No. ---------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
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
-------------------
-------------------
(---) --------
(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
Par value $.05 per share
Securities to be registered pursuant to Section 12(g) of the Act: None
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<PAGE> i
EXPLANATORY NOTE
This 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 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 an amendment or
supplement to this 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 Common 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 Common Stock" in the Information Statement and
such section is incorporated herein by reference. Reference is also made to the
Articles of Incorporation and Bylaws of TRICON Global Restaurants, Inc. which
are set forth as Exhibits 3.01 and 3.02 hereto.
Item 12. Indemnification of Directors and Officers.
The information required by this item is contained under the section
entitled "Indemnification of Directors" in the Information Statement and such
section is incorporated herein by reference.
<PAGE> iv
Item 13. Financial Statements and other Supplementary Data.
The information required by this item is contained under the sections
entitled "Combined Financial Statements", "Condensed Combined Financial
Statements" and Pro Forma Condensed Combined Financial Statements" on pages F-1
through F-32 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* Separation Agreement..............................................
3.01* Articles of Incorporation.........................................
3.02* Bylaws............................................................
10.01* Tax Separation Agreement..........................................
10.02* Employee Programs Agreement.......................................
10.03* Telecommunications, Software and Computing
Services Agreement................................................
10.04* TRICON Long-Term Incentive Plan...................................
10.05* TRICON Executive Incentive Compensation Plan......................
10.06* Employment Agreement between TRICON Global Restaurants, Inc. and
Andrall E. Pearson................................................
10.07* Agreement between KFC and the Pepsi - Cola
Company...........................................................
10.08* Agreement between Pizza Hut and the Pepsi - Cola Company..........
10.09* Agreement between Taco Bell and the Pepsi - Cola Company..........
10.10* Sales and Distribution Agreement between PFS,
Pizza Hut, Taco Bell and KFC......................................
21.01* Active Subsidiaries...............................................
27.1 Financial Data Schedule For Year-End 1996.........................
27.2 Financial Data Schedule For First Quarter 1997....................
* To be filed by amendment.
<PAGE> v
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
TRICON GLOBAL RESTAURANTS, INC.
July 2, 1997 By LAWRENCE F. DICKIE
----------------------------
Lawrence F. Dickie
Vice President and Secretary
<PAGE>
ANNEX A
SUBJECT TO COMPLETION DATED JULY 2, 1997
INFORMATION STATEMENT
TRICON GLOBAL RESTAURANTS, INC.
Common Stock
(par value $.05 share)
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 _________, 1997
of one share of common stock, par value of $.05 per share (the "Common Stock"),
of TRICON Global Restaurants, Inc. ("TRICON" or the "Company"), for every ___
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 _________, 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 is expected to be 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.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Summary...............................................................................4
Introduction..........................................................................8
Business of TRICON....................................................................9
Concepts...........................................................................9
Operating Structure...............................................................11
Human Resources and Management....................................................12
Industry Overview.................................................................13
Competitive Advantages............................................................18
Other.............................................................................21
Selected Combined Financial Data....................................................23
Financing............................................................................28
The Distribution.....................................................................28
Reasons for the Distribution......................................................28
Manner of Effecting the Distribution..............................................29
Results of the Distribution.......................................................29
Relationship between PepsiCo and TRICON after the Distribution....................30
Certain U.S. Federal Income Tax Consequences of the Distribution..................31
Management of TRICON.................................................................32
Directors.........................................................................32
Board Compensation and Benefits...................................................33
Committees of the Board...........................................................33
Executive Officers................................................................34
Senior Operating Management.......................................................34
Stock Ownership of Executive Officers and Directors...............................35
Executive Compensation...............................................................36
Summary Compensation Table........................................................36
PepsiCo Option Grants in Last Fiscal Year.........................................37
Aggregated PepsiCo Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values.............................................38
Pension Plan Table................................................................38
Employment Agreement..............................................................39
New Stock-Based and Incentive Plans of TRICON........................................39
TRICON Long-Term Incentive Plan...................................................39
TRICON Executive Incentive Compensation Plan......................................40
Successor Plans...................................................................40
PepsiCo Stock Option and Performance Share Conversion................................41
Description of TRICON Common Stock...................................................42
TRICON Common Stock...............................................................42
Dividends.........................................................................43
Transfer Agent and Registrar......................................................43
Listing and Trading of TRICON Common Stock........................................43
North Carolina Law - Share Acquisitions..............................................44
Indemnification of Directors.........................................................44
<PAGE> 3
1998 Annual Meeting and Shareholder Proposals........................................45
Available Information................................................................45
Management's Discussion and Analysis.................................................46
Glossary.............................................................................61
Index to Defined Terms...............................................................62
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 ___
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
<PAGE> 5
required to surrender or exchange PepsiCo Capital
Stock in order to receive TRICON Common Stock.
Shares to be Distributed......................... Approximately ___ million shares of TRICON Common
Stock, par value $.05 per share, based on the
number of shares of PepsiCo Capital Stock
outstanding as of ________, 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 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 is expected to be made
to list the TRICON Common Stock on the NYSE under
the symbol "___". 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...................................... _________, 1997.
Distribution Agent............................... Bank of Boston.
Distribution Date................................ ________, 1997. PepsiCo will transfer shares of
TRICON to the Distribution Agent for the benefit of
the record holders
<PAGE> 6
of PepsiCo Capital Stock at the close of
business on the Record Date. On or about
the Distribution Date, the Distribution Agent will
commence mailing TRICON shares to PepsiCo holders
of record.
Tax Consequences................................. PepsiCo has applied for 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. Receipt of
such a ruling is a condition to the Distribution.
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.
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 employees. PepsiCo and TRICON will enter
into certain agreements governing their
<PAGE> 7
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 the operating results and
financial requirements of TRICON on a stand-alone
basis. See "Description of TRICON Common Stock -
Dividends."
Principal Office of TRICON...................... ---------------------------
---------------------------
(---) --- - ----
</TABLE>
SHAREHOLDERS WITH QUESTIONS MAY CALL:
For questions relating to the Distribution and delivery of TRICON stock
certificates, call Bank of Boston at:
--------------
For other questions, call PepsiCo's Manager, Shareholder Relations at:
(914) 253-3055
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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> 8
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.
