================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MarkOne)
[|X|]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 5, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 1-13163
TRICON GLOBAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-3951308
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 Gardiner Lane, Louisville, Kentucky 40213
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 874-8300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
The number of shares outstanding of the Registrant's Common Stock as of October
15, 1998 was 152,850,836 shares.
================================================================================
<PAGE>
TRICON GLOBAL RESTAURANTS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
-----------------
<S> <C>
Part I. Financial Information
Condensed Consolidated Statement of Income (Unaudited) - 12 and 36 weeks ended September 3
5, 1998 and September 6, 1997
Condensed Consolidated Statement of Cash Flows (Unaudited) - 36 weeks ended 4
September 5, 1998 and September 6, 1997
Condensed Consolidated Balance Sheet - September 5, 1998 (Unaudited) and December 27, 5
1997
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis 14
Independent Accountants' Review Report 34
Part II. Other Information and Signatures 35
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data - unaudited)
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------- ---------------------------
9/5/98 9/6/97 9/5/98 9/6/97
----------- ---------- ----------- ------------
REVENUES
<S> <C> <C> <C> <C>
Company restaurants $ 1,869 $ 2,162 $ 5,526 $ 6,499
Franchise and license fees 148 138 416 392
----------- ---------- ----------- ------------
2,017 2,300 5,942 6,891
----------- ---------- ----------- ------------
Costs and Expenses, net
Company restaurants
Food and paper 592 698 1,762 2,102
Payroll and employee benefits 524 615 1,607 1,870
Occupancy and other operating expenses 477 592 1,420 1,754
----------- ---------- ----------- ------------
1,593 1,905 4,789 5,726
General, administrative and other expenses 204 236 605 658
Facility actions net gain (54) (51) (156) (136)
Unusual (credits) charges (5) 15 (5) 54
----------- ---------- ----------- ------------
Total costs and expenses, net 1,738 2,105 5,233 6,302
----------- ---------- ----------- ------------
Operating Profit 279 195 709 589
Interest expense, net 62 57 198 188
----------- ---------- ----------- ------------
Income Before Income Taxes 217 138 511 401
Income Tax Provision 89 59 217 149
----------- ---------- ----------- ------------
Net Income $ 128 $ 79 $ 294 $ 252
=========== ========== =========== ============
Basic Earnings Per Common Share $ .84 $ 1.93
=========== ===========
Diluted Earnings Per Common Share $ .82 $ 1.89
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TRICON GLOBAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions - unaudited)
<TABLE>
<CAPTION>
36 Weeks Ended
----------------------------
9/5/98 9/6/97
------------ -----------
Cash Flows - Operating Activities
<S> <C> <C>
Net Income $ 294 $ 252
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 298 379
Facility actions net gain (156) (136)
Unusual (credits) charges (5) 54
Deferred income taxes (28) (21)
Other noncash charges and credits, net 74 42
Changes in operating working capital, excluding working capital acquired and
disposed:
Accounts and notes receivable 3 (21)
Inventories 5 4
Prepaid expenses, deferred income taxes and other current assets (43) (74)
Accounts payable and other current liabilities (33) (101)
Income taxes payable 94 95
------------ -----------
Net change in operating working capital 26 (97)
------------ -----------
Net Cash Provided by Operating Activities 503 473
------------ -----------
Cash Flows - Investing Activities
Capital spending (252) (288)
Refranchising of restaurants 508 534
Sale of non-core businesses - 91
Sales of property, plant and equipment 34 88
Other, net (83) (58)
------------ -----------
Net Cash Provided by Investing Activities 207 367
------------ -----------
Cash Flows - Financing Activities
Proceeds from Notes 604 -
Proceeds from long-term debt, net 1 -
Payments of Revolving Credit Facility (760) -
Payments of long-term debt (659) (9)
Short-term borrowings-three months or less, net (17) 71
Decrease in investments by and advances from PepsiCo - (898)
Other, net 2 -
------------ -----------
Net Cash Used for Financing Activities (829) (836)
------------ -----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (4) (6)
------------ -----------
Net Decrease in Cash and Cash Equivalents (123) (2)
Cash and Cash Equivalents - Beginning of year 268 137
------------ -----------
Cash and Cash Equivalents - End of period $ 145 $ 135
============ ===========
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 214 $ 21
Income taxes paid 144 146
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
<TABLE>
<CAPTION>
9/5/98 12/27/97
--------------- --------------
(unaudited)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 145 $ 268
Short-term investments, at cost 94 33
Accounts and notes receivable, less allowance: $17 in 1998 and $20 in 1997 148 149
Inventories 66 73
Prepaid expenses, deferred income taxes and other current assets 189 160
--------------- --------------
Total Current Assets 642 683
Property, Plant and Equipment, net 2,952 3,261
Intangibles Assets, net 679 812
Investments in Unconsolidated Affiliates 130 143
Other Assets 213 199
--------------- --------------
Total Assets $ 4,616 $ 5,098
=============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 1,226 $ 1,260
Income taxes payable 285 195
Short-term borrowings 109 124
--------------- --------------
Total Current Liabilities 1,620 1,579
Long-term Debt 3,725 4,551
Other Liabilities and Deferred Credits 646 588
--------------- --------------
Total Liabilities 5,991 6,718
--------------- --------------
Shareholders' Deficit
Preferred stock, no par value, 250 shares authorized; no shares issued - -
Common stock, no par value, 750 shares authorized; 153 and 152 shares issued and
outstanding in 1998 and 1997, respectively 1,281 1,271
Accumulated deficit (2,469) (2,763)
Accumulated other comprehensive income - currency translation adjustment (187) (128)
--------------- --------------
Total Shareholders' Deficit (1,375) (1,620)
--------------- --------------
Total Liabilities and Shareholders' Deficit $ 4,616 $ 5,098
=============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
(Unaudited)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial
statements. Therefore, we suggest that the accompanying financial
statements be read in conjunction with the financial statements and notes
thereto included in our annual report on Form 10-K for the fiscal year
ended December 27, 1997 ("10-K"). Except as disclosed herein, there has
been no material change in the information disclosed in the notes to the
consolidated financial statements included in the 10-K. Forward looking
statements contained herein should be read in conjunction with the
cautionary statements contained on page 33.
The condensed consolidated financial statements include TRICON Global
Restaurants, Inc. and its wholly owned subsidiaries. The statements include
the worldwide operations of KFC, Pizza Hut and Taco Bell and, through their
respective disposal dates, our U.S. non-core businesses disposed of in
1997. These non-core businesses consist of California Pizza Kitchen, Chevys
Mexican Restaurant, D'Angelo Sandwich Shop, East Side Mario's and Hot 'n
Now (collectively, the "Non-core Businesses"). References to TRICON
throughout these notes to condensed consolidated financial statements are
made using the first person notations of "we" or "our." All significant
intercompany accounts and transactions have been eliminated. For all
periods presented prior to the Spin-off from PepsiCo, Inc. ("PepsiCo") on
October 6, 1997, the accompanying unaudited condensed consolidated
financial statements present our financial position, results of operations
and cash flows as if we had been an independent, publicly owned company.
Certain allocations in 1997 of previously unallocated PepsiCo interest of
$53 million and $171 million and general and administrative expenses of $10
million and $34 million for the 12 and 36 weeks ended September 6, 1997,
respectively, as well as computations of separate 1997 tax provisions, have
been made to facilitate such presentation. We believe that the bases of
allocation of interest and general and administrative expenses were
reasonable based on the facts available at the date of their allocation.
However, based on current information, such amounts are not indicative of
amounts which we would have incurred if we had been an independent,
publicly owned company for 1997.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
Certain items have been reclassified in the accompanying unaudited
condensed consolidated financial statements for prior periods to be
comparable with the classification adopted for the 12 and 36 weeks ended
September 5, 1998. Such reclassifications had no effect on previously
reported net income.
<PAGE>
In our opinion, the accompanying unaudited condensed consolidated financial
statements include all adjustments considered necessary to present fairly,
when read in conjunction with the 10-K, our financial position as of
September 5, 1998, and the results of our operations for the 12 and 36
weeks ended September 5, 1998 and September 6, 1997 and cash flows for the
36 weeks ended September 5, 1998 and September 6, 1997. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
2. EARNINGS PER COMMON SHARE ("EPS")
<TABLE>
<CAPTION>
12 Weeks 36 Weeks
Ended 9/5/98 Ended 9/5/98
-------------- -------------
<S> <C> <C>
Net income $ 128 $ 294
============== =============
Basic EPS:
Weighted-average common shares outstanding 153 152
============== =============
Basic EPS $ .84 $ 1.93
============== =============
Diluted EPS:
Weighted-average common shares outstanding 153 152
Shares assumed issued on exercise of dilutive options 24 21
Shares assumed purchased with proceeds of dilutive options (20) (18)
-------------- -------------
Shares applicable to diluted earnings 157 155
============== =============
Diluted EPS $ .82 $ 1.89
============== =============
</TABLE>
Unexercised employee stock options to purchase 190,000 and 1.5 million
shares of our common stock for the 12 and 36 weeks ended September 5, 1998,
respectively, were not included in the computation of diluted EPS because
their exercise prices were greater than the average market price of our
common stock during the 12 and 36 weeks ended September 5, 1998.
Basic and diluted EPS data has been omitted for the 12 and 36 weeks ended
September 6, 1997 since we were not an independent, publicly owned company
with a capital structure of our own during that period.
3. CHANGES IN ACCOUNTING PRINCIPLES
a. Reporting Comprehensive Income
Effective December 28, 1997, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as our other annual
financial statements. This Statement also requires that we classify items
of other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. Our annual financial statements for prior periods will be
reclassified, as required.
7
<PAGE>
Our quarterly total comprehensive income was as follows:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------------------- ------------------------
9/5/98 9/6/97 9/5/98 9/6/97
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 128 $ 79 $ 294 $ 252
Currency translation adjustment (25) (9) (59) (49)
---------- ----------- ---------- ----------
Total comprehensive income $ 103 $ 70 $ 235 $ 203
========== =========== ========== ==========
</TABLE>
b. Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued in
March 1998. SOP 98-1 identifies the characteristics of internal-use
software and specifies that once the preliminary project stage is complete,
certain external direct costs, certain direct internal payroll and
payroll-related costs and interest costs incurred during the development of
computer software for internal use should be capitalized and amortized. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998, with earlier application encouraged, and must be applied
to internal-use computer software costs incurred in those fiscal years for
all projects, including those projects in progress upon initial application
of this SOP. We currently expense all such costs as incurred. We have not
yet quantified the dollar impact of adopting SOP 98-1; however, when
implemented in 1999, it will result in the capitalization of costs which
would have been previously expensed.
c. Disclosures About Segments of an Enterprise and Related Information
Effective December 28, 1997, we adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This Statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" and requires that a public company report annual and interim
financial and descriptive information about its reportable operating
segments. Operating segments, as defined, are components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This Statement allows aggregation
of similar operating segments into a single operating segment, in general,
if the businesses are considered similar under the criteria of this
Statement. For purposes of applying this Statement, we consider our
domestic businesses similar so they have been aggregated. Generally,
financial information is required to be reported on the basis that we use
it internally for evaluating segment performance and deciding how to
allocate resources to segments. Our adoption of this Statement had no
impact on our reportable segments as disclosed in our 10-K. Following are
the disclosures recommended by the new standard on an interim basis:
8
<PAGE>
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
Revenues
-----------------------------------------------------------
12 Weeks Ended 36 Weeks Ended
9/5/98 9/6/97 (1) 9/5/98 9/6/97 (1)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States $ 1,529 $ 1,752 $ 4,523 $ 5,269
International 488 548 1,419 1,622
---------- ----------- ---------- ----------
$ 2,017 $ 2,300 $ 5,942 $ 6,891
========== =========== ========== ==========
Operating Profit, Interest Expense, Net and Income Before
Income Taxes
-----------------------------------------------------------
12 Weeks Ended 36 Weeks Ended
9/5/98 9/6/97 (1) 9/5/98 9/6/97 (1)
---------------------------------------------------------------------------------------------------------------
Operating profit
United States $ 266 $ 172 (2) $ 672 (2) $ 452 (2)
International 53 54 142 198
Foreign exchange net gains (losses) 2 (7) 2 (15)
Unallocated corporate expenses (42) (24) (107) (46)
---------- ----------- ---------- ----------
279 195 709 589
---------- ----------- ---------- ----------
Interest expense, net
United States 1 2 7 12
International (1) 2 (2) 5
Unallocated corporate expenses 62 53 193 171
---------- ----------- ---------- ----------
62 57 198 188
---------- ----------- ---------- ----------
Income before income taxes
United States 265 170 (2) 665 440 (2)
International 54 52 144 193
Foreign exchange net losses 2 (7) 2 (15)
Unallocated corporate expenses (104) (77) (300) (217)
---------- ----------- ---------- ----------
$ 217 $ 138 $ 511 $ 401
========== =========== ========== ==========
</TABLE>
(1) Results from the United States included the Non-core Businesses
disposed of in 1997. Excluding the unusual charges, the Non-core
Businesses contributed the following:
12 Weeks Ended 36 Weeks Ended
9/6/97 9/6/97
---------------- ---------------
Revenues $ 62 $ 253
Operating profit 5 15
Interest expense, net (1) (3)
Income before income taxes 4 12
Net income 4 10
9
<PAGE>
(2) 1998 includes reversal of certain charges of $5 million relating to
better-than-expected proceeds from the sale of properties and
settlement of lease liabilities associated with properties retained
upon sale of the Non-core Businesses. 1997 includes unusual charges
related to the disposal of the Non-core Businesses of $15 million for
the quarter and $54 million year-to-date.
