or adoption.
SEVENTH: To the full extent from time to time permitted by law, no
person who is serving or who has served as a Director of the Corporation 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
Corporation or otherwise. Neither the amendment or repeal of this Article, nor
the adoption of any provision of these Articles of Incorporation inconsistent
with this Article, shall eliminate or reduce the protection afforded by this
Article to a Director of the Corporation with respect to any matter which
occurred, or in any cause of action, suit or claim which but for this Article
would have accrued or arisen, prior to such amendment, repeal or adoption.
EIGHTH: The provisions of Article 9A of the NCBCA shall not be
applicable to the Corporation.
NINTH: Except as may be otherwise determined by the Board of Directors,
the Shareholders of the Corporation shall have access as a matter of right only
to the books and records of the Corporation as may be required to be made
available to qualified shareholders by the NCBCA.
TENTH: To the extent that there ever may be inconsistency between these
Articles of Incorporation and the Bylaws of the Corporation as may be adopted or
amended from time to time, the Articles of Incorporation shall always control.
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 [ ] day of [ ], 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 [ ], 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) 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) any final disposition by reason of the
expiration of the applicable statute of limitations; or (iv) 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.
"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.
"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 an affiliate of PepsiCo or 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, (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.
(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, (y) whether any extensions should be requested, and
(z) 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 within 120 days after the Distribution Date, regardless of
whether the member's Taxable year ends on the Distribution Date.
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). 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, whether arising in a Pre-Distribution Period or a
Post-Distribution Period. 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.
(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, 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, 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) 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, option grants, the adoption of, or
authorization of shares under, a stock option plan, capital contributions, or
acquisitions, but not including the Distribution), (v) 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, (vi) 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, (vii) 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, (viii) 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 (ix) 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 equity structure (including stock
issuances, pursuant to the exercise of options, option grants or otherwise,
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 agrees that PepsiCo is to have no liability for
any tax resulting from any action referred to in the preceding sentence 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
PepsiCo's determination of whether or not to grant any written consent required
under this Section 4(b). 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, 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 clause (iv) above which occurred during the preceding
month.
(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, 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, and 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) within 1 day of the exercise of any such option
or the occurrence of any other event that would result in a compensation related
Tax deduction, as the case may be, the TRICON Group shall pay to the PepsiCo
Group an amount equal to the product of the amount of the related deduction and
the PepsiCo Group's effective Tax rate for the relevant Taxable period, as
determined by the PepsiCo Vice President, Tax, (iii) 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 (iv) to the extent such deduction is disallowed, and if the PepsiCo
Vice President, Tax determines that the PepsiCo Group should file an amended
Return claiming such deduction, the PepsiCo Group shall pay to the TRICON Group
the actual benefit received by the PepsiCo Group in respect of such deduction.
For purposes of the immediately preceding clause (iii), 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;
(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) 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
(iii) 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. 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).
(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:
[name]
[address]
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.
<PAGE>
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:__________________________
Title:_______________________
TRICON on its own behalf and on behalf of the members of
the TRICON Group.
By:__________________________
Title:_______________________
Exhibit 10.02
EMPLOYEE PROGRAMS AGREEMENT
between
PepsiCo, Inc.
and
TRICON Global Restaurants, Inc.
Dated as of
____________, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1 DEFINITIONS AND REFERENCES.................................................................1
1.1 DEFINITIONS..........................................................................1
(a) 414(l)(1) Amount.................................................................1
(b) Action...........................................................................1
(c) Agreement........................................................................2
(d) ASO Contract.....................................................................2
(e) Award............................................................................2
(f) Casual Dining Businesses.........................................................2
(g) Bulk Asset Transfer..............................................................2
(h) Close of the Distribution Date...................................................2
(i) Code.............................................................................2
(j) Conversion Formula...............................................................2
(k) Deferral Programs................................................................2
(l) Distribution.....................................................................3
(m) Distribution Date................................................................3
(n) DRIP.............................................................................3
(o) ERISA............................................................................3
(p) Executive Programs...............................................................3
(q) Foreign Plan.....................................................................3
(r) Governmental Authority...........................................................4
(s) Group Insurance Policy...........................................................4
(t) Health and Welfare Plans.........................................................4
(u) Hiring Company...................................................................4
(v) HMO..............................................................................4
(w) HMO Agreements...................................................................4
(x) Immediately after the Distribution Date..........................................4
(y) Individual Agreement.............................................................5
(z) Indemnitor.......................................................................5
(aa) Initial Asset Transfer..........................................................5
(bb) Liabilities.....................................................................5
(cc) Long-Term Incentive Plan........................................................5
(dd) LTD VEBA........................................................................5
(ee) Master Trust....................................................................5
(ff) Material Feature................................................................6
(gg) Participating Company...........................................................6
(hh) Pension Equalization Plan.......................................................6
(ii) Pension Plan....................................................................6
(jj) PepsiCo Capital Stock...........................................................6
(kk) PepsiCo Executive...............................................................6
(ll) PepsiCo Group...................................................................7
(mm) PepsiCo Leave of Absence Programs...............................................7
(nn) Person..........................................................................7
(oo) Plan............................................................................7
(pp) Prior Company...................................................................7
(qq) Record Date.....................................................................7
(rr) Reimbursement Plans.............................................................7
(ss) Restaurant Businesses...........................................................7
(tt) Salaried Employee...............................................................8
(uu) Savings Plan....................................................................8
(vv) Separation Agreement............................................................8
(ww) SharePower Plan.................................................................8
(xx) Short-Term Incentive Plan.......................................................8
(yy) Stock Option Incentive Plan.....................................................8
(zz) Stock Purchase Plan.............................................................8
(aaa) Subsequent Asset Transfer......................................................9
(bbb) Subsidiary.....................................................................9
(ccc) Transferred Individual.........................................................9
(ddd) Transition Individual.........................................................10
(eee) Transition Period.............................................................10
(fff) TRICON Common Stock...........................................................11
(ggg) TRICON Group..................................................................11
1.2 REFERENCES..........................................................................11
2 GENERAL PRINCIPLES........................................................................12
2.1 ASSUMPTION OF LIABILITIES...........................................................12
2.2 TRICON PARTICIPATION IN PEPSICO PLANS...............................................12
(a) Participation in PepsiCo Plans and PepsiCo Restaurant Health and Welfare Plans..12
(b) PepsiCo's General Obligations as Plan Sponsor...................................12
(c) TRICON's General Obligations as Participating Company...........................13
(d) Termination of Participating Company Status.....................................13
2.3 ESTABLISHMENT OF TRICON PLANS.......................................................13
2.4 TERMS OF PARTICIPATION BY TRANSFERRED INDIVIDUALS...................................14
2.5 RESTRICTION ON PLAN AMENDMENTS......................................................14
3 DEFINED BENEFIT PLANS.....................................................................15
3.1 ESTABLISHMENT OF MIRROR PENSION TRUSTS..............................................15
3.2 PIZZA HUT PENSION PLANS.............................................................15
3.3 ASSUMPTION OF PENSION PLAN AND PENSION EQUALIZATION PLAN LIABILITIES AND
ALLOCATION OF INTERESTS IN THE PEPSICO PENSION TRUST................................15
(a) Assumption of Liabilities by TRICON Pension Plan................................15
(b) Asset Allocations and Transfers.................................................15
3.4 ACTION IN EVENT OF PBGC INTERVENTION................................................17
4 DEFINED CONTRIBUTION PLANS................................................................19
4.1 SAVINGS PLAN........................................................................19
(a) Savings Plan Trust..............................................................19
(b) Assumption of Liabilities and Transfer of Assets................................19
(c) Non-Employer Stock Funds........................................................19
(d) Miscellaneous Funds.............................................................20
4.2 ESOP................................................................................20
5 HEALTH AND WELFARE PLANS..................................................................21
5.1 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES...................................21
5.2 ESTABLISHMENT OF MIRROR LTD VEBA....................................................21
5.3 LTD VEBA ASSET TRANSFERS............................................................21
5.4 CONTRIBUTIONS TO, INVESTMENTS OF, AND DISTRIBUTIONS FROM VEBAS......................22
5.5 VENDOR CONTRACTS....................................................................22
(a) ASO Contracts, Group Insurance Policies, HMO Agreements and Letters of
Understanding....................................................................22
(b) Effect of Change in Rates.......................................................23
(c) Management of the ASO Contracts, Group Insurance Policies, HMO Agreements,
Letters of Understanding and other Vendor Contracts..............................23
5.6 PEPSICO SALARY CONTINUATION.........................................................24
5.7 POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS...................................24
5.8 COBRA AND HIPAA.....................................................................24
5.9 LEAVE OF ABSENCE PROGRAMS...........................................................25
5.10 PEPSICO WORKERS' COMPENSATION PROGRAM..............................................25
5.11 PEPSICO PRIVATE LINE EMPLOYEE ASSISTANCE PROGRAM...................................25
5.12 POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS........................................25
(a) Continuance of Elections, Co-Payments and Maximum Benefits......................25
(b) Administration..................................................................26
(c) Other Post-Distribution Transitional Rules......................................27
5.13 APPLICATION OF ARTICLE 5 TO THE TRICON GROUP.......................................27
6 EXECUTIVE PROGRAMS........................................................................28
6.1 ASSUMPTION OF OBLIGATIONS...........................................................28
6.2 SHORT-TERM INCENTIVE PLANS..........................................................28
6.3 LONG-TERM INCENTIVE PLAN AND STOCK OPTION INCENTIVE PLAN............................28
(a) Transferred Individuals Who Are Active Employees of TRICON......................28
(b) Transferred Individuals Who Are Not Active Employees of TRICON..................30
6.4 DEFERRAL PROGRAMS...................................................................31
(a) PepsiCo Executive Income Deferral Program.......................................31
(b) PepsiCo Performance Share Unit Deferral Program.................................31
(c) PepsiCo Option Gains Deferral Program...........................................31
6.5 RESTAURANT DEFERRED COMPENSATION PLAN...............................................32
6.6 EXECUTIVE LOAN PROGRAM..............................................................32
6.7 STOCK OPTION INCENTIVE PLAN RECORDKEEPING ACCOUNTS..................................32
7 MISCELLANEOUS BENEFITS....................................................................34
7.1 SHAREPOWER PLAN.....................................................................34
(a) Treatment of Outstanding Grants Under PepsiCo SharePower Plan...................34
(b) Recordkeeping Accounts..........................................................34
7.2 STOCK PURCHASE PLAN.................................................................35
(a) Transfer of PepsiCo Capital Stock...............................................35
(b) Transfer of TRICON Common Stock.................................................35
8 TRANSITIONAL ARRANGEMENTS.................................................................36
8.1 TRANSITION INDIVIDUALS/RECOGNITION OF SERVICE.......................................36
8.2 PENSION PLANS.......................................................................36
(a) Assumption of Liabilities/Noncommencement of Pensions...........................36
(b) Asset/Liability Allocations and Transfers.......................................36
8.3 SAVINGS PLAN........................................................................37
8.4 HEALTH AND WELFARE PLANS............................................................37
(a) Continuance of Elections, Co-Payments, and Maximum Benefits.....................37
(b) Reimbursement Plans.............................................................37
8.5 EXECUTIVE PROGRAMS..................................................................37
(a) Long-Term Incentive Plan and Stock Option Incentive Plan........................37
(b) Restaurant Deferred Compensation Plan...........................................38
(c) Deferral Programs...............................................................38
8.6 SHAREPOWER PLANS....................................................................38
8.7 STOCK PURCHASE PLANS................................................................38
8.8 SHORT-TERM INCENTIVE PLAN...........................................................38
9 GENERAL...................................................................................39
9.1 PAYMENT OF AND ACCOUNTING TREATMENT FOR EXPENSES AND BALANCE SHEET AMOUNTS..........39
(a) Expenses........................................................................39
(b) Balance Sheet Amounts...........................................................39
9.2 SHARING OF PARTICIPANT INFORMATION..................................................39
9.3 RESTRICTIONS ON EXTENSION OF OPTION EXERCISE PERIODS, AMENDMENT OR MODIFICATION
OF OPTION TERMS AND CONDITIONS......................................................39
9.4 NON-SOLICITATION OF EMPLOYEES.......................................................40
9.5 REPORTING AND DISCLOSURE AND COMMUNICATIONS TO PARTICIPANTS.........................40
9.6 PLAN AUDITS.........................................................................40
(a) Audit Rights with Respect to the Allocation or Transfer of Plan Assets..........40
(b) Audit Rights With Respect to Information Provided...............................41
(c) Audits Regarding Vendor Contracts...............................................41
9.7 BENEFICIARY DESIGNATIONS............................................................42
9.8 REQUESTS FOR INTERNAL REVENUE SERVICE RULINGS AND UNITED STATES DEPARTMENT OF
LABOR OPINIONS......................................................................42
(a) Cooperation.....................................................................42
(b) Applications....................................................................42
9.9 FIDUCIARY AND RELATED MATTERS.......................................................42
9.10 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES........................43
9.11 COLLECTIVE BARGAINING..............................................................43
9.12 CONSENT OF THIRD PARTIES...........................................................43
9.13 FOREIGN PLANS......................................................................43
9.14 EFFECT IF DISTRIBUTION DOES NOT OCCUR..............................................44
9.15 RELATIONSHIP OF PARTIES............................................................44
9.16 AFFILIATES.........................................................................44
9.17 ARBITRATION........................................................................44
9.18 INDEMNIFICATION....................................................................45
9.19 NOTICES............................................................................46
9.20 INTERPRETATION.....................................................................46
9.21 GOVERNING LAW/EXECUTION............................................................47
APPENDIX A PEPSICO EXECUTIVE PROGRAMS.......................................................48
APPENDIX B HEALTH AND WELFARE PLANS.........................................................49
APPENDIX C FOREIGN PLANS....................................................................51
</TABLE>
<PAGE>
EMPLOYEE PROGRAMS AGREEMENT
This EMPLOYEE PROGRAMS AGREEMENT, dated as of ___________, 1997, is by
and between PepsiCo, Inc., a North Carolina corporation ("PepsiCo"), and TRICON
Global Restaurants, Inc., a North Carolina corporation ("TRICON").
WHEREAS, PepsiCo has decided to consolidate the assets and operations of
its worldwide KFC, Pizza Hut and Taco Bell businesses (collectively, the
"Restaurant Businesses") into TRICON and TRICON's subsidiaries and affiliates
and to distribute the Common Stock of TRICON to the holders of PepsiCo Capital
Stock (the "Distribution"); and
WHEREAS, PepsiCo and TRICON have entered into a Separation Agreement,
dated as of the date of this agreement (the "Separation Agreement"), and certain
other agreements that will govern certain matters relating to the Distribution
and the relationship of PepsiCo and TRICON and their respective Subsidiaries
following the Distribution; and
WHEREAS, pursuant to the Separation Agreement, PepsiCo and TRICON have
agreed to enter into this Agreement for the purpose of allocating assets,
liabilities, and responsibilities with respect to certain employee compensation
and benefit plans and programs between them;
NOW, THEREFORE, in consideration of the mutual promises contained herein
and in the Separation Agreement, the Parties (as that term is defined in the
Separation Agreement) agree as follows:
ARTICLE
1
DEFINITIONS AND REFERENCES
1.1 DEFINITIONS
For purposes of this Agreement, capitalized terms used (other than the
formal names of PepsiCo Plans (as defined below)) and not otherwise defined
shall have the respective meanings assigned to them below or as assigned to them
in the Separation Agreement (as defined above):
(a) 414(l)(1) Amount
"414(l)(1) Amount" means, the minimum amount necessary to fund vested
benefits under the PepsiCo Pension Plan and the TRICON Pension Plan on a
"termination basis" (as that term is defined in Treas. Reg. Sec.
1.414(l)-1(b)(5)) in accordance with the actuarial assumptions described in
Section 3.3.
(b) Action
"Action" means any demand, action, cause of action, suit, countersuit,
arbitration, inquiry, proceeding, or investigation by or before any Governmental
Authority or any arbitration or mediation tribunal, pending or threatened, known
or unknown.
(c) Agreement
"Agreement" means this Employee Programs Agreement, including all the
attached Appendices.
(d) ASO Contract
"ASO Contract" means an administrative services only contract, related
prior practice, or related understanding with a third-party administrator that
pertains to any PepsiCo Health and Welfare Plan, PepsiCo Restaurants Health and
Welfare Plan, or TRICON Health and Welfare Plan.
(e) Award
"Award" means an award under a Long-Term Incentive Plan or a Short-Term
Incentive Plan or, as the context or facts may require, any other award under
another incentive or special bonus, incentive, or award program or arrangement.
(f) Casual Dining Businesses
"Casual Dining Businesses" has the meaning given that term under the
Separation Agreement.
(g) Bulk Asset Transfer
"Bulk Asset Transfer" is defined in Section 3.3(b)(2).
(h) Close of the Distribution Date
"Close of the Distribution Date" means 11:59:59 P.M., Eastern Standard
Time or Eastern Daylight Time (whichever shall then be in effect), on the
Distribution Date.
(i) Code
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor federal income tax law. Reference to a specific Code provision also
includes any proposed, temporary, or final regulation in force under that
provision.
(j) Conversion Formula
"Conversion Formula" means the appropriate formula described in the Form
10, filed with the Securities and Exchange Commission by PepsiCo in connection
with the Distribution, which shall be applied for adjusting the exercise price
and award size of PepsiCo stock options under the PepsiCo Long-Term Incentive
Plan, PepsiCo SharePower Plan and PepsiCo Stock Option Incentive Plan or for
determining the exercise price and number of TRICON stock options issued as a
result of the conversion of PepsiCo options granted under the PepsiCo Long-Term
Incentive Plan, the PepsiCo Stock Option Incentive Plan and the PepsiCo
SharePower Plan, as applicable.
(k) Deferral Programs
"Deferral Programs," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo, Inc. Executive Income Deferral Program, the PepsiCo, Inc.
Performance Share Unit Deferral Program, and the PepsiCo, Inc. Option Gains
Deferral Program. When immediately preceded by "TRICON" or when the applicable
Hiring Company or Prior Company is a member of the TRICON Group, "Deferral Plan"
means the executive income deferral program, performance share unit deferral
program and the option gains deferral program to be established by TRICON
pursuant to Section 2.3.
(l) Distribution
"Distribution" has the meaning given that term under the Separation
Agreement.
(m) Distribution Date
"Distribution Date" has the meaning given that term under the Separation
Agreement.
(n) DRIP
"DRIP," when immediately preceded by "PepsiCo" or when the applicable
Hiring Company or Prior Company is a member of the PepsiCo Group, means the
PepsiCo Dividend Reinvestment Plan. When immediately preceded by "TRICON" or
when the applicable Hiring Company or Prior Company is a member of the TRICON
Group, "DRIP" means the dividend reinvestment plan or program to be established
by TRICON.
(o) ERISA
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended. Reference to a specific provision of ERISA also includes any proposed,
temporary, or final regulation in force under that provision.
(p) Executive Programs
"Executive Programs," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the executive benefit and nonqualified plans, programs, and arrangements
established, maintained, agreed upon, or assumed by a member of the PepsiCo
Group for the benefit of employees and former employees of members of the
PepsiCo Group before the Close of the Distribution Date, including the plans and
programs listed in Appendix A. When immediately preceded by "TRICON" or when the
applicable Hiring Company or Prior Company is a member of the TRICON Group,
"Executive Programs" means the executive benefit plans and programs to be
established by TRICON pursuant to Section 2.3 that correspond to the respective
PepsiCo Executive Programs including those plans and programs listed in Appendix
A.
(q) Foreign Plan
"Foreign Plan," when immediately preceded by "PepsiCo," means a Plan
maintained by the PepsiCo Group or when immediately preceded as "TRICON," a plan
maintained by the TRICON Group, in either case for the benefit of employees who
are compensated under a payroll which is administered outside the 50 United
States, its territories and possessions, and the District of Columbia.
(r) Governmental Authority
"Governmental Authority" means any federal, state, local, foreign, or
international court, government, department, commission, board, bureau, agency,
official, or other regulatory, administrative, or governmental authority,
including the Department of Labor, the Internal Revenue Service, and the Pension
Benefit Guaranty Corporation.
(s) Group Insurance Policy
"Group Insurance Policy" means a group insurance policy issued in
connection with any PepsiCo Health and Welfare Plan, PepsiCo Restaurants Health
and Welfare Plan, or any TRICON Health and Welfare Plan, as applicable.
(t) Health and Welfare Plans
"Health and Welfare Plans," when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the health and welfare benefit plans, programs, and policies which
are sponsored by PepsiCo. When immediately preceded by "PepsiCo Restaurant,"
"Health and Welfare Plans" means the benefit plans, programs and policies listed
in the first part of Appendix B to this Agreement that are sponsored by a member
of the TRICON Group for periods immediately before the Close of the Distribution
Date, and such other welfare plans or programs as may apply to any such member's
employees, retirees and dependents for such periods. When immediately preceded
by "TRICON" or when the applicable Hiring Company or Prior Company is a member
of the TRICON Group, "Health and Welfare Plans" means benefit plans, programs,
and policies listed in the second part of Appendix B to this Agreement which are
sponsored by a member of the TRICON Group for periods Immediately after the
Distribution Date.
(u) Hiring Company
"Hiring Company," with respect to a Transition Individual described in
Section 1.1(ddd)(1) or (4), means a member of the PepsiCo Group, and, with
respect to a Transition Individual described in Section 1.1(ddd)(2) or (3),
means a member of the TRICON Group.
(v) HMO
"HMO" means a health maintenance organization that provides benefits
under the PepsiCo Health and Welfare Plans, PepsiCo Restaurants Health and
Welfare Plans, or the TRICON Health and Welfare Plans, as applicable.
(w) HMO Agreements
"HMO Agreements" means contracts, letter agreements, practices, and
understandings with HMOs that provide medical services under the PepsiCo Health
and Welfare Plans, PepsiCo Restaurants Health and Welfare Plans, and TRICON
Health and Welfare Plans, as applicable.
(x) Immediately after the Distribution Date
"Immediately after the Distribution Date" means 12:00 A.M., Eastern
Standard Time or Eastern Daylight Time (whichever shall then be in effect), on
the day after the Distribution Date.
(y) Individual Agreement
"Individual Agreement" means an individual contract or agreement
(whether written or unwritten) entered into between a member of the PepsiCo
Group or a member of the TRICON Group and any employee that establishes the
right of such individual to special compensation or benefits, special bonuses,
supplemental pension benefits, hiring bonuses, loans, guaranteed payments,
special allowances, tax equalization payments, special expatriate compensation
payments, disability benefits, or share units granted (and payable in the form
of cash or otherwise) under individual phantom share agreements, or that
provides benefits similar to those identified in Appendix A.
(z) Indemnitor
"Indemnitor" is defined in Section 9.18.
(aa) Initial Asset Transfer
"Initial Asset Transfer" is defined in Section 3.3(b)(2).
(bb) Liabilities
"Liabilities" means any and all losses, claims, charges, debts, demands,
actions, costs and expenses (including administrative and related costs and
expenses of any Plan, program, or arrangement), of any nature whatsoever,
whether absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising.
(cc) Long-Term Incentive Plan
"Long-Term Incentive Plan," when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the PepsiCo, Inc. 1987 Long-Term Incentive Plan, the PepsiCo, Inc.
1994 Long-Term Incentive Plan, and any other long-term incentive or stock-based
incentive plans assumed by a member of the PepsiCo Group by reason of merger,
acquisition, or otherwise. When immediately preceded by "TRICON" or when the
applicable Hiring Company or Prior Company is a member of the TRICON Group,
"Long-Term Incentive Plan" means the long-term incentive plan to be established
by TRICON pursuant to Section 2.3.
(dd) LTD VEBA
"LTD VEBA," when immediately preceded by "PepsiCo," means the PepsiCo
Long Term Disability Benefit Trust. When immediately preceded by "TRICON," "LTD
VEBA" means the welfare benefit fund to be established by TRICON pursuant to
Section 5.2 that corresponds to the PepsiCo LTD VEBA.
(ee) Master Trust
"Master Trust," when immediately preceded by "PepsiCo", means the master
trusts evidenced by the PepsiCo, Inc. Master Trust Agreement dated February 1,
1978 and the PepsiCo, Inc. Special Master Trust Agreement dated September 11,
1985, as amended from time to time, and currently associated with, among other
plans, the PepsiCo Pension Plan and the Pizza Hut Pension Plan. When immediately
preceded by "TRICON," "Master Trust" means the master trust(s) to be established
by TRICON pursuant to Section 3.1 that corresponds to the PepsiCo Master Trust.
(ff) Material Feature
"Material Feature" means any feature of a Plan that could reasonably be
expected to be of material importance to the sponsoring employer or the
participants and beneficiaries of the Plan, which could include, depending on
the type and purpose of the particular Plan, the class or classes of employees
eligible to participate in such Plan, the nature, type, form, source, and level
of benefits provided by the employer under such Plan and the amount or level of
contributions, if any, required to be made by participants (or their dependents
or beneficiaries) to such Plan.
(gg) Participating Company
"Participating Company" means any Person (other than an individual) that
is participating in a Plan sponsored by a member of the PepsiCo Group or a
member of the TRICON Group, as the context requires.
(hh) Pension Equalization Plan
"Pension Equalization Plan," when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the PepsiCo Pension Equalization Plan. When immediately preceded by
"TRICON" or when the applicable Hiring Company or Prior Company is a member of
the TRICON Group, "Pension Equalization Plan" means the plan to be established
by TRICON pursuant to Section 2.3 that corresponds to the PepsiCo Pension
Equalization Plan.
(ii) Pension Plan
"Pension Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Salaried Employees Retirement Plan. When immediately preceded
by "TRICON" or when the applicable Hiring Company or Prior Company is a member
of the TRICON Group, "Pension Plan" means the plan to be established by TRICON
pursuant to Section 2.3 that corresponds to the PepsiCo Pension Plan. When
immediately preceded by "Pizza Hut," "Pension Plan" means the Pizza Hut Hourly
Employees Pension Plan.
