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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[|X|] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 18, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 1-13163
TRICON GLOBAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-3951308
- -------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 Gardiner Lane, Louisville, Kentucky 40213
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 874-8300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's Common Stock as of
April 25, 2000 was 147,439,694 shares.
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TRICON GLOBAL RESTAURANTS, INC.
INDEX
Page No.
--------
Part I. Financial Information
Condensed Consolidated Statement of Income - 12 weeks ended
March 18, 2000 and March 20, 1999 3
Condensed Consolidated Statement of Cash Flows - 12 weeks ended
March 18, 2000 and March 20, 1999 4
Condensed Consolidated Balance Sheet - March 18, 2000 and
December 25, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Independent Accountants' Review Report 32
Part II. Other Information and Signatures 33
2
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
(in millions, except per share data - unaudited)
12 Weeks Ended
-------------------------
3/18/00 3/20/99
---------- ----------
Revenues
Company sales $ 1,425 $ 1,662
Franchise and license fees 172 151
---------- ----------
1,597 1,813
---------- ----------
Costs and Expenses, net
Company restaurants
Food and paper 441 528
Payroll and employee benefits 410 463
Occupancy and other operating expenses 373 412
---------- ----------
1,224 1,403
General and administrative expenses 181 213
Other (income) expense (7) (5)
Facility actions net gain (47) (34)
Unusual items 4 -
---------- ----------
Total costs and expenses, net 1,355 1,577
---------- ----------
Operating Profit 242 236
Interest expense, net 41 52
---------- ----------
Income Before Income Taxes 201 184
Income Tax Provision 81 78
---------- ----------
Net Income $ 120 $ 106
========== ==========
Basic Earnings Per Common Share $ 0.81 $ 0.69
========== ==========
Diluted Earnings Per Common Share $ 0.80 $ 0.66
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
(in millions - unaudited)
12 Weeks Ended
-------------------------
3/18/00 3/20/99
---------- -----------
Cash Flows - Operating Activities
Net Income $ 120 $ 106
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 82 95
Facility actions net gain (47) (34)
Other liabilities and deferred credits (36) 13
Deferred income taxes (14) (21)
Other non-cash charges and credits, net 18 33
Changes in operating working capital, excluding
effects of acquisitions and dispositions:
Accounts and notes receivable (194) (24)
Inventories (75) 5
Prepaid expenses and other current assets (16) (14)
Accounts payable and other current liabilities 77 (213)
Income taxes payable 67 78
---------- -----------
Net change in operating working capital (141) (168)
---------- -----------
Net Cash (Used In) Provided by Operating Activities (18) 24
---------- -----------
Cash Flows - Investing Activities
Capital spending (68) (66)
Refranchising of restaurants 83 121
Acquisition of restaurants - (6)
Sales of property, plant and equipment 6 3
AmeriServe debtor-in-possession revolving credit
facility (31) -
Short-term investments (75) (16)
Other, net (15) 6
---------- -----------
Net Cash (Used In) Provided by Investing Activities (100) 42
---------- -----------
Cash Flows - Financing Activities
Revolving Credit Facility activity, by original
maturity
Three months or less, net 200 (80)
Proceeds from long-term debt 1 1
Payments of long-term debt (36) (13)
Short-term borrowings-three months or less, net 90 9
Repurchase shares of common stock (138) -
Other, net 14 6
---------- -----------
Net Cash Provided by (Used In) Financing Activities 131 (77)
---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 13 (11)
Cash and Cash Equivalents - Beginning of Period 89 121
---------- -----------
Cash and Cash Equivalents - End of Period $ 102 $ 110
========== ===========
- --------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 32 $ 47
Income taxes paid 23 22
Significant Non-Cash Investing and Financing
Activities:
Issuance of promissory note to acquire temporary
control of an unconsolidated affiliate $ 25 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED BALANCE SHEET
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
(in millions)
3/18/00 12/25/99
------------ ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 102 $ 89
Short-term investments, at cost 122 48
Accounts and notes receivable, less allowance:
$15 in 2000 and $13 in 1999 386 161
Inventories 137 61
Prepaid expenses and other current assets 83 68
Deferred income taxes 59 59
------------ ------------
Total Current Assets 889 486
Property, Plant and Equipment, net 2,528 2,531
Intangible Assets, net 495 527
Investments in Unconsolidated Affiliates 192 170
Other Assets 268 247
------------ ------------
Total Assets $ 4,372 $ 3,961
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 1,127 $ 1,085
Income taxes payable 163 96
Short-term borrowings 205 117
------------ ------------
Total Current Liabilities 1,495 1,298
Long-term Debt 2,583 2,391
Other Liabilities and Deferred Credits 815 825
Deferred Income Taxes 7 7
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Total Liabilities 4,900 4,521
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Shareholders' Deficit
Preferred stock, no par value, 250 shares
authorized; no shares issued - -
Common stock, no par value, 750 shares
authorized; 148 and 151 shares issued in 2000
and 1999, respectively 1,176 1,264
Accumulated deficit (1,570) (1,691)
Accumulated other comprehensive income (134) (133)
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Total Shareholders' Deficit (528) (560)
------------ ------------
Total Liabilities and Shareholders'
Deficit $ 4,372 $ 3,961
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
(Unaudited)
1. Financial Statement Presentation
We have prepared our accompanying unaudited Condensed Consolidated
Financial Statements ("Financial Statements") in accordance with the rules
and regulations of the Securities and Exchange Commission for interim
financial information. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements. Therefore, we suggest that the accompanying
Financial Statements be read in conjunction with the Consolidated Financial
Statements and notes thereto included in our annual report on Form 10-K for
the fiscal year ended December 25, 1999 ("1999 Form 10-K"). Except as
disclosed herein, there has been no material change in the information
disclosed in the notes to our Consolidated Financial Statements included in
the 1999 Form 10-K.
Our Financial Statements include TRICON Global Restaurants, Inc. and its
wholly owned subsidiaries (collectively referred to as "TRICON" or the
"Company"). The Financial Statements include our worldwide operations of
KFC, Pizza Hut and Taco Bell. References to TRICON throughout these notes
to Financial Statements are made using the first person notations of "we"
or "us."
Our preparation of the Financial Statements in conformity with generally
accepted accounting principles requires us to make estimates and
assumptions that affect our reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
Financial Statements and our reported amounts of revenues and expenses
during the reporting period. Actual results could differ from our
estimates.
In our opinion, the accompanying unaudited Financial Statements include all
adjustments considered necessary to present fairly, when read in
conjunction with our 1999 Form 10-K, our financial position as of March 18,
2000, and the results of our operations and cash flows for the 12 weeks
ended March 18, 2000 and March 20, 1999. Our results of operations for
these interim periods are not necessarily indicative of the results to be
expected for the full year.