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 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.
<PAGE> 9
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 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
<PAGE> 10
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%. 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. 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. 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. Average U.S. system-wide
sales per unit in 1996 were $886,000.
<PAGE> 11
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 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.
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 or
licensed as a part of that program, the large
<PAGE> 12
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 nine 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.
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 ten 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
<PAGE> 13
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 336,000 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, sales, and unit profits in their
respective food categories.
<PAGE> 14
[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
Worldwide Quick Service Restaurant Sales
as of Year-End 1996
- -----------------------------------------------
TRICON 13%
McDonald's 20%
Other 67%
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. 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 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
<PAGE> 15
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.
(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.
<PAGE> 16
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
Canada.............. 43
Singapore........... 29
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
Reflecting the broad geographic consumer appeal of TRICON's concepts,
over 40% of TRICON International's restaurants are located in Asia, followed by
the Americas (Canada, Latin America and South America) with 22% and Europe with
20%.
<PAGE> 17
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 42%
Americas 22%
Europe 20%
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> 18
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, sales, and unit profits 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> 19
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 becomes 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 are also expected to enter into
multi-year agreements with the Pepsi-Cola Company regarding the sale of
Pepsi-Cola's 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 are required to buy food supplies, ingredients, seasonings, and
equipment only from
<PAGE> 20
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 or licensed 264 and 655 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 more than 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.
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
<PAGE> 21
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.
Limited Global Competitors with 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
3,300 and leased approximately 6,400 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. 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;
<PAGE> 22
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 (R), KFC (R), Pizza Hut (R)
and Taco Bell (R) 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 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
<PAGE> 23
("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, East Side Mario's and Chevys Mexican Restaurants were sold in 1997, and two
other non-core restaurant businesses, D'Angelo Sandwich Shops and California
Pizza Kitchen, are being offered for sale. These non-core restaurant businesses
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
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-28.
The pro forma selected financial data set forth below is derived from
the unaudited Pro Forma Condensed Combined Financial Information included on
pages F-29 to F-32. 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
<PAGE> 24
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 twelve
weeks ended March 22, 1997, which was based on ___ million shares outstanding.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Selected Combined Financial Data (Page 1 of 4)
(in millions except per share data, unaudited)
TRICON Global Restaurants, Inc.
- ------------------------------------------------------------------------------------------------
Proforma
1996 1996(a)(b) 1995 (b) 1994(b)(c)(d)
- ------------------------------------------- ------------- ------------ ---------- --------------
<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................. $ 147 (53) (132) 119
Cumulative effect of accounting
changes (f)........................... $ - - - (1)
Net income/(loss) (g)................... $ 147 (53) (132) 118
Earnings/(loss) per share............... $ 0.xx N.R. N.R. N.R.
Balance Sheet
Total assets............................ N.R. 6,520 6,908 7,387
Long-term debt (h)...................... 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> 25
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Selected Combined Financial Data (Page 2 of 4)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
- ----------------------------------------------------------------------------------------
1993(e) 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 (f)...................................... $ - (19)
Net income (g)..................................... $ 238 226
Balance Sheet
Total assets....................................... $ 6,526 5,086
Long-term debt (h)................................. $ 290 257
Investments by and advances from
PepsiCo ......................................... $ 4,366 3,506
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Selected Combined Financial Data (Page 3 of 4)
(in millions except per share data, unaudited)
TRICON Global Restaurants, Inc.
- -----------------------------------------------------------------------------------------
_____Twelve Weeks Ended_____
Proforma
3/22/97 3/22/97 3/23/96
- -------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Summary of Operations
Revenues....................................... $ 2,134 2,237 2,273
Net income (g)................................. $ 49 52 40
Earnings per share............................. $ 0.xx N.R. N.R.
Balance Sheet
Total assets................................... $ 6,102 6,413 N.R.
Long-term debt (h)............................. $ 173 222 N.R.
Investments by and advances from
PepsiCo ..................................... $ 3,954 4,201 N.R.
N.R. - Not Required
</TABLE>
<PAGE> 27
- -------------------------------------------------------------------------------
Selected Combined Financial Data (Page 4 of 4)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
- -------------------------------------------------------------------------------
(a) Included unusual charges of $246 ($189 after-tax) related to the
decision to dispose of TRICON's U.S. non-core restaurant 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 (b) below.
(b) 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.
(c) 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).
(d) 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).
(e) 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.
(f) 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 pages F-16 and
F-15, respectively) 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).
<PAGE> 28
(g) Includes 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.
(h) Long-term debt represents external third-party debt.
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 $_______ of
debt obligations. Substantially all of the proceeds of such debt obligations
will be transferred to PepsiCo in the form of 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 "Investments 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.
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.
<PAGE> 29
Manner of Effecting the Distribution
On or before the Distribution Date, PepsiCo will transfer to Bank of
Boston, as Distribution agent (the "Distribution Agent"), for the benefit of
holders of record of PepsiCo Capital Stock at the close of business on
_________, 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 on the Record Date, without any consideration being paid by such holders,
on the basis of one share of TRICON Common Stock for every _____ shares of
PepsiCo Capital Stock held on the Record Date. No certificates representing
fractional shares will be issued as part of the Distribution, although
fractional shares 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. Such persons will receive a cash
payment for their portion of the total sale proceeds.
Certificates representing shares of TRICON Common Stock will be mailed
by the Distribution Agent beginning on or about the Distribution Date. 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 Common Stock - TRICON Common Stock."
Distribution of TRICON Common Stock and payment for fractional interests
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.
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 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.
<PAGE> 30
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 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. The Separation
Agreement provides that, prior to the Distribution, TRICON will pay to PepsiCo
approximately $______ billion in the form of 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. 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.
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.
<PAGE> 31
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 are each expected to enter into a
multi-year agreement with the 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
of $_____ 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
Prior to the Distribution, PepsiCo expects to receive 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 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
<PAGE> 32
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. The receipt of such a ruling is a condition to the
Distribution.