Identifiable Assets
---------------------------
9/5/98 12/27/97
---------------------------------------------------------------
United States $ 3,200 $ 3,637
International 1,416 1,461
---------- -------------
$ 4,616 $ 5,098
========== =============
d. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. This Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively. When
adopted, SFAS No. 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997 (and,
at the company's election, before January 1, 1998).
We have not yet quantified the impacts of adopting SFAS No. 133 on our
financial statements and have not determined the timing of or method of our
adoption of SFAS No. 133. However, the Statement could increase volatility
in earnings and other comprehensive income.
4. LONG-TERM DEBT
During the 36 weeks ended September 5, 1998, we made net payments of $640
million and $760 million under our unsecured bank Term Loan Facility and
the unsecured Revolving Credit Facility, respectively. As discussed in our
10-K, amounts outstanding under the revolving credit facility are expected
to fluctuate from time to time, but term loan reductions cannot be
reborrowed. Such payments reduced amounts outstanding at September 5, 1998
to $1.33 billion and $1.68 billion from $1.97 billion and $2.44 billion at
year-end 1997, on the term facility and revolving facility, respectively.
At September 5, 1998, we had unused revolving credit agreement lines
available aggregating $1.43 billion, net of outstanding letters of credit
of $147 million.
10
<PAGE>
In fiscal 1997, we filed with the Securities and Exchange Commission a
shelf registration statement on Form S-3 with respect to offerings of up to
$2 billion of senior unsecured debt. In early May 1998, we issued $350
million 7.45% Unsecured Notes due May 15, 2005 and $250 million 7.65%
Unsecured Notes due May 15, 2008 (collectively referred to as the "Notes").
The proceeds, net of issuance costs, were used to reduce existing
borrowings under our unsecured term facility and revolving facility. The
Notes are carried net of related discounts which are being amortized over
the life of the Notes. The unamortized discount for both issues was
approximately $1.1 million at September 5, 1998 and the amount of
amortization in the quarter or year-to-date was not significant. Interest
is payable May 15 and November 15 commencing on November 15, 1998. In
anticipation of the issuance of the Notes, we entered into $600 million in
treasury locks to eliminate interest rate sensitivity in pricing of the
Notes. Concurrent with the issuance of the Notes, the locks were settled at
a gain which will be amortized to interest expense over the life of the
Notes.
5. COMMITMENTS AND CONTINGENCIES
Relationship with Former Parent After Spin-off
As disclosed in our 1997 10-K, in connection with the October 6, 1997
spin-off from PepsiCo (the "Spin-off"), separation and other related
agreements (the "Separation Agreement") were entered into which contain
certain indemnities to the parties and provide for the allocation of tax
and other assets, liabilities and obligations arising from periods prior to
the Spin-off. The Separation Agreement provided for, among other things,
our assumption of all liabilities relating to the restaurant businesses,
inclusive of the Non-core Businesses disposed of in 1997, and the
indemnification of PepsiCo with respect to such liabilities. Our best
estimates of all such liabilities have been included in the accompanying
condensed consolidated financial statements. Subsequent to Spin-off, claims
have been made by certain Non-core Business franchisees and a purchaser of
one of the businesses. We are disputing the validity of such claims;
however, we believe that any settlement of these claims at amounts in
excess of previously recorded liabilities is not likely to have a material
adverse effect on our results of operations, financial condition or cash
flows.
Under the Separation Agreement, PepsiCo maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for
periods through the Spin-off Date. PepsiCo also maintains full control and
absolute discretion regarding common tax audit issues. Although PepsiCo has
contractually agreed to, in good faith, use its best efforts to settle all
joint interests in any common audit issue on a consistent basis with prior
practice, there can be no assurance that determinations so made by PepsiCo
would be the same as we would reach, acting on our own behalf.
We have agreed to certain restrictions on future actions to help ensure
that the Spin-off maintains its tax-free status. Restrictions include,
among other things, limitations on the liquidation, merger or consolidation
with another company, certain issuances and redemptions of our Common
Stock, the granting of stock options and certain sales, refranchisings,
distributions or other dispositions of assets. If we fail to abide by such
restrictions or to obtain waivers from PepsiCo and, as a result, the
Spin-off fails to qualify as a tax-free reorganization, we will be
obligated to indemnify PepsiCo for any resulting tax liability, which could
be substantial. Additionally, we are obligated to indemnify PepsiCo in
certain circumstances with respect to any employer payroll tax it incurs
related to the exercise of vested PepsiCo options held by our employees
after the Spin-off. No payments under these indemnities have been required
through the third quarter of 1998.
11
<PAGE>
Other Commitments and Contingencies
We were directly or indirectly contingently liable in the amounts of $310
million and $302 million at September 5, 1998 and December 27, 1997,
respectively, for certain lease assignments and guarantees. In connection
with these contingent liabilities, after the Spin-off, we were required to
maintain cash collateral balances at certain institutions of approximately
$30 million, which are included in Other Assets in the accompanying
condensed consolidated balance sheet. At September 5, 1998, $215 million
represented contingent liabilities to lessors as a result of our assigning
our interest in and obligations under real estate leases as a condition to
the refranchising our restaurants. The $215 million represented the present
value of the minimum payments of the assigned leases, excluding any renewal
option periods, discounted at our pre-tax cost of debt. On a nominal basis,
the contingent liability resulting from the assigned leases was $320
million. The balance of the contingent liabilities primarily reflected
guarantees to support financial arrangements of certain unconsolidated
affiliates and restaurant franchisees.
We are currently and, for certain prior years were, primarily self-insured
for most workers' compensation, general liability and automotive liability
losses, subject to per occurrence and aggregate annual liability
limitations. During the first two quarters of 1997, we participated with
PepsiCo in a guaranteed cost program for certain coverages. We are also
primarily self-insured for health care claims for eligible participating
employees, subject to certain deductibles and limitations. We determine our
liability for claims reported and for claims incurred but not reported on
an actuarial basis.
In July 1998, we entered into severance agreements with certain key
executives which are triggered by a termination, under certain conditions,
of the executive following a change in control of the Company, as defined
in the agreements. Once triggered, the affected executives would receive
twice the amount of their annual base salary and their annual incentive in
a lump sum, outplacement services and a tax gross-up for any excise taxes.
The agreements expire December 31, 2000. In connection with the execution
of these agreements, the Compensation Committee of our Board of Directors
has authorized amendment of the deferred and incentive compensation plans
and, following a change in control, an establishment of rabbi trusts which
will be used to provide payouts under these deferred compensation plans
following a change in control.
We are subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Like some other large retail employers, Pizza Hut and Taco Bell
recently have been faced in a few states with allegations of purported
class-wide wage and hour violations. We believe 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 our results of operations, financial condition or cash flows.
6. SHAREHOLDERS' RIGHTS PLAN
On July 21, 1998, our Board of Directors declared a dividend distribution
of one right for each share of common stock outstanding as of August 3,
1998 (the "Record Date"). Each right initially entitles the registered
holder to purchase a unit consisting of one one-thousandth of a share (a
"Unit") of Series A Junior Participating Preferred Stock, without par
value, at a purchase price of $130 per Unit, subject to adjustment. The
rights, which do not have voting rights, will become exercisable for TRICON
common stock ten business days following a public announcement that a
person or group has acquired, or has commenced or intends to commence a
tender offer for, 15% or more, or 20% or more if such person or group owned
10% or more on the adoption date of this plan, of our common stock. In the
event the rights become exercisable for common stock, each right will
entitle its holder (other than the
12
<PAGE>
Acquiring Person as defined in the Agreement) to purchase, at the right's
then-current exercise price, TRICON common stock having a value of twice
the exercise price of the right. In the event the rights become exercisable
for common stock and thereafter we are acquired in a merger or other
business combination, each right will entitle its holder to purchase, at
the right's then-current exercise price, common stock of the acquiring
company having a value of twice the exercise price of the right.
The rights are redeemable in their entirety, prior to becoming exercisable,
at $.01 per right under certain specified conditions. The rights expire on
July 21, 2008, unless such date is extended or the rights are earlier
redeemed or exchanged as provided in the Agreement.
The foregoing description of the rights is qualified in its entirety by
reference to the Rights Agreement between TRICON and BankBoston, N.A., as
Rights Agent, dated as of July 21, 1998 (including the exhibits thereto).
13
<PAGE>
Management's Discussion and Analysis
for the 12 and 36 Weeks Ended September 5, 1998
Introduction
On October 6, 1997 (the "Spin-off Date"), the worldwide operations of KFC,
Pizza Hut and Taco Bell (the "Core Business(es)") became an independent,
publicly owned restaurant Company known as TRICON Global Restaurants, Inc.
through a Spin-off from our former parent, PepsiCo, Inc. (the "Spin-off"). The
following Management's Discussion and Analysis should be read in conjunction
with the unaudited Condensed Consolidated Financial Statements on pages 3 - 12
and the Cautionary Statements on page 33 and our filing on Form 10-K for the
year ended December 27, 1997 ("10-K"). For purposes of this Management's
Discussion and Analysis, we include the worldwide operations of the Core
Businesses and, through their respective dates of disposal in 1997, the Non-core
Businesses. Where significant to the discussion, the impact of the Non-core
Businesses has been separately identified.
In the following discussion, volume is the estimated dollar effect of the
year-over-year change in customer transaction counts. Effective net pricing
includes price increases/decreases and the effect of changes in product mix.
Portfolio effect includes the impact on operating results related to our
refranchising initiative and closure of underperforming stores. System sales
represents the Core Business' combined sales of the Company, joint venture,
franchised and licensed units. Franchised and licensed unit sales are estimated
based on remitted and accrued royalties.
Tabular amounts are displayed in millions except per share and unit count
amounts, or as specifically identified. Percentages may not recompute due to
rounding of reported numbers.
Comparability
Certain factors impacting comparability of operating performance in the
quarter ended September 5, 1998 were anticipated at the prior fiscal year end
and are more fully discussed in the 10-K. Updated information is provided below.
The 1998 full-year benefits of the fourth quarter 1997 unusual charge,
discussed below, have been and are expected to be significant. Based on the
year-to-date actuals and our fourth quarter estimates, we now expect that they
will be offset in the near term by the year-to-year decline in Asia operating
profits and spending related to Year 2000 issues as discussed below.
Asian Economic Events
The overall economic turmoil and weakening of local currencies throughout
much of Asia against the U.S. dollar beginning in late 1997 continues to
present, in the near term, a challenging retail environment. The difficult
economic conditions have continued through the third quarter of this year and
have adversely affected the U.S. dollar value of our foreign currency
denominated sales ("translation") and consumer demand as seen in reduced
transaction counts, both of which continue to impact our consolidated results of
operations.
Asian operations in such countries as China, Japan, Korea, Singapore,
Taiwan and Thailand, among others, comprised approximately 35% and 33% of our
international system U.S. dollar translated sales in the quarter and
year-to-date, respectively, versus 40% and 37% for the quarter and year-to-date
1997, respectively. Asian system sales declined 17% and 14% for the quarter and
year-to-date, respectively. Declines in system sales in Japan, Korea, and
Thailand have been mitigated by system sales increases in China and Taiwan
primarily due to new unit development. Excluding the impact of foreign currency
translation, Asian system sales increased 4% for both the quarter and
year-to-date.
14
<PAGE>
Total revenues from Asia declined 5% for the quarter and 6% year-to-date.
Included in total revenues are franchise fees which decreased $5 million, or
25%, for the quarter and $10 million, or 20%, year-to-date. Excluding the
negative impacts of foreign currency translation, total revenues from Asia
increased approximately 16% for both the quarter and year-to-date. New unit
development in China, Taiwan and Korea led the increase, partially offset by
volume declines both in the quarter and year-to-date.