2. Earnings Per Common Share ("EPS")
12 Weeks Ended
-----------------------
3/18/00 3/20/99
--------- ----------
Net income $ 120 $ 106
========= ==========
Basic EPS:
----------
Weighted-average common shares outstanding 149 153
========= ==========
Basic EPS $ 0.81 $ 0.69
========= ==========
Diluted EPS:
------------
Weighted-average common shares outstanding 149 153
Shares assumed issued on exercise of dilutive
share equivalents 18 26
Shares assumed purchased with proceeds of dilutive
share equivalents (16) (18)
--------- ----------
Shares applicable to diluted earnings 151 161
========= ==========
Diluted EPS $ 0.80 $ 0.66
========= ==========
6
Unexercised employee stock options to purchase 9.8 million shares of our
Common Stock for the 12 weeks ended March 18, 2000, were not included in
the computation of diluted EPS because their exercise prices were greater
than the average market price of our Common Stock during the quarter.
3. Items Affecting Comparability of Net Income
Impact of 1999 Accounting Changes
---------------------------------
As more fully described in our 1999 Form 10-K, we adopted in 1999 several
accounting and human resource policy changes (collectively, the "accounting
changes"). These changes impacted our operating results as follows:
12 Weeks
Ended
3/20/99
-----------
Restaurant margin $ 6
General and administrative expenses 4
-----------
Operating Profit $ 10
===========
United States $ 9
International (1)
Unallocated 2
-----------
Total $ 10
===========
After-tax $ 6
===========
Per diluted share $ 0.04
===========
Facility Actions Net Gain
--------------------------
Facility actions net gain 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 for restaurants we intend to close beyond the
quarter in which the closure decision is made.
12 Weeks Ended
------------------------
3/18/00 3/20/99
---------- ----------
Refranchising net gains(a) $ 47 $ 37
Store closure net credits (costs) 1 (1)
Impairment charges for stores to be closed (1) (2)
---------- ----------
Facility actions net gain $ 47 $ 34
========== ==========
United States $ 43 $ 33
International 4 1
---------- ----------
$ 47 $ 34
========== ==========
(a) Includes initial franchise fees of $5 million and $7 million for the
12 weeks ended March 18, 2000 and March 20, 1999, respectively.
7
The following table summarizes Company sales and restaurant margin for the
first quarter related to stores held for disposal at March 18, 2000 or
disposed of during 2000 and 1999. Restaurant margin represents company
sales less the cost of food and paper, payroll and employee benefits and
occupancy and other operating expenses.
12 Weeks Ended
----------------------
3/18/00 3/20/99
-------- ---------
Stores held for disposal at March 18, 2000
or disposed of during 2000:
Sales $ 24 $ 47
Restaurant Margin 2 6
Stores disposed of during all of 1999:
Sales $ - $ 256
Restaurant Margin - 28
The loss of restaurant margin from the disposal of these stores was largely
mitigated in income before income taxes by the increased franchise fees
from stores refranchised, lower field 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
restaurant margin reported above included the benefit from the suspension
of depreciation and amortization on assets held for disposal of an
insignificant amount in the first quarter of 2000 and $3 million ($2
million in the U.S. and $1 million in International) in the first quarter
of 1999.
Unusual Items
-------------
Unusual items of $4 million ($2 million after-tax) for the first quarter of
2000 primarily included the following: (1) direct incremental costs
incurred by TRICON as a result of AmeriServe Food Distribution, Inc.'s
("AmeriServe") bankruptcy filing and (2) additional costs of defending the
wage and hour litigation. These items are more fully described in Note 8.
4. New Accounting Pronouncement Not Yet Adopted
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 income, 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 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).
8
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.
5. Debt
Our primary bank credit agreement, as amended in February 2000, is
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. Amounts outstanding
under our Revolving Credit Facility are expected to fluctuate from time to
time, but reductions in our Term Loan Facility cannot be reborrowed. During
the 12 weeks ended March 18, 2000, we had net borrowings under our Credit
Facilities of over $160 million. The increase was due in part to
incremental borrowings of approximately $195 million to finance certain
programs associated with the AmeriServe bankruptcy. The increase was also
due to our current share repurchase program, which is more fully discussed
in Note 9. Our borrowing needs were reduced by the payments we withheld
related to the Pre-petition Payables to AmeriServe totaling $100 million.
See Note 8 for a discussion of the AmeriServe bankruptcy. We reduced our
amount outstanding under the Term Loan Facility at March 18, 2000 to $742
million from $774 million at December 25, 1999. Our amount outstanding
under the Revolving Credit Facility at March 18, 2000 increased to $1.15
billion from $955 million at December 25, 1999. In addition, we had unused
Revolving Credit Facility borrowings available aggregating $1.7 billion,
net of outstanding letters of credit of $182 million. At March 18, 2000,
the weighted average interest rate on our variable rate debt was 6.5%,
which included the effects of the associated interest rate swaps.
The remaining change in total debt was primarily due to an increase in
short-term International borrowings, which were repaid early in the second
quarter of 2000, and the issuance of a short-term promissory note to
acquire temporary control of an unconsolidated affiliate.
On February 25, 2000, we entered into an agreement to amend certain terms
of our Credit Facilities. This amendment gives us additional flexibility
with respect to permitted liens, restricted payments, other permitted
investments and transferring certain assets to certain 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 expense on the short-term borrowings and long-term debt was $45
million and $56 million for the 12 weeks ended March 18, 2000 and March 20,
1999, respectively.
6. Comprehensive Income
Our comprehensive income was as follows:
12 Weeks Ended
----------------------------
3/18/00 3/20/99
----------- -----------
Net income $ 120 $ 106
Currency translation adjustment (1) 5
----------- -----------
Total comprehensive income $ 119 $ 111
=========== ===========
9
7. Reportable Business Segments
Revenues
----------------------------
12 Weeks Ended
----------------------------
3/18/00 3/20/99
------------ ------------
United States $ 1,162 $ 1,366
International 435 447
------------ ------------
$ 1,597 $ 1,813
============ ============
Operating Profit;
Interest Expense, Net;
And Income Before
Income Taxes
----------------------------
12 Weeks Ended
----------------------------
3/18/00 3/20/99
------------ ------------
United States $ 156 $ 184
International 75 55
Unallocated and corporate expenses (32) (36)
Foreign exchange net loss - (1)
Facility actions net gain 47 34
Unusual items (4) -
------------ ------------
Total Operating Profit 242 236
Interest expense, net 41 52
------------ ------------
Income Before Income Taxes $ 201 $ 184
============ ============
Identifiable Assets
----------------------------
3/18/00 12/25/99
------------ ------------
United States $ 2,434 $ 2,478
International 1,495 1,367
Corporate(a) 443 116
------------ ------------
$ 4,372 $ 3,961
============ ============
Long-Lived Assets(b)
----------------------------
3/18/00 12/25/99
------------ ------------
United States $ 2,108 $ 2,143
International 874 874
Corporate 41 41
------------ ------------
$ 3,023 $ 3,058
============ ============
(a) In addition to the assets discussed in our 1999 Form 10-K, identifiable
assets also include the receivables and inventory arising from our
Temporary Direct Purchase Program and the "debtor-in-possession" revolving
credit facility associated with the AmeriServe bankruptcy, as more fully
discussed in Note 8.
