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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[|X|] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] for the fiscal year ended December 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
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(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
Name of Each Exchange
Title of Class On which Registered
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Securities registered Common Stock, no par value New York Stock Exchange
pursuant to 12(b) of Rights to purchase Series New York Stock Exchange
the Act: A Participating Preferred
Stock, no par value, of
the Registrant
Securities registered pursuant to 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock ) held by non-affiliates of the registrant as of February
28, 2000 computed by reference to the closing price of the registrant's Common
Stock on the New York Stock Exchange Composite Tape on such date was
$3,807,535,878.
The number of shares outstanding of the Registrant's Common Stock as of
February 28, 2000 was 148,225,241 shares.
Portions of the definitive proxy statement furnished to shareholders of the
Registrant in connection with the annual meeting of shareholders to be held on
May 18, 2000, are incorporated by reference into Part III.
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PART I
Item 1. Business.
TRICON Global Restaurants, Inc. (referred to herein as "Tricon") was
incorporated under the laws of the state of North Carolina in 1997. The
principal executive offices of Tricon are located at 1441 Gardiner Lane,
Louisville, Kentucky 40213, and its telephone number at that location is (502)
874-8300.
Tricon, the registrant, together with its restaurant operating companies
and other subsidiaries, is referred to in this Form 10-K annual report ("Form
10-K") as the Company. Prior to October 6, 1997, the business of the Company was
conducted by PepsiCo, Inc. ("PepsiCo") through various subsidiaries and
divisions.
This Form 10-K should be read in conjunction with the Cautionary Statements
on page 41.
(a) General Development of Business
In January 1997, PepsiCo announced its decision to spin-off its restaurant
businesses to shareholders as an independent public company (the "Spin-off").
Effective as of October 6, 1997, PepsiCo disposed of its restaurant businesses
by distributing all of the outstanding shares of common stock of Tricon to its
shareholders. Tricon's Common Stock began trading on the New York Stock Exchange
on October 7, 1997 under the symbol "YUM." (Prior to that date, from September
17, 1997 through October 6, 1997, Tricon's Common Stock was traded on the New
York Stock Exchange on a "when-issued" basis). As used in this Form 10-K,
references to Tricon or the Company include the historical operating results of
the businesses and operations transferred to the Company in the Spin-off and,
except where indicated, include the non-core businesses divested in 1997.
Additionally, throughout this Form 10-K, the terms "restaurants," "stores" and
"units" are used interchangeably.
Information about the Spin-off and the non-core businesses is included in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") and the related Consolidated Financial Statements and
footnotes in Part II, Item 7, pages 20 through 41; and Part II, Item 8, pages 42
through 81, respectively, of this Form 10-K.
(b) Financial Information about Operating Segments
Tricon consists of four operating segments: KFC, Pizza Hut, Taco Bell and
TRICON Restaurants International ("Tricon International"). For financial
reporting purposes, management considers the three U.S. operating segments to be
similar and, therefore, has aggregated them into a single reportable operating
segment. Operating segment information for the years ended December 25, 1999,
December 26, 1998 and December 27, 1997 is included in MD&A and the related
Consolidated Financial Statements and footnotes in Part II, Item 7, pages 20
through 41; and Part II, Item 8, pages 42 through 81, respectively, of this Form
10-K.
(c) Narrative Description of Business
General
Tricon is the world's largest quick service restaurant ("QSR") company
based on number of system units, with almost 30,000 units in 104 countries and
territories. The Tricon organization is currently made up of four operating
companies organized around its three core concepts, KFC, Pizza Hut and Taco Bell
(the "Concepts"). The four operating companies are KFC, Pizza Hut, Taco Bell and
Tricon International. KFC is based in
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Louisville, Kentucky; Pizza Hut and Tricon International are headquartered in
Dallas, Texas; and Taco Bell is based in Irvine, California.
Restaurant Concepts
Through its three widely-recognized Concepts, the Company develops,
operates, franchises and licenses a worldwide system of restaurants which
prepare, package and sell a menu of competitively priced food items. These
restaurants are operated by the Company or, under the terms of franchise or
license agreements, by franchisees or licensees who are independent third
parties, or by international affiliates in which we own a non-controlling equity
interest ("Unconsolidated Affiliates").
The Company's franchise program is designed to assure consistency and
quality, and the Company is selective in granting franchises. Under the standard
franchise agreement, franchisees supply capital - initially by paying a
franchise fee, purchasing or leasing the land and building and purchasing
equipment, signs, seating, inventories and supplies, and over the longer term,
by reinvesting in the business. Franchisees then contribute to the Company's
revenues through the payment of royalties based on a percentage of sales.
The Company believes that it is important to maintain strong and open
relationships with its franchisees and their representatives. To this end, the
Company invests a significant amount of time working with the franchisee
community and their representative organizations on all aspects of the business,
ranging from new products to new equipment to new management techniques.
Tricon is engaged in the operation, development, franchising and licensing
of a system of both traditional and non-traditional QSR units. Non-traditional
units include express units and kiosks which have a more limited menu and
operate in non-traditional locations like airports, gas and convenience stores,
stadiums, amusement parks and colleges, where a full-scale traditional outlet
would not be practical or efficient. In addition, as of year-end 1999, there
were 745 units in the worldwide system housing more than one Concept. Of these,
728 units offer food products from two of the Concepts (a "2n1"), and 17 units
offer food products from each of the Concepts (a "3n1").
In each Concept, consumers can dine in and/or carry out food. In addition,
Taco Bell and KFC offer a drive-thru option in many stores, and Pizza Hut offers
a drive-thru option on a much more limited basis. Pizza Hut and, on a much more
limited basis, KFC offer delivery service.
Each Concept has proprietary menu items and emphasizes the preparation of
food with high quality ingredients as well as unique recipes and special
seasonings to provide appealing, tasty and attractive food at competitive
prices.
Following is a brief description of each Concept.
KFC
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KFC was founded in Corbin, Kentucky, by Colonel Harland D. Sanders, an
early developer of the quick service food business and a pioneer of the
restaurant franchise concept. The Colonel perfected his secret blend of 11 herbs
and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee
in 1952. KFC now has more than 5,200 units in the U.S., and almost 5,600 units
in 84 countries and territories outside the U.S. Approximately 28 percent of the
U.S. units and 21 percent of the non-U.S. units are operated by the Company.
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While product offerings vary throughout the worldwide system, all KFC
restaurants offer fried chicken products and many also offer non-fried
chicken-on-the-bone products. These products are marketed under the names
Original Recipe, Extra Tasty Crispy and Tender Roast, among others. Other
principal entree items include chicken sandwiches and Colonel's Crispy Strips,
and, seasonally, Chunky Chicken Pot Pies. KFC restaurants also offer a variety
of side items, such as biscuits, mashed potatoes and gravy, coleslaw, corn,
Potato Wedges (in the U.S.) and french fries (outside of the U.S.), as well as
desserts and non-alcoholic beverages. Their decor is characterized by the image
of the Colonel and KFC's distinctive packaging includes the "Bucket" of chicken.
As of year-end 1999, KFC was the leader in the U.S. chicken QSR segment
among companies featuring chicken as their primary product offering, with a 55
percent market share in that segment which is almost seven times that of its
closest national competitor.
Pizza Hut
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Pizza Hut operates in 88 countries and territories throughout the world
under the name "Pizza Hut" and features a variety of pizzas, including The Big
New Yorker, Pan Pizza, Thin n' Crispy, Pizzeria Stuffed Crust, Hand Tossed and
Sicilian, each offered with a variety of different toppings. Pizza Hut also
features beverages and, in some restaurants, breadsticks, pasta, salads and
sandwiches. The distinctive Pizza Hut decor features a bright red roof.
The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and
within a year, the first franchise unit was opened. Today, Pizza Hut is the
largest restaurant chain in the world specializing in the sale of ready-to-eat
pizza products. As of year-end 1999, the Concept had grown to more than 8,000
units in the U.S., and more than 3,900 units outside of the U.S. Approximately
29 percent of the U.S. units and 20 percent of the non-U.S. units are operated
by the Company.
As of year-end 1999, Pizza Hut was the leader in the U.S. pizza QSR
segment, with a 21 percent market share in that segment which is 75 percent more
than its closest national competitor.
Taco Bell
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Taco Bell operates in 15 countries and territories throughout the world
under the name "Taco Bell" and specializes in Mexican style food products,
including various types of tacos, burritos, Gorditas, Chalupas, salads, nachos
and other related items. Taco Bell units feature a distinctive bell logo on
their signage.
The first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey,
California, and in 1964, the first Taco Bell franchise was sold. By year-end
1999, there were almost 6,900 Taco Bell units within the U.S., and more than 200
units outside of the U.S. Approximately 17 percent of the U.S. units and 16
percent of the non-U.S. units are operated by the Company.
Taco Bell is the leader in the U.S. Mexican QSR segment, with a market
share in that segment of 72 percent.
Tricon International
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The international operations of the three Tricon Concepts are consolidated
into a separate international operating company, which has directed its focus
toward generating more system growth through franchisees and concentrating its
development of Company units in those markets with sufficient scale. Tricon
International has developed new global systems and tools designed to improve
marketing, operations consistency, product delivery, market planning and
development and franchise support capability.
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The Company has almost 9,800 units in the system outside of the U.S.
Approximately 20 percent of the total non-U.S. units are operated by the
Company. In 1999, Tricon International accounted for 33 percent of the Company's
total system sales and 27 percent of the Company's total revenues.
Operating Structure
In all three of its Concepts, the Company either operates units or they are
operated by independent franchisees or licensees. Franchisees can range in size
from individuals owning just a few units to large publicly traded companies. In
addition, the Company participates in Unconsolidated Affiliates who operate as
franchisees. As of year-end 1999, approximately 23 percent of Tricon's worldwide
units were operated by the Company, approximately 62 percent by franchisees,
approximately 11 percent by licensees and approximately 4 percent by
Unconsolidated Affiliates.
Refranchising
Beginning in 1995, the Company began rebalancing the system toward more
franchisee ownership to focus its resources on what it believes are high growth
potential markets where it can more efficiently leverage its scale. Since the
strategy began, the Company has refranchised 5,138 units: 1,435 units in 1999,
1,373 units in 1998, 1,407 units in 1997, 659 units in 1996 and 264 units in
1995. As a result of the Company's refranchising activity, coupled with new
points of distribution added by franchisees and licensees and the program to
upgrade the asset portfolio by closing underperforming stores, the Company's
overall ownership of total system units declined 24 percentage points in five
years from 47 percent at year-end 1994 to 23 percent at year-end 1999. The
refranchising program is expected to continue, in the near term, but as Company
ownership approaches approximately 20 percent, refranchising activity is
expected to substantially decrease. The continuation of the program depends on
the Company's ability to identify and sell to qualified franchisees Company
restaurants at prices and terms considered by the Company to be appropriate.
There can be no assurance as to whether, or to what extent, management will be
able to effect refranchising activities in the future.
Competitive Advantages
Global Scale
Powerful Concepts in Growing Food Categories. KFC, Pizza Hut and Taco Bell
are three of the most recognized restaurant Concepts in the world. Each is the
U.S. leader in terms of market share and number of units in its respective food
category. The Company believes that the near universal appeal of chicken and
pizza provide a strong foundation for global Concept expansion, and that the
emerging trend towards Mexican-style foods may provide additional growth
opportunities.
Worldwide Capabilities. Based on available industry data, Tricon is the
world's largest QSR company measured by system units and the second largest
based on system sales. In terms of international locations, the Company believes
that, as of year-end 1999, its total of almost 9,800 system units outside the
U.S. was second only to McDonald's Corporation. The Company has global scale
capabilities in marketing, advertising, purchasing and research and development
("R&D"). Tricon believes that its worldwide network of Company and franchise
operations provides a strong foundation from which to expand in existing
markets, enter new markets and launch new products and marketing campaigns. In
many countries and regions, the Company has the scale to use extensive
television advertising, an important factor in increasing brand awareness. The
Company's scale enables it to negotiate superior marketing promotions when
compared to many of its competitors.
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Purchasing/Distribution Network. The Company is a substantial purchaser of
a number of food products, and it believes its scale purchasing capabilities
provide it with competitive advantages such as its ability to ensure a
consistent supply of high quality food, ingredients and other supplies at
attractive prices to all of its Concepts. In 1996, to ensure reliable sources,
the Company consolidated most of its worldwide food and supply procurement
activities under an internal organization now called Supply Chain Management,
which sources, negotiates contracts and buys specified food and supplies from
hundreds of suppliers in a significant number of countries and territories.
Supply Chain Management monitors market trends and seeks to identify and
capitalize on purchasing opportunities that will enhance the Company's
competitive position. The principal products purchased include beef, cheese,
chicken products, cooking oils, corn, flour, lettuce, paper and packaging
materials, pinto beans, pork, seasonings, soft drink beverage products and
tomato products.
Effective as of March 1, 1999, the Company, along with the KFC National
Purchasing Cooperative, Inc. and representatives of the Company's KFC, Pizza Hut
and Taco Bell franchisee groups, formed the Unified FoodService Purchasing
Co-op, LLC (the "Unified Co-op") for the purpose of purchasing certain
restaurant products and equipment in the U.S. The core mission of the Unified
Co-op is to provide the lowest possible sustainable store-delivered prices for
restaurant products and equipment. This arrangement combines the purchasing
power of the Company and franchisee restaurants in the U.S., which the Company
believes will further leverage the system's scale to drive cost savings and
effectiveness in the purchasing function. Annual purchasing volume for the new
Unified Co-op is expected to exceed $4 billion, making it the largest purchasing
cooperative of its kind in the QSR industry. The Company also believes that the
Unified Co-op should result in an even closer alignment of interests and a
stronger relationship with its franchisee community.
To ensure the wholesomeness of all food products, suppliers are required to
meet or exceed strict quality control standards. Long-term contracts and
long-term vendor relationships have been used to ensure availability of
products. The Company has not experienced any significant continuous shortages
of supplies. Prices paid for these supplies may be subject to fluctuation. When
prices increase, the Company may be able to pass on such increases to its
customers, although there is no assurance this can be done in the future.
Historically, many food products, paper and packaging supplies, and
equipment used in the operation of the Company's restaurants have been
distributed to individual Company units by PepsiCo Food Services ("PFS"), which
was PepsiCo's restaurant distribution operation prior to its disposition in 1997
as described below. PFS also sold and distributed these same items to many
franchisees and licensees that operate in the three restaurant systems, though
principally to Pizza Hut and Taco Bell franchised/licensed units in the U.S. In
May 1997, KFC, Pizza Hut and Taco Bell entered into a five-year Sales and
Distribution Agreement with PFS to distribute the majority of their food and
supplies for Company stores, subject to PFS maintaining certain performance
levels. The Sales and Distribution Agreement became effective upon the closing
of the sale by PepsiCo of the distribution business of PFS to AmeriServe Food
Distribution, Inc. ("AmeriServe"), a subsidiary of Holberg Industries, Inc.,
pursuant to a definitive agreement dated as of May 23, 1997, as amended.
Effective as of November 1, 1998, the Company, KFC, Pizza Hut and Taco Bell
entered into an amended and restated Sales and Distribution Agreement with
AmeriServe (the "Amended AmeriServe Agreement") which provided for the extension
of the term of the original agreement with PFS for an additional period of two
and one-half years to January 2005. The Amended AmeriServe Agreement
substantially modifies the way in which distribution fees are calculated, and
includes incentives for utilizing more efficient distribution practices by both
parties. The Amended AmeriServe Agreement, which continues to cover all Company
KFC, Pizza Hut and Taco Bell restaurants in the U.S. (including Pizza Hut and
Taco Bell units sold pursuant to the Company's refranchising program), also
provides for a two and one-half year renewal option that could extend the
contract, based on market rates, through July 2007. Under the terms of the
Amended AmeriServe Agreement, Company KFC, Pizza Hut and Taco Bell restaurants
in the U.S. (the "Company Restaurants") may not, except in limited circumstances
which generally relate to availability of supply, use
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alternative distributors. AmeriServe also provides distribution services to a
substantial portion of the Pizza Hut and Taco Bell franchise system, and, to a
lesser extent, the KFC franchise system.
On January 31, 2000, AmeriServe filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. AmeriServe has advised the Company that it intends to
prepare and file with the Bankruptcy Court a plan of reorganization in the
future.
The Company, the Unified Co-op and key representatives of the Tricon
franchise community are working closely together to proactively address the
AmeriServe bankruptcy situation and develop appropriate contingency plans. The
Company intends to take all actions reasonably necessary and prudent to ensure
continued supply of restaurant products and equipment to the Tricon restaurant
system, and to minimize any incremental costs or exposures related to the
AmeriServe bankruptcy. The significant actions that the Company has taken to
date are described below.
On February 2, 2000, the Company and another major AmeriServe customer
agreed to provide a $150 million interim "debtor-in-possession" revolving credit
facility (the "Facility") to AmeriServe. The Company initially committed to
provide up to $100 million under this Facility. However, the Company has reached
an agreement in principle to assign $30 million of its commitment to a third
party, reducing the Company's total commitment under the Facility to $70
million. AmeriServe has advised the Company that it is actively seeking to
arrange alternative debtor-in-possession financing to replace the Facility.
In addition to the Company's participation in the Facility, to help ensure
that the Tricon supply chain continues to remain open, the Company has begun to
purchase (and take title to) supplies directly from suppliers (the "Temporary
Direct Purchase Program") for use in Company Restaurants, as well as for resale
to KFC, Pizza Hut and Taco Bell franchisees and licensees who previously
purchased supplies from AmeriServe (collectively, the "Franchise Restaurants").
AmeriServe has agreed, for the same fee in effect prior to the bankruptcy
filing, to continue to be responsible for distributing supplies and providing
ordering, inventory, billing and collection services to Company Restaurants and
Franchise Restaurants. To date, this arrangement has been effective in ensuring
supplies to Company Restaurants and Franchise Restaurants, and the Company has
not experienced any significant supply interruption.
Further, the Company has commenced contingency planning and believe that it
can arrange with an alternative distributor or distributors to meet the needs of
the Company Restaurants and Franchise Restaurants if AmeriServe is no longer
able to adequately service those Restaurants or if otherwise permitted by the
U.S. Bankruptcy Court.
As in most bankruptcies involving a primary supplier or distributor, the
AmeriServe bankruptcy poses certain risks and uncertainties to the Company, as
well as to KFC, Pizza Hut and Taco Bell franchisees that rely on AmeriServe to
distribute products to their restaurants. The more significant of these risks
and uncertainties are described below. Significant adverse developments in any
of these risks or uncertainties could have a material adverse impact on the
Company's results of operations, cash flow or financial condition.
The Company expects to incur costs in connection with the Temporary Direct
Purchase Program, including the cost of additional debt incurred to finance the
inventory purchases and to carry the receivables arising from inventory sales.
While the Company believes that adequate inventory control and collections
systems are in place, it may also incur costs related to the possibility of
inventory obsolescence and uncollectible receivables from its franchisees. The
Company expects to mitigate, if not fully offset, these costs through discounts
granted by suppliers for prompt payments. The Company also expects to incur
certain one-time unusual costs as a result of the AmeriServe bankruptcy,
primarily consisting of professional fees.
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The Company intends to continue to work with AmeriServe and suppliers to
meet the Company's supply needs while AmeriServe seeks to reorganize. Due to the
uncertainties surrounding AmeriServe's reorganization, the Company cannot
predict the ultimate impact, if any, on its businesses. There can be no
assurance that the Facility will be sufficient to meet AmeriServe's cash
requirements or that the Company will be able to fully recover the amount
advanced under the Facility. There can be no assurance that AmeriServe will be
successful in arranging replacement debtor-in-possession financing on
satisfactory terms, or that a plan of reorganization for AmeriServe will
ultimately be confirmed, or if confirmed, what the plan will provide.
Additionally, there can be no assurance that AmeriServe will be able to maintain
the Company's supply line indefinitely without additional financing or at
current contractual rates.
Each of the Concepts currently has a multi-year contract with AmeriServe
which is subject to the U.S. Bankruptcy Court procedures during the
reorganization process. As stated above, the Company believes that it can
arrange with an alternative distributor or distributors to meet the needs of the
Company Restaurants and Franchise Restaurants if AmeriServe is no longer able to
adequately service those restaurants or if otherwise permitted by the U.S.
Bankruptcy Court. The Company could, however, experience some short-term delays
due to the time required to qualify and contract with, and transition the
business to, other distributors. There can be no assurance that the cost of
these alternatives would be at the same rates the Company currently pays
AmeriServe.
The Company believes that it may have a set-off or recoupment claim against
amounts owed by the Concepts to AmeriServe under the Amended AmeriServe
Agreement that would allow the Company to recover certain costs and damages that
it has incurred (or may incur) as a result of AmeriServe's failure to perform
its contractual obligations to Company Restaurants both prior to and after the
bankruptcy filing. While the Company intends to assert this claim, there can be
no assurance that it will be successful.
Without regard to the final outcome of the AmeriServe bankruptcy
proceedings, it is the Company's intention to take whatever steps are reasonably
required to ensure continued supply of restaurant products and equipment to the
Tricon restaurant system. To the extent the Company incurs any ongoing
incremental costs as a result of the AmeriServe bankruptcy or actions related
thereto, it intends to mitigate those costs to the maximum extent possible
through other reasonable management actions.
Tricon, KFC, Pizza Hut, Taco Bell and Tricon International have also
entered into multi-year agreements with Pepsi-Cola Company regarding the sale of
Pepsi-Cola beverage products at Company stores.
Strong Cash Flow
As indicated in Items 7 and 8, the Company has generated significant cash
flows from operating activities and through its global refranchising program.
This cash flow has funded existing operations, capital expenditures and debt
reduction of over $2.1 billion since the Spin-off. This cash flow has also
allowed the Company to fund investment in existing and new restaurant units,
product innovation and quality, improved operating platforms leading to improved
service, information technology systems, store-level human resources including
recruiting and training and creative marketing programs. Additionally, this cash
flow permitted the Company to repurchase 3.3 million shares of its stock through
the end of 1999 under the Company's share repurchase program.
A discussion of the Company's financing activities, cash flow and liquidity
is contained in MD&A in Part II, Item 7, pages 20 through 41.
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U.S. Growth Opportunities
Tricon believes it has many opportunities to achieve growth in both sales
per unit and distribution channels in its U.S. businesses due to the following:
Daypart Expansion. The Company's strengths in market research and R&D,
combined with underdeveloped dayparts (segments of each business day) in all
three Concepts provide an opportunity to increase the average sales per unit. In
1999, almost two-thirds of KFC and approximately three-quarters of Pizza Hut
system sales occurred during the dinner occasion. At Taco Bell, approximately
half of its system sales occurred during the lunch occasion, with about 45
percent occurring at dinner and the remainder during snacking hours.
Channel Expansion. The Company believes that significant growth
opportunities exist with respect to delivery services. The Company's products,
especially chicken and pizza, are well suited to delivery because their
relatively long holding times allow them to be delivered hot and ready to eat.
Today, Pizza Hut has a well-developed delivery system and over 450 KFC units
currently offer some delivery services. In addition, the Company believes there
is opportunity to innovate with respect to the type of unit that best meets
consumer needs. Some of the alternative channels that are under development
include non-traditional units such as Taco Bell Express in venues such as
shopping malls, food courts, airports, gas and convenience stores, and schools.
Multi-Branding. The Company is actively pursuing the strategy of
multi-branding, where two or more of its Concepts are operated in a single
restaurant unit. As of year-end 1999, there were 647 system units housing more
than one Concept. By combining two or more of its Concepts in one location,
particularly those that have complementary daypart strengths, the Company
believes it can generate higher sales volumes from such units, significantly
improve returns on per unit investment, and enhance its ability to penetrate a
greater number of trade areas throughout the U.S. Through the consolidation of
market planning initiatives across all three of its Concepts, the Company has
established multi-year development plans by trade area to optimize franchise and
company penetration of all three Concepts and to improve returns on its existing
asset base. The development of these multi-branded units may be limited, in some
instances, by prior development and/or territory rights granted to franchisees.
International Growth Opportunities
Focus on Key Growth Markets. Following the Spin-off, the Company redirected
its international ownership strategy to focus on building Company stores in what
it believes are high growth potential markets where it can more efficiently
leverage its scale, while increasing franchise penetration through franchise
development and refranchising in other international markets. As an example, the
Company has demonstrated considerable success in penetrating Asian emerging
markets, with some of its highest volume stores in the world being operated in
China. In the future, the Company intends to focus a significant portion of its
new-unit capital on this and other high growth potential markets.
Underdeveloped Presence. Although the Company and its franchisees have
established a presence in 104 countries and territories, many of these countries
are still underpenetrated considering not only population size and growth, but
also per capita purchasing power. Even in countries which have populations with
similar per capita purchasing power, the ratio of stores per million people is
still far below that found in the U.S., and the Company believes there is
significant opportunity to leverage an increasing demand for convenient, fully
prepared foods in those countries.
Scale Advantages. Tricon International has the ability to leverage not only
the scale advantages of administration, purchasing and R&D, but also the
experience of the Company's U.S. operations to quickly identify new product
opportunities for local markets.
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Human Resources and Management
The Company believes that high quality, customer-focused restaurant
management is critical to its long-term success. It also believes that its
leadership position, strong results-oriented and recognition culture, and
various training and incentive programs help attract and retain highly motivated
restaurant general managers ("RGMs") who are committed to providing superior
customer satisfaction and outstanding business results. The Company believes
that having a high quality restaurant manager in a unit for a meaningful tenure
is one of the most important factors in a unit's ability to achieve excellent
results in the areas of sales, profits and overall guest satisfaction.
The Company's restaurant management structure varies by concept and unit
size. Generally, each Company restaurant is led by an RGM, together with one or
more assistant managers, depending on the operating complexity and sales volume
of the restaurant. Each restaurant usually has between 10 and 35 hourly
employees, most of whom work part-time. The Company's four operating companies
each issue detailed manuals covering all aspects of their respective operations,
including food handling and product preparation procedures, safety and quality
issues, equipment maintenance, facility standards and accounting procedures. The
restaurant management teams are responsible for the day-to-day operation of each
unit and for ensuring compliance with operating standards. RGMs' efforts are
monitored by area managers or market coaches, who work with approximately nine
to eleven restaurants. The Company's restaurants are visited from time to time
by various senior operators within their respective organizations to help ensure
adherence to system standards.
RGMs attend and complete their respective operating company's required
training programs. These programs consist of initial training, as well as
additional continuing development and training programs that may be offered or
required from time to time. Initial manager training programs generally last at
least six weeks and emphasize leadership, business management, supervisory
skills (including training, coaching, and recruiting), product preparation and
production, safety, quality control, customer service, labor management, and
equipment maintenance.
Sale of Non-Core Concepts
In late 1996, the Company set a strategy to focus human and financial
resources on growing the sales and profitability of its core Concepts. As a
result, the non-core restaurant businesses of California Pizza Kitchen, Chevys
Mexican Restaurant, D'Angelo's Sandwich Shops, East Side Mario's and Hot 'n Now
(the "Non-core Businesses") were sold in 1997. The operations of these Non-core
Businesses were not material to the operations of Tricon.
Information about the Non-core Businesses is included in MD&A and the related
Consolidated Financial Statements and footnotes in Part II, Item 7, pages 20
through 41; and Part II, Item 8, pages 42 through 81, respectively, of this Form
10-K.
Trademarks and Patents
The Company has numerous registered trademarks and service marks. The
Company believes that many of these marks, including its Kentucky Fried
Chicken(R), KFC(R), Pizza Hut(R) and Taco Bell(R) trademarks, have significant
value and are materially important to its business. The Company's policy is to
pursue registration of its important trademarks whenever possible and to oppose
vigorously any infringement of its trademarks. The use of the Company's
trademarks by franchisees and licensees has been authorized in KFC, Pizza Hut
and Taco Bell franchise and license agreements. Under current law and with
proper use, the Company's rights in its trademarks can last indefinitely. The
Company also has certain patents on restaurant equipment, which, while valuable,
are not material to its business.
10
<PAGE>
Working Capital
Information about the Company's working capital is included in MD&A in Part
II, Item 7, pages 20 through 41 of this Form 10-K.
Customers
The Company's business is not dependent upon a single customer or small
group of customers.
Seasonal Operations
The Company does not consider its operations to be seasonal to any material
degree.
Backlog Orders
Company restaurants have no backlog orders.
Government Contracts
No material portion of the Company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
U.S. government.
Competition
The overall food service industry and the QSR segment are intensely
competitive with respect to food quality, price, service, convenience,
restaurant location and concept. The restaurant business is often affected by
changes in consumer tastes; national, regional or local economic conditions;
currency fluctuations; demographic trends; traffic patterns; the type, number
and location of competing restaurants; and disposable purchasing power. The
Company competes within each market with national and regional chains as well as
locally-owned restaurants, not only for customers, but also for management and
hourly personnel, suitable real estate sites and qualified franchisees.
Research and Development
The Company operates R&D facilities in Louisville, Kentucky; Dallas, Texas;
and Irvine, California. The Company expensed $24 million in 1999 and $21 million
in both 1998 and 1997 for R&D activities.
Environmental Matters
The Company is not aware of any federal, state or local environmental laws
or regulations that will materially affect its earnings or competitive position,
or result in material capital expenditures. However, the Company cannot predict
the effect on its operations of possible future environmental legislation or
regulations. During 1999, there were no material capital expenditures for
environmental control facilities and no such material expenditures are
anticipated.
Government Regulation
U.S. The Company is subject to various federal, state and local laws
affecting its business. Each of the Company's restaurants must comply with
licensing and regulation by a number of governmental authorities, which include
health, sanitation, safety and fire agencies in the state or municipality in
which the restaurant is
11
<PAGE>
located. In addition, each of the Tricon operating companies must comply with
various state laws that regulate the franchisor/franchisee relationship. To
date, the Company has not been significantly affected by any difficulty, delay
or failure to obtain required licenses or approvals.
A small portion of Pizza Hut's net sales is attributable to the sale of
beer and wine. A license is required in most cases for each site that sells
alcoholic beverages (in most cases, on an annual basis) and licenses may be
revoked or suspended for cause at any time. Regulations governing the sale of
alcoholic beverages relate to many aspects of restaurant operations, including
the minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages.
The Company is also subject to federal and state laws governing such
matters as employment and pay practices, overtime, tip credits and working
conditions. The bulk of the Company's employees are paid on an hourly basis at
rates related to the federal minimum wage.
The Company is also subject to federal and state child labor laws which,
among other things, prohibit the use of certain "hazardous equipment" by
employees 18 years of age or younger. The Company has not to date been
materially adversely affected by such laws.
The Company continues to monitor its facilities for compliance with the
Americans With Disabilities Act ("ADA") in order to conform to its requirements.
Under the ADA, the Company could be required to expend funds to modify its
restaurants to better provide service to, or make reasonable accommodation for
the employment of, disabled persons. Expenditures, if required, would not have a
material adverse effect on the Company's operations.
International. Internationally, the Company's restaurants are subject to
national and local laws and regulations which are similar to those affecting the
Company's U.S. restaurants, including laws and regulations concerning labor,
health, sanitation and safety. The international restaurants are also subject to
tariffs and regulations on imported commodities and equipment and laws
regulating foreign investment. International compliance with environmental
requirements has not had a material adverse effect on the Company's results of
operations, capital expenditures or competitive position.
Employees
At year-end 1999, the Company employed approximately 210,000 persons,
approximately 70 percent of whom were part-time employees. Nearly 70 percent of
the Company's employees are employed in the U.S. The Company believes that it
provides working conditions and compensation that compare favorably with those
of its principal competitors. Most Company employees are paid on an hourly
basis. About 2 percent of the Company's U.S. employees are covered by collective
bargaining agreements. The Company's non-U.S. employees are subject to numerous
labor council relationships that vary due to the diverse cultures in which the
Company operates. The Company considers its employee relations to be good.
d) Financial Information about International and U.S. Operations
Financial information about International and U.S. markets is incorporated
herein by reference from Selected Financial Data, MD&A and the related
Consolidated Financial Statements and footnotes in Part II, Item 6, page 19;
Part II, Item 7, pages 20 through 41; and Part II, Item 8, pages 42 through 81,
respectively, of this Form 10-K.
12
<PAGE>
Item 2. Properties.
As of year-end 1999, Tricon Concepts owned approximately 800 and leased
approximately 4,200 units in the U.S.; and Tricon International owned
approximately 1,200 and leased approximately 800 units outside the U.S. Company
restaurants in the U.S. which are not owned are generally leased for initial
terms of 15 or 20 years and generally have renewal options; however, Pizza Hut
delivery/carryout units in the U.S. generally are leased for significantly
shorter initial terms with short renewal options. Unconsolidated Affiliates
owned or leased approximately 1,200 units. Tricon leases Tricon International's
and Pizza Hut's corporate headquarters in Dallas, Texas. Taco Bell leases its
corporate headquarters in Irvine, California and KFC owns its corporate
headquarters and a research facility in Louisville, Kentucky. In addition,
Tricon owns an office facility in Wichita, Kansas (the "Wichita Facility") and
leases office facilities for accounting services in both Louisville, Kentucky,
and Albuquerque, New Mexico. In 1998, the primary operations conducted at the
Wichita Facility were relocated to Louisville, Kentucky, and Dallas, Texas, and
the facility was closed. The Company expects to sell the Wichita Facility at a
price which should at least recover its current carrying amount, but cannot
estimate the timing of such a sale at this time. Additional information about
the Company's properties is included in the Consolidated Financial Statements
and footnotes in Part II, Item 8, pages 42 through 81, of this Form 10-K.
The Company believes that its properties are generally in good operating
condition and are suitable for the purposes for which they are being used.
Item 3. Legal Proceedings.
The Company is subject to various claims and contingencies related to
lawsuits, taxes, real estate, environmental and other matters arising out of the
normal course of business. The following is a brief description of the more
significant of these categories of lawsuits and other matters. Except as stated
below, the Company believes that the ultimate liability, if any, in excess of
amounts already provided for in these matters, is not likely to have a material
adverse effect on the Company's annual results of operations, financial
condition or cash flows.
Franchising
A substantial number of the Company's restaurants are franchised to
independent business people operating under arrangements with the Company. In
the course of the franchise relationship, occasional disputes arise between the
Company and its franchisees relating to a broad range of subjects, including,
without limitation, quality, service, and cleanliness issues, contentions
regarding grants, transfers or terminations of franchises, territorial disputes
and delinquent payments.
Employees
At any given time, the Company employs hundreds of thousands of persons,
primarily in its restaurants. In addition, thousands of persons, from time to
time, seek employment with the Company and its restaurants. From time to time,
disputes arise regarding employee hiring, compensation, termination and
promotion practices.
Like some other 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.
On May 11, 1998, a purported class action lawsuit against Pizza Hut, Inc.,
and one of its franchisees, PacPizza, LLC, entitled Aguardo, et al. v. Pizza
Hut, Inc., et al. ("Aguardo"), was filed in the Superior Court of the State of
California of the County of San Francisco. The lawsuit was filed by three former
Pizza Hut
13
<PAGE>
restaurant general managers purporting to represent approximately
1,300 current and former California restaurant general managers of Pizza Hut and
PacPizza. The lawsuit alleges violations of state wage and hour laws involving
unpaid overtime wages and vacation pay and seeks an unspecified amount in
damages. On January 12, 2000, the Court certified a class of approximately 1,300
current and former restaurant general managers. This lawsuit is in the early
discovery phase.