(jj) PepsiCo Capital Stock
"PepsiCo Capital Stock" has the meaning given that term in the
Separation Agreement.
(kk) PepsiCo Executive
"PepsiCo Executive" means an employee or former employee of a member of
the PepsiCo Group or a member of the TRICON Group, who immediately before the
Close of the Distribution Date is or was eligible to participate in or receive a
benefit under any PepsiCo Executive Program.
(ll) PepsiCo Group
"PepsiCo Group" has the meaning given that term under the Separation
Agreement.
(mm) PepsiCo Leave of Absence Programs
"PepsiCo Leave of Absence Programs" means the leave of absence programs
offered from time to time under the personnel policies and practices of PepsiCo
and leaves offered in accordance with the Family and Medical Leave Act of 1993,
as amended.
(nn) Person
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity, and any Governmental Authority.
(oo) Plan
"Plan," when immediately preceded by "PepsiCo" or "TRICON," means any
plan, policy, program, payroll practice, on-going arrangement, contract, trust,
insurance policy or other agreement or funding vehicle, whether written or
unwritten, providing benefits to employees, or former employees of the PepsiCo
Group or the TRICON Group, as applicable.
(pp) Prior Company
"Prior Company," with respect to a Transition Individual described in
Section 1.1(ddd)(1) or (4), means a member of the TRICON Group and, with respect
to a Transition Individual described in Section 1.1(ddd)(2) or (3), means a
member of the PepsiCo Group.
(qq) Record Date
"Record Date" has the meaning given that term under the Separation
Agreement.
(rr) Reimbursement Plans
"Reimbursement Plans," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Inc. Health Care Reimbursement account plan that is part of
the PepsiCo Employees Health Care Program and the PepsiCo, Inc. Dependent Care
Reimbursement Account Plan, as applicable. When immediately preceded by "TRICON"
or when the applicable Hiring Company or Prior Company is a member of the TRICON
Group, "Reimbursement Account Plans" means the corresponding health care
reimbursement account plan and the dependent care reimbursement account plan to
be established by TRICON pursuant to Section 2.3.
(ss) Restaurant Businesses
"Restaurant Businesses" is defined in the second paragraph of the
preamble of this Agreement.
(tt) Salaried Employee
"Salaried Employee" means any individual who is an eligible employee
within the meaning of the PepsiCo Pension Plan or the TRICON Pension Plan, as
applicable.
(uu) Savings Plan
"Savings Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Long Term Savings Program. When immediately preceded by
"TRICON" or when the applicable Hiring Company or Prior Company is a member of
the TRICON Group, "Savings Plan" means the TRICON Long Term Savings Program to
be established by TRICON pursuant to Section 2.3.
(vv) Separation Agreement
"Separation Agreement" is defined in the third paragraph of the preamble
of this Agreement.
(ww) SharePower Plan
"SharePower Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo SharePower Stock Option Plan. When immediately preceded by
"TRICON" or when the applicable Hiring Company or Prior Company is a member of
the TRICON Group, "SharePower Plan" means the stock option plan to be
established by TRICON pursuant to Section 2.3.
(xx) Short-Term Incentive Plan
"Short-Term Incentive Plan," when immediately preceded by "PepsiCo,"
means the PepsiCo, Inc. 1994 Executive Incentive Compensation Plan, the PepsiCo,
Inc. Executive Incentive Plan, the Middle Management Incentive Compensation
Plan, and any other special compensation, bonus and incentive compensation
programs. When immediately preceded by "TRICON," "Short-Term Incentive Plan"
means the executive incentive compensation plan, executive incentive plan, the
middle management compensation plan and any other special compensation, bonus
and incentive compensation programs to be established by TRICON pursuant to
Section 2.3.
(yy) Stock Option Incentive Plan
"Stock Option Incentive Plan" when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the "PepsiCo, Inc. 1995 Stock Option Incentive Plan" and any
predecessor plans. When immediately preceded by "TRICON" or when the applicable
Hiring Company or Prior Company is a member of the TRICON Group, "Stock Option
Incentive Plan" means the stock option incentive plan established by TRICON
pursuant to Section 2.3.
(zz) Stock Purchase Plan
"Stock Purchase Plan," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Capital Stock Purchase Plan. When immediately preceded by
"TRICON" or when the applicable Hiring Company or Prior Company is a member of
the TRICON Group, "Stock Purchase Plan" means the employee stock purchase plan
to be established by TRICON pursuant to Section 2.3.
(aaa) Subsequent Asset Transfer
"Subsequent Asset Transfer" is defined in Section 3.3(b)(2).
(bbb) Subsidiary
"Subsidiary" of any Person means any corporation or other organization
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such Person or by any one or more of its
Subsidiaries, or by such Person and one or more of its Subsidiaries; provided,
however, that no Person that is not directly or indirectly wholly owned by any
other Person shall be a Subsidiary of such other Person unless such other Person
controls, or has the right, power, or ability to control, that Person.
(ccc) Transferred Individual
"Transferred Individual" means any individual who, as of the Close of
the Distribution Date: (1) is either then actively employed by, or then on a
leave of absence from, a member of the TRICON Group; or (2) is neither then
actively employed by, nor then on a leave of absence from, a member of the
TRICON Group, but (A) whose most recent (through the Close of the Distribution
Date) active employment with PepsiCo or a past or present affiliate of PepsiCo
was with an entity or a corporate division of the Restaurant Businesses, the
Casual Dining Businesses, and the predecessors of any such entities, to the
extent such information is available, and who has not had an intervening period
of employment covered by an agreement under which assets and liabilities with
respect to the individual were or are to be transferred from a PepsiCo Pension
Plan, or (B) who otherwise is identified pursuant to a methodology approved by
PepsiCo and TRICON, which methodology shall be consistent with the intent of the
parties that former employees of PepsiCo or a past or present affiliate of
PepsiCo will be aligned with the entity for which they most recently (through
the Close of the Distribution Date) worked and based upon the business of such
entity. An alternate payee under a qualified domestic relations order (within
the meaning of Code Sec. 414(p) and ERISA Sec. 206(d)), alternate recipient
under a qualified medical child support order (within the meaning of ERISA Sec.
609(a)), beneficiary or covered dependent, in each case, of an employee or
former employee described in (1) or (2) above shall also be a Transferred
Individual with respect to that employee's or former employee's benefit under
the applicable Plans. Such an alternate payee, alternate recipient, beneficiary,
or covered dependent shall not otherwise be considered a Transferred Individual
with respect to his or her own benefits under any applicable Plans unless he or
she is a Transferred Individual by virtue of either of the first two sentences
of this definition. In addition, PepsiCo, in its sole discretion, may designate
any other individuals, or group of individuals, as Transferred Individuals. An
individual may be a Transferred Individual pursuant to this definition
regardless of whether such individual is, as of the Distribution Date, alive,
actively employed, on a temporary leave of absence from active employment, on
layoff, terminated from employment, retired or on any other type of employment
or post-employment status relative to a PepsiCo or TRICON Plan, and regardless
of whether, as of the Close of the Distribution Date, such individual is then
receiving any benefits from a PepsiCo or TRICON Plan. Transferred Individual
includes any individual who is on an international assignment whether paid on a
U.S. payroll or a payroll outside the U.S. if such individual otherwise falls
within any of the above categories.
(ddd) Transition Individual
"Transition Individual" means any individual who:
(1) is a Transferred Individual who during the Transition Period
becomes an employee of a member of the PepsiCo Group, without an
intervening period of employment, as a result of transfer arranged by
PepsiCo and TRICON; or
(2) is an employee of a member of the PepsiCo Group as of the
Distribution Date (and is not a Transferred Individual) who during the
Transition Period becomes an employee of a member of the TRICON Group,
without an intervening period of employment, as a result of a transfer
arranged by PepsiCo and TRICON; or
(3) is a Transferred Individual who during the Transition Period
(A) becomes an employee of a member of the PepsiCo Group, and (B)
subsequently becomes an employee of a member of the TRICON Group, in
each case without an intervening period of employment and as a result of
a transfer arranged by PepsiCo and TRICON; or
(4) is an employee of a member of the PepsiCo Group as of the
Distribution Date (and is not a Transferred Individual) who during the
Transition Period (A) becomes an employee of a member of the TRICON
Group, and (B) subsequently becomes an employee of a member of the
PepsiCo Group, in each case without an intervening period of employment
and as a result of a transfer arranged by PepsiCo and TRICON.
An alternate payee under a qualified domestic relations order, (within
the meaning of Code Sec. 414(p) and ERISA Sec. 206(d)), alternate recipient
under a qualified medical child support order, (within the meaning of ERISA Sec.
609(a)), beneficiary or covered dependent, in each case, of an individual
described in clause (1), (2), (3), or (4) of this definition shall also be a
Transition Individual with respect to that individual's benefit under the
applicable Plans. Such an alternate payee, alternate recipient, beneficiary, and
covered dependent shall not otherwise be considered a Transition Individual with
respect to his or her own benefits under any applicable Plans, unless he or she
is a Transition Individual by virtue of clause (1), (2), (3), or (4) of this
definition.
(eee) Transition Period
"Transition Period" means the period beginning Immediately after the
Distribution Date and ending on December 31, 1998.
(fff) TRICON Common Stock
"TRICON Common Stock" has the meaning given that term in the Separation
Agreement.
(ggg) TRICON Group
"TRICON Group" has the meaning given that term under the Separation
Agreement.
1.2 REFERENCES
Unless the context clearly indicates otherwise, reference to a
particular Article, Section, or subsection means the Article, Section, or
subsection so delineated in this Agreement.
<PAGE>
ARTICLE
2
GENERAL PRINCIPLES
2.1 ASSUMPTION OF LIABILITIES
TRICON hereby assumes and agrees to pay, perform, fulfill, and
discharge, in accordance with their respective terms, all of the following
(regardless of when or where such Liabilities arose or arise or were or are
incurred): (i) all Liabilities to or relating to Transferred Individuals arising
out of or resulting from employment by a member of the PepsiCo Group before
becoming Transferred Individuals (including Liabilities under PepsiCo Plans and
TRICON Plans); (ii) all other Liabilities to or relating to Transferred
Individuals and other employees or former employees of a member of the TRICON
Group, and their dependents and beneficiaries, to the extent relating to,
arising out of or resulting from future, present or former employment with a
member of the TRICON Group (including Liabilities under PepsiCo Plans and TRICON
Plans); (iii) all Liabilities relating to, arising out of, or resulting from any
other actual or alleged employment relationship with the TRICON Group; (iv) all
Liabilities under any Individual Agreements relating to Transferred Individuals;
and (v) all other Liabilities relating to, arising out of, or resulting from
obligations, liabilities, and responsibilities expressly assumed or retained by
a member of the TRICON Group, or a TRICON Plan pursuant to this Agreement.
TRICON shall have assumed all such Liabilities described in this Agreement,
unless the Liability is explicitly retained in writing by PepsiCo or excluded in
writing by PepsiCo from those being assumed by TRICON.
2.2 TRICON PARTICIPATION IN PEPSICO PLANS
(a) Participation in PepsiCo Plans and PepsiCo Restaurant Health and
Welfare Plans
Subject to the terms and conditions of this Agreement, each member of
the TRICON Group that is, as of the date of this Agreement, a Participating
Company in any of the PepsiCo Plans or the PepsiCo Restaurant Health and Welfare
Plans shall continue as such through the Close of the Distribution Date.
Effective as of any date before the Distribution Date, a member of the TRICON
Group not described in the preceding sentence may, at its request and with the
consent of PepsiCo (which shall not be unreasonably withheld), become a
Participating Company in any or all of the PepsiCo Plans (applicable to
Transferred Individuals) or PepsiCo Restaurant Health and Welfare Plans.
(b) PepsiCo's General Obligations as Plan Sponsor
PepsiCo shall continue through the Close of the Distribution Date to
administer, or cause to be administered, in accordance with their terms and
applicable law, the PepsiCo Plans and the PepsiCo Restaurant Health and Welfare
Plans; provided, however, that effective September 1, 1997 through the Close of
the Distribution Date (unless PepsiCo directs otherwise, in its sole
discretion), TRICON shall be responsible, subject to the direction and control
of PepsiCo, for administering, or causing to be administered, in accordance with
their terms and applicable law, the PepsiCo Restaurant Health and Welfare Plans
and such portion of the PepsiCo Plans as PepsiCo shall determine in its sole
discretion. Through the Close of the Distribution Date, PepsiCo shall have the
sole discretion and authority to interpret the PepsiCo Plans and the PepsiCo
Restaurant Health and Welfare Plans as set forth therein.
(c) TRICON's General Obligations as Participating Company
TRICON shall perform with respect to its participation in the PepsiCo
Plans and PepsiCo Restaurant Health and Welfare Plans, and shall cause each
other member of the TRICON Group that is a Participating Company in any PepsiCo
Plan or PepsiCo Restaurant Health and Welfare Plan to perform the duties of a
Participating Company as set forth in such Plans or any procedures adopted
pursuant thereto, including: (i) assisting in the administration of claims, to
the extent requested by the claims administrator or plan administrator of the
applicable PepsiCo Plan or PepsiCo Restaurant Health and Welfare Plan; (ii)
cooperating fully with PepsiCo Plan or PepsiCo Restaurant Health and Welfare
Plan auditors, benefit personnel and benefit vendors; (iii) preserving the
confidentiality of all financial arrangements PepsiCo has or may have with any
vendors, claims administrators, trustees or any other entity or individual with
whom PepsiCo has entered into an agreement relating to the PepsiCo Plans or
PepsiCo Restaurant Health and Welfare Plans; and (iv) preserving the
confidentiality of participant health information (including health information
in relation to leaves under the Family and Medical Leave Act of 1993, as
amended).
(d) Termination of Participating Company Status
Effective as of the Close of the Distribution Date, TRICON and each
other member of the TRICON Group shall cease to be a Participating Company in
the PepsiCo Plans.
2.3 ESTABLISHMENT OF TRICON PLANS
Effective Immediately after the Distribution Date, unless otherwise
provided, TRICON shall have adopted, or shall have caused to be adopted, before
the Close of the Distribution Date, the TRICON Pension Plan, the TRICON Pension
Equalization Plan, the TRICON Savings Plan, the TRICON SharePower Plan, the
TRICON Stock Purchase Plan, and the TRICON Executive Programs for the benefit of
Transferred Individuals and other current, future, and former employees of the
TRICON Group. Before the Close of the Distribution Date, to the extent that it
has not already occurred, TRICON shall have adopted, or shall have caused to be
adopted, effective Immediately after the Distribution Date, the TRICON Health
and Welfare Plans listed in the second part of Appendix B to this Agreement, and
it shall substitute itself or another member of the TRICON Group as the plan
sponsor and administrator of the TRICON Health and Welfare Plans. In the context
of TRICON's adoption of the TRICON Health and Welfare Plans, TRICON shall also
take such steps as may be necessary to adopt and shall assume all Liabilities
with respect to the PepsiCo Restaurant Health and Welfare Plans and those plans
and programs under the PepsiCo Health and Welfare Plans in which Transferred
Individuals participate as of the Close of the Distribution Date. TRICON shall
convert such PepsiCo Restaurant Health and Welfare Plan, along with any PepsiCo
Health and Welfare Plans in which Transferred Individuals participate as of the
Close of the Distribution Date, to TRICON Health and Welfare Plans effective
Immediately after the Distribution Date. Except for the TRICON Stock Option
Incentive Plan, the TRICON Long-Term Incentive Plan, the TRICON SharePower Plan,
and the TRICON Stock Purchase Plan , the foregoing TRICON Plans as in effect
Immediately after the Distribution Date shall be substantially identical in all
Material Features to the corresponding PepsiCo Plans as in effect as of the
Close of the Distribution Date. The TRICON Stock Option Incentive Plan, the
TRICON Long-Term Incentive Plan, the TRICON SharePower Plan, and the TRICON
Stock Purchase Plan shall be adopted by TRICON and approved by PepsiCo as sole
shareholder of TRICON, before the Close of the Distribution Date, to become
effective Immediately after the Distribution Date; provided, however, that
during the two year period following the Distribution, TRICON shall in no event
authorize or grant a number of options under the terms of the TRICON Stock
Option Incentive Plan, the TRICON Long-Term Incentive Plan, the TRICON
SharePower Plan or any other TRICON stock option plan or program, which in the
aggregate 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. The exact aggregate number of options which may be authorized or
granted by TRICON pursuant to the preceding sentence shall be determined by
PepsiCo in its sole discretion and shall be communicated to TRICON in writing no
later than October 6, 1997. Commencing on November 3, 1997, TRICON shall provide
to PepsiCo, on the first business day of every month, a certificate specifying
the number of options authorized or granted during the preceding month.
2.4 TERMS OF PARTICIPATION BY TRANSFERRED INDIVIDUALS
The TRICON Plans shall be, with respect to Transferred Individuals, in
all respects the successors in interest to, shall recognize all rights and
entitlements as of the Close of the Distribution Date under, and shall not
provide benefits that duplicate benefits provided by, the corresponding PepsiCo
Plans for such Transferred Individuals. PepsiCo and TRICON shall agree on
methods and procedures, including amending the respective Plan documents, to
prevent Transferred Individuals from receiving duplicative benefits from the
PepsiCo Plans and the TRICON Plans. TRICON shall not permit any TRICON Plan to
commence benefit payments to any Transferred Individual until it receives notice
from PepsiCo regarding the date on which payments under the corresponding
PepsiCo Plan shall cease. With respect to Transferred Individuals, each TRICON
Plan shall provide that all service, all compensation, and all other
benefit-affecting determinations that, as of the Close of the Distribution Date,
were recognized under the corresponding PepsiCo Plan (including the PepsiCo
Restaurant Health and Welfare Plans) (for periods immediately before the Close
of the Distribution Date) shall, as of Immediately after the Distribution Date,
receive full recognition, credit, and validity and be taken into account under
such TRICON Plan to the same extent as if such items occurred under such TRICON
Plan, except to the extent that duplication of benefits would result. The
provisions of this Agreement for the transfer of assets from certain trusts
relating to PepsiCo Plans (including Foreign Plans) to the corresponding trusts
relating to TRICON Plans (including Foreign Plans) are based upon the
understanding of the parties that each such TRICON Plan will assume all
Liabilities of the corresponding PepsiCo Plan to or relating to Transferred
Individuals, as provided for herein. If there are any legal or other
authoritative reasons that any such Liabilities are not effectively assumed by
the appropriate TRICON Plan, then the amount of assets transferred to the trust
relating to such TRICON Plan from the trust relating to the corresponding
PepsiCo Plan shall be recomputed, ab initio, as set forth below but taking into
account the retention of such Liabilities by such PepsiCo Plan, and assets shall
be transferred by the trust relating to such TRICON Plan to the trust relating
to such PepsiCo Plan so as to place each such trust in the position it would
have been in, had the initial asset transfer been made in accordance with such
recomputed amount of assets.
2.5 RESTRICTION ON PLAN AMENDMENTS
During the Transition Period, neither PepsiCo nor TRICON shall adopt any
amendment, or allow any amendment to be adopted, to any of their respective
Pension Plans or Savings Plans that, in the opinion of counsel acceptable to
both PepsiCo and TRICON, would violate Code Sec. 411(d)(6) or that would create
an optional form of benefit subject to Code Sec. 411(d)(6). During the
Transition Period, TRICON shall not eliminate any investment option available
under the TRICON Savings Plan as of Immediately after the Distribution Date.
<PAGE>
ARTICLE
3
DEFINED BENEFIT PLANS
3.1 ESTABLISHMENT OF MIRROR PENSION TRUSTS
Effective Immediately after the Distribution Date, TRICON shall
establish, or cause to be established, the TRICON Master Trust which shall be
qualified under Code Sec. 401(a), exempt from taxation under Code Sec.
501(a)(1), and forming part of the TRICON Pension Plan and the Pizza Hut Pension
Plan.
3.2 PIZZA HUT PENSION PLANS
TRICON shall continue to be responsible for all Liabilities relating to
the Pizza Hut Pension Plan. Effective no later than the Close of the
Distribution Date, TRICON shall substitute itself or another member of the
TRICON Group for PepsiCo as the plan sponsor and administrator of the Pizza Hut
Pension Plan.
3.3 ASSUMPTION OF PENSION PLAN AND PENSION EQUALIZATION PLAN LIABILITIES AND
ALLOCATION OF INTERESTS IN THE PEPSICO PENSION TRUST
(a) Assumption of Liabilities by TRICON Pension Plan
Immediately after the Distribution Date all Liabilities to or relating
to Transferred Individuals under the PepsiCo Pension Plan and the PepsiCo
Pension Equalization Plan shall cease to be Liabilities of the PepsiCo Pension
Plan and the PepsiCo Pension Equalization Plan, as applicable, and shall be
assumed in full and in all respects by the TRICON Pension Plan and the TRICON
Pension Equalization Plan, respectively.
(b) Asset Allocations and Transfers
(1) Calculation of Pension Plan Asset Allocation
(A) As soon as practicable after the Close of the
Distribution Date, PepsiCo shall cause to be calculated the 414(l)(1) Amount for
the PepsiCo Pension Plan and the TRICON Pension Plan as of the Close of the
Distribution Date. The assumptions used in determining the 414(l)(1) Amount for
each Pension Plan shall be as follows:
(i) As if each plan were terminating as of the Close of the
Distribution Date and with 100% of participants who are active
employees, employees on leave of absence, or former employees
with rights to a future deferred vested pension assumed to elect
a lump sum distribution of the value of the pension benefit
accrued as of the Close of the Distribution Date.
(ii) For purposes of calculating the lump sum present value,
mortality rates shall be based on the applicable mortality table
under Code Sec. 417(e)(3)(A)(ii)(I) as specified in Rev. Rul.
95-6 and interest calculated based on the annual rate of interest
on 30-year Treasury securities for the second month preceding the
month of the Close of the Distribution Date.
(iii) For retired participants or former employees receiving
benefits as of the Close of the Distribution Date, the lump sum
present value of the form of benefit currently elected shall be
valued in the same manner and using the same assumptions as in
(i) and (ii) above. For active participants who are eligible to
retire as of the Close of the Distribution Date, the lump sum
benefit shall be based on the accrued benefit payable at the
current age reflecting appropriate early retirement reductions
under the plan. For all other participants, the lump sum value is
the present value of the accrued benefit commencing at normal
retirement age. Early retirement subsidies shall be considered
only for those participants who are retired or eligible to retire
as of the Close of the Distribution Date.
(B) If the aggregate amount of the assets of the PepsiCo
Pension Plan, determined as of the Close of the Distribution Date, is not less
than the sum of the 414(l)(1) Amounts for the PepsiCo Pension Plan and the
TRICON Pension Plan determined in accordance with (A) above, then such assets
shall be allocated between the PepsiCo Pension Plan and the TRICON Pension Plan
in proportion to the 414(l)(1) Amounts of each plan.
(C) If the aggregate amount of the assets of the PepsiCo
Pension Plan, determined as of the Close of the Distribution Date is less than
the sum of the 414(l)(1) Amounts for the PepsiCo Pension Plan and the TRICON
Pension Plan, then such assets shall be allocated between the PepsiCo Pension
Plan and the TRICON Pension Plan proportionately to each priority category as
specified under ERISA Sec. 4044, using the assumptions specified in (A) above.
(2) Transfer of Assets to TRICON Pension Trusts
Effective Immediately after the Distribution Date, PepsiCo shall cause
to be transferred from the PepsiCo Master Trust to the TRICON Master Trust an
initial amount of assets in cash ("the Initial Asset Transfer"). The amount of
the Initial Asset Transfer shall be an estimate, determined by PepsiCo in its
sole discretion, of the cash required by the TRICON Pension Plan and Pizza Hut
Pension Plan to make payment of benefits and appropriate expenses from the
TRICON Master Trust in accordance with the plans from Immediately after the
Distribution Date to the time of the Bulk Asset Transfer, described below. In
the event that the Initial Asset Transfer provides insufficient cash for this
purpose and upon TRICON's written request therefor, PepsiCo will cause to be
transferred other amounts of assets in cash ("Subsequent Asset Transfer"), but
only to the extent required to make cash payments as described above.
As soon as practicable after the calculation of each plan's interest in
the Master Trust pursuant to Section 3.3(b)(1), but in no event before PepsiCo
(or its authorized representative) determines that the calculation and the data
on which it is based are acceptably complete, accurate, and consistent, PepsiCo
will cause the appropriate amount of assets to be transferred from the PepsiCo
Master Trust to the TRICON Master Trust (the "Bulk Asset Transfer"). The amount
of assets to be transferred in the Bulk Asset Transfer shall be equal to the
aggregate of interests of the TRICON Pension Plan determined pursuant to Section
3.3(b)(1) and the Pizza Hut Pension Plan, adjusted by PepsiCo as of the date of
the Bulk Asset Transfer to the extent necessary or appropriate to reasonably and
appropriately reflect additional pension contributions, actual investment gains
and losses experienced in the PepsiCo Master Trust, benefit payments, expenses,
the Initial Asset Transfer, Subsequent Asset Transfers, data corrections,
enhancements, and computational refinements from Immediately after the
Distribution Date through the date of the actual asset transfer of such assets.