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 Articles of Incorporation provide that the number of Directors
shall be fixed, and may be altered from time to time, by resolution duly adopted
by TRICON's Board of Directors, but at no time shall the number of Directors be
less than three. The following individuals have agreed to serve as Directors of
TRICON following the Distribution. It is anticipated that several other people
will also agree to serve as Directors prior to the Distribution Date. These
Directors will hold office until the first annual meeting of TRICON's
shareholders in __________, 1998. Shareholders will elect all of the directors
at that meeting and each succeeding annual meeting.
Andrall E. Pearson, age 72, will be elected Chairman of the Board and
Chief Executive Officer of TRICON 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 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
<PAGE> 33
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 the 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.
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> 34
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 the 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.
Jeffrey A. Moody, age 38, 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 42, 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.
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.
<PAGE> 35
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 the 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 46, 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 highest paid TRICON executive officers 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 __________, 1997, and do not include any options granted under PepsiCo plans.
Effective on the Distribution Date, certain executive officers of TRICON will
have certain PepsiCo stock options converted into options to acquire TRICON
Common Stock. See "PepsiCo Stock Option and Performance Share Conversion." In
addition, certain executive officers of TRICON will be granted options to
acquire TRICON Common Stock on or about the Distribution Date. These converted
options and new grants are not reflected in this table. None of the following
persons will hold in excess of 1% of TRICON Common Stock.
Beneficial Owner Projected Number of Shares
Andrall E. Pearson................................... [ ___ ]
David C. Novak....................................... [ ___ ]
Peter A. Bassi....................................... [ ___ ]
Jeffrey A. Moody..................................... [ ___ ]
Peter C. Waller...................................... [ ___ ]
All Directors and Executive Officers as a Group...... [ ___ ]
<PAGE> 36
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 433,200 515,200 [____](3) 888,861 0 0
Vice Chairman of the
Board and President
Peter A. Bassi 1996 316,800 297,200 [____] 114,130 0 0
President, International
Restaurants
Jeffrey A. Moody 1996 191,300 147,700 [____] 51,391 0 0
President and Chief
Concept Officer, KFC
U.S.A
Peter C. Waller 1996 240,000 114,200 [____] 111,125 0 0
President and Chief
Concept Officer, Taco
Bell U.S.A.
- ---------------
</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 and Rawlings were not previously employed by TRICON or
its subsidiaries (see "Management of TRICON - Executive Officers" for
biographies of named executive officers). Mr. Pearson served as a Director of
PepsiCo in 1994, 1995 and 1996, and received an annual retainer of $70,000 and
an annual stock grant with a value of $30,000 on the grant date in 1994 and
1995. In 1996, Mr. Pearson received an annual retainer of $70,000 until his
retirement in April 1996.
(2) The options listed in this column are PepsiCo options and do not
reflect the adjustments discussed in the section entitled "PepsiCo Stock Option
and Performance Share Conversion."
(3) This amount includes benefits from the use of corporate
transportation.
<PAGE>37
<TABLE>
<CAPTION>
PepsiCo Option Grants in Last Fiscal Year (1)
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation for
Individual Grants Option Term
- ------------------------------------------------------------------------------ ---------------------------------------
Number of % of Total
Securities Options
Under- Granted to Exercise
lying Employees in or Base
Options Fiscal Price Expiration
Name Granted (#) Year ($/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
Jeffrey A. Moody 487(3) 0.001 35.50 6/30/06 10,873 27,553
50,904(4) 0.100 29.46875 1/25/06 943,391 2,390,737
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
- ----------
</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> 38
(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
Jeffrey A. Moody 0 0 78,005 101,904 1,029,001 501,657
Peter C. Waller 0 0 41,526 169,747 493,177 736,550
- ----------
</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> 39
<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 36 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; Jeffrey A. Moody, 9 years; and Peter C. Waller, 6
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
$__________; and annual incentive compensation awards to be determined by the
TRICON Board of Directors. However, the bonus for the first year of the
agreement will not be less than __________. As soon as practicable after the
Distribution Date, Mr. Pearson will also be granted options to purchase ________
shares of TRICON Common Stock.
NEW STOCK-BASED AND INCENTIVE PLANS OF TRICON
TTRICON 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 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
<PAGE> 40
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 PepsiCo Long-Term Incentive Plan ("PepsiCo
LTIP") will be considered to have been awarded under the TRICON LTIP described
above.
<PAGE> 41
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 by the PepsiCo Board of
Directors (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 terms
of the Adjusted PepsiCo Stock Options shall be the same as the terms of the
pre-adjustment PepsiCo stock options.
<PAGE> 42
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 COMMON STOCK
Under TRICON's 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 750,000,000 shares of Common Stock, par value $.05 per share. Based on
__________ shares of PepsiCo Capital Stock outstanding as of _______________,
1997, and a distribution ratio of one share of TRICON Common Stock for every
________ shares of PepsiCo Capital Stock, it is expected that approximately
________ shares of TRICON Common Stock will be distributed to holders of PepsiCo
Capital Stock.
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. 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.
<PAGE> 43
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 the operating
results and financial requirements of TRICON on a stand-alone basis. 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.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the TRICON Common Stock will be
Bank of Boston, P.O. Box 9155, Boston, MA 02205-9155, (___) ___-____.
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 "_______." 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 rules the
transactions are to be settled.
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 _______, 1997,
there were ________ holders of PepsiCo Capital Stock, which approximates the
number of prospective record holders of TRICON Common Stock.
Shares of TRICON Common Stock issued 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.
<PAGE> 44
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 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 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
<PAGE> 45
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 is expected to be held at its
principal office in _________________ in __________________ 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 ______________, 1998.
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 . Copies of the Form 10,
including the exhibits thereto, and the reports, proxy statements and other
information filed by TRICON with the SEC can then be inspected and copied at the
public reference facilities of the SEC, 450 Fifth Street N.W., Room 1024,
Washington D.C. 20549 and at the SEC'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 SEC, 450 Fifth Street N.W, Room 1024, Washington
D.C. 20549. Copies may also be obtained from the SEC'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.
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis
For Fiscal Years Ended December 28 1996, December 30, 1995
and December 31, 1994
The following Management's Discussion and Analysis should be read in
conjunction with the audited Combined Financial Statements on pages F-2 - F-
23 and the Cautionary Statements on pages 59-60. 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.
