UNITED STATES 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 September 6, 1997 (12 and 36 Weeks Ended)
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.
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 incorporate or organization) Identification No.)
1441 Gardiner Lane
Louisville, Kentucky 40213
(Address of principal executive offices) (Zip Code)
502-456-8300
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
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
Number of shares of Capital Stock outstanding as of October 6, 1997:
151,773,751
TRICON GLOBAL RESTAURANTS, INC.
INDEX
Page No.
Part I Financial Information
Condensed Combined Statement of
Operations - 12 and 36 weeks ended
September 6, 1997 and September 7, 1996 2
Condensed Combined Statement of
Cash Flows - 36 weeks ended
September 6, 1997 and September 7, 1996 3
Condensed Combined Balance Sheet -
September 6, 1997 and December 28, 1996 4
Notes to Condensed Combined
Financial Statements 5-7
Pro Forma Condensed Combined Statement of
Operations - 36 weeks ended
September 6, 1997 8
Pro Forma Condensed Combined Balance Sheet -
September 6, 1997 9
Notes to Unaudited Pro Forma Condensed
Combined Financial Statements 10-11
Management's Analysis of Operations,
Cash Flows and Financial Condition 12-20
Independent Accountants' Review Report 21
Part II Other Information and Signatures 22-24
- -1-
PART I - FINANCIAL INFORMATION
TRICON GLOBAL RESTAURANTS, INC.
CONDENSED COMBINED STATEMENT OF OPERATIONS
(in millions - unaudited)
12 Weeks Ended 36 Weeks Ended
9/6/97 9/7/96 9/6/97 9/7/96
REVENUES
Company-operated restaurants $2,164 $2,329 $6,501 $6,771
Franchise and license fees 136 119 389 332
2,300 2,448 6,890 7,103
Costs and Expenses, net
Company-operated restaurants
Food and paper 698 773 2,102 2,228
Payroll and employee benefits 615 657 1,870 1,932
Occupancy and other operating
expenses 592 640 1,756 1,865
1,905 2,070 5,728 6,025
General, administrative and other
expenses 236 207 655 618
Facility actions net gains (51) (25) (136) (91)
Unusual disposal losses 15 - 54 26
Total costs and expenses, net 2,105 2,252 6,301 6,578
Operating Profit 195 196 589 525
Interest expense, net 57 69 188 212
Income Before Income Taxes 138 127 401 313
Income Taxes 59 67 149 147
Net Income $ 79 $ 60 $ 252 $ 166
See accompanying notes.
- -2-
TRICON GLOBAL RESTAURANTS, INC.
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(in millions - unaudited)
36 Weeks Ended
9/6/97 9/7/96
Cash Flows - Operating Activities
Net income $ 252 $ 166
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 379 426
Unusual disposal losses 54 26
Deferred income taxes (21) (176)
Other noncash charges and credits, net (94) (26)
Changes in operating working capital,
excluding effects of acquisitions and dis-
positions
Accounts and notes receivable (21) 7
Inventories 4 10
Prepaid expenses, deferred income taxes and
other current assets (74) (48)
Accounts payable and other current
liabilities (101) 135
Income taxes payable 95 28
Net change in operating working capital (97) 132
Net Cash Provided by Operating Activities 473 548
Cash Flows - Investing Activities
Capital spending (288) (357)
Refranchising of restaurants 534 238
Sales of non-core businesses 91 -
Sales of property, plant and equipment 88 23
Other, net (58) 22
Net Cash Provided by (Used for) Investing
Activities 367 (74)
Cash Flows - Financing Activities
Short-term borrowings-three months or less 71 (69)
Net payments of long-term debt (9) (44)
Decrease in investments by and
advances from PepsiCo (898) (357)
Net Cash Used for Financing Activities (836) (470)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (6) -
Net (Decrease) Increase in Cash and
Cash Equivalents (2) 4
Cash and Cash Equivalents - Beginning of year 137 94
Cash and Cash Equivalents - End of period $ 135 $ 98
___________________________________________________________________________
Supplemental Cash Flow Information
Interest paid $ 21 $ 21
Income taxes paid $ 146 $ 154
See accompanying notes.
- -3-
TRICON GLOBAL RESTAURANTS, INC.