The specific assets to be transferred from the PepsiCo Master Trust to
the TRICON Master Trust in the Bulk Asset Transfer shall represent a reasonable
cross-section of the asset classes in the PepsiCo Master Trust consistent with
the objective of enabling TRICON to implement an investment program for the
TRICON Master Trust, but in no event shall PepsiCo or the PepsiCo Master Trust
be required to incur unreasonable transaction costs in the process of
transferring assets and subsequently re-balancing the investment portfolio held
by the PepsiCo Master Trust. Furthermore, PepsiCo shall not transfer any shares
of PepsiCo or TRICON stock or any interests in group annuity contracts held by
the PepsiCo Master Trust unless specifically requested by TRICON in writing, and
PepsiCo shall not be required to transfer any specific asset, any portion of any
specific fund or investment manager account, or any specific portion of any
specific asset, fund or investment manager account. In transferring specific
assets, PepsiCo makes no representation as to the appropriateness of the
resulting asset allocation or investment performance resulting from the specific
assets transferred. By accepting the assets transferred, TRICON acknowledges
that it and not PepsiCo is serving as the fiduciary for the TRICON Master Trust
with respect to the determination and actual transfer of assets from the PepsiCo
Master Trust and that, acting as fiduciary for the TRICON Pension Plan and Pizza
Hut Pension Plan, TRICON further acknowledges that it is able to change the
asset allocation as it deems appropriate at any time. Once the assets have been
transferred to and received by the TRICON Master Trust, such event shall fully
and finally foreclose any issue or matter of any nature whatsoever by TRICON,
the TRICON Master Trust, the TRICON Pension Plan, and the Pizza Hut Pension Plan
or any other trust(s) related to such plans against PepsiCo, the PepsiCo Master
Trust, the PepsiCo Pension Plan, or any other trust(s) related to such plans
relating to the condition, identity, or value of such assets and TRICON shall
fully indemnify PepsiCo, its employees, officers, directors, and the PepsiCo
Pension Plan and the PepsiCo Master Trust regarding any Liability or regulatory
issue of any nature with respect thereto.
3.4 ACTION IN EVENT OF PBGC INTERVENTION
Notwithstanding any provision of this Agreement to the contrary, in the
event that at any time the Pension Benefit Guaranty Corporation ("PBGC") asserts
that the Distribution may provide justification for PBGC to seek termination of
the PepsiCo Pension Plan pursuant to ERISA Sec. 4042 or otherwise asserts that
the transaction may increase unreasonably the long-run loss to the PBGC (within
the meaning of ERISA Sec. 4042(a)(4)) with respect to the PepsiCo Pension Plan,
PepsiCo may, in its sole discretion (i) retain all assets and Liabilities with
respect to Transferred Individuals and Transition Individuals under the PepsiCo
Pension Plan and/or the PepsiCo Pension Equalization Plan and require TRICON to
provide equivalent benefits under plans maintained by it with an offset for any
benefits continued to be provided under the PepsiCo Pension Plan and/or the
PepsiCo Pension Equalization Plan, (ii) enter into negotiations with the PBGC to
resolve these issues and, upon satisfactorily resolving such issues, TRICON
shall fully comply with the terms of this Article; or (iii) reach such other
agreement as may be satisfactory to PepsiCo and TRICON. In any case and
notwithstanding any other provision of this Agreement, TRICON shall be fully
responsible and liable for any obligation to, agreement with, or undertaking (on
behalf of or relating to the TRICON Pension Plan) to the PBGC and shall hold
PepsiCo free from and fully indemnify it against any such obligation, agreement,
or undertaking. For purposes of this Section 3.4, reference to the PepsiCo
Pension or the TRICON Pension Plan, as applicable, shall mean and include the
Pizza Hut Pension Plan. If PepsiCo retains any liability of any Transferred
Individual under the PepsiCo Pension Equalization Plan, TRICON shall fully
reimburse PepsiCo for the full cash costs of, including any administrative
expenses relating to, any such liability.
<PAGE>
ARTICLE
4
DEFINED CONTRIBUTION PLANS
4.1 SAVINGS PLAN
(a) Savings Plan Trust
Effective Immediately after the Distribution Date, TRICON shall
establish, or cause to be established, a trust qualified under Code Sec. 401(a),
exempt from taxation under Code Sec. 501(a)(1), and forming part of the TRICON
Savings Plan.
(b) Assumption of Liabilities and Transfer of Assets
Effective Immediately after the Distribution Date: (i) the TRICON
Savings Plan shall assume and be solely responsible for all Liabilities
(including any amounts attributable to additional contributions with respect to
Transferred Individuals required pursuant to negotiations with the Internal
Revenue Service that began before the Distribution Date) to or relating to
Transferred Individuals under the PepsiCo Savings Plan; (ii) the TRICON Savings
Plan shall assume and be solely responsible for all ongoing rights of or
relating to Transferred Individuals for future participation (including the
right to make contributions through payroll deductions) in the TRICON Savings
Plan; and (iii) PepsiCo shall cause the accounts of the Transferred Individuals
under the PepsiCo Savings Plan which are held by its related trust as of the
Close of the Distribution Date to be transferred to the TRICON Savings Plan and
its related trust, and TRICON shall cause such transferred accounts to be
accepted by such plan and trust. Effective no later than Immediately after the
Distribution Date, TRICON shall use its reasonable best efforts to enter into
such agreements to accomplish such assumptions and transfers, the maintenance of
the necessary participant records, the appointment of State Street Bank and
Trust Company as initial trustee under the TRICON Savings Plan, and the
engagement of State Street Bank and Trust Company as initial recordkeeper under
such plans. As soon as practicable after the Close of the Distribution Date,
assets related to the accounts of all Transferred Individuals shall be
transferred from the PepsiCo Savings Plan to the TRICON Savings Plan in cash or
in kind, at PepsiCo's discretion, and to the extent practicable, shall be
invested in comparable investment options in the TRICON Savings Plan as such
accounts were invested immediately before the Close of the Distribution Date.
(c) Non-Employer Stock Funds
Effective Immediately after the Distribution Date, a TRICON common stock
fund shall be added as an investment option to the PepsiCo Savings Plan and the
TRICON Savings Plan shall provide for both a PepsiCo capital stock fund and a
TRICON common stock fund as investment options. The TRICON common stock fund in
the PepsiCo Savings Plan and the PepsiCo capital stock fund in the TRICON
Savings Plan are each referred to as a "Non-Employer Stock Fund" with respect to
the applicable plan. Each Non-Employer Stock Fund shall be maintained under the
respective Plan at least through December 31, 1998. The PepsiCo Savings Plan and
the TRICON Savings Plan shall each provide that, after the Distribution Date, no
new contributions may be invested in, and no amounts may be transferred from
other investment options to the Non-Employer Stock Fund under the respective
Plan. The PepsiCo Savings Plan shall provide that no earnings or dividends under
its Non-Employer Stock Fund may be reinvested in TRICON Common Stock and the
TRICON Savings Plan shall provide that no earnings or dividends under its
Non-Employer Stock Fund may be reinvested in PepsiCo Capital Stock.
(d) Miscellaneous Funds
In the event that PepsiCo determines that it is not feasible or
appropriate to transfer in-kind the assets of a particular investment fund from
the PepsiCo Savings Plan to the TRICON Savings Plan, then the value of the
assets, as of the close of business on the Distribution Date (plus earnings
attributable to such amount from the Distribution Date to the date the assets
are actually transferred) shall be transferred in cash to the TRICON Savings
Plan and TRICON shall invest such cash in its plan and trust in the same manner
and proportion as it was invested in the PepsiCo Savings Plan or otherwise at
the direction of each affected participant.
4.2 ESOP
At PepsiCo's election and as soon as reasonably practicable after the
Distribution Date with respect to Transferred Individuals and Transition
Individuals, after transfer to TRICON, the accounts of all Transferred
Individuals and Transition Individuals (described in Section 1.1(ddd)(2) or (3))
shall either be (i) retained under the PepsiCo Employee Stock Ownership Plan and
such individuals shall not be considered to have terminated service for any
purposes under the Plan, or (ii) shall be transferred to the TRICON Savings Plan
and invested in the PepsiCo or TRICON stock funds, as applicable, under the
TRICON Savings Plan or, if such is not possible, in such fund or funds as
otherwise determined by TRICON or, at TRICON's election, as directed by each
such Transferred Individual or Transition Individual, respectively. If the
accounts of Transferred Individuals and Transition Individuals are retained
under the PepsiCo Employee Stock Ownership Plan, TRICON will undertake to inform
PepsiCo of any change in employment status or any relevant information about
TRICON employees who have balances in the PepsiCo Employee Stock Ownership Plan.
<PAGE>
ARTICLE
5
HEALTH AND WELFARE PLANS
5.1 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES
Immediately after the Distribution Date, all Liabilities for or relating
to Transferred Individuals under the PepsiCo Health and Welfare Plans, PepsiCo
Restaurant Health and Welfare Plans or TRICON Health and Welfare Plans shall
cease to be Liabilities of PepsiCo or the PepsiCo Plans and shall be assumed by
TRICON and the TRICON Health and Welfare Plans. Thus, TRICON shall be
responsible for all Liabilities that pertain to Transferred Individuals,
including all reported claims that are unpaid, all incurred but not reported
claims as of the Close of the Distribution Date, and all future claims that
pertain to Transferred Individuals under the PepsiCo Health and Welfare Plans,
PepsiCo Restaurant Health and Welfare Plans and the TRICON Health and Welfare
Plans. TRICON shall be required to make all payments due or payable to
Transferred Individuals under the TRICON Health and Welfare Plans for the period
beginning Immediately after the Distribution Date, including incurred but not
reported claims. All treatments which have been pre-certified for or are being
provided to a Transferred Individual as of the Close of the Distribution Date
shall continue to be provided without interruption under the appropriate TRICON
Health and Welfare Plan and TRICON shall continue to be responsible for all
Liabilities relating to, arising out of, or resulting from such on-going
treatments as of the Close of the Distribution Date. Unless otherwise
specifically set forth in writing, TRICON shall not be entitled to assets
associated with any PepsiCo Health and Welfare Plan, PepsiCo Restaurant Health
and Welfare Plan, or TRICON Health and Welfare Plan including, but not limited
to, premium stabilization reserves, contract or plan surpluses, any other
reserve, prior inter-company assessments or premiums, any prior per-capita
inter-company rate payments, reimbursement for charges or premiums previously
collected or any other payment or credit, of any nature whatsoever, from
PepsiCo, any trust associated with any plan or program or from any third-party
vendor.
5.2 ESTABLISHMENT OF MIRROR LTD VEBA
On or before the Distribution Date, TRICON shall establish, or cause to
be established, the TRICON LTD VEBA, for the purpose of funding long-term
disability benefits under the TRICON Health and Welfare Plans. Such trust shall
constitute a voluntary employees' beneficiary association under Code
Sec.501(c)(9) which is exempt from the imposition of federal income tax under
Code Sec.501(a).
5.3 LTD VEBA ASSET TRANSFERS
This Section 5.3 shall govern the transfer of assets from the PepsiCo LTD VEBA
to the TRICON LTD VEBA. As soon as practicable after the Close of the
Distribution Date, PepsiCo shall determine the aggregate present value, as of
the Close of the Distribution Date, of the future benefit obligations of each
PepsiCo Plan funded by the PepsiCo LTD VEBA (separately with respect to
Transferred Individuals who are eligible to receive benefits under the PepsiCo
LTD VEBA as of the Close of the Distribution Date, and with respect to other
individuals who are not Transferred Individuals who are eligible for such
benefits). The future benefit obligations will be determined by the actuary
appointed by PepsiCo, for purposes of providing necessary actuarial services for
the PepsiCo LTD VEBA, in the following manner: the disabled life reserve
(exclusive of the incurred but not reported ("IBNR") reserve) will be calculated
as of the Close of the Distribution Date using September 1, 1997 census
information requested from the third-party administrator (Aetna). The reserve
for the lives that will be transferred to TRICON will be calculated separately.
The actuarial basis for the disabled life reserve will be calculated using the
following assumptions: interest at 7% compounded annually; termination of
disability based on rates of recovery and mortality developed from the 1975
study of the Society of Actuaries of experience under Group LTD policies for
durations of disablement of three years or less. For durations of disablement in
excess of three years, assumed terminations are based on a modification of the
1952 Disability Study. As soon as practicable after such determination is made,
there shall be transferred from the PepsiCo LTD VEBA to the TRICON LTD VEBA an
amount having a fair market value on the date of transfer equal to the amount
calculated as [(A)/(B)] x (C), where "(A)" is the disabled life reserve as of
the Close of the Distribution Date for the lives that will be transferred to
TRICON using September 1, 1997 census information; "(B)" is the disabled life
reserve for all lives under the PepsiCo LTD VEBA as of the Close of the
Distribution Date using September 1, 1997 census information; and "(C)" is the
market value of the PepsiCo LTD VEBA assets on the date of transfer. PepsiCo
shall direct the trustee of the PepsiCo LTD VEBA to transfer cash to the trustee
of the TRICON LTD VEBA in the amount determined above and TRICON shall direct
the trustee of the TRICON LTD VEBA to accept such cash transfer.
5.4 CONTRIBUTIONS TO, INVESTMENTS OF, AND DISTRIBUTIONS FROM VEBAS
Before the Close of the Distribution Date, PepsiCo shall have sole
authority to direct the trustee of the PepsiCo LTD VEBA, and any other VEBA
sponsored by PepsiCo, as to the timing and manner of any contributions, if any,
to the PepsiCo LTD VEBA, and any other VEBA sponsored by PepsiCo, the investment
of any trust assets, and the distributions and/or transfers of trust assets to
PepsiCo, TRICON, any Participating Company in the trusts, any paying agent, any
successor trustee, or any other Person.
5.5 VENDOR CONTRACTS
(a) ASO Contracts, Group Insurance Policies, HMO Agreements and Letters
of Understanding
(1) Before the Distribution Date, PepsiCo shall, in its sole
discretion, take such steps as are necessary under each ASO Contract, Group
Insurance Policy, HMO Agreement and letters of understanding and arrangements in
existence as of the date of this Agreement to permit TRICON to participate in
the terms and conditions of such ASO Contract, Group Insurance Policy, HMO
Agreement or letters of understanding and arrangements from Immediately after
the Distribution Date through December 31, 1998. PepsiCo, in its sole
discretion, may cause one or more of its ASO Contracts, Group Insurance
Policies, HMO Agreements and letters of understanding and arrangements into
which PepsiCo enters after the date of this Agreement, but before the Close of
the Distribution Date, to allow TRICON to participate in the terms and
conditions thereof. Nothing contained in this Section 5.5(a) shall preclude
PepsiCo from choosing to enter into ASO Contracts, Group Insurance Policies, HMO
Agreements or other letters of understandings and arrangements with new or
different vendors.
(2) PepsiCo shall have the right to determine, and shall promptly
notify TRICON of, the manner in which TRICON's participation in the terms and
conditions of ASO Contracts, Group Insurance Policies, HMO Agreements, letters
of understanding and arrangements as set forth above shall be effectuated. The
permissible ways in which TRICON's participation may be effectuated include, but
are not limited to, automatically making TRICON a party to the ASO Contracts,
Group Insurance Policies, HMO Agreement or letters of understanding and
arrangements or obligating the third party to enter into a separate ASO
Contract, Group Insurance Policy, or HMO Agreement or letters of understanding
and arrangements with TRICON providing (to the extent practicable and agreeable
to such third party) for the same terms and conditions as are contained in the
ASO Contracts, Group Insurance Policies, HMO Agreements and letters of
understanding and arrangements to which PepsiCo is a party. Such terms and
conditions shall include the financial and termination provisions, performance
standards, methodology, auditing policies, quality measures, reporting
requirements and target claims. TRICON hereby authorizes PepsiCo to act on its
behalf to extend to TRICON the terms and conditions of the ASO Contracts, Group
Insurance Policies, HMO Agreements and letters of understanding and
arrangements. TRICON shall fully cooperate with PepsiCo in such efforts, and,
for periods through December 31, 1998, TRICON shall not perform any act,
including discussing any alternative arrangements with any third party, that
would prejudice PepsiCo's efforts.
(b) Effect of Change in Rates
PepsiCo and TRICON shall use their reasonable best efforts to cause each
of the insurance companies, HMOs, paid provider organizations and third-party
administrators providing services and benefits under the PepsiCo Health and
Welfare Plans and the TRICON Health and Welfare Plans to maintain the premium
and/or administrative rates based on the aggregate number of participants in
both the PepsiCo Health and Welfare Plans, after the Close of the Distribution
Date, and the TRICON Health and Welfare Plans through December 31, 1998,
separately rated or adjusted for the demographics, experience or other relevant
factors related to the covered participants of PepsiCo and TRICON, respectively.
To the extent they are not successful in such efforts, PepsiCo and TRICON shall
each bear the revised premium or administrative rates for health and welfare
benefits attributable to the individuals covered by their respective Plans.
(c) Management of the ASO Contracts, Group Insurance Policies, HMO
Agreements, Letters of Understanding and other Vendor Contracts
From September 1, 1997 through the Close of the Distribution Date,
TRICON shall be responsible, subject to the direction and control of PepsiCo,
for the management of the existing contractual and other arrangements pertaining
to the administration of the PepsiCo Restaurant Health and Welfare Plans.
Immediately after the Distribution Date, TRICON shall be responsible for the
management and control of the ASO contracts, Group Insurance Policies, HMO
Agreements, letters of understanding, arrangements and other vendor contracts
and relationships to the extent such contracts, policies and agreements apply to
the TRICON Health and Welfare Plans. Notwithstanding the foregoing, nothing
contained in this Section 5.5(c) shall permit TRICON to direct any insurance
carrier, third-party vendor or claims administrator with respect to any
contractual arrangement, policy or agreement pertaining to or impacting any
PepsiCo Health and Welfare Plan.
5.6 PEPSICO SALARY CONTINUATION
PepsiCo shall be responsible for the administration of claims incurred
under the PepsiCo Salary Continuation Plan by Transferred Individuals, and other
employees and former employees of the TRICON Group before the Close of the
Distribution Date; provided, however, that effective September 1, 1997 (unless
PepsiCo directs otherwise in its sole discretion), TRICON shall be responsible,
subject to the direction and control of PepsiCo, for administering or causing to
be administered in accordance with its terms and applicable law, the TRICON
Salary Continuation Plan. Any determination made or settlements entered into by
PepsiCo with respect to such claims shall be final and binding. PepsiCo shall
transfer to TRICON, effective Immediately after the Distribution Date, and
TRICON shall assume responsibility for (i) administering all claims incurred by
Transferred Individuals and other employees and former employees of the TRICON
Group before the Close of the Distribution Date that are administered by PepsiCo
as of the Close of the Distribution Date, and (ii) all Liabilities for
Transferred Individuals as of the Close of the Distribution Date, in the same
manner, and using the same methods and procedures, as PepsiCo used in
determining and paying such claims. As of the Close of the Distribution Date,
TRICON shall have sole discretionary authority to make any necessary
determinations with respect to such claims, including entering into settlements
with respect to such claims, and shall be solely responsible for any costs,
liabilities or related expenses of any nature whatsoever related to such claims,
payments or obligations.
5.7 POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS
As soon as practicable after the Distribution Date, TRICON shall
determine all Transferred Individuals who are, to the best knowledge of TRICON,
eligible to receive retiree medical coverage and/or postretirement life
insurance coverage under the PepsiCo Health and Welfare Plans or PepsiCo
Restaurant Health and Welfare Plans as of the Close of the Distribution Date,
and the type of retiree medical coverage and the level of life insurance
coverage for which they are eligible, as applicable. With respect to Transferred
Individuals receiving postretirement health benefits or postretirement life
insurance benefits under the PepsiCo Health and Welfare Plans or PepsiCo
Restaurant Health and Welfare Plans as of the Close of the Distribution Date,
TRICON agrees to provide substantially the same postretirement health and
postretirement life insurance benefits Immediately after the Distribution Date.
To the extent a claim or cause of action asserted by or on behalf of any
Transferred Individual or any Liabilities arise at any time following the Close
of the Distribution Date in connection with such postretirement health or
postretirement life insurance benefits, TRICON shall be solely responsible for
such Liabilities and shall hold each member of the PepsiCo Group and their
respective directors, officers and employees and the PepsiCo Plans harmless for
all such Liabilities.
5.8 COBRA AND HIPAA
For periods prior to September 1, 1997, PepsiCo shall be responsible for
administering compliance with the continuation coverage requirements for "group
health plans" under Title X of the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, and the portability requirements under the Health
Insurance Portability and Accountability Act of 1996 with respect to Transferred
Individuals and other employees and former employees of the TRICON Group and
beneficiaries and dependents thereof and the TRICON Group shall be responsible
for filing all necessary employee change notices with respect to these persons
in accordance with applicable PepsiCo policies and procedures. Effective
September 1, 1997 and thereafter, TRICON shall be solely responsible for
administering compliance with such health care continuation coverage and
portability requirements with respect to these persons.
5.9 LEAVE OF ABSENCE PROGRAMS
TRICON shall be responsible for the administration and compliance of all
leaves of absences and related programs (including compliance with the Family
and Medical Leave Act) affecting Transferred Individuals for the period
Immediately after the Closing Date.
5.10 PEPSICO WORKERS' COMPENSATION PROGRAM
Notwithstanding any other provision of this Agreement or the Separation
Agreement, effective Immediately after the Distribution Date, TRICON shall
assume all Liabilities for Transferred Individuals related to any and all
workers' compensation matters under any law of any state, territory, or
possession of the U.S. or the District of Columbia and TRICON shall be fully
responsible for the administration of all such claims. If TRICON is unable to
assume any such Liability or the administration of any such claim because of the
operation of applicable state law or for any other reason, TRICON shall fully
indemnify PepsiCo for all such Liabilities, including the costs of any
administration that TRICON has not been able to assume.
5.11 PEPSICO PRIVATE LINE EMPLOYEE ASSISTANCE PROGRAM
Effective Immediately after the Distribution Date, TRICON shall be
responsible for the TRICON Private Line Employee Assistance Program which is the
employee assistance plan component of the TRICON Employees Health Care Program
with respect to Transferred Individuals.
5.12 POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS
(a) Continuance of Elections, Co-Payments and Maximum Benefits
...............(1) TRICON shall cause the TRICON Health and Welfare Plans to
recognize and maintain all coverage and contribution elections made by
Transferred Individuals under the PepsiCo Restaurant Health and Welfare Plans in
effect for the period immediately prior to the Distribution Date and shall apply
such elections under the TRICON Health and Welfare Plans for the remainder of
the period or periods for which such elections are by their terms applicable.
...............(2) TRICON shall cause the TRICON Health and Welfare Plans to
recognize and give credit for (A) all amounts applied to deductibles,
out-of-pocket maximums, and other applicable benefit coverage limits with
respect to such expenses which have been incurred by Transferred Individuals
under the PepsiCo Restaurant Health and Welfare Plans (or other PepsiCo Plans)
for the remainder of the benefit limit year in which the Distribution occurs,
and (B) all benefits paid to Transferred Individuals under the PepsiCo
Restaurant Health and Welfare Plans, (or other PepsiCo Plans) during and prior
to the benefit limit year in which the Distribution occurs, for purposes of
determining when such persons have reached their lifetime maximum benefits under
the TRICON Health and Welfare Plans.
(3) Subject to Section 5.8, TRICON shall recognize and cover
under the TRICON Health and Welfare Plans through December 31, 1998 all eligible
populations covered by the PepsiCo Health and Welfare Plans (pertaining to
Transferred Individuals) and the PepsiCo Restaurant Health and Welfare Plans on
the Close of the Distribution Date (determined under the applicable Plan
documents), including term and temporary employees and all categories of
part-time employees (which are fully and partially eligible for employer
contributions).
(4) TRICON shall (A) provide coverage to Transferred Individuals
under the TRICON Health and Welfare Plans without the need to undergo a physical
examination or otherwise provide evidence of insurability, and (B) recognize and
maintain all irrevocable assignments and elections made by Transferred
Individuals in connection with their life insurance coverage under the PepsiCo
Restaurant Health and Welfare Plans and any predecessor plans.
(b) Administration
(1) Coordination of Benefits for Spouses and Dependents
Effective as of the first January 1 or change in family status (within
the meaning of the Code and applicable regulations) that occurs Immediately
after the Distribution Date, TRICON shall cause the TRICON Health and Welfare
Plans to permit eligible Transferred Individuals to cover their lawful spouses
as dependents if such lawful spouses are active or retired PepsiCo employees
(but were not otherwise covered as a dependent under the PepsiCo Restaurant
Health and Welfare Plans or other PepsiCo Plans due to their previous status as
both employee and dependent of a PepsiCo employee). As of the first January 1 or
change in family status (within the meaning of the Code and applicable
regulations) that occurs Immediately after the Distribution Date, PepsiCo shall
cause the PepsiCo Health and Welfare Plans to permit eligible PepsiCo Group
employees to cover their lawful spouses as dependents if such lawful spouses are
active or retired TRICON employees. All benefits provided under any such plans
to a lawful spouse dependent of the other company's employees shall be
coordinated pursuant to the terms and conditions of the applicable PepsiCo and
TRICON Plans.
(2) Health Care Financing Administration Data Match
Immediately after the Distribution Date, TRICON shall assume all
Liabilities relating to, arising out of or resulting from claims verified by
PepsiCo or TRICON under the Health Care Financing Administration data match
reports that relate to Transferred Individuals. TRICON and PepsiCo shall share
all information necessary to verify Health Care Financing Administration data
match reports regarding Transferred Individuals. TRICON shall not change any
employee identification numbers assigned by PepsiCo without notifying PepsiCo of
the change and the new Employee Identification Number.
(c) Other Post-Distribution Transitional Rules
(1) PepsiCo Reimbursement Plans
To the extent any Transferred Individual contributed to an account under
the TRICON Health Care Reimbursement Plan or PepsiCo Dependent Care
Reimbursement Plan during the calendar year that includes the Distribution Date,
effective as of the Close of the Distribution Date, TRICON shall be solely
responsible for the account balances of Transferred Individuals for such
calendar year under the TRICON Health Care Reimbursement Plan or TRICON
Dependent Care Reimbursement Plan.
(2) Health and Welfare Plans Subrogation Recovery
If TRICON recovers any amounts through subrogation or otherwise for
claims incurred by or reimbursed to employees and former employees of the
PepsiCo Group and their respective beneficiaries and dependents (other than
Transferred Individuals), TRICON shall pay such amounts to PepsiCo.