Management's Discussion and Analysis is presented in four sections.
The first section analyzes the combined results of operations and provides
a perspective on operations outside of the United States (pages 46-52). The
second and third sections address TRICON's combined cash flows (pages 52-54)
and financial condition (page 54), respectively. The final section
summarizes TRICON's use of derivatives (pages 54-55).
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 a difficult comparison with the second quarter
1995 introduction of Stuffed Crust pizza in the U.S., and the net
unfavorable impact of fewer Company-operated units. These declines were
partially offset by higher effective net pricing and the consolidation of
California Pizza Kitchen at the end of the second quarter of 1996 (see Note
16 on page F-19). The $57 million or 13% increase in franchise and license
fees primarily reflected new franchise and license units, including the
continuing effects of restaurant refranchisings.
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 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 new franchise and license units.
<PAGE> 47
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).
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 points primarily
reflecting the deleveraging effect of reduced revenues due to decreased
customer transaction counts in Pizza Hut U.S. and Taco Bell U.S. 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 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 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-19). 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
<PAGE> 48
expenses of $53 million, $52 million and $50 million in 1996, 1995 and 1994,
respectively. The amounts allocated to TRICON were based on the ratio of
TRICON's revenues to PepsiCo's revenues. They are not necessarily indicative
of the expenses that TRICON would have incurred for these services had it been
a separate, independent company.
Net facility actions
($ in millions) 1996 1995 1994
Pre- After- Pre- After- Pre- After-
Tax Tax Tax Tax Tax Tax
Refranchising gains $(139) $(86) $(93) $(55) $ - $-
Store closure costs 40 25 38 26 10 6
SFAS 121 impairment charges 62 40 457 324 - -
Net (gains)/losses $(37) $(21) $402 $295 $10 $6
______________________________________________________________________________
Net 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. See
Note 3 on page F-11.
Unusual disposal charges of $246 million ($189 million after-tax) in 1996
were associated with the decision to dispose of TRICON's non-core U.S.
restaurant businesses. See Note 3 on page F-11.
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 profits from Company-operated
restaurants, partially offset by increased profits 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 $127 or 22%. The
fifty-third week in 1994 (see Note 3 on page F-11) reduced the ongoing
operating profit growth rate by approximately 5 points. The increase was
due to net refranchising gains in 1995, compared to store closure costs in
1994, higher profits from Company-operated restaurants and increased
franchise and license fees. These improvements were partially offset by
increased G&A expenses.
<PAGE> 49
Interest Expense, net
% Growth Rates
($ 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) $(341) (15) 4
_______________________________________________________________________________
TRICON's operations have been financed through its operating cash flows,
refranchising of restaurants and investments by or advances from PepsiCo.
TRICON's interest expense includes an allocation of PepsiCo's interest
expense (PepsiCo's weighted average interest rate applied to the average
balance of investments by and advances from PepsiCo to TRICON) and interest
expense on its external debt. TRICON's external debt is primarily limited
to capital lease obligations associated with real estate and, to a much
lesser extent, assumed debt of acquired businesses and international third-
party debt. TRICON is expected to have a capital structure different from
the capital structure in the Combined Financial Statements and accordingly,
interest expense is not necessarily indicative of the interest expense that
TRICON would have incurred as a separate, independent company or will incur
in future periods.
Interest expense, net declined 15% in 1996 primarily reflecting a
lower average balance of net investments by and advances from PepsiCo to
TRICON, coupled with PepsiCo having a lower weighted average interest rate.
Interest expense, net in 1995 increased 4%, reflecting an increase in
PepsiCo's weighted average interest rate, coupled with a higher average
balance of investments by and advances from PepsiCo to TRICON.
Income Taxes
($ 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).
_______________________________________________________________________________
<PAGE> 50
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 points to 57.2% while
the 1995 ongoing effective tax rate declined 4.8 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 tax statutory 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 as a result of a change in judgment as to the
realizability of certain foreign deferred tax assets.
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 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.
<PAGE> 51
(Loss)/Income Before Cumulative Effect of Accounting Changes
($ in millions) % Growth Rates
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. Material translation effects are identified in
Management's Analysis.
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.
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.
<PAGE> 52
Net Facility Actions
1996 1995
Refranchising gains $(5) $(4)
Store closure costs (5) 12
Recurring SFAS 121
impairment charges 8 -
Net (gains)/losses $(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 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 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
Cash flow from operations, refranchising of restaurants and investments by
or advances from PepsiCo have financed TRICON's capital investments and
acquisitions. 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 reflected in the audited Combined Financial Statements
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 $x billion. TRICON expects to use $x billion of
the 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.
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.
<PAGE> 53
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.
<PAGE> 54
Net cash used for financing activities of $218 million in 1995 compared to
a cash inflow of $388 million in 1994. This change was primarily due to a
swing in investments by and advances from PepsiCo.
Free cash flow is the key internal measure used to evaluate cash flow
performance.
($ 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.
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
<PAGE> 55
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 Twelve Weeks Ended March 22, 1997 and March 23, 1996
The following Management's Discussion and Analysis should be read in
conjunction with the unaudited Condensed Combined Financial Statements on
pages F-24 - F-28 and the Cautionary Statements on pages 59-60.
Results of Operations
Revenues decreased $36 million or 2% in 1997. Company-operated restaurants
revenue decreased $48 million or 2%. The decrease was driven by fewer
Company-operated units as a result of TRICON's initiatives to refranchise
units and close underperforming units. This decrease was partially offset
by an increase in the non-core restaurant businesses, primarily as a result
of the consolidation of CPK at the end of the second quarter of 1996.
Combined same store sales were not a factor in the total sales decline as
customer transaction count declines, primarily due to a difficult
comparison with the first quarter 1996 introduction of Triple Decker Pizza,
were offset by higher effective net pricing. The $12 million or 12%
increase in franchise and license fees reflected new franchise and license
units, including the continuing effects of refranchising.