(b) Includes Property, Plant and Equipment, net and, Intangible Assets, net.
10
8. Commitments and Contingencies
Impact of AmeriServe Bankruptcy
-------------------------------
AmeriServe filed for protection under Chapter 11 of the U.S. Bankruptcy
Code on January 31, 2000. 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. We continue to take all actions reasonably
necessary and prudent to ensure continued supply of restaurant products and
equipment ("supplies") 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 ("DIP") revolving
credit facility (the "DIP Facility") to AmeriServe. We initially committed
to provide up to $100 million under this DIP Facility. However, we have
reached an agreement in principle to assign $30 million of our commitment
to a third party, which will reduce our total commitment under the DIP
Facility to $70 million. AmeriServe has advised us that it is seeking to
arrange alternative DIP financing to replace the DIP Facility. At March 18,
2000, we had advanced $31 million to AmeriServe under the DIP Facility.
In addition to our participation in the DIP 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.
During the first quarter, we purchased approximately $290 million in
supplies of which $210 million was used in Company operations or sold to
our franchisees and licensees. We also accrued or paid AmeriServe $38
million in distribution fees. These distribution activities, due primarily
to prompt pay discounts from suppliers, were essentially break-even in the
quarter after considering incremental interest incurred on our increased
borrowings under our Revolving Credit Facility to finance our Temporary
Direct Purchase Program. Under SFAS No. 45, "Accounting for Franchise Fee
Revenue," the results of these distribution activities are reported on a
net basis. Based on the non-recurring nature of this bankruptcy, we believe
these results are properly reported as an Unusual Item in our Condensed
Consolidated Statement of Income.
At March 18, 2000, our investment in receivables from franchisees and
licensees from sales of supplies under the Temporary Direct Purchase
Program was $194 million and our supplies inventory was $78 million. These
assets are subject to the Replacement Lien discussed in the following
paragraph. Our payables to suppliers were $185 million. These amounts are
included in the respective lines of our Condensed Consolidated Balance
Sheet.
11
On the bankruptcy date, AmeriServe's pre-bankruptcy secured lenders (the
"Secured Lenders") had a lien on certain collateral (consisting primarily
of inventory and receivables) owned by AmeriServe as of that date (the
"Pre-Petition Collateral"). The Secured Lenders have agreed to allow the
Pre-Petition Collateral to be used in the normal course of business by
AmeriServe following the bankruptcy date. In exchange, we and another
AmeriServe customer have agreed with the agent for the Secured Lenders to
grant a lien in favor of these lenders on inventory that we and the other
customer purchase and the receivables resulting from the sale of this
inventory under our respective Temporary Direct Purchase Programs (the
"Replacement Lien"). The purpose of this Replacement Lien is to provide
substitute collateral to the Secured Lenders to the extent the Pre-Petition
Collateral has been used in the normal course of business by AmeriServe
since the bankruptcy date. This is intended to ensure that the assets
securing AmeriServe's pre-bankruptcy credit facility are not eroded from
the date of the bankruptcy filing.
We are currently engaged in 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 supplies 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, financial condition or cash flow.
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 to our franchisees and licensees. 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 and licensees. We expect to
mitigate, if not fully offset, these costs through discounts granted by
suppliers for prompt payments. We also expect to incur other incremental
costs as a result of the AmeriServe bankruptcy, primarily consisting of
professional fees. During the first quarter, we incurred approximately $2
million of these types of costs which are reported as an Unusual Item.
We intend to continue to work with AmeriServe and our suppliers to meet our
supply needs while AmeriServe seeks to reorganize through the bankruptcy
process - whether in the form of a restructured company or though the sale
of the business to one or more acceptable distributors. Due to the
uncertainties surrounding AmeriServe's reorganization, we cannot predict
the ultimate impact, if any, on our business. There can be no assurance
that the DIP Facility will be sufficient to meet AmeriServe's cash
requirements. Moreover, we believe it reasonably possible that we will not
be able to fully recover the amount advanced under the DIP Facility. There
can be no assurance that AmeriServe will be successful in arranging
replacement DIP 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. Finally, we are exposed to the risk that a portion of our inventory
or receivables subject to the Replacement Lien under the Temporary Direct
Purchase Program may be required to satisfy AmeriServe's obligations at the
bankruptcy date under its pre-petition credit facility. Based upon
currently available information, we are unable to determine the amount of
the potential loss exposure related to the Replacement Lien.
12
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 some or
all of the amounts we owe AmeriServe for supplies we purchased prior to
AmeriServe's bankruptcy filing ("Pre-petition Payables") 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 in its prosecution or that we will be able to
settle this claim on a basis favorable to the Company. To protect our
rights, and on the advice of outside counsel, we have withheld payment of
approximately $100 million of Pre-petition Payables. This action has
reduced the borrowings we otherwise would have required under our Revolving
Credit Facility.
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 operating
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.
Casualty Loss Programs and Estimates
------------------------------------
As more fully described in our 1999 Form 10-K, we are currently
self-insured for a 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)"). To mitigate the cost of our exposures for certain casualty
losses, 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.
For 2000, we have decided to bundle our risks for casualty losses, property
losses and various other insurable risks into one risk pool with a single
maximum loss limit. 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 a significant 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.
We determine our retained liabilities for casualty losses, including
reported claims and those claims that have been incurred but not yet
reported, based on information provided by our independent actuary. We have
our actuary perform valuations two times a 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.
Based on these valuations, we 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) primarily as a result of our
independent actuary's changes in its estimate of losses. 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 were a direct
13
result of our recent investments in safety and security programs to better
manage risk at the store level. Beginning in 2000, valuations will be
received and required adjustments will be made in the second and fourth
quarters of each year. As a result, we will have a timing difference from
recognizing the adjustment in the first quarter 1999 and second quarter
2000.
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.
Change of Control Agreements
----------------------------
In July 1998, we entered into severance agreements with certain key
executives which would be 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 required, 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.
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.
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
14
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. The
original trial date of July 10, 2000 has been continued to January 15,
2001.
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. Taco Bell appealed
this decision to the Supreme Court of Oregon and the Court denied Taco
Bell's Writ of Mandamus on March 2, 2000. 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.
Obligations to PepsiCo, Inc. After Spin-off
-------------------------------------------
As disclosed in our 1999 Form 10-K, in connection with the October 7, 1997
Spin-off from PepsiCo, Inc. ("PepsiCo") (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.
The Separation Agreement provided for, among other things, our assumption
of all liabilities relating to the restaurant businesses, inclusive of
California Pizza Kitchen, Chevys Mexican Restaurant, D'Angelo's Sandwich
Shops, East Side Mario's and Hot `n Now (collectively the "Non-core
Business(es)"), and our indemnification of PepsiCo with respect to these
liabilities. We have included our best estimates of these liabilities in
the accompanying 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.