CONDENSED COMBINED BALANCE SHEET
(in millions)
(Unaudited)
9/6/97 Pro Forma 12/28/96
ASSETS
Current Assets
Cash and cash equivalents $ 135 $ 137
Short-term investments, at cost 45 50
180 187
Accounts and notes receivable, less
allowance: $14 in 1997 and $9 in 1996 139 125
Inventories 78 88
Prepaid expenses, deferred income taxes
and other current assets 383 229
Non-core assets held for disposal 123 333
Total Current Assets 903 962
Property, Plant and Equipment, net 3,632 4,050
Intangible Assets, net 937 1,100
Investments in Unconsolidated Affiliates 225 228
Other Assets 168 180
Total Assets $5,865 $6,520
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable and other current
liabilities $1,086 $1,200
Income taxes payable 249 157
Short-term borrowings 123 59
Total Current Liabilities 1,458 1,416
Long-term Debt 176 231
Other Liabilities 443 434
Deferred Income Taxes 224 200
Shareholder's Equity/(Deficit)
Investments by and advances from PepsiCo 3,640 $(860) 4,266
Currency translation adjustment (76) (76) (27)
Total Shareholder's Equity/(Deficit) 3,564 $(936) 4,239
Total Liabilities and
Shareholder's Equity/(Deficit) $5,865 $6,520
See accompanying notes.
- -4-
TRICON GLOBAL RESTAURANTS, INC.
(unaudited)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(1) On August 14, 1997, the Board of Directors of PepsiCo, Inc. (PepsiCo)
approved a formal plan to spin off its restaurant businesses to its
shareholders as an independent publicly-traded company (Distribution), and
announced it also received a ruling from the Internal Revenue Service that
the spin-off would be tax free to PepsiCo and its shareholders. TRICON
Global Restaurants, Inc. (TRICON), the new company, is composed of the
worldwide operations of Pizza Hut, Taco Bell and KFC and the non-core U.S.
businesses either disposed of or held for disposal (see Note 2). The spin-
off was effective October 6, 1997 (Distribution Date). Owners of PepsiCo
capital stock as of September 19, 1997 (Record Date) received one share of
common stock of TRICON for every ten shares of PepsiCo capital stock or 152
million shares. On October 6, 1997, TRICON made a $4.5 billion cash
distribution to PepsiCo representing repayment of certain amounts due and a
dividend. See Note 3 for a description of the bank credit agreement
entered into subsequent to the end of the quarter.
The Condensed Combined Balance Sheet at September 6, 1997 and the Condensed
Combined Statement of Operations for the 12 and 36 weeks ended September 6,
1997 and September 7, 1996 and the Condensed Combined Statement of Cash
Flows for the 36 weeks ended September 6, 1997 and September 7, 1996 have
not been audited, but have been prepared in conformity with the accounting
principles applied in the TRICON audited combined financial statements for
the year ended December 28, 1996 contained in TRICON's Information
Statement included in the Form 10 Registration Statement, as amended
(Registration Statement). In the opinion of management, this information
includes all material adjustments necessary for a fair presentation. The
results for the 12 and 36 weeks are not necessarily indicative of the
results expected for the year. This Form 10-Q should be read in conjunction
with the audited combined financial statements and notes included in the
Registration Statement. The condensed combined financial statements of
TRICON include the results of operations and assets and liabilities
directly related to TRICON's operations. Certain estimates, assumptions
and allocations were made in preparing such financial statements.
Therefore such financial statements may not necessarily be indicative of
the results of operations, financial position or cash flows that would have
existed had TRICON been a separate, independent company.
The unaudited pro forma statement of operations for the 36 weeks ended
September 6, 1997 and the unaudited pro forma balance sheet as of September
6, 1997 and related notes are presented on pages 8-11.
(2) During the first half of 1997, TRICON sold the following non-core
businesses: Chevys Mexican Restaurants (Chevys), East Side Mario's (ESM)
and Hot 'n Now (HNN) for an aggregate of $105 million, composed of $91
million in cash and a $14 million note. Subsequent to the end of the
quarter, TRICON sold D'Angelo Sandwich Shops (D'Angelo) and California
Pizza Kitchen (CPK) for $96 million in cash which equaled its carrying
amount at the end of the quarter less liabilities assumed by the buyers.
In accordance with the terms of certain of the transactions, TRICON
retained and is holding for disposal certain properties. The carrying
value of all such properties have been fully reserved.
- -5-
TRICON recorded unusual disposal losses of $15 million ($12 million after-
tax) in the quarter and $54 million ($34 million after-tax) year-to-date to
adjust the carrying amounts of the non-core U.S. businesses to their actual
selling prices and $26 million ($17 million after-tax) related to the first
quarter 1996 decision to dispose of HNN's operating assets.