Same store sales for Company-operated units increased 4% at Taco Bell
reflecting the very successful Star Wars promotion, mix shifts into higher-
priced products such as Border Select Combos and Fajita Wraps and higher
pricing taken in late 1996. Same store sales for Company-operated units at
KFC also increased 4% due to the favorable impact of core products. Same
store sales for Company-operated units at Pizza Hut decreased 8% reflecting
fewer customer transaction counts.
Company-Operated Restaurant Margins and Profit
12 Weeks Ended
3/22/97 3/23/96
Revenues from company -
operated restaurants 100.0% 100.0%
Food and paper 32.2% 32.9%
Payroll and employee benefits 29.8% 29.2%
Occupancy and other operating
expenses 27.0% 27.8%
Margins 11.0% 10.1%
Profit $234 $219
_______________________________________________________________________________
Company-operated restaurant margins increased .9 points primarily due to
higher effective pricing exceeding increased labor costs, partially offset
by the deleveraging effect of reduced transaction counts. Labor costs
increased due to
<PAGE> 56
national customer service improvement initiatives and increased wage rates and
benefits.
General, administrative and other expenses (G&A) grew $3 million or 2%.
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 of $12
million and $10 million in 1997 and 1996, respectively. The amounts
allocated to TRICON were based on the ratio of TRICON's revenues to
PepsiCo's revenues. They are not necessarily indicative of the expenses
that TRICON would have incurred had it been a separate, independent
company.
Net facility actions
12 Weeks Ended
($ in millions) 3/22/97 3/23/96
Pre- After- Pre- After-
Tax Tax Tax Tax
Refranchising gains $(16) $(10) $(46) $(28)
Store closure costs 4 3 - -
SFAS 121 impairment charges - - - -
Net gains $(12) $ (7) $(46) $(28)
___________________________________________________________________________
Unusual disposal charges of $26 million ($17 million after-tax) in 1996
reflected the decision to dispose of the operating assets of HNN.
Reported operating profit increased $16 million or 11%. Ongoing operating
profit, which was adjusted to exclude the unusual disposal charge in 1996
related to the decision to dispose of the operating assets of HNN,
decreased $10 million or 6%. The decline reflected reduced gains from net
facility actions partially offset by increased profits from Company-
operated restaurants and franchise and license fees.
Interest Expense, net
12 Weeks Ended
%
($ in millions) 3/22/97 3/23/96 Change
PepsiCo allocation $(60) $(67) (10)
External debt (8) (9) (11)
Interest expense $(68) $(76) (11)
Interest income 2 2 -
Interest expense, net $(66) $(74) (11)
_______________________________________________________________________________
TRICON's operations have been financed through its operating cash flows,
refranchising of restaurants and investments by or 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
<PAGE> 57
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 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 11% in 1997 reflecting a lower average balance of net
investments by and advances from PepsiCo to TRICON.
Income Taxes
The 1997 reported effective tax rate of 45.8% increased 1.4 points and 1.9
points from the 1996 reported and ongoing effective tax rates of 44.4% and
43.9%, respectively. The 1996 ongoing effective tax rate was adjusted to
exclude the effect of the unusual disposal charge related to the decision
to dispose of the operating assets of HNN. The 1.9 point increase
primarily reflected a higher foreign effective rate and other individually
immaterial items.
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
%
($ in millions) 3/22/97 3/23/96 Change
Reported $52 $40 30
Ongoing* $52 $57 (9)
* Adjusted to exclude the effect of the unusual disposal charge in 1996
related to the decision to dispose of the operating assets of HNN.
_______________________________________________________________________________
<PAGE> 58
International Operations
12 Weeks Ended
%
($ in millions) 3/22/97 3/23/96 Change
Revenues $514 $497 3
Operating profit* $ 43 $ 34 26
* Includes equity income/(loss) but excludes foreign exchange gains/
(losses).
___________________________________________________________________________
Revenues increased $17 million in 1997 driven by higher effective net
pricing, additional Company-operated units and increased franchise and
license fees primarily due to net new unit activity. Sales growth was
hampered by the effect of one less accounting period in 1997 (to facilitate
the quarterly closing process) for Canada and Korea.
Operating profit increased $9 million reflecting increased franchise
and license fees and additional Company-operated units. The positive
impact of higher effective net pricing was offset by higher store operating
costs, led by labor, and losses from net facility actions compared to
profits last year.
Net Facility Actions
12 Weeks Ended
($ in millions) 3/22/97 3/23/96
Refranchising gains $ - $ (2)
Store closure costs 1 (2)
Net losses/(gains) $ 1 $ (4)
Combined Cash Flows
Cash flow from operations, refranchising of restaurants and
investments by or advances from PepsiCo have financed TRICON's capital
investments and acquisitions. 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 $ x billion. TRICON expects to use $x billion of the 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.
Combined cash flow activity in 1997 primarily reflected a $117 million
decrease in investments by and advances from PepsiCo and capital spending
of $62 million partially offset by cash inflows from debt proceeds,
refranchising of restaurants and operating activities of $60 million, $40
million, and $27 million, respectively.
Net cash provided by operating activities increased $21 million to $27
million in 1997. The increase was primarily due to reduced working capital
cash outflows of $29 million. A favorable swing in income taxes payable
was partially offset by faster growth in prepaid expenses, deferred income
taxes and other current assets, reflecting 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 of $10 million in 1997
compares to cash outflows of $13 million in 1996. A favorable swing in
other net, which primarily reflected net proceeds from short-term
investments compared to investments made in 1996, reduced capital spending
and increased proceeds from sales of property plant
<PAGE> 59
and equipment were partially offset by reduced proceeds from refranchising of
restaurants.
Net cash used for financing activities increased $51 million to $57
million in 1997. This reflected a decrease in investments by and advances
from PepsiCo, partially offset by debt proceeds in 1997.
Free cash flow is the key internal measure used to evaluate cash flow
performance.
($ in millions) 1997 1996
Net cash provided by
operating activities $ 27 $ 6
Investing activities
Capital spending (62) (89)
Refranchising of restaurants 40 101
Sales of property, plant
and equipment 15 4
Other, net 17 (29)
$ 37 $ (7)
The $44 million favorable swing in free cash flow primarily reflected
the swing in other, net described above, reduced capital spending,
increased cash from operating activities and increased proceeds from sales
of property, plant and equipment. These cash inflows were partially offset
by reduced proceeds from refranchising of restaurants.