Operating profits from Asia declined 28% and 40% for the quarter and
year-to-date, respectively. Excluding the impact of foreign currency
translation, operating profits increased 13% in the quarter and decreased 6%
year-to-date. New unit growth as well as increased store margins in China were
partially offset in the quarter by lower margins in Korea and volume declines in
both Korea and China. Year-to-date, the lower margins in Korea and volume
declines in both Korea and China were partially offset by new unit growth and
increased store margins in China. While we continue to work with our suppliers
to reduce food costs and focus on increasing our everyday value offerings, the
challenges continue. We expect to continue to cautiously seek out investment
opportunities in Asia, drawing on lessons learned there, and from our experience
in other countries which have faced similar problems in the past such as Mexico
and Poland. The complexities of the international environment in which we
operate make it difficult to accurately predict the ongoing effect of currency
movements and continuing economic turmoil on our results of operations. Related
effects will be reported in our financial statements as they become known and
estimable.
Selected highlights of our recent operating results in Asia are as follows:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
---------------------------------------- ----------------------------------------
% B(W) % B(W)
9/5/98 9/6/97 vs. 1997 9/5/98 9/6/97 vs. 1997
---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Systems Sales $ 549 $ 659 (17) $ 1,509 $ 1,765 (14)
% of International System Sales 35% 40% 33% 37%
Revenues $ 126 $ 133 (5) $ 318 $ 338 (6)
% of International Revenues 26% 24% 22% 21%
Operating Profit, excluding facility
actions $ 18 $ 24 (28) $ 41 $ 67 (40)
% of Total International Operating
Profit, excluding facility actions 33% 55% 31% 55%
</TABLE>
Note: A summary of total International results is located on page 28.
Year 2000
We have established an enterprise-wide plan to prepare our information
technology systems (IT) and non-information technology systems with embedded
technology applications (ET) for the Year 2000 issue as well as to reasonably
assure that our critical business partners are prepared and to plan for business
continuity as we enter the coming millennium.
Our plan encompasses the use of both internal and external resources to
identify, correct and test systems for Year 2000 readiness. External resources
include nationally recognized consulting firms and other contract resources to
supplement available internal resources.
15
<PAGE>
The phases of our plan - awareness, assessment, remediation, testing and
implementation - are currently expected to cost $55 to $65 million from their
inception through the end of 1999. This estimate includes costs related to
accelerated implementation of replacement systems. Our plan contemplates our own
IT/ET as well as assessment and contingency planning relative to potential Year
2000 business risks inherent in our material third party relationships. The
total cost represents less than 20% of our total estimated information
technology related expenses through the end of 1999. Approximately $23 million
has been incurred from inception of planned actions through September 5, 1998 of
which $19 million has been incurred during 1998 ($6 million in the third
quarter). Approximately $31 million is expected to be incurred during the
current year. All costs are expected to be funded by cash flow from operations.
a. TRICON IT/ET State of Readiness
We have substantially completed our inventory process of hardware
(including desktops), software (third party and internally developed) and
embedded technology applications and have implemented monitoring procedures
designed to insure that new IT/ET investment is Year 2000 compliant.
Based on this inventory, we are prioritizing critical IT/ET applications
and determining the Year 2000 compliance status of the IT/ET through third party
vendor inquiry or internal processes. All identified critical internally
developed IT is in the process of remediation, replacement or retirement.
Multiple phases of our Year 2000 project are occurring at the same time and some
phases will require repetition. However, the majority of remediation and unit
testing is expected to be completed in early 1999. Integration testing of
remediated, replaced and consolidated systems is expected to continue throughout
1999. International IT/ET efforts are expected to lag domestic efforts, however,
we believe that business risk is minimized by the predominant use of unmodified
third party IT in our international business for which Year 2000 compliant
versions already exist.
The following table identifies by category and status the major identified
IT/ET applications.
Remediation
Category Compliant In Process Not Compliant
- ------------------------------- ------------ -------------- --------------
Third Party Developed Software 321 916 133
Internally Developed Software 19 420 92
Desktop 169 497 87
Hardware 268 1,062 74
ET 189 497 12
Other 24 394 2
------------ -------------- --------------
990 3,786 400
============ ============== ==============
Note: Tabulations based on currently available inventory of identified
"applications." We have defined this term (as used in this Year 2000 discussion)
to describe separately identifiable groups of program, hardware or ET which can
be both logically segregated by business purpose and separately unit tested as
to performance of a single business function. "Not compliant" applications will
be either retired or replaced before the end of 1999.
16
<PAGE>
b. Material Third Party Relationships
We believe that our critical third party relationships can be subdivided
generally into Suppliers, Banks, and Franchisees. An initial inventory of
domestic restaurant suppliers and distributors is complete, and letters have
been mailed requesting information regarding their Year 2000 status. Contingency
plans will be developed by early 1999 for suppliers that we believe have
substantial Year 2000 operational risks. An inventory is in process for
international suppliers with a target for late 1998 completion after which we
anticipate following the domestic process described above.
Letters requesting compliance information have been or are being sent to
relationship banks. Contingency plans will be developed by early 1999 for all
banks that have not submitted written representation of Year 2000 readiness. An
inventory of international banks responsible for processing deposits and payroll
is in process with a late 1998 target for completion. The international banks
will then be mailed letters following the same process to be used for domestic
banks.
We have approximately 1,200 domestic and 950 international franchisees.
Information has been sent to all domestic franchisees regarding the business
risks associated with Year 2000. Sample IT/ET project plans and a report of the
compliance status in Company-owned restaurants will be made available to the
franchisees by year-end. Our plan includes similar steps beginning in the fourth
quarter for all international franchisees.
Additionally, we are in the process of identifying all other third party
companies that provide business critical services by late 1998 after which
project plans will be developed to assess their Year 2000 readiness and develop
contingency plans, as appropriate.
The following table indicates by type of third party risk the status of the
readiness process.
Responses Received Responses Not Yet Received
------------------- ----------------------------
Suppliers 12 91
Banks 34 77
------------------- ----------------------------
46 168
=================== ============================
Note: Suppliers tabulations consist primarily of existing electronic data
exchange partners, including our largest suppliers, distributors and third party
administrators.
Due to the forward-looking nature and lack of historical precedent for Year
2000 issues, it is a difficult disclosure challenge. Only one thing is certain
about the impact of Year 2000 - it is difficult to predict with certainty what
truly will happen after December 31, 1999. Given our best efforts and execution
of remediation, replacement and testing, it is probable that there will be
disruptions and unexpected business problems during the early months of 2000.
Our plans anticipate making diligent, reasonable efforts to assess Year 2000
readiness of our critical business partners and will ultimately yield
contingency plans for business critical systems prior to the end of 1999.
However, we are heavily dependent on the continued normal operations of not only
our key suppliers of chicken, cheese, beef, tortillas and other raw materials
and our major food and supplies distributor, but also on other entities such as
lending, depository and disbursement banks and third party administrators of our
benefit plans. Despite diligent preparation, unanticipated third party failures,
more general public infrastructure failures, or failure to successfully conclude
our remediation efforts as planned could have a material adverse impact on our
results of operations, financial condition and/or cash flows in 1999 and beyond.
Inability of our franchisees to remit franchise fees on a timely basis or lack
of publicly available hard currency or credit card processing capability
supporting our retail sales stream could also have material adverse impact on
our results of operations, financial condition and/or cash flows.
17
<PAGE>
Other Factors Affecting Comparability
In addition to the above identified near-term risks in our Asian businesses
and costs related to Year 2000 issues, we believe that certain items included in
1997 results of operations will not recur in 1998 or will recur in significantly
different magnitudes, thereby affecting comparability of results. These items
include $4 million in the quarter and $23 million year-to-date in special KFC
franchise contract renewal fees primarily from renewals in the second and third
quarters of 1997 which did not recur in 1998 and the income included in 1997
results attributable to the Non-core Businesses sold in 1997. Excluding unusual
disposal charges, the Non-core Businesses had income of $4 million ($4 million
after-tax) in the third quarter of 1997 and $12 million ($10 million
after-tax)year-to-date 1997. In the fourth quarter of 1997, the Non-core
Businesses had income of $2 million ($1 million after-tax). Unusual disposal
charges related to the Non-core Businesses were $15 million and $54 million in
the quarter and year-to-date, respectively. In addition, 1998 total facility
actions net gain after-tax is currently expected to decline less than 20%
compared to the after-tax net gain recognized in 1997, excluding the fourth
quarter 1997 charge. 1997 total facility actions net gain after-tax, excluding
the fourth quarter 1997 charge, included a tax-free gain of approximately $100
million related to the refranchising of our restaurants in New Zealand through
an initial public offering.
In our 1997 10-K, we stated that we believed our 1998 net interest expense
would be $40 million to $50 million higher than the interest allocated to us by
PepsiCo for 1997, driven by the higher outstanding debt levels and higher
expected weighted average interest rates. However, the better-than-expected
proceeds from our refranchising activities and cash flows from operations have
allowed us to reduce our outstanding debt at a faster pace than previously
anticipated. In addition, overall borrowing rates have been lower than expected.
Therefore, we now expect that our full-year 1998 net interest expense will
approximate 1997 levels.
As disclosed in the 10-K, we are proceeding with the relocation of our
Wichita, Kansas, operations to other facilities. Through September 5, 1998, we
have incurred approximately $12 million ($7 million in the third quarter) of
termination benefits, relocation costs, early retirement and other expenses
related to this relocation. We currently expect to incur the remaining
relocation costs of approximately $2.5 million in the fourth quarter. These
charges were expected to be substantially offset by the anticipated gain on the
sale of the facility in the fourth quarter. However, due to contractual disputes
with the proposed buyer, the sale of this processing center is not expected to
close in the fourth quarter of 1998.
Store Portfolio Perspectives
In the fourth quarter of 1997, we announced a $530 million unusual charge
($425 million after-tax). The charge included (1) costs of closing
underperforming stores during 1998, primarily at Pizza Hut and internationally;
(2) reduction to fair market value, less costs to sell, of the carrying amounts
of certain restaurants we intended to refranchise in 1998; (3) impairment of
certain restaurants intended to be used in the business; (4) impairment of
certain joint venture investments; and (5) costs of related personnel
reductions. Of the $530 million charge, approximately $405 million related to
asset writedowns and approximately $125 million related to liabilities,
primarily occupancy-related costs and severance. While the total charge is
unchanged, the component amounts have been revised from our prior disclosures to
reflect better information. The liabilities are expected to be settled from cash
flow from operations. Through September 5, 1998, the amounts utilized to date
apply only to the actions covered by the charge. Based on better-than-expected
lease settlements with certain lessors, we have reversed $.7 million of the
charge in the quarter and $1.7 million year-to-date. These reversals have been
included in and have increased reported Facility Actions Net Gain.
The charge included reserves related to 1,392 units expected to be
refranchised (652 units) or closed (740 units). Our prior disclosure of 1,407
has been revised to eliminate a duplication in the unit count of 15 units to be
refranchised. As of September 5, 1998, 417 units have been closed and 97 units
have been refranchised. In addition, during the quarter, we decided to continue
to operate 15 units we had planned to refranchise.
18
<PAGE>
Although we expected to refranchise or close all units by year-end 1998, we
now forecast that we will not complete the refranchising of approximately 350
units and the closure of approximately 100 units until 1999. This delay is
primarily due to operational issues such as longer than expected periods to
locate qualified buyers, particularly for International units, extended
negotiations with some lessors, and execution delays in consolidating the
operations of certain units to be closed with other units that will continue to
operate. We intend to refranchise or close these 450 units.
The charge is expected to have a favorable impact on future cash flows and
operating profits. We believe our worldwide business, upon completion of the
actions covered by the charge, will be significantly more focused and better
positioned to deliver consistent growth in operating earnings before facility
actions. We estimate that the favorable impact on operating profit related to
the 1997 fourth quarter charge was approximately $16 million in the third
quarter of 1998 and approximately $46 million year-to-date resulting primarily
from the absence of depreciation in 1998 for stores included in the charge.
Based primarily on the improved performance of Pizza Hut in the U.S., we
are currently re-evaluating our prior estimates of the fair market values of
units to be refranchised and whether to close certain other units originally
expected to be closed. We expect this re-evaluation to be completed in the
fourth quarter of 1998.
For the last few years, we have been working to reduce our share of total
system units by selling Company restaurants to existing and new franchisees
where their expertise can be leveraged to improve our concepts' overall
operational performance, while retaining Company ownership of key markets. This
portfolio-balancing activity has reduced, and will continue to reduce, our
reported revenues and increase the importance of system sales as a key
performance measure. Refranchising frees up invested capital while continuing to
generate franchise fees, thereby improving returns. The impact of refranchising
gains is expected to decrease over time. The following table summarizes the
refranchising activities for the quarter and year-to-date 1998 and 1997.