Excluding these unusual losses, the non-core U.S. businesses sold or held
for disposal contributed the following:
12 Weeks Ended 36 Weeks Ended
($ in millions) 9/6/97 9/7/96 9/6/97 9/7/96
Net Revenues $61 $115 $252 $256
Net Income/(Loss) $ 4 $ (6) $ 10 $(13)
(3)Subsequent Event
On October 1, 1997 TRICON entered into a $5.25 billion bank credit
agreement consisting of two components. The first is a $2 billion senior,
unsecured term loan facility, which is due on October 1, 2002. The second
is a $3.25 billion senior, unsecured revolving credit facility, which
expires on October 1, 2002.
The facilities are guaranteed by TRICON's principal U.S. subsidiaries. Of
the $4.55 billion borrowed under the facilities, $4.5 billion was used to
make a cash distribution to PepsiCo representing a dividend and repayment
of certain amounts due. The additional proceeds have been used to provide
cash collateral securing certain obligations previously secured by PepsiCo,
to pay fees and expenses related to the spin-off and the bank credit
facilities, and for general corporate purposes. Interest on amounts
borrowed is payable quarterly at rates which are variable, based
principally on either the London Interbank Offered Rate (LIBOR) or the
prime rate for interest periods selected by TRICON plus an applicable
margin factor as defined in the agreement. At the date of the initial
borrowings under the bank credit agreement, the weighted average interest
rate was approximately 6.5% for the initially selected interest periods
ranging from one to six months. TRICON expects to utilize interest rate
swaps or other fixed rate debt instruments in the future to mitigate its
exposure to interest rate risk. TRICON also pays a commitment fee on the
unused portion of the revolving credit facility. The margin factor and the
commitment fee rate are determined based on TRICON's leverage ratio or
senior debt ratings as defined in the agreement. The facilities contain
mandatory prepayment terms for certain capital market transactions and
sales of restaurants as defined in the agreement.
The credit facilities are subject to various covenants including financial
covenants relating to maintenance of specific leverage and fixed charge
coverage ratios. In addition, the facilities contain affirmative and
negative covenants including, among other things, limitations on additional
indebtedness including guarantees of indebtedness, cash dividends,
aggregate non-U.S. investment, and certain other transactions, as defined
in the agreement.
- -6-
As of October 6, 1997 TRICON had commitments under its bank credit
agreement of $126 million related to outstanding letters of credit and
unused availability under the revolving credit facility of approximately
$574 million. The term loan facility was fully outstanding. See pro forma
financial statements and related notes on pages 8-11.
The unaudited pro forma shareholder's equity/(deficit) gives effect to a
$4.5 billion cash distribution to PepsiCo in repayment of certain amounts
due and a dividend.
- -7-
___________________________________________________________________________
Pro Forma Condensed Combined Statement of Operations
(in millions except per share amounts, unaudited)
TRICON Global Restaurants, Inc.
36 Weeks ended September 6, 1997
Pro Forma Pro Forma
1997 Adjustments 1997
__________________________________________________________________________
REVENUES
Company-operated restaurants $6,501 $ (250)(a) $6,251
Franchise and license fees 389 (2)(a) 387
6,890 (252)(a) 6,638
Costs and Expenses, net
Company-operated restaurants
Food and paper 2,102 (77)(a) 2,025
Payroll and employee benefits 1,870 (86)(a) 1,784
Occupancy and other operating
expenses 1,756 (53)(a) 1,703
5,728 (216)(a) 5,512
General, administrative and other
expenses 655 (21)(a) 634
Facility actions net gains (136) - (136)
Unusual disposal losses 54 (54)(a) -
Total costs and expenses, net 6,301 (291)(a) 6,010
Operating Profit 589 39 (a) 628
Interest expense, net 188 (3)(a) 224
39 (b)
Income Before Income Taxes 401 3 404
Income Taxes 149 3 (c) 152
Net Income $ 252 $ - $ 252
Pro Forma Net Income Per Share $ 1.64
Pro Forma shares and
equivalents(d) 154
___________________________________________________________________________
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
___________________________________________________________________________
- -8-
___________________________________________________________________________
Pro Forma Condensed Combined Balance Sheet
(in millions, unaudited)
TRICON Global Restaurants, Inc.