On October 2, 1996, a class action lawsuit against Taco Bell Corp.,
entitled Mynaf, et al. v. Taco Bell Corp. ("Mynaf"), was filed in the Superior
Court of the State of California of the County of Santa Clara. The lawsuit was
filed by two former restaurant general managers and two former assistant
restaurant general managers purporting to represent all current and former Taco
Bell restaurant general managers and assistant restaurant general managers in
California. The lawsuit alleges violations of California wage and hour laws
involving unpaid overtime wages. The complaint also includes an unfair business
practices claim. The four named plaintiffs claim individual damages ranging from
$10,000 to $100,000 each. On September 17, 1998, the court certified a class of
approximately 3,000 current and former assistant restaurant general managers and
restaurant general managers. Taco Bell petitioned the appellate court to review
the trial court's certification order. The petition was denied on December 31,
1998. Taco Bell then filed a petition for review with the California Supreme
Court, and the petition was subsequently denied. Class notices were mailed on
August 31, 1999 to over 3,400 class members. Discovery has commenced, and a
trial date has been set for July 10, 2000.
On August 29, 1997, a class action lawsuit against Taco Bell Corp.,
entitled Bravo, et al. v. Taco Bell Corp. ("Bravo"), was filed in the Circuit
Court of the State of Oregon of the County of Multnomah. The lawsuit was filed
by two former Taco Bell shift managers purporting to represent approximately
17,000 current and former hourly employees statewide. The lawsuit alleges
violations of state wage and hour laws, principally involving unpaid wages
including overtime, and rest and meal period violations, and seeks an
unspecified amount in damages. Under Oregon class action procedures, Taco Bell
was allowed an opportunity to "cure" the unpaid wage and hour allegations by
opening a claims process to all putative class members prior to certification of
the class. In this cure process, Taco Bell has currently paid out less than $1
million. On January 26, 1999, the Court certified a class of all current and
former shift managers and crew members who claim one or more of the alleged
violations. The lawsuit is in the discovery and pre-trial motions phase. A trial
date of November 2, 1999 was set. However, on November 1, 1999, the Court issued
a proposed order postponing the trial and establishing a pre-trial claims
process. The final order regarding the claims process was entered on January 14,
2000. Taco Bell moved for certification of an immediate appeal of the
Court-ordered claims process and requested a stay of the proceedings. This
motion was denied on February 8, 2000, and Taco Bell intends to appeal this
decision to the Supreme Court of Oregon. A Court-approved notice and claim form
was mailed to approximately 14,500 class members on January 31, 2000.
We have provided for the estimated costs of the Aguardo, Mynaf and Bravo
litigations, based on a projection of eligible claims (including claims filed to
date, where applicable), the cost of each eligible claim and the estimated legal
fees incurred by plaintiffs. Although the outcome of these lawsuits cannot be
determined at this time, we believe the ultimate cost of these cases in excess
of the amounts already provided will not be material to our annual results of
operations, financial condition or cash flows.
On February 10, 1995, a class action lawsuit, entitled Ryder, et al. v.
Taco Bell Corp. ("Ryder"), was filed in the Superior Court of the State of
Washington for King County on behalf of approximately 16,000 current and former
Taco Bell employees claiming unpaid wages resulting from alleged uniform, rest
and meal period violations and unpaid overtime. In April 1996, the Court
certified the class for purposes of injunctive relief and a finding on the issue
of liability. The trial was held during the first quarter of 1997 and resulted
in a liability finding. In August 1997, the Court certified the class for
purposes of damages as well. Prior to the damages phase of the trial, the
parties reached a court-approved settlement process in April 1998. The
settlement process is substantially complete, with less than 50 claims left to
be resolved. We have provided for the estimated cost of settling these remaining
claims.
14
<PAGE>
Customers
The Company's restaurants serve a large and diverse cross-section of the
public and in the course of serving so many people, disputes arise regarding
products, service, accidents and other matters typical of large restaurant
systems such as those of the Company.
Trademarks
The Company has registered trademarks and service marks, many of which are
of material importance to the Company's business. From time to time, the Company
may become involved in litigation to defend and protect its use of such
registered marks.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Registrant
The executive officers of the Company as of February 28, 2000, and their
ages and current positions as of that date are as follows:
Name Age Position
---- --- --------
David C. Novak 47 Vice Chairman of the Board, Chief Executive
Officer and President
David J. Deno 42 Chief Financial Officer
Gregg R. Dedrick 40 Executive Vice President, People and Shared
Services
Aylwin B. Lewis 45 Executive Vice President, Operations and New
Business Development
Christian L. Campbell 49 Senior Vice President, General Counsel and
Secretary
Robert L. Carleton 59 Senior Vice President and Controller
Jonathan D. Blum 41 Senior Vice President - Public Affairs
Mark S. Cosby 41 Chief Development Officer
Peter A. Bassi 50 President, Tricon Restaurants International
Charles E. Rawley, III 49 President and Chief Operating Officer, KFC
Michael S. Rawlings 45 President and Chief Concept Officer, Pizza
Hut
Peter C. Waller 45 President and Chief Concept Officer, Taco
Bell
Peter R. Hearl 48 Executive Vice President, Tricon Restaurants
International
Terry D. Davenport 42 Chief Concept Officer and Chief Marketing
Officer, KFC
Michael A. Miles, Jr 38 Chief Operating Officer, Pizza Hut
Robert T. Nilsen 40 Chief Operating Officer, Taco Bell
15
<PAGE>
David C. Novak is Vice Chairman of the Board, Chief Executive Officer and
President of Tricon. From October 1997 to December 1999, he served as Vice
Chairman and President of Tricon. Mr. Novak previously served as Group President
and Chief Executive Officer, KFC and Pizza Hut from August 1996 to July 1997.
Mr. Novak joined Pizza Hut in 1986 as Senior Vice President, Marketing. In 1990,
he became Executive Vice President, Marketing and National Sales, for Pepsi-Cola
Company. In 1992 he became Chief Operating Officer, Pepsi-Cola North America,
and in 1994 he became President and Chief Executive Officer of KFC North
America.
David J. Deno is Chief Financial Officer of Tricon. He has served in this
position since November 1999. From August 1997 to November 1999, Mr. Deno served
as Senior Vice President and Chief Financial Officer of Tricon Restaurants
International. From August 1996 to August 1997, Mr. Deno served as Senior Vice
President and Chief Financial Officer for Pizza Hut. From 1994 to August 1996,
Mr. Deno was Division Vice President for the Southeast Division of Pizza Hut.
Mr. Deno joined Pizza Hut in 1991 as Vice President and Controller.
Gregg R. Dedrick is Executive Vice President and Chief People Officer for
Tricon. From July 1997 to November 1999, he served as Senior Vice President and
Chief People Officer. Mr. Dedrick previously served as Senior Vice President,
Human Resources, for Pizza Hut and KFC, a position he assumed in 1996. Mr.
Dedrick joined Pepsi-Cola Company in 1981 and held various personnel-related
positions with Pepsi-Cola from 1981 to 1994. In 1994, he became a Vice
President, Human Resources for Pizza Hut, and in 1995 he became Senior Vice
President of Human Resources for KFC.
Aylwin B. Lewis is Executive Vice President, Operations and New Business
Development for Tricon. From July 1997 to December 1999, he served as Chief
Operating Officer of Pizza Hut. Mr. Lewis previously served as Senior Vice
President, Operations for Pizza Hut, a position he assumed in 1996. He served in
various positions at KFC, including Senior Director of Franchising and Vice
President of restaurant Support Services, becoming Division Vice President,
Operations for KFC in 1993, and Senior Vice President, New Concepts for KFC in
1995. Mr. Lewis joined KFC in 1991 as a Regional General Manager.
Christian L. Campbell is Senior Vice President, General Counsel and
Secretary of Tricon. He has served in this position since September 1997. From
1995 to September 1997, Mr. Campbell served as Senior Vice President, General
Counsel and Secretary of Owens Corning, a building products company. Before
joining Owens Corning, Mr. Campbell served as Vice President, General Counsel
and Secretary of Nalco Chemical Company in Naperville, Illinois, from 1990
through 1994.
Robert L. Carleton is Senior Vice President and Controller of Tricon. He
has served in this position since August 1997. Mr. Carleton previously served as
Senior Vice President and Controller for PepsiCo from August 1982 to August
1997.
Jonathan D. Blum is Senior Vice President of Public Affairs for Tricon. He
has served in this position since July 1997. Mr. Blum previously served as Vice
President of Public Affairs for Taco Bell, a position that he held since joining
Taco Bell in 1993.
Mark S. Cosby is Chief Development Officer at Tricon. He has served in this
position since September 1997. From August 1996 to September 1997, Mr. Cosby was
Senior Vice President Operations Development for KFC. From March 1993 to August
1996, he held various positions at KFC including Vice President of Planning,
Vice President of Purchasing, and Vice President of Operations for the North
Central Division. Mr. Cosby joined PepsiCo with Taco Bell in 1988.
16
<PAGE>
Peter A. Bassi is President of Tricon Restaurants International. He has
served in this position since July 1997. Mr. Bassi served as Executive Vice
President, Asia, of PepsiCo Restaurants International from February 1996 to July
1997. From 1995 to 1996 he served as Senior Vice President and Chief Financial
Officer at PepsiCo Restaurants International. He served as Senior Vice
President, Finance and Chief Financial Officer at Taco Bell from 1987 to 1994.
He joined Pepsi-Cola Company in 1972 and served in various management positions
at Frito-Lay, Pizza Hut and PepsiCo Food Service International.
Charles E. Rawley, III is President and Chief Operating Officer of KFC. Mr.
Rawley assumed his position of Chief Operating Officer in 1995 and President in
1998. Mr. Rawley joined KFC in 1985 as a Director of Operations. He served as
Vice President of Operations for the Southwest, West, Northeast, and
Mid-Atlantic Divisions from 1988 to 1994, when he became Senior Vice President,
Concept Development for KFC.
Michael S. Rawlings is President and Chief Concept Officer of Pizza Hut. He
has served in this position since July 1997. From 1991 to 1996, Mr. Rawlings
served as Chairman, President and Chief Executive Officer of DDB Needham
Worldwide Dallas Group, a position he held following the merger of Tracy-Locke,
Inc. into DDB Needham. Previously, Mr. Rawlings was General Manager and Chief
Operating Officer of Tracy-Locke, Inc., a position he assumed in 1989.
Peter C. Waller is President and Chief Concept Officer of Taco Bell. He has
served in this position since July 1997. Mr. Waller served as Senior Vice
President of Marketing of Taco Bell from December 1995 to June 1997. He
previously held the position of Senior Vice President of Marketing for KFC from
August 1994 to December 1995. He joined PepsiCo in 1990 as Managing Director for
Western Europe, and subsequently spent two years as Regional Marketing Director
for KFC for the South Pacific and South Africa.
Peter R. Hearl is Executive Vice President of Tricon Restaurants
International. He has served in this position since December 1998. Prior to
that, he was Region Vice President for Tricon Restaurants International in Asia
Pacific, a position he assumed in October 1997. From March 1996 to September
1997, Mr. Hearl was Regional Vice President for Tricon Restaurants International
with responsibility for Australia, New Zealand and South Africa. Prior to that,
he was Regional Vice President for KFC with responsibility for the United
Kingdom, Ireland and South Africa, a position he assumed in January 1995. From
September 1993 to December 1994, Mr. Hearl was Regional Vice President for KFC
Europe.
Terry D. Davenport is Chief Concept Officer and Chief Marketing Officer of
KFC. He has served in this position since October 1998. From September 1997 to
October 1998 he was Chief Marketing Officer of KFC. From February 1997 to
September 1997 he was Chief Marketing Officer for Einstein Bagels in Golden,
Colorado. From September 1994 to February 1997 he was Sr. Vice President for
Arby's in Ft. Lauderdale, Florida. From June 1991 to September 1994 he was Vice
President, Marketing for Taco Bell in Irvine, California.
Michael A. Miles, Jr. is Chief Operating Officer of Pizza Hut. He has
served in this position since January 2000. From May 1996 to December 1999, Mr.
Miles served as Senior Vice President, Concept Development and Franchise. From
December 1994 to April 1996, he was Division Vice President for Pizza Hut. Mr.
Miles joined PepsiCo in May 1993 as Director of Strategic Planning.
Robert T. Nilsen is Chief Operating Officer of Taco Bell. He has served in
this position since January 2000. From January 1999 to December 1999, he was
Senior Vice President and Managing Director of Tricon Restaurants International
brands in the South Pacific. From October 1997 to January 1999, he served as
Vice President and Managing Director of Tricon Restaurants International brands
in the South Pacific. From April 1996 to October 1997, Mr. Nilsen was Region
Vice President of Tricon Restaurants International with
17
<PAGE>
responsibility for franchise operations across South Asia, the Middle East and
Hawaii. From 1995 to April 1996, he was Managing Director for KFC and Pizza Hut
in Southern Africa.
Executive officers are elected by and serve at the discretion of the Board
of Directors.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Company's Common Stock trades under the symbol YUM and is listed on the
New York Stock Exchange. The following sets forth the high and low composite
closing sale prices by quarter of the Company's Common Stock.
1999 1998
- -------------------------------------------------------------------------------
Quarter High Low High Low
- -------------------------------------------------------------------------------
First $ 69 1/2 $ 46 $ 30 5/8 $ 25 15/16
Second 73 1/2 50 1/4 33 1/8 29 9/16
Third 56 3/8 35 3/4 40 3/4 29 15/16
Fourth 45 1/8 37 11/16 49 1/2 33 1/4
- -------------------------------------------------------------------------------
The approximate number of shareholders of record of the Company's common
stock as of February 28, 2000 was 156,000.
The Company does not presently intend to pay dividends on its common stock.
18
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
- -----------------------------------------------------------------------------------------------------------
Selected Financial Data
TRICON Global Restaurants, Inc. and Subsidiaries
(in millions, except per share and unit amounts)
- -----------------------------------------------------------------------------------------------------------
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
System sales (rounded)(1)
U.S. $ 14,500 $ 14,000 $ 13,500 $ 13,400 $ 13,200
International 7,300 6,600 7,000 6,900 6,500
--------------------------------------------------------------
Total 21,800 20,600 20,500 20,300 19,700
--------------------------------------------------------------
Revenues
Company sales 7,099 7,852 9,112 9,738 9,813
Franchise and license fees 723 627 578 494 437
--------------------------------------------------------------
Total 7,822 8,479 9,690 10,232 10,250
--------------------------------------------------------------
Facility actions net gain (loss)(2) 381 275 (247) 37 (402)
Unusual items(3) (51) (15) (184) (246) -
--------------------------------------------------------------
Operating profit 1,240 1,028 241 372 252
Interest expense, net 202 272 276 300 355
--------------------------------------------------------------
Income (loss) before income taxes(2)(3) 1,038 756 (35) 72 (103)
Net income (loss)(2)(3) 627 445 (111) (53) (132)
Basic earnings per common share(4) 4.09 2.92 N/A N/A N/A
Diluted earnings per common share(4) 3.92 2.84 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------
Cash Flow Data
Provided by operating activities $ 565 $ 674 $ 810 $ 713 $ 813
Capital spending 470 460 541 620 701
Refranchising of restaurants 916 784 770 355 165
- -----------------------------------------------------------------------------------------------------------
Balance Sheet
Total assets $ 3,961 $ 4,531 $ 5,114 $ 6,520 $ 6,908
Operating working capital deficit (832) (960) (1,073) (915) (925)
Long-term debt 2,391 3,436 4,551 231 260
Total debt 2,508 3,532 4,675 290 404
Investments by and advances from PepsiCo - - - 4,266 4,604
- -----------------------------------------------------------------------------------------------------------
Other Data
Number of stores at year-end(1)
Company 6,981 8,397 10,117 11,876 12,540
Unconsolidated Affiliates 1,178 1,120 1,090 1,007 926
Franchisees 18,414 16,650 15,097 13,066 11,901
Licensees 3,409 3,596 3,408 3,147 2,527
--------------------------------------------------------------
System 29,982 29,763 29,712 29,096 27,894
U.S. Company same store sales growth(1)
KFC 2% 3% 2% 6% 7%
Pizza Hut 9% 6% (1)% (4)% 4%
Taco Bell - 3% 2% (2)% (4)%
Blended 4% 4% 1% N/A N/A
Shares outstanding at year-end (in millions) 151 153 152 N/A N/A
Market price per share at year-end $ 37 15/16 $ 47 5/8 $ 28 5/16 N/A N/A
- -----------------------------------------------------------------------------------------------------------
</TABLE>
N/A - Not Applicable.
TRICON Global Restaurants, Inc. and Subsidiaries ("TRICON") became an
independent, publicly owned company on October 6, 1997 through the spin-off of
the restaurant operations of its former parent, PepsiCo, Inc., to its
shareholders. The historical consolidated financial data for 1997 and the prior
years above were prepared as if we had been an independent, publicly owned
company for all periods presented. The selected financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto.
(1) Excludes Non-core Businesses.
(2) Includes $13 million ($10 million after-tax) and $54 million ($33 million
after-tax) of favorable adjustments to our 1997 fourth quarter charge in
1999 and 1998, respectively, $410 million ($300 million after-tax) related
to our fourth quarter charge in 1997 and $457 million ($324 million
after-tax) related to the early 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" in 1995.
(3) Includes $11 million ($10 million after-tax) and $11 million ($7 million
after-tax) of favorable adjustments to our 1997 fourth quarter charge in
1999 and 1998, respectively. 1997 includes $120 million ($125 million
after-tax) related to our 1997 fourth quarter charge and an additional $54
million ($34 million after-tax) related to the 1997 disposal of the
Non-core Businesses. 1996 includes $246 million ($189 million after-tax)
write-down of our Non-core Businesses. See Note 5 to the Consolidated
Financial Statements.
(4) EPS data has been omitted for 1997 and prior years as our capital structure
as an independent, publicly owned company did not exist for those years.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
TRICON Global Restaurants, Inc. and Subsidiaries (collectively referred to
as "TRICON" or the "Company") is comprised of the worldwide operations of KFC,
Pizza Hut and Taco Bell (the "Core Business(es)") and is the world's largest
quick service restaurant ("QSR") company based on the number of system units.
Separately, each brand ranks in the top ten among QSR chains in U.S. system
sales and units. Our 9,000 plus international units make us the second largest
QSR company outside the United States.
Throughout Management Discussion and Analysis ("MD&A"), we make reference
to ongoing operating profit which represents our operating profit excluding the
impact of our accounting and human resources policy changes in 1999
(collectively, the "accounting changes"), facility actions net gain and unusual
items. See Note 5 to the Consolidated Financial Statements for a detailed
discussion of these exclusions. We use ongoing operating profit as a key
performance measure of our results of operations for purposes of evaluating
performance internally and as the base to forecast future performance. Ongoing
operating profit is not a measure defined in generally accepted accounting
principles ("GAAP") and should not be considered in isolation or as a
substitution for measures of performance in accordance with GAAP.
In 1999, our international business accounted for 33% of system sales, 27%
of total revenues and 25% of operating profit before unallocated and corporate
expenses, gains and losses from foreign exchange, accounting changes, facility
actions net gain and unusual items. We anticipate that, despite the inherent
risks and generally higher general and administrative expenses required by
international operations, we will continue to invest in key international
markets with substantial growth potential.
TRICON became an independent, publicly owned company on October 6, 1997
(the "Spin-off Date") via a tax free distribution of our Common Stock (the
"Distribution" or "Spin-off") to the shareholders of our former parent, PepsiCo,
Inc. ("PepsiCo"). See Notes 2, 11 and 21 to the Consolidated Financial
Statements. For purposes of this MD&A, we include the worldwide operations of
our Core Businesses and, through their respective dates of disposal in 1997, our
U.S. non-core businesses. These non-core businesses consist of California Pizza
Kitchen, Chevys Mexican Restaurant, D'Angelo's Sandwich Shops, East Side Mario's
and Hot `n Now (collectively the "Non-core Businesses"). Where significant to
the discussion, we separately identify the impact of the Non-core Businesses.
This MD&A should be read in conjunction with our Consolidated Financial
Statements on pages 43 - 81 and the Cautionary Statements on page 41. All Note
references herein refer to the Notes to the Consolidated Financial Statements on
pages 47 - 81. Tabular amounts are displayed in millions except per share and
unit count amounts, or as specifically identified.
Factors Affecting Comparability of 1999 Results to 1998
1997 Fourth Quarter Charge
--------------------------
In the fourth quarter of 1997, we recorded a $530 million unusual charge
($425 million after-tax). The charge included estimates for (1) costs of closing
stores, 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; (3) impairment of certain restaurants intended to be
used in the business; (4) impairment of certain investments in unconsolidated
affiliates to be retained; and (5) costs of related personnel reductions.
20
<PAGE>
During 1999 and 1998, we continued to re-evaluate our prior estimates of
the fair market value of units to be refranchised or closed and other
liabilities arising from the charge. In 1999, we made favorable adjustments of
$13 million ($10 million after-tax) and $11 million ($10 million after-tax)
included in facility actions net gain and unusual items, respectively. These
adjustments related to lower-than-expected losses from stores disposed of,
decisions to retain stores originally expected to be disposed of and changes in
estimated costs. In 1998, favorable adjustments of $54 million ($33 million
after-tax) and $11 million ($7 million after-tax) were included in facility
actions net gain and unusual items, respectively. These adjustments primarily
related to decisions to retain certain stores originally expected to be disposed
of, lower-than-expected losses from stores disposed of and favorable lease
settlements with certain lessors related to stores closed. At December 25, 1999,
we had completed the actions covered by the charge. See Note 5 for a detailed
analysis of the 1997 fourth quarter charge, which includes a roll-forward of the
asset valuation allowances and liabilities.
Our ongoing operating profit includes benefits from the suspension of
depreciation and amortization of approximately $12 million ($7 million
after-tax) and $33 million ($21 million after-tax) in 1999 and 1998,
respectively, for stores held for disposal. The relatively short-term benefits
from depreciation and amortization suspension related to stores that were
operating at the end of the respective periods ceased when the stores were
refranchised, closed or a subsequent decision was made to retain the stores.
Unusual Items
-------------
We had unusual items of $51 million ($29 million after-tax), $15 million
($3 million after-tax) and $184 million ($165 million after-tax) in 1999, 1998
and 1997, respectively. See Note 5 for a detailed discussion of our unusual
items.
Store Portfolio Perspectives
----------------------------
For the last several years, we have been strategically reducing our share
of total system units by selling Company restaurants to existing and new
franchisees where their expertise can be leveraged to improve our overall
operating performance, while retaining Company ownership of key U.S. and
International markets. This portfolio-balancing activity has reduced, and will
continue to reduce, our reported revenues and restaurant profits and increase
the importance of system sales as a key performance measure. We expect that the
loss of restaurant level profits from the disposal of these stores will be
largely mitigated by increased franchise fees from stores refranchised, lower
field general and administrative expenses and reduced interest costs due to the
reduction of debt from the after-tax cash proceeds from our refranchising
activities.
We currently expect to refranchise approximately 500 to 600 restaurants in
2000 compared to over 1,400 in 1999. However, if market conditions are
favorable, we may sell more restaurants than the current forecast. As a result
of this decline, we estimate that our 2000 refranchising gains will be
significantly less than our 1999 gains. In addition, we expect the impact of
refranchising gains to be even less significant over time as we approach our
target of approximately 20 percent Company ownership of the total system.
21
<PAGE>
The following table summarizes our refranchising activities for the last
five years:
<TABLE>
<CAPTION>
Total 1999 1998 1997 1996 1995
--------- ------------ ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Number of units refranchised 5,138 1,435 1,373 1,407 659 264
Refranchising proceeds, pre-tax $ 2,990 $ 916 $ 784 $ 770 $ 355 $ 165
Refranchising net gain, pre-tax $ 1,045 $ 422(a) $ 279(b) $ 112(c) $ 139 $ 93
</TABLE>
(a) Includes favorable adjustments to our 1997 fourth quarter charge of $4
million.
(b) Includes unfavorable adjustments to our 1997 fourth quarter charge of $2
million.
(c) Includes a 1997 fourth quarter charge of $136 million.
In addition to our refranchising program, we have been closing restaurants
over the past several years. Restaurants closed include poor performing
restaurants, restaurants that are relocated to a new site within the same trade
area or U.S. Pizza Hut delivery units consolidated with a new or existing
dine-in traditional store which has been remodeled to provide dine-in, carry-out
and delivery services within the same trade area.
The following table summarizes store closure activities for the last five
years:
<TABLE>
<CAPTION>
Total 1999 1998 1997 1996 1995
--------- ---------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Number of units closed 2,119 301 572 632 347 267
Store closure net costs $ 312 $ 13(a) $ (27)(b) $ 248(c) $ 40 $ 38
</TABLE>
(a) Includes favorable adjustments to our 1997 fourth quarter charge of $9
million.
(b) Includes favorable adjustments to our 1997 fourth quarter charge of $56
million.
(c) Includes a 1997 fourth quarter charge of $213 million.
Our overall Company ownership percentage of total system units was 23% at
December 25, 1999, a decline of 5 percentage points from year-end 1998 and 11
percentage points from year-end 1997.
The portfolio effect on ongoing operating profit included in our
discussions of results of operations represents the estimated impact on revenue,
restaurant margin, general and administrative expenses and operating profit
related to our refranchising and store closure initiatives described above.
Results of Operations
Our Spin-off in 1997, the impacts of our facility actions over the last
three years, our 1997 fourth quarter charge and the impacts of the disposal of
our Non-core Businesses represent significant items which complicate
year-over-year comparisons.
Prior to October 7, 1997, our historical financial statements were impacted
by our lack of history as an independent, publicly owned company. The amounts
for certain items, specifically general and administrative expenses, interest
expense and income taxes, included in our historical reported results for
periods prior to the Spin-off, include allocations or computations which are not
indicative of the amounts we would have incurred if we had been an independent,
publicly owned company during all periods presented. See Note 2.
Comparative information is also impacted by the operations of and disposal
charges related to our Non-core Businesses in 1997. These disposal charges
included an estimated provision for all expected future liabilities associated
with the disposal of our Non-core Businesses. We were required to retain these
liabilities as part of the Spin-off. Our best estimates of all such liabilities
have been included in the accompanying Consolidated Financial Statements. See
Note 21. Actual amounts incurred may ultimately differ from these estimates.
However, we believe the amounts, if any, in excess of our previously recorded
liabilities are not likely to have a material adverse effect on our results of
operations, financial condition or cash flow.
22
<PAGE>
Following is a summary of the results of the operations of our Non-core
Businesses through their respective disposal dates:
1997
--------
Revenues $ 268
% of total revenues 3%
Non-core Businesses operating profit, before disposal charges $ 13
Unusual disposal charges 54
Net loss (26)
Worldwide Results of Operations
<TABLE>
<CAPTION>
% B(W) % B(W)
1999 vs. 1998 1998 vs. 1997
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
System Sales $ 21,762 6 $ 20,620 1
=========== ===========
Revenues
Company sales $ 7,099 (10) $ 7,852 (14)
Franchise and license fees(1) 723 15 627 8
----------- -----------
Total Revenues $ 7,822 (8) $ 8,479 (12)
=========== ===========
Company Restaurant Margin $ 1,091 3 $ 1,058 -
=========== ===========
% of sales 15.4% 1.9 ppts. 13.5% 1.9 ppts.
Ongoing operating profit $ 881 15 $ 768 14
Accounting changes(2) 29 NM - -
Facility actions net gain (loss) 381 38 275 NM
Unusual items (51) NM (15) NM
----------- -----------
Operating Profit 1,240 21 1,028 NM
Interest expense, net 202 26 272 1
Income Tax Provision 411 (32) 311 NM
----------- -----------
Net Income (Loss) $ 627 41 $ 445 NM
=========== ===========
Diluted Earnings Per Share $ 3.92 38 $ 2.84 NM
=========== ===========
</TABLE>
(1) Excluding the special 1997 KFC renewal fees, 1998 increased 13% over 1997.
(2) See Note 5 for complete discussion of our 1999 favorable accounting
changes.
- --------------------------------------------------------------------------------
23
<PAGE>
Worldwide Restaurant Unit Activity
<TABLE>
<CAPTION>
Unconsolidated
Company Affiliates Franchisees Licensees Total
------------ ---------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 27, 1997 10,117 1,090 15,097 3,408 29,712
New Builds & Acquisitions 225 63 790 544 1,622
Refranchising & Licensing (1,373) (9) 1,302 80 -
Closures (572) (24) (539) (436) (1,571)
------------ ---------------- ------------- ----------- ---------
Balance at Dec. 26, 1998 8,397 1,120 16,650 3,596 29,763
New Builds & Acquisitions 323 83 858 586 1,850
Refranchising & Licensing (1,435) (5) 1,443 (3) -
Closures (301) (20) (434) (646) (1,401)
Other (3) - (103) (124) (230)
------------ ---------------- ------------- ----------- ---------
Balance at Dec. 25, 1999 6,981(a) 1,178 18,414 3,409 29,982
============ ================ ============= =========== =========
% of total 23.3% 3.9% 61.4% 11.4% 100.0%
</TABLE>
(a) Includes 37 Company units approved for closure but not yet closed at
December 25, 1999.
- --------------------------------------------------------------------------------
Worldwide System Sales and Revenues
System Sales increased $1.1 billion or 6% in 1999. Excluding the favorable
impact of foreign currency translation, system sales increased $1 billion or 5%.
The improvement was driven by new unit development and positive same store sales
growth in our three U.S. concepts and our international business, Tricon
Restaurants International ("TRI" or "International"). U.S. development was
primarily at Taco Bell while International development was primarily in Asia.
The increase was partially offset by store closures at our three U.S. concepts
and in International.
In 1998, system sales increased $155 million or 1%. Excluding the negative
impact of foreign currency translation, system sales increased by $871 million
or 4%. The increase reflected the development of new units, primarily by
franchisees and licensees, and positive same store sales growth. U.S.
development was primarily at Taco Bell while international development was
primarily in Asia. This growth in system sales was partially offset by store
closures.
Revenues decreased $657 million or 8% in 1999. As expected, Company sales
decreased $753 million or 10% in 1999. The decline in Company sales was due to
the portfolio effect. Excluding the portfolio effect, Company sales increased
$513 million or 8%. The increase was primarily due to new unit development,
favorable effective net pricing and volume increases at Pizza Hut, led by "The
Big New Yorker," and at TRI. Effective net pricing includes increases or
decreases in price and the effect of changes in product mix. Franchise and
license fees grew $96 million or 15% in 1999. The growth was primarily driven by
units acquired from us and new unit development primarily in Asia and at Taco
Bell in the U.S., partially offset by store closures by franchisees and
licensees.
In 1998, revenues decreased $1.2 billion or 12%. Revenues in 1997 included
$268 million related to the Non-core Businesses. Excluding the negative impact
of foreign currency translation and revenues from the Non-core Businesses,
revenues decreased $749 million or 8%. Company sales decreased $1.3 billion or
14%. The decline in Company sales was due to the portfolio effect. Excluding the
portfolio effect, the negative impact of foreign currency translation and the
Non-core Businesses, Company sales increased $511 million or 7%. The increase in
Company sales was primarily driven by new unit development and effective net
pricing, partially offset by store closures. Franchise and license fees
increased $49 million or 8%. Excluding the negative impact of foreign currency
translation and the special 1997 KFC renewal fees of $24 million,
24
<PAGE>
franchise and license fees increased $95 million or 17%. The growth was
primarily driven by units acquired from us and new unit development primarily in
Asia and at Taco Bell in the U.S., partially offset by store closures by
franchisees and licensees.
Worldwide Company Restaurant Margin
1999 1998 1997
-------- -------- --------
Company sales 100.0% 100.0% 100.0%
Food and paper 31.5 32.1 32.4
Payroll and employee benefits 27.6 28.6 28.7
Occupancy and other operating expenses 25.5 25.8 27.3
-------- -------- --------
Restaurant margin 15.4% 13.5% 11.6%
======== ======== ========
Our restaurant margin as a percentage of sales increased approximately 190
basis points for 1999. The portfolio effect contributed nearly 50 basis points
and accounting changes contributed approximately 15 basis points to our
improvement. Excluding the portfolio effect and accounting changes, our
restaurant margin grew approximately 125 basis points. This improvement in
restaurant margin was primarily attributable to effective net pricing in excess
of cost increases, primarily labor in the U.S. Restaurant margin also benefited
from improved food and paper cost management in both the U.S. and key
International equity markets. Volume increases at Pizza Hut in the U.S. and in
key International equity markets were fully offset by volume declines at Taco
Bell and the unfavorable impact of the introduction of lower margin chicken
sandwiches at KFC in the U.S.
In 1998, our restaurant margin as a percent of sales increased almost 190
basis points. Portfolio effect contributed approximately 65 basis points and the
suspension of depreciation and amortization relating to our 1997 fourth quarter
charge contributed approximately 55 basis points to our improvement. Excluding
the portfolio effect and the benefits of the 1997 fourth quarter charge, our
restaurant margin increased approximately 70 basis points. The improvement was
largely due to effective net pricing in excess of increased costs, primarily
labor. Labor increases were driven by higher wage rates, primarily attributable
to the September 1997 minimum wage increase in the U.S., an increase in the
management complement in our U.S. Taco Bell restaurants and lower favorable
insurance-related adjustments in 1998. The decrease in occupancy and other
operating expenses related primarily to higher spending in 1997 on store
refurbishment and quality initiatives at Taco Bell and Pizza Hut as well as an
increase in higher favorable insurance-related adjustments in 1998. These
favorable items were partially offset by increased store refurbishment expenses
at KFC in 1998.
Worldwide General & Administrative Expenses ("G&A")
G&A decreased $21 million or 2% in 1999. Excluding the $18 million
favorable impact of 1999 accounting changes, G&A decreased $3 million in 1999.
In 1999, the favorable impacts of our portfolio effect, our fourth quarter 1998
decision to streamline our international business and the absence of costs
associated with relocating certain operations from Wichita, Kansas in 1998 were
partially offset by higher strategic and other corporate expenses. In addition
to the items described above, higher spending on biennial meetings to support
our culture initiatives and the absence of favorable cost recovery agreements
with AmeriServe Food Distribution, Inc. ("AmeriServe") and PepsiCo that were
terminated in 1998 resulted in a modest increase in G&A in 1999. Our 1999 G&A
included Year 2000 spending of approximately $30 million as compared to $31
million in 1998.
In 1998, G&A decreased $15 million or 2%. G&A in 1997 included
approximately $24 million related to Non-core Businesses. Excluding the impact
of the Non-core Businesses, G&A increased $9 million or 1%. The increase
reflected higher investment spending offset by the favorable impacts of our
portfolio effect,
25
<PAGE>
decreased restaurant support center and field operating overhead and foreign
currency translation. Our investment spending consisted primarily of costs
related to Year 2000 compliance and remediation efforts of $31 million in 1998
versus $4 million in 1997, along with the costs to relocate our processing
center from Wichita to other existing restaurant support centers of $14 million.
In addition, we experienced increased administrative expenses as an independent,
publicly owned company and incurred additional expenses related to continuing
efforts to improve and standardize administrative and accounting systems.
Worldwide Other (Income) Expense
<TABLE>
<CAPTION>
% B(W) % B(W)
1999 vs. 1998 1998 vs. 1997
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Equity income from investments in
unconsolidated affiliates $ (19) 6 $ (18) NM
Foreign exchange net loss (gain) 3 NM (6) NM
-------- --------
$ (16) (31) $ (24) NM
======== ========
</TABLE>
Other income declined $8 million in 1999. Net foreign exchange losses were
$3 million in 1999 compared to net foreign exchange gains of $6 million in 1998.
This decline was due to foreign losses in 1999 versus gains in 1998 related to
U.S. dollar denominated short-term investments in Canada.
In 1998, equity income from investments in our unconsolidated affiliates
increased $10 million. This increase was due primarily to lower amortization
relating to the impact of the $79 million joint venture investment impairment
included in our 1997 fourth quarter charge and, to a lesser extent, the impact
of new unit development primarily by our affiliate in the United Kingdom. Net
foreign exchange gains were $6 million in 1998 compared to net foreign exchange
losses of $16 million in 1997. This improvement was due primarily to
non-recurring 1997 foreign exchange losses, predominantly in Thailand and the
Netherlands, and to foreign exchange gains in 1998 primarily due to U.S. dollar
denominated short-term investments in Canada.