15
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 March 18, 2000, PepsiCo remains liable for almost $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 Agreement, PepsiCo maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for
periods through the Spin-off Date. PepsiCo also maintains full control and
absolute discretion regarding 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 March 18, 2000, 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. We review any proposed
transaction involving these activities to determine whether it complies
with these restrictions. 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 or are expected to be 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.
Contingent Liabilities
----------------------
We were directly or indirectly contingently liable in the amounts of $388
million and $386 million at March 18, 2000 and December 25, 1999,
respectively, for certain lease assignments and guarantees. In connection
with these contingent liabilities, after the Spin-off we were required to
maintain cash collateral balances at certain institutions of approximately
$30 million, which are included in Other Assets in the accompanying
Condensed Consolidated Balance Sheet. At March 18, 2000, $309 million
represented contingent liabilities to lessors as a result of our assigning
our interest in and obligations under real estate leases as a condition to
the refranchising of Company restaurants. The $309 million represented the
present value of the minimum payments under 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 $481 million. The balances of the contingent liabilities primarily
reflected our guarantees to support financial arrangements of certain
unconsolidated affiliates and restaurant franchisees.
9. Share Repurchase Program
In 1999, our Board of Directors authorized the repurchase of up to $350
million of our outstanding Common Stock excluding applicable transaction
fees. During the 12 weeks ended March 18, 2000, we repurchased
approximately 3.9 million shares for $138 million at an average price per
share of $35.58. Since the inception of the Share Repurchase Program, we
have repurchased approximately 7.2 million shares for over $270 million.
16
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Introduction
TRICON Global Restaurants, Inc. and Subsidiaries (collectively referred to
as "TRICON," the "Company," "we" or "us") is comprised of the worldwide
operations of KFC, Pizza Hut and Taco Bell and is the world's largest quick
service restaurant ("QSR") company based on the number of system units. The
following Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements which
begin on page 3, the Cautionary Statements on page 31 and our annual report on
Form 10-K for the fiscal year ended December 25, 1999 ("1999 Form 10-K"). All
Note references herein refer to the accompanying notes to the Condensed
Consolidated Financial Statements.
Throughout MD&A, we make reference to ongoing operating profit which
represents our operating profit excluding the impact of our facility actions net
gain, unusual items and accounting and human resources policy changes in 1999
(collectively, the "accounting changes"). See Note 3 for a 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.
Impact of AmeriServe Bankruptcy
See Note 8 for a complete discussion of the impact of the AmeriServe Food
Distribution, Inc. ("AmeriServe") bankruptcy.
Significant Known Events, Trends or Uncertainties Expected to Impact 2000
Comparisons with 1999
The following factors impacted comparability of operating performance for
the quarter ended March 18, 2000 to the quarter ended March 20, 1999 or could
impact comparisons for the remainder of 2000. These factors were previously
discussed in our 1999 Form 10-K.
Change in Casualty Loss Estimates
---------------------------------
As described in Note 8, we 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). The adjustments 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
these favorable adjustments were 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 ongoing operating profit 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.
17
Unusual Items
-------------
We had unusual items of $4 million ($2 million after-tax) in the first
quarter of 2000. See Note 3 for a detailed discussion of our unusual items.
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
March 18, 2000. 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 our restaurants are being consolidated.
The impact of these transactions on operating results will be similar to the
portfolio effect of our refranchising activities, which is described on page 20.
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. Had these ventures been formed at the beginning of 2000, our
International Company sales for the 12 weeks ended March 18, 2000 would have
declined approximately 17% as compared to the reported decline of 5%. However,
we estimate the overall impact on first quarter 2000 ongoing operating profit
would have been favorable.
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.
Year 2000
---------
As more fully described in our 1999 Form 10-K, we developed and implemented
an enterprise-wide plan to prepare our systems for the Year 2000 issue. We
incurred approximately $1 million and $8 million of Year 2000 costs in the 12
weeks ended March 18, 2000 and March 20, 1999, respectively. We are essentially
complete with all of our Year 2000 activities and currently estimate that the
remaining costs to be incurred in 2000 will be insignificant. We incurred Year
2000 costs of approximately $30 million during the 52 weeks ended December 25,
1999.
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.
18
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 transition period will be approximately $10 million, related to the
conversion in the EMU member countries in which we operate stores. Approximately
60% of these expenditures relate to capital expenditures for new point-of-sale
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.
Store Portfolio Strategy
------------------------
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 currently expect to refranchise approximately 500 to 600 restaurants in
2000 compared to over 1,400 in 1999. As a result of this decline, we estimate
that our 2000 refranchising gains will be significantly less than our 1999
gains. However, if market conditions are favorable, we may sell more restaurants
than the current forecast. 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.
The following table summarizes the refranchising activities:
12 Weeks Ended
----------------------------
3/18/00 3/20/99
----------- -------------
Number of units refranchised 183 221
Refranchising proceeds, pre-tax $ 83 $ 121
Refranchising net gain, pre-tax $ 47 $ 37
19
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. We closed 50 and 82 units in
the first quarter of 2000 and 1999, respectively. The store closure costs
associated with these units were not significant.
Overall Company ownership percentage of our total system units was 22.6% at
March 18, 2000, which was slightly less than year-end 1999.
The Portfolio Effect on ongoing operating profit included in our
discussions of results of operations represents the estimated impact on Company
sales, franchise fees, restaurant margin, general and administrative expenses
and operating profit related to our refranchising and store closure initiatives.
The amounts presented below reflect the impact from stores that were operated by
us for all or some portion of the first quarter of 1999 and are no longer
operated by us as of March 18, 2000.
The following table summarizes the revenue impact of the Portfolio Effect
for the 12 weeks ended March 18, 2000:
U.S. International Worldwide
--------- ------------- ------------
Company sales from refranchised or
closed stores $ (231) $ (55) $ (286)
Increased franchise fees from Company
stores refranchised 11 3 14
--------- ------------- ------------
Reduction in total revenues $ (220) $ (52) $ (272)
========= ============= ============
The following table summarizes the estimated impact on ongoing operating
profit of the Portfolio Effect for the 12 weeks ended March 18, 2000:
U.S. International Worldwide
--------- ------------- ------------
Decreased restaurant margin amounts from
refranchised or closed stores $ (25) $ (6) $ (31)
Increased franchise fees from Company stores
refranchised 11 3 14
General and administrative expense reductions 4 1 5
--------- ------------- ------------
Reduction in ongoing operating profit $ (10) $ (2) $ (12)
========= ============= ============
The estimated interest savings resulting from the reduction of debt by the
after-tax cash proceeds from our refranchising activities largely mitigated this
reduction in ongoing operating profit.
20
Worldwide Results of Operations
12 Weeks Ended
-----------------------------
3/18/00 3/20/99 % B(W)
------------- ------------ -----------
System Sales $ 4,926 $ 4,806 2
============= ============
Revenues
Company sales $ 1,425 $ 1,662 (14)
Franchise and license fees 172 151 13
------------- ------------
Total Revenues $ 1,597 $ 1,813 (12)
============= ============
Company Restaurant Margin $ 201 $ 259 (22)
============= ============
% of Company sales 14.1% 15.6% (1.5) ppts.