September 6, 1997
Pro Forma Pro Forma
1997 Adjustments 1997
___________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents $ 135 $ 34 (b) $ 169
Short-term investments, at cost 45 - 45
Other current assets 600 - 600
Non-core assets held for disposal 123 (123)(a) -
Total Current Assets 903 (89) 814
Property, plant and equipment, net 3,632 - 3,632
Intangible assets, net 937 - 937
Investment in unconsolidated affiliates 225 - 225
Other assets 168 16 (b) 184
Total Assets $5,865 $ (73) $ 5,792
LIABILITIES AND SHAREHOLDER'S EQUITY/
(DEFICIT)
Current Liabilities
Accounts payable and other current
liabilities $1,086 $ (20)(a) $ 1,066
Income taxes payable 249 - 249
Short-term borrowings 123 - 123
Total Current Liabilities 1,458 (20) 1,438
Long-term Debt 176 (11)(a) 4,715
- 4,550 (b) -
Other Liabilities 443 (5)(a) 438
Deferred Income Taxes 224 9 (a) 233
Total Liabilities 2,301 4,523 6,824
Shareholder's Equity/(Deficit)
Investments by and advances from PepsiCo 3,640 (96)(a) -
(4,500)(b)
956 (c)
Preferred stock, no par value
authorized 250 shares - - -
Common stock, no par value,
authorized 750 shares, issued 152 shares - - (c) -
Capital deficit - (956)(c) (956)
Currency translation adjustment (76) - (76)
Total Shareholder's Equity/(Deficit) 3,564 (4,596) (1,032)
Total Liabilities and
Shareholder's Equity/(Deficit) $5,865 $ (73) $ 5,792
___________________________________________________________________________
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
___________________________________________________________________________
- -9-
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
The historical condensed combined financial statements reflect periods
during which TRICON did not operate as a separate, independent Company;
certain estimates, assumptions and reasonable allocations were made in
preparing such financial statements. Therefore such historical combined
financial statements do not necessarily reflect the combined results of
operations or financial position that would have existed had TRICON been a
separate, independent company.
The Pro Forma Condensed Combined Financial Statements should be read
in conjunction with the historical combined financial statements of TRICON
and the notes thereto contained in the Registration Statement and this Form
10-Q. The pro forma condensed combined financial information is presented
for informational purposes only and does not purport to reflect the results
of operations or financial position of TRICON or the results of operations
or financial position that would have occurred had TRICON been operated as
a separate, independent company.
Note 1 - The pro forma adjustments to the accompanying historical condensed
combined statements of operations for the 36 weeks ended September 6, 1997
were:
(a)To eliminate the effect of TRICON's non-core U.S. businesses composed
of CPK, Chevys, D'Angelo, ESM and HNN. TRICON has disposed of these
businesses in 1997.
(b)To record the net effect of eliminating the PepsiCo interest expense
allocation and recording interest expense based on $4.55 billion of
external debt TRICON incurred on October 6, 1997. TRICON's interest
expense was calculated using an approximate weighted average borrowing
rate of 6.67%. The weighted average interest rate assumed
approximately 60% of the borrowings were effectively converted to
fixed rate debt through interest rate swaps or issuance of other fixed
rate debt, with the balance varying primarily based on LIBOR or the
prime rate. TRICON's actual interest rate may also vary based upon
TRICON's credit rating, changes in market rates, TRICON's leverage
ratio, and potential long-term debt issuances. A 1/8 percentage point
change in the assumed financing rate would change interest expense by
$5.7 million annually and $3.9 million for the 36 weeks ended
September 6, 1997.
(c)To reflect the estimated tax impact for the pro forma adjustments in
Note 1 (a) and (b).
(d)Pro Forma shares and equivalents used to compute pro forma net income
per share was based upon 154 million shares of TRICON common stock.
Pro Forma shares were adjusted for the dilutive effect of TRICON stock
options. Approximately 152 million shares were issued on October 6,
1997 based on a distribution ratio of one share of TRICON stock for
every 10 shares of PepsiCo stock.
-10-
Note 2 - The pro forma adjustments to the accompanying historical condensed
combined balance sheet at September 6, 1997 were:
(a) To eliminate the effect of D'Angelo and CPK, non-core U.S. businesses
held for disposal. TRICON disposed of these businesses in the fourth
quarter of 1997.
(b) To record $4.55 billion in advances under a five-year $5.25 billion
bank credit agreement drawn on October 6, 1997. The advances were
primarily used to make a $4.5 billion cash distribution to PepsiCo
representing a dividend and repayment of certain amounts due.