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------------- ------------------------------
9/5/98 9/6/97 9/5/98 9/6/97
-------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Number of units refranchised 328 441 913 920
Refranchising proceeds, pre-tax $ 218 $ 150 $ 508 $ 534
Refranchising net gain, pre-tax 64 50 172 203
</TABLE>
Our overall Company ownership percentage (including joint venture units) of
our Core Businesses' total system units decreased by almost 4 percentage points
from year-end 1997 and by 10 percentage points from year-end 1996 to 34% at
September 5, 1998. This reduction was a result of our portfolio initiatives and
the relative number of new points of distribution added and units closed by our
franchisees and licensees and by us. As we approach a Company/franchise balance
more consistent with our major competitors, refranchising activity is expected
to substantially decrease.
19
<PAGE>
Results of Operations
Worldwide
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------------------------ ----------------------------------------
9/5/98 9/6/97 % B(W) 9/5/98 9/6/97 % B(W)
------------ ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
SYSTEM SALES - CORE ONLY $ 4,905 $ 4,987 (2) $14,198 $ 14,107 1
============ =========== ========== ==========
REVENUES
Company sales $ 1,869 $ 2,162 (14) $ 5,526 $ 6,499 (15)
Franchise and license fees (1) 148 138 7 416 392 6
------------ ----------- ---------- ----------
Total Revenues $ 2,017 $ 2,300 (12) $ 5,942 $ 6,891 (14)
============ =========== ========== ==========
COMPANY RESTAURANT MARGINS
Domestic $ 214 $ 196 9 $ 573 $ 602 (5)
International 62 61 2 164 171 (4)
------------ ----------- ---------- ----------
Total $ 276 $ 257 8 $ 737 $ 773 (5)
============ =========== ========== ==========
% of sales 14.8% 11.9% 2.9 points 13.3% 11.9% 1.4 points
Ongoing operating profit $ 220 $ 159 38 $ 548 $ 507 8
Facility actions net gain (54) (51) 5 (156) (136) 14
Unusual (credits) charges (5) 15 NM (5) 54 NM
------------ ----------- ---------- ----------
Operating profit 279 195 43 709 589 20
Interest expense, net 62 57 (10) 198 188 (5)
Income tax provision 89 59 (50) 217 149 (46)
------------- ----------- ---------- ----------
Net Income $ 128 $ 79 60 $ 294 $ 252 17
============ =========== ========== ==========
Diluted earnings per share $ .82 $ 1.89
============ ==========
Pro forma diluted earnings per share
(2) $ .50 $ 1.62
========== ==========
</TABLE>
(1) Excluding the 1997 KFC renewal fees, quarter and year-to-date increased 11%
and 13% over the prior year, respectively.
(2) The shares used to compute pro forma diluted earnings per common share for
the 12 and 36 weeks ended September 6, 1997 are the same as those used in
1998, as our capital structure as an independent publicly owned Company did
not exist during the first three quarters of 1997.
NM - Not Meaningful
- --------------------------------------------------------------------------------
20
<PAGE>
WORLDWIDE RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
Joint
Company Venture Franchised Licensed Total
------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 27, 1997 10,117 1,090 15,097 3,408 29,712
New Builds & Acquisitions 161 60 530 384 1,135
Refranchising & Licensing (913) (6) 834 85 -
Closures (421) (39) (476) (311) (1,247)
------------- ------------ -------------- ------------
Balance at September 5, 1998 (a) 8,944 1,105 15,985 3,566 29,600
============= ============ ============== ============ ============
% of Total 30.2% 3.7% 54.0% 12.1% 100.0%
============= ============ ============== ============ ============
</TABLE>
(a) Includes 314 Company and joint venture units approved for closure, but not
yet closed at September 5, 1998.
- --------------------------------------------------------------------------------
System sales decreased $82 million, or 2%, in the quarter and increased $91
million, or 1%, year-to-date. Excluding the negative impact of foreign currency
translation, system sales increased $121 million, or 2%, in the quarter and $594
million, or 4%, year-to-date. The increase in both the quarter and year-to-date
resulted primarily from new unit development during the last twelve months which
exceeded sales declines due to closure of lower volume units. New unit
development was predominantly by franchisees and licensees. Domestically,
development during 1998 was principally at Pizza Hut and Taco Bell with
international development largely in China, Taiwan and Korea.
Revenues decreased $283 million, or 12%, in the quarter and $949 million,
or 14%, year-to-date. Company restaurant sales decreased $293 million, or 14%,
in the quarter and $973 million, or 15%, year-to-date. The Non-core Businesses
had revenues of $62 million and $253 million in last year's quarter and
year-to-date, respectively. Excluding the negative impact of foreign currency
translation and revenues from the Non-core Businesses, total revenues decreased
$236 million, or 10%, in the quarter and $797 million, or 12%, year-to-date and
Company restaurant sales decreased $251 million, or 12%, in the quarter and $836
million, or 13%, year-to-date. This decrease in Company restaurant sales for
both the quarter and year-to-date was primarily due to portfolio actions,
partially offset by new unit development and growth in same store sales.
Franchise and license fees increased $10 million, or 7%, and $24 million,
or 6%, for the quarter and year-to-date, respectively. Excluding the negative
impact of foreign currency translation and the 1997 KFC renewal fees of $4
million in the quarter and $23 million year-to-date, franchise and license fees
increased $21 million, or 16%, and $62 million, or 17%, for the quarter and
year-to-date, respectively. The increase in franchise and license fees reflected
the increase in continuing fees from units acquired from us and new unit
development, partially offset by store closures.
Company Restaurant Margins - Worldwide
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------ ----------------------------
9/5/98 9/6/97 9/5/98 9/6/97
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Company sales 100.0% 100.0% 100.0% 100.0%
Food and paper 31.6 32.3 31.9 32.3
Payroll and employee benefits 28.0 28.4 29.1 28.8
Occupancy and other operating expenses 25.6 27.4 25.7 27.0
---------- ---------- ----------- ------------
Company restaurant margins 14.8% 11.9% 13.3% 11.9%
========== ========== =========== ============
</TABLE>
21
<PAGE>
Company restaurant margins as a percent of sales increased 290 basis points
for the third quarter of 1998 and 140 basis points year-to-date as compared to
the same periods in 1997. The portfolio effect contributed approximately 80
basis points and 70 basis points for the quarter and year-to-date, respectively,
to this improvement. In addition, the absence in 1998 of depreciation and
amortization relating to stores included in the 1997 fourth quarter charge
contributed approximately 60 basis points for both the quarter and year-to-date.
Margins, excluding the portfolio effect and the benefits of the fourth quarter
charge, increased 150 basis points in the quarter and increased slightly
year-to-date. In the quarter, favorable effective net pricing in excess of cost
increases, primarily labor, was partially offset by volume declines in the U.S.
and internationally, driven by Asia. Labor increases were driven by higher wage
rates primarily related to the September 1997 minimum wage increase in the U.S.
and higher incentive compensation accruals. The decrease in occupancy and other
operating expenses in the quarter related primarily to store condition and
quality initiatives at Taco Bell in 1997 partially offset by increased 1998
store refurbishment expenses at KFC. In addition to the factors affecting the
quarterly comparison, the year-to-date results were also unfavorably impacted by
an increase in the management complement in our Taco Bell restaurants and by the
absence of favorable insurance actuarial adjustments which occurred in the prior
year.
General, Administrative and Other Expenses
General, administrative and other expenses ("G&A") decreased $32 million in
the quarter, or 13%, and $53 million, or 8%, year-to-date and includes the
following:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------ ----------------------
% B(W) vs. % B(W)
9/5/98 9/6/97 1997 9/5/98 9/6/97 vs. 1997
---------- ---------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
G&A - Core $ 210 $ 225 6 $ 620 $ 628 1
G&A - Non-Core - 5 NM - 20 NM
Equity (income) loss from investments
in unconsolidated affiliates
(4) (1) NM (13) (5) NM
Foreign exchange (gains) losses (2) 7 NM (2) 15 NM
---------- ---------- --------- ---------
$ 204 $ 236 13 $ 605 $ 658 8
========== ========== ========= =========
</TABLE>
Included in the 1997 core G&A was a PepsiCo allocation amount of $10
million in the quarter and $34 million year-to-date, reflecting a portion of
PepsiCo's shared administrative expenses. The allocated PepsiCo administrative
expenses were based on PepsiCo's total corporate administrative expenses using a
ratio of our revenues to PepsiCo's revenues. We believe that this basis of
allocation was reasonable based on the facts available at the date of such
allocation. However, based on current information, such amounts are not
indicative of amounts which we would have incurred if we had been an
independent, publicly owned entity for all periods presented.
We now estimate that our ongoing corporate annual general and
administrative expenses as an independent, publicly owned entity will exceed the
annualized amount of the PepsiCo allocation by approximately $26 million in
1998. This expected increase will be partially offset by non-recurring TRICON
start-up costs of approximately $14 million which were incurred in the last
three quarters of 1997. This is higher than the estimate reported in the 1998
second quarter Form 10-Q primarily due to increased estimates of performance and
stock-based compensation due to better-than-expected operating results,
partially offset by delays in staffing positions at Tricon corporate.
22
<PAGE>
Core G&A decreased $15 million, or 6%, in the quarter and $8 million, or
1%, year-to-date. Excluding the impact of foreign currency translation, core G&A
decreased $12 million, or 5%, in the quarter and increased $1 million, or 1%,
year-to-date. The favorable impact of stores sold or closed and decreased
Restaurant Support Center and field overhead expenses were partially offset in
the quarter and fully offset year-to-date by increased investment spending.
Investment spending consisted primarily of costs related to our Year 2000
compliance and remediation efforts ($6 million in the quarter and $19 million
year-to-date - see page 15) and costs to relocate certain support operations
from Wichita, Kansas, to Louisville, Kentucky, and Dallas, Texas ($7 million in
the quarter and $12 million year-to-date see page 18). Additionally, we
experienced increased administrative expenses as an independent publicly owned
company and incurred additional expenses related to the continued efforts to
improve and consolidate administrative and accounting systems.
Facility Actions Net Gain
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------------------------- -------------------------------
9/5/98 9/6/97 9/5/98 9/6/97
----------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Refranchising net gain $ 64 $ 50 $ 172 $ 203
Store closure costs, net (10) 1 (8) (28)
Recurring impairment - - (8) (39)
----------- ------------- -------------- ------------
Facility actions net gain $ 54 $ 51 $ 156 $ 136
=========== ============= ============== ============
</TABLE>
Refranchising net gain included initial franchise fees of $10 million and
$13 million for the 12 weeks ended September 5, 1998 and September 6, 1997,
respectively, and $29 million and $25 million for the 36 Weeks ended September
5, 1998 and September 6, 1997, respectively. The refranchising net gain arose
from refranchising 913 and 920 units in 1998 and 1997, respectively. See page 19
for more details regarding refranchising activities. Additionally, 1998 store
closure costs, net includes the reversal of $.7 million and $1.7 million in the
quarter and year-to-date, respectively, of a portion of the 1997 fourth quarter
charge related to better-than-expected lease settlements with certain lessors.
Impairment resulted from our normal recurring evaluation of stores held for
use. The lower amount in 1998 was primarily driven by 1997 decisions to dispose
of certain stores which may have otherwise been impaired in the current
evaluation. Future impairment charges depend on the facts and circumstances at
each future evaluation date, so current impairment is not necessarily indicative
of future impairment.
Unusual (Credits) Charges
Unusual credits in 1998 includes the reversal of certain reserves relating
to better-than-expected proceeds from the sale of properties and settlement of
lease liabilities associated with properties retained upon the sale of the
Non-core Businesses. Unusual charges of $15 million in the third quarter of 1997
and $54 million year-to-date resulted from our 1996 decision to dispose of our
remaining Non-core Businesses. These disposal charges represented a further
reduction of the carrying amounts of the Non-core Businesses to their estimated
or actual fair market value, less costs to sell.
23
<PAGE>
Operating Profits
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
---------------------------------------- ---------------------------------------
9/5/98 9/6/97 % B(W) 9/5/98 9/6/97 % B(W)
---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Domestic - Core $ 207 $ 140 47 $ 523 $ 429 22
Domestic - Non-core - 5 NM - 15 NM
International 53 45 20 130 124 5
Foreign exchange gain (losses) 2 (7) NM 2 (15) NM
Unallocated expenses (42) (24) (77) (107) (46) NM
---------- ----------- ---------- ----------
Ongoing operating profit 220 159 38 548 507 8
Facility actions net gain (54) (51) 5 (156) (136) 14
Unusual (credits) charges (5) 15 NM (5) 54 NM
---------- ----------- ---------- ----------
Reported operating profit $ 279 $ 195 43 $ 709 $ 589 20
========== =========== ========== ==========
</TABLE>
Excluding facility actions net gain and the unusual (credits) charges
related to the Non-core Businesses, ongoing operating profits increased $61
million, or 38%, for the quarter and $41 million, or 8%, year-to-date. Excluding
the negative impact of currency translation the increase in ongoing operating
profits was $66 million, or 42%, and $56 million, or 11%, for the quarter and
year-to-date, respectively. This increase in the quarter was driven by reduced
G&A, restaurant margin improvements and higher franchise fees, partially offset
by the absence in 1998 of the operating profits from the Non-core Businesses and
the 1997 KFC renewal fees. The increase year-to-date was driven by reduced G&A
and higher franchise fees, partially offset by lower restaurant margin dollars,
the absence of the 1997 KFC renewal fees and the disposal of the Non-core
Businesses. Ongoing operating profits included benefits related to our 1997
fourth quarter charge of $16 million and $46 million in the quarter and
year-to-date, respectively. These benefits were fully offset year-to-date and
partially offset in the quarter by the year-to-year decline in Asia profits and
Year 2000 spending.