5.13 APPLICATION OF ARTICLE 5 TO THE TRICON GROUP
Any reference in this Article 5 to "TRICON" shall include a reference to
another member of the TRICON Group when and to the extent TRICON has caused the
other member of the TRICON Group to (a) become a party to a vendor contract,
group insurance contract, HMO agreement, letter of understanding or arrangement
associated with a TRICON Health and Welfare Plan, (b) become a self-insured
entity for the purposes of one or more TRICON Health and Welfare Plans, (c)
assume all or a portion of the Liabilities or administrative responsibilities
for benefits which arose before the Close of the Distribution Date under a
PepsiCo Restaurant Health and Welfare Plan and which were expressly assumed by
TRICON pursuant to this Agreement, or (d) take any other action, extend any
coverage, assume any other Liability or fulfill any other responsibility that
TRICON would otherwise be required to take under the terms of this Article 5,
unless it is clear from the context that the particular reference is not
intended to include another member of the TRICON Group. In all such instances in
which a reference in this Article 5 to "TRICON" includes a reference to another
member of the TRICON Group, TRICON shall be responsible to PepsiCo for ensuring
that the other member of the TRICON Group complies with the applicable terms of
this Agreement and the Transferred Individuals allocated to such member of the
TRICON Group shall have the same rights and entitlements to benefits under the
applicable TRICON Health and Welfare Plans that the Transferred Individual would
have had if he or she had instead been allocated to TRICON.
<PAGE>
ARTICLE
6
EXECUTIVE PROGRAMS
6.1 ASSUMPTION OF OBLIGATIONS
Effective Immediately after the Distribution Date, the TRICON Group
shall assume and be solely responsible for all Liabilities to or relating to
Transferred Individuals under all PepsiCo Executive Programs. TRICON shall be
solely responsible for all such Liabilities notwithstanding any failure by
TRICON to complete its obligations under this Article 6.
SHORT-TERM INCENTIVE PLANS
With respect to all Awards that would otherwise be payable under a
Short-Term Incentive Plan to Transferred Individuals for the 1997 performance
year, TRICON shall be responsible for determining (a) the extent to which
established performance criteria have been met, and (b) the payment level for
each Transferred Individual for the 1997 performance year, and TRICON shall be
solely responsible for paying all such Awards. Nothing contained in this Section
6.2 shall entitle PepsiCo or TRICON to any contributions for any Short-Term
Incentive Plan payment made by the other under this Section.
6.3 LONG-TERM INCENTIVE PLAN AND STOCK OPTION INCENTIVE PLAN
PepsiCo and TRICON shall use their reasonable best efforts to take all
actions necessary or appropriate so that each outstanding Award granted under
any PepsiCo Long-Term Incentive Plan or PepsiCo Stock Option Incentive Plan held
by any Transferred Individual shall be converted, as set forth in this Section
6.3, to an Award under the TRICON Long-Term Incentive Plan or TRICON Stock
Option Incentive Plan, whichever is applicable, as provided below. References to
PepsiCo and its affiliates under the PepsiCo Long-Term Incentive Plan and the
PepsiCo Stock Option Incentive Plan shall be amended to refer to TRICON and its
affiliates.
The treatment of outstanding Awards described below shall also apply to
Transferred Individuals who are compensated under a payroll which is
administered outside the 50 United States, its territories and possessions, and
the District of Columbia; provided, however, if such treatment is not legally
permitted, or results in adverse consequence for PepsiCo or the Transferred
Individual, as determined by PepsiCo in its sole discretion, PepsiCo may
determine in its sole discretion, a different treatment.
(a) Transferred Individuals Who Are Active Employees of TRICON
(1) Before 1996 Award Year Stock Options
Effective Immediately after the Distribution Date, each Award or grant
consisting of an option based on or included in an award year before 1996,
regardless of the date granted, that is outstanding under the PepsiCo Stock
Option Incentive Plan or PepsiCo Long-Term Incentive Plan as of the Close of the
Distribution Date for Transferred Individuals shall continue to be held as an
option for PepsiCo Capital Stock. At PepsiCo's election, such Award or grant
shall either (i) remain, and recordkeeping accounts shall be maintained, under
the PepsiCo Stock Option Incentive Plan or PepsiCo Long-Term Incentive Plan,
whichever is applicable, after the Distribution Date and, at PepsiCo's further
election, TRICON shall be fully responsible for administering and providing for
the recordkeeping for such PepsiCo options under the PepsiCo Stock Option
Incentive Plan or PepsiCo Long-Term Incentive Plan in a manner consistent with
provisions of such plans, or (ii) be held and treated, and recordkeeping
accounts shall be maintained by TRICON, under the TRICON Stock Option Incentive
Plan or TRICON Long-Term Incentive Plan. As soon as practicable after the
Distribution Date, the number of options and the exercise price for such options
which shall continue to be held as options for PepsiCo Capital Stock shall be
adjusted, as of the Close of the Distribution Date, by a Conversion Formula. The
determination of which company shall be entitled to any tax deduction and any
other treatment related to any such tax deduction (federal and state) with
respect to the exercise of such PepsiCo stock options shall be made in
accordance with applicable provisions of the Tax Separation Agreement. TRICON
shall be solely responsible for all recordkeeping, plan maintenance and
administrative costs and fees associated with such PepsiCo options.
(2) 1996 or Later Award Year Stock Options
Effective Immediately after the Distribution Date, each Award or grant
consisting of an option based on or included in an award year of 1996,
regardless of the date of the grant, under the PepsiCo Long-Term Incentive Plan
or PepsiCo Stock Option Incentive Plan that is outstanding as of the Close of
the Distribution Date for all such Transferred Individuals shall be converted to
options for TRICON Common Stock under the TRICON Long-Term Incentive Plan or
TRICON Stock Option Incentive Plan, whichever is applicable, and shall be
transferred to the recordkeeper of the TRICON Long-Term Incentive Plan or TRICON
Stock Option Incentive Plan, as appropriate. As soon as practicable after the
Distribution Date, the number of options and the exercise price for such options
converted to options for TRICON Common Stock shall be determined, as of the
Close of the Distribution Date, in accordance with a Conversion Formula. Such
converted TRICON stock option grants shall continue to vest and become
exercisable under the TRICON Stock Option Incentive Plan or TRICON Long-Term
Incentive Plan in accordance with the terms of the original grant under the
PepsiCo Stock Option Incentive Plan or PepsiCo Long-Term Incentive Plan,
whichever is applicable. TRICON shall be the obligor with respect to such
options. TRICON shall be solely responsible for all stock option grants and
payments under the TRICON Stock Option Incentive Plan or TRICON Long-Term
Incentive Plan, with respect to, but not limited to, recordkeeping,
administrative costs and fees, plan maintenance, option exercise and related tax
filings.
(3) Performance Units
............... (i) 1994 Award Year
PepsiCo shall cause each Award under the PepsiCo Long-Term Incentive
Plan consisting of PepsiCo performance unit awards based on the 1994 award year
that is (A) outstanding as of the Close of the Distribution Date, and (B) is
held by a Transferred Individual who, as of the Distribution Date, is an active
employee of, or on leave of absence from, the TRICON Group, to remain an
outstanding Award under the PepsiCo Long-Term Incentive Plan under its original
terms and conditions; provided, however, that (i) Transferred Individuals shall
not be deemed to have terminated employment under the PepsiCo Long-Term
Incentive Plan until such time as they have terminated employment from TRICON,
and (ii) PepsiCo ,in its sole discretion, shall determine the administration and
related recorkeeping with respect to Awards for Transferred Individuals,
including transfer of all related recordkeeping and administration to TRICON.
Notwithstanding the foregoing, for purposes of determining whether any
performance unit targets have been attained for Awards from the 1994 award year,
performance shall be measured based on the consolidated performance of PepsiCo
and TRICON for the 1994 through 1997 performance period. TRICON agrees to
furnish PepsiCo with such data and information as may be necessary for PepsiCo
to determine consolidated performance results for the applicable performance
period and PepsiCo, in its sole discretion, shall determine whether and to what
extent performance criteria or targets have been attained.
(ii) 1996 Award Year
To the extent a Transferred Individual has an Award under the PepsiCo
Long-Term Incentive Plan consisting of PepsiCo performance units from the 1996
award year or later that is (A) outstanding as of the Close of the Distribution
Date, and (B) held by a Transferred Individual who, as of the Distribution Date,
is an active employee of, or on leave of absence from, the TRICON Group, TRICON
agrees to assume such Award under the TRICON Long-Term Incentive Plan, effective
Immediately after the Distribution Date. The number of TRICON performance units
shall be adjusted as determined by PepsiCo in its sole discretion. Each such
Award assumed by TRICON shall otherwise have the same terms and conditions as
were applicable to the corresponding PepsiCo Award as of the Close of the
Distribution Date, except that references to PepsiCo and its affiliates shall be
amended to refer to TRICON and its affiliates. For purposes of determining
whether a performance unit target has been attained for the 1996 award year and
any subsequent year Awards, TRICON shall be required to measure its performance
period based solely on TRICON's performance and PepsiCo shall have no
responsibility, financial or otherwise, to Transferred Individuals for these
1996 or later Awards. To the extent any Award of performance units has been
assumed by TRICON, any shares distributable by reason of such Awards shall be in
the form of TRICON Common Stock. TRICON shall be solely responsible for all such
Liabilities notwithstanding any failure by TRICON to complete its obligations
under this Article 6.
(b) Transferred Individuals Who Are Not Active Employees of TRICON
Each outstanding Award under the PepsiCo Long-Term Incentive Plan and
each grant under the PepsiCo Stock Option Incentive Plan that is held by a
Transferred Individual who, as of the Close of the Distribution Date, is not an
active employee of, or on leave of absence from, the TRICON Group shall remain
outstanding Immediately after the Distribution Date in accordance with its terms
as applicable as of the Close of the Distribution Date, subject to such
adjustments as may be applicable to outstanding Awards held by individuals who
remain active employees of, or on leave of absence from, the PepsiCo Group after
the Distribution Date.
6.4 DEFERRAL PROGRAMS
(a) PepsiCo Executive Income Deferral Program
Immediately after the Distribution Date, the liability with respect to
the balance of any Transferred Individual in an account under the PepsiCo
Executive Income Deferral Program as of the Close of the Distribution Date shall
be transferred to the TRICON Executive Income Deferral Program. TRICON agrees to
maintain and administer the TRICON Executive Income Deferral Program (1) so as
to continue all elections by Transferred Individuals under the PepsiCo Executive
Income Deferral Program, and (2) in a manner that will ensure that as of the
Close of Distribution Date, the investment choices will be the same; provided ,
however, that TRICON may, in its sole discretion amend, modify or terminate
investment alternatives after the Distribution Date. Account balances invested
in whole or in part in PepsiCo phantom shares as of the Close of the
Distribution Date, shall be converted to investments in phantom shares of
PepsiCo and TRICON in a manner consistent with the treatment of employer
securities in the PepsiCo Savings Plan and the TRICON Savings Plan, as
determined in PepsiCo's sole discretion. After the Close of the Distribution
Date, TRICON shall have the right to amend or modify such investment options.
(b) PepsiCo Performance Share Unit Deferral Program
Immediately after the Distribution Date, any obligations or Liabilities
with respect to the balance of any Transferred Individual in an account under
the PepsiCo Performance Share Unit Deferral Program as of the Close of the
Distribution Date shall be transferred to and assumed by the TRICON Performance
Share Unit Deferral Program.
TRICON agrees to maintain and continue all elections by Transferred
Individuals under the PepsiCo Performance Share Unit Deferral Program, and to
provide, as of the Close of the Distribution Date, the same investment choices
as provided by this Program.; provided, however, that deferrals credited to the
phantom stock investment account shall be converted to investments in phantom
shares of PepsiCo and TRICON in a manner consistent with the treatment of
employer securities in the PepsiCo Savings Plan and the TRICON Savings Plan, as
determined in PepsiCo's sole discretion. After the Close of the Distribution
Date, TRICON shall have the right to amend or modify such investment options.
(c) PepsiCo Option Gains Deferral Program
Effective as of the Close of the Distribution Date, any obligations or
Liabilities with respect to the balance of any Transferred Individual under the
PepsiCo Option Gains Deferral Program shall be transferred to and assumed by
TRICON. TRICON agrees to maintain and administer the current deferrals under the
PepsiCo Option Gains Deferral Program, as of the Close of the Distribution Date,
so as to maintain and continue all elections by Transferred Individuals under
the PepsiCo Option Gains Deferral Program; provided, however, that Transferred
Individuals shall not be permitted to defer any gains by reason of the exercise
of any option after the Close of the Distribution Date under the PepsiCo
Long-Term Incentive Plan and Transferred Individuals shall not be credited with
any phantom PepsiCo stock, stock units, or dividend equivalents under the TRICON
Option Gains Deferral Program following the Close of the Distribution Date.
6.5 RESTAURANT DEFERRED COMPENSATION PLAN
Effective Immediately after the Distribution Date, TRICON shall have
established the TRICON Restaurant Deferred Compensation Plan and shall have
assumed all Liabilities under the Restaurant Deferred Compensation Plan.
Effective Immediately after the Distribution Date, TRICON shall cause such
TRICON Restaurant Deferred Compensation Plan to have the same investment options
and phase-out of investment features as TRICON will apply to the TRICON Savings
Plan. PepsiCo shall not transfer any assets to TRICON in connection with the
Restaurant Deferred Compensation Plan.
6.6 EXECUTIVE LOAN PROGRAM
Effective Immediately after the Distribution Date, TRICON shall assume,
accept the assignment of, and be solely responsible for all loans extended to
Transferred Individuals under the PepsiCo Executive Loan Program. TRICON agrees
to execute such documents as may be necessary to effect the assignment of any
outstanding loans and any related security for such loans and agrees to
guarantee all such loan repayments to the applicable lender and to hold PepsiCo
harmless for any amounts due and owing on such loans with respect to Transferred
Individuals.
6.7 STOCK OPTION INCENTIVE PLAN RECORDKEEPING ACCOUNTS
PepsiCo and TRICON shall make their reasonable best efforts to provide
accurate, timely information with respect to stock options granted Transferred
Individuals under the PepsiCo Stock Option Incentive Plan and PepsiCo Long-Term
Incentive Plan and the TRICON Stock Option Incentive Plan and TRICON Long-Term
Incentive Plan. Whichever of PepsiCo or TRICON controls, and is responsible for
providing, the information to a recordkeeper, may take such action as is
necessary to effectuate a correction of any erroneous or inaccurate information
provided to the recordkeepers of the TRICON Stock Option Incentive Plan or the
TRICON Long-Term Incentive Plan and the PepsiCo Stock Option Incentive Plan or
the PepsiCo Long-Term Incentive Plan, respectively. On or after the Close of the
Distribution Date, PepsiCo shall be under no obligation to accept any data
correction with respect to any TRICON employee's eligibility for stock option
grants. TRICON agrees that in the event that any stock option is incorrectly or
erroneously exercised under the PepsiCo Stock Option Incentive Plan or the
PepsiCo Long-Term Incentive Plan, due to the untimely or inaccurate transmission
of data to the recordkeeper of the PepsiCo Stock Option Incentive Plan or the
PepsiCo Long-Term Incentive Plan, TRICON shall indemnify PepsiCo and hold
PepsiCo and its directors, officers, employees and the Plans harmless for any
Liabilities arising as a result of such transaction, including reimbursing
PepsiCo for amounts paid to any individual by reason of the improper exercise of
an option.
TRICON shall be responsible for the integrity of any data or information
that it provides to the recordkeeper of the PepsiCo Stock Option Incentive Plan
or the PepsiCo Long-Term Incentive Plan. TRICON agrees to provide to PepsiCo
unlimited access to records in its possession which may be relevant to
eligibility, vesting, exercise or other aspects of the PepsiCo Stock Option
Incentive Plan or the PepsiCo Long-Term Incentive Plan with respect to any
Transferred Individual or Transition Individual.
TRICON shall provide or cause to be provided all such information as may
be reasonably necessary or required by PepsiCo, in its sole discretion, to
prepare any financial returns, records or reports and shall provide such
information on a timely basis sufficiently far in advance to permit the orderly
preparation and filing of such financial returns, records and reports.
<PAGE>
ARTICLE
7
MISCELLANEOUS BENEFITS
7.1 SHAREPOWER PLAN
(a) Treatment of Outstanding Grants Under PepsiCo SharePower Plan
Effective Immediately after the Distribution Date, all outstanding
vested stock option grants under the PepsiCo SharePower Plan as of the Close of
the Distribution Date of all Transferred Individuals shall continue to be held
as options for PepsiCo Capital Stock and, at PepsiCo's election, shall either
(1) remain, and recordkeeping accounts shall be maintained, under the PepsiCo
SharePower Plan after the Distribution Date and, at PepsiCo's further election,
TRICON shall be fully responsible for administering and providing for the
recordkeeping for such PepsiCo options under the PepsiCo SharePower Plan in a
manner consistent with provisions of such plan, or (2) be held and treated, and
recordkeeping accounts shall be maintained, under the TRICON SharePower Plan. As
soon as practicable after the Distribution Date, the number of options and the
exercise price for such options which shall continue to be held as options for
PepsiCo Capital Stock shall be adjusted, as of the Close of the Distribution
Date, by a Conversion Formula. The determination of which company shall be
entitled to any tax deduction and any other treatment related to any such tax
deduction (federal and state) with respect to the exercise of such PepsiCo stock
options shall be made in accordance with applicable provisions of the Tax
Separation Agreement. Effective Immediately after the Distribution Date, all
outstanding nonvested stock option grants under the PepsiCo SharePower Plan as
of the Close of the Distribution Date of all such Transferred Individuals shall
be converted to options for TRICON Common Stock under the TRICON SharePower Plan
and shall be transferred to the recordkeeper of the TRICON SharePower Plan. The
number of options and the exercise price for such TRICON options shall be
determined in accordance with the Conversion Formula. Such converted,
transferred TRICON stock option grants shall continue to vest and become
exercisable under the TRICON SharePower Plan in accordance with the terms in
effect as of the date of the original grant under the PepsiCo SharePower Plan.
TRICON shall be the obligor with respect to such options. TRICON shall be solely
responsible for all aspects of the stock option grants under the TRICON
SharePower Plan, including, but not limited to, recordkeeping, administrative
costs and fees, plan maintenance, option exercise and related tax filings.
The foregoing shall apply to Transferred Individuals who are compensated
under a payroll which is administered outside the 50 United States, its
territories and possessions, and the District of Columbia; provided, however, if
such treatment is not legally permitted, or results in adverse consequences for
PepsiCo or the Transferred Individual, as determined by PepsiCo in its sole
discretion, PepsiCo may determine in its sole discretion, a different treatment.
(b) Recordkeeping Accounts
PepsiCo and TRICON shall make their reasonable best efforts to provide
accurate, timely information with respect to stock options granted Transferred
Individuals under the PepsiCo SharePower Plan. Whichever of PepsiCo or TRICON
controls, and is responsible for providing, the information to a recordkeeper,
may take such action as is necessary to effectuate a correction of any erroneous
or inaccurate information provided to the recordkeepers of the TRICON SharePower
Plan or the PepsiCo SharePower Plan, respectively. On or after the Close of the
Distribution Date, PepsiCo shall be under no obligation to accept any data
correction with respect to any TRICON employee's eligibility for stock option
grants. TRICON agrees that in the event that any stock option is incorrectly or
erroneously exercised under the PepsiCo SharePower Plan, due to the untimely or
inaccurate transmission of data to the recordkeeper, TRICON shall indemnify
PepsiCo and hold PepsiCo and its directors, officers, employees and the Plans
harmless for any Liabilities arising as a result of such transaction, including
reimbursing PepsiCo for amounts paid to any individual by reason of the improper
exercise of an option.
TRICON shall be responsible for the integrity of any data or information
that it provides to the recordkeeper. TRICON agrees to provide to PepsiCo
unlimited access to records in its possession which may be relevant to
eligibility, vesting, exercise or other aspects of the PepsiCo SharePower Plan
with respect to any Transferred Individual or Transition Individual.
TRICON shall provide or cause to be provided all such information as may
be reasonably necessary or required by PepsiCo, in its sole discretion, to
prepare any financial returns, records or reports and shall provide such
information on a timely basis sufficiently far in advance to permit the orderly
preparation and filing of such financial returns, records and reports.
7.2 STOCK PURCHASE PLAN
(a) Transfer of PepsiCo Capital Stock
With respect to all Transferred Individuals who have beneficial
ownership of PepsiCo Capital Stock in the PepsiCo Stock Purchase Plan, as of the
Close of the Distribution Date, PepsiCo shall create individual accounts under
the PepsiCo DRIP, and shall transfer such PepsiCo Capital Stock to those
accounts, as of the Close of the Distribution Date or as soon as practicable
thereafter.
(b) Transfer of TRICON Common Stock
With respect to all Transferred Individuals who become beneficial owners
of TRICON Common Stock received under the PepsiCo Stock Purchase Plan, as a
result of the Distribution, TRICON shall create individual accounts under the
TRICON Stock Purchase Plan for the purpose of receiving such TRICON Common Stock
which shall be transferred by PepsiCo, as of the Close of the Distribution Date
or as soon as practicable thereafter.
With respect to all employees or former employees of the PepsiCo Group
who become beneficial owners of TRICON Common Stock received under the PepsiCo
Stock Purchase Plan, as a result of the Distribution, TRICON shall create
individual accounts under the TRICON DRIP, for the purpose of receiving such
TRICON Common Stock which shall be transferred by PepsiCo, as of the Close of
the Distribution Date or as soon as practicable thereafter.
<PAGE>
ARTICLE
8
TRANSITIONAL ARRANGEMENTS
8.1 TRANSITION INDIVIDUALS/RECOGNITION OF SERVICE
The parties intend that, for the duration of the Transition Period, the
respective Plans of PepsiCo and TRICON shall mutually recognize service,
compensation, and other benefit determining factors (except as otherwise
provided herein with respect to stock options) with respect to Transition
Individuals as if the Transition Individual's service recognized by either the
PepsiCo Group or the TRICON Group, respectively, had been performed entirely for
the Hiring Company. In this regard, in determining a Transition Individual's
service under the Hiring Company's Pension Plan, Pension Equalization Plan,
Savings Plan, SharePower Plan, Stock Purchase Plan, Health and Welfare Plans,
Executive Programs, vacation and payroll practices, and other Plans, the Hiring
Company shall grant full credit for and recognition of the Transition
Individual's service as such may be recognized under the above mentioned plans
and programs.
8.2 PENSION PLANS
(a) Assumption of Liabilities/Noncommencement of Pensions
Effective as of the date a Transition Individual is transferred to a
Hiring Company: (i) the Hiring Company's Pension Plan shall assume and be solely
responsible for all Liabilities to or relating to the Transition Individual
under the Prior Company's Pension Plan; and (ii) no pension benefits with
respect to the Transition Individual from a Prior Company's Pension Plan or
Pension Equalization Plan shall commence while he or she is employed by the
Hiring Company.
(b) Asset/Liability Allocations and Transfers
PepsiCo or TRICON, as applicable, shall arrange to transfer assets and
liabilities relating to the benefit of each Transition Individual under the
Prior Company Pension Plan to the Hiring Company Pension Plan. The liability
related to each such Transition Individual shall be calculated in accordance
with the same procedures and assumptions described in Section 3.3(b) effective
as of the date the Transition Individual is transferred to the Hiring Company.
The transfer of assets relating to such liability shall occur as soon as
practicable after the Transition Period and a single net aggregate transfer
shall take place in accordance with the procedures described in the following
paragraph.
The amount of assets related to each Transition Individual shall be 100%
of the benefit liability calculated at the effective date of the transfer,
adjusted to reflect interest at a rate equal to the yield on the Northern Trust
Collective Short-Term Investment Fund from the effective date of the transfer to
the date the assets are transferred. The amount of assets so calculated shall be
aggregated for all Transition Individuals transferring from PepsiCo to TRICON
and for all Transition Individuals transferring from TRICON to PepsiCo. The
company with the greater aggregate amount of assets shall substract the other
company's aggregate amount of assets, and shall arrange to transfer the net
aggregate amount so calculated from its plan and trust to the other company's
plan and trust.
8.3 SAVINGS PLAN
Upon a Transition Individual's transfer to a Hiring Company (i) the
Prior Company shall cause the accounts of the Transition Individual under the
Prior Company's Savings Plan which are held by their related trusts to be
transferred to the corresponding Hiring Company's Savings Plan and their related
trusts as soon as practicable after the Transition Individual's date of
transfer; and (ii) the Hiring Company shall cause the transferred accounts to be
accepted by its plans and trusts; and (iii) as soon as the assets relating to
the Transition Individual's account have been transferred, the Hiring Company's
Savings Plan shall assume and be solely responsible for all Liabilities to or
relating to the Transition Individual under the corresponding Prior Company's
Savings Plan. Assets may be transferred from the Prior Company Savings Plan to
the Hiring Company Savings Plan in cash or in kind and, to the extent
practicable, the Transition Individual's accounts shall be invested in
comparable investment options under the Hiring Company Savings Plan as his or
her accounts were invested under the Prior Company Savings Plan immediately
before the transfer.
8.4 HEALTH AND WELFARE PLANS
(a) Continuance of Elections, Co-Payments, and Maximum Benefits.
Each of PepsiCo and TRICON shall cause the Health and Welfare Plans of
itself and its affiliates to recognize and maintain all coverage and
contribution elections made by Transition Individuals under the Health and
Welfare Plans of the other company and its affiliates. Each Hiring Company shall
apply such elections under its Health and Welfare Plans for the remainder of the
period or periods for which the elections are by their terms originally
applicable; provided, however that Hiring Company shall cause the Hiring Company
Health and Welfare Plans to permit new coverage and contribution elections by
Transition Individuals in the same manner as such elections were permitted by
PepsiCo for transfers between its divisions before the Distribution Date.
PepsiCo Health and Welfare Plans and TRICON Health and Welfare Plans
shall recognize and give credit for all amounts applied to deductibles,
out-of-pocket maximums, and other applicable benefit coverage limits with
respect to the current year.