============= ============
Ongoing operating profit $ 199 $ 192 3
Accounting changes(a) - 10 NM
Facility actions net gain 47 34 39
Unusual items (4) - NM
------------- ------------
Operating profit 242 236 2
Interest expense, net 41 52 22
Income tax provision 81 78 (4)
------------- ------------
Net Income $ 120 $ 106 13
============= ============
21
Diluted earnings per share $ 0.80 $ 0.66
============= ============
(a) See Note 3 for a discussion of our 1999 accounting changes.
- --------------------------------------------------------------------------------
Worldwide Restaurant Unit Activity
Unconsolidated
Company Affiliates Franchisees Licensees Total
--------------- ------------------- --------------- ------------- ------------
Balance at December 25, 1999 6,981 1,178 18,414 3,409 29,982
Openings & Acquisitions 31 8 154 69 262
Refranchising & Licensing (183) 1 184 (2) -
Closures (50) (8) (93) (83) (234)
--------------- ------------------- --------------- ------------- ------------
Balance at March 18, 2000 6,779(a) 1,179 18,659 3,393 30,010
=============== =================== =============== ============= ============
% of Total 22.6% 3.9% 62.2% 11.3% 100.0%
(a) Includes 11 Company units approved for closure, but not yet closed at March
18, 2000.
- --------------------------------------------------------------------------------
Worldwide System Sales and Revenues
System sales increased $120 million or 2% in the first quarter. The
increase was driven by new unit development at TRICON Restaurants International
("TRI" or "International") and at our three U.S. concepts. U.S. development was
primarily at Taco Bell and KFC while International development was primarily in
Asia. The increase was partially offset by store closures at our three U.S.
concepts and in International.
Revenues decreased $216 million or 12% due to the expected decline in
Company sales of $237 million or 14%. The decline in Company sales was primarily
due to the Portfolio Effect. Excluding the Portfolio Effect, Company sales
increased $49 million or 4%. The increase was primarily due to new unit
development partially offset by volume declines.
21
Franchise and license fees grew $21 million or 13% in the first quarter.
The growth was primarily driven by units acquired from us and new unit
development primarily in International and Taco Bell in the U.S., partially
offset by store closures by franchisees and licensees.
Worldwide Company Restaurant Margin
12 Weeks Ended
--------------------------
3/18/00 3/20/99
---------- ------------
Company sales 100.0% 100.0%
Food and paper 31.0 31.7
Payroll and employee benefits 28.8 27.9
Occupancy and other operating expenses 26.1 24.8
---------- ------------
Company restaurant margin 14.1% 15.6%
========== ============
Our restaurant margin as a percentage of sales declined approximately 145
basis points in the quarter as compared to the first quarter of 1999. The
unfavorable impact of lapping our 1999 accounting changes, which were discussed
in our 1999 Form 10-K, caused approximately 35 basis points of the decline. Our
restaurant margin included approximately 50 basis points related to the
favorable impact of the Portfolio Effect. Excluding these items, the decline was
approximately 160 basis points. This decrease included approximately 125 basis
points resulting from the absence of $21 million of favorable 1999 U.S.
insurance-related adjustments, which are further described on page 13. The
remaining decrease was primarily attributable to volume declines in the U.S. and
in International as well as the unfavorable impact of the introduction of lower
margin chicken sandwiches at KFC in the U.S. The favorable impact of Effective
Net Pricing in excess of costs in key International equity markets was fully
offset by net cost increases in the U.S. Effective Net Pricing includes
increases or decreases in price and the effect of changes in product mix.
Worldwide General and Administrative Expenses ("G&A")
G&A decreased $32 million or 15% in the quarter. Excluding the 1999 benefit
from accounting changes, ongoing G&A decreased $36 million or 16% in the
quarter. The decrease was primarily due to the absence of spending at Pizza Hut
and Taco Bell on biennial conferences held in 1999 to support our culture
initiatives and lower stock-based compensation expense. In addition, G&A
declined as a result of lower Year 2000 costs and the favorable impact of the
Portfolio Effect as discussed on page 20.
Worldwide Other (Income) Expense
12 Weeks Ended
----------------------- %
3/18/00 3/20/99 B(W)
--------- ---------- -------
Equity income from investments in
unconsolidated affiliates $ (7) $ (6) 19
Foreign exchange net loss - 1 NM
--------- ----------
Other (income) expense $ (7) $ (5) 31
========= ==========
Worldwide Facility Actions Net Gain
12 Weeks Ended
----------------------- %
3/18/00 3/20/99 B(W)
--------- ---------- -------
Refranchising net gains $ 47 $ 37 28
Store closure net credits (costs) 1 (1) NM
Impairment charges for stores to be closed (1) (2) 59
--------- ----------
Facility actions net gain $ 47 $ 34 39
========= ==========
22
Refranchising net gains included initial franchise fees of $5 million and
$7 million for the 12 weeks ended March 18, 2000 and March 20, 1999,
respectively. The refranchising net gains arose from refranchising 183 and 221
units in the first quarter of 2000 and 1999, respectively. See pages 19 - 20 for
more details regarding our refranchising activities.
The loss of restaurant margin from the disposal of stores was largely
mitigated in income before income taxes by the increased franchise fees from
stores refranchised, lower field 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 as discussed more fully on pages
19-20. Restaurant margin included the benefit from the suspension of
depreciation and amortization on assets held for disposal of an insignificant
amount for the first quarter of 2000 and $3 million ($2 million in the U.S. and
$1 million in International) for the first quarter of 1999.
We evaluate stores that will continue to be used in the business for
impairment on a semi-annual basis or when impairment indicators exist. Stores
that will be closed in the quarter beyond which the closure decision is made are
evaluated for impairment in the quarter in which the closure decision is made.
Our 2000 refranchising gains, store closure costs and impairment charges are not
necessarily indicative of future results.
Worldwide Operating Profit
12 Weeks Ended
-----------------------
3/18/00 3/20/99 % B(W)
--------- ---------- ---------
United States ongoing operating profit $ 156 $ 175 (11)
International ongoing operating profit 75 56 33
Ongoing unallocated and corporate expenses (32) (38) 16
Accounting changes(a) - 10 NM
Foreign exchange net loss - (1) NM
Facility actions net gain 47 34 39
Unusual items (4) - NM
--------- ----------
Reported operating profit $ 242 $ 236 2
========= ==========
(a) See Note 3 for a discussion of our 1999 accounting changes.
The U.S. and International ongoing operating profit for the first quarter
of 2000 are discussed on page 26 and 28, respectively. Facility actions net
gain, unusual items and 1999 accounting changes are discussed in Note 3.
Ongoing unallocated and corporate expenses decreased $6 million or 16% in
the first quarter of 2000. The decline was primarily due to lower Year 2000
spending in 2000.