Interest Expense, Net
Prior to the Spin-off, our operations were financed through operating cash
flows, proceeds from refranchising activities and investments by and advances
from PepsiCo. Our 1997 interest expense includes an allocation of $53 million
and $171 million for the 12 and 36 Weeks ended September 6, 1997, respectively,
by PepsiCo of its interest expense (PepsiCo's weighted average interest rate
applied to the average balance of investments by and advances from PepsiCo) and
interest on our external debt for periods prior to the Spin-off. We believe such
allocated interest expense is not indicative of the interest expense that we
would have incurred as an independent, publicly owned Company or will incur in
future periods.
Interest expense increased $5 million, or 10% and $10 million, or 5% for
the quarter and year-to-date, respectively. This increase is primarily due to
the higher interest rate on our outstanding debt, as compared to the PepsiCo
rate used in the allocation process prior to the Spin-off, and also higher
average outstanding debt levels.
24
<PAGE>
Income Taxes
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------------------------- -------------------------------
9/5/98 9/6/97 9/5/98 9/6/97
------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Income taxes $ 89 $ 59 $ 217 $ 149
Reported effective tax rate 40.7 42.5 42.3 37.1
Ongoing effective tax rate* 40.7 50.7 42.3 45.9
</TABLE>
* 1997 adjusted to exclude the effects of the tax-free New Zealand gain of $7
million and $100 million and the unusual charges of $15 million and $54
million for the quarter and year-to-date, respectively.
The decrease in the ongoing 1998 year-to-date effective tax rate as
compared to 1997 is primarily attributable to adjustments related to prior years
and a decrease in foreign taxes, partially offset by an increase in state taxes.
The ongoing 1998 year-to-date effective tax rate is lower than the year-to-date
rate in the second quarter of 1998 due to the favorable shift in the mix of the
components of our taxable income.
Diluted Earnings Per Share
The components of diluted earnings per common share ("EPS") were as
follows:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
----------------------------- ----------------------------
9/5/98 9/6/97 (a) 9/5/98 9/6/97(a)
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Operating earnings - Core Businesses (b) $ .58 $ .28 $ 1.28 $ 1.05
Facility actions net gain .22 .27 .59 .73
---------- -------------- ---------- --------------
Net income - Core Businesses .80 .55 1.87 1.78
Operating earnings - Non-core Businesses - .03 - .06
Unusual credits (charges) .02 (.08) .02 (.22)
---------- -------------- ---------- --------------
Net income $ .82 $ .50 $ 1.89 $ 1.62
========== ============== ========== ==============
</TABLE>
(a) The shares used to compute pro forma diluted earnings per common share for
the 12 and 36 weeks ended September 6, 1997 are the same as those used in
1998, as our capital structure as an independent publicly owned Company did
not exist during the first three quarters of 1997.
(b) 1997 operating earnings from Core Businesses include KFC renewal fees of $4
million ($3 million after-tax or $.02 per pro forma diluted share) and $23
million ($14 million after-tax or $.09 per pro forma diluted share) in the
quarter and year-to-date, respectively.
25
<PAGE>
Domestic
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
--------------------------------------- -----------------------------------
% B(W) % B(W)
9/5/98 9/6/97 9/5/98 9/6/97
------------ ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SYSTEM SALES - CORE ONLY $ 3,351 $ 3,321 1 $ 9,647 $ 9,339 3
============ =========== ========== ==========
REVENUES
Company sales $ 1,428 $ 1,664 (14) $ 4,244 $ 5,014 (15)
Franchise and license fees (1) 101 88 14 279 255 9
------------ ----------- ---------- ----------
Total Revenues $ 1,529 $ 1,752 (13) $ 4,523 $ 5,269 (14)
============ =========== ========== ==========
COMPANY RESTAURANT MARGINS $ 214 $ 196 9 $ 573 $ 602 (5)
% of sales 15.0% 11.8% 3.2 points 13.5% 12.0% 1.5 points
OPERATING PROFITS, EXCLUDING FACILITY ACTIONS
NET GAIN AND UNUSUAL (CREDITS) CHARGES
Core Businesses $ 207 $ 140 47 $ 523 $ 429 22
Non-core Businesses - 5 NM - 15 NM
------------ ----------- ---------- ----------
$ 207 $ 145 41 $ 523 $ 444 18
============ =========== ========== ==========
</TABLE>
(1) Excluding the 1997 KFC renewal fees, quarter and year-to-date increased 19%
and 20% over the prior year, respectively.
- --------------------------------------------------------------------------------
U.S. RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
Company Franchised Licensed Total
--------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 27, 1997 7,822 9,597 3,167 20,586
New Builds & Acquisitions 38 172 342 552
Refranchising & Licensing (835) 827 8 -
Closures (318) (151) (272) (741)
--------------- -------------- ----------- ------------
Balance at September 5, 1998 (a) 6,707 10,445 3,245 20,397
=============== ============== =========== ============
% of Total 32.9% 51.2% 15.9% 100.0%
=============== ============== =========== ============
</TABLE>
(a) Includes 242 Company and joint venture units approved for closure, but not
yet closed at September 5, 1998.
- --------------------------------------------------------------------------------
System sales increased $30 million, or 1%, in the quarter and $308 million,
or 3%, year-to-date. The increase in the quarter and year-to-date is
attributable to new unit development during the last twelve months predominately
by franchisees and licensees of Taco Bell and Pizza Hut, partially offset by
store closures. In addition, year-to-date was positively impacted by same store
sales growth, led by Pizza Hut.
Revenues decreased $223 million, or 13%, in the quarter and $746 million,
or 14%, year-to-date. Company restaurant sales decreased $236 million, or 14%,
in the quarter and $770 million, or 15%, year-to-date. Excluding the effect of
the Non-core Businesses, Company restaurant sales declined $175 million, or 11%,
in the quarter and $519 million, or 11%, year-to-date. The decrease in the
quarter and year-to-date was driven by the portfolio effect. Positive same store
sales growth at all three of our brands in the quarter and year-to-date
partially offset this decrease.
26
<PAGE>
Franchise and license fees increased $13 million, or 14%, in the quarter
and $24 million, or 9%, year-to-date. Excluding the 1997 KFC contract renewal
fees, franchise and license fees increased $17 million, or 19%, and $47 million,
or 20%, in the quarter and year-to-date, respectively. The increase in the
quarter and year-to-date is primarily due to the increase in continuing fees
from refranchising and new unit development primarily by Pizza Hut and Taco Bell
franchisees, partially offset by store closures.
Same store sales are measured for our U.S. Company units. Same store sales
at KFC increased 5% in the quarter and 3% year-to-date. The increase in the
quarter was primarily driven by the successful promotion of crispier "Extra
Crispy" chicken and "Honey Barbecue" wings compared to soft sales from "Twister"
in the prior year. The increase year-to-date was primarily driven by favorable
effective net pricing and strong product promotions, such as "Honey Barbecue"
wings and "Original Recipe."
Same store sales at Pizza Hut increased 4% for the quarter and 6%
year-to-date. The increase in the quarter and year-to-date reflects a higher
average guest check at traditional and delivery units driven by the new product
offerings of "The Edge" and the "Sicilian" pizzas. In addition, year-to-date
reflects the positive impact of increased volume.
Taco Bell same store sales increased 2% in the quarter and 1% year-to-date.
The increase in the quarter and year-to-date was driven by an increase in the
average guest check resulting primarily from favorable effective net pricing.
Same store sales also benefited from the introduction of "Gorditas," a higher
priced menu item. The increase in the quarter and year-to-date was partially
offset by volume declines.
Company Restaurant Margins - Domestic
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------------- ------------------------------
9/5/98 9/6/97 9/5/98 9/6/97
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Company sales 100.0% 100.0% 100.0% 100.0%
Food and paper 30.5 31.2 30.7 31.0
Payroll and employee benefits 29.7 30.2 30.8 30.5
Occupancy and other operating expenses 24.8 26.8 25.0 26.5
-------------- ------------ ------------- -------------
Company restaurant margins 15.0% 11.8% 13.5% 12.0%
============== ============ ============= =============
</TABLE>
Company restaurant margins as a percent of sales increased 320 basis points
in quarter and 150 basis points year-to-date as compared to the same periods in
1997. The portfolio effect contributed approximately 90 basis points in both the
quarter and year-to-date to this improvement. In addition, benefits from the
fourth quarter charge contributed approximately 50 basis points in both the
quarter and year-to-date. Margins, excluding the portfolio effect and benefits
from the 1997 fourth quarter charge, increased approximately 180 basis points in
the quarter and increased slightly year-to-date. The quarter and year-to-date
benefited from favorable effective net pricing in excess of cost increases,
primarily labor. This improvement was partially offset in the quarter and
largely offset year-to-date by volume declines. Labor increases in the both the
quarter and year-to-date were driven by higher wage rates primarily related to
the September 1997 minimum wage increase and higher incentive compensation
accruals. Labor was also unfavorably impacted on a year-to-date basis by
increases in the management complement at our Taco Bell restaurants and by the
absence of favorable insurance actuarial adjustments which occurred in the prior
year. The decreases in occupancy and other expenses related primarily to store
condition and quality initiatives at Pizza Hut and Taco Bell in 1997 offset by
1998 store refurbishment expenses at KFC.
27
<PAGE>
Operating profits from Core Businesses, excluding facilities action net
gain, increased $67 million, or 47%, in the quarter and $94 million, or 22%,
year-to-date. This increase in the quarter was driven by reduced G&A, restaurant
margin improvements and higher franchise fees, partially offset by the absence
of the 1997 KFC renewal fees. The increase year-to-date was driven by reduced
G&A and higher franchise fees, partially offset by lower restaurant margin
dollars and the absence of the 1997 KFC renewal fees. Operating profits included
the benefits related to our 1997 fourth quarter charge of $9 million and $24
million in the quarter and year-to-date, respectively. These benefits were
partially offset in the quarter and year-to-date by Year 2000 spending.
International
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------------------------------- -------------------------------------
9/5/98 9/6/97 % B(W) 9/5/98 9/6/97 % B(W)
---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
SYSTEM SALES $ 1,554 $ 1,666 (7) $ 4,551 $ 4,768 (5)
========== =========== ========== ==========
REVENUES
Company sales $ 441 $ 499 (12) $ 1,282 $ 1,485 (14)
Franchise and license fees 47 49 (4) 137 137 -
---------- ----------- ---------- ----------
Total Revenues $ 488 $ 548 (11) $ 1,419 $ 1,622 (12)
========== =========== ========== ==========
COMPANY RESTAURANT MARGINS $ 62 $ 61 2 $ 164 $ 171 (4)
% of sales 14.0% 12.2% 1.8 points 12.8% 11.5% 1.3 points
OPERATING PROFIT, EXCLUDING
FACILITY ACTIONS NET GAIN $ 53 $ 45 20 $ 130 $ 124 5
-----------------------------------------------------------------------------------------------------------------
</TABLE>
INTERNATIONAL RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
Joint
Company Venture Franchised Licensed Total
------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 27, 1997 2,295 1,090 5,500 241 9,126
New Builds & Acquisitions 123 60 358 42 583
Refranchising & Licensing (78) (6) 7 77 -
Closures (103) (39) (325) (39) (506)
------------- ----------- -------------- ------------ ------------
Balance at September 5, 1998 (a) 2,237 1,105 5,540 321 9,203
============= =========== ============== ============ ============
% of Total 24.3% 12.0% 60.2% 3.5% 100.0%
============= =========== ============== ============ ============
</TABLE>
(a) Includes 72 Company and joint venture units approved for closure, but not
yet closed at September 5, 1998.
- --------------------------------------------------------------------------------
System sales decreased $112 million, or 7%, in the quarter and $217
million, or 5%, year-to-date. Excluding the impact of foreign currency
translation, system sales increased $91 million, or 5% and $286 million, or 6%
in the quarter and year-to-date, respectively. The increase was primarily due to
new unit development primarily in China, Taiwan and Korea, partially offset by
store closures in other countries/markets.