Worldwide Facility Actions Net (Gain) Loss
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ----------------------------- ------------------------
Excluding Excluding
1997 4th Qtr. 1997 4th Qtr. Excluding
Charge Charge 4th Qtr.
Total Adjustments Total Adjustments Total Charge
--------- --------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Refranchising net gains $ (422) $ (418) $ (279) $ (281) $ (112) $ (248)
Store closure net costs 13 22 (27) 29 248 35
Impairment charges for stores that
will continue to be used in the
business 16 16 25 25 111 50
Impairment charges for stores to be
closed in the future 12 12 6 6 - -
--------- --------------- --------- ---------------- --------- -----------
Facility actions net (gain) loss $ (381) $ (368) $ (275) $ (221) $ 247 $ (163)
========= =============== ========= ================ ========= ===========
</TABLE>
Refranchising net gains resulted from the refranchising of 1,435 units in
1999, 1,373 units in 1998 and 1,407 units in 1997. These gains included initial
franchise fees of $45 million, $44 million and $41 million in 1999, 1998 and
1997, respectively. See pages 21 - 22 for more details regarding our
refranchising activities.
Impairment charges for stores that will continue to be used in the business
were $16 million in 1999 compared to $25 million in 1998 reflecting fewer
underperforming stores. In 1998, upon adoption of the SEC's
26
<PAGE>
interpretation of SFAS 121, we also began to perform impairment evaluations when
we expect to actually close a store beyond the quarter in which our closure
decision is made. This change resulted in additional impairment charges of $12
million in 1999 and $6 million in 1998. Under our prior accounting policy, these
impairment charges would have been included in store closure costs. We believe
the overall decrease in impairment in 1998 was significantly impacted by 1997
decisions included in our fourth quarter charge to dispose of certain stores
which may have otherwise been impaired in our evaluations, and improved
performance in 1998, primarily at Pizza Hut in the U.S.
Our 1999 refranchising gains, store closure costs and impairment charges
are not necessarily indicative of future results.
Worldwide Operating Profit
<TABLE>
<CAPTION>
% B(W) % B(W)
1999 vs. 1998 1998 vs. 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. ongoing operating profit(a) $ 813 10 $ 740 23
International ongoing operating profit 265 39 191 11
Accounting changes 29 NM - -
Foreign exchange net (loss) gain (3) NM 6 NM
Ongoing unallocated and corporate expenses(b) (194) (14) (169) (93)
Facility actions net gain (loss) 381 38 275 NM
Unusual items (51) NM (15) NM
---------- ----------
Reported operating profit $ 1,240 21 $ 1,028 NM
========== ==========
</TABLE>
(a) Excludes 1999 favorable accounting changes of approximately $15 million.
(b) Excludes 1999 favorable accounting changes of approximately $14 million.
The increases in U.S. and International ongoing operating profit for 1999
and 1998 are discussed fully on pages 32 and 34, respectively. Accounting
changes, facility actions net gain (loss) and unusual items are discussed in
Note 5.
Ongoing unallocated and corporate expenses increased $25 million or 14% in
1999. The increase was driven by higher strategic and other corporate spending,
system standardization investment and the absence of favorable cost recovery
agreements from AmeriServe and PepsiCo that were terminated in 1998. These
increases were partially offset by the absence of costs associated with
relocating certain of our operations from Wichita, Kansas in 1998.
In 1998, ongoing unallocated and corporate expenses increased $82 million
or 93%. The increase was primarily due to spending on Year 2000 compliance and
remediation efforts, costs to relocate our processing center from Wichita to
other facilities and expenses incurred as an independent, publicly owned
company, as well as, additional expenses related to the efforts to improve and
standardize operating, administrative and accounting systems.
Worldwide Interest Expense, Net
1999 1998 1997
-------- -------- --------
External debt $ 218 $ 291 $ 102
PepsiCo allocation - - 188
-------- -------- --------
Interest expense 218 291 290
Interest income (16) (19) (14)
-------- -------- --------
Interest expense, net $ 202 $ 272 $ 276
======== ======== ========
27
<PAGE>
Our net interest expense decreased approximately $70 million in 1999. The
decline was primarily due to the reduction of debt through use of after-tax cash
proceeds from our refranchising activities and cash from operations.
In 1998, our net interest expense decreased approximately $4 million. The
decline was due to an increase in interest income, partially offset by a slight
increase in interest expense. The increase in interest income was driven by
higher average international investment balances. The slight increase in
interest expense was primarily due to higher average outstanding debt balances.
Prior to the Spin-off in the fourth quarter of 1997, our operations were
financed through operating cash flows, proceeds from refranchising activities
and investment by and advances from PepsiCo. At the Spin-off date, we borrowed
$4.55 billion under a bank credit agreement to replace the financing previously
provided by PepsiCo and, additionally, to fund a dividend to PepsiCo. See Notes
2 and 11. For periods prior to the Spin-off, our interest expense included
PepsiCo's allocation 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, including capital leases. We believe
such allocated interest expense is not indicative of the interest expense that
we would have incurred as an independent, publicly owned company. Subsequent to
the Spin-off date, our interest costs consist primarily of interest expense
related to our bank credit agreement, unsecured notes and other external debt.
Most of the other external debt existed at the Spin-off date.
Worldwide Income Taxes
1999 1998 1997
--------- --------- ---------
Reported
Income taxes $ 411 $ 311 $ 76
Effective tax rate 39.5% 41.1% NM
Ongoing(a)
Income taxes $ 267 $ 210 $ 179
Effective tax rate 39.3% 42.3% 45.2%
(a) Excludes the effects of 1999 accounting changes, facility actions net gain
(loss) and unusual items. See Note 5 for a discussion of these exclusions.
For periods prior to the Spin-off in 1997, income tax expense was
calculated, to the extent possible, as if we filed income tax returns separate
from PepsiCo.
The following reconciles the U.S. federal statutory tax rate to our ongoing
effective tax rate:
1999 1998 1997
------- ------- -------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit 2.3 2.8 3.9
Foreign and U.S. tax effects attributable to
foreign operations 1.5 6.3 4.9
Adjustments relating to prior years 0.2 (3.3) 0.8
Other, net 0.3 1.5 0.6
------- ------- -------
Ongoing effective tax rate 39.3% 42.3% 45.2%
======= ======= =======
The 1999 ongoing effective tax rate decreased 3.0 points to 39.3%. The
decrease in the ongoing effective tax rate was primarily due to a one-time
favorable international benefit in Mexico. The recent pattern of profitability
in Mexico and expectations of future profitability have allowed us to reverse a
previous valuation allowance against deferred tax assets. This will allow us to
reduce future cash tax payments in Mexico.
28
<PAGE>
The 1998 ongoing effective tax rate decreased 2.9 points to 42.3%. The
decrease in the 1998 ongoing effective tax rate was primarily due to favorable
adjustments related to prior years.
The effective tax rate attributable to foreign operations varied from
year-to-year but in each year was higher than the U.S. federal statutory tax
rate. This was primarily due to foreign tax rate differentials, including
foreign withholding tax paid without benefit of the related foreign tax credit
for U.S. income tax purposes and losses of foreign operations for which no tax
benefit could be currently recognized.
Diluted Earnings Per Share
The components of diluted earnings per common share ("EPS") were as
follows:
<TABLE>
<CAPTION>
Diluted(a) Basic Diluted(a) Basic
------------ --------- ------------ ----------
1999 1999 1998 1998
------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
Ongoing operating earnings $ 2.58 $ 2.69 $ 1.83 $ 1.88
Accounting changes 0.11 0.12 - -
Facility actions net gain(b) 1.41 1.47 1.03 1.06
Unusual items(c) (0.18) (0.19) (0.02) (0.02)
------------ --------- ------------ ----------
Total $ 3.92 $ 4.09 $ 2.84 $ 2.92
============ ========= ============ ==========
</TABLE>
(a) Based on 160 million shares in 1999 and 156 million shares in 1998
applicable to diluted earnings. See Note 4.
(b) Includes favorable adjustments to our 1997 fourth quarter charge of $0.06
and $0.21 per diluted share in 1999 and 1998, respectively.
(c) Includes favorable adjustments to our 1997 fourth quarter charge of $0.07
and $0.04 per diluted share in 1999 and 1998, respectively.
U.S. Results of Operations
<TABLE>
<CAPTION>
% B(W) % B(W)
1999 vs. 1998 1998 vs. 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
System Sales $ 14,516 4 $ 14,013 4
========== ==========
Revenues
Company sales $ 5,253 (13) $ 6,013 (14)
Franchise and license fees(1) 495 16 426 13
---------- ----------
Total Revenues $ 5,748 (11) $ 6,439 (13)
========== ==========
Company Restaurant Margin $ 825 1 $ 819 -
========== ==========
% of sales 15.7% 2.1 ppts. 13.6% 1.9 ppts.
Ongoing Operating Profit(2) $ 813 10 $ 740 23
========== ==========
</TABLE>
(1) Excluding the special 1997 KFC renewal fees, 1998 increased 21% over 1997.
(2) Excludes 1999 accounting changes, facility actions net gain (loss) and
unusual items.
- --------------------------------------------------------------------------------
29
<PAGE>
U.S. Restaurant Unit Activity
<TABLE>
<CAPTION>
Company Franchisees Licensees Total
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at Dec. 27, 1997(a) 7,794 9,512 3,167 20,473
New Builds & Acquisitions 75 338 508 921
Refranchising & Licensing (1,219) 1,216 3 -
Closures (418) (204) (403) (1,025)
----------- ------------- ----------- ---------
Balance at Dec. 26, 1998 6,232 10,862 3,275 20,369
New Builds & Acquisitions 155 432 539 1,126
Refranchising & Licensing (1,170) 1,167 3 -
Closures (230) (248) (593) (1,071)
Other (3) (103) (124) (230)
----------- ------------- ----------- ---------
Balance at Dec. 25, 1999 4,984(b) 12,110 3,100 20,194
=========== ============= =========== =========
% of total 24.7% 60.0% 15.3% 100.0%
</TABLE>
(a) A total of 114 units have been reclassified from the U.S. to International
to reflect the transfer of management responsibility.
(b) Includes 36 Company units approved for closure, but not yet closed at
December 25, 1999.
- --------------------------------------------------------------------------------
U.S. System Sales and Revenues
System sales increased $503 million or 4% in 1999. The improvement was
driven by new unit development, led by Taco Bell franchisees and same store
sales growth at our three U.S. concepts. These increases were partially offset
by store closures, primarily at Pizza Hut and Taco Bell.
In 1998, system sales increased $511 million or 4%. The increase was
attributable to new unit development, primarily by franchisees and licensees of
Taco Bell and, to a lesser extent, KFC, and positive same store sales growth at
all three of our concepts. These increases were partially offset by the impact
of store closures.
Revenues decreased $691 million or 11% due to the expected decline in
Company sales of $760 million or 13% in 1999. The decline in Company sales was
due to the portfolio effect. Excluding the portfolio effect, Company sales
increased approximately $305 million or 6%. This increase was primarily due to
new unit development, favorable effective net pricing and volume increases led
by Pizza Hut's first quarter new product introduction, "The Big New Yorker."
Franchise and license fees increased $69 million or 16% in 1999. The increase
was driven by units acquired from us, new unit development and franchisee same
store sales growth, primarily at Pizza Hut. These increases were partially
offset by store closures.
We measure same store sales only for our U.S. Company restaurants. Same
store sales at Pizza Hut increased 9% in 1999. The improvement was primarily
driven by an increase in transactions of over 5%, resulting from the launch of
"The Big New Yorker." The growth at Pizza Hut was also aided by effective net
pricing of over 3%. Same store sales at KFC grew 2%. The increase was almost
equally driven by effective net pricing and transaction growth. Transaction
growth at KFC was primarily due to the fourth quarter launch of its new chicken
sandwiches. This favorable impact was partially offset by lower check averages
from these transactions and declines in other products. Same store sales at Taco
Bell were flat as an increase in effective net pricing of approximately 4% was
fully offset by transaction declines. In the fourth quarter, Taco Bell
introduced a new hot, fried product, the Chalupa, reigniting transaction growth
during that period.
In 1998, revenues decreased $931 million or 13% due to the expected decline
in Company sales of $981 million or 14%. Excluding the effect of the Non-core
Businesses, our Company sales decreased $715 million or 11%. The decline in
Company sales was driven by the portfolio effect. Excluding the impact of
Non-core
30
<PAGE>
Businesses and portfolio effect, Company sales increased approximately $331
million or 6%. This increase was primarily due to positive same store sales
growth at all three of our operating companies. Franchise and license fees
increased $50 million or 13% in 1998. In 1997, we generated $24 million of
special KFC renewal fees. Substantially all of KFC's franchisees renewed their
franchise agreements, typically for 20 years, during 1997. As part of this
special renewal program at KFC, certain participating franchisees also committed
to attain over the next several years certain facility standards based on
physical assessment of that franchisee's restaurants. We believe these upgrades
of the franchised facilities will ultimately result in higher system sales and,
therefore, higher franchise fees. Excluding the special 1997 KFC renewal fees,
1998 franchise and license fees increased $74 million or 21%. The increase was
primarily driven by units acquired from us and new unit development, partially
offset by the impact of store closures by franchisees and licensees.
In 1998, same store sales at Pizza Hut increased 6%. The improvement was
primarily driven by effective net pricing of 4% aided by transaction increases
of 2%. Same store sales at KFC grew 3%. This growth was due to transaction
increases of 2% aided by effective net pricing of 1%. Same store sales at Taco
Bell increased 3%. The improvement at Taco Bell was driven by transaction
increases of 1% aided by effective net pricing of 2%.
U.S. Company Restaurant Margin
1999 1998 1997
-------- -------- --------
Company sales 100.0% 100.0% 100.0%
Food and paper 30.0 31.0 31.1
Payroll and employee benefits 29.8 30.4 30.5
Occupancy and other operating expenses 24.5 25.0 26.7
-------- -------- --------
Restaurant margin 15.7% 13.6% 11.7%
======== ======== ========
Our restaurant margin as a percentage of sales increased approximately 210
basis points for 1999. Portfolio effect contributed approximately 45 basis
points and accounting changes contributed nearly 25 basis points to our
improvement. Excluding the portfolio effect and accounting changes, our
restaurant margin grew approximately 140 basis points. The improvement in
restaurant margin was primarily attributable to favorable effective net pricing.
Labor cost increases, primarily driven by higher wage rates, were fully offset
by lower food and paper costs as improved product cost management resulted in
lower overall beverage and distribution costs. The improvement in our restaurant
margin also included approximately 15 basis points from retroactive beverage
rebates related to 1998 recognized in 1999. In addition, an increase in
favorable insurance-related adjustments over 1998 contributed approximately 10
basis points to our improvement. These adjustments arose from improved casualty
loss trends across all three of our U.S. operating companies. See Note 21 for
additional information regarding our insurance-related adjustments. All of these
improvements were partially offset by volume declines at Taco Bell and the
unfavorable impact of the introduction of lower margin chicken sandwiches at
KFC.
In 1998, our restaurant margin as a percentage of sales increased over 190
basis points. The portfolio effect contributed approximately 75 basis points and
the suspension of depreciation and amortization relating to our 1997 fourth
quarter charge contributed approximately 40 basis points. Excluding the
portfolio effect and the benefit of the 1997 fourth quarter charge, our
restaurant margin increased approximately 80 basis points. We benefited from
favorable effective net pricing in excess of costs, primarily labor and
commodity costs. Our labor increases were driven by higher wage rates, primarily
the September 1997 minimum wage increase, an increase in the management
complement at our Taco Bell restaurants and lower favorable insurance-related
adjustments in 1998. Commodity cost increases, primarily cheese and produce,
were partially offset by a decrease in other commodity costs. Our occupancy and
other operating expenses were favorably impacted by higher favorable
insurance-related adjustments in 1998 and the decreased store condition and
quality initiative
31
<PAGE>
spending at Pizza Hut and Taco Bell. These favorable items were partially offset
by increased store refurbishment expenses at KFC in 1998.
U.S. Ongoing Operating Profit
Ongoing operating profit increased $73 million or 10% in 1999. The increase
was due to our base restaurant margin improvement of 140 basis points and higher
franchise fees primarily from new unit development. The favorable impact of
these items was partially offset by the net negative impact of the portfolio
effect. We have estimated the 1999 net negative impact due to the portfolio
effect was approximately $40 million or approximately 5% of our operating profit
in 1998. Higher G&A, net of field G&A savings from our portfolio activities,
also unfavorably impacted ongoing operating profit. This increase in G&A was
largely due to the biennial conferences at Pizza Hut and Taco Bell to support
our corporate culture initiatives.
In 1998, ongoing operating profit increased approximately $137 million or
23%. Excluding the effect of our Non-core Businesses, our ongoing operating
profit increased approximately $150 million or 26%. The increase was due to our
base restaurant margin improvement of 80 basis points and reduced G&A expenses.
Higher franchise and license fees were partially offset by the absence of the
special 1997 KFC renewal fees. The impact due to the portfolio effect was
insignificant. Ongoing operating profit included the benefits of our 1997 fourth
quarter charge of approximately $35 million, of which $19 million related to the
suspension of depreciation and amortization for stores included in the charge.
International Results of Operations
<TABLE>
<CAPTION>
1999 1998
------------------------- ------------------------
% B(W) % B(W)
Amount vs. 1998 Amount vs. 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
System Sales $ 7,246 10 $ 6,607 (5)
========== ==========
Revenues
Company sales $ 1,846 - $ 1,839 (13)
Franchise and license fees 228 13 201 -
---------- ----------
Total Revenues $ 2,074 2 $ 2,040 (12)
========== ==========
Company Restaurant Margin $ 266 11 $ 239 (1)
========== ==========
% of sales 14.4% 1.4 ppts. 13.0% 1.6 ppts.
Ongoing Operating Profit(1) $ 265 39 $ 191 11
========== ==========
</TABLE>
(1) Excludes 1999 accounting changes, facility actions net gain (loss) and
unusual items.
- --------------------------------------------------------------------------------
32
<PAGE>
International Restaurant Unit Activity
<TABLE>
<CAPTION>
Unconsolidated
Company Affiliates Franchisees Licensees Total
----------- ---------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 27, 1997(a) 2,323 1,090 5,585 241 9,239
New Builds & Acquisitions 150 63 452 36 701
Refranchising & Licensing (154) (9) 86 77 -
Closures (154) (24) (335) (33) (546)
----------- ---------------- ------------- ----------- ---------
Balance at Dec. 26, 1998 2,165 1,120 5,788 321 9,394
New Builds & Acquisitions 168 83 426 47 724
Refranchising & Licensing (265) (5) 276 (6) -
Closures (71) (20) (186) (53) (330)
----------- ---------------- ------------- ----------- ---------
Balance at Dec. 25, 1999 1,997(b) 1,178 6,304 309 9,788
=========== ================ ============= =========== =========
% of Total 20.4% 12.0% 64.4% 3.2% 100.0%
</TABLE>
(a) A total of 114 units have been reclassified from the U.S. to International
to reflect the transfer of management responsibility.
(b) Includes 1 Company unit approved for closure, but not yet closed at
December 25, 1999.
- --------------------------------------------------------------------------------
International System Sales and Revenues
System Sales increased $639 million or 10% in 1999 largely driven by our
strong performance in Asia. Excluding the favorable impact from foreign currency
translation, system sales increased $498 million or 8%. This was led by Asia,
our largest region. System sales in Asia increased $426 million or 19%.
Excluding the favorable impact of foreign currency translation, system sales in
Asia increased $229 million or 10%. In 1999, the economy in Asia began to show
signs of a steady recovery after the overall economic turmoil and weakening of
local currencies against the U.S. dollar that began in late 1997. The increase
in system sales in Asia was driven by new unit development and same store sales
growth. Outside of Asia, the improvement was driven by new unit development,
both by franchisees and us, and same store sales growth. New unit development
was primarily in Mexico and the U.K. The increase in system sales was partially
offset by store closures primarily by franchisees in Canada, Latin America and
Japan.
In 1998, system sales decreased $356 million or 5%. Excluding the negative
impact of foreign currency translation, system sales increased $360 million or
5%. The increase was driven by new unit development, primarily in Asia,
partially offset by store closures in other countries/markets. System sales in
Asia decreased $254 million or 10% as a result of the economic turmoil.
Excluding the unfavorable impact of foreign currency translation, system sales
in Asia increased 8%.
Revenues increased $34 million or 2% in 1999. Excluding the favorable
impact of foreign currency translation, revenues increased $29 million or 1%.
Company sales increased less than 1% in 1999. New unit development, favorable
effective net pricing and volume increases were largely offset by the portfolio
effect. Excluding the portfolio effect, Company sales increased $208 million or
13% in 1999 largely driven by our strong performance in Asia. Revenues in Asia
increased $139 million or 28%. Excluding the favorable impact of foreign
currency translation, revenues in Asia increased $115 million or 23% driven by
new unit development and same store sales growth.
Franchise and license fees rose $27 million or 13% in 1999. The increase in
franchise and license fees was driven by new unit development, same store sales
growth and units acquired from us. New unit development was primarily in Asia.
These increases were partially offset by store closures.
33
<PAGE>
In 1998, revenues decreased $280 million or 12%. Excluding the negative
impact of foreign currency translation, revenues decreased $86 million or 4%.
Company sales decreased $279 million or 13% driven by the portfolio effect.
Excluding the negative impact of foreign currency translation and the portfolio
effect, Company sales increased $180 million or 10%. The increase was driven by
new unit development, primarily in Asia, and effective net pricing. Franchise
and license fees decreased $1 million or less than 1%. Excluding the negative
impact of foreign currency translation, franchise and license fees increased $21
million or 11%. The increase was driven by new unit development, primarily in
Asia, and units acquired from us, partially offset by store closures by
franchisees and licensees.
International Company Restaurant Margin
1999 1998 1997
-------- -------- --------
Company sales 100.0% 100.0% 100.0%
Food and paper 36.0 35.8 36.5
Payroll and employee benefits 21.0 22.6 22.7
Occupancy and other operating expenses 28.6 28.6 29.4
-------- -------- --------
Restaurant margin 14.4% 13.0% 11.4%
======== ======== ========
Our restaurant margin as a percentage of sales increased approximately 140
basis points in 1999. Excluding the favorable impact of foreign currency
translation, restaurant margins increased approximately 130 basis points.
Portfolio effect contributed approximately 50 basis points. Excluding the
portfolio effect, our restaurant margin grew approximately 80 basis points. The
improvement in restaurant margin was driven by volume increases in China, Korea
and Australia and favorable effective net pricing in excess of cost increases,
primarily in the U.K., Puerto Rico and Korea. Our growth in 1999 was partially
offset by volume decreases in Taiwan and Poland. In addition to the factors
described above, margins benefited from improved cost management, primarily in
China.
In 1998, our restaurant margin increased over 160 basis points. Excluding
the negative impact of foreign currency translation, restaurant margin increased
approximately 195 basis points. The increase was driven primarily by the
suspension of depreciation and amortization relating to restaurants included in
our 1997 fourth quarter charge, which contributed 110 basis points. The
portfolio effect also contributed approximately 30 basis points to the
improvement. The remaining margin improvement of approximately 55 basis points
resulted from favorable effective net pricing in excess of costs in Mexico,
Australia and Spain. Restaurant margin improvement was partially offset by
volume declines in Asia, led by Korea. The economic turmoil throughout Asia
resulted in an overall volume decline, even though we had volume increases in
Mexico, Canada and Spain.
International Ongoing Operating Profit
Ongoing operating profit grew $74 million or 39% in 1999. Excluding the
favorable impact of foreign currency translation, ongoing operating profit
increased $69 million or 36%. The increase in operating profit was driven by our
base margin improvement of approximately 80 basis points, higher franchise and
license fees and a decline in G&A. Our ongoing operating profit benefited from
the economic recovery in Asia. Operating profit in Asia increased $55 million or
84%. Excluding the favorable impact of foreign currency translation, Asia
operating profit increased $46 million or 72%. Additionally, ongoing operating
profit included benefits of approximately $15 million from our 1998 fourth
quarter decision to streamline our international infrastructure in Asia, Europe
and Latin America and other actions.
In 1998, ongoing operating profit increased $19 million or 11%. Excluding
the negative impact of foreign currency translation, ongoing operating profit
increased $43 million or 25% in 1998. The increase was driven
34
<PAGE>
by our base margin improvement of 55 basis points and a decline in G&A. The
favorable impact of these items was partially offset by the net negative impact
of the portfolio effect, which was approximately $10 million or approximately 6%
of operating profit in 1997. Lower franchise and license fees, net of fees from
units acquired from us, also unfavorably impacted ongoing operating profit.
Ongoing operating profit in 1998 included benefits related to our 1997 fourth
quarter charge of approximately $29 million, of which $14 million related to the
suspension of depreciation and amortization for the stores included in the
charge. These benefits were fully offset by the 30% decline in Asia operating
profit and Year 2000 spending.
Consolidated Cash Flows
Net cash provided by operating activities decreased $109 million to $565
million in 1999. Net income before facility actions and all other non-cash
charges increased $12 million from $780 million to $792 million, despite the net
decline of 1,400 Company restaurants. This decline was primarily due to our
portfolio activities during the year. Portfolio activities also contributed to
the decline of $128 million in our operating working capital deficit due
primarily to a reduction in accounts payable and other current liabilities. Our
operating working capital deficit, which excludes cash, short-term investments
and short-term borrowings, is typical of restaurant operations where the
majority of sales are for cash while payment to suppliers for food and supply
inventories carry longer payment terms, generally from 10-30 days. The decline
in accounts payable was a result of the reduction in the number of our
restaurants and timing in the payment of liabilities. Other current liabilities
declined primarily due to lower vacation accruals due to the change in vacation
policy (described in Note 5), lower casualty loss reserves based on our
independent actuary's valuation, lower advertising accruals and lower accrued
interest due to the reduction in debt. As expected, the refranchising of our
restaurants and the related increase in franchised units have caused accounts
receivable for franchise fees to increase.
In 1998, net cash provided by operating activities decreased $136 million
to $674 million. Cash used for working capital was $106 million for 1998
compared to cash provided by working capital of $27 million in 1997. The 1998
use was primarily due to an increase in current deferred tax assets and reduced
income taxes payable. Excluding net changes in working capital, net income
before facility actions and all other non-cash charges was essentially unchanged
despite the net decline of over 1,700 Company restaurants. The decline was
driven by our portfolio activities.
Cash provided by investing activities increased $220 million to $522
million in 1999. The majority of the increase is due to higher gross
refranchising proceeds and proceeds from the sale of international short-term
investments in connection with a planned tax-efficient repatriation to the U.S.
We look at refranchising proceeds on an "after-tax" basis. We define
after-tax proceeds as gross refranchising proceeds less the settlement of
working capital liabilities related to the units refranchised, primarily
accounts payable and property taxes, and payment of taxes on the gains. This use
of proceeds reduces our normal working capital deficit as more fully discussed
above. The after-tax proceeds are available to pay down debt or repurchase
shares. The estimated after-tax proceeds from refranchising of $683 million in
1999 increased approximately 13% compared to prior year. This increase is due to
the increased number of units refranchised as well as the mix of units sold and
the level of taxable gains from each refranchising.
In 1998, net cash provided by investing activities decreased $164 million
to $302 million compared to $466 million in 1997. The 1998 decrease was
primarily due to the prior year sale of the Non-core Businesses partly offset by
increased proceeds from refranchising and the sales of property, plant and
equipment. Capital spending decreased by $81 million or 15%.
35
<PAGE>
Net cash used for financing activities was essentially unchanged at $1.1
billion in 1999. Payments on our unsecured Term Loan Facility and our unsecured
Revolving Credit Facility totaled $1.0 billion.
In September 1999, the Board of Directors authorized the repurchase of up
to $350 million of the Company's outstanding Common Stock. Through December 25,
1999, 3.3 million shares were repurchased under this program at a cost of $134
million. We have repurchased approximately 3.4 million additional shares for
approximately $125 million through February 25, 2000.
In 1998, net cash used for financing activities of $1.1 billion decreased
slightly compared to 1997. The 1998 use represents net debt repayments. During
1998, we issued unsecured notes resulting in proceeds of $604 million. These
proceeds were used to reduce existing borrowings under our unsecured Term Loan
Facility and unsecured Revolving Credit Facility.
Financing Activities
Our primary bank credit agreement, as amended in March 1999, is currently
comprised of a senior, unsecured Term Loan Facility and a $3 billion senior
unsecured Revolving Credit Facility (collectively referred to as the "Credit
Facilities") which mature on October 2, 2002. At December 25, 1999, we had
approximately $774 million outstanding under the Term Loan Facility and $955
million outstanding under the Revolving Credit Facility. Amounts outstanding
under our Term Loan Facility and Revolving Credit Facility are expected to
fluctuate from time to time, but Term Loan Facility reductions cannot be
reborrowed. At December 25, 1999, we had unused Revolving Credit Facility
borrowings available aggregating $1.9 billion, net of outstanding letters of
credit of $152 million. We believe that we will be able to replace or refinance
our Credit Facilities with another form of borrowing including a new credit
facility or publicly issued debt, depending on market conditions or terms
available at that time. We currently believe we will be able to replace or
refinance the Credit Facilities prior to the maturity date.
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. Interest on the Credit
Facilities is based principally on the London Interbank Offered Rate ("LIBOR")
plus a variable margin as defined in the credit agreement. Therefore, our future
borrowing costs may fluctuate depending upon the volatility in LIBOR. We
currently mitigate a portion of our interest rate risk through the use of
financial instruments. See Notes 11 and 13 and our market risk discussion for
further discussions of our interest rate risk.
We anticipate that our 2000 combined cash flow from operating and
refranchising activities will be lower than 1999 levels primarily because of our
expectations of reduced refranchising activity. However, we believe it will be
sufficient to support our expected capital spending and still allow us to make
required debt repayments and buy back shares under our current stock repurchase
program.
Consolidated Financial Condition
Assets decreased $570 million or 13% to $4.0 billion at year-end 1999. This
decrease is primarily attributable to the portfolio effect and a decrease in
cash and short-term investments. The decrease in cash and short-term investments
was primarily driven by initiatives which allowed us to repatriate $210 million
of cash to the U.S. from foreign countries at minimal tax cost. We continue to
look for opportunities to tax efficiently repatriate cash generated from foreign
operations.
Liabilities decreased $1.2 billion or 21% to $4.5 billion primarily due to
net debt repayments.
36
<PAGE>
Our operating working capital deficit declined 13% to $832 million at
year-end 1999 from $960 million at year-end 1998, primarily reflecting the
portfolio effect.
Other Significant Known Events, Trends or Uncertainties Expected to
Impact 2000 Ongoing Operating Income Comparisons with 1999
Impact of AmeriServe Bankruptcy
-------------------------------
As described in Note 22, on January 31, 2000, AmeriServe filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. AmeriServe has advised
us that it intends to prepare and file with the Bankruptcy Court a plan of
reorganization in the future.
TRICON, the purchasing cooperative for the TRICON system and key
representatives of the TRICON franchise community are working closely together
to proactively address the bankruptcy situation and develop appropriate
contingency plans. It is our intention to take all actions reasonably necessary
and prudent to ensure continued supply of restaurant products and equipment to
the TRICON system, and to minimize any incremental costs or exposures related to
the AmeriServe bankruptcy. The significant actions that we have taken to date
are described below.
On February 2, 2000, we and another major AmeriServe customer agreed to
provide a $150 million interim "debtor-in-possession" revolving credit facility
(the "Facility") to AmeriServe. We initially committed to provide up to $100
million under this Facility. However, we have reached an agreement in principle
to assign $30 million of our commitment to a third party, reducing our total
commitment under the Facility to $70 million. AmeriServe has advised us that it
is actively seeking to arrange alternative debtor-in-possession financing to
replace the Facility.
In addition to our participation in the Facility, to help ensure that our
supply chain continues to remain open, we have begun to purchase (and take title
to) supplies directly from suppliers (the "temporary direct purchase program")
for use in our restaurants, as well as for resale to our franchisees and
licensees who previously purchased supplies from AmeriServe. AmeriServe has
agreed, for the same fee in effect prior to the bankruptcy filing, to continue
to be responsible for distributing the supplies to us and our participating
franchisee and licensee restaurants as well as providing ordering, inventory,
billing and collection services for us. To date, this arrangement has been
effective in ensuring supplies to our restaurants, and we have not experienced
any significant supply interruption.
Further, we have commenced contingency planning and believe that we can
arrange with an alternative distributor or distributors to meet the needs of the
TRICON restaurant system if AmeriServe is no longer able to adequately service
our restaurants or if otherwise permitted by the Bankruptcy Court.
As in most bankruptcies involving a primary supplier or distributor, the
AmeriServe bankruptcy poses certain risks and uncertainties to us, as well as to
our franchisees that rely on AmeriServe to distribute products to their
restaurants. The more significant of these risks and uncertainties are described
below. Significant adverse developments in any of these risks or uncertainties
could have a material adverse impact on our results of operations, cash flow or
financial condition.
We expect to incur costs in connection with our temporary direct purchase
program, including the cost of additional debt incurred to finance the inventory
purchases and to carry the receivables arising from inventory sales. While we
believe that adequate inventory control and collections systems are in place, we
may also incur costs related to the possibility of inventory obsolescence and
uncollectible receivables from our franchisees. We expect to mitigate, if not
fully offset, these costs through discounts granted by suppliers for prompt
37
<PAGE>
payments. We also expect to incur certain one-time unusual costs as a result of
the AmeriServe bankruptcy, primarily consisting of professional fees.
We intend to continue to work with AmeriServe and our suppliers to meet our
supply needs while AmeriServe seeks to reorganize. Due to the uncertainties
surrounding AmeriServe's reorganization, we cannot predict the ultimate impact,
if any, on our businesses. There can be no assurance that the Facility will be
sufficient to meet AmeriServe's cash requirements or that we will be able to
fully recover the amount advanced under the Facility. There can be no assurance
that AmeriServe will be successful in arranging replacement debtor-in-possession
financing on satisfactory terms, or that a plan of reorganization for AmeriServe
will ultimately be confirmed, or if confirmed, what the plan will provide.
Additionally, there can be no assurance that AmeriServe will be able to maintain
our supply line indefinitely without additional financing or at our current
contractual rates.
We currently have a multi-year contract with AmeriServe which is subject to
the Bankruptcy Court procedures during the reorganization process. As stated
above, we believe that we can arrange with an alternative distributor or
distributors to meet the needs of the TRICON restaurant system if AmeriServe is
no longer able to adequately service our restaurants or if otherwise permitted
by the Bankruptcy Court. We could, however, experience some short-term delays
due to the time required to qualify and contract with, and transition the
business to, other distributors. There can be no assurance that the cost of
these alternatives would be at the same rates we currently pay AmeriServe.
We believe that we may have a set-off or recoupment claim against amounts
we owe AmeriServe under our distribution contract that would allow us to recover
certain costs and damages that we have incurred (or may incur) as a result of
AmeriServe's failure to perform its contractual obligations to our restaurants
both prior to and after the bankruptcy filing. While we intend to assert this
claim, there can be no assurance that we will be successful.
Without regard to the final outcome of the AmeriServe bankruptcy
proceedings, it is our intention to take whatever steps are reasonably required
to ensure continued supply of restaurant products and equipment to the TRICON
system. To the extent we incur any ongoing incremental costs as a result of the
AmeriServe bankruptcy or actions related thereto, we intend to mitigate those
costs to the maximum extent possible through other reasonable management
actions.
Impact of New Ventures
----------------------
Consistent with our strategy to focus our capital on key international
markets, we entered into agreements in the fourth quarter of 1999 to form new
ventures during 2000 in Canada and Poland with our largest franchisees in those
markets. We intend to contribute approximately 300 restaurants in Canada and 50
restaurants in Poland in exchange for an equity interest in each venture. These
units represented approximately 18% of total International Company units at
December 25, 1999. These interests will be accounted for under the equity
method. We have not yet determined the timing of the formation of these new
ventures.