(b) Reimbursement Plans
To the extent any Transition Individual contributed to an account under
a Prior Company's Reimbursement Plan during a calendar year falling within the
Transition Period, the Prior Company shall transfer to the Hiring Company (a)
the liability for such account balances for that calendar year and (b) an equal
amount of cash to cover such liability.
8.5 EXECUTIVE PROGRAMS
(a) Long-Term Incentive Plan and Stock Option Incentive Plan
Effective as of the date a Transition Individual is transferred to a
Hiring Company, the Transition Individual shall retain such stock options,
phantom shares, and performance units as were granted or awarded and in effect
as of the effective date of transfer under the Prior Company Plans. Service with
the Prior Company and the Hiring Company shall be mutually recognized under each
company's Long-Term Incentive Plan and Stock Option Incentive Plan.
(b) Restaurant Deferred Compensation Plan
To the extent the Transition Individual is a participant in the
Restaurant Deferred Compensation Plan, and is transferred from TRICON to
PepsiCo, TRICON shall retain all Liabilities with regard to such Transition
Individual under the Restaurant Deferred Compensation Plan. TRICON will amend
its plan to preclude distributions on account of termination of employment prior
to the Transition Individual's termination of employment from PepsiCo or TRICON.
(c) Deferral Programs
Effective as of the date a Transition Individual is transferred to a
Hiring Company, the Transition Individual's account balance under the Deferral
Programs of the Prior Company shall remain on the books and records of the Prior
Company. The Transition Individual shall not be entitled to a distribution from
such Deferral Programs at the Prior Company by reason of the transfer.
8.6 SHAREPOWER PLANS
Effective as of the date a Transition Individual is transferred to a
Hiring Company, the Transition Individual shall retain such stock options as
were granted or awarded and in effect as of the effective date of transfer under
the Prior Company SharePower Plan. Service with the Prior Company and the Hiring
Company shall be mutually recognized under each company's SharePower Plans.
8.7 STOCK PURCHASE PLANS
As soon as practicable after a Transiton Individual is transferred to a
Hiring Company, the Prior Company shall determine whether the Transition
Individual has a beneficial interest in any stock (PepsiCo Capital Stock or
TRICON Common Stock, as applicable) purchased under the Prior Company Stock
Purchase Plan. In the event that a Transition Individual has a beneficial
interest in any stock (PepsiCo Capital Stock or TRICON Common Stock, as
applicable) purchased under the Prior Company Stock Purchase Plan, the Prior
Company shall transfer such stock to an individual account established under its
DRIP for the benefit of such Transition Individual
8.8 SHORT-TERM INCENTIVE PLAN
To the extent a Transition Individual is hired or rehired by a Hiring
Company during the Transition Period, the payment of any Award under the PepsiCo
Short-Term Incentive Plan or TRICON Short-Term Incentive Plan or any comparable
or other incentive or award program shall be paid for in its entirety by the
entity (PepsiCo or TRICON) on whose payroll the Transition Individual was
employed on December 31, 1997 (for the 1997 performance year) or December 31,
1998 (for the 1998 performance year) and shall be based on the Transition
Individual's period of employment with both the Hiring Company and the Prior
Company during the performance year in question. Neither PepsiCo nor TRICON
shall be entitled to any reimbursement from the other for payments under this
Section.
<PAGE>
ARTICLE
9
GENERAL
9.1 PAYMENT OF AND ACCOUNTING TREATMENT FOR EXPENSES AND BALANCE SHEET AMOUNTS
(a) Expenses
All expenses (and the accounting treatment related thereto) through the
Close of the Distribution Date regarding matters addressed herein shall be
handled and administered by PepsiCo and TRICON in accordance with past PepsiCo
accounting and financial practices and procedures pertaining to such matters. To
the extent expenses are unpaid as of the Close of the Distribution Date that
pertain to Transferred Individuals, TRICON or any member of the TRICON Group,
TRICON shall be solely responsible for such payment, without regard to any
accounting treatment to be accorded such expense by PepsiCo or TRICON on their
respective books and records. The accounting treatment to be accorded all such
expenses, whether such expenses are paid by PepsiCo or TRICON, shall be
determined by PepsiCo in its sole discretion.
(b) Balance Sheet Amounts
TRICON shall assume any balance sheet liability for any Liability
assumed by it under this Agreement as of the Close of the Distribution Date or
thereafter, with respect to any Transferred Individual or Transition Individual.
The determination of any balance sheet liability as of the Close of the
Distribution Date shall be determined by PepsiCo in its sole discretion
consistent with past accounting practices, consistently applied.
9.2 SHARING OF PARTICIPANT INFORMATION
PepsiCo and TRICON shall share, PepsiCo shall cause each applicable
member of the PepsiCo Group to share, and TRICON shall cause each applicable
member of the TRICON Group to share, with each other and their respective agents
and vendors (without obtaining releases) all participant information necessary
for the efficient and accurate administration of each of the PepsiCo Plans and
the TRICON Plans during the Transition Period. PepsiCo and TRICON and their
respective authorized agents shall, subject to applicable laws on
confidentiality, be given reasonable and timely access to, and may make copies
of, all information relating to the subjects of this Agreement in the custody of
the other party, to the extent necessary for such administration. Until the
Close of the Distribution Date, all participant information shall be provided in
the manner and medium applicable to Participating Companies in the PepsiCo Plans
generally, and thereafter until December 31, 1998, all participant information
shall be provided in a manner and medium that is compatible with the data
processing systems of PepsiCo as in effect of the Close of the Distribution
Date, unless otherwise agreed to by PepsiCo and TRICON.
9.3 RESTRICTIONS ON EXTENSION OF OPTION EXERCISE PERIODS, AMENDMENT OR
MODIFICATION OF OPTION TERMS AND CONDITIONS
TRICON agrees that, without the prior written consent of PepsiCo,
neither TRICON nor any of its affiliates shall take any action to extend the
exercise period of or to provide for additional vesting with respect to any
PepsiCo options for Transferred or Transition Individuals, including, but not
limited to, providing such Transferred or Transition Individuals with leaves of
absences or special termination or severance arrangements. Neither TRICON nor
any of its affiliates may in any way or for any purpose modify, alter, amend or
terminate any terms or conditions with respect to any PepsiCo option.
9.4 NON-SOLICITATION OF EMPLOYEES
For a period of two years from the Close of the Distribution Date,
TRICON and its affiliates will not, without the prior written consent of
PepsiCo, and PepsiCo and its affiliates will not, without the prior written
consent of TRICON, whether directly or indirectly, solicit (in writing or
orally) for employment or other services, whether as an employee, officer,
director, agent, consultant or independent contractor, any person who or which
is at the time of such solicitation an employee, agent, representative, officer
or director of the other party; provided, however, that this covenant shall
continue to apply in the case of Persons who have left the employ of either
party within a thirty day period prior to being solicited by the other party.
9.5 REPORTING AND DISCLOSURE AND COMMUNICATIONS TO PARTICIPANTS
While TRICON is a Participating Company in the PepsiCo Plans, TRICON
shall take, and shall cause each other applicable member of the TRICON Group to
take, all actions necessary or appropriate to facilitate the distribution of all
PepsiCo Plan-related communications and materials to employees, participants and
beneficiaries, including summary plan descriptions and related summaries of
material modification, summary annual reports, investment information,
prospectuses, notices and enrollment material for the TRICON Plans. TRICON shall
assist, and TRICON shall cause each other applicable member of the TRICON Group
to assist, PepsiCo in complying with all reporting and disclosure requirements
of ERISA, including the preparation of Form 5500 annual reports for the PepsiCo
Plans, where applicable.
9.6 PLAN AUDITS
(a) Audit Rights with Respect to the Allocation or Transfer of Plan
Assets
The allocation of Pension Plan assets and liabilities pursuant to
Section 3.2 and the transfer of assets from PepsiCo VEBAs pursuant to Section
5.2, shall, at the election of TRICON, be audited on behalf of both PepsiCo and
TRICON by an actuarial and benefit consulting firm mutually selected by the
parties. The scope of such audit shall be limited to the accuracy of the data
and the accuracy of the computation and adherence to the methodology specified
in this Agreement and except as set forth in the penultimate sentence of this
Section 9.6(a), such audit shall not be binding on the parties. The actuarial
and benefit consulting firm shall provide its report to both PepsiCo and TRICON.
No other audit shall be conducted with respect to the transfer or allocation of
Plan assets and no issue of any nature whatsoever may be raised by TRICON once
the allocation has been effected. TRICON shall pay or shall be responsible for
the payment of the full costs of such audit. To the extent such audit recommends
a change to the value of assets allocated to a TRICON Plan of less than 5%, the
original determination shall be binding on the parties and shall not be subject
to the dispute resolution process provided under the Separation Agreement. To
the extent such audit recommends such a change of 5% or more, any unresolved
dispute between the parties as to whether and how to make any change in response
to such recommendation shall be subject to the dispute resolution process
provided under the Separation Agreement.
(b) Audit Rights With Respect to Information Provided
(1) Each of PepsiCo and TRICON, and their duly authorized
representatives, shall have the right to conduct audits at any time upon
reasonable prior notice, at their own expense, with respect to all information
provided to it or to any Plan recordkeeper or third party administrator by the
other party; provided, however, that PepsiCo or its authorized representatives
may, at TRICON's expense, conduct audits at any time with respect to any
information related to PepsiCo options granted to Transferred Individuals or
Transition Individuals. The party conducting the audit shall have the sole
discretion to determine the procedures and guidelines for conducting audits and
the selection of audit representatives under this Section 9.6(b); provided, that
audits with respect to the allocation or transfer of Plan assets and liabilities
shall be subject only to Section 9.6(a). The auditing party shall have the right
to make copies of any records at its expense, subject to the confidentiality
provisions set forth in the Separation Agreement, which are incorporated by
reference herein. The party being audited shall provide the auditing party's
representatives with reasonable access during normal business hours to its
operations, computer systems and paper and electronic files, and provide
workspace to its representatives. After any audit is completed, the party being
audited shall have the right to review a draft of the audit findings and to
comment on those findings in writing within five business days after receiving
such draft.
(2) The auditing party's audit rights under this Section 9.6(b)
shall include the right to audit, or participate in an audit facilitated by the
party being audited, of any Subsidiaries and affiliates of the party being
audited and of any benefit providers and third parties with whom the party being
audited has a relationship, or agents of such party, to the extent any such
persons are affected by or addressed in this Agreement (collectively, the
"Non-parties"). The party being audited shall, upon written request from the
auditing party, provide an individual (at the auditing party's expense) to
supervise any audit of any such benefit provider or third party. The auditing
party shall be responsible for supplying, at its expense, additional personnel
sufficient to complete the audit in a reasonably timely manner.
(c) Audits Regarding Vendor Contracts
From Immediately after the Distribution Date through December 31, 1998,
PepsiCo and TRICON and their duly authorized representatives shall have the
right to conduct joint audits with respect to any vendor contracts that relate
to both the PepsiCo Health and Welfare Plans and the TRICON Health and Welfare
Plans. The scope of such audits shall encompass the review of all
correspondence, account records, claim forms, canceled drafts (unless retained
by the bank), provider bills, medical records submitted with claims, billing
corrections, vendor's internal corrections of previous errors and any other
documents or instruments relating to the services performed by the vendor under
the applicable vendor contracts. PepsiCo and TRICON shall agree on the
performance standards, audit methodology, auditing policy and quality measures
and reporting requirements relating to the audits described in this Section 9.6
and the manner in which costs incurred in connection with such audits will be
shared.
9.7 BENEFICIARY DESIGNATIONS
All beneficiary designations made by Transferred Individuals for PepsiCo
Plans shall be transferred to and be in full force and effect under the
corresponding TRICON Plans until such beneficiary designations are replaced or
revoked by the Transferred Individual who made the beneficiary designation. All
beneficiary designations made by Transition Individuals for Prior Company Plans
shall be transferred to and be in full force and effect under the corresponding
Hiring Company Plans until such beneficiary designations are replaced or revoked
by the Transition Individual who made the beneficiary designation.
9.8 REQUESTS FOR INTERNAL REVENUE SERVICE RULINGS AND UNITED STATES DEPARTMENT
OF LABOR OPINIONS
(a) Cooperation
TRICON shall cooperate fully with PepsiCo on any issue relating to the
transactions contemplated by this Agreement for which PepsiCo elects to seek a
determination letter or private letter ruling from the Internal Revenue Service
or an advisory opinion from the United States Department of Labor. PepsiCo shall
cooperate fully with TRICON with respect to any request for a determination
letter or private letter ruling from the Internal Revenue Service or advisory
opinion from the United States Department of Labor with respect to any of the
TRICON Plans relating to the transactions contemplated by this Agreement.
(b) Applications
PepsiCo and TRICON shall make such applications to regulatory agencies,
including the Internal Revenue Service and the United States Department of
Labor, as may be necessary to ensure that any transfers of assets from the
PepsiCo LTD VEBA to the TRICON LTD VEBA will neither (i) result in any adverse
tax, legal or fiduciary consequences to PepsiCo and TRICON, the PepsiCo LTD
VEBA, the TRICON LTD VEBA, any participant therein or beneficiaries thereof, ,
any successor welfare benefit funds established by or on behalf of TRICON, or
the trustees of such trusts, nor (ii) contravene any statute, regulation or
technical pronouncement issued by any regulatory agency. Before the Close of the
Distribution Date, TRICON shall prepare all forms required to obtain favorable
determination letters from the Internal Revenue Service with respect to the
tax-exempt status of the TRICON LTD VEBA. TRICON and PepsiCo agree to cooperate
with each other to fulfill any filing and/or regulatory reporting obligations
with respect to such transfers.
9.9 FIDUCIARY AND RELATED MATTERS
The Parties acknowledge that PepsiCo will not be a fiduciary with
respect to the TRICON Plans and that TRICON will not be a fiduciary with respect
to the PepsiCo Plans. TRICON also acknowledges that PepsiCo shall not be deemed
to be in violation of this Agreement if it fails to comply with any provisions
hereof based upon its good faith determination that to do so would violate any
applicable fiduciary duties or standards of conduct under ERISA or other
applicable law. Notwithstanding any other provision in this Agreement, the
Parties may take such actions as necessary or appropriate to effectuate the
terms and provisions of this Agreement.
9.10 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES
No provision of this Agreement or the Separation Agreement shall be
construed to create any right, or accelerate entitlement, to any compensation or
benefit whatsoever on the part of any Transferred Individual or other future,
present, or former employee of the PepsiCo Group or the TRICON Group under any
PepsiCo Plan or TRICON Plan or otherwise. Without limiting the generality of the
foregoing, except as expressly provided in this Agreement: (i) neither the
Distribution nor the termination of the Participating Company status of a member
of the TRICON Group shall cause any employee to be deemed to have incurred a
termination of employment which entitles such individual to the commencement of
benefits under any of the PepsiCo Plans, any of the TRICON Plans, or any of the
Individual Agreements; and (ii) nothing in this Agreement other than those
provisions specifically set forth herein to the contrary shall preclude TRICON,
at any time after the Close of the Distribution Date, from amending, merging,
modifying, terminating, eliminating, reducing, or otherwise altering in any
respect any TRICON Plan, any benefit under any Plan or any trust, insurance
policy or funding vehicle related to any TRICON Plan.
9.11 COLLECTIVE BARGAINING
To the extent any provision of this Agreement is contrary to the
provisions of any applicable collective bargaining agreement to which PepsiCo or
any affiliate of PepsiCo is a party, the terms of such collective bargaining
agreement shall prevail. Should any provisions of this Agreement be deemed to
relate to a topic determined by an appropriate authority to be a mandatory
subject of collective bargaining, PepsiCo or TRICON may be obligated to bargain
with the union representing affected employees concerning those subjects.
Neither party will agree to a modification of any applicable collective
bargaining agreement without the consent of the other. In the event a force
surplus affecting members of a bargaining unit in both the PepsiCo Group (on the
one hand) and the TRICON Group (on the other hand) directly results, due to the
provisions of such a collective bargaining agreement, in an employee
involuntarily leaving the payroll of the party not declaring the surplus, then
the party declaring the surplus shall bear the cost of any severance payable to
such employee.
9.12 CONSENT OF THIRD PARTIES
If any provision of this Agreement is dependent on the consent of any
third party (such as a vendor or a union) and such consent is withheld, PepsiCo
and TRICON shall use their reasonable best efforts to implement the applicable
provisions of this Agreement to the full extent practicable. If any provision of
this Agreement cannot be implemented due to the failure of such third party to
consent, PepsiCo and TRICON shall negotiate in good faith to implement the
provision in a mutually satisfactory manner. The phrase "reasonable best
efforts" as used in this Agreement shall not be construed to require the
incurrence of any non-routine or unreasonable expense or liability or the waiver
of any right.
9.13 FOREIGN PLANS
As soon as practicable after the date of this Agreement, PepsiCo and
TRICON shall enter into an agreement regarding the treatment of Foreign Plans
consistent with the principles set forth in Appendix C.
9.14 EFFECT IF DISTRIBUTION DOES NOT OCCUR
If the Distribution does not occur, then all actions and events that
are, under this Agreement, to be taken or occur effective as of the Close of the
Distribution Date, Immediately after the Distribution Date, or otherwise in
connection with the Distribution, shall not be taken or occur except to the
extent specifically agreed by TRICON and PepsiCo.
9.15 RELATIONSHIP OF PARTIES
Nothing in this Agreement shall be deemed or construed by the parties or
any third party as creating the relationship of principal and agent, partnership
or joint venture between the parties, it being understood and agreed that no
provision contained herein, and no act of the parties, shall be deemed to create
any relationship between the parties other than the relationship set forth
herein.
9.16 AFFILIATES
Each of PepsiCo and TRICON shall cause to be performed, and hereby
guarantees the performance of, all actions, agreements and obligations set forth
in this Agreement to be performed by members of the PepsiCo Group or members of
the TRICON Group, respectively, where relevant.
9.17 ARBITRATION
Any controversy or claim arising out of or relating to this Agreement,
or the breach hereof, shall be settled by arbitration in accordance with the
then prevailing Commercial Arbitration Rules of the American Arbitration
Association (the "AAA") as such rules may be modified herein.
An award rendered in connection with an arbitration pursuant to this
Section shall be final and binding and judgment upon such an award may be
entered and enforced in any court of competent jurisdiction.
The forum for arbitration under this Section shall be agreed upon by the
Parties, or, failing such agreement, shall be New York, New York.
Arbitration shall be conducted by a single arbitrator selected jointly
by PepsiCo and TRICON. If within 30 days after a demand for arbitration is made,
PepsiCo and TRICON are unable to agree on a single arbitrator, three arbitrators
shall be appointed. Within 30 days after such inability to agree, PepsiCo and
TRICON shall each select one arbitrator and those two arbitrators shall then
select a third arbitrator unaffiliated with either Party. In connection with the
selection of the third arbitrator, consideration shall be give to familiarity
with employee benefit plans and programs and related matters and experience in
dispute resolution between parties, as a judge or otherwise. If the arbitrators
selected by PepsiCo and TRICON cannot agree on the third arbitrator within such
30 day period, they shall discuss the qualifications of such third arbitrator
with the AAA prior to selection of such arbitrator, which selection shall be in
accordance with the Commercial Arbitration Rules of the AAA.
If an arbitrator cannot continue to serve, a successor to an arbitrator
selected by PepsiCo or TRICON, as the case may be, also shall be selected by the
same Party, and a successor to the neutral arbitrator shall be selected as
specified above. A full rehearing will be held only if the neutral arbitrator is
unable to continue to serve or if the remaining arbitrators unanimously agree
that such a rehearing is appropriate.
The arbitrator or arbitrators shall be guided, but not bound, by the
Federal Rules of Evidence and by the procedural rules, including discovery
provisions, of the Federal Rules of Civil Procedure. Any discovery shall be
limited to information directly relevant to the controversy or claim in
arbitration.
9.18 INDEMNIFICATION
Effective on the Distribution Date, TRICON agrees to indemnify and hold
harmless each member of the PepsiCo Group and each of their respective officers,
directors, employees and agents and the PepsiCo Plans from and against any and
all losses, Liabilities, claims, suits, damages, costs and expenses (including
without limitation, reasonable attorneys' fees and any and all expenses
reasonably incurred in investigating, preparing or defending against any pending
or seriously threatened litigation or claim) arising out of or related in any
manner to Transferred Individuals and Transition Individuals described in
Section 1.1(ddd)(2) and (3). Similarly, effective on the Distribution Date,
PepsiCo agrees to indemnify and hold harmless each member of the TRICON Group
and each of their respective officers, directors, employees and agents and the
TRICON Plans from and against any and all losses, Liabilities, claims, suits,
damages, costs and expenses (including, without, limitation reasonable
attorneys' fees and any and all expenses reasonably incurred in investigating,
preparing or defending against any pending or seriously threatened litigation or
claim) arising out of or related in any manner to Transferred Individuals and
Transition Individuals described in Section 1.1(ddd)(1) and (4).
If any action is brought or any claim is made against a Party or person
in respect of which indemnity may be sought pursuant to this Section 9.18 (the
"Indemnitee"), the Indemnitee shall, within ten days after the receipt of
information indicating that an action or claim is likely, notify in writing the
Party from whom indemnification is sought (the "Indemnitor") of the institution
of the action or the making of the claim, and the Indemnitor shall have the
right, and at the request of the Indemnitee, shall have the obligation, to
assume the defense of the action or claim, including the employment of counsel.
If the Indemnitor assumes the defense of the action or claim, the Indemnitor
shall be entitled to settle the action or claim on behalf of the Indemnitee
without the prior written consent of the Indemnitee unless such settlement
would, in addition to the payment of money, materially affect the ongoing
business or employment of the Indemnitee.
The Indemnitee shall have the right to employ its own counsel, but the
fees and expenses of that counsel shall be the responsibility of the Indemnitee
unless (i) the employment of that counsel shall have been authorized in writing
by the Indemnitor in connection with the defense of the action or claim; (ii)
the Indemnitor shall not have employed counsel to have charge of the defense of
such action or claim; or (iii) such Indemnitee shall have reasonably concluded
that there may be defenses available to it which are different from or
additional to those available to the Indemnitor (in which case the Indemnitor
shall not have the right to direct any different defense of the action or claim
on behalf of the Indemnitee). The Indemnitee shall, in any event, be kept fully
informed of the defense of any such action or claim. Except as expressly
provided above, in the event that the Indemnitor shall not previously have
assumed the defense of an action or claim, at such time as the Indemnitor does
assume the defense of the action or claim, the Indemnitor shall not thereafter
be liable to any Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in investigating, preparing or defending against such action or
claim.
Anything in this Section 9.18 to the contrary notwithstanding, the
Indemnitor shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that if after due
notice the Indemnitor refuses to defend a claim or action, the Indemnitee shall
have the right to defend and/or settle such action, and the Indemnitee shall not
be precluded from making a claim against the Indemnitor for reasonable expenses
and liabilities resulting from such defense and/or settlement in accordance with
this Section 9.18.
Notwithstanding the foregoing provisions of this Section 9.18, there may
be particular actions or claims which reasonably could result in both Parties
being liable to the other under the indemnification provisions of this
Agreement. In such events, the Parties shall endeavor, acting reasonably and in
good faith, to agree upon a manner of conducting the defense and settlement of
the action or claim with a view to minimizing the legal expenses and associated
costs that might otherwise be incurred by the Parties, such as, by way of
illustration only, agreeing to use the same legal counsel.
The indemnification provisions of this Section 9.18 shall not inure to
the benefit of any third party. By way of illustration only, an insurer who
would otherwise be obligated to pay any claim shall not be relieved of the
responsibility with respect thereto, or, solely by virtue of the indemnification
provisions, hereof, have any subrogation rights with respect thereto, it being
expressly understood and agreed that no insurer or any other third party shall
be entitled to a "windfall" (i.e., a benefit they would not be entitled to
receive in the absence of the indemnification provisions) by virtue of these
indemnification provisions.
9.19 NOTICES
Any notice, demand, claim, or other communication under this Agreement
shall be in writing and shall given in accordance with the provisions for giving
notice under the Separation Agreement.
9.20 INTERPRETATION
Words in the singular shall be held to include the plural and vice versa
and words of one gender shall be held to include the other genders as the
context requires. The terms "hereof," "herein," and "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole (including all Exhibits hereto) and not to any particular
provision of this Agreement. The word "including" and words of similar import
when used in this Agreement shall mean "including, without limitation," unless
the context otherwise requires or unless otherwise specified. The word "or"
shall not be exclusive.
9.21 GOVERNING LAW/EXECUTION
This Agreement shall be governed by and construed in accordance with the
laws of the State of North Carolina, may not be assigned by either Party without
the written consent of the other, and shall bind and inure to the benefit of the
Parties hereto and their respective successors and permitted assignees. This
Agreement may not be amended or supplemented except by an agreement in writing
signed by PepsiCo and TRICON. This Agreement may be executed in counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Employee Programs
Agreement to be duly executed as of the day and year first above written.
PepsiCo, Inc.
By: -----------------------------
Name:
Title:
TRICON, Inc.
By: -----------------------------
Name:
Title:
<PAGE>
APPENDIX A
PEPSICO EXECUTIVE PROGRAMS
PepsiCo, Inc. Executive Income Deferral Program
PepsiCo, Inc. Performance Share Unit Deferral Program
PepsiCo, Inc. 1994 Executive Incentive Compensation Plan
PepsiCo, Inc. Option Gains Deferral Program
Middle Management Incentive Compensation Plan
PepsiCo Inc. Executive Incentive Plan
PepsiCo, Inc. 1987 Long-Term Incentive Plan
PepsiCo, Inc. 1995 Stock Option Incentive Plan
PepsiCo, Inc. 1994 Long-Term Incentive Plan
Financial Planning (including tax planning and return preparation)
Country Club Program
Split-Dollar Life Insurance
Executive Automobile Program
Executive Loan Program
Individual Agreements (including employment, separation and consulting
agreements, special bonus arrangements, leave of absence agreements and
commitments made in the context of any merger, acquisition or similar activity)
Restaurant Deferred Compensation Plan
<PAGE>
APPENDIX B
HEALTH AND WELFARE PLANS
Part One: PepsiCo Restaurant Health and Welfare Plans
Health Plan:
Restaurant Employees Health Care Program (which includes medical,
post-retirement medical, dental, prescription drug, mental
health/substance abuse, various HMOs and OSCs, vision/hearing,
LensCrafters vision, health care reimbursement, and employee assistance
benefits).