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
$338 million and $445 million for 1997 and 1996, respectively. Increased
prepaid expenses, deferred income taxes and other current assets was
primarily due to the premium deposit for U.S. casualty insurance, partially
offset by lower accounts payable and other current liabilities in 1997.
Cautionary Statements
From time to time, in both written reports and oral statements, PepsiCo and
TRICON may discuss expectations regarding its 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:
- - The impairment charge recorded to reduce the investment in the non-core
U.S. restaurant businesses to estimated fair market value assumed
certain sales prices, based primarily on the opinion of investment
bankers retained to assist TRICON in the selling activity, less
estimated costs to sell. The assumed prices could vary significantly
from the final sales prices.
<PAGE> 60
- - 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> 61
GLOSSARY
CONCEPTS - TRICON's restaurant concepts, including the franchise business
and company-operated restaurants of KFC, Pizza Hut and Taco Bell and the
U.S. non-core restaurant brands of Chevys, California Pizza Kitchen,
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
unconsolidated affiliates.
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 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,
store closure costs and SFAS 121 impairment charges for restaurants to
be used in the businesses.
NET REFRANCHISING GAINS/(LOSSES) - Gains/losses from refranchisings
net of store closure costs.
NON-CORE RESTAURANT BUSINESSES - California Pizza Kitchen, Chevys,
D'Angelo Sandwich Shops, East Side Mario's and Hot'n Now concepts in
the U.S. which were or are expected to be sold prior to the
Distribution Date.
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.
RESTAURANTS, UNITS, STORES - Terms are interchangeable.
SAME STORE SALES - The average sales per store calculated using
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> 62
INDEX TO DEFINED TERMS
2n1s...............................................................9
ADA...............................................................23
Adjusted PepsiCo Stock Option.....................................41
Affiliates........................................................43
AmeriServe........................................................19
Code..............................................................31
Common Stock.......................................................1
Company............................................................1
Compensation Committee............................................39
Distribution.......................................................1
Distribution Agent................................................29
Distribution Date..................................................1
Employee Programs Agreement.......................................30
EPS...............................................................42
NYSE...............................................................1
PepsiCo............................................................1
PepsiCo LTIP......................................................40
PepsiCo SharePower................................................40
PepsiCo SOIP......................................................40
PepsiCo Stock Conversion Ratio....................................41
Per Share Post-Split PepsiCo Stock Price..........................41
Per Share Pre-Split PepsiCo Stock Price...........................41
Per Share TRICON Stock Price......................................41
Provision.........................................................44
PSUs..............................................................40
QSR................................................................8
R&D...............................................................18
Record Date.......................................................29
Refranchising.....................................................11
RGM...............................................................11
SEC...............................................................45
Securities Act....................................................43
Separation Agreement..............................................30
Tax Separation Agreement..........................................30
TRICON.............................................................1
TRICON Articles...................................................42
TRICON Incentive Plan.............................................40
TRICON International...............................................9
TRICON LTIP.......................................................39
TRICON Stock Conversion Ratio.....................................41
TS&C Agreement....................................................31
When issued.......................................................43
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page No.
2.01* Separation Agreement..................................
3.01* Articles of Incorporation.............................
3.02* Bylaws................................................
10.01* Tax Separation Agreement..............................
10.02* Employee Programs Agreement...........................
10.03* Telecommunications, Software and Computing
Services Agreement....................................
10.04* TRICON Long-Term Incentive Plan.......................
10.05* TRICON Executive Incentive Compensation Plan..........
10.06* Employment Agreement between TRICON Global Restaurants,
Inc. and Andrall E. Pearson...........................
10.07* Agreement between KFC and the Pepsi - Cola
Company...............................................
10.08* Agreement between Pizza Hut and the Pepsi - Cola Company
10.09* Agreement between Taco Bell and the Pepsi - Cola Company
10.10* Sales and Distribution Agreement between PFS,
Pizza Hut, Taco Bell and KFC..........................
21.01* Active Subsidiaries...................................
27.1 Financial Data Schedule For Year-End 1996.............
27.2 Financial Data Schedule for First Quarter 1997........
* To be filed by amendment.
<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-23
CONDENSED COMBINED FINANCIAL STATEMENTS
Condensed Combined Statement of Operations -
twelve weeks ended March 22, 1997 and
March 23, 1996 (unaudited) F-24
Condensed Combined Statement of Cash Flows -
twelve weeks ended March 22, 1997 and
March 23, 1996 (unaudited) F-25 - F-26
Condensed Combined Balance Sheet -
March 22, 1997(unaudited) and December 28, 1996 F-27
Notes to (unaudited) Condensed Combined
Financial Statements F-28
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Pro Forma Condensed Combined Statement of Operations -
fiscal year ended December 28, 1996 (unaudited) F-29
Pro Forma Condensed Combined Statement of Operations -
twelve weeks ended March 22, 1997 (unaudited) F-30
Pro Forma Condensed Combined Balance Sheet -
March 22, 1997 (unaudited) F-31
Notes to unaudited Pro Forma Condensed Combined
Financial Statements F-32
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
<PAGE>
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
<PAGE>
___________________________________________________________________________
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
<PAGE>
___________________________________________________________________________
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
<PAGE>
___________________________________________________________________________
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
<PAGE>
___________________________________________________________________________
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
<PAGE>
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
<PAGE>
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 U.S. non-core restaurant 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
<PAGE>
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'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
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.
F-9
<PAGE>
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. 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 over appropriate periods, generally ranging from 10 to 40 years.
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.
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.
F-10
<PAGE>
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.
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.
restaurant 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. restaurant businesses charge of $246 million was a result
of a fourth quarter 1996 decision to dispose of TRICON's remaining non-core
U.S. restaurant businesses: California Pizza Kitchen ("CPK"), Chevys,
D'Angelo Sandwich Shops ("D'Angelo"), and East Side Mario's ("ESM") and a
first quarter 1996 decision to dispose of the operating assets of HNN. The
charge represented a reduction of the carrying amounts of the non-core U.S.
restaurant 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. restaurant 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
F-11
<PAGE>
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. restaurant 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
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 U.S.
non-core restaurant 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.