Upon formation of these ventures, we will recognize our share of the
ventures' net income or loss as equity income from investments in unconsolidated
affiliates. Currently, the results from these restaurants are being
consolidated. The impact of these transactions on operating results will be
similar to the portfolio effect of our refranchising activities. These
transactions will result in a decline in our Company sales, restaurant margin
dollars and general and administrative expenses and an increase in franchise
fees. In addition, because of our retained interest in these ventures, we will
recognize our share of the ventures' net income or loss. Had these ventures been
formed at the beginning of 1999, our 1999 International Company sales would have
declined approximately 14% as compared to the slight increase reported in 1999.
However, we estimate the overall impact on 1999 operating profit would have been
favorable due to higher franchise fees and equity income.
38
<PAGE>
Change in Casualty Loss Estimates
---------------------------------
As described in Note 21, we have recorded favorable adjustments to our
casualty loss reserves of $30 million in 1999 ($21 million in the first quarter
and $9 million in the fourth quarter), $23 million in 1998 and $18 million in
1997 primarily as a result of our independent actuary's changes in its estimate
of casualty losses. The changes were related to previously recorded casualty
loss estimates determined by our independent actuary for both the current and
prior years in which we retained some risk of loss. We believe the favorable
adjustments are a direct result of our recent investments in safety and security
programs to better manage risk at the store level.
We will continue to make adjustments both based on our actuary's periodic
valuations as well as whenever there are significant changes in the expected
costs of settling large claims not contemplated by the actuary. Due to the
inherent volatility of our actuarially-determined casualty loss estimates, it is
reasonably possible that we will experience changes in estimated losses which
could be material to our growth in net income in 2000. However, we currently
expect the magnitude of such estimate changes will be less than those
experienced in 1999. This expectation is primarily based on indications by our
independent actuary that its current loss estimates are based more on the
favorable actual loss trends we have achieved in the last few years than the
more negative trends we experienced in earlier years. We believe that, since we
record our reserves for casualty losses at a 75% confidence level, we have
mitigated the negative impact of adverse development and/or volatility. At
December 25, 1999, our reserves for casualty losses were $142 million, compared
to $154 million at year-end 1998.
Year 2000
---------
As previously disclosed, we developed and implemented an enterprise-wide
plan to prepare our information technology (IT) systems and non-information
technology systems with embedded technology applications (ET) for the Year 2000
issue. We also took actions we believed would mitigate our Year 2000 risks
related to our critical business partners including suppliers, banks,
franchisees and other service providers (primarily data exchange partners). We
have not experienced any significant disruptions of our operating or financial
activities caused by a failure of our IT/ET systems or unexpected business
problems resulting from Year 2000 issues. Given the absence of any significant
problems to date, we do not expect Year 2000 issues to have a material adverse
effect on TRICON's operations or financial results in 2000.
We currently expect our Year 2000 plan to cost approximately $67 to $68
million from inception of the planned actions in 1997 through 2000. We have
incurred approximately $65 million of Year 2000 costs from 1997 through December
25, 1999 of which approximately $30 million was incurred during 1999. We expect
to incur approximately $2 to 3 million to complete all Year 2000 problem
resolution in 2000. These costs relate to additional validation of our IT/ET
systems and resolution of any Year 2000 problems or issues that arise during the
remainder of 2000. We have funded the costs related to our Year 2000 plan
through cash flows from operations.
Extra Week in 2000
------------------
Our fiscal calendar results in a fifty-third week every five or six years.
Fiscal year 2000 will include a fifty-third week in the fourth quarter. This
additional week will have a favorable effect on our operating results for 2000.
39
<PAGE>
Euro Conversion
---------------
On January 1, 1999, eleven of the fifteen member countries of the European
Economic and Monetary Union ("EMU") adopted the Euro as a common legal currency
and fixed conversion rates were established. From that date through no later
than June 30, 2002, participating countries will maintain both legacy currencies
and the Euro as legal tender. Beginning January 1, 2002, new Euro-denominated
bills and coins will be issued, and a transition period of up to six months will
begin during which legacy currencies will be removed from circulation.
We have Company and franchised businesses in the adopting member countries,
which are preparing for the conversion. Expenditures associated with conversion
efforts to date have been insignificant. We currently estimate that our spending
over the ensuing three-year transition period will be approximately $10 million,
related to the conversion in the EMU member countries in which we operate
stores. In our 1998 Form 10-K, we estimated that our spending over the period
would be approximately $16 million. This estimate was reduced in the fourth
quarter of 1999 to reflect the refranchising of certain equity markets and
enhancements made to our existing point-of-sale ("P.O.S.") systems.
Approximately 60% of these expenditures relate to capital expenditures for new
P.O.S. and back-of-restaurant hardware and software to accommodate
Euro-denominated transactions. We expect that adoption of the Euro by the U.K.
would significantly increase this estimate due to the size of our businesses
there relative to our aggregate businesses in the adopting member countries in
which we operate.
The pace of ultimate consumer acceptance of and our competitors' responses
to the Euro are currently unknown and may impact our existing plans. However, we
know that, from a competitive perspective, we will be required to assess the
impacts of product price transparency, potentially revise product bundling
strategies and create Euro-friendly price points prior to 2002. We do not
believe that these activities will have sustained adverse impacts on our
businesses. Although the Euro does offer certain benefits to our treasury and
procurement activities, these are not currently anticipated to be significant.
We currently anticipate that our suppliers and distributors will continue
to invoice us in legacy currencies until late 2001. We expect to begin dual
pricing in our restaurants in 2001. We expect to compensate employees in Euros
beginning in 2002. We believe that the most critical activity regarding the
conversion for our businesses is the completion of the rollout of Euro-ready
point-of-sale equipment and software by the end of 2001. Our current plans
should enable us to be Euro-compliant prior to the requirements for these
changes. Any delays in our ability to complete our plans, or in the ability of
our key suppliers to be Euro-compliant, could have a material adverse impact on
our results of operations, financial condition or cash flows.
Improvement in Effective Tax Rate
---------------------------------
As discussed on page 28 - 29, we have achieved significant improvements in
our effective tax rate ("ETR") on ongoing operating profit in both 1999 and 1998
as a result of several tax planning initiatives and other events. In 1999, our
ETR was 39.3%, an improvement of 300 basis points from 1998 and 590 basis points
better than 1997.
We continue to pursue a variety of initiatives designed to further reduce
our ETR. The most significant current initiative is to become eligible to claim
foreign income tax credits against our U.S. income tax liability on foreign
sourced income. When it becomes more likely than not that we will be able to
claim the benefit of foreign tax credits, which is reasonably possible in 2000,
it should result in a further improvement in our ETR.
40
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk of Financial
Instruments
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 and receivables are denominated in foreign
currencies which exposes us to market risk associated with exchange rate
movements. Historically, we have used derivative financial instruments on a
limited basis 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 December 25, 1999, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $12 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
December 25, 1999. In addition, the fair value of our interest rate derivative
contracts would increase approximately $7 million in value to us, and the fair
value of our unsecured Notes would decrease approximately $28 million. Fair
value was determined by discounting the projected cash flows.
New Accounting Pronouncement
See Note 2.
Cautionary Statements
From time to time, in both written reports and oral statements, we present
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The statements include those identified by such words as "may,"
"will," "expect," "anticipate," "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
limited 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 accruals for wage and hour litigation
and the liabilities related to the sale of the Non-core Businesses; the ongoing
business viability of our key distributor of restaurant products and equipment
in the United States and our ability to ensure adequate supply of restaurant
products and equipment in our stores; our ability to complete our conversion
plans or the ability of our key suppliers to be Euro-compliant; our potential
inability to identify qualified franchisees to purchase restaurants at prices we
consider appropriate under our strategy to reduce the percentage of system units
we operate; volatility of actuarially determined casualty loss estimates and
adoption of new or changes in accounting policies and practices.
Industry risks and uncertainties include, but are not limited to, global
and local business, 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; consumer preferences, spending patterns and demographic trends;
political or economic instability in local markets and currency exchange rates.
41
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL INFORMATION
Item 8 (a) (1) - (2)
Page
Reference
---------
Item 8 (a) (1) Consolidated Financial Statements
Consolidated Statement of Operations for the fiscal years ended
December 25, 1999, December 26, 1998
and December 27, 1997 43
Consolidated Statement of Cash Flows for the fiscal years ended
December 25, 1999, December 26, 1998
and December 27, 1997 44
Consolidated Balance Sheet at December 25, 1999 and December 26, 1998 45
Consolidated Statement of Shareholders' (Deficit) Equity and
Comprehensive Income for the fiscal
years ended December 25, 1999, December 26, 1998 and
December 27, 1997 46
Notes to Consolidated Financial Statements 47
Management's Responsibility for Financial Statements 82
Report of Independent Auditors, KPMG LLP 83
Item 8 (a) (2) Financial Statement Schedules
No schedules are required because either the required information is not present
or not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the above listed financial
statements or notes thereto.
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statement of Operations
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
(in millions, except per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Company sales $ 7,099 $ 7,852 $ 9,112
Franchise and license fees 723 627 578
---------- ---------- ----------
7,822 8,479 9,690
---------- ---------- ----------
Costs and Expenses, net
Company restaurants
Food and paper 2,238 2,521 2,949
Payroll and employee benefits 1,956 2,243 2,614
Occupancy and other operating expenses 1,814 2,030 2,491
---------- ---------- ----------
6,008 6,794 8,054
General and administrative expenses 920 941 956
Other (income) expense (16) (24) 8
Facility actions net (gain) loss (381) (275) 247
Unusual items 51 15 184
---------- ---------- ----------
Total costs and expenses, net 6,582 7,451 9,449
---------- ---------- ----------
Operating Profit 1,240 1,028 241
Interest expense, net 202 272 276
---------- ---------- ----------
Income (Loss) Before Income Taxes 1,038 756 (35)
Income Tax Provision 411 311 76
---------- ---------- ----------
Net Income (Loss) $ 627 $ 445 $ (111)
========== ========== ==========
Basic Earnings Per Common Share $ 4.09 $ 2.92
========== ==========
Diluted Earnings Per Common Share $ 3.92 $ 2.84
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
(in millions)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows - Operating Activities
Net income (loss) $ 627 $ 445 $ (111)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 386 417 536
Facility actions net (gain) loss (381) (275) 247
Unusual items 45 15 184
Other liabilities and deferred credits 65 58 -
Deferred income taxes (16) 3 (138)
Other non-cash charges and credits, net 66 117 65
Changes in operating working capital, excluding
effects of acquisitions and dispositions:
Accounts and notes receivable (28) (8) (22)
Inventories 6 4 3
Prepaid expenses and other current assets (13) (20) -
Accounts payable and other current liabilities (215) 10 3
Income taxes payable 23 (92) 43
---------- ---------- ----------
Net change in operating working capital (227) (106) 27
---------- ---------- ----------
Net Cash Provided by Operating Activities 565 674 810
---------- ---------- ----------
Cash Flows - Investing Activities
Capital spending (470) (460) (541)
Refranchising of restaurants 916 784 770
Acquisition of restaurants (6) - -
Sales of Non-core businesses - - 186
Sales of property, plant and equipment 51 58 40
Other, net 31 (80) 11
---------- ---------- ----------
Net Cash Provided by Investing Activities 522 302 466
---------- ---------- ----------
Cash Flows - Financing Activities
Proceeds from Notes - 604 -
Revolving Credit Facility activity, by original maturity
More than three months - proceeds - 400 500
More than three months - payments - (900) -
Three months or less, net (860) (120) 1,935
Proceeds from long-term debt 4 4 2,000
Payments of long-term debt (180) (1,068) (65)
Short-term borrowings-three months or less, net 21 (53) 83
Decrease in investments by and advances from PepsiCo - - (3,281)
Dividend to PepsiCo - - (2,369)
Repurchase shares of common stock (134) - -
Other, net 30 13 59
---------- ---------- ----------
Net Cash Used for Financing Activities (1,119) (1,120) (1,138)
---------- ---------- ----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents - (3) (7)
---------- ---------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents (32) (147) 131
Cash and Cash Equivalents - Beginning of Year 121 268 137
---------- ---------- ----------
Cash and Cash Equivalents - End of Year $ 89 $ 121 $ 268
========== ========== ==========
- -------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 212 $ 303 $ 64
Income taxes paid 340 310 210
- -------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
Consolidated Balance Sheet
TRICON Global Restaurants, Inc. and Subsidiaries
December 25, 1999 and December 26, 1998
(in millions)
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 89 $ 121
Short-term investments, at cost 48 87
Accounts and notes receivable, less allowance: $13 in
1999 and $17 in 1998 161 155
Inventories 61 68
Prepaid expenses and other current assets 68 57
Deferred income tax assets 59 137
----------- ----------
Total Current Assets 486 625
Property, Plant and Equipment, net 2,531 2,896
Intangible Assets, net 527 651
Investments in Unconsolidated Affiliates 170 159
Other Assets 247 200
----------- ----------
Total Assets $ 3,961 $ 4,531
=========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 1,085 $ 1,283
Income taxes payable 96 94
Short-term borrowings 117 96
----------- ----------
Total Current Liabilities 1,298 1,473
Long-term Debt 2,391 3,436
Other Liabilities and Deferred Credits 825 720
Deferred Income Taxes 7 65
----------- ----------
Total Liabilities 4,521 5,694
----------- ----------
Shareholders' Deficit
Preferred stock, no par value, 250 shares authorized;
no shares issued - -
Common stock, no par value, 750 shares authorized;
151 and 153 shares issued in 1999 and
1998, respectively 1,264 1,305
Accumulated deficit (1,691) (2,318)
Accumulated other comprehensive income (133) (150)
----------- ----------
Total Shareholders' Deficit (560) (1,163)
----------- ----------
Total Liabilities and Shareholders' Deficit $ 3,961 $ 4,531
=========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
45
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Shareholders' (Deficit) Equity and Comprehensive Income
- -------------------------------------------------------------------------------------------------------------------
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 25, 1999, December 26, 1998 and December 27, 1997
(in millions)
Issued Accumulated
Common Stock Investments by Other
-------------------- Accumulated and Advances Comprehensive
Shares Amount Deficit from PepsiCo Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1996 $ 4,268 $ (29) $ 4,239
----------------------------------------------------------------------------------
Net income prior to Spin-off 283 283
Net loss after Spin-off (394) (394)
Foreign currency translation adjustment (101) (101)
Minimum pension liability adjustment (includes
tax of $2 million) 2 2
-----------
Comprehensive Income (Loss) (210)
Net investments by and advances from PepsiCo (1,152) (1,152)
Spin-off dividend and partial repayment of
advances (2,369) (2,131) (4,500)
Issuance of shares of common stock, no par value,
in connection with the Spin-off 152 -
Contribution to capital of remaining unpaid
advances 1,268 (1,268) -
Stock option exercises 3 3
----------------------------------------------------------------------------------
Balance at December 27, 1997 152 $ 1,271 $ (2,763) $ - $ (128) $ (1,620)
----------------------------------------------------------------------------------
Net income 445 445
Foreign currency translation adjustment (20) (20)
Minimum pension liability adjustment (includes
tax of $1 million) (2) (2)
-----------
Comprehensive Income 423
Adjustment to opening equity related to net
advances from PepsiCo 12 12
Stock option exercises (includes tax benefits of
$3 million) 1 22 22
----------------------------------------------------------------------------------
Balance at December 26, 1998 153 $ 1,305 $ (2,318) $ - $ (150) $ (1,163)
----------------------------------------------------------------------------------
Net income 627 627
Foreign currency translation adjustment 15 15
Minimum pension liability adjustment (includes
tax of $1 million) 2 2
-----------
Comprehensive Income 644
Adjustment to opening equity related to net
advances from PepsiCo 7 7
Repurchase of shares of common stock (3) (134) (134)
Stock option exercises (includes tax benefits of
$14 million) 1 39 39
Compensation-related events 47 47
----------------------------------------------------------------------------------
Balance at December 25, 1999 151 $ 1,264 $ (1,691) $ - $ (133) $ (560)
==================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
46
<PAGE>
Notes to Consolidated Financial Statements
(tabular amounts in millions, except share data)
Note 1 - Description of Business
TRICON Global Restaurants, Inc. and Subsidiaries (collectively referred to
as "TRICON" or the "Company") is the world's largest quick service restaurant
company based on the number of system units, with almost 30,000 units in 104
countries and territories. References to TRICON throughout these Consolidated
Financial Statements are made using the first person notations of "we" or "us."
Our worldwide businesses, KFC, Pizza Hut and Taco Bell ("Core Business(es)"),
include the operations, development and franchising or licensing of a system of
both traditional and non-traditional quick service restaurant units. Our
traditional restaurants feature dine-in, carryout and, in some instances,
drive-thru or delivery service. Non-traditional units include express units and
kiosks which have a more limited menu and operate in non-traditional locations
like airports, gas and convenience stores, stadiums, amusement parks and
colleges, where a full-scale traditional outlet would not be practical or
efficient. Each Core Business has proprietary menu items and emphasizes the
preparation of food with high quality ingredients as well as unique recipes and
special seasonings to provide appealing, tasty and attractive food at
competitive prices. Approximately 33% of our system units are located outside
the U.S. In late 1994, we determined that each Core Business system should be
rebalanced toward a higher percentage of total system units operated by
franchisees and that Company underperforming units should be closed. Since that
time, we have refranchised 5,138 units and closed 2,119 units through December
25, 1999. Our overall Company ownership percentage of total system units was 23%
at December 25, 1999, a decline of 5 percentage points from year-end 1998 and 11
percentage points from year-end 1997. Our target Company ownership is
approximately 20%.
We also previously operated other non-core businesses disposed of in 1997,
which included California Pizza Kitchen, Chevys Mexican Restaurant, D'Angelo's
Sandwich Shops, East Side Mario's and Hot 'n Now (collectively, the "Non-core
Businesses").
Note 2 - Summary of Significant Accounting Policies
Our preparation of the accompanying Consolidated Financial Statements in
conformity with generally accepted accounting principles requires us to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from our estimates.
Principles of Consolidation and Basis of Preparation. TRICON was created as
an independent, publicly owned company on October 6, 1997 (the "Spin-off Date")
via a tax-free distribution by our former parent, PepsiCo, Inc. ("PepsiCo"), of
our Common Stock (the "Distribution" or "Spin-off") to its shareholders. The
accompanying Consolidated Financial Statements present our financial position,
results of operations and cash flows as if we had been an independent, publicly
owned company for all prior periods presented. Intercompany accounts and
transactions have been eliminated. Investments in unconsolidated affiliates in
which we exercise significant influence but do not control are accounted for by
the equity method. Our share of the net income or loss of those unconsolidated
affiliates and net foreign exchange gains or losses are included in other
(income) expense. The Consolidated Financial Statements prior to the Spin-off
Date represent the combined worldwide operations of our Core Businesses and
Non-core Businesses disposed of in 1997. To facilitate this presentation,
PepsiCo made certain allocations of its previously unallocated interest and
general and administrative expenses as well as pro forma computations, to the
extent possible, of separate income tax provisions for its restaurant segment.
47
<PAGE>
PepsiCo based its interest allocations on its weighted average interest
rate applied to the average annual balance of investments by and advances from
PepsiCo and its allocations of general and administrative expenses on our
revenue as a percent of PepsiCo's total revenue. We believe that the bases of
allocation of interest expense and general and administrative expenses were
reasonable based on the facts and circumstances available at the date of their
allocation, however, these allocations are not indicative of amounts that we
would have incurred as an independent, publicly owned company. Our 1997 results
included $188 million of interest allocations and $37 million of general and
administrative allocations from PepsiCo. PepsiCo used its weighted-average
interest rate of 6.1% to calculate the interest allocation for 1997 through the
Spin-off Date. PepsiCo managed its tax position on a consolidated basis, which
took into account the results of all of its businesses. For this reason, our
historical effective tax rates prior to 1998 are not indicative of our future
tax rates.
In addition, our capital structure changed in 1997 as a result of the
Distribution and bears little relationship to the average net outstanding
investments by and advances from PepsiCo prior to the Spin-off. In connection
with the Spin-off, we borrowed $4.55 billion to fund a dividend and repayments
to PepsiCo, which exceeded the net aggregate balance owed at the Spin-off Date
by $1.1 billion.
Segment Disclosures. Effective December 28, 1997, we adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). Operating segments, as defined by SFAS 131, 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 if the
businesses are considered similar under the criteria of SFAS 131. We identify
our operating segments based on management responsibility within the U.S. and
International. For purposes of applying SFAS 131, we consider our three U.S.
Core Business operating segments to be similar and therefore have aggregated
them into a single reportable operating segment.
Internal Development Costs and Abandoned Site Costs. We capitalize direct
internal payroll and payroll related costs and direct external costs associated
with the acquisition of a site to be developed as a Company unit and the
construction of a unit on that site. Only those site-specific costs incurred
subsequent to the time that the site acquisition is considered probable are
capitalized. We consider acquisition probable upon final site approval. If we
subsequently make a determination that a site for which internal development
costs have been capitalized will not be acquired or developed, the previously
capitalized costs are expensed at this date and included in general and
administrative expenses.
Fiscal Year. Our fiscal year ends on the last Saturday in December and, as
a result, a fifty-third week is added every five or six years. Fiscal years
1999, 1998 and 1997 comprised 52 weeks. Fiscal year 2000 will include a
fifty-third week. Each of the first three quarters of each fiscal year consists
of 12 weeks and the fourth quarter consists of 16 or 17 weeks. Our subsidiaries
operate on similar fiscal calendars with period end dates suited to their
businesses. Period end dates are within one week of TRICON's period end date
with the exception of our international businesses, which close one period or
month earlier to facilitate consolidated reporting.
Direct Marketing Costs. We report substantially all of our direct marketing
costs in occupancy and other operating expenses in the Consolidated Statement of
Operations, which include costs of advertising and other marketing activities.
We charge direct marketing costs to expense ratably in relation to revenues over
the year in which incurred. Direct marketing costs deferred at year-end consist
of media and related ad production costs. We expense these costs when the media
or ad is first used. Deferred advertising expense, classified as prepaid
expenses in the Consolidated Balance Sheet, was $3 million in 1999 and $4
million in 1998. Our advertising expenses were $385 million, $435 million and
$517 million in 1999, 1998 and 1997, respectively.
48
<PAGE>
The decline in our advertising expense is a direct result of substantially fewer
Company stores as a result of our major refranchising program.
Research and Development Expenses. Research and development expenses, which
we expense as incurred, were $24 million in 1999 and $21 million in both 1998
and 1997.
Stock-Based Employee Compensation. We measure stock-based employee
compensation cost for financial statement purposes in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related interpretations and include pro forma information in Note 15 as
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Accordingly, we measure compensation
cost for the stock option grants to our employees as the excess of the average
market price of our Common Stock at the grant date over the amount the employee
must pay for the stock. Our policy is to generally grant stock options at the
average market price of the underlying Common Stock at the date of grant.
Earnings (Loss) Per Common Share. In the accompanying Consolidated
Statement of Operations, we have omitted loss per share information for 1997 as
our capital structure as an independent, publicly owned company did not exist
for the entire year.
Derivative Instruments. From time to time, we utilize interest rate swaps,
collars and forward rate agreements to hedge our exposure to fluctuations in
variable interest rates.
We recognize the interest differential to be paid or received on interest
rate swap and forward rate agreements as an adjustment to interest expense as
the differential occurs. We recognize the interest differential to be paid or
received on an interest rate collar as an adjustment to interest expense only if
the interest rate falls below or exceeds the contractual collared range. We
reflect the recognized interest differential not yet settled in cash in the
accompanying Consolidated Balance Sheet as a current receivable or payable. If
we were to terminate an interest rate swap, collar or forward rate position, any
gain or loss realized upon termination would be deferred and amortized to
interest expense over the remaining term of the underlying debt instrument it
was intended to modify or would be recognized immediately if the underlying debt
instrument was settled prior to maturity.
We recognize foreign exchange gains and losses on forward contracts that
are designated and effective as hedges of foreign currency receivables each
period as the differential occurs. This is fully offset by the corresponding
gain or loss recognized in income on the currency translation of the receivable,
as both amounts are based upon the same exchange rates. We reflect the
recognized foreign currency differential not yet settled in cash on the
accompanying Consolidated Balance Sheet each period as a current receivable or
payable. If a foreign currency forward contract was to be terminated prior to
maturity, the gain or loss recognized upon termination would be immediately
recognized into income.
We defer gains and losses on futures contracts that are designated and
effective as hedges of future commodity purchases and include them in the cost
of the related raw materials when purchased. Changes in the value of futures
contracts that we use to hedge commodity purchases are highly correlated to the
changes in the value of the purchased commodity. If the degree of correlation
between the futures contracts and the purchase contracts were to diminish such
that the two were no longer considered highly correlated, we would recognize in
income subsequent changes in the value of the futures contracts.
Cash and Cash Equivalents. Cash equivalents represent funds we have
temporarily invested (with original maturities not exceeding three months) as
part of managing our day-to-day operating cash receipts and disbursements.
49
<PAGE>
Inventories. We value our inventories at the lower of cost (computed on the
first-in, first-out method) or net realizable value.
Property, Plant and Equipment. We state property, plant and equipment
("PP&E") at cost less accumulated depreciation and amortization, impairment
writedowns and valuation allowances. We calculate depreciation and amortization
on a straight-line basis over the estimated useful lives of the assets as
follows: 5 to 25 years for buildings and improvements, 3 to 20 years for
machinery and equipment and 3 to 7 years for capitalized software costs. We
suspend depreciation and amortization on assets related to restaurants that are
held for disposal. Our depreciation and amortization expense was $345 million,
$372 million and $460 million in 1999, 1998 and 1997, respectively.
Intangible Assets. Intangible assets include both identifiable intangibles
and goodwill arising from the allocation of purchase prices of businesses
acquired. Where appropriate, the intangibles are allocated to the individual
store level at the time of acquisition. We base amounts assigned to identifiable
intangibles on independent appraisals or internal estimates. Goodwill represents
the residual purchase price after allocation to all identifiable net assets. Our
intangible assets are stated at historical allocated cost less accumulated
amortization, impairment writedowns and valuation allowances. We amortize
intangible assets on a straight-line basis as follows: up to 20 years for
reacquired franchise rights, 3 to 34 years for trademarks and other identifiable
intangibles and up to 20 years for goodwill. As discussed further below, we
suspend amortization on intangible assets allocated to restaurants that are held
for disposal. Our amortization expense was $44 million, $52 million and $70
million in 1999, 1998 and 1997, respectively.
Franchise and License Fees. We execute franchise or license agreements
covering each point of distribution which provide the terms of our arrangement
with the franchisee or licensee. Our franchise and certain license agreements
generally require the franchisee or licensee to pay an initial, non-refundable
fee. Our agreements also require continuing fees based upon a percentage of
sales. Subject to our approval and payment of a renewal fee, a franchisee may
generally renew its agreement upon its expiration. Our direct costs of the sales
and servicing of franchise and license agreements are charged to general and
administrative expense as incurred.
We recognize initial fees as revenue when we have performed substantially
all initial services required by the franchising or licensing agreement, which
is generally upon opening of a store. We recognize continuing fees as earned
with an appropriate provision for estimated uncollectible amounts. We recognize
renewal fees in earnings when a renewal agreement becomes effective. We include
initial fees collected upon the sale of a restaurant to a franchisee in
refranchising gains (losses).
Refranchising Gains (Losses). Refranchising gains (losses) include the
gains or losses from the sales of our restaurants to new and existing
franchisees and the related initial franchise fees reduced by direct
administrative costs of refranchising. We recognize gains on restaurant
refranchisings when the sale transaction closes, the franchisee has a minimum
amount of the purchase price in at-risk equity and we are satisfied that the
franchisee can meet its financial obligations. Otherwise, we defer refranchising
gains until those criteria have been met. In executing our refranchising
initiatives, we most often offer groups of restaurants. We only consider the
stores in the group "held for disposal" where the group is expected to be sold
at a loss. We recognize estimated losses on restaurants to be refranchised and
suspend depreciation and amortization when: (1) we make a decision to
refranchise stores; (2) the estimated fair value less costs to sell is less than
the carrying amount of the stores; and (3) the stores can be immediately removed
from operations. For groups of restaurants expected to be sold at a gain, we
typically do not suspend depreciation and amortization until the sale is
probable. For practical purposes, we treat the closing date as the point at
which the sale is probable. When we make a decision to retain a store previously
held for refranchising, we revalue the store at the lower of its net book value
at our original disposal decision date less normal depreciation during the
period held for disposal or its current fair market value. This value becomes
the store's new cost basis. We
50
<PAGE>
charge (or credit) any difference between the store's carrying amount and its
new cost to refranchising gains (losses). When we make a decision to close a
store previously held for refranchising, we reverse any previously recognized
refranchising loss and then record the store closure costs as described below.
Store Closure Costs. Effective for closure decisions made on or subsequent
to April 23, 1998, we recognize store closure costs when we have closed the
restaurant within the same quarter our decision is made. Store closure costs
include the cost of writing-down (impairing) the carrying amount of a
restaurant's assets to estimated fair market value less costs of disposal.
Additionally, we record a liability for the net present value of any remaining
operating lease obligations after the expected closure date, net of estimated
sublease income, if any, at the date the closure is considered probable.
Impairment of Long-Lived Assets to be Held and Used in the Business. We
review our long-lived assets, including any allocated intangible assets, related
to each restaurant to be held and used in the business semi-annually for
impairment, or whenever events or changes in circumstances indicate that the
carrying amount of a restaurant may not be recoverable. We evaluate restaurants
using a "two-year history of operating losses" as our primary indicator of
potential impairment. Based on the best information available, we write down an
impaired restaurant to its estimated fair market value, which becomes its new
cost basis. We generally measure estimated fair market value by discounting
estimated future cash flows. In addition, after April 23, 1998, when we decide
to close a store beyond the quarter in which the closure decision is made, it is
reviewed for impairment and depreciable lives are adjusted. The impairment
evaluation is based on the estimated cash flows from continuing use until the
expected disposal date plus the expected terminal value.
Considerable management judgment is necessary to estimate future cash
flows. Accordingly, actual results could vary significantly from our estimates.
Impairment of Investments in Unconsolidated Affiliates and Enterprise-Level
Goodwill. Our methodology for determining and measuring impairment of our
investments in unconsolidated affiliates and enterprise-level goodwill is
similar to the methodology we use for our restaurants except (a) the recognition
test for an investment in an unconsolidated affiliate compares the carrying
amount of our investment to a forecast of our share of the unconsolidated
affiliate's undiscounted cash flows including interest and taxes instead of
undiscounted cash flows before interest and taxes used for our restaurants and
(b) enterprise-level goodwill is generally evaluated at a country level instead
of by individual restaurant. Also, we record impairment charges related to our
investments in unconsolidated affiliates whenever other circumstances indicate
that a decrease in the value of an investment has occurred which is other than
temporary.
Considerable management judgment is necessary to estimate future cash
flows. Accordingly, actual results could vary significantly from our estimates.
New Accounting Pronouncement Not Yet Adopted. In June 1998, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 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. SFAS 133
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 the
related change in fair value on the hedged item in the consolidated statement of
operations, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
In June 1999, the FASB amended SFAS 133 to extend the required adoption
date from fiscal years beginning after June 15, 1999 to fiscal years beginning
after June 15, 2000. The amendment was in response to
51
<PAGE>
issues identified by FASB constituents regarding implementation difficulties. A
company may implement SFAS 133 as of the beginning of any fiscal quarter after
issuance, (that is, fiscal quarters beginning June 16, 1998 and thereafter).
SFAS 133 cannot be applied retroactively. When adopted, SFAS 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, 1998 (and, at the company's election, before January 1, 1999).
We have not yet quantified the effects of adopting SFAS 133 on our
financial statements or determined the timing or method of our adoption of SFAS
133. However, the adoption of SFAS 133 could increase volatility in our earnings
and other comprehensive income.
Reclassifications. We have reclassified certain items in the accompanying
Consolidated Financial Statements for prior periods to be comparable with the
classification we adopted for the fiscal year ended December 25, 1999. These
reclassifications had no effect on previously reported net income or loss.
Note 3 - Comprehensive Income
Accumulated Other Comprehensive Income includes:
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- ---------
<S> <C> <C> <C>
Foreign currency translation adjustment arising during the period $ 15 $ (21) $ (90)
Less: Foreign currency translation adjustment included in net income (loss) - 1 (11)
------ -------- ---------
Net foreign currency translation adjustment $ 15 $ (20) $ (101)
====== ======== =========
</TABLE>
Accumulated Other Comprehensive Income consisted of the following
components as of December 25, 1999 and December 26, 1998:
1999 1998
--------- ---------
Foreign currency translation adjustment $ (133) $ (148)
Minimum pension liability adjustment - (2)
--------- ---------
Total accumulated other comprehensive income $ (133) $ (150)
========= =========
Note 4 - Earnings Per Common Share ("EPS")
1999 1998
--------- ---------
Net income $ 627 $ 445
========= =========
Basic EPS:
- ----------
Weighted-average common shares outstanding 153 153
========= =========
Basic EPS $ 4.09 $ 2.92
========= =========
Diluted EPS:
- ------------
Weighted-average common shares outstanding 153 153
Shares assumed issued on exercise of dilutive
share equivalents 24 20
Shares assumed purchased with proceeds of
dilutive share equivalents (17) (17)
--------- ---------
Shares applicable to diluted earnings 160 156
========= =========
Diluted EPS $ 3.92 $ 2.84
========= =========
Unexercised employee stock options to purchase approximately 2.5 million
and 1 million shares of our Common Stock for the years ended December 25, 1999
and December 26, 1998, respectively, were not
52
<PAGE>
included in the computation of diluted EPS because their exercise prices were
greater than the average market price of our Common Stock during the year.
We have omitted EPS data for the year ended December 27, 1997 since we were
not an independent, publicly owned company with a capital structure of our own
for the entire year.
Note 5 - Items Affecting Comparability of Net Income (Loss)
Accounting Changes
- ------------------
In 1998 and 1999, we adopted several accounting and human resource policy
changes (collectively, the "accounting changes") that impacted our 1999
operating profit. These changes, which we believe are material in the aggregate,
fall into three categories:
o required changes in Generally Accepted Accounting Principles ("GAAP"),
o discretionary methodology changes implemented to more accurately measure
certain liabilities and
o policy changes driven by our human resource and accounting standardization
programs.
Required Changes in GAAP- Effective December 27, 1998, we adopted Statement
of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 identifies the characteristics
of internal-use software and specifies that once the preliminary project stage
is complete, direct external 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.
Previously, we expensed all software development and procurement costs as
incurred. In 1999, we capitalized approximately $13 million of internal software
development costs and third party software costs that we would have previously
expensed. As of December 25, 1999, no interest costs were capitalized due to the
insignificance of amounts. The majority of the software being developed is not
yet ready for its intended use. The amortization of assets that became ready for
their intended use in 1999 was immaterial.
In addition, we adopted Emerging Issues Task Force Issue No. 97-11 ("EITF
97-11"), "Accounting for Internal Costs Relating to Real Estate Property
Acquisitions," upon its issuance in March 1998. EITF 97-11 limits the
capitalization of internal real estate acquisition costs to those site-specific
costs incurred subsequent to the time that the real estate acquisition is
probable. We consider acquisition of the property probable upon final site
approval. In the first quarter of 1999, we also made a discretionary policy
change limiting the types of costs eligible for capitalization to those direct
cost types described as capitalizable under SOP 98-1. Prior to the adoption of
EITF 97-11, all pre-acquisition real estate activities were considered
capitalizable. This change unfavorably impacted our 1999 operating profit by
approximately $3 million.
To conform to the Securities and Exchange Commission's April 23, 1998
letter interpretation 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," our store closure accounting policy was changed in 1998.