Group Insurance Plan:
Restaurant Employees Group Insurance Program (which includes basic and
optional life, accidental death and dismemberment, and business travel
accident insurance benefits).
Disability Plans:
PepsiCo Long Term Disability Plan
PepsiCo Salary Continuation Plan (short-term disability plan)
Salary Continuation Plan for Employees Working in States other than
California
Combination Plan (Health and Cafeteria):
Taco Bell Pre-Tax Elective Benefits Plan
Severance Plans:
Pizza Hut Severance Plan
KFC Severance Plan
Taco Bell Severance Plan
Miscellaneous Plans (ERISA):
PepsiCo Group Legal Services Plan
PepsiCo Vacation Plan for Hourly Crew Employees
Cafeteria Plans (non-ERISA):
Pizza Hut Benefits Plus
Pizza Hut Pre-Tax Crew Benefits Plan
KFC Benefits Plus
PepsiCo One + Plus (KFC hourly plan)
Taco Bell Benefits Plus
Miscellaneous Plans (non-ERISA):
PepsiCo Dependent Care Reimbursement Plan
PepsiCo Educational Assistance Program
Part Two: TRICON Health and Welfare Plans
Health Plan:
TRICON Employees Health Care Program (which includes medical,
post-retirement medical, dental, prescription drug, mental
health/substance abuse, various HMOs and OSCs, vision/hearing,
LensCrafters vision, health care reimbursement, and employee assistance
benefits).
Group Insurance Plan:
TRICON Employees Group Insurance Program (which includes basic and
optional life, accidental death and dismemberment, and employee
assistance benefits).
Disability Plans:
TRICON Long Term Disability Plan
TRICON Salary Continuation Plan (Short-Term disability plan)
TRICON Salary Continuation Plan for Employees Working in States other
than California
Combination Plan (Health and Cafeteria):
Taco Bell Pre-Tax Elective Benefits Plan
Severance Plans:
Pizza Hut Severance Plan
KFC Severance Plan
Taco Bell Severance Plan
Miscellaneous Plans (ERISA):
TRICON Group Legal Services Plan
TRICON Vacation Plan for Hourly Crew Employees
Cafeteria Plan (non-ERISA):
Pizza Hut Benefits Plus
Pizza Hut Pre-Tax Crew Benefits Plan
KFC Benefits Plus
KFC One + Plus
Taco Bell Benefits Plan
Miscellaneous Plans (non-ERISA):
TRICON Dependent Care Reimbursement Plan
TRICON Educational Assistance Program
<PAGE>
APPENDIX C
FOREIGN PLANS
This Appendix C describes the principles under which Foreign Plans shall
be treated. For purposes of this Appendix, outside the U.S. means outside the 50
United States, its territories and possessions, and the District of Columbia,
and employed outside the U.S. means compensated under a payroll which is
administered outside the U.S..
C.1 Plans Covering only Employees of PepsiCo or TRICON
Effective as of the Close of the Distribution Date or such later date as
may be required by applicable law, union, or works council agreement, any
Foreign Plan that covers only individuals employed outside the U.S. by the
PepsiCo Group shall be the sole responsibility of the PepsiCo Group and no
member of the TRICON Group shall have any Liability with respect to such a Plan;
and any Foreign Plan that covers only individuals employed outside the U.S. by
the TRICON Group shall be the sole responsibility of the TRICON Group and no
member of the PepsiCo Group shall have any Liability with respect to such a
Plan.
C.2 Plans Covering Employees of Both PepsiCo and TRICON
(a) Termination of Participation
Effective as of the Close of the Distribution Date, if legally
permitted, or as soon as possible thereafter, TRICON and each other applicable
member of the TRICON Group shall cease to be a Participating Company in each
Foreign Plan maintained by the PepsiCo Group and PepsiCo and each other
applicable member of the PepsiCo Group shall cease to be a Participating Company
in each Foreign Plan maintained by the TRICON Group.
(b) Mirror Plans
(1) Effective Immediately after the Distribution Date, TRICON
shall adopt, or cause to be adopted, Foreign Plans for the benefit of employees
of the TRICON Group employed outside the United States who are eligible to
participate in PepsiCo Foreign Plans and shall cause such TRICON Foreign Plans
to be substantially identical in all Material Features to the corresponding
PepsiCo Foreign Plans as in effect on the Distribution Date; provided, however,
that TRICON may satisfy this requirement by extending coverage to such
individuals under a Foreign Plan of the TRICON Group which was in effect before
the Distribution Date.
(2) Effective Immediately after the Distribution Date, PepsiCo
shall adopt, or cause to be adopted, Plans for the benefit of employees of the
PepsiCo Group employed outside the United States who are eligible to participate
in Plans and shall cause such Plans to be substantially identical in all
Material Features to the corresponding TRICON Foreign Plans as in effect on the
Distribution Date; provided, however, that PepsiCo may satisfy this requirement
by extending or continuing coverage to such individuals under a PepsiCo Foreign
Plan of the PepsiCo Group which was in effect before the Distribution Date.
(3) The continuation by PepsiCo or TRICON of separate employment
terms and conditions for employees previously covered by the other entity's
Plans shall not continue beyond the time legally required.
(c) Transfer of Assets
As of the Close of the Distribution Date, PepsiCo and TRICON will use
their reasonable best efforts to ensure that, to the extent legally permitted:
(i) Liabilities of the Foreign Plans of PepsiCo relating to Transferred
Individuals shall be assumed by the appropriate Foreign Plans of TRICON; and
(ii) a portion of any assets of the Foreign Plans of PepsiCo shall be
transferred to the appropriate Foreign Plans of TRICON, and vice versa.
C.3 Severance Issues
If under applicable law, any Transferred Individual employed outside the
U.S. is deemed to have incurred a termination of employment as a result of the
Distribution or any other transaction contemplated by the Separation Agreement
or this Agreement, which entitles such individual to receive any payment or
benefit under any Foreign Plan, governmental plan or arrangement or pursuant to
any law or regulation, including severance benefits, notwithstanding such
individual's continued employment by the TRICON Group, then TRICON shall be
liable for any such payment or benefit and, notwithstanding any other provision
hereof, to the extent legally permitted, appropriate adjustments shall be made
to the treatment of such individual during such continued employment, including
not giving such individual credit for prior service and/or treating such
individual as having been newly hired immediately after such deemed termination,
for purposes of all applicable Foreign Plans. Liability with respect to such
payments shall be the responsibility of TRICON.
C.4 Legally Permitted
For purposes of this Appendix C, "legally permitted" means permitted
under the laws of the country, the labor union, works council, or collective
agreement without adverse consequences to PepsiCo, TRICON or Transferred
Individuals, as determined by PepsiCo, in its sole discretion, including
mandated waiting periods before which working conditions (including benefits)
cannot be changed, and upon receiving required agreement from individual
employees and/or Plan trustees, foundation boards and members, and any other
organizations having a recognized right to determine or affect benefits and/or
funding of the Plan.
C.5 Multinational Pooling
PepsiCo and TRICON shall keep their existing multinational pooling
arrangements intact through December 31, 1997. If there is any dividend payable
from the consolidated pooling arrangements with respect to the 1997 pool
accounting year, that dividend will be allocated between PepsiCo and TRICON
proportionately, based on the contribution to the overall surplus of the pooling
arrangements by the PepsiCo Group and the TRICON Group, respectively.
Alternatively, any net deficits incurred under any one (or all) consolidated
pooling arrangement(s) will be apportioned back to the entity which incurred the
deficit proportionately based on each entities' contribution to the net deficit.
Any potential additions (local insurance contracts) to the consolidated
pooling arrangement during the remainder of the 1997 international accounting
period will be mutually agreed upon between PepsiCo and TRICON.
Exhibit 10.04
TRICON Global Restaurants, Inc.
June 25, 1997
Mr. Andrall E. Pearson
Clayton Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Dear Andy:
This letter agreement (the "Agreement") confirms the terms and
conditions of your employment as Chairman and Chief Executive Officer of TRICON
Global Restaurants, Inc. ("TRICON"), a newly formed North Carolina corporation
and wholly owned subsidiary of PepsiCo, Inc. ("PepsiCo"). TRICON was formed to
be the parent company for PepsiCo's quick service restaurant businesses. Subject
to certain conditions, in October 1997, PepsiCo intends to spin off TRICON to
PepsiCo's shareholders (the "Spin-off").
1. Employment and Term. You are hereby employed as Chairman and Chief
Executive Officer of TRICON for a term of three years, commencing July 1, 1997.
Such term may, however, be modified pursuant to Paragraph 5 hereof.
2. Duties. Prior to the Spin-off, you shall be responsible for assisting
with and facilitating the Spin-off, including, without limitation, matters
relating to TRICON's capital structure, staffing, investor relations, public
relations, benefits, compensation and operating structure. You will perform such
duties consistent with the direction and decisions of PepsiCo's Board of
Directors and senior management.
At and after the Spin-off, you shall have supervision of the
policies, business and affairs of TRICON, and such other powers and duties as
are commonly incident to the offices of Chairman and Chief Executive Officer.
3. Compensation. As compensation for your services hereunder, you shall
be paid a salary of $900,000 per year, in equal bi-weekly installments.
You shall also receive annual incentive compensation in amounts
to be determined by the Compensation Committee (the "Committee") of the TRICON
Board of Directors based on performance objectives established by the Committee.
The target incentive compensation for each year of this Agreement is $900,000
and bonus awards may range from zero to 200% of such target. However, the bonus
for 1997 (payable in early 1998) shall be $450,000. In addition, you shall be
paid, by year end 1997, a one-time bonus of $850,000.
4. Long-Term Incentives. As soon as practicable after the Spin-off, the
Committee shall grant to you options to purchase 1,050,000 shares of TRICON
Common Stock, par value $.05 per share (the "Options"). Such grant shall be made
pursuant to a separate option agreement (the "Option Agreement"), the form of
which is annexed hereto as Exhibit A. Subject to the terms and conditions of the
Option Agreement, 350,000 Options shall vest on each of July 1, 1998, July 1,
1999 and July 1, 2000, and, once vested, shall be exercisable for a period of
ten years from the date of grant. The exercise price for all Options shall be
the mean of the closing prices for TRICON Common Stock for the fifth through the
twentieth trading day after the Spin-off.
5. Modification of Term. You agree that, in order to effect an early
succession plan, the Committee may reduce the term of your employment hereunder
and, in connection therewith, have the discretion to vest all unvested Options
granted pursuant to the Option Agreement, and pay 100% of the special retirement
payment provided for in Paragraph 6 hereof.
6. Special Retirement Payment. TRICON shall make a special $1,000,000
retirement payment to you at the conclusion of your three-year employment term
hereunder or such shorter term as may be determined by the Committee pursuant to
Paragraph 5. In the event of death or total disability (as determined by the
Committee), you, your designated beneficiary or estate shall receive a
retirement payment which is in proportion to your service during the term of
this Agreement.
7. Benefits and Perquisites.
a. TRICON shall reimburse you for dues, initiation fees and
capital or other special assessments at a country club of your choice.
b. TRICON shall reimburse you for expenses, not to exceed $5,000
per year, for personal financial planning.
c. TRICON shall provide you with the use of an executive
automobile, and reimburse expenses related to such automobile consistent with
the PepsiCo executive car program for its most senior executives.
d. You may participate in any income deferral and long-term
savings (401(k)) plans, as well as any medical, dental, life insurance,
disability insurance or other benefit or welfare plans adopted by TRICON with
respect to its full-time employees.
8. Death or Disability. In the event of your death or disability (as
determined by the Committee), no additional amounts shall be due or payable
hereunder except as provided in Paragraph 6 and in your Option Agreement, and
except for payments under TRICON's insurance programs.
9. Non-Competition. You agree that, while employed by TRICON, and for a
period of two years following the end of such employment, you shall not directly
or indirectly participate or have any interest in, or own, manage, operate or
control, or otherwise engage, invest or participate in any business that is
competitive with the business conducted by TRICON or any of its subsidiaries or
affiliates. The provisions of this Paragraph 9 shall not apply to stock
ownership in a publicly traded company which is not in excess of 5% of that
company's outstanding equity securities.
10. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be telecopied, delivered by overnight
delivery service or mailed to the intended recipient at the address specified
below, or at such other address as either party may hereafter designate to the
other.
a. If to Mr. Pearson, to:
Mr. Andrall E. Pearson
41 Meadow Wood Drive
Greenwich, CT 06830
b. If to TRICON, to:
TRICON Global Restaurants, Inc.
c/o PepsiCo, Inc.
700 Anderson Hill Road
Purchase, New York 10577
Attention: Secretary
11. Entire Agreement. This Agreement contains all the understandings and
representations between you and TRICON concerning your employment, and
supersedes all agreements and understandings, whether oral or written, between
TRICON and you with respect to such matters.
12. Binding Agreement. This Agreement shall be binding upon and shall be
for the benefit of TRICON, its successors and assigns, and you and, in the event
of your death, your estate or legal representative. No rights or obligations
under this Agreement can be assigned or transferred by you without the express
prior written consent of TRICON.
13. Amendment; Waiver. No provision of this Agreement may be amended,
modified, supplemented or waived unless such amendment, modification, supplement
or waiver is agreed to in writing, and signed by you and an authorized employee
of TRICON. TRICON is not authorized to amend this Agreement in any material
manner except as directed by the Committee.
14. Governing Law. This Agreement is deemed a contract made under, and
for all purposes to be governed by and construed in accordance with, the laws of
the State of New York, without reference to principles of conflicts of laws.
Please indicate your understanding and acceptance of this
Agreement by signing as indicated below.
Very truly yours,
TRICON Global Restaurants, Inc.
By /s/Lawrence F. Dickie
--------------------------
Lawrence F. Dickie
Vice President & Secretary
AGREED TO AND ACCEPTED:
/s/Andrall E. Pearson
- ----------------------
Andrall E. Pearson
Exhibit 10.08
SALES AND DISTRIBUTION AGREEMENT
This Sales and Distribution Agreement dated as of the 6th day of May,
1997, by and among PFS ("PFS"), an unincorporated division of PepsiCo, Inc., a
North Carolina corporation, Pizza Hut, Inc., a Delaware corporation ("Pizza
Hut"), Taco Bell Corp., a California corporation ("Taco Bell"), Kentucky Fried
Chicken Corporation, a Delaware corporation, and Kentucky Fried Chicken of
California, Inc., a Delaware corporation (Kentucky Fried Chicken Corporation and
Kentucky Fried Chicken of California, Inc. are together referred to herein as
"KFCC"); (Pizza Hut, Taco Bell and KFCC are collectively referred to herein as
the "Customer").
WHEREAS, PFS is an approved distributor of all proprietary and
non-proprietary food, supplies, equipment, smallwares, uniforms, beverages,
promotional items and point of purchase materials sold to Pizza Hut, Taco Bell
and KFC company owned and franchised (including licensed) restaurants; and
WHEREAS, the Customer desires to appoint PFS, and PFS desires to act, as
the exclusive distributor of certain proprietary and non proprietary food,
supplies and smallwares (but not restaurant equipment, uniforms, beverages,
promotional items or point of purchase materials) sold to the company owned
Pizza Hut, Taco Bell and KFC restaurants of the Customer within the continental
United States, all on the terms and conditions set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. Appointment as Approved Distributor of all Company Owned and
Franchised Restaurants.
(a) The Customer hereby appoints PFS as an approved distributor during
the term of this Agreement of the Restaurant Products (defined below) sold to
all Pizza Hut, Taco Bell and KFC restaurants, whether franchised or owned by the
Customer or its subsidiaries or affiliates, in the United States (including
Hawaii and Alaska), Canada and the countries where PFS currently exports
Restaurant Products from its distribution centers in the United States, which
countries are listed in Exhibit A attached hereto (the "Export Countries"). PFS
understands that the appointment contained in this Section 1 is not exclusive
and that PFS shall only have the exclusive distribution rights for the
restaurants and products described in Section 2 below.
<PAGE>
(b) For purposes of this Agreement, the term "Restaurant Products" shall
mean all of the proprietary and non-proprietary food, equipment, supplies,
smallwares (pans, brooms, cutting knifes, salt and pepper shakers, etc.),
uniforms, beverages, promotional items (basketballs, puppets, movies, etc.) and
point of purchase materials (table tents, door hangers, etc.) currently or in
the future approved by the respective Customer for purchase by any Pizza Hut,
Taco Bell or KFC company owned or franchised restaurants. For purposes of
clarity, smallwares, as generally known, are reusable items with small dollar
values such as the ones described above which are used in the operation of the
business and (i) expensed under the Customer's current accounting practices when
they are for replacements and (ii) capitalized under the Customer's current
accounting practice when they are purchased as part of a new restaurant opening
or a major rollout of a new Restaurant Product. In contrast, equipment items are
always capitalized under the Customer's current accounting practice (whether as
a new or replacement item) and food and suppliers are always expensed.
(c) All suppliers and specifications for all Pizza Hut, Taco Bell and
KFC Restaurant Products purchased by PFS must be approved in advance in writing
by Pizza Hut, Taco Bell and KFCC, respectively. PFS hereby acknowledges that it
shall have no role in the process of approving any supplier or the
specifications for the Restaurant Products. PFS understands that Pizza Hut has
signed an exclusive agreement with Leprino Foods Company to buy 100% of the
cheese used on pizzas by the Pizza Hut restaurants within the United States
which are owned by Pizza Hut and its subsidiaries. As a result, unless other
suppliers are specifically approved in writing by Pizza Hut, Leprino Foods
Company will be the sole designated supplier of such cheese purchased by Pizza
Hut restaurants within the United States, both company owned and franchised. As
described in Section 7 below, the Customer's Smart Sourcing division or other
equivalent purchasing function ("Smart Sourcing") shall negotiate the price and
other purchase terms of all Restaurant Products sold by PFS to the Exclusive
Restaurants (defined below) and certain franchised Pizza Hut, Taco Bell and KFC
restaurants within the United States. PFS agrees that it shall not purchase
Restaurant Products under agreements negotiated by Smart Sourcing for any
customers other than Pizza Hut, Taco Bell or KFC restaurants without the prior
written approval of Smart Sourcing. Any breach of the preceding sentence by PFS
shall constitute a material breach of this Agreement.
(d) As described in this Section 1, PFS is an approved distributor for
all Pizza Hut, Taco Bell and KFC restaurants throughout the United States,
Canada and the Export Countries. All Sections of this Agreement after this
Section 1 shall, however, only describe the relationship between the Customer
and PFS with respect to certain Pizza Hut, Taco Bell and KFC restaurants within
the 48 contiguous States of the United States of America (the "Continental
United States"). To the extent that PFS sells Restaurant Products to Pizza Hut,
Taco Bell or KFC restaurants outside of the Continental United States, the
Customer and PFS shall separately agree on the terms of their relationship for
these restaurants.
2. Appointment as Exclusive Distributor of Company Owned Restaurants.
(a) The Customer hereby appoints PFS as the exclusive distributor during
the term of this Agreement of the "Exclusive Restaurant Products" (defined
below) purchased by (i) the Pizza Hut, Taco Bell and KFC restaurants
(traditional and nontraditional units) within the Continental United States
which are owned by the Customer on the Closing Date (as defined in Section 9
below) or any of its Subsidiaries (defined below), except for Restaurants Under
Definitive Contract (defined below) and the 53 Excluded KFC Restaurants (defined
below) or (ii) any additional Pizza Hut, Taco Bell or KFC restaurants
(traditional and nontraditional) within the Continental United States which are
acquired or built by the Customer or its Subsidiaries during the term of this
Agreement (the "Exclusive Restaurants"). The term "Restaurants Under Definitive
Contract" shall mean any Pizza Hut, Taco Bell or KFC restaurants owned by the
Customer which the Customer has agreed to sell pursuant to a definitive
agreement signed by the parties thereto prior to the Closing Date. The term
"Excluded KFC Restaurants" shall mean the 53 KFC restaurants currently owned by
WMCR Corporation, a subsidiary of KFCC, or hereafter built or acquired by WMCR
Corporation in any of the four States where it currently operates, Illinois,
Indiana, Michigan and Wisconsin. During the term of this Agreement, the Customer
and its Subsidiaries shall purchase, and PFS agrees to sell, 100% of the
Exclusive Restaurant Products required by the Exclusive Restaurants, except
incidental purchases in emergency situations. The Customer agrees that during
the term of this Agreement no supplier or distributor other than PFS shall sell
the Exclusive Restaurant Products to the Exclusive Restaurants; provided,
however, that if PFS for any reason fails to deliver any Exclusive Restaurant
Products on a scheduled delivery date which was ordered within the time required
for ordering as described in subsection 5(c) hereof, the Exclusive Restaurant
shall be permitted to purchase such Exclusive Restaurant Products from another
source or sources to meet its requirements (but only for such order and not for
any future orders), and no such purchase shall be construed as a breach of the
Customer's obligations or require additional compensation to PFS. The term
Exclusive Restaurants shall include all types of nontraditional restaurants
including kiosks, carts, delivery units and restaurants in hotels, schools,
airports and hospitals but it shall not include any restaurants owned, acquired
or built by the Customer which are not Pizza Hut, Taco Bell or KFC restaurants.
To the extent the Customer owns, acquires or builds other concept restaurants,
they will only be considered Exclusive Restaurants under this Agreement if the
Customer and PFS specifically agree in writing to include them under this
Agreement.
(b) For purposes of this Agreement, the term "Exclusive Restaurant
Products" shall mean all proprietary and non-proprietary food (except fresh
chicken and fresh produce), restaurant supplies (including, without limitation,
all paper products) and smallwares currently or in the future approved by the
respective Customer for purchase by any Exclusive Restaurant. Fresh chicken,
fresh produce, equipment, uniforms, beverages, promotional items and point of
purchase materials shall not be within the definition of Exclusive Restaurant
Products. As a result, PFS shall be an approved distributor as described in
Section 1 above (but not an exclusive distributor) of all such nonexclusive
Restaurant Products which are excluded from the definition of Excluded
Restaurant Products. The above definition of Exclusive Restaurants Products may
be changed only by written agreement of the Customer and PFS.
(c) For purposes of this Agreement, the term "Subsidiaries" shall mean
the companies, partnerships or other entities in which the Customer owns at
least a majority of the total equity interests. For purposes of convenience
only, the numerous Subsidiaries of the Customer who own the Exclusive
Restaurants are not signing this Agreement. The Customer hereby unconditionally
guarantees the full performance of the obligations of its Subsidiaries who own
the Exclusive Restaurants during the term of this Agreement and the fact that
such Subsidiaries are not signing this Agreement shall not affect in any way the
rights or obligations of the Customer or PFS under this Agreement.
(d) A list of the Exclusive Restaurants on the Closing Date will be
provided by the Customer to PFS on the Closing Date, which list will be the
initial list of the Exclusive Restaurants. If during the term of this Agreement
the Customer or any of its Subsidiaries acquires or builds any additional Pizza
Hut, Taco Bell or KFC restaurants, the Customer shall so notify PFS and such
additional restaurants shall be added to the list of Exclusive Restaurants and
become subject to the terms of this Agreement for the remaining period of this
Agreement. If the Customer or any of its Subsidiaries sell, or enters into a
definitive agreement to sell, any Pizza Hut or Taco Bell Exclusive Restaurants
during the term of this Agreement, and the buyer of such Exclusive Restaurants
is or becomes a Pizza Hut or Taco Bell franchisee, as the case may be, the buyer
of such Exclusive Restaurants shall be required prior to such sale to enter into
a Sales and Distribution Agreement with PFS with respect to such purchased
Exclusive Restaurants on substantially the same terms and conditions as this
Agreement pursuant to which PFS will continue to be the exclusive distributor of
the Exclusive Restaurant Products for such newly franchised Exclusive
Restaurants for a term equal to the remaining term of this Agreement. As a
result, PFS shall continue to be the exclusive distributor of the Exclusive
Restaurant Products during the remaining period of the five year term of this
Agreement for any Exclusive Restaurant sold by the Customer or its Subsidiaries
as a franchised Pizza Hut or Taco Bell restaurant. Once such buyer enters into
such a Sales and Distribution Agreement with PFS with respect to such purchased
Exclusive Restaurants, the Customer shall have no further obligations under this
Agreement with respect to such purchased Exclusive Restaurants and the Customer
shall not guarantee in any way the payment or other obligations of such buyer to
PFS. If the buyer of such Exclusive Restaurant already owns other franchised
Pizza Hut or Taco Bell restaurants, such other restaurants owned by such buyer
shall not be required to become Exclusive Restaurants subject to the terms of
this Agreement. The requirement that refranchised Pizza Hut and Taco Bell
Exclusive Restaurants must continue to be Exclusive Restaurants under this
Agreement shall not apply to KFC Exclusive Restaurants sold by the Customer or
its Subsidiaries during the term of this Agreement. If a KFC Exclusive
Restaurant is sold by the Customer or its Subsidiaries during the term of this
Agreement and becomes a franchised KFC restaurant, the terms of this Agreement
shall not apply to said KFC restaurant which will be removed from the list of
Exclusive Restaurants.