Interest rates on amounts borrowed under the agreement are variable
based principally on either LIBOR or the prime rate.
(c) To record the issuance of 152 million shares of TRICON common stock
with no par value (at a distribution ratio of one share of TRICON
stock for every 10 shares of PepsiCo stock held on the Record Date)
and the elimination of investments by and advances from PepsiCo.
- -11-
Management's Discussion and Analysis
for the 12 and 36 Weeks Ended September 6, 1997 and September 7, 1996
Overview
On August 14, 1997, the Board of Directors of PepsiCo, Inc. (PepsiCo)
approved a formal plan to spin off its restaurant businesses to its
shareholders as an independent publicly-traded company (Distribution), and
announced it also received a ruling from the Internal Revenue Service that
the spin-off would be tax free to PepsiCo and its shareholders. TRICON
Global Restaurants, Inc. (TRICON), the new company, is composed of the
worldwide operations of Pizza Hut, Taco Bell and KFC and the non-core U.S.
businesses either disposed of or held for disposal (see Note 2). The spin-
off was effective October 6, 1997 (Distribution Date). Owners of PepsiCo
capital stock as of September 19, 1997 (Record Date) received one share of
common stock of TRICON for every ten shares of PepsiCo capital stock or 152
million shares. On October 6, 1997, TRICON made a $4.5 billion cash
distribution to PepsiCo representing repayment of certain amounts due and a
dividend. See Note 3 for a description of the bank credit agreement
entered into subsequent to the end of the third quarter.
The following Management's Discussion and Analysis should be read in
conjunction with the unaudited Condensed Combined Financial Statements on
pages 2-7 and the Cautionary Statements on page 20. For purposes of this
Management's Discussion and Analysis, TRICON includes the worldwide
operations of KFC, Pizza Hut and Taco Bell, its core businesses. In
addition, the information includes TRICON's U.S. non-core businesses
consisting of Chevys Mexican Restaurants, East Side Mario's (ESM), and
Hot'n Now (HNN) through their respective dates of disposal, and D'Angelo
Sandwich Shops (D'Angelo) and California Pizza Kitchen (CPK), which were
disposed of subsequent to the end of the third quarter.
Ownership Initiatives
As a result of TRICON's initiative to reduce its percentage ownership
of total system units, TRICON's overall ownership percentage (including
joint venture units) of its core businesses' total system units since year-
end 1996 declined 4 percentage points to 40% at September 6, 1997, driven
by declines in the U.S. and the sale of the New Zealand units. This
reduction was accomplished by selling company-operated units to existing
and new franchisees (refranchising) and closing underperforming units,
coupled with additional points of distribution by TRICON's franchisees and
licensees. TRICON refranchised 441 and 920 company-operated units in the
quarter and year-to-date, respectively. Total system units increased over
half a percentage point from the end of 1996. At September 6, 1997 and
December 28, 1996 TRICON had 166 and 299 company-operated non-core U.S.
restaurants, respectively.
- -12-
Results of Operations
($ in millions)
12 Weeks Ended 36 Weeks Ended
% %
9/6/97 9/7/96 Change 9/6/97 9/7/96 Change
SYSTEM-WIDE SALES* $4,987 $4,857 3 $14,264 $13,970 2
REVENUES
Company-operated
restaurants $2,164 $2,329 (7) $6,501 $6,771 (4)
Franchise and
license fees 136 119 14 389 332 17
$2,300 $2,448 (6) $6,890 $7,103 (3)
*Excludes Non-Core businesses.
___________________________________________________________________________
System-wide sales represents the combined sales of company-operated, joint
venture, franchised and licensed units. The increase of $130 million in
the quarter and $294 million year-to-date reflects net development of new
units, led by Taco Bell and TRICON Restaurants International (TRI) offset
by the effect of fewer units due to closures particularly at Taco Bell and
Pizza Hut and the effects of unfavorable currency translation.
Revenues decreased $148 million in the quarter and $213 million year-
to-date. Company-operated restaurants revenue decreased $165 million in
the quarter and $270 million or year-to-date. The declines primarily
reflected fewer company-operated units as a result of TRICON's initiatives
to reduce its ownership of the restaurant system. In addition, the
decrease in revenues reflected lapping a high level of transactions year-to-
date in 1996 because of the successful introduction of Triple Decker Pizza
and in the quarter, the effect of selling several non-core businesses in
1997. These declines were partially offset by higher effective net
pricing.