Revenues decreased $60 million, or 11%, in the quarter and $203 million, or
12%, year-to-date. Excluding the negative impact of foreign currency
translation, revenues decreased $12 million, or 2%, and $51 million, or 3%, for
the quarter and year-to-date, respectively. The decrease in the quarter and
year-to-date reflects the absence of revenues due to portfolio actions partially
offset by new unit development and effective net pricing. Franchise and license
fees decreased $2 million, or 4%, for the quarter and were unchanged
year-to-date.
28
<PAGE>
Excluding the negative impact of foreign currency translation, franchise and
license fees increased $5 million, or 9%, in the quarter and $15 million, or
11%, year-to-date. Fees from franchisee and licensee unit development and units
acquired from us were partially offset by store closures.
Company restaurant sales decreased $58 million, or 12% in the quarter and
$203 million, or 14%, year-to-date. Excluding the impact of foreign currency
translation, company restaurant sales decreased $11 million, or 2%, and $65
million, or 4%, for the quarter and year-to-date, respectively. The decrease in
the quarter was driven by portfolio actions and volume declines, primarily in
Asia. Declines in the quarter were partially offset by new unit development,
effective net pricing and transaction increases in Mexico, Puerto Rico and
Poland. Year-to-date, sales declines due to portfolio actions, driven by the
refranchising of our restaurants in New Zealand in the second quarter of 1997,
and volume declines were partially offset by effective net pricing and volume
increases in several countries led by in Mexico, Puerto Rico and Poland.
Company Restaurant Margins - International
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------------ ----------------------------
9/5/98 9/6/97 9/5/98 9/6/97
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Company sales 100.0% 100.0% 100.0% 100.0%
Food and paper 35.3 35.9 35.6 36.6
Payroll and employee benefits 22.6 22.5 23.5 23.0
Occupancy and other operating expenses 28.1 29.4 28.1 28.9
------------- ------------- ------------- -----------
Company restaurant margins 14.0% 12.2% 12.8% 11.5%
============= ============= ============= ===========
</TABLE>
Restaurant margins increased 180 basis points in the quarter and 130 basis
points year-to-date. Excluding the impact of foreign currency translation,
restaurant margins increased 215 basis points in the quarter and 160 basis
points year-to-date. This increase was driven primarily by the absence of
depreciation relating to stores included in the 1997 fourth quarter charge which
contributed approximately 130 basis points and 125 basis points in the quarter
and year-to-date, respectively. The remaining 85 basis point improvement in the
quarter and 35 basis point improvement year-to-date reflected favorable
effective net pricing in excess of cost increases, partially offset by volume
declines. The continuing economic turmoil throughout much of Asia resulted in an
overall volume decline, even though we had volume increases in several countries
led by Mexico, Puerto Rico and Poland.
Operating profits, excluding facility actions net gain, increased $8 million, or
20% in the quarter and $6 million, or 5%, year-to-date. Excluding the negative
impact of foreign currency translation, operating profits increased $13 million,
or 29%, and $23 million, or 19%, in the quarter and year-to-date, respectively.
The increase in the quarter and year-to-date reflected a decline in G&A,
partially offset by lower franchise fees in the quarter and lower restaurant
margin dollars year-to-date. Operating profits included benefits related to our
1997 fourth quarter charge of $7 million and $22 million in the quarter and
year-to-date, respectively. These benefits were fully offset in the quarter and
more than offset year-to-date by the year-to-year decline in Asia operating
profits and Year 2000 spending.
Consolidated Cash Flows
Net cash provided by operating activities increased $30 million, or 6%, to
$503 million year-to-date. Excluding net changes in working capital, net cash
provided by operating activities declined $93 million due primarily to the
decline in the number of Company restaurants in operation in the current year
relating to our refranchising initiative.
29
<PAGE>
Cash provided from working capital was $26 million this year compared to a
$97 million use of cash last year. This swing was primarily due to the change in
accounts payable balances which decreased $94 million in 1997 versus a decrease
of $47 million in 1998. In addition, an increase in accrued casualty claims
liabilities of approximately $44 million in 1998 reflecting a change to
self-insurance from the previous insured programs also contributed to the swing.
Net cash provided by investing activities decreased by $160 million to $207
million year-to-date, primarily due to the prior year sale of the Non-core
Businesses and lower proceeds from the sales of property, plant and equipment.
Net cash used for financing activities decreased by $7 million to $829
million year-to-date. The slightly larger net debt repayments in 1997 include
amounts paid to PepsiCo.
Financing Activities
Through September 1998, we reduced our reliance on bank debt by $1 billion
by reducing term debt. Term debt was reduced through a combination of proceeds
from the debt securities offered under our shelf registration discussed below,
proceeds from refranchising activities and a draw against the Revolving Credit
Facility. A key component of our financing philosophy is to build balance sheet
liquidity and to diversify sources of funding. Consistent with that philosophy,
we have taken steps to refinance a portion of our existing bank credit facility
referred to below. In 1997 we filed with the Securities and Exchange Commission
a shelf registration statement on Form S-3 with respect to offerings of up to $2
billion of senior unsecured debt. In early May 1998, under our shelf
registration, we issued $350 million 7.45% unsecured Notes due May 15, 2005 and
$250 million 7.65% unsecured Notes due May 15, 2008. The proceeds were used to
reduce existing borrowings under our unsecured Term Loan Facility and unsecured
Revolving Credit Facility. We may offer and sell from time to time additional
debt securities in one or more series, in amounts, at prices and on terms we
determine based on market conditions at the time of sale, as discussed in more
detail in the registration statement.
To fund the Spin-off, we negotiated a $5.25 billion bank credit agreement
comprised of a $2 billion senior, unsecured Term Loan Facility and a $3.25
billion senior, unsecured Revolving Credit Facility which mature on October 2,
2002. Interest is based principally on the London Interbank Offered Rate
("LIBOR") plus a variable margin as defined in the credit agreement. During the
36 weeks ended September 5, 1998, we made net payments of $640 million and $760
million under our unsecured bank Term Loan Facility and the unsecured Revolving
Credit Facility, respectively. As discussed in our 10-K, amounts outstanding
under the revolving credit facility are expected to fluctuate from time to time,
but term loan reductions cannot be reborrowed. Such payments reduced amounts
outstanding at September 5, 1998 to $1.33 billion and $1.68 billion from $1.97
billion and $2.44 billion at year end 1997, on the term facility and revolving
facility, respectively. At September 5, 1998, we had unused revolving credit
agreement borrowings available aggregating $1.43 billion, net of outstanding
letters of credit of $147 million. The credit facilities are subject to various
affirmative and negative covenants including financial covenants as well as
limitations on additional indebtedness including guarantees of indebtedness,
cash dividends, aggregate non-U.S. investments, among other things, as defined
in the credit agreement.
This substantial indebtedness subjects us to significant interest expense
and principal repayment obligations which are limited, in the near term, to
prepayment events as defined in the credit agreement. Our highly leveraged
capital structure could also adversely affect our ability to obtain additional
financing in the future or to undertake refinancings on terms and subject to
conditions that are acceptable to us.
30
<PAGE>
At the end of the third quarter of 1998, we were in compliance with the
bank covenants. We will continue to closely monitor on an ongoing basis the
various operating issues that could, in aggregate, affect our ability to comply
with financial covenant requirements. Such issues include, among other things,
the ongoing economic turmoil faced by much of Asia as well as the intensely
competitive nature of the quick service restaurant industry.
We use various derivative instruments with the objective of reducing
volatility in our borrowing costs. We have utilized interest rate swap
agreements to effectively convert a portion of our variable rate (LIBOR) bank
debt to fixed rate. We have also entered into interest rate arrangements to
limit the range of effective interest rates on a portion of our variable rate
bank debt. At September 5, 1998, the weighted average interest rate on our
variable bank debt, including the effect of derivatives, was 6.4%. Other
derivative instruments may be considered from time to time as well to manage our
debt portfolio and to hedge foreign currency exchange exposures.
Though we anticipate that cash flows from both operating and refranchising
activities will be lower than prior year levels, we believe they will be
sufficient to support our expected capital spending and still allow us to make
significant debt repayments.
Consolidated Financial Condition
Our working capital deficit, which excludes short-term investments and
short-term borrowings, is typical of restaurant operations where the vast
majority of company sales are for cash and food and supply inventories are
relatively small. The terms of payment to suppliers generally range from 10-30
days. Our working capital deficit increased 20% to $963 million at September 5,
1998 from $805 million at December 27, 1997. This increase primarily reflected a
decrease in cash and cash equivalents which were at higher than normal levels at
year end due to less flexible debt repayment terms than exist today. It also
reflects an increase in income taxes payable due to timing of estimated tax
payments offset by a decrease in accounts payable, also due to timing of
payments and a lower number of Company-operated restaurants.
As expected, we are continuing to experience reductions in most of our
asset and liability accounts as we continue our initiatives to reduce the number
of Company-operated restaurants to a level more consistent with our major
competitors. An exception to these reductions is Other Liabilities and Deferred
Credits which increased by $58 million, or 10%. The primary driver of this
increase was pension and deferred compensation accruals.
Euro Conversion
The Single European Currency (euro) will be introduced on January 1, 1999.
Complete transition is required by June 2002. We have completed an assessment of
the impact of the introduction of the euro on our European businesses. This
process, supported by outside consultants, will now move into implementing all
necessary actions to accommodate the introduction of the euro, including
inquiries of key suppliers as to their euro readiness. The conclusion of the
euro assessment process is that we face a number of strategic and operational
issues. The impact, if any, of these strategic and operational issues on our
results of operation, financial condition and cash flows is not presently
determinable.
The key strategic issues include the as yet unknown competitor response and
the effect of price transparency on the European quick service restaurant
market-place. The key operational issues include the introduction of a euro
marketing and pricing policy and the transition to the euro currency in both
front and back-of-house IT systems. There will be costs associated with these
and other IT changes but we currently estimate they will not be material. The
euro offers benefits on the Treasury and Procurement side of our European
businesses and policies are being developed for migrating to euro-purchasing
over the three year
31
<PAGE>
transition period. We plan to be euro compliant before the introduction of euro
notes and coins in 2002. Any delays in our ability to be euro complaint, or in
our key suppliers to be euro compliant, could have a material adverse impact on
our results of operations, financial condition and/or cash flows.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Our primary market risk exposure with regard to financial instruments is to
changes in interest rates, principally in the United States. In addition, an
immaterial portion of our debt is denominated in a currency other than the
functional currency of the respective country which exposes us to market risk
associated with exchange rate movements. Historically, we have not used
derivative financial instruments to manage our exposure to foreign currency rate
fluctuations since the market risk associated with our foreign currency
denominated debt was not considered significant.
At September 5, 1998, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $13 million in annual pre-tax
earnings. The estimated reduction is based upon the unhedged portion of our
variable rate debt and assumes no change in the volume or composition of debt at
September 5, 1998. In addition, the fair value to us of our interest rate
derivative contracts hedging the remaining portion of our variable rate bank
debt would increase approximately $30 million. Fair value was determined by
discounting the projected interest rate swap and collar cash flows.
32
<PAGE>
Cautionary Statements
From time to time, in both written reports and oral statements, we present
"forward-looking statements" within the meaning of Federal and state securities
laws, including those identified by such words as "may," "will," "expect,"
"believe," "plan" and other similar terminology. These "forward-looking
statements" reflect our current expectations and are based upon data available
at the time of the statements. Actual results involve risks and uncertainties,
including both those specific to the Company and those specific to the industry,
and could differ materially from expectations.
Company risks and uncertainties include but are not limited to the lack of
experience of our management group in operating the Company as an independent,
publicly owned business; potentially substantial tax contingencies related to
the Spin-off, which, if they occur, require us to indemnify PepsiCo; our
substantial debt leverage and the attendant potential restriction on our ability
to borrow in the future, as well as the substantial interest expense and
principal repayment obligations; potential unfavorable variances between
estimated and actual liabilities including those related to the sale of the
Non-core Businesses; failures to achieve timely, effective Year 2000
remediation; and the potential inability to identify qualified franchisees to
purchase Company restaurants at prices we consider appropriate under our
strategy to reduce the percentage of system units we operate.
Industry risks and uncertainties include, but are not limited to, global
and local business and economic and political conditions; legislation and
governmental regulation; competition; success of operating initiatives and
advertising and promotional efforts; volatility of commodity costs and increases
in minimum wage and other operating costs; availability and cost of land and
construction; adoption of new or changes in accounting policies and practices;
consumer preferences, spending patterns and demographic trends; political or
economic instability in local markets; and currency exchange rates.
33
<PAGE>
Independent Accountants' Review Report
--------------------------------------
The Board of Directors
TRICON Global Restaurants, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of TRICON
Global Restaurants, Inc. and Subsidiaries ("TRICON") as of September 5, 1998 and
the related condensed consolidated statement of income for the twelve and
thirty-six weeks ended September 5, 1998 and September 6, 1997 and the condensed
consolidated statement of cash flows for the thirty-six weeks ended September 5,
1998 and September 6, 1997. These financial statements are the responsibility of
TRICON's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of TRICON as of December 27, 1997, and
the related consolidated statements of operations, cash flows and shareholders'
(deficit) equity for the year then ended not presented herein; and in our report
dated February 12, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 27, 1997,
is fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Our report, referred to above, contains an explanatory paragraph that states
that 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."