Worldwide Interest Expense, Net
12 Weeks Ended
-----------------------
3/18/00 3/20/99 % B(W)
--------- ---------- ---------
Interest expense $ 45 $ 56 20
Interest income (4) (4) -
--------- ----------
Interest expense, net $ 41 $ 52 22
========= ==========
23
The decrease in our net interest expense is primarily due to the reduction
of debt by the after-tax cash proceeds from our refranchising activities and
cash from operations. The net interest expense on the incremental borrowings
related to the AmeriServe bankruptcy has been included in Unusual Items on the
Condensed Consolidated Statement of Income. The AmeriServe-related net interest
expense was insignificant for the 12 weeks ended March 18, 2000.
Worldwide Income Taxes
12 Weeks Ended
-----------------------------
3/18/00 3/20/99
------------ -------------
Reported
Income taxes $ 81 $ 78
Effective tax rate 40.1% 42.3%
Ongoing(a)
Income taxes $ 62 $ 59
Effective tax rate 39.0% 42.6%
(a) Excludes the effects of facility actions net gain, unusual items and 1999
accounting changes. See Note 3 for a discussion of these exclusions.
The decrease in our effective tax rate compared to 1999 is primarily
attributable to a reduction in the tax on our international operations. This
reduction included the benefits of becoming eligible for the first time to claim
a portion of our available foreign income tax credits against our U.S. income
tax liability for foreign taxes paid in 2000.
Diluted Earnings Per Share
The components of diluted earnings per common share were as follows:
12 Weeks Ended(a)
------------------------------
3/18/00 3/20/99
------------ --------------
Ongoing operating earnings $ 0.64 $ 0.50
Accounting changes - 0.04(b)
Facility actions net gain 0.18 0.12
Unusual items (0.02) -
------------ --------------
Net income $ 0.80 $ 0.66
============ ==============
(a) All computations were based on diluted shares of 151 million and 161
million for the 12 weeks ended March 18, 2000 and March 20, 1999,
respectively.
(b) See Note 3 for a discussion of our 1999 accounting changes.
24
U.S. Results of Operations
12 Weeks Ended
-----------------------------
3/18/00 3/20/99 % B(W)
------------ ------------- -----------
System Sales $ 3,205 $ 3,220 -
============ =============
Revenues
Company sales $ 1,047 $ 1,264 (17)
Franchise and license fees 115 102 12
------------ -------------
Total Revenues $ 1,162 $ 1,366 (15)
============ =============
Company Restaurant Margin $ 144 $ 204 (29)
============ =============
% of Company sales 13.7% 16.1% (2.4) ppts.
============ =============
Ongoing Operating Profit(a) $ 156 $ 175 (11)
============ =============
(a) Excludes facility actions net gain, unusual items and 1999 accounting
changes.
- --------------------------------------------------------------------------------
U.S. Restaurant Unit Activity
Company Franchisees Licensees Total
------------ -------------- ------------ ------------
Balance at December 25, 1999 4,984 12,110 3,100 20,194
Openings & Acquisitions 18 65 60 143
Refranchising & Licensing (122) 124 (2) -
Closures (41) (45) (73) (159)
------------ -------------- ------------ ------------
Balance at March 18, 2000 4,839(a) 12,254 3,085 20,178
============ ============== ============ ============
% of Total 24.0% 60.7% 15.3% 100.0%
(a) Includes 10 Company units approved for closure, but not yet closed at March
18, 2000.
- --------------------------------------------------------------------------------
U.S. System Sales and Revenues
System sales declined slightly in the first quarter due to store closures,
primarily at Pizza Hut and Taco Bell, and same store sales declines. This
decrease was almost fully offset by new unit development, led by Taco Bell and
KFC.
Revenues decreased $204 million or 15% due to the expected decline in
Company sales of $217 million or 17% in the first quarter of 2000. The decline
in Company sales was due to the Portfolio Effect. Excluding the Portfolio
Effect, Company sales increased approximately $14 million or 2%. This increase
was primarily due to new unit development partially offset by unfavorable
Effective Net Pricing and volume declines. The unfavorable Effective Net Pricing
was primarily a result of a shift from higher-priced menu items to value-priced
menu items at Taco Bell and chicken sandwiches at KFC. The decline in volume was
mainly due to the lapping of Pizza Hut's successful first quarter 1999 new
product introduction, "The Big New Yorker," partially offset by volume increases
at Taco Bell.
Franchise and license fees increased $13 million or 12%. The increase was
driven by units acquired from us and new unit development. These increases were
partially offset by store closures and franchisee same store sales declines.
Blended same store sales for our three U.S. restaurant concepts decreased
almost 2%. The decrease was almost equally driven by unfavorable Effective Net
Pricing and transaction declines. Same store sales at Taco Bell were slightly
favorable due to transaction increases of nearly 3%, primarily driven by the
introduction of
25
the "Enchirito" and the fourth quarter 1999 introduction of the "Chalupa." The
increase in transactions at Taco Bell was almost fully offset by unfavorable
Effective Net Pricing. Same store sales at Pizza Hut declined 2% in the first
quarter. The decline was primarily driven by a decrease in transactions of
almost 5% compared to the highly successful introduction of "The Big New Yorker"
in the first quarter of 1999. This product introduction drove transaction growth
of over 9%. The 2000 decrease was partially offset by favorable Effective Net
Pricing of over 2%. Same store sales at KFC decreased 3%. The decrease was due
to transaction declines of 2% and unfavorable Effective Net Pricing of 1%. The
decline in transactions was due in part to lapping successful promotions in the
first quarter of 1999, which was KFC's strongest quarter in 1999. KFC did not
achieve overall incremental transaction growth in the first quarter of 2000, in
spite of its strong growth in its chicken sandwiches, due to the higher than
expected negative impact of chicken sandwiches on sales of other products.
U.S. Company Restaurant Margin
12 Weeks Ended
---------------------------
3/18/00 3/20/99
----------- -----------
Company sales 100.0% 100.0%
Food and paper 29.1 30.5
Payroll and employee benefits 31.7 29.6
Occupancy and other operating expenses 25.5 23.8
----------- -----------
Company restaurant margin 13.7% 16.1%
=========== ===========
Our restaurant margin as a percentage of sales declined approximately 240
basis points in the first quarter as compared to the first quarter of 1999. The
unfavorable impact of lapping our 1999 accounting changes, which were discussed
in our 1999 Form 10-K, caused approximately 45 basis points of the decline. Our
restaurant margin included approximately 55 basis points related to the
favorable impact of the Portfolio Effect. Excluding these items, the decline was
approximately 250 basis points. This decrease included approximately 165 basis
points resulting from the absence of $21 million of favorable 1999
insurance-related adjustments, which are further described on page 13. The
remaining decrease was primarily attributable to cost increases in excess of
Effective Net Pricing and volume declines. The increased costs were driven by
higher wage rates, partially offset by a decline in commodity costs, primarily
cheese. Volume declines at Pizza Hut and the unfavorable impact of the
introduction of lower margin chicken sandwiches at KFC were partially offset by
increased volume at Taco Bell.