Effective for closure decisions made on or subsequent to April 23, 1998, we
recognize store closure costs when we have closed the restaurant within the same
quarter the closure decision is made. When we decide to close a restaurant
beyond the quarter in which the closure decision is made, it is reviewed for
impairment. The impairment evaluation is based on the estimated cash flows from
continuing use until the expected date of disposal plus the expected terminal
value. If the restaurant is not fully impaired, we continue to depreciate the
assets over their estimated remaining useful life. Prior to April 23, 1998, we
recognized store closure costs and generally suspended depreciation and
amortization when we decided to close a restaurant within the next twelve
months. This change resulted in additional depreciation and amortization of
approximately $3 million through April 23, 1999.
53
<PAGE>
Discretionary Methodology Changes- In 1999, the methodology used by our
independent actuary was refined and enhanced to provide a more reliable estimate
of the self-insured portion of our current and prior years' ultimate loss
projections related to workers' compensation, general liability and automobile
liability insurance programs (collectively "casualty loss(es)"). Our prior
practice was to apply a fixed factor to increase our independent actuary's
ultimate loss projections which was at the 51% confidence level for each year to
approximate our targeted 75% confidence level. Confidence level means the
likelihood that our actual casualty losses will be equal to or below those
estimates. Based on our independent actuary's opinion, our prior practice
produced a very conservative confidence factor at a level higher than our target
of 75%. Our actuary now provides an actuarial estimate at our targeted 75%
confidence level in the aggregate for all self-insured years. The change in
methodology resulted in a one-time increase in our 1999 operating profit of over
$8 million.
At the end of 1998, we changed our method of determining the pension
discount rate to better reflect the assumed investment strategies we would most
likely use to invest any short-term cash surpluses. Accounting for pensions
requires us to develop an assumed interest rate on securities with which the
pension liabilities could be effectively settled. In estimating this discount
rate, we look at rates of return on high-quality corporate fixed income
securities currently available and expected to be available during the period to
maturity of the pension benefits. As it is impractical to find an investment
portfolio which exactly matches the estimated payment stream of the pension
benefits, we often have projected short-term cash surpluses. Previously, we
assumed that all short-term cash surpluses would be invested in U.S. government
securities. Our new methodology assumes that our investment strategies would be
equally divided between U.S. government securities and high-quality corporate
fixed income securities. The pension discount methodology change resulted in a
one-time increase in our 1999 operating profit of approximately $6 million.
Human Resource and Accounting Standardization Programs - In the first
quarter of 1999, we began the standardization of our U.S. personnel practices.
At the end of 1999, our vacation policies were conformed to a calendar-year
based, earn-as-you-go, use-or-lose policy. The change provided a one-time
favorable increase in our 1999 operating profit of approximately $7 million.
Other accounting policy standardization among our three U.S. Core Businesses
provided a one-time favorable increase in our 1999 operating profit of
approximately $1 million.
The impact of the above described accounting changes is summarized below:
1999
Impact
---------
GAAP $ 7
Methodology 14
Standardization 8
---------
Total $ 29
=========
These changes impacted our results as follows:
Restaurant margin $ 11
General and administrative expenses 18
---------
Operating Profit $ 29
=========
U.S. $ 15
International -
Unallocated 14
---------
Total $ 29
=========
After-tax $ 18
=========
Per diluted share $ 0.11
=========
54
<PAGE>
1997 Fourth Quarter Charge
- --------------------------
In the fourth quarter of 1997, we recorded a $530 million unusual charge
($425 million after-tax). The charge included estimates for (1) costs of closing
stores, 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; (3) impairment of certain restaurants intended to be
used in the business; (4) impairment of certain investments in unconsolidated
affiliates to be retained; and (5) costs of related personnel reductions. Of the
$530 million charge, approximately $401 million related to asset writedowns and
approximately $129 million related to liabilities, primarily occupancy-related
costs and, to a much lesser extent, severance. The liabilities were expected to
be settled from cash flows provided by operations. Through December 25, 1999,
the amounts used apply only to the actions covered by the charge.
The components of the 1997 fourth quarter charge are detailed below:
<TABLE>
<CAPTION>
U.S. International Worldwide
-------- --------------- -----------
<S> <C> <C> <C>
Store closure costs $ 141 $ 72 $ 213
Refranchising losses 77 59 136
Impairment charges 12 49 61
-------- --------------- -----------
Total facility actions net loss 230 180 410
-------- --------------- -----------
Impairment of investments in unconsolidated
affiliates - 79 79
Severance and other 18 23 41
-------- --------------- -----------
Total unusual items 18 102 120
-------- --------------- -----------
Total fourth quarter charges $ 248 $ 282 $ 530
======== =============== ===========
Total fourth quarter charges, after-tax $ 176 $ 249 $ 425
======== =============== ===========
</TABLE>
During 1999 and 1998, we continued to re-evaluate our prior estimates of
the fair market value of units to be refranchised or closed and other
liabilities arising from the charge. In 1999, we recorded favorable adjustments
of $13 million ($10 million after-tax) and $11 million ($10 million after-tax)
included in facility actions net gain and unusual items, respectively. These
adjustments relate to lower-than-expected losses from stores disposed of,
decisions to retain stores originally expected to be disposed of and changes in
estimated costs. In 1998, favorable adjustments of $54 million ($33 million
after-tax) and $11 million ($7 million after-tax) were included in facility
actions net gain and unusual items, respectively. These adjustments primarily
related to decisions to retain certain stores originally expected to be disposed
of, lower-than-expected losses from stores disposed of and favorable lease
settlements with certain lessors related to stores closed.
Our operating profit includes benefits from the suspension of depreciation
and amortization of approximately $12 million ($7 million after-tax) and $33
million ($21 million after-tax) in 1999 and 1998, respectively, for stores held
for disposal. The relatively short-term benefits from depreciation and
amortization suspension related to stores that were operating at the end of the
respective periods ceased when the stores were refranchised, closed or a
subsequent decision was made to retain the stores.
Although we originally expected to refranchise or close all 1,392 units
included in the original charge by year-end 1998, the disposal of 531 units was
delayed. In 1999, we disposed of 326 units, and decisions were made to retain
195 units originally expected to be disposed of in 1999.
55
<PAGE>
Below is a summary of activity through 1999 related to the units covered by
the 1997 fourth quarter charge:
Units Expected to be Total Units
Closed Refranchised Remaining
-------- -------------- -----------
Units at December 27, 1997 740 652 1,392
Units disposed of (426) (320) (746)
Units retained (88) (20) (108)
Change in method of disposal (109) 109 -
Other 6 (13) (7)
-------- -------------- -----------
Units at December 26, 1998 123 408 531
Units disposed of (79) (247) (326)
Units retained (29) (166) (195)
Change in method of disposal (21) 21 -
Other 6 (16) (10)
-------- -------------- -----------
Units at December 25, 1999 - - -
======== ============== ===========
Below is a summary of the 1999 and 1998 activity related to our asset
valuation allowances and liabilities recognized as a result of the 1997 fourth
quarter charge:
Asset
Valuation
Allowances Liabilities Total
------------ ------------- ---------
Balance at December 27, 1997 $ 261 $ 129 $ 390
Amounts used (131) (54) (185)
(Income) expense impacts:
Completed transactions (27) (7) (34)
Decision changes (22) (17) (39)
Estimate changes 15 (7) 8
Other 1 - 1
------------ ------------- ---------
Balance at December 26, 1998 $ 97 $ 44 $ 141
Amounts used (87) (32) (119)
(Income) expense impacts:
Completed transactions (5) - (5)
Decision changes 1 (3) (2)
Estimate changes (7) (9) (16)
Other 1 - 1
------------ ------------- ---------
Balance at December 25, 1999 $ - $ - $ -
============ ============= =========
Facility Actions Net (Gain) Loss
- --------------------------------
Facility actions net (gain) loss consists of three components:
o Gains and losses on sales of our restaurants to new and existing
franchisees,
o Costs of closing our underperforming stores and
o Impairment charges both for restaurants we intend to continue to use in the
business and, since April 23, 1998, restaurants we intend to close beyond
the quarter in which the closure decision is made.
56
<PAGE>
The components of facility actions net (gain) loss for 1999, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- --------------------------
(Excluding (Excluding
1997 4th Qtr. 1997 4th Qtr. (Excluding
Charge Charge 1997 4th
Total Adjustments) Total Adjustments) Total Qtr. Charge)
--------- --------------- --------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
U.S.
- ----
Refranchising net gains(a) $ (405) $ (396) $ (275) $ (249) $ (67) $ (144)
Store closure net costs 5 15 (9) 27 154 13
Impairment charges for stores that
will continue to be used in the
business 6 6 23 23 59 47
Impairment charges for stores to be
closed in the future 9 9 5 5 - -
--------- --------------- --------- --------------- --------- --------------
Facility actions net (gain) loss (385) (366) (256) (194) 146 (84)
--------- --------------- --------- --------------- --------- --------------
International
- -------------
Refranchising net gains(a) (17) (22) (4) (32) (45) (104)
Store closure net costs 8 7 (18) 2 94 22
Impairment charges for stores that
will continue to be used in the
business 10 10 2 2 52 3
Impairment charges for stores to be
closed in the future 3 3 1 1 - -
--------- --------------- --------- --------------- --------- --------------
Facility actions net (gain) loss 4 (2) (19) (27) 101 (79)
--------- --------------- --------- --------------- --------- --------------
Worldwide
- ---------
Refranchising net gains(a) (422) (418) (279) (281) (112) (248)
Store closure net costs 13 22 (27) 29 248 35
Impairment charges for stores that
will continue to be used in the
business(b) 16 16 25 25 111 50
Impairment charges for stores to be
closed in the future(b) 12 12 6 6 - -
--------- --------------- --------- --------------- --------- --------------
Facility actions net (gain) loss $ (381) $ (368) $ (275) $ (221) $ 247 $ (163)
========= =============== ========= =============== ========= ==============
Facility actions net (gain) loss,
after-tax $ (226) $ (216) $ (162) $ (129) $ 163 $ (137)
========= =============== ========= =============== ========= ==============
</TABLE>
(a) Includes initial franchise fees in the U.S. of $38 million in 1999 and $39
million in both 1998 and 1997, and in International of $7 million, $5
million and $2 million in 1999, 1998 and 1997, respectively. See Note 6.
(b) Impairment charges for 1999 and 1998 were recorded against the following
asset categories:
1999 1998
------ ------
Property, plant and equipment $ 25 $ 25
Intangible assets:
Goodwill 1 4
Reacquired franchise rights 2 2
------ ------
Total impairment $ 28 $ 31
====== ======
57
<PAGE>
The following table displays a summary of the 1999 and 1998 activity
related to all stores disposed of or held for disposal including the stores
covered by the fourth quarter 1997 charge. We believe that the remaining
carrying amounts are adequate to complete our disposal actions.
Asset
Valuation
Allowances Liabilities
------------ ------------
Carrying amount at December 27, 1997 $ 291 $ 115
Amounts used (148) (36)
(Income) expense impact:
New decisions 16 5
Estimate/decision changes (33) (8)
Other 1 1
------------ ------------
Carrying amount at December 26, 1998 127 77
Amounts used (100) (36)
(Income) expense impact:
New decisions 9 15
Estimate/decision changes (20) 15
Other 4 -
------------ ------------
Carrying amount at December 25, 1999 $ 20 $ 71
============ ============
The carrying values of assets held for disposal (which include stores, our
idle processing facility in Wichita, Kansas and a minority interest investment
in a non-core business in 1998) by reportable operating segment as of December
25, 1999 and December 26, 1998 were as follows:
1999 1998
------ -------
U.S. $ 40 $ 111
International - 46
------ -------
Total $ 40 $ 157
====== =======
We anticipate that all assets held for disposal at December 25, 1999 will
be disposed of during 2000.
The results of operations for stores held for disposal or disposed of in
1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- --------- --------
<S> <C> <C> <C>
Stores held for disposal or disposed of in 1999:
Sales $ 734 $ 1,271 $ 1,155
Restaurant margin 76 147 114
Stores disposed of in 1998 and 1997:
Sales $ - $ 637 $ 1,779
Restaurant margin - 55 132
</TABLE>
The loss of restaurant margin from the disposal of these stores is
mitigated in income before taxes by the increased franchise fees for stores
refranchised, lower general and administrative expenses and reduced interest
costs primarily resulting from the reduction of debt by the after-tax cash
proceeds from our refranchising activities. The margin reported above includes
the benefit from the suspension of depreciation and amortization of
approximately $9 million ($8 million in the U.S. and $1 million in
International), $32 million ($24 million in the U.S. and $8 million in
International) and $17 million in the U.S. in 1999, 1998 and 1997, respectively,
on assets held for disposal.
58
<PAGE>
Unusual Items
- -------------
1999 1998 1997
-------- ------- ---------
U.S. $ 48 $ 11 $ 85
International 3 4 99
-------- ------- ---------
Worldwide $ 51 $ 15 $ 184
======== ======= =========
After-tax $ 29 $ 3 $ 165
======== ======= =========
On January 31, 2000, AmeriServe Food Distribution, Inc. ("AmeriServe"), our
primary U.S. distributor, filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. As a result of the bankruptcy, we wrote off approximately $41
million of amounts owed to us by AmeriServe, including a $15 million unsecured
loan. See Note 22. In addition to the AmeriServe write-off, unusual items
included the following in 1999: (1) an increase in the estimated costs of
settlement of certain wage and hour litigation and associated defense and other
costs incurred, as more fully described in Note 21; (2) favorable adjustments to
our 1997 fourth quarter charge related to lower actual costs; (3) the writedown
to estimated fair market value less cost to sell of our idle Wichita processing
facility; (4) costs associated with the pending formation of international
unconsolidated affiliates in Canada and Poland; (5) the impairment of
enterprise-level goodwill in one of our international businesses; and (6)
additional severance and other exit costs related to 1998 strategic decisions to
streamline the infrastructure of our international businesses. The estimated
fair market value of our idle Wichita processing facility was determined by
using the estimated selling price based primarily on an evaluation by a
qualified third party.
Unusual items in 1998 included: (1) an increase in the estimated costs of
settlement of certain wage and hour litigation and associated defense and other
costs incurred; (2) severance and other exit costs related to 1998 strategic
decisions to streamline the infrastructure of our international businesses; (3)
favorable adjustments to our 1997 fourth quarter charge related to anticipated
actions that were not taken, primarily severance; (4) the writedown to estimated
fair market value less costs to sell of our minority interest in a privately
held non-core business, previously carried at cost; and (5) reversals of certain
valuation allowances and lease liabilities relating to better-than-expected
proceeds from the sale of properties and settlement of lease liabilities
associated with properties retained upon the sale of a Non-core Business.
Unusual items in 1997 included: (1) $120 million ($125 million after-tax)
of unusual asset impairment and severance charges included in our 1997 fourth
quarter charge described above; (2) charges to further reduce the carrying
amounts of the Non-core Businesses held for disposal to estimated market value,
less costs to sell; and (3) charges relating to the estimated costs of
settlement of certain wage and hour litigation and the associated defense and
other costs incurred.
Note 6 - Franchise and License Fees
1999 1998 1997
- -------------------------------------------------------------------------
Initial fees, including renewal fees $ 71 $ 67 $ 86
Initial franchise fees included in
refranchising gains (45) (44) (41)
-------- --------- --------
26 23 45
Continuing fees 697 604 533
-------- --------- --------
$ 723 $ 627 $ 578
======== ========= ========
Initial fees in 1997 include $24 million of special KFC renewal fees.
- --------------------------------------------------------------------------
59
<PAGE>
Note 7 - Other (Income) Expense
1999 1998 1997
- ------------------------------------------------------------------------------
Equity income from investments in
unconsolidated affiliates $ (19) $ (18) $ (8)
Foreign exchange net loss (gain) 3 (6) 16
------------ ------------ ------------
$ (16) $ (24) $ 8
============ ============ ============
- --------------------------------------------------------------------------------
Note 8 - Property, Plant and Equipment, net
1999 1998
- ------------------------------------------------------------------------------
Land $ 572 $ 707
Buildings and improvements 2,553 2,861
Capital leases, primarily buildings 102 124
Machinery and equipment 1,598 1,795
------------ ------------
4,825 5,487
Accumulated depreciation and amortization (2,279) (2,491)
Disposal valuation allowances (15) (100)
------------ ------------
$ 2,531 $ 2,896
============ ============
- --------------------------------------------------------------------------------
Note 9 - Intangible Assets, net
1999 1998
- ------------------------------------------------------------------------------
Reacquired franchise rights $ 326 $ 418
Trademarks and other identifiable intangibles 124 123
Goodwill 77 110
------------ ------------
$ 527 $ 651
============ ============
In determining the above amounts, we have subtracted accumulated
amortization of $456 million for 1999 and $473 million for 1998. We have also
subtracted disposal valuation allowances of $18 million for 1998.
- --------------------------------------------------------------------------------
Note 10 - Accounts Payable and Other Current Liabilities
1999 1998
- ------------------------------------------------------------------------------
Accounts payable $ 375 $ 476
Accrued compensation and benefits 281 310
Other accrued taxes 85 98
Other current liabilities 344 399
------------ ------------
$ 1,085 $ 1,283
============ ============
- --------------------------------------------------------------------------------
60
<PAGE>
Note 11 - Short-term Borrowings and Long-term Debt
1999 1998
- --------------------------------------------------------------------------
Short-term Borrowings
Current maturities of long-term debt $ 47 $ 46
Other 70 50
---------- ----------
$ 117 $ 96
========== ==========
Long-term Debt
Senior, unsecured Term Loan Facility, due
October 2002 $ 774 $ 926
Senior, unsecured Revolving Credit Facility,
expires October 2002 955 1,815
Senior, Unsecured Notes, due May 2005 (7.45%) 352 352
Senior, Unsecured Notes, due May 2008 (7.65%) 251 251
Capital lease obligations (see Note 12) 97 117
Other, due through 2010 (6% - 11%) 9 21
---------- ----------
2,438 3,482
Less current maturities of long-term debt (47) (46)
---------- ----------
$ 2,391 $ 3,436
========== ==========
Our primary bank credit agreement, as amended in March 1999 and February
2000, is currently comprised of a senior, unsecured Term Loan Facility and a $3
billion senior unsecured Revolving Credit Facility (collectively referred to as
the "Credit Facilities") which mature on October 2, 2002. Our U.S. Core
Businesses have guaranteed the Credit Facilities. Amounts borrowed under the
Term Loan Facility that we repay may not be reborrowed.
The Credit Facilities are subject to various covenants including financial
covenants relating to maintenance of specific leverage and fixed charge coverage
ratios. In addition, the Credit Facilities contain affirmative and negative
covenants including, among other things, limitations on certain additional
indebtedness including guarantees of indebtedness, cash dividends, aggregate
non-U.S. investment and certain other transactions, as defined in the agreement.
Since October 6, 1997, we have complied with all covenants governing the Credit
Facilities. The Credit Facilities contain mandatory prepayment terms for certain
capital market transactions and refranchising of restaurants as defined in the
agreement.
The amended Credit Facilities, under which at amendment we voluntarily
reduced our maximum borrowing under the Revolving Credit Facility by $250
million, gives us additional flexibility with respect to acquisitions and other
permitted investments and the repurchase of Common Stock or payment of
dividends. We deferred the Credit Facilities amendment costs of approximately
$2.6 million. These costs are being amortized to interest expense over the
remaining life of the Credit Facilities. Additionally, an insignificant amount
of our previously deferred original Credit Facilities costs was written off in
the second quarter of 1999 as a result of this amendment.
In addition, on February 25, 2000, we entered into an agreement to amend
certain terms of our Credit Facilities. This amendment will give us additional
flexibility with respect to permitted liens, restricted payments, other
permitted investments and transferring assets to foreign subsidiaries. We
deferred the Credit Facilities amendment costs of approximately $2 million.
These costs will be amortized into interest expense over the remaining life of
the Credit Facilities.
Interest on amounts borrowed is payable at least quarterly at rates which
are variable, based principally on the London Interbank Offered Rate ("LIBOR")
plus a variable margin factor as defined in the credit agreement. At December
25, 1999 and December 26, 1998, the weighted average interest rate on our
variable rate debt was 6.6% and 6.2%, respectively, which includes the effects
of associated interest rate swaps and collars. See Note
61
<PAGE>
13 for a discussion of our use of derivative instruments, our management of
inherent credit risk and fair value information related to debt and interest
rate swaps.
At December 25, 1999, we had unused borrowings available under the
Revolving Credit Facility of $1.9 billion, net of outstanding letters of credit
of $152 million. Under the terms of the Revolving Credit Facility, we may borrow
up to $3.0 billion until maturity less outstanding letters of credit. We pay a
facility fee on the Revolving Credit Facility. The variable margin factor and
facility fee rate is determined based on the more favorable of our leverage
ratio or third-party senior debt ratings as defined in the agreement. Facility
fees accrued at December 25, 1999 and December 26, 1998 were $1.1 million and
$1.7 million, respectively.
The initial borrowings of $4.55 billion under the Credit Facilities at
inception in October 1997 were primarily used to fund a $4.5 billion Spin-off
related payment to PepsiCo. We used the remaining $50 million of the proceeds to
provide cash collateral securing certain obligations previously secured by
PepsiCo, to pay fees and expenses related to the Spin-off and the establishment
of the Credit Facilities and for general corporate purposes.
In 1997, we filed with the Securities and Exchange Commission a shelf
registration statement with respect to offerings of up to $2 billion of senior
unsecured debt. In 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"). We used the proceeds, net of issuance
costs, to reduce existing borrowings under the Credit Facilities. We carry the
Notes net of related discounts, which are being amortized over the life of the
Notes. The unamortized discount for both issues was approximately $1.0 million
at December 25, 1999 and $1.1 million at December 26, 1998. The amortization
during 1999 and 1998 was not significant. Interest is payable May 15 and
November 15 and commenced on November 15, 1998. In anticipation of the issuance
of the Notes, we entered into $600 million in treasury locks (the "Locks") to
reduce interest rate sensitivity in pricing of the Notes. Concurrent with the
issuance of the Notes, the Locks were settled at a gain, which is being
amortized to interest expense over the life of the Notes. The effective interest
rate on the 2005 Notes and the 2008 Notes is 7.6% and 7.8%, respectively.
Interest expense on the short-term borrowings and long-term debt was $218
million, $291 million and $290 million in 1999, 1998 and 1997, respectively.
Interest expense in 1997 included the PepsiCo interest allocation of $188
million.
The annual maturities of long-term debt through 2004 and thereafter,
excluding capital lease obligations, are 2000 - $37 million; 2001 - $3 million;
2002 - $1.7 billion; 2003 - $.7 million; 2004 - $352 million and $252 million
thereafter.
Note 12 - Leases
We have non-cancelable commitments under both capital and long-term
operating leases, primarily for our restaurants. Capital and operating lease
commitments expire at various dates through 2087 and, in many cases, provide for
rent escalations and renewal options. Most leases require us to pay related
executory costs, which include property taxes, maintenance and insurance.
62
<PAGE>
Future minimum commitments and sublease receivables under non-cancelable
leases are set forth below:
Commitments Sublease Receivables
------------------------ --------------------------
Direct
Capital Operating Financing Operating
--------- ----------- ----------- -----------
2000 $ 17 $ 190 $ 2 $ 13
2001 16 160 2 12
2002 15 142 2 10
2003 15 123 1 9
2004 13 109 1 7
Thereafter 112 617 11 41
--------- ----------- ----------- -----------
$ 188 $ 1,341 $ 19 $ 92
========= =========== =========== ===========
At year-end 1999, the present value of minimum payments under capital
leases was $97 million, after deducting $91 million representing imputed
interest.
The details of rental expense and income are set forth below:
1999 1998 1997
------ ------- -------
Rental expense
Minimum $ 263 $ 308 $ 341
Contingent 28 25 30
------ ------- -------
$ 291 $ 333 $ 371
====== ======= =======
Minimum rental income $ 8 $ 18 $ 19
====== ======= =======
Contingent rentals are based on sales levels in excess of stipulated amounts
contained in the lease agreements.
Note 13 - Financial Instruments
Derivative Instruments
- ----------------------
Our policy prohibits the use of derivative instruments for trading
purposes, and we have procedures in place to monitor and control their use. Our
use of derivative instruments has included interest rate swaps, collars and
forward rate agreements. In addition, we utilize on a limited basis foreign
currency forward contracts and commodity futures contracts. Our interest rate
and foreign currency derivative contracts are entered into with financial
institutions and our commodity futures contracts are traded on national
exchanges.
We enter into interest rate swaps, collars, and forward rate agreements
with the objective of reducing our exposure to interest rate risk. We entered
into interest rate swap and forward rate agreements to convert a portion of our
variable rate bank debt to fixed rate. Reset dates and the floating rate indices
on the swaps and forward rate agreements match those of the underlying bank
debt. Accordingly, any market risk or opportunity associated with the swaps and
forward rate agreements is offset by the opposite market impact on the related
debt. At December 25, 1999 and December 26, 1998, we had outstanding interest
rate swaps with notional amounts of $800 million and $1.2 billion, respectively.
Under the contracts, we agree with other parties to exchange, at specified
intervals, the difference between variable rate and fixed rate amounts
calculated on a notional principal amount. At both December 25, 1999 and
December 26, 1998, our average pay rate was 5.9%. Our payables under the related
swaps aggregated $0.4 million and $1.6 million at December 25, 1999 and December
26, 1998, respectively. The swaps mature at various dates through 2001.
63
<PAGE>
During 1999 and 1998, we entered into interest rate collars to reduce
interest rate sensitivity on a portion of our variable rate bank debt. Interest
rate collars effectively lock in a range of interest rates by establishing a cap
and floor. Reset dates and the floating index on the collars match those of the
underlying bank debt. If interest rates remain within the collared cap and
floor, no payments are made. If rates rise above the cap level, we receive a
payment. If rates fall below the floor level, we make a payment. At December 25,
1999, we did not have any outstanding interest rate collars. At December 26,
1998, we had outstanding interest rate collars of $700 million, and our average
pay rate was 5.4%. Under the contracts, we agreed with other parties to
exchange, as required, the difference between the effective LIBOR rate and the
cap or floor rate if the effective LIBOR rates fall outside the collared range.
We enter into foreign currency exchange contracts with the objective of
reducing our exposure to earnings and cash flow volatility associated with
foreign currency fluctuations. In 1999, we entered into forward contracts to
hedge our exposure related to certain foreign currency receivables. The notional
amount and maturity dates of the contracts match those of the underlying
receivables. Accordingly, any market risk or opportunity associated with these
contracts is offset by the opposite market impact on the related receivables.
Our credit risk from the interest rate swap, collar and forward rate
agreements and foreign exchange contracts is dependent both on the movement in
interest and currency rates and possibility of non-payment by counterparties. We
mitigate credit risk by entering into these agreements with high-quality
counterparties, netting swap and forward rate payments within contracts and
limiting payments associated with the collars to differences outside the
collared range.
Open commodity future contracts and deferred gains and losses at year-end
1999 and 1998, as well as gains and losses recognized as part of cost of sales
in 1999, 1998 and 1997, were not significant.
Fair Value
- ----------
Excluding the financial instruments included in the table below, the
carrying amounts of our other financial instruments approximate fair value.
The carrying amounts and fair values of TRICON's financial instruments are
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Debt
Short-term borrowings and long-term debt,
excluding capital leases $ 2,411 $ 2,377 $ 3,415 $ 3,431
Debt-related derivative instruments
Open contracts in an (asset) liability
position - (3) 2 17
---------- ---------- ---------- ---------
Debt, excluding capital leases $ 2,411 $ 2,374 $ 3,417 $ 3,448
========== ========== ========== =========
Guarantees $ - $ 27 $ - $ 24
========== ========== ========== =========
</TABLE>
We estimated the fair value of debt, debt-related derivative instruments
and guarantees using market quotes and calculations based on market rates. See
Note 2 for recently issued accounting pronouncements relating to financial
instruments.
64
<PAGE>
Note 14 - Pension Plans and Postretirement Medical Benefits
We sponsor noncontributory defined benefit pension plans covering
substantially all full-time U.S. salaried employees and certain hourly employees
and noncontributory defined benefit pension plans covering certain international
employees. In addition, we provide postretirement health care benefits to
eligible retired employees and their dependents, principally in the U.S.
Salaried retirees who have 10 years of service and attain age 55 are eligible to
participate in the postretirement benefit plans; since 1994, these plans have
included retiree cost sharing provisions. We base benefits generally on years of
service and compensation or stated amounts for each year of service.
The components of net periodic benefit cost are set forth below:
<TABLE>
<CAPTION>
Pension Benefits
- --------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 20 $ 21 $ 18
Interest cost 22 20 17
Expected return on plan assets (24) (21) (19)
Amortization of prior service cost 1 - -
Amortization of transition (asset) obligation - (2) (4)
Recognized actuarial loss - 2 1
--------- -------- --------
Net periodic benefit cost $ 19 $ 20 $ 13
========= ======== ========
Additional loss recognized due to:
Curtailment $ 4 $ - $ -
Special termination benefits - 3 2
Postretirement Medical Benefits
- --------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
Service cost $ 2 $ 2 $ 2
Interest cost 3 3 2
Amortization of prior service cost (2) (2) (2)
--------- -------- --------
Net periodic benefit cost $ 3 $ 3 $ 2
========= ======== ========
Additional (gain) loss recognized due to:
Curtailment $ (1) $ (3) $ -
Special termination benefits - 1 -
</TABLE>
Prior service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits.
65
<PAGE>
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Medical Benefits
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 315 $ 286 $ 38 $ 38
Service cost 20 21 2 2
Interest cost 22 20 3 3
Plan amendments 6 - - -
Curtailment gain (5) - (1) (3)
Special termination benefits - 1 - 1
Benefits and expenses paid (24) (13) (2) (2)
Actuarial (gain) loss (19) - 5 (1)
--------- --------- --------- ---------
Benefit obligation at end of year 315 315 45 38
--------- --------- --------- ---------
Change in plan assets
Fair value of plan assets at beginning of year 259 270 - -
Actual return on plan assets 51 1 - -
Employer contributions 5 1 - -
Benefits paid (23) (11) - -
Administrative expenses (2) (2) - -
--------- --------- --------- ---------
Fair value of plan assets at end of year 290 259 - -
--------- --------- --------- ---------
Reconciliation of funded status
Funded status (25) (56) (45) (38)
Unrecognized actuarial (gain) loss (35) 11 3 (2)
Unrecognized prior service costs 7 2 (2) (4)
--------- --------- --------- ---------
Net amount recognized at year-end $ (53) $ (43) $ (44) $ (44)
========= ========= ========= =========
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability $ (53) $ (46) $ (44) $ (44)
Accumulated other comprehensive income - 3 - -
--------- --------- --------- ---------
Net amount recognized at year-end $ (53) $ (43) $ (44) $ (44)
========= ========= ========= =========
Other comprehensive income attributable to
change in additional minimum liability
recognition $ (3) $ 3
Additional year-end information for pension
plans with benefit obligations in excess
of plan assets:
Benefit obligation $ 315 $ 315
Fair value of plan assets 290 259
Additional year-end information for pension
plans with accumulated benefit obligations
in excess of plan assets:
Projected benefit obligation $ 31 $ 46
Accumulated benefit obligation 12 29
Fair value of plan assets - 15
</TABLE>
66
<PAGE>
The assumptions used to compute the information above are set forth below:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Medical Benefits
1999 1998 1999 1998
------- ------ ------ -------
<S> <C> <C> <C> <C>
Discount rate - projected benefit obligation 7.8% 6.8% 7.6% 7.0%
Expected long-term rate of return on plan assets 10.0% 10.0% - -
Rate of compensation increase 5.5% 4.5% 5.5% 4.5%
</TABLE>
We have assumed the annual increase in cost of postretirement medical
benefits was 6.5% in 1999 and will be 6.0% in 2000. We are assuming the rate
will decrease 0.5% to an ultimate rate of 5.5% in the year 2001 and remain at
that level thereafter. There is a cap on our medical liability for certain
retirees, which is expected to be reached between the years 2001-2004; at that
point our cost for a retiree will not increase.
Assumed health care cost trend rates have a significant effect on the
amounts reported for our postretirement health care plans. The effects of a one
percentage point increase or decrease in the assumed health care cost trend
rates on postretirement benefit obligations are $2.3 million and $2.5 million,
respectively. The effects of a one percentage point increase or decrease in the
assumed health care cost trend rates on total service and interest cost
components are not significant.
At the end of 1998, we changed the method for determining our pension and
postretirement medical benefit discount rate to better reflect the assumed
investment strategies we would most likely use to invest any short-term cash
surpluses. See Note 5.
Note 15 - Employee Stock-Based Compensation
At year-end 1999, we had four stock option plans in effect: the TRICON
Global Restaurants, Inc. Long Term Incentive Plan ("1999 LTIP"), the 1997
Long-Term Incentive Plan ("1997 LTIP"), the TRICON Global Restaurants, Inc.
Restaurant General Manager Stock Option Plan ("YUMBUCKS") and the TRICON Global
Restaurants, Inc. SharePower Plan ("SharePower").
We may grant options to purchase up to 7.6 million and 22.5 million shares
of stock under the 1999 LTIP and 1997 LTIP, respectively, at a price equal to or
greater than the average market price of the stock on the date of grant. New
options we grant can have varying vesting provisions and exercise periods.
Previously granted options vest in periods ranging from immediate to 2006 and
expire ten to fourteen years after grant. Potential awards to employees and
non-employee directors under the 1999 LTIP include stock options, incentive
stock options, stock appreciation rights, restricted stock, stock units,
restricted stock units, performance shares and performance units. Potential
awards to employees and non-employee directors under the 1997 LTIP include stock
options, incentive stock options, stock appreciation rights, restricted stock
and performance restricted stock units. We have issued only stock options and
performance restricted stock units under the 1997 LTIP and have yet to grant any
awards under the 1999 LTIP.
We may grant options to purchase up to 7.5 million shares of stock under
YUMBUCKS at a price equal to or greater than the average market price of the
stock on the date of grant. YUMBUCKS options granted have a four year vesting
period and expire ten years after grant. We do not anticipate that any further
SharePower grants will be made although options previously granted could be
outstanding through 2006.
At the Spin-off Date, we converted certain of the unvested options to
purchase PepsiCo stock that were held by our employees to TRICON stock options
under either the 1997 LTIP or SharePower. We converted the options at amounts
and exercise prices that maintained the amount of unrealized stock appreciation
that existed
67
<PAGE>
immediately prior to the Spin-off. The vesting dates and exercise periods of the
options were not affected by the conversion. Based on their original PepsiCo
grant date, our converted options vest in periods ranging from one to ten years
and expire ten to fifteen years after grant.
Had we determined compensation cost for all TRICON option grants to
employees and non-employee directors consistent with SFAS 123, our net income
(loss) and basic and diluted earnings per Common Share would have been reduced
(increased) to the pro forma amounts indicated below:
1999 1998 1997
--------- --------- ----------
Net Income (Loss)
As reported $ 627 $ 445 $ (111)
Pro forma 597 425 (112)
Basic Earnings per Common Share
As reported $ 4.09 $ 2.92
Pro forma 3.90 2.79
Diluted Earnings per Common Share
As reported $ 3.92 $ 2.84
Pro forma 3.73 2.72
SFAS 123 pro forma loss per Common Share data for 1997 is not meaningful as
we were not an independent, publicly owned company with a capital structure of
our own for the entire year.
The effects of applying SFAS 123 in the pro forma disclosures are not
likely to be representative of the effects on pro forma net income for future
years because variables such as the number of option grants, exercises and stock
price volatility included in these disclosures may not be indicative of future
activity.