KPMG Peat Marwick LLP
Louisville, Kentucky
October 14, 1998
34
<PAGE>
PART II - OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
EXHIBITS
Exhibit 10.18+ Form of Severance Agreement (in the event of a
change in control)
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 15 Letter from KPMG Peat Marwick LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment)
Exhibit 27 Financial Data Schedule
+ Indicates a management contract or compensatory plan.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K dated August 19, 1998
attaching a press release of August 19, 1998 announcing
anticipated third quarter operating and financial trends.
35
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, duly authorized officer of the registrant.
TRICON GLOBAL RESTAURANTS, INC.
-----------------------------------
(Registrant)
Date: October 19, 1998
/s/ Robert L. Carleton
------------------------------------------
Senior Vice President and
Controller and Chief Accounting Officer
(Principal Accounting Officer)
36
<PAGE>
EXHIBIT 10.18
SEVERANCE AGREEMENT
THIS AGREEMENT, dated , 1998, is made by and between Tricon Global
Restaurants, Inc., a North Carolina corporation (the "Company"), and
______________(the "Executive").
WHEREAS, the Company considers it essential to the best interests of its
shareholders to foster the continued employment of key management personnel; and
WHEREAS, the Board recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its shareholders; and
WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Executive hereby agree as follows:
1
<PAGE>
1. Defined Terms. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.
2. Term of Agreement. The Term of this Agreement shall commence on the date
hereof and shall continue in effect through December 31, 2000; provided,
however, that if a Change in Control shall have occurred during the Term, the
Term shall expire no earlier than the second anniversary of the date of such
Change in Control.
3. Company's Covenants Summarized. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 9.1
hereof, no Severance Payments shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the Term, the Executive will remain in the employ of the Company
until the earliest of (i) a date which is six (6) months from the date of such
Potential Change in Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death or Disability, or (iv) the termination by the
Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.1 Following a Change in Control and during the Term, and during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company shall pay the Executive's full salary to the Executive at the rate in
effect at the commencement of any such period, together with all compensation
and benefits
2
<PAGE>
payable to the Executive under the terms of any compensation or benefit plan,
program or arrangement maintained by the Company during such period, until the
Executive's employment is terminated by the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay the
Executive's full salary to the Executive through the Date of Termination at the
rate in effect immediately prior to the Date of Termination or, if higher, the
rate in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, together with all compensation and
benefits payable to the Executive through the Date of Termination under the
terms of the Company's compensation and benefit plans, programs or arrangements
as in effect immediately prior to the Date of Termination or, if more favorable
to the Executive, as in effect immediately prior to the first occurrence of an
event or circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay to the
Executive the Executive's normal post-termination compensation and benefits as
such payments become due. Such post-termination compensation and benefits shall
be determined under, and paid in accordance with, the Company's retirement,
insurance and other compensation or benefit plans, programs and arrangements as
in effect immediately prior to the Date of Termination or, if more favorable to
the Executive, as in effect immediately prior to the occurrence of the first
event or circumstance constituting Good Reason.
6. Severance Payments.
6.1 Subject to Section 6.2 hereof, if (i) the Executive's employment is
terminated following a Change in Control and during the Term, other than (A) by
the Company for Cause, (B) by reason of death or Disability, or (C) by the
Executive without Good Reason, the Company shall pay the Executive the amounts,
and provide the Executive the benefits, described in this Section 6.1
("Severance Payments") and Section 6.2, in addition to any payments and benefits
to which the Executive is entitled under Section 5 hereof. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company
3
<PAGE>
without Cause or by the Executive with Good Reason, if (i) the Executive's
employment is terminated by the Company without Cause after the occurrence of a
Potential Change in Control and prior to a Change in Control (whether or not a
Change in Control ever occurs) and such termination was at the request or
direction of a Person who has entered into an agreement with the Company the
consummation of which would constitute a Change in Control, (ii) the Executive
terminates his employment for Good Reason after the occurrence of a Potential
Change in Control and prior to a Change in Control (whether or not a Change in
Control ever occurs) and the circumstance or event which constitutes Good Reason
occurs at the request or direction of such Person, or (iii) the Executive's
employment is terminated by the Company without Cause or by the Executive for
Good Reason after the occurrence of a Potential Change in Control and such
termination or the circumstance or event which constitutes Good Reason is
otherwise in connection with or in anticipation of a Change in Control (whether
or not a Change in Control ever occurs). For purposes of any determination
regarding the applicability of the immediately preceding sentence, any position
taken by the Executive shall be presumed to be correct unless the Company
establishes by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any severance
benefit otherwise payable to the Executive, the Company shall pay to the
Executive a lump sum severance payment, in cash, equal to two times the sum
of (i) the Executive's base salary as in effect immediately prior to the
Date of Termination or, if higher, in effect immediately prior to the first
occurrence of an event or circumstance constituting Good Reason and (ii)
the target annual incentive compensation for the Executive in respect of
the fiscal year in which the Change in Control occurred, or, if higher, the
actual incentive compensation the Executive earned for the fiscal year
preceding the year in which the Executive's employment is terminated.
(B) Notwithstanding any provision of any annual or long-term incentive
plan to the contrary, the Company shall pay to the Executive a lump sum
amount, in cash, equal to the sum of (i) any unpaid incentive compensation
which has been allocated or awarded to the Executive for a completed fiscal
year or other measuring period preceding the Date of
4
<PAGE>
Termination under any such plan and which has not yet been paid or deferred
pursuant to a deferral plan maintained by the Company, and (ii) and,
notwithstanding any provision of the Company's annual incentive plan to the
contrary, a cash lump sum amount equal to a pro rata portion to the Date of
Termination of the aggregate value of the annual incentive compensation
award to the Executive for the then uncompleted fiscal year under such
plan, assuming achievement of performance goals at the target level, or, if
higher, assuming continued achievement of such performance goals at the
level achieved through the Date of Termination.
(C) The Company shall provide the Executive with outplacement services
suitable to the Executive's position for a period of one year or, if
earlier, until the first acceptance by the Executive of an offer of
employment.
6.2 (A) Whether or not the Executive becomes entitled to the Severance
Payments, if any payment or benefit received or to be received by the Executive
in connection with a Change in Control or the termination of the Executive's
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any Person whose actions result in a
Change in Control or any Person affiliated with the Company or such Person) (all
such payments and benefits, excluding the Gross-Up Payment, being hereinafter
called "Total Payments") will be subject (in whole or part) to the Excise Tax,
then, subject to the provisions of subsection (B) of this Section 6.2, the
Company shall pay to the Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of any
Excise Tax on the Total Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the
Total Payments. For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at the highest
marginal rate of taxation in the state and locality of the Executive's residence
on the Date of Termination (or if there is no Date of Termination, then the date
on which the Gross-up Payment is calculated for purposes of this Section 6.2),
net of the maximum reduction in federal income tax which could be obtained from
deduction of such state and local taxes.
5
<PAGE>
(B) In the event that, after giving effect to any redeterminations
described in subsection (D) of this Section 6.2, the Total Payments do not
exceed by more than ten percent (10%) the largest amount that would result in no
portion of the Total Payments being subject to the Excise Tax, then subsection
(A) of this Section 6.2 shall not apply and Severance Payments shall first be
reduced (if necessary, to zero) in the manner elected by the Executive to the
extent necessary so that no portion of the Total Payments will be subject to the
Excise Tax.
(C) For purposes of determining whether any of the Total Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (i) all of the
Total Payments shall be treated as "parachute payments" within the meaning of
section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting
firm which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such other payments or benefits (in whole
or in part) do not constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of
the Base Amount allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, and (iii) the value of any noncash benefits or any
deferred payment or benefit shall be determined by the Auditor in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the
payment date set forth in Section 6.3 hereof, the Company shall provide the
Executive with its calculation of the amounts referred to in this Section 6.2(C)
and such supporting materials as are reasonably necessary for the Executive to
evaluate the Company's calculations. If the Executive disputes the Company's
calculations (in whole or in part), the reasonable opinion of Tax Counsel with
respect to the matter in dispute shall prevail.
(D) In the event that (i) amounts are paid to the Executive pursuant to
subsection (A) of this Section 6.2, (ii) the Excise Tax is finally determined to
be less than the amount taken into account hereunder in calculating the Gross-Up
Payment, and (iii) after giving effect to such redetermination, the
6
<PAGE>
Total Payments are to be reduced pursuant to subsection (B) of this Section 6.2,
the Executive shall repay to the Company, within ten (10) business days
following the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such reduction
(plus that portion of the Gross-Up Payment attributable to the Excise Tax and
federal, state and local income and employment taxes imposed on the Gross-Up
Payment being repaid by the Executive), to the extent that such repayment
results in (i) no portion of the Total Payments being subject to the Excise Tax
and (ii) a dollar-for-dollar reduction in the Executive's taxable income and
wages for purposes of federal, state and local income and employment taxes) plus
interest on the amount of such repayment at 120% of the rate provided in section
1274(b)(2)(B) of the Code. In the event that (x) the Excise Tax is determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment) and
(y) after giving effect to such redetermination, the Total Payments should not
have been reduced pursuant to subsection (B) of this Section 6.2, the Company
shall make an additional Gross-Up Payment in respect of such excess and in
respect of any portion of the Excise Tax with respect to which the Company had
not previously made a Gross-Up Payment (plus any interest, penalties or
additions payable by the Executive with respect to such excess and such portion)
within ten (10) business days following the time that the amount of such excess
is finally determined.
6.3 The payments provided in subsections (A), (C) and (D) of
Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the
tenth day following the Date of Termination; provided, however, that if the
amounts of such payments, and the limitation on such payments set forth in
Section 6.2 hereof, cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2
hereof, in accordance with Section 6.2 hereof, of the minimum amount of such
payments to which the Executive is clearly entitled and shall pay the remainder
of such payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the
7
<PAGE>
amount thereof can be determined but in no event later than the thirtieth (30th)
day after the Date of Termination. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to the Executive, payable on the
tenth (10th) business day after demand by the Company (together with interest at
120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time
that payments are made under this Agreement, the Company shall provide the
Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from Tax
Counsel, the Auditor or other advisors or consultants (and any such opinions or
advice which are in writing shall be attached to the statement). The Company
shall bear the entire cost of any opinions, advice or similar expenses
associated with Sections 6.2 or 6.3 hereof.
6.4 The Company also shall pay to the Executive all legal fees and expenses
incurred by the Executive in disputing in good faith any issue hereunder
relating to the termination of the Executive's employment, in seeking in good
faith to obtain or enforce any benefit or right provided by this Agreement or in
connection with any tax audit or proceeding to the extent attributable to the
application of section 4999 of the Code to any payment or benefit provided
hereunder. Such payments shall be made within ten (10) business days after
delivery of the Executive's written requests for payment accompanied with such
evidence of fees and expenses incurred as the Company reasonably may require.
7. Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. After a Change in Control and during the Term
(or under the circumstances described in the second sentence of section 6.1
hereof), any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under
8
<PAGE>
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15) days after any
Notice of Termination is given, or, if later, prior to the Date of Termination
(as determined without regard to this Section 7.3), the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be extended until the earlier of
(i) the date on which the Term ends or (ii) the date on which the dispute is
finally resolved, either by mutual written agreement of the parties or by a
final judgment, order or decree of an arbitrator or a court of competent
jurisdiction (which is not appealable or with respect to which the time for
appeal therefrom has expired and no appeal has been perfected); provided,
however, that the Date of Termination shall be extended by a notice of dispute
given by the Executive only if such notice is given in good faith and the
Executive pursues the resolution of such dispute with reasonable diligence.
9
<PAGE>
7.4 Compensation During Dispute. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3 hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance with
Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all
other amounts due under this Agreement (other than those due under Section 5.2
hereof) and shall not be offset against or reduce any other amounts due under
this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's employment
with the Company terminates during the Term, the Executive is not required to
seek other employment or to attempt in any way to reduce any amounts payable to
the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof.
Further, the amount of any payment or benefit provided for in this Agreement
shall not be reduced by any compensation earned by the Executive as the result
of employment by another employer, by retirement benefits, by offset against any
amount claimed to be owed by the Executive to the Company, or otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any successor to the
Company, the Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive were to
terminate the Executive's employment for Good Reason after a Change in Control,
10
<PAGE>
except that, for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
10. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page hereof and, if to the Company, to the address set forth below, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:
To the Company:
Tricon Global Restaurants, Inc.