U.S. Ongoing Operating Profit
Ongoing operating profit declined $19 million or 11%. As discussed on page
20, the estimated net negative impact due to the Portfolio Effect was
approximately $10 million or 6% of our ongoing operating profit for the first
quarter of 1999. The remaining decrease was primarily driven by a decline in
base restaurant margin of 250 basis points. This decline was partially offset by
a significant reduction in G&A. The decrease in G&A was largely due to the
absence of the biennial conferences at Pizza Hut and Taco Bell held in 1999 as
well as lower stock-based compensation expense.
26
International Results of Operations
12 Weeks Ended
--------------------------
3/18/00 3/20/99 % B(W)
----------- ----------- -----------
System Sales $ 1,721 $ 1,586 9
=========== ===========
Revenues
Company sales $ 378 $ 398 (5)
Franchise and license fees 57 49 16
----------- -----------
Total Revenues $ 435 $ 447 (3)
=========== ===========
Company Restaurant Margin $ 57 $ 55 4
=========== ===========
% of Company sales 15.2% 13.8% 1.4 ppts.
=========== ===========
Ongoing Operating Profit(a) $ 75 $ 56 33
=========== ===========
(a) Excludes facility actions net gain, unusual items and 1999 accounting
changes.
- --------------------------------------------------------------------------------
International Restaurant Unit Activity
Unconsolidated
Company Affiliates Franchisees Licensees Total
-------------- ------------------ -------------- ------------ -----------
Balance at December 25, 1999 1,997 1,178 6,304 309 9,788
Openings & Acquisitions 13 8 89 9 119
Refranchising & Licensing (61) 1 60 - -
Closures and Divestitures (9) (8) (48) (10) (75)
-------------- ------------------ -------------- ------------ -----------
Balance at March 18, 2000 1,940(a) 1,179 6,405 308 9,832
============== ================== ============== ============ ===========
% of Total 19.7% 12.0% 65.1% 3.2% 100.0%
(a) Includes 1 Company unit approved for closure, but not yet closed at
March 18, 2000.
- --------------------------------------------------------------------------------
International System Sales and Revenues
System sales increased $135 million or 9% in the first quarter. Excluding
the impact from foreign currency translation, system sales increased $121
million or 8%. This increase was driven by new unit development and same store
sales growth by our franchisees. This increase was partially offset by store
closures, primarily in Asia, Germany and Canada.
Revenues decreased $12 million or 3%. The decline in Company sales of $20
million or 5% was due to the Portfolio Effect. Excluding the Portfolio Effect,
Company sales grew $35 million or 10%. The increase was driven by new unit
development, primarily in Asia and Mexico, and favorable Effective Net Pricing.
Franchise and license fees grew approximately $8 million or 16%. The
increase was driven by new unit development, units acquired from us and same
store sales growth. These increases were partially offset by store closures.
27
International Company Restaurant Margin
12 Weeks Ended
--------------------------
3/18/00 3/20/99
----------- -----------
Company sales 100.0% 100.0%
Food and paper 36.1 35.8
Payroll and employee benefits 20.7 22.3
Occupancy and other operating expenses 28.0 28.1
----------- -----------
Company restaurant margin 15.2% 13.8%
=========== ===========
Our restaurant margin as a percentage of sales increased approximately 135
basis points in the quarter as compared to the first quarter of 1999. Excluding
the favorable impact of foreign currency translation, restaurant margin
increased approximately 125 basis points. Portfolio Effect contributed
approximately 40 basis points to the improvement. Excluding these items, our
restaurant margin grew over 85 basis points. China and Australia, which are both
key equity markets, were the major contributors to the improvement. New unit
development in China and Effective Net Pricing in excess of cost increases in
Australia and China were the key drivers. China and Australia experienced volume
increases, primarily as a result of same store sales growth, which were more
than offset by volume declines in other equity markets.
International Ongoing Operating Profit
Ongoing operating profit grew $19 million or 33%. As discussed on page 20,
the estimated net negative impact due to the Portfolio Effect was approximately
$2 million or 4% of our ongoing operating profit for the first quarter of 1999.
Excluding this impact, the increase in operating profit was driven by our base
restaurant margin improvement of almost 100 basis points, a decline in G&A and
higher franchise and license fees. The decline in G&A, excluding the Portfolio
Effect, was primarily due to lower headquarters expenses.
Consolidated Cash Flows
Net cash used in operations decreased $42 million to a use of $18 million
for the quarter. Net income before facility actions and all other non-cash
charges decreased $69 million to $123 million. The decline was primarily
attributable to our portfolio activities over the past year that has led to a
net decrease of over 1,300 Company restaurants. Our operating working capital
reflected a net use of cash of $141 million for the quarter. As more fully
discussed in Note 8, the primary driver of the net use was the program where the
Company is temporarily purchasing food and supply inventories directly from
third party suppliers for the Tricon system and selling a portion of these
supplies to franchisees and licensees (the "Temporary Direct Purchase Program")
related to the AmeriServe bankruptcy filing. This impacted our operating working
capital as a net use of funds totaling about $164 million. We also withheld
payment of Pre-petition Payables to Ameriserve totaling $100 million. The net
impact of these two items is reflected in our working capital net use of cash as
$194 million use in Accounts and notes receivable, $78 million use in
Inventories and $208 million source in Accounts payable and other current
liabilities.
Excluding the impact of the Temporary Direct Purchase Program and the
withheld amounts payable to Ameriserve, our operating working capital reflects a
net use of $77 million in the quarter versus a net use of $168 million in the
prior year. The change versus the prior year is primarily attributable to larger
reductions in accrued compensation and casualty loss reserves than in the first
quarter of 1999.
28
Cash used in investing activities was $100 million in the first quarter of
2000 compared to cash provided of $42 million in the first quarter of 1999. The
decline in cash flow from investing activities was primarily due to a net
increase in short-term investments of $59 million, a decrease in proceeds from
refranchising of $38 million and $31 million advanced to AmeriServe under the
DIP Facility which is more fully discussed in Note 8.
Cash provided by financing activities in the quarter was $131 million
compared to cash used in financing activities of $77 million in the same quarter
last year. The cash provided was primarily due to increased borrowing under our
credit facilities to fund share repurchases as more fully discussed in Note 9
and to finance certain items associated with the AmeriServe bankruptcy as more
fully discussed in Note 8.
Through April 25, 2000, we have repurchased over 800,000 shares for
approximately $25 million since the end of the first quarter of 2000.