We estimated the fair value of each option grant made during 1999, 1998 and
1997 subsequent to the Spin-off as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
1999 1998 1997
------- ------- -------
Risk-free interest rate 4.9% 5.5% 5.8%
Expected life (years) 6.0 6.0 6.6
Expected volatility 29.7% 28.8% 27.5%
Expected dividend yield 0.0% 0.0% 0.0%
68
<PAGE>
A summary of the status of all options granted to employees and
non-employee directors as of December 25, 1999, December 26, 1998 and December
27, 1997, and changes during the years then ended is presented below (tabular
options in thousands):
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998 December 27, 1997
------------------------ -------------------------- -------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 22,699 $ 26.16 15,245 $ 23.03 - $ -
Conversion of PepsiCo options - - - - 13,951 21.48
Granted at price equal to average
market price 5,709 49.07 12,084 29.37 872 32.95
Granted at price greater than average
market price - - - - 1,334 31.63
Exercised (1,273) 19.51 (962) 18.93 (112) 24.80
Forfeited (2,969) 31.94 (3,668) 25.60 (800) 20.84
---------- ----------- ----------- ----------- ---------- -----------
Outstanding at end of year 24,166 $ 31.18 22,699 $ 26.16 15,245 $ 23.03
========== =========== =========== =========== ========== ===========
Exercisable at end of year 3,665 $ 22.44 3,006 $ 21.16 1,251 $ 23.84
========== =========== =========== =========== ========== ===========
Weighted average of fair value of
options granted $ 19.20 $ 11.65 $ 13.37
========== =========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 25, 1999 (tabular options in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Exercise Remaining Average Average
Prices Options Contractual Life Exercise Price Options Exercise Price
-------------------- --------- ----------------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.01 - 17.80 1,932 4.91 $ 15.22 1,582 $ 14.67
22.02 - 29.40 11,874 7.11 25.60 1,279 26.11
30.41 - 34.47 4,642 8.26 31.77 773 31.46
35.13 - 46.97 5,078 9.18 44.50 30 42.05
72.75 640 9.27 72.75 1 72.75
--------- ---------
24,166 3,665
========= =========
</TABLE>
In November 1997, we granted two awards of performance restricted stock
units of TRICON's Common Stock to our CEO. The awards were made under the 1997
LTIP and may be paid in Common Stock of TRICON or cash at the discretion of the
Board of Directors. Payments of the awards of $2.7 million and $3.6 million are
contingent upon the CEO's continued employment through January 25, 2001 and
2006, respectively, and our attainment of certain pre-established earnings
thresholds, as defined. We expense these awards over the performance periods
stipulated above; the amount included in earnings for both 1999 and 1998 was
$1.3 million and the amount for 1997 was insignificant.
69
<PAGE>
During 1999, modifications of certain 1997 LTIP and Sharepower options held
by terminated employees were made. These modifications resulted in additional
compensation expense of $5.0 million in 1999 with a corresponding increase in
our Common Stock account.
Note 16 - Other Compensation and Benefit Programs
We sponsor two deferred compensation benefit programs, the Executive Income
Deferral Program and the Restaurant Deferred Compensation Plan (the "EID Plan"
and the "RDC Plan," respectively) for eligible employees and non-employee
directors. These plans allow participants to defer receipt of all or a portion
of their annual salary and incentive compensation. As defined by the benefit
programs, we credit the amounts deferred with earnings based on certain
investment options selected by the participants.
In late 1997, we introduced a new investment option for the EID Plan
allowing participants to defer certain incentive compensation into the purchase
of phantom shares of our Common Stock at a 25% discount from the average market
price at the date of deferral (the "Discount Stock Account"). Participants bear
the risk of forfeiture of both the discount and any amounts deferred if they
voluntarily separate from employment during the two year vesting period. We
expense the intrinsic value of the discount over the vesting period.
We are phasing in certain program changes to the EID Plan during 1999 and
2000. These changes include limiting investment options, primarily to phantom
shares of our Common Stock, and requiring the distribution of investments in the
TRICON Common Stock investment options to be paid in shares of our Common Stock.
Due to these changes, in 1998 we agreed to credit to their accounts a one time
premium on January 1, 2000 to participants with an account balance as of
December 31, 1999. The premium credited totaled approximately $3 million and was
equal to 10% of the participant's account balance as of December 31, 1999,
excluding investments in the discounted TRICON Common Stock investment option
discussed above and 1999 deferrals.
Prior to January 1, 1999, we recognized as compensation expense all
investment appreciation or depreciation within the EID Plan. Subsequent to
January 1, 1999, we no longer recognize as compensation expense the appreciation
or depreciation, if any, attributable to investments in the Discount Stock
Account since investments in the Discount Stock Account can only be settled in
shares of our Common Stock. For 1998, we expensed $9 million related to
appreciation attributable to investments in the Discount Stock Account. We also
reduced our liabilities by $21 million related to investments in the Discount
Stock Account and increased the Common Stock Account by the same amount at
January 1, 1999.
For periods subsequent to January 1, 2000, we will no longer recognize as
compensation expense the appreciation or depreciation, if any, attributable to
investments in any phantom shares of our Common Stock in the EID Plan since
these investments can only be settled in shares of our Common Stock. For 1999,
we recorded a benefit of $3 million related to depreciation of investments
impacted by the January 2000 plan amendment.
Our obligations under the EID Plan as of the end of 1999 and 1998 were $50
million and $59 million, respectively. We recognized compensation expense of $6
million in 1999 and $20 million in 1998, including the estimated premium
payment, and $9 million in 1997 for the EID Plan.
Investment options in the RDC Plan consist of phantom shares of various
mutual funds and TRICON Common Stock. During 1998, RDC participants also became
eligible to purchase phantom shares of our Common Stock under YUMSOP as defined
below. We recognize compensation expense for the appreciation or depreciation,
if any, attributable to all investments in the RDC Plan as well as for our
matching contribution. Our obligations under the RDC program as of the end of
1999 and 1998 were $6 million and $7 million, respectively. We recognized
compensation expense of $1 million in 1999, 1998 and 1997 for the RDC Plan.
70
<PAGE>
We sponsor a contributory plan to provide retirement benefits under the
provision of Section 401(k) of the Internal Revenue Code ("401(k) Plan") for
eligible full-time U.S. salaried and certain hourly employees. Participants may
elect to contribute up to 15% of their eligible compensation on a pre-tax basis.
We are not required to make contributions to the Plan. In 1998, a Stock
Ownership Program ("YUMSOP") was added to the TRICON Common Stock investment
option. Under YUMSOP, we make a partial discretionary matching contribution
equal to a predetermined percentage of each participant's contribution to the
TRICON Common Stock Fund. We determine our percentage match at the beginning of
each year based on the immediate prior year performance of our Core Businesses.
We recognized as compensation expense our total matching contribution of $4
million and $1 million in 1999 and 1998, respectively.
Note 17 - 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 our 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 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.
We can redeem the rights in their entirety, prior to becoming exercisable,
at $0.01 per right under certain specified conditions. The rights expire on July
21, 2008, unless we extend that date or we have earlier redeemed or exchanged
the rights as provided in the Agreement.
This 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).
Note 18 - Share Repurchases
On September 23, 1999, we announced that our Board of Directors authorized
the repurchase of up to $350 million of our outstanding Common Stock. As of
December 25, 1999, we have purchased 3.3 million shares for $134 million at an
average price per share of $40.
71
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Note 19 - Income Taxes
The details of our income tax provision are set forth below:
1999 1998 1997
- --------------------------------------------------------------------------------
Current: Federal $ 342 $ 231 $ 106
Foreign 46 55 77
State 39 22 31
--------- --------- ----------
427 308 214
--------- --------- ----------
Deferred: Federal (18) (2) (66)
Foreign 17 10 (59)
State (15) (5) (13)
--------- --------- ----------
(16) 3 (138)
--------- --------- ----------
$ 411 $ 311 $ 76
========= ========= ==========
- --------------------------------------------------------------------------------
The 1998 and 1997 deferred state tax benefits included net operating loss
carryovers of $1 million that were utilized in 1999. Taxes payable were reduced
by $14 million, $3 million and less than $1 million in 1999, 1998 and 1997,
respectively, as a result of stock option exercises. In addition, goodwill and
other intangibles were reduced by $22 million in 1999 as a result of the
settlement of a disputed claim with the Internal Revenue Service relating to the
deductibility of the amortization of reacquired franchise rights and other
intangibles. Finally, the valuation allowance as of the beginning of 1999 that
related to deferred tax assets in certain foreign countries was reduced by $13
million as a result of establishing a pattern of profitability.
Our U.S. and foreign income (loss) before income taxes are set forth below:
1999 1998 1997
- --------------------------------------------------------------------------------
U.S. $ 782 $ 542 $ 13
Foreign 256 214 (48)
--------- --------- ----------
$ 1,038 $ 756 $ (35)
========= ========= ==========
- --------------------------------------------------------------------------------
Our 1999 and 1998 reconciliation of income taxes calculated at the U.S.
federal tax statutory rate to our effective tax rate is set forth below:
1999 1998
- --------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0%
State income tax, net of federal tax benefit 3.0 2.7
Foreign and U.S. tax effects attributable to foreign
operations 1.7 4.4
Effect of unusual items (0.5) (0.6)
Adjustments relating to prior years 0.2 (2.1)
Other, net 0.1 1.6
--------- ----------
Effective income tax rate 39.5% 41.1%
========= ==========
72
<PAGE>
In 1997, our reconciliation of income taxes calculated at the U.S. federal
tax statutory rate was computed on a dollar basis, as a reconciliation on a
percentage basis is not meaningful due to our pre-tax loss.
1997
- -----------------------------------------------------------------------------
Income taxes computed at the U.S. federal statutory rate of 35% $ (12)
State income tax, net of federal tax benefit 18
Foreign and U.S. tax effects attributable to foreign operations 24
Effect of unusual items 79
Adjustments relating to prior years 3
Other, net (36)
------------
Income tax provision $ 76
============
Effective income tax rate (217.1%)
============
- --------------------------------------------------------------------------------
The details of our 1999 and 1998 deferred tax liabilities (assets) are set
forth below:
1999 1998
- -----------------------------------------------------------------------------
Intangible assets and property, plant and equipment $ 170 $ 243
Other 25 8
-------- ---------
Gross deferred tax liabilities $ 195 $ 251
======== =========
Net operating loss and tax credit carryforwards $ (140) $ (107)
Employee benefits (91) (58)
Self-insured casualty claims (38) (46)
Stores held for disposal (12) (62)
Various liabilities and other (178) (183)
-------- ---------
Gross deferred tax assets (459) (456)
Deferred tax assets valuation allowance 173 133
-------- ---------
Net deferred tax assets (286) (323)
-------- ---------
Net deferred tax (asset) liability $ (91) $ (72)
======== =========
Included in:
Deferred income tax assets $ (59) $ (137)
Other assets (51) -
Accounts payable and other current liabilities 12 -
Deferred income taxes 7 65
-------- ---------
$ (91) $ (72)
======== =========
Our valuation allowance related to deferred tax assets increased by $40
million in 1999 primarily due to additions related to current and prior year
operating losses and temporary differences in a number of foreign and state
jurisdictions.
A determination of the unrecognized deferred tax liability for temporary
differences related to our investments in foreign subsidiaries and investments
in foreign unconsolidated affiliates that are essentially permanent in duration
is not practicable.
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<PAGE>
We have available net operating loss and tax credit carryforwards totaling
$837 million at year-end 1999 to reduce future tax of TRICON and certain
subsidiaries. The carryforwards are related to a number of foreign and state
jurisdictions. Of these carryforwards, $51 million expire in 2000 and $725
million expire at various times between 2001 and 2019. The remaining $61 million
of carryforwards do not expire.
Note 20 - Reportable Operating Segments
We are engaged principally in developing, operating, franchising or
licensing the worldwide KFC, Pizza Hut and Taco Bell concepts. We also
previously operated the Non-core Businesses, all of which were sold in 1997
prior to the Spin-off.
KFC, Pizza Hut and Taco Bell operate throughout the U.S. and 84, 87 and 14
countries and territories outside the U.S., respectively. Principal
international markets include Australia, Canada, China, Japan and the U.K. At
year-end 1999, we had 10 investments in unconsolidated affiliates outside the
U.S. which operate KFC and/or Pizza Hut restaurants, the most significant of
which are operating in Japan and the U.K.
As disclosed in Note 2, we identify our operating segments based on
management responsibility within the U.S. and International. For purposes of
applying SFAS 131, we consider our three U.S. Core Business operating segments
to be similar and therefore have aggregated them into a single reportable
operating segment. Other than the U.S., no individual country represented 10% or
more of our total revenues, profits or assets.
<TABLE>
<CAPTION>
Revenues
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 5,748 $ 6,439 $ 7,370(a)
International 2,074 2,040 2,320
---------- ---------- -------------
$ 7,822 $ 8,479 $ 9,690
========== ========== =============
Operating Profit; Interest Expense, Net; and
Income Before Income Taxes
1999 1998 1997
- ---------------------------------------------------------------------------------
United States $ 828 $ 740 $ 603(a)
International(b) 265 191 172
Foreign exchange gain (loss) (3) 6 (16)
Unallocated and corporate expenses (180) (169) (87)(c)
Facility actions net gain (loss)(d) 381 275 (247)
Unusual items(d) (51) (15) (184)
---------- ---------- -------------
Total Operating Profit 1,240 1,028 241
Interest expense, net 202 272 276(c)
---------- ---------- -------------
Income (loss) before income taxes $ 1,038 $ 756 $ (35)
========== ========== =============
Depreciation and Amortization
1999 1998 1997
- ---------------------------------------------------------------------------------
United States $ 266 $ 300 $ 388
International 110 104 143
Corporate 10 13 5
---------- ---------- -------------
$ 386 $ 417 $ 536
========== ========== =============
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Capital Spending
1999 1998 1997
- -------------------------------------------------- ------------- ----------------
<S> <C> <C> <C>
United States $ 315 $ 305 $ 381
International 139 150 157
Corporate 16 5 3
---------- ---------- -------------
$ 470 $ 460 $ 541
========== ========== =============
Identifiable Assets
1999 1998
- -------------------------------------------------- -------------
United States $ 2,478 $ 2,942
International(e) 1,367 1,447
Corporate(f) 116 142
---------- ----------
$ 3,961 $ 4,531
========== ==========
Long-Lived Assets
1999 1998
- -------------------------------------------------- -------------
United States(g) $ 2,143 $ 2,616
International(g) 874 895
Corporate(g) 41 36
---------- ----------
$ 3,058 $ 3,547
========== ==========
</TABLE>
(a) Results from the United States in 1997 included the Non-core Businesses
disposed of in 1997. Excluding unusual disposal charges, the Non-core
Businesses contributed the following:
1997
---------
Revenues $ 268
Operating profit 13
Interest expense, net 3
Income before income taxes 10
(b) Includes equity income of unconsolidated affiliates of $22 million, $18
million and $8 million in 1999, 1998 and 1997, respectively.
(c) Includes amounts allocated by PepsiCo prior to the Spin-off of $37 million
in 1997 related to general and administrative expenses and $188 million in
1997 related to interest expense.
(d) See Note 5 for a discussion by reportable operating segment of facility
actions net gain (loss) and unusual items.
(e) Includes investment in unconsolidated affiliates of $170 million and $159
million for 1999 and 1998, respectively.
(f) Includes restricted cash, capitalized debt issuance costs, advances to our
voluntary employees' beneficiary association trust, leasehold improvements
in certain of our office facilities and non-core assets held for sale.
(g) Includes PP&E, net and Intangible Assets, net.
See Note 5 for additional operating segment disclosures related to
impairment, suspension of depreciation and amortization and the carrying amount
of assets held for disposal.
The 1997 financial data we reported above is materially consistent with
restaurant segment information previously reported by PepsiCo. We made
adjustments to these amounts primarily to remove the impact of the restaurant
distribution business previously included by PepsiCo in its restaurant segment,
and to include the investment in and our equity income of unconsolidated
affiliates within the international segment. We made
75
<PAGE>
this change to align our reporting with the way we internally review and make
decisions regarding our international business.
Note 21 - Commitments and Contingencies
Contingent Liabilities
----------------------
We were directly or indirectly contingently liable in the amounts of $386
million and $327 million at year-end 1999 and 1998, respectively, for certain
lease assignments and guarantees. In connection with these contingent
liabilities, after the Spin-off Date, we were required to maintain cash
collateral balances at certain institutions of approximately $30 million, which
is included in Other Assets in the accompanying Consolidated Balance Sheet. At
year-end 1999, $311 million represented contingent liabilities to lessors as a
result of assigning our interest in and obligations under real estate leases as
a condition to the refranchising of Company restaurants. The $311 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
$485 million. The balance of the contingent liabilities primarily reflected
guarantees to support financial arrangements of certain unconsolidated
affiliates and other restaurant franchisees.
Casualty Loss Programs and Estimates
------------------------------------
To mitigate the cost of our exposures for certain casualty losses as
defined in Note 5, we make annual decisions to either retain the risks of loss
up to certain per occurrence or maximum loss limits negotiated with our
insurance carriers or to fully insure those risks. Since the Spin-off, we have
elected to retain the risks subject to insured limitations. In addition, we also
purchased insurance in 1998 to limit the cost of our retained risks for the
years 1994 to 1996.
Effective August 16, 1999, we made changes to our U.S. and portions of our
International property and casualty loss programs which we believe will reduce
our annual property and casualty costs. Under the new program, we bundled our
risks for casualty losses, property losses and various other insurable risks
into one risk pool with a single large retention limit. Based on our historical
casualty loss experience over the past ten years, we believe that the
combination of the annual risk of loss that we retained and the lower insurance
premium costs under the new program should be less than the average total costs
incurred under the old program. However, since all of these risks have been
pooled and there are no per occurrence limits for individual claims, it is
possible that we may experience increased volatility in property and casualty
losses on a quarter to quarter basis. This would occur if an individual large
loss is incurred either early in a program year or when the latest actuarial
projection of losses for a program year is significantly below our aggregate
loss retention. A large loss is defined as a loss in excess of $2 million which
was our predominate per occurrence casualty loss limit under our previous
insurance program.
Under both our old and new programs, we have determined our retained
liabilities for casualty losses, including reported and incurred but not
reported claims, based on information provided by our independent actuary.
Effective August 16, 1999, property losses are also included in our actuary's
valuation. Prior to that date, property losses were based on our internal
estimates.
We have our actuary perform valuations two times a year. However, given the
complexities of the Spin-off, we had only one 1998 valuation, based on
information through June 30, 1998, which we received and recognized in the
fourth quarter of that year. In the first and fourth quarters of 1999, we
received a valuation from the actuary based on information through December 31,
1998 and June 30, 1999, respectively. As a result, we have a timing difference
in our actuarial adjustments, from recognizing the entire 1998 adjustment in the
fourth quarter of 1998 to recognizing adjustment in both the first quarter and
fourth quarters of 1999. We
76
<PAGE>
expect that, beginning in 2000, valuations will be received and required
adjustments will be made in the second and fourth quarters of each year.
We have recorded favorable adjustments to our casualty loss reserves of $30
million in 1999 ($21 million in the first quarter and $9 million in the fourth
quarter), $23 million in 1998 and $18 million in 1997 primarily as a result of
our independent actuary's changes in its estimated losses. The changes were
related to previously recorded casualty loss estimates determined by our
independent actuary for both the current and prior years in which we retained
some risk of loss. The 1999 adjustments resulted primarily from improved loss
trends related to our 1998 casualty losses across all three of our U.S.
operating companies. We believe the favorable adjustments are a direct result of
our recent investments in safety and security programs to better manage risk at
the store level. In addition, the favorable insurance adjustments in 1998
included the benefit of the insurance transaction discussed above.
We will continue to make adjustments both based on our actuary's periodic
valuations as well as whenever there are significant changes in the expected
costs of settling large claims not contemplated by the actuary. Due to the
inherent volatility of our actuarially determined casualty loss estimates, it is
reasonably possible that we will experience changes in estimated losses which
could be material to our growth in net income in 2000. We believe that, since we
record our reserves for casualty losses at a 75% confidence level, we have
mitigated the negative impact of adverse development and/or volatility. At
December 25, 1999, our reserves for casualty losses were $142 million, compared
to $154 million at year-end 1998.
Change of Control Severance Agreements
--------------------------------------
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. Since the timing of any payments under these
agreements cannot be anticipated, the amounts are not estimable. However, these
payments, if made, could be substantial. 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.
Wage and Hour Litigation
------------------------
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.
On May 11, 1998, a purported class action lawsuit against Pizza Hut, Inc.,
and one of its franchisees, PacPizza, LLC, entitled Aguardo, et al. v. Pizza
Hut, Inc., et al. ("Aguardo"), was filed in the Superior Court of the State of
California of the County of San Francisco. The lawsuit was filed by three former
Pizza Hut restaurant general managers purporting to represent approximately
1,300 current and former California restaurant general managers of Pizza Hut and
PacPizza. The lawsuit alleges violations of state wage and hour laws involving
unpaid overtime wages and vacation pay and seeks an unspecified amount in
damages. On January 12, 2000, the Court certified a class of approximately 1,300
current and former restaurant general managers. This lawsuit is in the early
discovery phase.
77
<PAGE>
On October 2, 1996, a class action lawsuit against Taco Bell Corp.,
entitled Mynaf, et al. v. Taco Bell Corp. ("Mynaf"), was filed in the Superior
Court of the State of California of the County of Santa Clara. The lawsuit was
filed by two former restaurant general managers and two former assistant
restaurant general managers purporting to represent all current and former Taco
Bell restaurant general managers and assistant restaurant general managers in
California. The lawsuit alleges violations of California wage and hour laws
involving unpaid overtime wages. The complaint also includes an unfair business
practices claim. The four named plaintiffs claim individual damages ranging from
$10,000 to $100,000 each. On September 17, 1998, the court certified a class of
approximately 3,000 current and former assistant restaurant general managers and
restaurant general managers. Taco Bell petitioned the appellate court to review
the trial court's certification order. The petition was denied on December 31,
1998. Taco Bell then filed a petition for review with the California Supreme
Court, and the petition was subsequently denied. Class notices were mailed on
August 31, 1999 to over 3,400 class members. Discovery has commenced, and a
trial date has been set for July 10, 2000.
On August 29, 1997, a class action lawsuit against Taco Bell Corp.,
entitled Bravo, et al. v. Taco Bell Corp. ("Bravo"), was filed in the Circuit
Court of the State of Oregon of the County of Multnomah. The lawsuit was filed
by two former Taco Bell shift managers purporting to represent approximately
17,000 current and former hourly employees statewide. The lawsuit alleges
violations of state wage and hour laws, principally involving unpaid wages
including overtime, and rest and meal period violations, and seeks an
unspecified amount in damages. Under Oregon class action procedures, Taco Bell
was allowed an opportunity to "cure" the unpaid wage and hour allegations by
opening a claims process to all putative class members prior to certification of
the class. In this cure process, Taco Bell has currently paid out less than $1
million. On January 26, 1999, the Court certified a class of all current and
former shift managers and crew members who claim one or more of the alleged
violations. The lawsuit is in the discovery and pre-trial motions phase. A trial
date of November 2, 1999 was set. However, on November 1, 1999, the Court issued
a proposed order postponing the trial and establishing a pre-trial claims
process. The final order regarding the claims process was entered on January 14,
2000. Taco Bell moved for certification of an immediate appeal of the
Court-ordered claims process and requested a stay of the proceedings. This
motion was denied on February 8, 2000, and Taco Bell intends to appeal this
decision to the Supreme Court of Oregon. A Court-approved notice and claim form
was mailed to approximately 14,500 class members on January 31, 2000.
We have provided for the estimated costs of the Aguardo, Mynaf and Bravo
litigations, based on a projection of eligible claims (including claims filed to
date, where applicable), the cost of each eligible claim and the estimated legal
fees incurred by plaintiffs. Although the outcome of these lawsuits cannot be
determined at this time, we believe the ultimate cost of these cases in excess
of the amounts already provided will not be material to our annual results of
operations, financial condition or cash flows.
On February 10, 1995, a class action lawsuit, entitled Ryder, et al. v.
Taco Bell Corp. ("Ryder"), was filed in the Superior Court of the State of
Washington for King County on behalf of approximately 16,000 current and former
Taco Bell employees claiming unpaid wages resulting from alleged uniform, rest
and meal period violations and unpaid overtime. In April 1996, the Court
certified the class for purposes of injunctive relief and a finding on the issue
of liability. The trial was held during the first quarter of 1997 and resulted
in a liability finding. In August 1997, the Court certified the class for
purposes of damages as well. Prior to the damages phase of the trial, the
parties reached a court-approved settlement process in April 1998. The
settlement process is substantially complete, with less than 50 claims left to
be resolved. We have provided for the estimated cost of settling these remaining
claims.
Obligations to PepsiCo After Spin-off
-------------------------------------
At the Spin-off, we entered into separation and other related agreements
(the "Separation Agreement"), governing the Spin-off transaction and our
subsequent relationship with PepsiCo. These agreements provide certain
indemnities to PepsiCo. In addition, prior to the Spin-off, our U.S. Core
Businesses each entered into a
78
<PAGE>
multi-year agreement with Pepsi-Cola Company, a wholly owned subsidiary of
PepsiCo, regarding the purchase of beverage products. Prior to the Spin-off and
PepsiCo's sale to AmeriServe of PFS, our primary U.S. food and supplies
distributor, our Core Businesses signed a multi-year distribution agreement with
PFS. Neither contract is for quantities expected to exceed normal usage.
The Separation Agreement provided for, among other things, our assumption
of all liabilities relating to the restaurant businesses, inclusive of the
Non-core Businesses, and our indemnification of PepsiCo with respect to these
liabilities. We have included our best estimates of these liabilities in the
accompanying 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. Certain of these claims have been settled, and we are
disputing the validity of the remaining 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.
In addition, we have indemnified PepsiCo for any costs or losses it incurs
with respect to all letters of credit, guarantees and contingent liabilities
relating to our businesses under which PepsiCo remains liable. As of December
25, 1999, PepsiCo remains liable for approximately $200 million related to these
contingencies. This obligation ends at the time they are released, terminated or
replaced by a qualified letter of credit. We have not been required to make any
payments under this indemnity.
Under the separation agreements, 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 any 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 basis consistent with prior practice,
there can be no assurance that determinations made by PepsiCo would be the same
as we would reach, acting on our own behalf. Through December 25, 1999, there
have not been any determinations made by PepsiCo where we would have reached a
different determination.
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 our liquidation, merger or consolidation with
another company, certain issuances and redemptions of our Common Stock, our
granting of stock options and our sale, refranchising, distribution or other
disposition of assets. If we fail to abide by these 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. No payments under these
indemnities have been required. Additionally, under the terms of the tax
separation agreement, PepsiCo is entitled to the federal income tax benefits
related to the exercise after the Spin-off of vested PepsiCo options held by our
employees. We incur the payroll taxes related to the exercise of these options.
Note 22 - Subsequent Event
We and our franchisees and licensees are dependent on frequent
replenishment of the food ingredients and paper supplies required by our
restaurants. We and a large number of our franchisees and licensees are under
multi-year contracts to use AmeriServe to purchase and make deliveries of most
of these supplies.
On January 31, 2000, AmeriServe filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. We had approximately $43 million of receivables from
AmeriServe at December 25, 1999. While it is possible that we may recover a
portion of these receivables, the amount of the recovery is not currently
estimable. We have written off our January 31, 2000 receivable balance of
approximately $41 million, which represents the year-end balance less
settlements in the ordinary course of business between December 26, 1999 and the
date of bankruptcy.
79
<PAGE>
On February 2, 2000, we and another major AmeriServe customer agreed to
provide a $150 million interim revolving credit facility (the "Facility") to
AmeriServe. We initially committed to provide up to $100 million under this
Facility. However, we have reached an agreement in principle to assign $30
million of our commitment to a third party, reducing our total commitment under
the Facility to $70 million. The Facility represents post-bankruptcy
"debtor-in-possession" financing which enjoys preference over pre-bankruptcy
unsecured creditors. The interest rate is prime plus 4%.
To help ensure that our supply chain continues to remain open, we have
begun to purchase (and take title to) supplies directly from suppliers (the
"temporary direct purchase program") for use in our restaurants as well as for
resale to our franchisees and licensees who previously purchased supplies from
AmeriServe. AmeriServe has agreed, for the same fee in effect prior to the
bankruptcy filing, to continue to be responsible for distributing the supplies
to us and our participating franchisee and licensee restaurants as well as
providing ordering, inventory, billing and collection services for us.
Note 23 - Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Company sales $ 1,662 $ 1,723 $ 1,639 $ 2,075 $ 7,099
Franchise and license fees 151 163 173 236 723
-------------------------------------------------------
Total revenues 1,813 1,886 1,812 2,311 7,822
Total costs and expenses 1,577 1,537 1,435 2,033 6,582
Operating profit 236 349 377 278 1,240
Net income 106 179 197 145 627
Diluted earnings per common share 0.66 1.10 1.23 0.93 3.92
Operating profit (loss) attributable to:
Accounting changes 10 6 5 8 29
Facility actions net gain 34 133 144 70 381
Unusual items - (4) (3) (44) (51)
Net income (loss) attributable to:
Accounting changes 6 4 3 5 18
Facility actions net gain 19 80 84 43 226
Unusual items - (2) (3) (24) (29)
- -----------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Company sales $ 1,790 $ 1,867 $ 1,869 $ 2,326 $ 7,852
Franchise and license fees 132 140 152 203 627
-------------------------------------------------------
Total revenues 1,922 2,007 2,021 2,529 8,479
Total costs and expenses 1,754 1,745 1,742 2,210 7,451
Operating profit 168 262 279 319 1,028
Net income 54 112 128 151 445
Diluted earnings per common share 0.35 0.72 0.82 0.95 2.84
Operating profit (loss) attributable to:
Facility actions net gain 29 73 54 119 275
Unusual items - - 5 (20) (15)
Net income (loss) attributable to:
Facility actions net gain 16 42 34 70 162
Unusual items - - 3 (6) (3)
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Note 5 for details of 1999 accounting changes, facility actions net gain
(loss) and unusual items.
81
<PAGE>
Management's Responsibility for Financial Statements
- --------------------------------------------------------------------------------
To Our Shareholders:
We are responsible for the preparation, integrity and fair presentation of
the Consolidated Financial Statements, related notes and other information
included in this annual report. The financial statements were prepared in
accordance with generally accepted accounting principles and include certain
amounts based upon our estimates and assumptions, as required. Other financial
information presented in the annual report is derived from the financial
statements.
We maintain a system of internal control over financial reporting, designed
to provide reasonable assurance as to the reliability of the financial
statements, as well as to safeguard assets from unauthorized use or disposition.
The system is supported by formal policies and procedures, including an active
Code of Conduct program intended to ensure employees adhere to the highest
standards of personal and professional integrity. Our internal audit function
monitors and reports on the adequacy of and compliance with the internal control
system, and appropriate actions are taken to address significant control
deficiencies and other opportunities for improving the system as they are
identified.
The financial statements have been audited and reported on by our
independent auditors, KPMG LLP, who were given free access to all financial
records and related data, including minutes of the meetings of the Board of
Directors and Committees of the Board. We believe that management
representations made to the independent auditors were valid and appropriate.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, provides oversight to our financial reporting process and our
controls to safeguard assets through periodic meetings with our independent
auditors, internal auditors and management. Both our independent auditors and
internal auditors have free access to the Audit Committee.
Although no cost-effective internal control system will preclude all errors
and irregularities, we believe our controls as of December 25, 1999 provide
reasonable assurance that our assets are reasonably safeguarded.
/s/ David J. Deno
David J. Deno
Chief Financial Officer
- --------------------------------------------------------------------------------
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<PAGE>
Report of Independent Auditors
- --------------------------------------------------------------------------------
The Board of Directors
TRICON Global Restaurants, Inc.:
We have audited the accompanying consolidated balance sheet of TRICON
Global Restaurants, Inc. and Subsidiaries ("TRICON") as of December 25, 1999 and
December 26, 1998, and the related consolidated statements of operations, cash
flows and shareholders' (deficit) equity and comprehensive income for each of
the years in the three-year period ended December 25, 1999. These consolidated
financial statements are the responsibility of TRICON's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TRICON as of
December 25, 1999 and December 26, 1998, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 25,
1999, in conformity with generally accepted accounting principles.
KPMG LLP
Louisville, Kentucky
February 8, 2000, except as to
Note 11, which is as of
February 25, 2000
- --------------------------------------------------------------------------------
83
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding directors is incorporated by reference from the
Company's definitive proxy statement which will be filed with the Securities and
Exchange Commission no later than 120 days after December 25, 1999.
Information regarding executive officers of the Company is included in Part
I.
Item 11. Executive Compensation.
Information regarding executive compensation is incorporated by reference
from the Company's definitive proxy statement which will be filed with the
Securities and Exchange Commission no later than 120 days after December 25,
1999. Information appearing in the sections entitled "Compensation Committee
Report on Executive Compensation" and "Performance Graph" contained in the
Company's definitive proxy statement shall not be deemed to be incorporated by
reference in this Form 10-K, notwithstanding any general statement contained
herein incorporating portions of such proxy statement by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the Company's definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 25, 1999.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions is
incorporated by reference from the Company's definitive proxy statement which
will be filed with the Securities and Exchange Commission no later than 120 days
after December 25, 1999.
84
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements: Consolidated financial statements filed as
part of this report are listed under Part II, Item 8 of this Form
10-K.
(2) Financial Statement Schedules: No schedules are required because
either the required information is not present or not present in
amounts sufficient to require submission of the schedule, or
because the information required is included in the financial
statements or the related notes thereto filed as a part of this
Form 10-K.
(3) Exhibits: The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-K. The Index to
Exhibits specifically identifies each management contract or
compensatory plan required to be filed as an exhibit to this Form
10-K.
(b) Reports on Form 8-K
(1) We filed a Current Report on Form 8-K dated September 23, 1999
attaching a press release dated September 23, 1999 announcing a
$350 million Share Repurchase Program and anticipated third
quarter and full year operating and financial trends.
(2) We filed a Current Report on Form 8-K dated October 12, 1999
attaching our third quarter 1999 earnings release on October 12,
1999.
(3) We filed a Current Report on Form 8-K dated November 15, 1999
attaching a press release dated November 15, 1999 announcing the
appointment of a new Chief Executive Officer, effective January
1, 2000, and a Chief Financial Officer. In addition, the press
release reaffirmed our anticipated 1999 earnings goal and raised
our 2000 earnings goal.
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K annual
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 6, 2000
TRICON GLOBAL RESTAURANTS, INC.
By: /s/ Andrall E. Pearson
-----------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K annual report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Andrall E. Pearson Chairman of the Board March 6, 2000
- -----------------------
Andrall E. Pearson
/s/ David C. Novak Vice Chairman of the Board, March 6, 2000
- ----------------------- Chief Executive Officer and
David C. Novak President (principal executive
officer)
/s/ David J. Deno Chief Financial March 6, 2000
- ----------------------- Officer (principal
David J. Deno financial officer)
/s/ Robert L. Carleton Senior Vice President March 6, 2000
- ----------------------- and Controller
Robert L. Carleton (principal accounting
officer)
/s/ D. Ronald Daniel Director March 6, 2000
- -----------------------
D. Ronald Daniel
/s/ James Dimon Director March 6, 2000
- -----------------------
James Dimon
/s/ Massimo Ferragamo Director March 6, 2000
- -----------------------
Massimo Ferragamo
86
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Robert Holland, Jr. Director March 6, 2000
- -----------------------
Robert Holland, Jr.
/s/ Sidney Kohl Director March 6, 2000
- -----------------------
Sidney Kohl
/s/ Kenneth G. Langone Director March 6, 2000
- -----------------------
Kenneth G. Langone
/s/ Jackie Trujillo Director March 6, 2000
- -----------------------
Jackie Trujillo
/s/ Robert J. Ulrich Director March 6, 2000
- -----------------------
Robert J. Ulrich
/s/ Jeanette S. Wagner Director March 6, 2000
- -----------------------
Jeanette S. Wagner
/s/ John L. Weinberg Director March 6, 2000
- -----------------------
John L. Weinberg
87
<PAGE>
TRICON Global Restaurants, Inc.