1441 Gardiner Lane
Louisville, KY 40213
Attention: General Counsel
11. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement supersedes any other
agreements or representations, oral or otherwise, express or implied,
11
<PAGE>
with respect to the subject matter hereof which have been made by either party;
provided, however, that this Agreement shall supersede any agreement setting
forth the terms and conditions of the Executive's employment with the Company
only in the event that the Executive's employment with the Company is terminated
on or following a Change in Control, by the Company other than for Cause or by
the Executive for Good Reason. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Kentucky, without reference to its principles of conflicts of law. All
references to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments provided for
hereunder shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the
Executive has agreed. The obligations of the Company and the Executive under
this Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without limitation,
those under Sections 6 and 7 hereof) shall survive such expiration.
12. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive
for benefits under this Agreement shall be directed to and determined by the
Board and shall be in writing. Any denial by the Board of a claim for benefits
under this Agreement shall be delivered to the Executive in writing and shall
set forth the specific reasons for the denial and the specific provisions of
this Agreement relied upon. The Board shall afford a reasonable opportunity to
the Executive for a review of the decision denying a claim and shall further
allow the Executive to appeal to the Board a decision of the Board within sixty
(60) days after notification by the Board that the Executive's claim has been
denied.
14.2 Any further dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in Louisville,
Kentucky in accordance with the rules of the American Arbitration Association
then in effect; provided, however, that the evidentiary standards set forth in
this Agreement shall apply. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. Notwithstanding any provision of this Agreement
to the contrary, the Executive shall be entitled to seek specific performance of
the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
15. Definitions. For purposes of this Agreement, the following terms shall
have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of
the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under
the Exchange Act.
(E) "Board" shall mean the Board of Directors of the Company.
(F) "Cause" for termination by the Company of the Executive's employment
shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's
13
<PAGE>
act, or failure to act, was in the best interest of the Company and (y) in the
event of a dispute concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company establishes
to the Board by clear and convincing evidence that Cause exists.
(G) A "Change in Control" shall be deemed to have occurred if the event set
forth in any one of the following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its affiliates) representing 20% or more of the combined voting
power of the Company's then outstanding securities, excluding any Person
who becomes such a Beneficial Owner in connection with a transaction
described in clause (i) of paragraph (III) below; or
14
<PAGE>
(II) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the
date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual
or threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the
Company's shareholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination
for election was previously so approved or recommended; or
(III) there is consummated a merger or consolidation of the Company or
any direct or indirect subsidiary of the Company with any other
corporation, other than (i) a merger or consolidation immediately following
which those individuals who, immediately prior to the consummation of such
merger or consolidation, constituted the Board, constitute a majority of
the board of directors of the Company or the surviving or resulting entity
or any parent thereof, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in
which no Person is or becomes the Beneficial Owner, directly or indirectly,
of securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or
its Affiliates) representing 20% or more of the combined voting power of
the Company's then outstanding securities,
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate
15
<PAGE>
ownership in an entity which owns all or substantially all of the assets of the
Company immediately following such transaction or series of transactions.
(H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(I) "Company" shall mean Tricon Global Restaurants, Inc. and, except
in determining under Section 15(G) hereof whether or not any Change in
Control of the Company has occurred, shall include any successor to its
business and/or assets which assumes and agrees to perform this Agreement
by operation of law, or otherwise.
(J) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof.
(K) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the
Company for a period of six (6) consecutive months, the Company shall have
given the Executive a Notice of Termination for Disability, and, within
thirty (30) days after such Notice of Termination is given, the Executive
shall not have returned to the full-time performance of the Executive's
duties.
(L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(M) "Excise Tax" shall mean any excise tax imposed under section 4999
of the Code.
(N) "Executive" shall mean the individual named in the first paragraph
of this Agreement.
(O) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express
written consent) after any Change in Control, or prior to a Change in
Control under the circumstances described in clauses (ii) and (iii) of the
second sentence of Section 6.1 hereof (treating all references in
paragraphs (I) through (VII) below to a "Change in Control" as references
to a "Potential Change
16
<PAGE>
in Control"), of any one of the following acts by the Company, or failures
by the Company to act, unless, in the case of any act or failure to act
described in paragraph (I), (V), (VI) or (VII) below, such act or failure
to act is corrected prior to the Date of Termination specified in the
Notice of Termination given in respect thereof:
(I) the assignment to the Executive of any duties inconsistent
with the Executive's status as an executive officer of the Company or
a substantial adverse alteration in the nature or status of the
Executive's responsibilities from those in effect immediately prior to
the Change in Control;
(II) a reduction by the Company in the Executive's annual base
salary or target incentive award or incentive award opportunity as in
effect on the date hereof or as the same may be increased from time to
time;
(III) the relocation of the Executive's principal place of
employment to a location more than 50 miles from the Executive's
principal place of employment immediately prior to the Change in
Control or the Company's requiring the Executive to be based anywhere
other than such principal place of employment (or permitted relocation
thereof) except for required travel on the Company's business to an
extent substantially consistent with the Executive's present business
travel obligations;
(IV) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation, or to pay to the
Executive any portion of an installment of deferred compensation under
any deferred compensation program of the Company, within seven (7)
days of the date such compensation is due;
(V) the failure by the Company to continue in effect any
compensation plan in which the Executive participates immediately
prior to
17
<PAGE>
the Change in Control which is material to the Executive's total
compensation, including but not limited to the Company's or any
substitute plans adopted prior to the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the
failure by the Company to continue the Executive's participation
therein (or in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount or timing of
payment of benefits provided and the level of the Executive's
participation relative to other participants, as existed immediately
prior to the Change in Control;
(VI) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Company's pension, savings, life insurance,
medical, health and accident, or disability plans in which the
Executive was participating immediately prior to the Change in Control
(except for across the board changes similarly affecting all
executives of the Company and all executives of any Person in control
of the Company), the taking of any other action by the Company which
would directly or indirectly materially reduce any of such benefits or
deprive the Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure by the
Company to provide the Executive with the number of paid vacation days
to which the Executive is entitled on the basis of years of service
with the Company in accordance with the Company's normal vacation
policy in effect at the time of the Change in Control; or
(VII) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7.1 hereof; for purposes of this
Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to
physical or mental illness. The
18
<PAGE>
Executive's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be
presumed to be correct unless the Company establishes to the Board by
clear and convincing evidence that Good Reason does not exist.
(P) "Gross-Up Payment" shall have the meaning set forth in Section 6.2
hereof.
(Q) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.
(R) "Pension Plan" shall mean any tax-qualified, supplemental or
excess benefit pension plan maintained by the Company and any other plan or
agreement entered into between the Executive and the Company which is
designed to provide the Executive with supplemental retirement benefits.
(S) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
(T) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have
occurred:
(I) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated, would
constitute a Change in Control;
19
<PAGE>
(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 15% or more of
either the then outstanding shares of common stock of the Company or
the combined voting power of the Company's then outstanding securities
(not including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its affiliates),
excluding, however, any entity or group which, as of July 21, 1998,
has on file with the Securities and Exchange Commission a Form 13D or
13G indicating ownership aggregating 10% or more of the then
outstanding shares of common stock of the Company or the combined
voting power of the Company's then outstanding securities; or
(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.
(U) "Severance Payments" shall have the meaning set forth in Section
6.1 hereof.
(V) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.
(W) "Term" shall mean the period of time described in Section 2 hereof
(including any extension, continuation or termination described therein).
(X) "Total Payments" shall mean those payments so described in Section
6.2 hereof.
TRICON GLOBAL RESTAURANTS, INC.
By:
-----------------------------------
Name:
Title:
-----------------------------------
Executive
Address:
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
TRICON Global Restaurants, Inc.
Ratio of Earnings to Fixed Charges Years Ended 1997-1993
and 36 Weeks Ended September 5, 1998 and September 6, 1997
(in millions except ratio amounts)
53 Weeks 52 Weeks
52 Weeks 36 Weeks
------------------------------- ------------ ---------- -----------------------
1997 1996 1995 1994 1993 9/5/98 9/6/97
-------- -------- -------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income from continuing operations
before income taxes and cumulative
effect of accounting changes (35) 72 (103) 241 416 511 401
Unconsolidated affiliates' interests,
net (a) (1) (6) - (1) (3) (1) (2)
Interest expense, net (a) 290 310 368 349 238 212 195
Interest portion of net rent expense (a) 109 109 109 108 87 63 70
-------- -------- -------- ------------ ---------- ---------- ----------
Earnings available for fixed charges 363 485 374 697 738 785 664
======== ======== ======== ============ ========== ========== ==========
Fixed Charges:
Interest Expense (a) 290 310 368 349 238 212 195
Interest portion of net rent expense (a) 109 109 109 108 87 63 70
-------- -------- -------- ------------ ---------- ---------- ----------
Total Fixed Charges 399 419 477 457 325 275 265
======== ======== ======== ============ ========== ========== ==========
Ratio of Earnings to Fixed
Charges (b) (c) (d) .91x 1.16x .78x 1.53x 2.27x 2.86x 2.51x
</TABLE>
(a) Included in earnings for the years 1993 through 1997 are certain
allocations related to overhead costs and interest expense from PepsiCo.
For purposes of these ratios, earnings are calculated by adding to
(subtracting from) income from continuing operations before income taxes
and cumulative effect of accounting changes the following: fixed charges,
excluding capitalized interest; and losses and (undistributed earnings)
recognized with respect to less than 50% owned equity investments. Fixed
charges consist of interest on borrowings, the allocation of PepsiCo's
interest expense and that portion of rental expense that approximates
interest. For a description of the PepsiCo allocations, see the notes to
the consolidated financial statements included in the 10-K.
(b) Included the impact of unusual, disposal and other charges of $174 million
($159 million after tax) in 1997, $246 million ($189 million after tax) in
1996, $457 million ($324 million after tax) in 1995 and $54 million ($34
million after tax) for the 36 weeks ended September 6, 1997. Also included
in the 36 weeks ended September 5, 1998 are unusual credits of $5 million
($3 million after tax). Excluding the impact of such charges and credits,
the ratio of earnings to fixed charges would have been 1.35x, 1.74x, 1.74x,
2.71x and 2.84x for the fiscal years ended 1997, 1996 and 1995,
respectively and the 36 weeks ended September 6, 1997 and September 5,
1998, respectively.
(c) The Company is contingently liable for obligations of certain franchisees
and other unaffiliated parties. Fixed charges associated with such
obligations aggregated approximately $17 million during the fiscal year
1997. Such fixed charges, which are contingent, have not been included in
the computation of the ratios.
(d) For the fiscal years ending December 27, 1997 and December 30, 1995,
earnings were insufficient to cover fixed charges by approximately $36
million and $103 million, respectively. Earnings in 1997 includes a charge
of $530 million ($425 million after-tax) taken in the fourth quarter to
refocus our business. Earnings in 1995 included the noncash charge of $457
million ($324 million after-tax) for the initial adoption of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
<PAGE>
EXHIBIT 15
Accountants' Acknowledgment
The Board of Directors
TRICON Global Restaurants, Inc.:
We hereby acknowledge our awareness of the use of our report dated October 14,
1998 included within the Quarterly Report on Form 10-Q of TRICON Global
Restaurants, Inc. for the twelve and thirty-six weeks ended September 5, 1998,
and incorporated by reference in the following Registration Statements:
Description Registration Statement Number
Form S-3
Initial Public Offering of Debt Securities 333-42969
Form S-8s
Restaurant Deferred Compensation Plan 333-36877
Executive Income Deferral Program 333-36955
TRICON Long-Term Incentive Plan 333-36895
Share Power Stock Option Plan 333-36961
TRICON Long-Term Savings Program 333-36893
Restaurant General Manager Stock Option Plan 333-64547
Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
KPMG Peat Marwick LLP
Louisville, Kentucky
October 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from TIRCON
Global Restaurants, Inc. Condensed Consolidated Financial Statements for
the 12 and 36 weeks ended September 5, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001041061
<NAME> TRICON Global Restaurants, Inc.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-27-1997
<PERIOD-START> Dec-28-1998
<PERIOD-END> Sep-5-1998
<EXCHANGE-RATE> 1.000
<CASH> 145
<SECURITIES> 94
<RECEIVABLES> 165
<ALLOWANCES> 17
<INVENTORY> 66
<CURRENT-ASSETS> 642
<PP&E> 5,650
<DEPRECIATION> 2,998
<TOTAL-ASSETS> 4,616
<CURRENT-LIABILITIES> 1,620
<BONDS> 3,725
0
0
<COMMON> 1,281
<OTHER-SE> (2,656)
<TOTAL-LIABILITY-AND-EQUITY> 4,616
<SALES> 5,526
<TOTAL-REVENUES> 5,942
<CGS> 3,369
<TOTAL-COSTS> 4,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 198
<INCOME-PRETAX> 511
<INCOME-TAX> 217
<INCOME-CONTINUING> 294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.89
</TABLE>