3. Prices For Exclusive Restaurant Products
(a) The prices to be paid by the Exclusive Restaurants for the Exclusive
Restaurant Products purchased from PFS during the term of this Agreement shall
be equal to (x) the "Landed Cost" (defined below) of the Exclusive Restaurant
Products plus an average mark up described in Exhibit B above as a percentage of
the Landed Cost of all Exclusive Restaurant Products plus (y) the costs of Smart
Sourcing allocated to the Exclusive Restaurant Products and charged to PFS as
described in Section 7 below. As described in Exhibit B, the mark up will be
different for the different restaurant chains, Pizza Hut, Taco Bell and KFC.
(b) The term "Landed Cost" shall mean the F.O.B. price to purchase the
Exclusive Restaurant Products from the vendor, net of all related allowances,
discounts, rebates, or other payments of any kind from the vendor to PFS or the
Customer (which will be fully passed through), plus the actual inbound freight
costs to ship the Exclusive Restaurant Products to the distribution centers of
PFS. Landed Costs shall include the costs incurred by PFS in transferring the
Exclusive Restaurant Products between distribution centers only if these
transfers are for cross docking or break bulk purposes, where the shipment from
the vendor to the final distribution center is planned to go through other
distribution centers of PFS. Any costs incurred by PFS in transferring the
Exclusive Restaurant Products between its distribution centers as a result of
out of stocks (or equivalent circumstances), however, shall not be considered
Landed Cost but instead shall be borne by PFS. All cash or early pay discounts
which are received by PFS (whether negotiated by Smart Sourcing or PFS) for
paying the vendors of the Exclusive Restaurant Products before the payment due
date negotiated by Smart Sourcing will not reduce or otherwise be factored into
the calculation of the Landed Costs. As described in Section 7 below, the
inbound freight costs to ship the Exclusive Restaurant Products to PFS's
distribution centers will be managed by PFS unless Smart Sourcing decides
otherwise and all of PFS's costs of such inbound freight will be subject to
review by Smart Sourcing.
(c) The parties will agree on the specific method of billing the
Exclusive Restaurants (e.g., electronic billing, faxed invoice or other format)
and whenever possible electronic billing will be used. The parties understand
that at the time it sets its prices lists PFS will only be able to approximate
the Landed Costs of the Exclusive Restaurant Products sold to each of the
respective Pizza Hut, Taco Bell and KFC Exclusive Restaurants. PFS agrees to
make a good faith estimate of such Landed Costs at the time it sets its price
lists and to make appropriate adjustments to subsequent invoices to make up for
any inaccuracies in the estimates. In addition, at the beginning of each month
during the term of this Agreement PFS and the Customer shall jointly review
PFS's records relating to the Landed Costs of all Exclusive Restaurants Products
sold to each of the respective Pizza Hut, Taco Bell and KFC Exclusive
Restaurants during the prior month and shall agree on the appropriate
adjustments to the subsequent invoices to make up for any inaccuracies in the
estimates. From time to time during the term of this Agreement, the Customer
shall have the right to review all financial and business records of PFS which
are reasonably requested by the Customer to determine the Landed Costs of the
Exclusive Restaurant Products sold to the Exclusive Restaurants. Within 90 days
after the end of each calendar year, PFS shall provide to the Customer a
calculation by a major independent international public accounting firm, agreed
upon by PFS and the Customer, of the Landed Costs of all Exclusive Restaurant
Products sold to each of the respective Pizza Hut, Taco Bell and KFC Exclusive
Restaurants during that calendar year (which shall be during the stub period
from the Closing Date to December 31, 1997 for the 1997 calendar year). Within
30 days after receipt by the Customer of such calculation of the Landed Costs,
PFS or the Customer, as the case may be, shall make an adjusting payment to the
other party to reflect the difference between the amounts actually charged to
the Customer for the Exclusive Restaurant Products and the amounts which should
have been charged based on such revised calculation of the Landed Costs. PFS
shall make available to the independent accounting firm all financial records
necessary to make such calculation. The costs of the independent accounting firm
shall be shared equally by the Customer and PFS (50% by each).
(d) The prices described in paragraphs (a), (b) and (c) above shall
apply only to the Exclusive Restaurant Products. For all Restaurant Products
which are not included within the definition of Exclusive Restaurant Products
(e.g., fresh chicken, fresh produce, equipment, uniforms, beverages, promotional
items and point of purchase materials), the prices will be negotiated from time
to time by PFS and the Customer.
(e) Notwithstanding the foregoing, the parties agree that the prices of
the Restaurant Products which are food, paper products and similar restaurant
supplies purchased by all Pizza Hut restaurants within the Continental United
States (both Pizza Hut Exclusive Restaurants and Pizza Hut franchised
restaurants) will continue during the term of this Agreement to be subject to
the 2.5% net pre-tax profit margin limit set forth in clause D (ii) of Section
8.3 of the standard Pizza Hut Franchise Agreement, a copy of which is attached
hereto as Exhibit C. PFS agrees to maintain during the term of this Agreement
the rebate program for this 2.5% net pre-tax profit margin limit for Pizza Hut
restaurants in the same manner as the program has been administered in the past,
including maintaining the current basis for allocating costs (including, without
limitation, the current method of charging a hypothetical interest cost) and
providing to Pizza Hut and its Pizza Hut franchisees the audit of all allocated
costs and the rebate payments provided for under Section 8.3 of the standard
Pizza Hut Franchise Agreement.
4. Payment Terms for the Restaurant Products
(a) The Customer shall pay to PFS the purchase price for the Restaurant
Products delivered to and accepted by the Customer within 30 calendar days after
the date of invoice (which invoice will be the same day as delivery).
Notwithstanding the foregoing, if any Exclusive Restaurant which is not owned by
the Customer does not pay within the required payment terms, such Exclusive
Restaurant may be placed by PFS on a cash-on-delivery (C.O.D.) basis or required
to provide security or collateral for amounts owed to PFS. Payment to PFS shall
be made (i) in the case of the Exclusive Restaurants owned by the Customer, by
wire transfer of funds and (ii) in the case of the Exclusive Restaurants which
are not owned by the Customer, upon receipt on the due date by PFS of a check in
PFS's lock box or by wire transfer of funds. No interest shall be charged to the
Customer with respect to payments made on or before the due date. Early pay
discounts, if any, will be negotiated by the Customer and PFS from time to time
during the term of this Agreement.
(b) If any amounts due to PFS are not paid in accordance with the
payment terms when due as described in subsection 4(a) above, a service charge
shall be added to the sums due, which charge shall be equal to the lesser of (i)
an interest charge determined by applying to the delinquent balance an interest
rate equal to the prime rate of interest of Citibank N.A. (as published from
time to time) plus 2% per annum or (ii) the amount determined by applying the
maximum rate permitted to be charged under applicable state law.
(c) If PFS decides to extend credit to any Exclusive Restaurant which is
not owned by the Customer, such credit extension shall be subject to the
condition that such franchised Exclusive Restaurants provides (i) evidence of
continued financial ability to pay its debts and (ii) adequate security or
collateral as requested by PFS.
5. Deliveries and Orders of the Restaurant Products excluding Equipment
(a) The provisions of this Section 5 describe the mechanics and
procedures for ordering and delivering all of the Restaurant Products
distributed and sold by PFS to the Exclusive Restaurants except for the new and
replacement equipment and furnishings which PFS sells to the Exclusive
Restaurants through its equipment business and certain smallware items which are
not delivered through the PFS distribution centers (the "Non Fleet Smallwares").
The Restaurant Products, excluding equipment and furnishings and the Non Fleet
Smallwares, is hereinafter referred to as the "F & S Restaurant Products". The
specific mechanics and procedures for ordering and delivering of equipment,
furnishings and the Non Fleet Smallwares is not described in this Agreement and
will be subject to the agreement of PFS and the Exclusive Restaurants from time
to time.
(b) Deliveries of the F & S Restaurant Products shall be made twice a
week to the Exclusive Restaurants. If the Customer desires to have more than two
deliveries per week for any particular Exclusive Restaurants, the Customer will
be required to pay an additional charge to PFS in an amount to be negotiated and
agreed upon by PFS and the Customer. PFS will offer to the Customer a discount
off the purchase price of the F & S Restaurant Products (in an amount determined
by PFS) if an Exclusive Restaurant agrees to reduce the number of its scheduled
deliveries to less than two deliveries per week. Notwithstanding the foregoing,
the Exclusive Restaurants which currently receive three deliveries per week
shall continue to receive three deliveries per week without additional charge.
PFS may deliver the ordered F & S Restaurant Products to the Exclusive
Restaurant at any time during which the Exclusive Restaurant is open for
business except for the black out periods described in Exhibit D attached
hereto, or such other black out periods which are agreed upon by PFS and the
Exclusive Restaurants. Before the beginning of each such black out period PFS's
drivers must complete their deliveries and be out of the Exclusive Restaurant
and failure to do so will not be considered as an on time delivery. PFS agrees
to start deliveries within one hour (before or after) of the expected delivery
time that PFS notifies an Exclusive Restaurant. As examples: (i) if the expected
delivery time is 9:00am and PFS's driver starts the delivery between 8:00am and
10:00am, the delivery will be on time but (ii) if the expected delivery time is
11:00am for a Taco Bell restaurant and PFS's driver starts the delivery at
11:00am but does not complete the delivery by 11:30am, the delivery will not be
on time. PFS will notify the Exclusive Restaurants of the expected delivery time
no later than the day preceding the date of delivery. If the delivery cannot be
started within such two hour period (one hour before and one hour after the
scheduled delivery time), PFS will notify the Exclusive Restaurant in advance
but the delivery will still be made the same day. PFS will be allowed to deliver
the F & S Restaurant Products when the Exclusive Restaurant is closed (so called
"key" deliveries) only with the prior written approval of an officer of the
Customer (or other appropriate level employee of the Exclusive Restaurants as
designated by the Customer). If PFS's driver sets off an alarm at a key delivery
(other than because the Exclusive Restaurant did not provide the correct alarm
code) and there are charges incurred by the Exclusive Restaurant as a result of
such alarm, PFS will reimburse the Exclusive Restaurant for such charges.
Delivery days and times will be scheduled so as to cause as little interruption
to the operation of the Exclusive Restaurants as is practical under the
circumstances.
(c) Orders by the Customer for the F & S Restaurant Products must be
made to PFS no later than 5:00pm on the day which is two days prior to the
scheduled delivery date; provided, however, that for Exclusive Restaurants which
are not close to a distribution center of PFS (not within one day normal driving
time from PFS's distribution center), PFS may require that these orders be made
no later than 5:00pm on the day which is three days prior to the scheduled
delivery date. If there are any exceptional cases where PFS wishes to receive
orders four days prior to the scheduled delivery date, they must be approved in
writing by the local manager of the affected Exclusive Restaurant. PFS agrees to
continue to maintain the "Sourcelink" electronic ordering system (or equivalent
up to date electronic ordering system) which currently allows the Exclusive
Restaurants to make electronic orders for the F & S Restaurant Products. If the
Sourcelink orders are not received within two hours before the 5:00pm order
deadline, PFS will call the restaurant before the order deadline in order to try
to receive the order. If the distribution center of PFS is still unable to
receive an order from an Exclusive Restaurant prior to the 5:00pm order
deadline, PFS shall automatically order for the Exclusive Restaurant the exact
same order it received for the same day of the previous week (excluding
smallwares) and the Exclusive Restaurant will be required to accept such
delivery when made. To the extent the Exclusive Restaurant is late in ordering
or changes its order after the 5:00pm order deadline, PFS is not required to
accept such late or changed order. If PFS decides to accept such late or changed
order, PFS may charge the Customer a special delivery charge to be negotiated by
PFS and the Customer.
(d) Deliveries shall be to such location on the Exclusive Restaurant
premises as the Exclusive Restaurants shall reasonably direct. F & S Restaurant
Products shall be deemed delivered when actually placed in the storage areas of
the Exclusive Restaurant (including the temperature controlled compartments in
the case of the frozen or refrigerated F & S Restaurant Products) by PFS's
drivers, as reasonably directed by employees of the Exclusive Restaurant. PFS's
drivers will not be required to stock shelves or rotate the F & S Restaurant
Products. The Exclusive Restaurants will be responsible to keep the back door
and aisle free of debris for PFS's drivers to deliver the F & S Restaurant
Products to the storage areas. To the extent practicable, deliveries by PFS
shall have unloading priority over all other vendors. The Exclusive Restaurants
shall assign and make available an employee or employees to accept delivery,
subject to the terms of paragraph (f) below, of F & S Restaurant Products, and
to sign the invoice documenting receipt of the ordered F & S Restaurant Products
(to the extent received and not damaged).
(e) PFS will only deliver the F & S Restaurant Products specified by the
Customer and shall not substitute products for the F & S Restaurant Products;
provided, however, that the delivery on an infrequent basis of F & S Restaurant
Products in a different size than ordered shall not be considered a substitute
if the total quantity of the F & S Restaurant Products is the amount ordered
(e.g., delivery of two 12 ounce jars instead of four 6 ounce jars). PFS agrees
to comply with all quality assurance programs and guidelines required by the
Customer from time to time during the term of this Agreement to ensure that the
quality of the F & S Restaurant Products is maintained while the Restaurant
Product is being stored, handled and transported by PFS. The current quality
assurance programs and guidelines of each of Pizza Hut, Taco Bell and KFC have
been provided to PFS prior to the date hereof.
(f) If ordered F & S Restaurant Products are not delivered by PFS on the
scheduled delivery date (including key deliveries), or are delivered damaged or
not meeting the required specification, at the request of the Exclusive
Restaurant, PFS will make a special delivery to redeliver the F & S Restaurant
Products as quickly as possible. In addition, PFS shall take back all F & S
Restaurant Products which are damaged or out of specification and give a credit
to the Exclusive Restaurant for the purchase price charged by PFS to the
Exclusive Restaurant for that product. If the F & S Restaurant Products were out
of specification or the damages were internal and not visible to PFS upon
receiving delivery of the F & S Restaurant Products from the vendor, the vendor
shall be responsible to PFS for all costs relating to making such special
deliveries and to take back damaged or out of specification F & S Restaurant
Products. The Customer and PFS each agree to use their respective best efforts
to collect such costs from the vendors.
(g) If the Customer decides to return any nonperishable F & S Restaurant
Products ordered by the Customer and delivered to it within specification, not
damaged and on the scheduled delivery date, PFS shall charge the Customer for
taking back such F & S Restaurant Product an amount equal to 15% of the invoice
price of such F & S Restaurant Product (as a restocking fee).
(h) Title and risk of loss for the F & S Restaurant Products purchased
by the Exclusive Restaurants from PFS shall pass to the Exclusive Restaurants
upon delivery by PFS inside the Exclusive Restaurant. In the event that any F &
S Restaurant Products are delivered and subsequently returned or rejected by an
Exclusive Restaurant, title and risk of loss shall revert to PFS upon the
physical transfer of possession of the F & S Restaurant Products back to PFS.
(i) The Customer acknowledges and agrees that PFS has full discretion to
direct all deliveries from any distribution center which PFS operates, and to
make such changes to the routing process as PFS, in its sole discretion,
determines appropriate; provided, however, that PFS shall notify the affected
Pizza Hut, Taco Bell and KFC restaurants of any changes in its routes. In
addition, the Customer acknowledges and agrees that PFS's fleet may not be
solely dedicated to the distribution of F & S Restaurant Products to Pizza Hut,
Taco Bell and KFC restaurants. As a result, PFS's fleet which distribute the F &
S Restaurant Products to Pizza Hut, Taco Bell and KFC restaurants may also carry
other products for delivery to other customers (including competing customers)
on the same routes so long as they do not in any way damage, contaminate or
adversely affect the quality of the F & S Restaurant Products during the
delivery or adversely affect deliveries to the Exclusive Restaurants.
(j) Management of the inventory levels in the distribution centers of
PFS will be the responsibility of PFS except that PFS agrees that it will not
buy any F & S Restaurant Products which PFS expects to keep in inventory for
more than 60 days without the consent of the Customer. PFS agrees to provide to
the extent practicable weekly information to the Customer by distribution center
of its inventory levels of the F & S Restaurant Products. PFS shall not be
required to buy promotional items or new or test market F & S Restaurant
Products until it first receives a firm commitment from the Customer and, in the
case of such promotional items or new or test market F & S Restaurant Products
which are for sale to franchised Pizza Hut, Taco Bell or KFC restaurants, until
it first receives a firm commitment from such franchisees to purchase such
promotional items or new or test market F & S Restaurant Products. If any
promotional items or any other F & S Restaurant Products which are unique to the
Customer's operations are purchased by PFS based on the Customer's projections
and such F & S Restaurant Products remain in PFS's inventory for more than 90
days after Customer's projected need, however, PFS may charge the Customer a
storage and handling charge equal to 1 % of the Landed Cost of such F & S
Restaurant Products per month until such F & S Restaurant Products are delivered
to the Customer. Each month during the term of this Agreement the Customer and
PFS shall meet to review the amount of promotional items or other unique F & S
Restaurant Products which have remained in inventory for more than 90 days after
Customer's projected need and use their respective best efforts to agree on a
schedule for delivery of such excess inventory to the Exclusive Restaurants as
quickly as possible and in any event not more than an additional 90 days after
such initial 90 day period. At the end of such additional 90 day period, PFS may
require the Customer to either order such excess inventory or direct PFS to
dispose of such excess inventory at the Customer's cost. Unless either (i) an F
& S Restaurant Product is discontinued by the Customer or (ii) the Customer
approves an AIP (authorization for inventory purchase) for F & S Restaurant
Products ordered by franchised Pizza Hut, Taco Bell or KFC restaurants, the
Customer shall not be responsible to PFS for any storage charges or purchase
commitments of any franchised Pizza Hut, Taco Bell or KFC restaurants.
(k) In the event the Customer decides to recall any Restaurant Product,
PFS agrees to assist the Customer, to the extent reasonably requested by the
Customer, in its recall efforts, including, without limitation, promptly
assisting the Customer in determining exactly which Pizza Hut, Taco Bell or KFC
restaurants may need to be notified of a product recall. Unless such recall was
needed as a result of any action or omission to act by PFS, the Customer (or the
vendor at the Customer's direction) shall reimburse PFS for all additional costs
incurred by PFS (e.g., labor, fuel, etc.) in such recall efforts, to the extent
such recall was requested by the Customer.
(l) PFS warrants that all F & S Restaurant Products to be distributed by
it to Pizza Hut, Taco Bell or KFC restaurants shall be inspected, handled,
stored, shipped and sold by PFS in strict compliance with all applicable (i)
federal and state laws (ii) rules and regulations of all governmental agencies
having jurisdiction and (iii) municipal ordinances. Upon its receipt of any
citation issued by any governmental or regulatory authority which might result
in the interruption in PFS's distribution service to any Pizza Hut, Taco Bell or
KFC restaurant customers, PFS shall promptly notify such customers who may be
affected.
(m) PFS agrees to use its best efforts to take and respond to emergency
calls from the Exclusive Restaurants for delivery of F & S Restaurant Products.
PFS and the Exclusive Restaurants will agree upon the additional charges to be
paid to PFS for special deliveries needed to respond to such emergency calls.
6. Minimum Service Levels.
(a) PFS agrees to maintain during the term of this Agreement, on a total
basis for all Exclusive Restaurants serviced by PFS, each of the following
monthly service levels:
(i) The actual number of Perfect Orders (defined below) of the F
& S Restaurant Products which are delivered to the Exclusive Restaurants
during each month as a percentage of the total number of deliveries of
the F & S Restaurant Products ordered shall not be less than 85%; and
(ii) The number of deliveries of the F & S Restaurant Products
during any month which are on time (within one hour before or after the
scheduled delivery time as described in Section 5(b) above) shall not be
less than 80%.
The above service levels shall be measured on a total basis for all
distribution centers of PFS together (not separately for each individual
distribution center). Key deliveries will not be factored in any way into the
measurement of on time deliveries described in (ii) above.
If PFS fails to achieve either of such service levels during any three
months of any calendar year during the term of this Agreement (commencing in
1998), this failure shall constitute a material breach of this Agreement
entitling the Customer to terminate this Agreement upon notice to PFS as
described in Section 10 below.
(b) PFS agrees to maintain during the term of this Agreement, for the
Exclusive Restaurants serviced by each distribution center of PFS, the following
monthly service level:
The actual number of Perfect Orders of the F & S Restaurant
Products which are delivered to the Exclusive Restaurants from
that distribution center during each month as a percentage of the
total number of deliveries of the F & S Restaurant Products
ordered shall not be less than 75%.
The above service level shall be measured separately for each
distribution center of PFS which delivers to the Exclusive Restaurants.
If PFS fails to achieve the above service level during any three months
of any calendar year during the term of this Agreement (commencing in 1998), the
Customer shall have the right upon notice to PFS to remove the Exclusive
Restaurants which were serviced by such distribution center from the list of
Exclusive Restaurants. As a result, if the Customer gives such notice, PFS will
lose the exclusive right under this Agreement to deliver the Exclusive
Restaurant Products to the Exclusive Restaurants which were customers of such
underperforming distribution center.
(c) The term "Perfect Order" shall mean a delivery where 100% of the
cases of the delivered F & S Restaurant Products are (i) exactly the items
ordered by the Exclusive Restaurant, (ii) not damaged and (iii) within
specification.
If PFS does not deliver a F & S Restaurant Product because the vendor
was not able to supply a F & S Restaurant Product ordered by PFS, such failure
shall not be counted against the service levels described in paragraphs (a) and
(b) above.
Promptly after the end of each month PFS shall notify the Customer of
its service levels described in paragraphs (a) and (b) above for that month and,
at the request of the Customer, PFS shall make available to the Customer all of
its records which support its determination of the service levels and such other
records reasonably requested by the Customer.
7. Smart Sourcing.
(a) PFS and Smart Sourcing intend that their relationship will be based
on a spirit of cooperation where they will support each other whenever possible.
During the term of this Agreement, Smart Sourcing will negotiate with the
vendors all price and other purchase terms for all Restaurant Products which are
distributed and sold by PFS to any Exclusive Restaurants and such prices will
constitute, together with inbound freight, the Landed Costs of the Exclusive
Restaurant Products as described in Section 3 above. The commitment by PFS to
exclusively buy under terms and agreements negotiated by Smart Sourcing all
Restaurant Products sold to the Exclusive Restaurants is subject to the
exception that if PFS is able to buy such Restaurant Products for the Exclusive
Restaurants on terms more favorable to the Exclusive Restaurants than those
negotiated by Smart Sourcing, PFS will notify the Customer of such better terms
and offer the Customer the opportunity to buy such Restaurant Products on such
better terms negotiated by PFS. For the Pizza Hut, Taco Bell or KFC franchised
restaurants which are customers of PFS, other than the Exclusive Restaurants
which are franchised, PFS shall be required to purchase the Restaurant Products
sold to such franchised Pizza Hut and Taco Bell restaurants under the terms and
agreements which are negotiated by Smart Sourcing for the Exclusive Restaurants
owned by the Customer but PFS may, but it shall not be required to, purchase the
Restaurant Products sold to such franchised KFC restaurants under prices and
other terms which are negotiated by Smart Sourcing. As a result, PFS shall be
committed to exclusively buy through Smart Sourcing terms and agreements all of
the Restaurant Products it sells to franchised Pizza Hut and Taco Bell
restaurants but PFS shall not be committed to exclusively buy through Smart
Sourcing terms all of the Restaurant Products it sells to the franchised KFC
restaurants which are not Exclusive Restaurants. Smart Sourcing shall have the
right to allocate among two or more vendors the total purchases of the
Restaurant Products purchased under terms and agreements negotiated by Smart
Sourcing. In addition, Smart Sourcing shall have the right to determine which
vendors will supply the Restaurant Products purchased under terms and agreements
negotiated by Smart Sourcing to each of the respective distribution centers of
PFS. The Customer agrees that the "Weighted Average Payment Term" (defined
below) for the Restaurant Products purchased during any calendar quarter by PFS
and negotiated through Smart Sourcing will be no less than 15 calendar days. For
purposes of this Agreement, the term "Weighted Average Payment Term" shall mean
the average number of days after invoice which the suppliers of the Restaurant
Products purchased through Smart Sourcing require for payment by PFS, weighted
by the Dollar volumes for the different items of the Restaurant Products and the
different required terms for payment. Notwithstanding the foregoing, Smart
Sourcing may negotiate payment terms for Restaurant Products purchased by PFS
for sale to the Exclusive Restaurants owned by the Customer (not franchised
Exclusive Restaurants) which result in a Weighted Average Payment Term for such
Restaurant Products below 15 calendar days so long as there is an equivalent
reduction in the receivable payment terms for such Exclusive Restaurants to
fully compensate PFS for paying earlier than a Weighted Average Payment Term of
15 days. As described in Section 3(b) above, PFS shall be entitled to receive
all early pay discounts and such discounts shall not reduce the amount of the
Landed Costs. Smart Sourcing shall have the right to negotiate early pay
discounts which PFS will receive so long as the Weighted Average Payment Term,
after taking into account such discounts, is not less than 15 calendar days as
described above. Smart Sourcing agrees that PFS shall have the right to receive
a total amount of early pay discounts equal to at least $10,600,000 per year
(commencing in 1998), without any reduction in the Weighted Average Payment Term
below 15 days. If PFS does not have the right to receive at least $10,600,000
early pay discounts during any calendar year during the term of this Agreement
(commencing in 1998) without reducing the Weighted Average Payment Term below 15
days, Smart Sourcing shall pay to PFS the amount of such shortfall within 30
days after the end of such calendar year. In addition, Smart Sourcing may
negotiate payment terms which include an interest charge for late payments by
PFS to the supplier equal to the lesser of: (i) the prime rate of interest of
Citibank N.A. (as published from time to time) plus 2% per annum or (ii) the
maximum rate permitted to be charged under applicable State law.
(b) Except as described below, all inbound freight of the Restaurant
Products to the distribution centers of PFS, including the selection of the
carriers and the negotiation of the freight charges, will be managed by and
incurred by PFS as part of its distribution services provided under this
Agreement (without any additional fee to the Customer). PFS agrees to use its
best efforts to reduce its inbound freight costs and whenever possible arrange
for deliveries of the Restaurant Products in full truckloads. If Smart Sourcing
requests, PFS shall be required to obtain Smart Sourcing's approval of all
deliveries which are less than full truckloads; provided, however, that Smart
Sourcing will bear all additional costs to comply with this approval process.