Exhibit Index
(Item 14)
Exhibit
Number Description of Exhibits
3.1 Restated Articles of Incorporation of Tricon.
3.2 Amended and restated Bylaws of Tricon.
4.1* Indenture, dated as of May 1, 1998, between Tricon and The First
National Bank of Chicago, pertaining to 7.45% Senior Notes and 7.65%
Senior Notes due May 15, 2005 and May 15, 2008, respectively, which is
incorporated herein by reference from Exhibit 4.1 to Tricon's Report
on Form 8-K filed with the Commission on May 13, 1998.
4.2 Rights Agreement, dated as of July 21, 1998, between Tricon and
BankBoston, N.A., which is incorporated herein by reference from
Exhibit 4.01 to Tricon's Quarterly Report on Form 10-Q for the quarter
ended June 13, 1998.
10.1 Separation Agreement between PepsiCo, Inc. and Tricon. effective as of
August 26, 1997, and the First Amendment thereto dated as of October
6, 1997, which is incorporated herein by reference from Exhibit 10.1
to Tricon's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997.
10.2 Tax Separation Agreement between PepsiCo, Inc. and Tricon effective as
of August 26, 1997, which is incorporated herein by reference from
Exhibit 10.2 to Tricon's Annual Report on Form 10-K for the fiscal
year ended December 27, 1997.
10.3 Employee Programs Agreement between PepsiCo, Inc. and Tricon effective
as of August 26, 1997, which is incorporated herein by reference from
Exhibit 10.3 to Tricon's Annual Report on Form 10-K for the fiscal
year ended December 27, 1997.
10.4 Telecommunications, Software and Computing Services Agreement between
PepsiCo, Inc. and Tricon effective as of August 26, 1997, which is
incorporated herein by reference from Exhibit 10.4 to Tricon's Annual
Report on Form 10-K for the fiscal year ended December 27, 1997.
10.5 Amended and Restated Sales and Distribution Agreement between
AmeriServe Food Distribution, Inc., Tricon, Pizza Hut, Taco Bell and
KFC, effective as of November 1, 1998.
10.6 Credit Agreement dated as of October 2, 1997 among Tricon, the lenders
party thereto, The Chase Manhattan Bank, as Administrative Agent, and
Chase Manhattan Bank as Issuing Bank, which is incorporated herein by
reference from Exhibit 10 to Tricon's Quarterly Report on Form 10-Q
for the quarter ended September 6, 1997, as amended by Amendment No. 1
hereto which is incorporated herein by reference from Exhibit 10.6 to
TRICON's Quarterly Report on Form 10-Q for the quarter ended March 20,
1999, as amended by Amendment No. 2 hereto (as filed herewith).
88
<PAGE>
10.7+ Tricon Director Deferred Compensation Plan, as effective October 7,
1997, which is incorporated herein by reference from Exhibit 10.7 to
Tricon's Annual Report on Form 10-K for the fiscal year ended December
27, 1997.
10.8+ Tricon 1997 Long Term Incentive Plan, as effective October 7, 1997,
which is incorporated herein by reference from Exhibit 10.8 to
Tricon's Annual Report on Form 10-K for the fiscal year ended December
27, 1997
10.9+ Tricon Executive Incentive Compensation Plan, as effective January 1,
1999, as amended (as filed herewith).
10.10+ Tricon Executive Income Deferral Program, as effective October 7,
1997, which is incorporated herein by reference from Exhibit 10.11 to
Tricon's Annual Report on Form 10-K for the fiscal year ended December
27, 1997.
10.13+ Tricon Pension Equalization Plan, as effective October 7, 1997, which
is incorporated herein by reference from Exhibit 10.14 to Tricon's
Annual Report on Form 10-K for the fiscal year ended December 27,
1997.
10.14+ Employment Agreement between Tricon and Andrall E. Pearson dated as of
June 25, 1997, and subsequently amended as of October 20, 1997, which
is incorporated herein by reference from Exhibit 10.15 to Tricon's
Annual Report on Form 10-K for the fiscal year ended December 27,
1997.
10.15+ Terms of Employment Agreement between Tricon and Robert L. Carleton,
which is incorporated herein by reference from Exhibit 10.16 to
Tricon's Annual Report on Form 10-K for the fiscal year ended December
27, 1997.
10.16 Form of Directors' Indemnification Agreement, which is incorporated
herein by reference from Exhibit 10.17 to Tricon's Annual Report on
Form 10-K for the fiscal year ended December 27, 1997.
10.17 Form of Severance Agreement (in the event of a change in control),
which is incorporated herein by reference from Exhibit 10.18 to
Tricon's Quarterly Report on Form 10-Q for the quarter ended September
5, 1998.
10.18+ Tricon 1999 Long Term Incentive Plan, as effective May 20,
1999 (as filed herewith).
10.19+ Employment Agreement between Tricon and Christian L. Campbell, dated
as of September 3, 1997, which is incorporated herein by reference
from Exhibit 10.19 to Tricon's Annual Report on Form 10-K for fiscal
year ended December 26, 1998.
10.20 Tricon Purchasing Coop Agreement, dated as of March 1, 1999, between
Tricon and the Unified FoodService Purchasing Coop, LLC, which is
incorporated herein by reference from Exhibit 10.20 to Tricon's Annual
Report on Form 10-K for fiscal year ended December 26, 1998.
12.1 Computation of ratio of earnings to fixed charges.
21.1 Active Subsidiaries of Tricon.
89
<PAGE>
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
- -----------------------
* Neither Tricon nor any of its subsidiaries is party to any other long-term
debt instrument under which securities authorized exceed 10 percent of the
total assets of Tricon and its subsidiaries on a consolidated basis.
Copies of instruments with respect to long-term debt of lesser amounts
will be furnished to the Commission upon request.
+ Indicates a management contract or compensatory plan.
90
<PAGE>
EXHIBIT 10.6
AMENDMENT dated as of February 25, 2000, to the Credit
Agreement dated as of October 2, 1997, as amended (the
"Credit Agreement"), among TRICON GLOBAL RESTAURANTS, INC.
(the "Borrower"), the Lenders party thereto, and THE CHASE
MANHATTAN BANK, as Administrative Agent (the "Administrative
Agent"). Capitalized terms used and not defined herein shall
have the meanings assigned to such terms in the Credit
Agreement.
WHEREAS the Borrower has requested the Lenders to amend the
Credit Agreement as set forth herein; and
WHEREAS the undersigned Lenders are willing to approve such
amendment, subject to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements
contained in this Amendment and other good and valuable consideration,
the sufficiency and receipt of which are hereby acknowledged, the
parties hereto hereby agree as follows:
SECTION 1. Amendments. (a) Section 1.01 of the Credit Agreement
is hereby amended, as of the Amendment Effective Date (as defined in
Section 4 below), by deleting clause (e) of the definition of the term
"Permitted Investments" and substituting in lieu thereof the
following:
(e) investments in money market funds (i) with a policy to invest
substantially all their assets in one or more investments described in
the foregoing items (a), (b), (c) and (d) or (ii) having the highest
credit rating obtainable from S&P or from Moody's; and
(b) Section 6.02 of the Credit Agreement is hereby amended, as of the
Amendment Effective Date, by (i) deleting the word "and" at the end of
clause (g) thereof, (ii) deleting the period at the end of clause (h)
thereof and substituting a semi-colon in lieu thereof and (iii) adding
following clause (h) thereof the following":
(i) Liens on inventory and accounts receivable of the Borrower
created pursuant to the Interim Stipulation and Order authorizing the
Use of Cash Collateral and Granting Replacement Liens made February 2,
2000 in the United States Bankruptcy Court for the District of
Delaware (the "Court") in re:
<PAGE>
Ameriserve Food Distribution, Inc., et al, Debtors, Chapter 11 Case
No. 00-0358, as such order may be amended from time to time or
evidenced by any documents entered into to effect such Liens with the
approval of the Court or replaced by any similar arrangement ordered
by the Court so long as the interests of the Lenders are not
materially adversely affected by any such amendment, documents or
replacement orders; provided that in no event shall the book value of
all inventory and accounts receivable subject to such Lien exceed
$320,000,000; and
(j) Liens on marketable securities or operating assets owned by
the Borrower or any of its Subsidiaries securing Indebtedness for
borrowed money in an aggregate principal amount not exceeding
$100,000,000; provided that all the Net Proceeds of such Indebtedness
are applied to prepay Term Borrowings within 10 Business Days after
such Net Proceeds are received (which prepayment shall be treated for
all purposes as a mandatory prepayment under Section 2.11(b), except
such prepayment shall not be subject to the limitations on the amount
of mandatory prepayments specified therein).
(c) Section 6.04 of the Credit Agreement is hereby amended, as of the
Amendment Effective Date, by adding at the end thereof the following:
Notwithstanding the limitations set forth in the foregoing provisos,
the Borrower may form a wholly owned Foreign Subsidiary organized in
the Cayman Islands (the "Foreign IP Subsidiary") and the Borrower and
its Domestic Subsidiaries may transfer to the Foreign IP Subsidiary
trademarks or other intellectual property used outside of the United
States ("Foreign IP"), and any such transfer of Foreign IP to the
Foreign IP Subsidiary shall not be treated as an investment in a
Foreign Subsidiary for purposes of determining compliance with the
Foreign Exposure Limit; provided that (i) the Foreign IP Subsidiary
shall become a Guarantor under the Guarantee Agreement prior to any
such transfer to it of Foreign IP and shall deliver to the
Administrative Agent such legal opinions and other evidence as the
Administrative Agent shall reasonably request regarding the
authorization and validity thereof, and (ii) any subsequent transfer
of any Foreign IP by the Foreign IP Subsidiary to a Foreign Subsidiary
shall be subject to the Foreign Exposure Limit.
<PAGE>
(d) Section 6.06 of the Credit Agreement is hereby amended, as of the
Amendment Effective Date, by adding in clause (e) thereof, following the
words "the Borrower", the words "and its Subsidiaries".
SECTION 2. Representations and Warranties. The Borrower
represents and warrants to each of the Lenders, on and as of the date
hereof after giving effect to this Amendment, that:
(a) The representations and warranties of each Loan Party set
forth in each Loan Document are true and correct on and as of the date
hereof except to the extent that any such representations and
warranties expressly relate to an earlier date in which case any such
representations and warranties shall be true and correct at and as of
such earlier date.
(b) No Default has occurred and is continuing.
SECTION 3. Applicable Law. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 4. Conditions of Effectiveness. This Amendment shall
become effective only when (a) the Administrative Agent or its counsel
shall have received duly executed counterparts of this Amendment
which, when taken together, bear the signatures of the Borrower and
the Required Lenders (the date on which this Amendment so becomes
effective being herein called the "Amendment Effective Date") and (b)
the Administrative Agent shall have received for the account of each
Lender executing this Amendment on or prior to February 25, 2000, a
lender fee equal to 5 basis points multiplied by the sum of such
Lender's Revolving Commitment and outstanding Term Loans. Unless and
until this Amendment becomes effective, the Credit Agreement shall
continue in full force and effect in accordance with the provisions
thereof and the rights and obligations of the parties thereto shall
not be affected hereby.
SECTION 5. Amended Credit Agreement. Any reference in the Credit
Agreement, or in any documents or instruments required thereunder or
annexes or schedules thereto, referring to the Credit Agreement shall
be deemed to refer to the Credit Agreement as amended by this
Amendment. As used in the Credit Agreement, the terms "Agreement",
"this Agreement", "herein", "hereinafter", "hereto", "hereof" and
words of similar import shall, unless the context otherwise requires,
mean the Credit Agreement as
<PAGE>
amended by this Amendment. Except as expressly modified by this
Amendment, the terms and provisions of the Credit Agreement are hereby
confirmed and ratified in all respects and shall remain in full force
and effect.
SECTION 6. Counterparts. This Amendment may be executed in two or
more counterparts, each of which shall constitute an original but all
of which when taken together shall constitute but one contract.
Delivery of an executed counterpart of a signature page by facsimile
transmission shall be effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 7. Expenses. The Borrower agrees to reimburse the
Administrative Agent for its reasonable out-of-pocket expenses in
connection with this Amendment, including the reasonable fees, charges
and disbursements of Cravath, Swaine & Moore, counsel for the
Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed by their respective authorized officers as of the
day and year first written above.
TRICON GLOBAL RESTAURANTS, INC.,
by /s/ David Deno MM
------------------------------------
Name: DAVID DENO
Title: CHIEF FINANCIAL OFFICER
THE CHASE MANHATTAN BANK, individually and
as Administrative Agent and Swingline
Lender,
by
--------------------------------------
Name:
Title:
<PAGE>
CHASE MANHATTAN BANK DELAWARE, as Issuing
Agent,
by /s/ Michael P. Handago
----------------------------------------
Name: MICHAEL P. HANDAGO
Title: VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
-----------------------------------------------
by /s/ Neil Brisson
--------------------------------------------
Name: NEIL BRISSON
Title: DIRECTOR
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution CHANG HWA COMMERCIAL BANK. LTD. NEW YORK BRANCH
-----------------------------------------------
by /s/ Wan Tu Yeh
--------------------------------------------
Name: WAN TU YEH
Title: VP & GENERAL MANAGER
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution National City Bank of Kentucky
-----------------------------------------------
by /s/ J. Page Walker
--------------------------------------------
Name: J. Page Walker
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution NORDDEUTSCHE LANDESBANK GIROZENTRALE
-----------------------------------------------
by /s/ Stephanie Finnen
--------------------------------------------
Name: Stephanie Finnen
Title: VP
by /s/ Stephen K. Hunter
--------------------------------------------
Name: Stephen K. Hunter
Title: SVP
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Chiao Tung Bank Co., Ltd, New York Agency
-----------------------------------------
by /s/ Kuang Si Shiu
--------------------------------------------
Name: Kuang Si Shiu
Title: SVP & GM
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution BANCA DI ROMA
-----------------------------------------------
by /s/ Christopher Strike
--------------------------------------------
Name: Christopher Strike
Title: Asst. Vice President
by /s/ Alessandro Paoli
--------------------------------------------
Name: Alessandro Paoli
Title: Asst. Treasurer
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution FIFTH THIRD BANK
-----------------------------------------------
by /s/ Anthony M. Buehler
--------------------------------------------
Name: ANTHONY M. BUEHLER
Title: Assistant Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Erste Bank
-----------------------------------------------
by /s/ David Manheim
--------------------------------------------
Name: David Manheim
Title: Assistant Vice President
Erste Bank New York Branch
by /s/ John S. Runnion
--------------------------------------------
Name: JOHN S. RUNNION
Title: FIRST VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Toyo Trust and Banking Company, Limited
----------------------------------------------
by /s/ Shinya Kameda
--------------------------------------------
Name: Shinya KAMEDA
Title: Assistant General Manager
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Tokai Bank, Ltd.
-----------------------------------------------
by /s/ Shinichi Nakatani
--------------------------------------------
Name: Shinichi Nakatani
Title: Assistant General Manager
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution National Bank of Kuwait SAK
-----------------------------------------------
by /s/ Robert J. McNeill
--------------------------------------------
Name: Robert J. McNeill
Title: Executive Manager
by /s/ Jeffrey J. Ganter
--------------------------------------------
Name: Jeffrey J. Ganter
Title: Senior Credit Officer
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Mitsubishi Trust and Banking Corporation
-----------------------------------------------
by /s/ Toshihiro Hayashi
--------------------------------------------
Name: Toshihiro Hayashi
Title: Senior Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Westdeutsche Landesbank Girozentrale
-----------------------------------------------
by /s/ Andreas Schroeter
--------------------------------------------
Name: ANDREAS SCHROETER
Title: DIRECTOR
by /s/ Walter T. Duffy III
--------------------------------------------
Name: Walter T. Duffy III
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Credit Industrial et. Commercial
-----------------------------------------------
by /s/ Brian O'Leary
--------------------------------------------
Name: Brian O'Leary
Title: Vice President
by /s/ Marcus Edward
--------------------------------------------
Name: Marcus Edward
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution CITIBANK, N.A.
-----------------------------------------------
by /s/ Thomas F. Bruscino
--------------------------------------------
Name: THOMAS F. BRUSCINO
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Goldman Sachs Credit Partners L.P.
-----------------------------------------------
by /s/ Elizabeth Fischer
--------------------------------------------
Name: ELIZABETH FISCHER
Title: AUTHORIZED SIGNATORY
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Bank of Louisville
-----------------------------------------------
by /s/ Roy L. Johnson, Jr.
--------------------------------------------
Name: Roy L. Johnson, Jr.
Title: Senior Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution CREDIT SUISSE FIRST BOSTON
-----------------------------------------------
by /s/ David W. Kratovil
--------------------------------------------
Name: David W. Kratovil
Title: Director
by /s/ Andrea Shkane
--------------------------------------------
Name: Andrea Shkane
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution STB Delaware Funding Trust I
-----------------------------------------------
by /s/ Robert D. Brown
--------------------------------------------
Name: ROBERT D. BROWN
Title: VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution DLJ CAPITAL FUNDING, INC.
-----------------------------------------------
by /s/ Thomas C. Hendrick
--------------------------------------------
Name: Thomas C. Hendrick
Title: Managing Director
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Le Bank of New York
-----------------------------------------------
by /s/ Thomas McCrohan
--------------------------------------------
Name: THOMAS C. McCROHAN
Title: VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution THE SUMITOMO BANK, LIMITED
-----------------------------------------------
by /s/ Edward D. Henderson, Jr.
--------------------------------------------
Name: Edward D. Henderson, Jr.
Title: Senior Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Transamerica Occidental Life Insurance Company
-----------------------------------------------
by /s/ Frederick B. Howard
--------------------------------------------
Name: Frederick B. Howard
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Bank of Scotland
-----------------------------------------------
by /s/ Annie Glynn
--------------------------------------------
Name: ANNIE GLYNN
Title: SENIOR VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution NATEXIS BANQUE
-----------------------------------------------
by /s/ Jordan Sadler
--------------------------------------------
Name: JORDAN SADLER
Title: ASSISTANT VICE PRESIDENT
by /s/ Gary Kania
--------------------------------------------
Name: GARY KANIA
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution ROYAL BANK OF CANADA
-----------------------------------------------
by /s/ John M. Crawford
--------------------------------------------
Name: JOHN M. CRAWFORD
Title: VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Summit Bank
-----------------------------------------------
by /s/ Catherine E. Garrity
--------------------------------------------
Name: Catherine E. Garrity
Title: VP
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution City National Bank
-----------------------------------------------
by /s/ Patrick M. Cassidy
--------------------------------------------
Name: Patrick M. Cassidy
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Northern Trust Company
-----------------------------------------------
by /s/ Mark R. Moteuelle
--------------------------------------------
Name: Mark R. Motuelle
Title: Second Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Mercantile Bank National Association
-----------------------------------------------
by /s/ Kirk A. Porter
--------------------------------------------
Name: KIRK A. PORTER
Title: SENIOR VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution MORGAN GUARANTY TRUST COMPANY OF NEW YORK
-----------------------------------------------
by /s/ R. David Stone
--------------------------------------------
Name: R. David Stone
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Comerica Bank
-----------------------------------------------
by /s/ Kathleen M. Kosperek
--------------------------------------------
Name: KATHLEEN M. KOSPEREK
Title: ACCOUNT Officer
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Dai-Ichi Kangyo Bank, Ltd.
-----------------------------------------------
by /s/ Bertram H. Tang
--------------------------------------------
Name: Bertram H. Tang
Title: Vice President & Group Leader
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution PNC Bank, N.A.
-----------------------------------------------
by /s/ Ralph M. Bowman
--------------------------------------------
Name: RALPH M. BOWMAN
Title: VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution BAYERISCHE HYPO- UND VEREINSBANK AG NEW YORK
BRANCH
-----------------------------------------------
by /s/ Marianne Weinzinger
--------------------------------------------
Name: Marianne Weinzinger
Title: Director
by /s/ Pamela J. Gillons
--------------------------------------------
Name: PAMELA J. GILLONS
Title: ASSOCIATE DIRECTOR
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution NATIONAL WESTMINSTER BANK PLC
-----------------------------------------------
By: NatWest Capital Markets Limited, its Agent
By: Greenwich Capital Markets, Inc., its Agent
by /s/ Richard J. Jacoby
--------------------------------------------
Name: Richard J. Jacoby
Title: Assistant Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
SENIOR DEBT PORTFOLIO
Name of Institution Boston Management and Research as Investment
Advisor
-----------------------------------------------
by /s/ Barbara Campbell
--------------------------------------------
Name:
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Bank of Nova Scotia
-----------------------------------------------
by /s/ John Campbell
--------------------------------------------
Name: John Campbell
Title: Managing Director and Unit Head
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Sanwa Bank, Limited
-----------------------------------------------
by /s/ Christopher DiCarlo
--------------------------------------------
Name: Christopher DiCarlo
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Banque Nationale de Paris
-----------------------------------------------
by /s/ Arnaud Collin du Bocage
--------------------------------------------
Name: Arnaud Collin du Bocage
Title: Executive Vice President and
General Manager
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Barclays Bank PLC
-----------------------------------------------
by /s/ Paul Kavanagh
--------------------------------------------
Name: PAUL KAVANAGH
Title: DIRECTOR
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution First Security Bank, N.A.
-----------------------------------------------
by /s/ Troy S. Akagi
--------------------------------------------
Name: Troy S. Akagi
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Industrial Bank of Japan, Limited
-----------------------------------------------
by /s/ J. Kenneth Biegen
--------------------------------------------
Name: J. KENNETH BIEGEN
Title: SENIOR VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution The Fuji Bank, Limited
-----------------------------------------------
by /s/ Raymond Ventura
--------------------------------------------
Name: RAYMOND VENTURA
Title: Vice President & Manager
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Sun Trust Bank, Inc. (formerly Crestar)
-----------------------------------------------
by /s/ Charles J. Johnson
--------------------------------------------
Name: Charles J. Johnson
Title: Director
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Bank One, Indiana N.A.
-----------------------------------------------
by /s/ Randall K. Stephens
--------------------------------------------
Name: Randall K. Stephens
Title: Managing Director
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution SPS TRADES
-----------------------------------------------
by /s/ John F. Gehebe
--------------------------------------------
Name: JOHN F. GEHEBE
Title: VICE PRESIDENT
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution GENERAL ELECTRIC CAPTIAL CORPORATION
-----------------------------------------------
by /s/ William E. Magee
--------------------------------------------
Name: WILLIAM E. MAGEE
Title: DULY AUTHORIZED SIGNATORY
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Union Bank of California, N.A.
-----------------------------------------------
by /s/ J. Scott Jessup
--------------------------------------------
Name: J. Scott Jessup
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution BANK OF TOKYO-MITSUBISHI TRUST CO.
-----------------------------------------------
by /s/ J. Jeffers
--------------------------------------------
Name: J. JEFFERS
Title: SVP & Manager
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution FLEET NATIONAL BANK
-----------------------------------------------
by /s/ Steven Kaelin
--------------------------------------------
Name: Steven Kaelin
Title:
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution BANK OF MONTREAL
-----------------------------------------------
by /s/
--------------------------------------------
Name:
Title:
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution WACHOVIA
-----------------------------------------------
by /s/
--------------------------------------------
Name:
Title:
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution FIRSTAR BANK, N.A.
-----------------------------------------------
by /s/ Toby B. Rau
--------------------------------------------
Name: Toby B. Rau
Title: Vice President
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution SOCIETE GENERALE
-----------------------------------------------
by /s/
--------------------------------------------
Name:
Title:
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution HIBERNIA NATIONAL BANK
-----------------------------------------------
by /s/
--------------------------------------------
Name:
Title:
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Bear Sterns Investment Products, Inc.
-----------------------------------------------
by /s/
--------------------------------------------
Name:
Title:
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution STANDARD CHARTERED BANK
-----------------------------------------------
by /s/
--------------------------------------------
Name:
Title:
<PAGE>
SIGNATURE PAGE TO THE AMENDMENT DATED AS OF FEBRUARY 25, 2000,
AMONG TRICON GLOBAL RESTAURANTS, INC., THE LENDERS AND THE CHASE
MANHATTAN BANK, as Administrative Agent
Name of Institution Credit Agricole Indosuez
-----------------------------------------------
by /s/
--------------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.9
TRICON GLOBAL RESTAURANTS, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
SECTION 1
GENERAL
1.1. PURPOSE. The purpose of the Tricon Global Restaurants, Inc. Executive
Incentive Plan (the "Plan") is to promote the interests of Tricon Global
Restaurants, Inc. (the "Company" or "Tricon") and its stockholders by (i)
motivating executives, by means of performance-related incentives, to achieve
financial goals; (ii) attracting and retaining executives of outstanding
ability; (iii) strengthening the Company's capability to develop, maintain and
direct a competent executive staff; (iv) providing annual incentive compensation
opportunities which are competitive with those of other major corporations; and
(v) enabling executives to participate in the growth and financial success of
the Company.
1.2. PARTICIPATION. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Employees, those persons who will be granted one or more Awards under
the Plan, and thereby become "Participants" in the Plan.
1.3. DEFINITIONS. Capitalized terms in the Plan shall be defined as set forth in
the Plan (including the definition provisions of Section 7 of the Plan).
SECTION 2
AWARDS
2.1. GRANT OF AWARDS.
(a) For any Performance Period, the Committee shall determine and designate
those Eligible Employees (if any) who shall be granted Awards for the period,
and shall establish, with respect to each Award, (i) a Target Amount, expressed
as a percentage of the recipient's base salary for such Performance Period; (ii)
the performance goal(s) for the Performance Period with respect to the Award;
(iii) the payments to be earned with respect to various levels of achievement of
the performance goal(s) for the Performance Period; and (iv) whether the Award
is intended to satisfy the requirements for Performance-Based Compensation. For
any Performance Period for which Awards are granted, the Committee shall create
the Award Schedule, and the determinations required for Awards intended to be
Performance-Compensation shall be made at the time necessary to comply with such
requirements. The grant of an Award to any Eligible Employee for any Performance
Period shall not bestow upon such Eligible Employee the right to receive an
Award for any other Performance Period.
(b) The performance goal(s) to be established with respect to the grant of
any Awards shall be based upon on any one or more of the following measures:
cash flow, earnings per share, return on operating assets, return on equity,
operating profit, net income, revenue growth, shareholder return, gross margin
management, market share improvement, market value added, or economic value
added. Such goals may be particular to a line of business, Subsidiary, or other
unit or may be based on the Company generally.
2.2. DETERMINATION OF AWARD AMOUNT.
Payment with respect to Awards for each Participant for a Performance
Period shall be determined in accordance with the Award Schedule established by
the Committee, subject to the following:
(a) Prior to the payment with respect to any Award designated as intended
to satisfy the requirements for Performance-Based Compensation, the Committee
shall certify the attainment of the performance goal(s) and any other material
terms.
1
<PAGE>
(b) In the sole discretion of the Committee, the Award for each Participant
may be limited to the Participant's Target Amount multiplied by the Percent
Attainment (determined in accordance with the applicable Award Schedule),
subject to the following:
(i) Subject to Section 3 and the provisions of this subsection 2.2,
the Committee may adjust such Award for individual performance on the basis
of such quantitative and qualitative performance measures and evaluations
as it deems appropriate. The Committee may make such adjustments as it
deems appropriate in the case of any Participant whose position with the
Company has changed during the applicable Performance Period.
(ii) The Committee shall have the discretion to adjust performance
goals and the methodology used to measure the determination of the degree
of attainment of such goals; provided, however, that, to the extent
required by the requirements applicable to Performance-Based Compensation,
any Award designated as intended to satisfy the requirements for
Performance-Based Compensation may not be adjusted under this paragraph (b)
or otherwise in a manner that increases the value of such Award. Except as
otherwise provided by the Committee, the Committee shall retain the
discretion to adjust such Awards in a manner that does not increase such
Awards.
(c) Notwithstanding any other provision of the Plan, in no event will a
Participant become eligible for payment for an Award for any calendar year in
excess of $4,000,000.
(d) No segregation of any moneys or the creation of any trust or the making
of any special deposit shall be required in connection with any Awards made or
to be made under the Plan.
2.3. PAYMENT OF AWARDS. The amount earned with respect to any Award shall be
paid in cash at such time as is determined by the Committee. If a Participant to
whom an Award has been made dies prior to the payment of the Award, such payment
shall be delivered to the Participant's legal representative or to such other
person or persons as shall be determined by the Committee. The Company shall
have the right to deduct from all amounts payable under the Plan any taxes
required by law to be withheld with respect thereto; provided, however, that to
the extent provided by the Committee, any payment under the Plan may be deferred
and to the extent deferred, may be credited with an interest or earnings factor
as determined by the Committee.
2.4. TERMINATION OF EMPLOYMENT. Except to the extent otherwise provided by the
Committee, if a Participant's Date of Termination with respect to any Award
occurs prior to the last day of the Performance Period for the Award, then,
except in the case of death, disability or normal retirement (determined in
accordance with the qualified retirement plans of the Company) or except as
provided in Section 3, the Participant shall forfeit the Award.
SECTION 3
CHANGE IN CONTROL
BENEFITS ON CHANGE IN CONTROL.
Within ten (10) business days following the occurrence of a Change in
Control (as defined in the Tricon Global Restaurants, Inc. Long Term Incentive
Plan), each individual who has been granted an annual incentive award pursuant
to the Plan shall be paid an amount equal to (I) to the greater of (A) the
participant's target award for the period in which the Change in Control occurs
and (B) the award the participant would have earned for such period, assuming
continued achievement of the relevant performance goals at the rate achieved as
of the date of the Change in Control, multiplied by (II) a fraction the
numerator of which is the number of days in the performance period which have
elapsed as of the Change in Control, and the denominator of which is the number
of days in the performance period. Any former participant in the Plan who was
granted an annual incentive award pursuant to the Plan for the period in which
the Change in Control occurs and whose employment with the Company was
involuntarily terminated (other than for cause) during a Potential Change in
Control (as defined in the Tricon Global
2
<PAGE>
Restaurants, Inc. Long Term Incentive Plan) and within one year preceding the
occurrence of a Change in Control shall likewise be paid the amount of such
annual incentive award as if Tricon had fully achieved the applicable
performance target(s) for the performance period in which the Change in Control
occurs.
SECTION 4
MISCELLANEOUS
4.1. TRANSFERABILITY. Any payment to which a Participant may be entitled under
the Plan shall be free from the control or interference of any creditor of such
Participant and shall not be subject to attachment or susceptible of
anticipation or alienation. The interest of a Participant shall not be
transferable except by will or the laws of descent and distribution.
4.2. NO RIGHT TO PARTICIPATE; EMPLOYMENT. Neither the adoption of the Plan nor
any action of the Committee shall be deemed to give any Eligible Employee any
right to be designated as a Participant under the Plan. Further, nothing
contained in the Plan, nor any action by the Committee or any other person
hereunder, shall be deemed to confer upon any Eligible Employee any right of
continued employment with the Company or any Subsidiary or Affiliate or to limit
or diminish in any way the right of the Company or any Subsidiary or Affiliate
to terminate his or her employment at any time with or without cause.
4.3. NONEXCLUSIVITY OF THE PLAN. This Plan is not intended to and shall not
preclude the Board from adopting, continuing, amending or terminating such
additional compensation arrangements as it deems desirable for Participants
under this Plan, including, without limitation, any thrift, savings, investment,
stock purchase, stock option, profit sharing, pension, retirement, insurance or
other incentive plan.
SECTION 5
COMMITTEE
5.1. ADMINISTRATION. The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the "Committee") in
accordance with this subsection 5.1. The Committee shall be selected by the
Board, and shall consist solely of two or more non-employee members of the
Board.
5.2. POWERS OF COMMITTEE. The Committee's administration of the Plan shall be
subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible Employees those
persons who shall receive Awards, to determine the time or times of payment with
respect to the Awards, to establish the terms, conditions, performance goals,
restrictions, and other provisions of such Awards, and (subject to the
restrictions imposed by Section 6) to cancel or suspend Awards.
(b) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend, and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any Award made pursuant to the
Plan, and to make all other determinations that may be necessary or advisable
for the administration of the Plan.
(c) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(d) In controlling and managing the operation and administration of the
Plan, the Committee shall take action in a manner that conforms to the articles
and by-laws of the Company, and applicable state corporate law.
5.3. DELEGATION BY COMMITTEE. Except to the extent prohibited by applicable law,
the Committee may allocate all or any portion of its responsibilities and powers
to any one or more of its members and may
3
<PAGE>
delegate all or any part of its responsibilities and powers to any person or
persons selected by it. Any such allocation or delegation may be revoked by the
Committee at any time. Until action to the contrary is taken by the Board or
Committee, the Committee's authority with respect to matters concerning
Participants below the Partners Council or Executive Officer level is delegated
to the Chief Executive Officer and the Chief People Officer of the Company.
5.4. INFORMATION TO BE FURNISHED TO COMMITTEE. The Company, the Subsidiaries,
and the Affiliates shall furnish the Committee with such data and information as
it determines may be required for it to discharge its duties. The records of the
Company, the Subsidiaries, and the Affiliates as to an employee's or
Participant's employment, termination of employment, leave of absence,
reemployment and compensation shall be conclusive on all persons unless
determined to be incorrect. Participants and other persons entitled to benefits
under the Plan must furnish the Committee such evidence, data or information as
the Committee considers desirable to carry out the terms of the Plan.
SECTION 6
AMENDMENT AND TERMINATION
Except as otherwise provided in Section 3, the Board may, at any time,
amend or terminate the Plan, provided that no amendment or termination may, in
the absence of written consent to the change by the affected Participant (or, if
the Participant is not then living, the affected beneficiary), adversely affect
the rights of any Participant or beneficiary under any Award granted under the
Plan prior to the date such amendment is adopted by the Board.
SECTION 7
DEFINED TERMS
In addition to the other definitions contained herein, the following
definitions shall apply for purposes of the Plan:
(a) "Affiliate" means any corporation or other entity which is not a
Subsidiary but as to which the Company possesses a direct or indirect ownership
interest and has power to exercise management control.
(b) "Award" with respect to a Performance Period means a right to receive
cash payments that are contingent on the achievement of performance goals
determined in accordance with Section 2.
(c) "Award Schedule" means the schedule created by the Committee for any
Performance Period that sets forth the performance goals and the amounts (or the
formula for determining the amounts) of any payments earned pursuant to the
Awards granted for that period.
(d) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under
the Exchange Act of 1934, as amended from time to time, except that a Person
shall not be deemed to be the Beneficial Owner of any securities which are
properly filed on a Form 13-G.
(e) "Board" means the Board of Directors of the Company.
(f) A Participant's "Date of Termination" with respect to any Award shall
be the first day occurring on or after the Grant Date for the Award on which the
Participant is not employed by the Company, any Subsidiary, or any Affiliate,
regardless of the reason for the termination of employment; provided that a
termination of employment shall not be deemed to occur by reason of a transfer
of the Participant between the Company and a Subsidiary or an Affiliate, between
a Subsidiary and an Affiliate, or between two Subsidiaries or Affiliates; and
further provided that the Participant's employment shall not be considered
terminated while the Participant is on a leave of absence from the Company, a
Subsidiary, or an Affiliate approved by the Participant's employer. If, as a
result of a sale or other transaction, the Participant's employer ceases to be a
Subsidiary or Affiliate (and the Participant's employer is or becomes an entity
that is separate from the Company), and the Participant is not, at the end of
the 30-day period following the
4
<PAGE>
transaction, employed by the Company or an entity that is then a Subsidiary or
Affiliate, then the occurrence of such transaction shall be treated as the
Participant's Date of Termination caused by the Participant being discharged by
the employer.
(g) "Eligible Employee" means any member of the Partners Council or other
member of senior management of the Company.
(h) "Grant Date" with respect to any Award for any Participant means the
date on which the Award is granted to the Participant in accordance with
subsection 2.1.
(i) "Participant" means an Eligible Employee who is selected by the
Committee to receive one or more Awards under the Plan.