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.
F-12
<PAGE>
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
___________________________________________________________________________
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.
F-13
<PAGE>
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 maturities of long-term
debt issuances (26) (27)
$231 $260
___________________________________________________________________________
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
________________________________________________________________________
F-14
<PAGE>
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.
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. Such expense was based
on the provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions".
F-15
<PAGE>
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).
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 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,
contingent upon the attainment of prescribed performance goals. Payment of
PSUs are made in cash and/or stock. 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
F-16
<PAGE>
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
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.
F-17
<PAGE>
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
___________________________________________________________________________
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%
F-18
<PAGE>
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.
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.
F-19
<PAGE>
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.
___________________________________________________________________________
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-20
<PAGE>
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-21
<PAGE>
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 $ 146 113
Net income $ 40 42
___________________________________________________________________________
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 $ 182 146
Net income $ 112 62
___________________________________________________________________________
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 $ 77 87
___________________________________________________________________________
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 $ (152) (214)
Net loss $ (282) (323)
___________________________________________________________________________
F-22
<PAGE>
(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)
___________________________________________________________________________
(unaudited)
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-23
<PAGE>
Condensed Combined Statement of Operations
(in millions, unaudited)
TRICON Global Restaurants, Inc.
Twelve weeks ended March 22, 1997 and March 23, 1996
1997 1996
____________________________________________________________________________
REVENUES
Company-operated restaurants $2,123 $2,171
Franchise and license fees 114 102
2,237 2,273
Costs and Expenses, net
Company-operated restaurants
Food and paper 684 714
Payroll and employee benefits 633 634
Occupancy and other operating
expenses 572 604
1,889 1,952
General, administrative and other
expenses 198 195
Net facility actions (12) (46)
Unusual disposal charges - 26
Total costs and expenses 2,075 2,127
Operating Profit 162 146
Interest expense, net 66 74
Income Before Income Taxes 96 72
Income Taxes 44 32
Net Income $ 52 $ 40
____________________________________________________________________________
See accompanying Notes to Condensed Combined Financial Statements.
____________________________________________________________________________
F-24
<PAGE>
___________________________________________________________________________
Condensed Combined Statement of Cash Flows (page 1 of 2)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
Twelve Weeks ended March 22, 1997 and March 23, 1996
1997 1996
___________________________________________________________________________
Cash Flows - Operating Activities
Net income $ 52 $ 40
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 125 144
Unusual disposal charges - 26
Deferred income taxes (26) (26)
Other noncash charges and
credits, net (3) (28)
Changes in operating working capital,
excluding effects of acquisitions
Accounts and notes receivable (2) (17)
Inventories 1 12
Prepaid expenses, deferred income
taxes and other current assets (88) (31)
Accounts payable and other
current liabilities (86) (92)
Income taxes payable 54 (22)
Net change in operating
working capital (121) (150)
Net Cash Provided by Operating
Activities 27 6
Cash Flows - Investing Activities
Capital spending (62) (89)
Refranchising of restaurants 40 101
Sales of property, plant
and equipment 15 4
Other, net 17 (29)
Net Cash Provided by (Used for)
Investing Activities 10 (13)
___________________________________________________________________________
(Continued on following page)
F-25
<PAGE>
___________________________________________________________________________
Condensed Combined Statement of Cash Flows (page 2 of 2)
(in millions, unaudited)
TRICON Global Restaurants, Inc.
Twelve Weeks ended March 22, 1997 and March 23, 1996
1997 1996
___________________________________________________________________________
Cash Flows - Financing Activities
Short-term borrowings-three months
or less, net $ 36 $(40)
Proceeds from long-term debt 24 40
Decrease in investments by and
advances from PepsiCo (117) (6)
Net Cash Used for Financing
Activities (57) (6)
Effect of Exchange Rate Changes on
Cash and Cash Equivalents - (2)
Net Decrease in Cash
and Cash Equivalents (20) (15)
Cash and Cash Equivalents
- Beginning of Year 137 94
Cash and Cash Equivalents
- End of Quarter $ 117 $ 79
___________________________________________________________________________
Supplemental Cash Flow Information
Cash Flow Data
Interest paid $ 6 $ 8
Income taxes paid $ 16 $ 80
___________________________________________________________________________
See accompanying Notes to Condensed Combined Financial Statements.
___________________________________________________________________________
F-26
<PAGE>
_____________________________________________________________________________
Condensed Combined Balance Sheet
(in millions, unaudited)
TRICON Global Restaurants, Inc.
March 22, 1997 and December 28, 1996
3/22/97 12/28/96
_____________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents $ 117 $ 137
Short-term investments, at cost 22 50
139 187
Accounts and notes receivable, less allowance:
$11 in 1997 and $9 in 1996 126 125
Inventories 87 88
Prepaid expenses, deferred income taxes and
other current assets 650 562
Total Current Assets 1,002 962
Property, Plant and Equipment, net 3,955 4,050
Intangible Assets, net 1,068 1,100
Investments in Unconsolidated Affiliates 222 228
Other Assets 166 180
Total Assets $6,413 $6,520
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable and other current
liabilities $1,108 $1,200
Income taxes payable 210 157
Short-term borrowings 93 59
Total Current Liabilities 1,411 1,416
Long-term Debt 222 231
Other Liabilities 436 434
Deferred Income Taxes 174 200
Shareholder's Equity
Investments by and advances from PepsiCo 4,201 4,266
Currency translation adjustment (31) (27)
Total Shareholder's Equity 4,170 4,239
Total Liabilities and
Shareholder's Equity $6,413 $6,520
____________________________________________________________________________
See accompanying Notes to Condensed Combined Financial Statements.
___________________________________________________________________________
F-27
<PAGE>
Twelve Weeks ending March 22, 1997 and March 23, 1996
Notes to Unaudited Condensed Combined Financial Statements
1. The Condensed Combined Balance sheet at March 22, 1997 and the
Condensed Combined Statements of Operations and Cash Flows for the 12 weeks
ended March 22, 1997 and March 23, 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, which are of a normal and recurring nature, necessary
for a fair presentation. The results for the 12 weeks are not necessarily
indicative of the results expected for the year.