Financing Activities
Our primary bank credit agreement, as amended in February 2000, is
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. Amounts outstanding under our
Revolving Credit Facility are expected to fluctuate from time to time, but
reductions to our Term Loan Facility cannot be reborrowed. During the 12 weeks
ended March 18, 2000, we had net borrowings of over $160 million. The increase
was due in part to incremental borrowings of approximately $195 million to
finance certain programs associated with the AmeriServe bankruptcy. The increase
was also due to the current share repurchase program, which is more fully
discussed in Note 9. Our borrowing needs were reduced by the payments we
withheld related to the Pre-petition Payables to AmeriServe totaling $100
million. See Note 8 for a discussion of the AmeriServe bankruptcy. We reduced
our amount outstanding under the Term Loan Facility at March 18, 2000 to $742
million from $774 million at year-end 1999. Our amount outstanding under the
Revolving Credit Facility at March 18, 2000 increased to $1.15 billion from $955
million at year-end 1999. In addition, we had unused Revolving Credit Facility
borrowings available aggregating $1.7 billion, net of outstanding letters of
credit of $182 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.
The remaining change in total debt was primarily due to an increase in
short-term International borrowings, which were repaid early in the second
quarter of 2000, and the issuance of a short-term promissory note to acquire
temporary control of an unconsolidated affiliate.
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
derivative instruments. See our 1999 Form 10-K 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 share repurchase
program.
29
Consolidated Financial Condition
Assets increased $411 million or 10% to $4.4 billion. The increase is
primarily attributable to the impact of the AmeriServe bankruptcy on our
operations as more fully discussed in Note 8. Excluding this impact, assets
increased $108 million, primarily due to a temporary increase in short-term
investments related to short-term borrowings in our International business,
which were subsequently repaid in the second quarter of 2000.
Liabilities increased $379 million or 8% to $4.9 billion. The increase was
partially attributable to the impact of the AmeriServe bankruptcy as more fully
discussed in Note 8. Excluding this impact, liabilities increased $171 million.
This increase was driven by additional borrowings to fund our share repurchase
program and short-term borrowings in our International business, which were
subsequently repaid in the second quarter. This increase was partially offset by
a reduction in accounts payable and incentive compensation accruals.
Excluding the impact of the AmeriServe bankruptcy, our working capital
deficit decreased 13% to approximately $720 million at March 18, 2000 from $832
million at December 25, 1999. The decline was primarily due to a reduction in
accounts payable related to seasonal timing and fewer Company restaurants as a
result of our portfolio actions. The decrease was also due to a reduction in
accrued compensation due to payment or deferral of bonuses to future years under
one of our deferred compensation plans.
Quantitative and Qualitative Disclosures About Market Risk
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 is 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 March 18, 2000, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $15 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
March 18, 2000. In addition, the fair value of our interest rate derivative
contracts would increase approximately $5 million in value to us, and the fair
value of our Senior Unsecured Notes would decrease approximately $27 million.
Fair value was determined by discounting the projected cash flows.
30
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,
Inc.; 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 at competitive rates; 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.
31
Independent Accountants' Review Report
--------------------------------------
The Board of Directors
TRICON Global Restaurants, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of TRICON
Global Restaurants, Inc. and Subsidiaries ("TRICON") as of March 18, 2000 and
the related condensed consolidated statements of income and cash flows for the
twelve weeks ended March 18, 2000 and March 20, 1999. These financial statements
are the responsibility of TRICON's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of TRICON as of December 25, 1999, and
the related consolidated statements of operations, cash flows and shareholders'
(deficit) equity and comprehensive income for the year then ended not presented
herein; and in our report dated February 8, 2000, except as to Note 11, which is
as of February 25, 2000, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 25, 1999,
is fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG LLP
Louisville, Kentucky
April 25, 2000
32
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibit Index
EXHIBITS
--------
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 15 Letter from KPMG LLP regarding Unaudited Interim
Financial Information (Accountants' Acknowledgment)
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K dated January 31, 2000
attaching a press release addressing the bankruptcy filing of
AmeriServe, our primary distributor of food and dry goods in
the U.S., and announcing that anticipated fourth quarter and
full-year ongoing operating EPS will exceed consensus
estimates.
We filed a Current Report on Form 8-K dated February 10, 2000
attaching our fourth quarter and fiscal year ended December
25, 1999 earnings release dated February 9, 2000.
33
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, duly authorized officer of the registrant.
TRICON GLOBAL RESTAURANTS, INC.
---------------------------------------
(Registrant)
Date: May 1, 2000
/s/ Robert L. Carleton
-----------------------------------------
Senior Vice President and Controller
(Principal Accounting Officer)
34
EXHIBIT 12
TRICON Global Restaurants, Inc.
Ratio of Earnings to Fixed Charges Years Ended 1999-1995
and 12 Weeks Ended March 18, 2000 and March 20, 1999
(in millions except ratio amounts)
52 Weeks 12 Weeks Ended
----------------------------------------------------------- -----------------------
1999 1998 1997 1996 1995 3/18/00 3/20/99
--------- -------- --------- --------- --------- ---------- ----------
Earnings:
Pretax income from continuing operations
before cumulative effect of accounting
changes(a) 1,038 756 (35) 72 (103) 201 184
Minorities interests in consolidated - - - (1) - - -
subsidiaries
Unconsolidated affiliates' interests,
net(a) (12) (10) (3) (6) 26 (7) (6)
Interest expense(a) 218 291 290 310 368 45 56
Interest portion of net rent expense(a) 94 105 118 116 109 19 21
--------- -------- --------- --------- --------- ---------- ----------
Earnings available for fixed charges 1,338 1,142 370 491 400 258 255
========= ======== ========= ========= ========= ========== ==========
Fixed Charges:
Interest Expense(a) 218 291 290 310 368 45 56
Interest portion of net rent expense(a) 94 105 118 116 109 19 21
--------- -------- --------- --------- --------- ---------- ----------
Total Fixed Charges 312 396 408 426 477 64 77
========= ======== ========= ========= ========= ========== ==========
Ratio of Earnings to Fixed
Charges(b)(c) 4.29x 2.88x 0.91x 1.15x 0.84x 4.03x 3.31x
(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 items of $4 million ($2 million after-tax)
for the 12 weeks ended March 18, 2000, $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 4.09x,
4.45x, 2.92x, 1.36x, 1.73x and 1.80x for the 12 weeks ended March 18, 2000
and 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."
EXHIBIT 15
Accountants' Acknowledgment
The Board of Directors
TRICON Global Restaurants, Inc.:
We hereby acknowledge our awareness of the use of our report dated April 25,
2000 included within the Quarterly Report on Form 10-Q of TRICON Global
Restaurants, Inc. for the twelve weeks ended March 18, 2000, and incorporated by
reference in the following Registration Statements:
Description Registration Statement Number
Form S-3/A
Initial Public Offering of Debt Securities 333-42969
Form S-8s
TRICON Restaurants Puerto Rico, Inc. Save-Up Plan 333-85069
Restaurant Deferred Compensation Plan 333-36877
Executive Income Deferral Program 333-36955
TRICON Long-Term Incentive Plan 333-36895
SharePower Stock Option Plan 333-36961
TRICON Long-Term Savings Program 333-36893
Restaurant General Manager Stock Option Plan 333-64547
TRICON Global Restaurants, Inc. Long Term Incentive Plan 333-32052
Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/s/ KPMG LLP
Louisville, Kentucky
May 1, 2000