(j) "Performance-Based Compensation" means amounts satisfying the
applicable requirements imposed by section 162(m) of the Internal Revenue Code
of 1986, as amended, and the regulations thereunder, with respect to that term.
(k) "Performance Period" with respect to any Award means the period over
which achievement of performance goals is to be measured, as established by the
Committee at or prior to the Grant Date of the Award.
(l) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act of 1934, as amended, as modified and used in Section 13(d) and
14(d) thereof, except that such term shall not include (i) the Company or any of
its Affiliates, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Subsidiaries, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities , or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
(m) "Subsidiary" means any corporation partnership, joint venture or other
entity during any period in which at least a fifty percent voting or profits
interest is owned, directly or indirectly, by the Company (or by any entity that
is a successor to the Company), and any other business venture designated by the
Committee in which the Company (or any entity that is a successor to the
Company) has a significant interest, as determined in the discretion of the
Committee.
(n) "Target Amount" means the percentage of a Participant's base salary for
a Performance Period as established by the Committee pursuant to subsection 2.1.
5
<PAGE>
EXHIBIT 10.18
TRICON GLOBAL RESTAURANTS, INC.
LONG TERM INCENTIVE PLAN
SECTION 1
GENERAL
1.1. PURPOSE. The Tricon Global Restaurants, Inc. Long Term Incentive Plan (the
"Plan") has been established by Tricon Global Restaurants, Inc. (the "Company"
or "Tricon") to (i) attract and retain persons eligible to participate in the
Plan; (ii) motivate Participants, by means of appropriate incentives, to achieve
long-range goals; (iii) provide incentive compensation opportunities that are
competitive with those of other similar companies; and (iv) align the interests
of Participants with those of the Company's Shareholders.
1.2. PARTICIPATION. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Individuals, those persons who will be granted one or more Awards under
the Plan, and thereby become "Participants" in the Plan.
1.3. OPERATION, ADMINISTRATION, AND DEFINITIONS. The operation and
administration of the Plan, including the Awards made under the Plan, shall be
subject to the provisions of Section 4 (relating to operation and
administration). Capitalized terms in the Plan shall be defined as set forth in
the Plan (including the definition provisions of Section 7 of the Plan).
SECTION 2
OPTIONS AND SARS
2.1. DEFINITIONS.
(a) The grant of an "Option" entitles the Participant to purchase shares of
Stock at an Exercise Price and during a specified time established by the
Committee. Any Option granted under this Section 2 may be either a non-qualified
option (an "NQO") or an incentive stock option (an "ISO"), as determined in the
discretion of the Committee. An "NQO" is an Option that is not intended to be an
"incentive stock option" as that term is described in section 422(b) of the
Code. An "ISO" is an Option that is intended to satisfy the requirements
applicable to an "incentive stock option" described in section 422(b) of the
Code.
(b) A stock appreciation right (an "SAR") entitles the Participant to
receive, in cash or Stock (as determined in accordance with subsection 2.5),
value equal to (or otherwise based on) the excess of: (a) the Fair Market Value
of a specified number of shares of Stock at the time of exercise; over (b) an
Exercise Price established by the Committee.
2.2. EXERCISE PRICE. The "Exercise Price" of each Option and SAR granted under
this Section 2 shall be established by the Committee or shall be determined by a
method established by the Committee at the time the Option or SAR is granted;
except that the Exercise Price shall not be less than 100% of the Fair Market
Value of a share of Stock on the date of grant.
2.3. EXERCISE. An Option and an SAR shall be exercisable in accordance with such
terms and conditions and during such periods as may be established by the
Committee.
2.4. PAYMENT OF OPTION EXERCISE PRICE. The payment of the Exercise Price of an
Option granted under this Section 2 shall be subject to the following:
(a) Subject to the following provisions of this subsection 2.4, the full
Exercise Price for shares of Stock purchased upon the exercise of any Option
shall be paid at the time of such exercise (except that, in
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the case of an exercise arrangement approved by the Committee and described in
paragraph 2.4(c), payment may be made as soon as practicable after the
exercise).
(b) The Exercise Price shall be payable in cash or by tendering, by either
actual delivery of shares or by attestation, shares of Stock acceptable to the
Committee, and valued at Fair Market Value as of the day of exercise, or in any
combination thereof, as determined by the Committee.
(c) The Committee may permit a Participant to elect to pay the Exercise
Price upon the exercise of an Option by irrevocably authorizing a third party to
sell shares of Stock (or a sufficient portion of the shares) acquired upon
exercise of the Option and remit to the Company a sufficient portion of the sale
proceeds to pay the entire Exercise Price and any tax withholding resulting from
such exercise.
2.5. SETTLEMENT OF AWARD. Settlement of Options and SARs is subject to
subsection 4.7.
2.6. NO REPRICING, CANCELLATION, OR RE-GRANT OF OPTIONS. Except for adjustments
pursuant to subsection 4.2(f) (relating to adjustment of shares), the Exercise
Price for any outstanding Option granted under the Plan may not be decreased
after the date of grant nor may an outstanding Option granted under the Plan be
surrendered to the Company as consideration in exchange for the grant of a new
Option with a lower exercise price.
SECTION 3
OTHER STOCK AWARDS
3.1. DEFINITIONS.
(a) A "Stock Unit" Award is the grant of a right to receive shares of Stock
in the future.
(b) A "Performance Share" Award is a grant of a right to receive shares of
Stock or Stock Units which is contingent on the achievement of performance or
other objectives during a specified period.
(c) A "Performance Unit" Award is a grant of a right to receive a
designated dollar value amount of Stock which is contingent on the achievement
of performance or other objectives during a specified period.
(d) A "Restricted Stock" Award is a grant of shares of Stock, and a
"Restricted Stock Unit" Award is the grant of a right to receive shares of Stock
in the future, with such shares of Stock or right to future delivery of such
shares of Stock subject to a risk of forfeiture or other restrictions that will
lapse upon the achievement of one or more goals relating to completion of
service by the Participant, or achievement of performance or other objectives,
as determined by the Committee.
3.2. RESTRICTIONS ON AWARDS. Each Stock Unit Award, Restricted Stock Award,
Restricted Stock Unit Award, Performance Share Award, and Performance Unit Award
shall be subject to the following:
(a) Any such Award shall be subject to such conditions, restrictions and
contingencies as the Committee shall determine.
(b) Any Restricted Stock Award, Restricted Stock Unit Award, Performance
Share Award or Performance Unit Award granted shall provide, at a minimum, that
the restriction or performance period may not be less than three years except in
the case of retirement, death, disability, or termination without cause in which
case the restriction or performance period may be less than three years.
(c) The Committee may designate whether any such Award being granted to any
Participant is intended to be "performance-based compensation" as that term is
used in section 162(m) of the Code. Any such Awards designated as intended to be
"performance-based compensation" shall be conditioned on the achievement of one
or more Performance Measures, to the extent required by Code section 162(m). The
Performance Measures that may be used by the Committee for such Awards shall be
based on any one or more of the following Company, Subsidiary, operating unit or
division performance measures, as selected by the Committee: cash flow;
earnings; earnings per share; market value added or economic value added;
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profits; return on assets; return on equity; return on investment; revenues;
stock price; or total shareholder return. Each goal may be expressed on an
absolute and/or relative basis, may be based on or otherwise employ comparisons
based on internal targets, the past performance of the Company and/or the past
or current performance of other companies, and in the case of earnings-based
measures, may use or employ comparisons relating to capital, shareholders'
equity and/or shares outstanding, investments or to assets or net assets. For
Awards under this Section 3 intended to be "performance-based compensation," the
grant of the Awards and the establishment of the Performance Measures shall be
made during the period required under Code section 162(m).
SECTION 4
OPERATION AND ADMINISTRATION
4.1. EFFECTIVE DATE. Subject to the approval of the shareholders of the Company
at the Company's 1999 annual meeting of its shareholders, the Plan shall be
effective as of May 20, 1999 (the "Effective Date"). The Plan shall be unlimited
in duration and, in the event of Plan termination, shall remain in effect as
long as any Awards under it are outstanding; provided, however, that no Awards
may be granted under the Plan after the ten-year anniversary of the Effective
Date (except for Awards granted pursuant to commitments entered into prior to
such ten-year anniversary).
4.2 The shares of Stock for which Awards may be granted under the Plan shall be
subject to the following:
(a) The shares of Stock with respect to which Awards may be made under the
Plan shall be shares currently authorized but unissued or currently held or
subsequently acquired by the Company as treasury shares, including shares
purchased in the open market or in private transactions.
(b) Subject to the following provisions of this subsection 4.2, the maximum
number of shares of Stock that may be delivered to Participants and their
beneficiaries under the Plan shall be 7,600,000.
(c) To the extent provided by the Committee, any Award may be settled in
cash rather than Stock. To the extent any shares of Stock covered by an Award
are not delivered to a Participant or beneficiary because the Award is forfeited
or canceled, or the shares of Stock are not delivered because the Award is
settled in cash or used to satisfy the applicable tax withholding obligation,
such shares shall not be deemed to have been delivered for purposes of
determining the maximum number of shares of Stock available for delivery under
the Plan.
(d) If the exercise price of any stock option granted under the Plan is
satisfied by tendering shares of Stock to the Company (by either actual delivery
or by attestation), only the number of shares of Stock issued net of the shares
of Stock tendered shall be deemed delivered for purposes of determining the
maximum number of shares of Stock available for delivery under the Plan.
(e) Subject to paragraph 4.2(f), the following additional maximums are
imposed under the Plan.
(i) The maximum number of shares that may be covered by Awards granted
to any one individual pursuant to Section 2 (relating to Options and SARs)
shall be 2,000,000 shares during any five calendar-year period. If an
Option is in tandem with an SAR, such that the exercise of the Option or
SAR with respect to a share of Stock cancels the tandem SAR or Option
right, respectively, with respect to such share, the tandem Option and SAR
rights with respect to each share of Stock shall be counted as covering one
share of Stock for purposes of applying the limitations of this paragraph
(ii).
(ii) For Stock Unit Awards, Restricted Stock Awards, Restricted Stock
Unit Awards and Performance Share Awards that are intended to be
"performance-based compensation" (as that term is used for purposes of Code
section 162(m)), no more than 300,000 shares of Stock may be subject to
such Awards granted to any one individual during any five-calendar-year
period (regardless of when such shares are deliverable). If, after shares
have been earned, the delivery is deferred, any additional shares
attributable to dividends during the deferred period shall be disregarded.
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(iii) The maximum number of shares of Stock that may be issued in
conjunction with Awards granted pursuant to Section 3 (relating to Other
Stock Awards) shall be 500,000 shares except that Stock Units or Restricted
Shares granted with respect to the deferral of annual cash incentive awards
under the Company's deferral plan will not count towards this maximum.
(iv) For Performance Unit Awards that are intended to be
"performance-based compensation" (as that term is used for purposes of Code
section 162(m)), no more than $1,000,000 may be subject to such Awards
granted to any one individual during any one-calendar-year period
(regardless of when such amounts are deliverable). If, after amounts have
been earned with respect to Performance Unit Awards, the delivery of such
amounts is deferred, any additional amounts attributable to earnings during
the deferral period shall be disregarded.
(v) Awards to non-employee directors are limited to (i) an annual
Stock grant retainer with a Fair Market Value of $50,000; (ii) an annual
grant of options to buy $50,000 worth of Tricon's Stock at a price equal to
the Fair Market Value of a share of Stock on the grant date; and (iii) a
one-time Stock grant with a Fair Market Value of $25,000 on the grant date
upon joining the Board, payment of which will be deferred until termination
from the Board. The Board may increase these awards by twenty-five percent
(25%) of the amounts described in the previous sentence if necessary to
keep compensation of directors within competitive practices.
(f) In the event of a corporate transaction involving the Company
(including, without limitation, any stock dividend, stock split, extraordinary
cash dividend, recapitalization, reorganization, merger, consolidation,
split-up, spin-off, combination or exchange of shares), the Committee may adjust
Awards to preserve the benefits or potential benefits of the Awards. Action by
the Committee may include: (i) adjustment of the number and kind of shares which
may be delivered under the Plan; (ii) adjustment of the number and kind of
shares subject to outstanding Awards; (iii) adjustment of the Exercise Price of
outstanding Options and SARs; and (iv) any other adjustments that the Committee
determines to be equitable.
4.3. GENERAL RESTRICTIONS. Delivery of shares of Stock or other amounts under
the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall have
no liability to deliver any shares of Stock under the Plan or make any other
distribution of benefits under the Plan unless such delivery or distribution
would comply with all applicable laws (including, without limitation, the
requirements of the Securities Act of 1933), and the applicable requirements of
any securities exchange or similar entity.
(b) To the extent that the Plan provides for issuance of stock certificates
to reflect the issuance of shares of Stock, the issuance may be effected on a
non-certificated basis, to the extent not prohibited by applicable law or the
applicable rules of any stock exchange.
4.4. TAX WITHHOLDING. All distributions under the Plan are subject to
withholding of all applicable taxes, and the Committee may condition the
delivery of any shares or other benefits under the Plan on satisfaction of the
applicable withholding obligations. The Committee, in its discretion, and
subject to such requirements as the Committee may impose prior to the occurrence
of such withholding, may permit such withholding obligations to be satisfied
through cash payment by the Participant, through the surrender of shares of
Stock which the Participant already owns, or through the surrender of shares of
Stock to which the Participant is otherwise entitled under the Plan.
4.5. GRANT AND USE OF AWARDS. In the discretion of the Committee, a Participant
may be granted any Award permitted under the provisions of the Plan, and more
than one Award may be granted to a Participant. Awards may be granted as
alternatives to or replacement of awards granted or outstanding under the Plan,
or any other plan or arrangement of the Company or a Subsidiary (including a
plan or arrangement of a business or entity, all or a portion of which is
acquired by the Company or a Subsidiary). Subject to the overall limitation on
the number of shares of Stock that may be delivered under the Plan, the
Committee may use available shares of Stock as the form of payment for
compensation, grants or
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rights earned or due under any other compensation plans or arrangements of the
Company or a Subsidiary, including the plans and arrangements of the Company or
a Subsidiary assumed in business combinations.
4.6. DIVIDENDS AND DIVIDEND EQUIVALENTS. An Award (including without limitation
an Option or SAR Award) may provide the Participant with the right to receive
dividend payments or dividend equivalent payments with respect to Stock subject
to the Award (both before and after the Stock subject to the Award is earned,
vested, or acquired), which payments may be either made currently or credited to
an account for the Participant, and may be settled in cash or Stock, as
determined by the Committee. Any such settlements, and any such crediting of
dividends or dividend equivalents or reinvestment in shares of Stock, may be
subject to such conditions, restrictions and contingencies as the Committee
shall establish, including the reinvestment of such credited amounts in Stock
equivalents.
4.7. SETTLEMENT AND PAYMENTS. Awards may be settled through cash payments, the
delivery of shares of Stock, the granting of replacement Awards, or combination
thereof as the Committee shall determine. Any Award settlement, including
payment deferrals, may be subject to such conditions, restrictions and
contingencies as the Committee shall determine. The Committee may permit or
require the deferral of any Award payment, subject to such rules and procedures
as it may establish, which may include provisions for the payment or crediting
of interest, or dividend equivalents, including converting such credits into
deferred Stock equivalents. Each Subsidiary shall be liable for payment of cash
due under the Plan with respect to any Participant to the extent that such
benefits are attributable to the services rendered for that Subsidiary by the
Participant. Any disputes relating to liability of a Subsidiary for cash
payments shall be resolved by the Committee.
4.8. TRANSFERABILITY. Except as otherwise provided by the Committee, Awards
under the Plan are not transferable except as designated by the Participant by
will or by the laws of descent and distribution.
4.9. FORM AND TIME OF ELECTIONS. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification, or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.
4.10. AGREEMENT WITH COMPANY. An Award under the Plan shall be subject to such
terms and conditions, not inconsistent with the Plan, as the Committee shall, in
its sole discretion, prescribe. The terms and conditions of any Award to any
Participant shall be reflected in such form of written document as is determined
by the Committee. A copy of such document shall be provided to the Participant,
and the Committee may, but need not require that the Participant sign a copy of
such document. Such document is referred to in the Plan as an "Award Agreement"
regardless of whether any Participant signature is required.
4.11. ACTION BY COMPANY OR SUBSIDIARY. Any action required or permitted to be
taken by the Company or any Subsidiary shall be by resolution of its board of
directors, or by action of one or more non-employee members of the board
(including a committee of the board) who are duly authorized to act for the
board, or (except to the extent prohibited by applicable law or applicable rules
of any stock exchange) by a duly authorized officer of such company, or by any
employee of the Company or any Subsidiary who is delegated by the board of
directors authority to take such action.
4.12. GENDER AND NUMBER. Where the context admits, words in any gender shall
include any other gender, words in the singular shall include the plural and the
plural shall include the singular.
4.13. LIMITATION OF IMPLIED RIGHTS.
(a) Neither a Participant nor any other person shall, by reason of
participation in the Plan, acquire any right in or title to any assets, funds or
property of the Company or any Subsidiary whatsoever, including, without
limitation, any specific funds, assets, or other property which the Company or
any
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Subsidiary, in its sole discretion, may set aside in anticipation of a liability
under the Plan. A Participant shall have only a contractual right to the Stock
or amounts, if any, payable under the Plan, unsecured by any assets of the
Company or any Subsidiary, and nothing contained in the Plan shall constitute a
guarantee that the assets of the Company or any Subsidiary shall be sufficient
to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection as
a Participant will not give any participating employee or other individual the
right to be retained in the employ of the Company or any Subsidiary or the right
to continue to provide services to the Company or any Subsidiary, nor any right
or claim to any benefit under the Plan, unless such right or claim has
specifically accrued under the terms of the Plan. Except as otherwise provided
in the Plan, no Award under the Plan shall confer upon the holder thereof any
rights as a shareholder of the Company prior to the date on which the individual
fulfills all conditions for receipt of such rights.
4.14. EVIDENCE. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
SECTION 5
CHANGE IN CONTROL
Subject to the provisions of paragraph 4.2(f) (relating to the adjustment
of shares), and except as otherwise provided in the Plan or the Award Agreement
reflecting the applicable Award, the Committee may provide under the terms of
any Award that upon the occurrence of a Change in Control:
(a) All outstanding Options (regardless of whether in tandem with SARs)
shall become fully exercisable.
(b) All outstanding SARs (regardless of whether in tandem with Options)
shall become fully exercisable.
(c) All Stock Units, Restricted Stock, Restricted Stock Units, and
Performance Shares (including any Award payable in Stock which is granted in
conjunction with a Company deferral program) shall become fully vested.
SECTION 6
COMMITTEE
6.1. ADMINISTRATION. The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the "Committee") in
accordance with this Section 6. The Committee shall be selected by the Board,
and shall consist solely of two or more non-employee members of the Board. If
the Committee does not exist, or for any other reason determined by the Board,
the Board may take any action under the Plan that would otherwise be the
responsibility of the Committee. As of the date this Plan is adopted, the
Committee shall mean the Compensation Committee of the Board of Directors.
6.2. POWERS OF COMMITTEE. The Committee's administration of the Plan shall be
subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible Individuals those
persons who shall receive Awards, to determine the time or times of receipt, to
determine the types of Awards and the number of shares covered by the Awards, to
establish the terms, conditions, performance criteria, restrictions, and other
provisions of such Awards, and (subject to the restrictions imposed by Section
7) to cancel or suspend Awards.
(b) To the extent that the Committee determines that the restrictions
imposed by the Plan preclude the achievement of the material purposes of the
Awards in jurisdictions outside the United States, the Committee will have the
authority and discretion to modify those restrictions as the Committee
determines
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to be necessary or appropriate to conform to applicable requirements or
practices of jurisdictions outside of the United States.
(c) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend, and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any Award Agreement made pursuant
to the Plan, and to make all other determinations that may be necessary or
advisable for the administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(e) In controlling and managing the operation and administration of the
Plan, the Committee shall take action in a manner that conforms to the articles
and by-laws of the Company, and applicable state corporate law.
6.3. DELEGATION BY COMMITTEE. Except to the extent prohibited by applicable law
or the applicable rules of a stock exchange, the Committee may allocate all or
any portion of its responsibilities and powers to any one or more of its members
and may delegate all or any part of its responsibilities and powers to any
person or persons selected by it. Any such allocation or delegation may be
revoked by the Committee at any time. Until action to the contrary is taken by
the Board or the Committee, the Committee's authority with respect to Awards and
other matters concerning Participants below the Partners Council or Executive
Officer level is delegated to the Chief Executive Officer or the Chief People
Officer of the Company.
6.4. INFORMATION TO BE FURNISHED TO COMMITTEE. The Company and Subsidiaries
shall furnish the Committee with such data and information as it determines may
be required for it to discharge its duties. The records of the Company and
Subsidiaries as to an employee's or Participant's employment (or other provision
of services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect. Participants and other persons
entitled to benefits under the Plan must furnish the Committee such evidence,
data or information as the Committee considers desirable to carry out the terms
of the Plan.
6.5 MISCONDUCT. If the Committee determines that a present or former employee
has (i) used for profit or disclosed to unauthorized persons, confidential or
trade secrets of Tricon; (ii) breached any contract with or violated any
fiduciary obligation to Tricon; or (iii) engaged in any conduct which the
Committee determines is injurious to the Company, the Committee may cause that
employee to forfeit his or her outstanding awards under the Plan, provided,
however, that during the pendency of a Potential Change in Control and as of and
following the occurrence a Change in Control, no outstanding awards under the
Plan shall be subject to forfeiture pursuant to this Section 6.5. A "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:
A "Potential Change in Control" shall exist during any period in which the
circumstances described in items (i), (ii), (iii) or (iv), below, exist
(provided, however, that a Potential Change in Control shall cease to exist not
later than the occurrence of a Change in Control):
(i) The Company or any successor or assign thereof enters into an
agreement, the consummation of which would result in the occurrence of a
Change in Control; provided that a Potential Change in Control described in
this item (i) shall cease to exist upon the expiration or other termination
of all such agreements.
(ii) Any Person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated would
constitute a Change in Control; provided that a Potential Change in Control
described in this item (ii) shall cease to exist upon the withdrawal of
such intention, or upon a reasonable determination by the Board that there
is no reasonable chance that such actions would be consummated.
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(iii) Any Person becomes the Beneficial Owner, directly or indirectly,
of securities of the Company representing 15% or more of 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 any of its affiliates). However, a Potential
Change in Control shall not be deemed to exist by reason of ownership of
securities of the Company by any person, to the extent that such securities
of the Company are acquired pursuant to a reorganization, recapitalization,
spin-off or other similar transactions (including a series of prearranged
related transactions) to the extent that immediately after such transaction
or transactions, such securities are directly or indirectly owned in
substantially the same proportions as the proportions of ownership of the
Company's securities immediately prior to the transaction or transactions.
(iv) The Board adopts a resolution to the effect that, for purposes of
this Plan, a potential change in control exists; provided that a Potential
Change in Control described in this item (iv) shall cease to exist upon a
reasonable determination by the Board that the reasons that give rise to
the resolution providing for the existence of a Potential Change in Control
have expired or no longer exist."
SECTION 7
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that (i)
no amendment or termination may, in the absence of written consent to the change
by the affected Participant (or, if the Participant is not then living, the
affected beneficiary), adversely affect the rights of any Participant or
beneficiary under any Award granted under the Plan prior to the date such
amendment is adopted by the Board; (ii) no amendments may increase the
limitations on the number of shares set forth in subsections 4.2(b) and 4.2(e)
or decrease the minimum Option or SAR Exercise Price set forth in subsection 2.2
unless any such amendment is approved by the Company's shareholders; (iii) the
provisions of subsection 2.6 (relating to Option repricing) may not be amended,
unless any such amendment is approved by the Company's shareholders; (iv) no
amendment may expand the definition of Eligible Individual in subsection 8(e),
unless any such amendment is approved by the Company's shareholders; (v) no
amendment may decrease the minimum restriction or performance period set forth
in subsection 3.2(c), unless any such amendment is approved by the Company's
shareholders; and (vi) adjustments pursuant to subsection 4.2(f) shall not be
subject to the foregoing limitations of this Section 7.
SECTION 8
DEFINED TERMS
In addition to the other definitions contained herein, the following
definitions shall apply:
(a) AWARD. The term "Award" shall mean any award or benefit granted under
the Plan, including, without limitation, the grant of Options, SARs, Stock Unit
Awards, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Unit
Awards, and Performance Share Awards.
(b) BOARD. The term "Board" shall mean the Board of Directors of the
Company.
(c) CHANGE IN CONTROL. Except as otherwise provided by the Committee, 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
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(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 stockholders 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 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 ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under Section 12
of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the
Exchange Act, except that a Person shall not be deemed to be the Beneficial
Owner of any securities which are properly filed on a Form 13-G.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"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) Tricon or any of its Affiliates; (ii) a trustee or
other fiduciary holding securities under an employee benefit plan of Tricon or
any of its subsidiaries; (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities; or (iv) a corporation owned,
directly or indirectly, by the stockholders of Tricon in substantially the same
proportions as their ownership of stock of Tricon.
(d) CODE. The term "Code" means the Internal Revenue Code of 1986, as
amended. A reference to any provision of the Code shall include reference to any
successor provision of the Code.
(e) ELIGIBLE INDIVIDUAL. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a Subsidiary, and any
director of the Company. An Award may be granted to an employee, in connection
with hiring, retention or otherwise, prior to the date the employee or service
provider first performs services for the Company or the Subsidiaries, provided
that such Awards shall not become vested prior to the date the employee or
service provider first performs such services.
(f) FAIR MARKET VALUE. For purposes of determining the "Fair Market Value"
of a share of Stock as of any date, Fair Market Value shall mean the average
between the lowest and highest reported sale prices of the Stock on that date on
the principal exchange on which the Stock is then listed or admitted to trading.
9
<PAGE>
If the day is not a business day, and as a result, paragraphs (i) and (ii) next
above are inapplicable, the Fair Market Value of the Stock shall be determined
as of the last preceding business day.
(g) SUBSIDIARIES. The term "Subsidiary" means any corporation, partnership,
joint venture or other entity during any period in which at least a fifty
percent voting or profits interest is owned, directly or indirectly, by the
Company (or by any entity that is a successor to the Company), and any other
business venture designated by the Committee in which the Company (or any entity
that is a successor to the Company) has a significant interest, as determined in
the discretion of the Committee.
(h) STOCK. The term "Stock" shall mean shares of common stock of the
Company.
10
<PAGE>
EXHIBIT 12
TRICON Global Restaurants, Inc.
Ratio of Earnings to Fixed Charges Years Ended 1999-1995
(in millions except ratio amounts)
<TABLE>
<CAPTION>
52 Weeks
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax income from continuing operations before
cumulative effect of accounting changes(a) 1,038 756 (35) 72 (103)
Minorities interests in consolidated subsidiaries - - - (1) -
Unconsolidated affiliates' interests,
net(a) (12) (10) (3) (6) 26
Interest expense(a) 218 291 290 310 368
Interest portion of net rent expense(a) 94 105 118 116 109
--------- --------- --------- -------- --------
Earnings available for fixed charges 1,338 1,142 370 491 400
========= ========= ========= ======== ========
Fixed Charges:
Interest Expense(a) 218 291 290 310 368
Interest portion of net rent expense(a) 94 105 118 116 109
--------- --------- --------- -------- --------
Total Fixed Charges 312 396 408 426 477
========= ========= ========= ======== ========
Ratio of Earnings to Fixed
Charges(b)(c) 4.29x 2.88x 0.91x 1.15x 0.84x
</TABLE>
(a) Included in earnings for the years 1995 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) pretax income from continuing operations before income
taxes and cumulative effect of accounting changes the following: fixed
charges, excluding capitalized interest; (minority interests in
consolidated subsidiaries); (equity income (loss) from unconsolidated
affiliates); and distributed income from unconsolidated affiliates. Fixed
charges consist of interest on borrowings, the allocation of PepsiCo's
interest expense for years 1995-1997 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 our 1999
Form 10-K.
(b) Included the impact of unusual charges (credits) of $51 million ($29
million after-tax) in 1999, $15 million ($3 million after-tax) in 1998,
$184 million ($165 million after tax) in 1997, $246 million ($189 million
after tax) in 1996 and $457 million ($324 million after tax) in 1995.
Excluding the impact of such charges, the ratio of earnings to fixed
charges would have been 4.45x, 2.92x, 1.36x, 1.73x and 1.80x for the fiscal
years ended 1999, 1998, 1997, 1996 and 1995, respectively.
(c) For the fiscal years December 27, 1997 and December 30, 1995, earnings were
insufficient to cover fixed charges by approximately $38 million and $77
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 21.1
SUBSIDIARIES OF TRICON
----------------------
AS OF DECEMBER 31, 1999 (1)
-----------------------
State or
Country of
Name of Subsidiary Incorporation
- ------------------ --------------
A & M Food Services, Inc. Nevada
Calny, Inc. Delaware
Changsha KFC Co., Ltd. China
Chengdu KFC China
Chongqing KFC Co., Ltd. China
Dalian Kentucky Fried Chicken Co., Ltd. China
El KrAm, Inc Iowa
Glenharney Insurance Company Vermont
Guangdong KFC Co., Ltd. China
Hangzhou KFC China
Kentucky Fried Chicken (Great Britain) Limited United Kingdom
Kentucky Fried Chicken Beijing Co., Ltd. China
Kentucky Fried Chicken Corporate Holdings Ltd. Delaware
Kentucky Fried Chicken Corporation Delaware
Kentucky Fried Chicken de Mexico, S.A. de C.V. Mexico
Kentucky Fried Chicken Espana, S.L. Spain
Kentucky Fried Chicken Global B.V. Netherlands
Kentucky Fried Chicken International Holdings, Inc. Delaware
Kentucky Fried Chicken Japan Ltd. Japan
Kentucky Fried Chicken of California, Inc. Delaware
Kentucky Fried Chicken of Southern California, Inc. California
Kentucky Fried Chicken Worldwide B.V. Netherlands
KFC Corporation Delaware
KFC Enterprises, Inc. Delaware
KFC France SAS France
KFC International (Thailand) Ltd. Thailand
KFC Management Pte. Ltd. Singapore
KFC National Management Company Delaware
KFC Pty. Ltd. Australia
KFCC/TRICON Holdings Ltd. Canada
Nanjling KFC Co. Ltd. China
PCNZ Investments Ltd. Mauritius
PCNZ Ltd. Mauritius
PepsiCo Eurasia Limited Delaware
PHM de Mexico S.A. de C.V. Mexico
Pizza Belgium B.V.B.A. Belgium
Pizza France S.N.C. France
Pizza Gida Isletmeleri A.S. Turkey
Pizza Hut (U.K.) Ltd. United Kingdom
Pizza Hut International (UK) Ltd. United Kingdom
1
<PAGE>
State or
Country of
Name of Subsidiary Incorporation
- ------------------ --------------
Pizza Hut International, LLC Delaware
Pizza Hut Korea Co., Ltd. Korea
Pizza Hut Mexicana S.A. de C.V. Mexico
Pizza Hut of America, Inc. Delaware
Pizza Hut of Puerto Rico, Inc. Delaware
Pizza Hut Singapore Pte. Ltd. Singapore
Pizza Hut West, Inc. California
Pizza Hut, Inc. California
Pizza Huts of the Northwest, Inc. Minnesota
Pizza Management, Inc. Texas
Qingdao Kentucky Fried Chicken Co. Ltd. China
Red Raider Pizza Company Delaware
Restaurant Holdings Ltd. United Kingdom
SEPSA S.N.C. France
Shanghai Kentucky Fried Chicken China
Shanghai Pizza Hut Co. Ltd. China
Shenyang KFC Co., Ltd. China
Shenzhen KFC Co., Ltd. China
Spizza 30 S.A.S. France
Suzhou KFC China
Taco Bell Corp. California
Taco Bell of America, Inc. Delaware
Taco Bell of California, Inc. California
Taco Caliente, Inc. Arizona
Taco Del Sur, Inc. Georgia
Taco Enterprises, Inc. Michigan
TB Holdings California
TBLD Corp. California
Tenga Taco, Inc. Florida
Tianjin KFC Co. China
Tricon (China) Investment Company, Ltd. China
Tricon (Shanghai) Consulting Co., Ltd. China
Tricon Global Restaurants (Canada), Inc. Canada
Tricon Global Restaurants of Puerto Rico, Inc. Delaware
Tricon Global Restaurants S.A. de C.V. Mexico
Tricon International Participations S.a.r.l. Luxembourg
Tricon Restaurant Services Group, Inc. Delaware
TRICON Restaurants (Taiwan) Co., Ltd. Taiwan
TRICON Restaurants Australia Pty Ltd. Australia
Tricon Restaurants International (India) Pvt. Ltd. India
Tricon Restaurants International Ltd. & Co. K.G. Germany
Tricon Restaurants International, Ltd. Cayman Islands
2
<PAGE>
State or
Country of
Name of Subsidiary Incorporation
- ------------------ --------------
Tricon Restaurants Poland Sp.Zo.o. Poland
Tricon Restaurants South Africa Pty. Ltd. South Africa
Tricon Singapore Holdings Pte. Ltd. Singapore
Upper Midwest Pizza Hut, Inc. Delaware
Von Karman Leasing Corp. Delaware
Wuhan KFC Co. Ltd. China
Wuxi KFC Co., Ltd. China
Xiamen - KFC Co., Ltd. China
- -------------------------
Note:
(1) This Schedule lists the entities that were active subsidiaries of Tricon as
of December 31, 1999. Omitted from the above list are approximately 75
insignificant or inactive subsidiaries which, if considered in the
aggregate as a single subsidiary, would not constitute a significant
subsidiary. The list also excludes approximately 75 subsidiaries of Pizza
Hut, Inc., most of which operate restaurants in the U.S., and approximately
30 subsidiaries of Kentucky Fried Chicken Corporation and Kentucky Fried
Chicken of California, Inc., most of which operate restaurants outside of
the U.S.
3
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
TRICON Global Restaurants, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-42969) on Form S-3/A and (Nos. 333-36877, 333-36955, 333-36895, 333-36961,
333-36893, 333-64547, 333-85073 and 333-85069) on Form S-8 of our report dated
February 8, 2000, except as to Note 11, which is as of February 25, 2000,
relating to the consolidated balance sheet of TRICON Global Restaurants, Inc.
and Subsidiaries as of December 25, 1999 and December 26, 1998, and the related
consolidated statements of operations, cash flows and shareholders' (deficit)
equity and comprehensive income for each of the years in the three-year period
ended December 25, 1999, which report appears in the Company's December 25, 1999
annual report on Form 10-K of TRICON Global Restaurants, Inc.
KPMG LLP
Louisville, Kentucky
March 6, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from TRICON
Global Restaurants, Inc. Condensed Consolidated Financial Statements for
the fiscal year ended December 25, 1999 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> Year
<FISCAL-YEAR-END> Dec-25-1999
<PERIOD-START> Dec-27-1998
<PERIOD-END> Dec-25-1999
<EXCHANGE-RATE> 1.000
<CASH> 89
<SECURITIES> 48
<RECEIVABLES> 174
<ALLOWANCES> 13
<INVENTORY> 61
<CURRENT-ASSETS> 486
<PP&E> 4,825
<DEPRECIATION> 2,294
<TOTAL-ASSETS> 3,961
<CURRENT-LIABILITIES> 1,298
<BONDS> 2,391
0
0
<COMMON> 1,264
<OTHER-SE> (1,824)
<TOTAL-LIABILITY-AND-EQUITY> 3,961
<SALES> 7,099
<TOTAL-REVENUES> 7,822
<CGS> 4,194
<TOTAL-COSTS> 6,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 202
<INCOME-PRETAX> 1,038
<INCOME-TAX> 411
<INCOME-CONTINUING> 627
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-BASIC> 4.09
<EPS-DILUTED> 3.92
</TABLE>