2. The non-core U.S. restaurant businesses held for disposal contributed
$103 million and $67 million to revenues in 1997 and 1996, respectively.
Excluding the unusual disposal charge in 1996, operating results for the
non-core U.S. restaurant businesses were $5 million of operating profit in
1997 compared to a $6 million loss in 1996. About half of the profit
improvement was due to cessation of depreciation and amortization expense
in 1997 because these businesses are held for sale.
3. On February 19, 1997 TRICON sold ESM, one of its non-core U.S.
restaurant businesses, for $10 million in cash proceeds, which approximated
its carrying amount.
4. 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 1997 and 1996 were $477
million and $574 million, respectively.
F-28
<PAGE>
______________________________________________________________________________
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) 295
Income Before Income Taxes 72 261 333
Income Taxes 125 61 186
Net (Loss)/Income $ (53) $ 200 $ 147
Net Loss Per Share $ - $x.xx $ x.xx
Average shares outstanding - xxx xxx
____________________________________________________________________________
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
____________________________________________________________________________
F-29
<PAGE>
_____________________________________________________________________________
Pro Forma Condensed Combined Statement of Operations
(in millions except per share amounts, unaudited)
TRICON Global Restaurants, Inc.
Twelve Weeks ended March 22, 1997
Pro Forma Pro Forma
1997 Adjustments 1997
_____________________________________________________________________________
REVENUES
Company-operated restaurants $2,123 $ (102)(a) $2,021
Franchise and license fees 114 (1)(a) 113
2,237 (103)(a) 2,134
Costs and Expenses, net
Company-operated restaurants
Food and paper 684 (31)(a) 653
Payroll and employee benefits 633 (37)(a) 596
Occupancy and other operating
expenses 572 (22)(a) 550
1,889 (90)(a) 1,799
General, administrative and other
expenses 198 (8)(a) 190
Net facility actions (12) - (12)
Total costs and expenses 2,075 (98)(a) 1,977
Operating Profit 162 (5)(a) 157
Interest expense, net 66 (1) 65
Income Before Income Taxes 96 (4) 92
Income Taxes 44 (1) 43
Net Income $ 52 $ (3) $ 49
Net Income Per Share $ - $ x.xx $ x.xx
Average shares outstanding - x,xxx x,xxx
____________________________________________________________________________
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
____________________________________________________________________________
F-30
<PAGE>
____________________________________________________________________________
Pro Forma Condensed Combined Balance Sheet
(in millions except per share amount, unaudited)
TRICON Global Restaurants, Inc.
March 22, 1997
Pro Forma Pro Forma
1997 Adjustments 1997
____________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents $ 117 $ - $ 117
Short-term investments, at cost 22 - 22
139 - 139
Accounts and notes receivable, less
allowance: $11 126 - 126
Inventories 87 - 87
Prepaid expenses, deferred income taxes
and other current assets 650 (311)(a) 339
Total Current Assets 1,002 (311) 691
Property, Plant and Equipment, net 3,954 - 3,954
Intangible Assets, net 1,068 - 1,068
Investments in Unconsolidated Affiliates 222 - 222
Other Assets 167 - 167
Total Assets $6,413 $(311) $6,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other current
liabilities $1,108 $ (57)(a) $1,051
Income taxes payable 210 - 210
Short-term borrowings 93 - 93
Total Current Liabilities 1,411 (57) 1,354
Long-term Debt 222 (49)(a) 173
Other Liabilities 436 (6)(a) 430
Deferred Income Taxes 174 48 (a) 222
Shareholder's Equity
Investments by and advances from PepsiCo 4,201 (247)(a) 3,954
Capital stock, par value $0.05 per share:
authorized 750 shares, issued x,xxx
shares - - -
Capital in excess of par value - - -
Currency translation adjustment (31) - (31)
Total Shareholder's Equity 4,170 (247) 3,923
Total Liabilities and
Shareholder's Equity $6,413 $(311) $6,102
____________________________________________________________________________
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
____________________________________________________________________________
F-31
<PAGE>
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
statement of operations for the fiscal year ended December 28, 1996 are:
(a) To eliminate the effect of TRICON's non-core U.S. restaurant
businesses composed of CPK, Chevys, D'Angelo, ESM and HNN. TRICON has
disposed of or expects to dispose of these businesses in 1997.
(b) Items to be updated in a subsequent amendment
- External interest expense based on expected debt outstanding
- Shares outstanding
Note 2 - The pro forma adjustments to the accompanying historical combined
statement of operations for the twelve-weeks ended March 22, 1997 are:
(a) To eliminate the effect of TRICON's non-core U.S. restaurant
businesses composed of CPK, Chevys, D'Angelo, ESM and HNN. TRICON has
disposed of or expects to dispose of these businesses in 1997.
(b) Items to be updated in a subsequent amendment
- External interest expense based on expected debt outstanding
- Shares outstanding
Note 3 - The pro forma adjustments to the accompanying historical combined
balance sheet at March 22, 1997 are:
(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) Items to be updated in a subsequent amendment
- External debt based on expected debt outstanding
- Dividend payment and settlement of certain intercompany liabilities
to and with PepsiCo
- New Equity and Shares outstanding
F-32
<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> 78
<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 12
WEEKS ENDED MARCH 22, 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> Mar-22-1997
<PERIOD-TYPE> 3-MOS
<CASH> 117
<SECURITIES> 22
<RECEIVABLES> 137
<ALLOWANCES> 11
<INVENTORY> 87
<CURRENT-ASSETS> 1,002
<PP&E> 6,770
<DEPRECIATION> 2,816
<TOTAL-ASSETS> 6,413
<CURRENT-LIABILITIES> 1,411
<BONDS> 222
<COMMON> 0
0
0
<OTHER-SE> 4,170
<TOTAL-LIABILITY-AND-EQUITY> 6,413
<SALES> 2,123
<TOTAL-REVENUES> 2,237
<CGS> 1,317
<TOTAL-COSTS> 1,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> 96
<INCOME-TAX> 44
<INCOME-CONTINUING> 52
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