PFS shall make available to Smart Sourcing, at such intervals as requested by
Smart Sourcing, all of the records of PFS relating to its inbound freight costs
for the Restaurant Products. Smart Sourcing shall have the right at any time and
in its discretion to require PFS to receive prior approval from Smart Sourcing
for all inbound freight charges before they are incurred; provided, however,
that Smart Sourcing will bear all additional costs to comply with this approval
process. In addition, Smart Sourcing shall also have the right at any time and
in its discretion to take over the inbound freight function from PFS, including
the selection of carriers and negotiation of rates.
(c) In addition to and separate from PFS's appointment as the exclusive
distributor of the Exclusive Restaurant Products to the Exclusive Restaurants as
described in Section 2 hereof, the Customer agrees that, during the term of this
Agreement, Smart Sourcing will not allow another distributor other than PFS to
distribute the Restaurant Products to any Pizza Hut, Taco Bell or KFC franchised
restaurant within the Continental United States under the prices and other
purchase terms negotiated by Smart Sourcing. In other words, in addition to the
Exclusive Restaurants, PFS will also be the exclusive distributor during the
term of this Agreement for franchised Pizza Hut, Taco Bell and KFC restaurants
which purchase the Restaurant Products through Smart Sourcing terms.
Notwithstanding the foregoing, if KFC National Purchasing Cooperative, Inc.
purchases, or arranges for the purchase of, Restaurant Products for franchised
KFC restaurants under prices and other purchase terms negotiated by Smart
Sourcing, the provisions of this paragraph (c) shall not apply with respect to
the Restaurant Products so purchased and the distributor of such Restaurant
Products may be a firm other than PFS.
(d) The Customer shall charge PFS a fee for providing the services of
its Smart Sourcing division equal to 1/2 % of the F.O.B. price of the vendors of
the Restaurant Products which are purchased by PFS under terms and agreements
negotiated by Smart Sourcing. PFS shall pass on this fee to its Pizza Hut, Taco
Bell and KFC customers (including the Exclusive Restaurants and all franchised
restaurants) within the Continental United States, as described in Section 3(a)
in the case of Exclusive Restaurant Products sold to the Exclusive Restaurants.
The proportion of the total Smart Sourcing costs which are allocated to the
Restaurant Products sold to the Exclusive Restaurants cannot exceed the
percentage of the total purchases by PFS of all Restaurant Products under terms
and agreements negotiated by Smart Sourcing which is represented by the total
purchases by PFS of the Restaurant Products sold to the Exclusive Restaurants.
Promptly after the end of each month during the term of this Agreement the
Customer shall send to PFS an invoice for its Smart Sourcing fee for that month
which invoice will be due within 15 days after receipt. PFS shall have the right
to require Smart Sourcing to provide evidence reasonably acceptable to PFS which
supports Smart Sourcing's calculation of its fee.
8. Continuation of Equipment Business
Although the equipment products of PFS are not part of the Exclusive
Restaurant Products sold to the Exclusive Restaurants, PFS currently plans to
maintain the equipment business and to make the equipment products available for
purchase by the Pizza Hut, Taco Bell and KFC restaurant customers of PFS. PFS
agrees to provide to the Customer and its other Pizza Hut, Taco Bell and KFC
franchised restaurant customers at least six months prior notice before either
(i) any significant reduction by PFS in the distribution services it offers for
equipment products or (ii) PFS sells the equipment business. The Customer agrees
to provide to PFS at least six months prior notice before the Exclusive
Restaurants owned by the Customer purchase in any calendar year during the term
of this Agreement more than 20% of their total purchases of equipment products
from companies other than PFS.
9. Term
This Agreement shall not apply or go into effect until the closing date
(the "Closing Date") of the currently proposed sale of PFS by PepsiCo, Inc.
(estimated to occur at the end of June, 1997). This Agreement shall be for a
term of five years commencing on the Closing Date, unless earlier terminated as
provided in Section 10 hereof. This Agreement shall automatically terminate
after such term unless the Customer and PFS expressly agree in writing to extend
such term for an additional period.
10. Termination
This Agreement may be terminated prior to the end of the term hereof,
without affecting the rights or obligations of either party with respect to the
Restaurant Products already delivered by PFS, as follows:
(a) In the event that the other party breaches any material term of this
Agreement, and such breach shall remain unremedied for a period of thirty
calendar days after written notice of such breach from the non-breaching party,
the non-breaching party may terminate this Agreement upon written notice to the
breaching party.
(b) If PFS is in material breach of this Agreement for failure to
maintain either of the service levels described in Section 6(a) hereof for any
three months of any calendar year during the term of this Agreement (commencing
in 1998), the Customer may terminate this Agreement upon written notice to PFS
at any time during the 90 day period after the end the third month in which it
failed to meet such service level.
(c) In the event that either party (i) makes an assignment for the
benefit of its creditors, (ii) has a petition initiating a proceeding under
applicable bankruptcy laws filed against it and such petition is not set aside
within 60 days after such filing, (iii) files any voluntary petition for
bankruptcy, liquidation or dissolution or has a receiver, trustee or custodian
appointed for all or part of its assets or (iv) seeks to make an adjustment,
settlement or extension of its debt with its creditors generally, the other
party may terminate this Agreement upon written notice to such party.
11. Insurance
Each party shall obtain and maintain comprehensive general liability
insurance (including products liability) in amounts equal to at least Ten
Million Dollars ($10,000,000) combined single limit for death, personal injury,
and property damage, and worker's compensation insurance as required by law.
Each party shall file with the other certificates evidencing such insurance and
shall promptly pay all premiums on said policies as and when the same become
due. In addition, said policies shall contain a provision requiring thirty days
prior written notice to the other of any proposed cancellation or termination of
insurance. The insurance requirements set forth above are minimum coverage
requirements and are not to be construed in any way as a limitation of liability
under this Agreement.
12. Trademarks
(a) Neither the Customer nor PFS shall acquire any right or interest in
the trademarks or trade names of the other party pursuant to this Agreement.
Except as specifically set forth herein, neither the Customer nor PFS shall use
the name of the other or any part of any trademark or trade name of the other
party without the express written permission of such other party.
(b) PFS may continue to display the Pizza Hut, Taco Bell and KFC
trademarks on its delivery fleet in the same manner as such trademarks are
currently displayed. Any change in the way such trademarks are displayed on
PFS's delivery fleet shall require the prior written approval of the Customer.
The Customer may, in its discretion, either (i) require PFS, at the Customer's
cost (unless PFS is refurbishing its fleet pursuant to a normal maintenance
schedule), to change the way the Pizza Hut, Taco Bell and KFC trademarks are
displayed on the fleet of PFS in order to update the logos for any changes in
the way such trademarks are generally displayed by the Customer or (ii) require
PFS to remove such trademarks from its fleet at any time, at the Customer's
cost. PFS further agrees that, without the Customer's prior written consent,
PFS's delivery trucks which display the Pizza Hut, Taco Bell and KFC trademarks
will not be used for any deliveries to any customers of PFS other than Pizza
Hut, Taco Bell and KFC restaurants. PFS shall not be required, however, to
continue to display the Pizza Hut, Taco Bell and KFC trademarks on it delivery
fleet and shall be free, in its discretion, to remove such trademarks at any
time. PFS agrees that its delivery fleet which deliver the Restaurant Products
to any Pizza Hut, Taco Bell or KFC restaurants (the Exclusive Restaurants or any
franchised Pizza Hut, Taco Bell or KFC restaurants) shall not display the
trademarks of any other restaurant customer of PFS.
13. Confidentiality by PFS
(a) PFS acknowledges the Customer's need to maintain the confidentiality
of certain proprietary information disclosed by the Customer to PFS. All
information communicated by the Customer to PFS which contains vendor pricing
information negotiated by Smart Sourcing, marketing and restaurant data, new
product information or other information specifically relating to the Customer's
business shall be kept confidential and not used or disclosed by PFS to any
third party; provided, however, that the foregoing restriction shall not apply
to the Landed Cost information which PFS is required to provide to the
independent international public accounting firm as described in subsection 3(c)
hereof (but only to the extent so provided). Such confidential information shall
not include information (i) which becomes generally known to the public through
no disclosure by PFS, (ii) which PFS can show was known by it prior to
disclosure to it by the Customer or (iii) which is required by law to be
disclosed. PFS shall inform its employees of the confidential nature of all
information provided by the Customers which is confidential pursuant to the
terms of this Section 13 and PFS shall be fully responsible for any breach by
its employees of the terms of this Section 13.
(b) Each party hereto agree to keep the terms of this Agreement
confidential and not disclose them to any third party without the prior written
consent of the other parties hereto, except to the extent such disclosure is
required by law.
14. Indemnity
(a) PFS shall indemnify and hold the Customer, as well as the Customer's
parents, subsidiaries, affiliates, successors and assigns, and each of their
respective officers, directors, and employees, harmless from and against any and
all loss, liability, claims, demands or suits (including, without limitation,
reasonable attorneys' fees and expenses) which arise out of:
(i) the breach of any of the representations, warranties or
agreements made by PFS in this Agreement (including, without limitation,
damages caused by any violations of law by PFS or recalls caused by
PFS); or
(ii) the warehousing, delivery, storage, handling or transporting
of any Restaurant Products while under the care, custody, or control of
PFS.
(b) The Customer shall indemnify PFS, as well as PFS's parents,
subsidiaries, affiliates, successors and assigns, and each of their respective
officers, directors and employees, harmless from and against any and all loss,
liability, claims, demands or suits (including, without limitation, reasonable
attorneys' fees and expenses) which arise out of:
(i) the breach of any of the representations, warranties or
agreements made by the Customer in this Agreement; or
(ii) the operations or business of the Customer (including,
without limitation, Smart Sourcing) and the Exclusive Restaurants.
15. No Franchise or Agency
Nothing in this Agreement shall be deemed to make either party the agent
or representative of the other party for any purpose whatsoever. Nothing
provided in this Agreement shall be deemed to grant either party any right or
authority to assume, create or expand any obligation or responsibility, express
or implied, on behalf of or in the name of the other party, or to bind the other
party in any manner or matter whatsoever. Neither party to this Agreement shall
have any authority to employ any person as agent or employee for or on behalf of
the other party to this Agreement for any purpose. It is the express intention
of the parties that each party hold the other party harmless from and against
any and all claims, liability and expense arising out of any unauthorized act of
its respective employees and agents.
16. General Provisions
(a) Appointment of Executive Officers of Customer. During the term of
this Agreement Pizza Hut, Taco Bell and KFCC shall notify PFS in writing of the
names of the executive officers who shall have the authority to bind all three
companies, Pizza Hut, Taco Bell and KFCC and act on behalf of the Customer, in
connection with any matter relating to this Agreement, including, without
limitation, amending the terms of this Agreement as described in Section 16(e)
below.
(b) Dispute Resolution. Each of the Customer and PFS shall appoint one
or more employees who will meet with each other on a regular basis to review the
performance by each party pursuant to the terms of this Agreement. The Customer
and PFS shall each appoint an executive officer to meet for the purpose of
resolving any claim, dispute and/or controversy arising out of or relating to
the performance of this Agreement. If the dispute is not resolved by negotiation
within thirty (30) days, the parties shall endeavor to settle the dispute by
mediation under the then current Center For Public Resources ("CPR") Model
Procedure for Mediation of Business Disputes. The neutral third party will be
selected from the CPR panel of neutrals, with the assistance of CPR, unless the
parties agree otherwise. In the event that the parties are unsuccessful in
resolving the dispute via mediation, the parties agree promptly to resolve any
such claim, dispute and/or controversy through binding confidential arbitration
conducted in Louisville, Kentucky, in accordance with the then current rules of
the American Arbitration Association ("AAA"). The parties irrevocably consent to
such jurisdiction for purposes of the arbitration, and judgment may be entered
thereon in any state or federal court in the same manner as if the parties were
residents of the state of federal district in which said judgment is sought to
be entered. The arbitrator shall not make any award or decision that is not
consistent with applicable law. In any action between the parties, the
prevailing party in such action shall recover its costs and expenses, including
reasonable attorney fees, from the non-prevailing party. All applicable statutes
of limitations and defenses based upon the passage of time shall be tolled while
the requirements of this Section 16(b) are being followed.
(c) Access to Distribution Centers. During the term of this Agreement
the Customer shall have the right to inspect at any time during the term of this
Agreement the distribution centers, all delivery trucks and any other facility
of PFS which carry the Restaurant Products.
(d) Assignment. This Agreement shall be binding upon all of the parties
hereto and upon all of their respective heirs, successors and permitted assigns.
The Customer understands that PFS is currently in the process of being sold by
PepsiCo, Inc. PFS shall have the right to assign its rights and obligations
under this Agreement to any corporation, partnership, firm or other entity which
buys substantially all of PFS's assets and upon such assignment (i) such buyer
shall assume all of PFS's obligations under this Agreement and take the place of
PFS for all purposes of this Agreement and (ii) PepsiCo, Inc. shall have no
further obligations hereunder. Except for the permitted assignment by PFS as
described above, this Agreement shall not, however, be assignable or
transferable, in whole or in part, by any party except upon the express prior
written consent of all of the other parties. Any attempt to assign or otherwise
transfer this Agreement or any rights or obligations hereunder in violation of
the foregoing shall be void.
(e) Amendments. This Agreement shall not be amended except in writing
signed by all parties hereto.
(f) Notices. All notices, demands, consents or other communications
required or permitted hereunder shall be in writing and personally delivered or
sent by overnight air courier, addressed as follows: if to the Customer to each
of (i) Pizza Hut, Inc., 14841 Dallas Parkway, Dallas, Texas 75240, Attn:
President, (ii) Taco Bell Corp., 17901 Von Karman, Irvine, California 92714,
Attn: President and (iii) KFC Corporation, 1441 Gardiner Lane, Louisville,
Kentucky 40213, Attn: President; and if to PFS, to PFS 14841 Dallas Parkway,
Dallas, Texas 75240, Attn: President; or to such other address as may hereafter
be furnished in writing to the other party in the manner described above. Any
notice, demand, consent or communication given hereunder in the manner described
above shall be deemed to have been effected and received as of the date hand
delivered or as of the date received if sent by overnight air courier.
(g) Force Majeure. No party shall be responsible for delays or defaults
under this Agreement if such delay or default is occasioned by war, strikes,
fire, an act of God or other causes beyond such party's control.
(h) Waiver. No provision, requirement, or breach of this Agreement may
be waived by any party except in writing. If any party fails to enforce any
right or remedy available under this Agreement, that failure shall not be
construed as a waiver of any right or remedy with respect to any other breach or
failure by the other parties. If PFS fails to maintain the service levels
described in Sections 6 hereof during any three months of any calendar year
during the term of this Agreement (commencing in 1998) and the Customer does not
exercise its right to terminate this Agreement as described in Section 10(b)
hereof within 90 days after the third such month, the Customer shall waive any
right to terminate this Agreement with respect to the low service levels during
such three months but shall not waive any right to terminate this Agreement as a
result of low service levels during any months after such three months.
(i) Captions. The captions used herein are inserted only as a matter of
convenience and for reference and in no way define, limit, or describe the scope
or the intent of any section or paragraph hereof.
(j) Governing Law and Forum. This Agreement shall in all respects be
construed in accordance with and governed by the substantive laws of the State
of Kentucky without giving effect to the conflicts of laws principles thereof.
(k) Severability. If any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal, or unenforceable provision had never been contained
herein.
(l) Other Documents. The terms, conditions and provisions of any
invoice, billing statement, confirmation, or other similar document relating to
the services rendered in connection with this Agreement shall be subject and
subordinate to the terms, provisions and conditions of this Agreement and, in
the event of a conflict between the terms, conditions and provisions of any such
document and of this Agreement, the terms, conditions and provisions of this
Agreement shall govern.
(m) Survival of Obligations. The obligations of any party under this
Agreement, which by their nature would continue beyond expiration or termination
of this Agreement,
<PAGE>
including, without limitation, indemnification by such party as provided in
Section 14 hereof, shall survive the expiration or termination of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the date first set forth above.
PFS, a division of PepsiCo, Inc.
By: _____________________
Pizza Hut, Inc.
By: _____________________
David Novak
President, Chief Executive
Officer
Taco Bell Corp.
By: _____________________
John Antioco
President, Chief Executive
Officer
Kentucky Fried Chicken Corporation
By: _____________________
David Novak
President, Chief Executive
Officer
Kentucky Fried Chicken of
California, Inc.
By: _____________________
David Novak
President, Chief Executive
Officer
AMENDMENT AGREEMENT
Amendment Agreement dated as of May 29, 1997 among PFS, an
unincorporated division of PepsiCo, Inc., a North Carolina corporation, Pizza
Hut, Inc., a Delaware corporation, Taco Bell Corp., a California corporation,
Kentucky Fried Chicken Corporation, a Delaware corporation, and Kentucky Fried
Chicken of California, Inc., a Delaware corporation.
WHEREAS, the parties hereto are parties to the Sales and Distribution
Agreement dated as of May 6, 1997 (the "Distribution Agreement") pursuant to
which PFS has been appointed as the exclusive distributor of certain food,
supplies and smallwares sold to company owned Pizza Hut, Taco Bell and KFC
Restaurants in the continental United States; and
WHEREAS, the parties hereto desire to amend the Distribution Agreement
on the terms set forth herein.
NOW, THEREFORE, the parties hereto hereby agree as follows:
(1) Section 9 of the Distribution Agreement is hereby amended by adding
the following sentence to the end of such Section:
"Notwithstanding anything to the contrary herein, the termination of
this Agreement at the expiration of such term or otherwise shall not operate to
terminate the appointment of PFS as an approved distributor of the Restaurant
Products sold to all Pizza Hut, Taco Bell and KFC restaurants pursuant to
Section 1 hereof."
(2) Other than as specifically set forth herein, the Distribution
Agreement shall remain in full force and effect, without amendment, modification
or waiver.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first set forth above.
PFS, a division of PepsiCo, Inc.
By: _____________________
Pizza Hut, Inc.
By: _____________________
David Novak
President, Chief Executive
Officer
Taco Bell Corp.
By: _____________________
John Antioco
President, Chief Executive
Officer
Kentucky Fried Chicken Corporation
By: _____________________
David Novak
President, Chief Executive
Officer
Kentucky Fried Chicken of
California, Inc.
By: _____________________
David Novak
President, Chief Executive
Officer
EXHIBIT 21.01
<TABLE>
ACTIVE SUBSIDIARIES OF TRICON
AS OF OCTOBER 6, 1997(1)
<CAPTION>
Percentage of
Voting Securities State or
Owned By Country of
Name of Subsidiary Tricon Parent Incorporation
- ----------------------------------------------- ------ ------ -------------
<S> <C> <C> <C>
A & M Food Services, Inc. 100 Nevada
El KrAm, Inc. 100 Iowa
Pizza Huts of the Northwest, Inc. 100 Minnesota
Kentucky Fried Chicken of California, Inc. 100 Delaware
Tricon Global Restaurants (Canada), Ltd. 100 Canada
KFCC/PepsiCo Holdings Ltd. 100 Canada
KFC Management Ltd. 50 Singapore (2)
Internaticional Restaurants do Brasil Ltda. 100 Brazil
Prestige Holdings Ltd. 100 Trinidad
Restaurant Holdings Ltd. 100 Unitied Kingdom
Kentucky Fried Chicken (Great Britain) Limited 100 United Kingdom
Pizza Hut (U.K.) Ltd. 50 United Kingdom(3)
Pizza Hut International (UK) Ltd. 100 United Kingdom
KFC International (Thailand) Ltd. 100 Thailand
Corporativo International S.A. de C.V. 100 Mexico
Kentucky Fried Chicken de Mexico, S.A. de C.V. 100 Mexico
Kentucky Fried Chicken Caribbean Holdings, Inc. 100 Delaware
Kentucky Fried Chicken Corporate Holdings, Ltd. 92 Delaware (4)
KFC France SAS 100 France
Kentucky Fried Chicken Japan Ltd. 31 Japan (5)
Kentucky Fried Chicken International Holdings, Inc. 100 Delaware
Kentucky Fried Chicken Espana, S.L. 100 Spain
Kentucky Fried Chicken Global II B.V. 100 Netherlands
PepsiCo Restaurants International Ltd. & Co. K.G. 100 Germany
PepsiCo Eurasia Limited 100 Delaware
Kentucky Fried Chicken Worldwide B.V. 100 Netherlands
PepsiCo Holdings, B.V. 100 Netherlands
PepsiCo Restaurants International (Taiwan) Co. Ltd. 100 Taiwan
Pizza Gida Isletmeleri A.S. 100 Turkey
Pizza Hut Korea Co., Ltd. 100 Korea
PepsiCo (Southern Africa) Pty. Ltd. 100 South Africa
Kentucky Fried Chicken Global B.V. 100 Netherlands
PepsiCo Poland sp.zo.o. 100 Poland
PepsiCo Restaurants International S.A. 100 Spain
Global Restaurants Inc. 100 Mauritius
PepsiCo Restaurants International (India) Pvt. Ltd. 100 India
Pizza Belgium B.V.B.A. 100 Belgium
Kentucky Fried Chicken Singapore Holdings Pte. Ltd. 100 Singapore
Pizza Hut Singapore Pte. Ltd. 100 Singapore
PCNZ Ltd. 100 Mauritius
PCNZ Investments Ltd. 100 Mauritius
PepsiCo Finance B.V. 100 Netherlands
Kentucky Fried Chicken of Southern California, Inc. 100 California
PepsiCo Restaurant Services Group, Inc. 100 Delaware
Pizza Hut, Inc. 100 California
PepsiCo Australia Pty., Ltd. 60 Australia (6)
Kentucky Fried Chicken Pty. Ltd. 100 Australia
Pizza Hut of America, Inc. 100 Delaware
Pizza Management, Inc. 100 Texas
NKFC, Inc. 100 Delaware
QSR, Inc. 100 Delaware
KFC Enterprises, Inc. 100 Delaware
Kentucky Fried Chicken Corporation 100 Delaware
KFC Corporation 100 Delaware
KFC National Management Company 100 Delaware
Taco Bell Corp. 100 California
Calny, Inc. 100 Delaware
Taco Bell of California, Inc . 100 California
Taco Bell Royalty Company 100 California
Taco Caliente, Inc. 100 Arizona
Taco Del Sur, Inc. 100 Georgia
Tenga Taco, Inc. 100 Florida
Taco Enterprises, Inc. 100 Michigan
TBLD Corp. 100 California
Upper Midwest Pizza Hut, Inc. 100 Delaware
Von Karman Leasing Corp. 100 Delaware
</TABLE>
_____________
Notes:
(1) This Schedule lists the entities that are expected to be active
subsidiaries of TRICON as of October 6, 1997 based upon the
reorganization transactions that are in progress. Omitted from the
above list are approximately 73 insignificant or inactive subsidiaries
which, if considered in the aggregate as a single subsidiary, would
not constitute a significant subsidiary. The list also excludes
approximately 77 subsidiaries of Pizza Hut, Inc., most of which
operate restaurants in the U.S., and approximately 33 subsidiaries of
Kentucky Fried Chicken Corporation and Kentucky Fried Chicken of
California, Inc., most of which operate restaurants outside the U.S.
(2) Kentucky Fried Chicken Singapore Holdings Pte. Ltd. owns 50% of this
subsidiary.
(3) An outside shareholder owns 50% of this subsidiary.
(4) Kentucky Fried Chicken Corporation owns 8% of this subsidiary.
(5) Outside shareholders owns 69% of this subsidiary.
(6) Each of the following companies (on insignificant list) owns the
percentage listed of this subsidiary: PepsiCo Capital Ptd. Limited
10%, PepsiCo Australia Finance Pte. Ltd. 15%, and Pizza Hut Australia
Finance Pte. Ltd. 15%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM TRICON GLOBAL RESTAURANTS, INC. COMBINED
FINANCIAL STATEMENTS FOR THE 52 WEEKS ENDED DECEMBER
28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-28-1996
<PERIOD-END> Dec-28-1996
<CASH> 137
<SECURITIES> 50
<RECEIVABLES> 134
<ALLOWANCES> 9
<INVENTORY> 88
<CURRENT-ASSETS> 962
<PP&E> 6,852
<DEPRECIATION> 2,802
<TOTAL-ASSETS> 6,520
<CURRENT-LIABILITIES> 1,416
<BONDS> 231
<COMMON> 0
0
0
<OTHER-SE> 4,239
<TOTAL-LIABILITY-AND-EQUITY> 6,520
<SALES> 9,738
<TOTAL-REVENUES> 10,232
<CGS> 6,008
<TOTAL-COSTS> 8,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 300
<INCOME-PRETAX> 72
<INCOME-TAX> 125
<INCOME-CONTINUING> (53)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM TRICON GLOBAL RESTAURANTS, INC.
CONDENSED COMBINED FINANCIAL STATEMENTS FOR THE 24
WEEKS ENDED JUNE 14, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> Dec-27-1997
<PERIOD-END> Jun-14-1997
<PERIOD-TYPE> 6-MOS
<CASH> 110
<SECURITIES> 47
<RECEIVABLES> 143
<ALLOWANCES> 12
<INVENTORY> 103
<CURRENT-ASSETS> 950
<PP&E> 6,602
<DEPRECIATION> 2,822
<TOTAL-ASSETS> 6,107
<CURRENT-LIABILITIES> 1,413
<BONDS> 186
<COMMON> 0
0
0
<OTHER-SE> 3,758
<TOTAL-LIABILITY-AND-EQUITY> 6,107
<SALES> 4,337
<TOTAL-REVENUES> 4,590
<CGS> 2,659
<TOTAL-COSTS> 3,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 263
<INCOME-TAX> 90
<INCOME-CONTINUING> 173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