The $17 million increase in the quarter and $57 million increase year-
to-date in franchise and license fee revenues included $4 million and $23
million, respectively, of initial fees under a special KFC franchise
renewal program. Year to date, substantially all of KFC's franchisees
expected to renew their franchise agreements during 1997 have done so.
Such renewals typically cover the next 20 years.
TRICON measures same store sales for U.S. company-operated units.
Same store sales at Pizza Hut increased 3% for the quarter and decreased 4%
year-to-date. Improved transaction counts were partially offset by lower
average guest checks in the quarter. The year-to-date decline reflected
both lower average guest checks and decreased transaction counts, due
primarily to lapping the 1996 introduction of Triple Decker Pizza. At Taco
Bell, same store sales increased 3% for both the quarter and year-to-date
reflecting higher pricing taken in late 1996 and in 1997 and mix shifts
into higher-priced products such as Border Select Combos, Grilled Steak
Tacos and Fajita Wraps partially offset by lower transaction counts. The
- -13-
year-to-date same store sales growth also benefited from the very
successful first quarter Star Wars promotion. Same store sales at KFC were
even with prior year for the quarter and grew 2% year-to-date.
Company-Operated Restaurant Margins and Profit
12 Weeks Ended 36 Weeks Ended
($ in millions) 9/6/97 9/7/96 9/6/97 9/7/96
Revenues from Company-
operated restaurants 100.0% 100.0% 100.0% 100.0%
Food and paper 32.2% 33.2% 32.3% 32.9%
Payroll and employee
benefit 28.4% 28.2% 28.8% 28.5%
Occupancy and other
operating expenses 27.4% 27.5% 27.0% 27.6%
Margins 12.0% 11.1% 11.9% 11.0%
Profit $ 259 $ 259 $ 773 $ 746
___________________________________________________________________________
Company-operated restaurant margins increased almost 1 percentage
point in the quarter and year-to-date primarily due to higher effective
net pricing (includes price increases/decreases and the effect of product
and country mix) in excess of increased costs, led by labor, and closing
and refranchising lower margin units. Both periods also benefited from the
effect of disposing of several lower-margin non-core businesses. This
improvement was partially offset by the effect of reduced transaction
counts. The increased labor costs were due to the increased minimum wage
in the U.S. and to costs incurred to improve customer satisfaction,
partially offset year-to-date by favorable actuarial adjustments to prior
years' casualty claim liabilities.
General, administrative and other expenses grew $29 million in the
quarter and $37 million year-to-date, or 14% and 6%, respectively. G&A
comprises general and administrative expenses, other income and expense and
equity income or loss from investments in unconsolidated affiliates.
Included in G&A is an allocated amount reflecting TRICON's share of
overhead costs related to PepsiCo's shared administrative expenses (see
below). The amounts allocated to TRICON were based on the ratio of
TRICON's revenues to PepsiCo's revenues. They are not necessarily
indicative of the expenses that TRICON would have incurred had it been a
separate, independent company.
Allocated G&A
($ in millions) 1997 1996 B/(W)
12 weeks ended $10 $11 $ 1
36 Weeks ended $34 $32 $(2)
Excluding the allocated G&A, G&A increased $30 million or 15% in the
quarter and $35 million or 6% year to date. Higher foreign exchange
losses, increased investment spending and incentive compensation, and legal
expenses drove the increase. Investment spending consisted primarily of
costs related to improving and updating administrative systems and to costs
of improving the training and customer focus of the Restaurant General
Managers. Additionally, the quarter was impacted by infrastructure
- -14-
investment in high potential international markets and TRICON startup
costs. These cost increases were somewhat offset by the absence of general
and administrative expenses related to the non-core businesses sold.
Net facility actions
12 Weeks Ended 36 Weeks Ended
($ in millions) 9/6/97 9/7/96 9/6/97 9/7/96
Refranchising gains* $ (50) $(26) $(203) $(114)
Store closure costs (1) 1 28 5
SFAS 121 recurring
impairment charges - - 39 18
Facility actions net
gains $ (51) $(25) $(136) $ (91)
After-tax net gains -
Full-Year** $ (33) $(15) $(119) $ (56)
* Included initial franchise fees of $13 and $4 for the 12 weeks ended
9/6/97 and 9/7/96, respectively, and $25 and $13 for the 36 Weeks
ended 9/6/97 and 9/7/96, respectively.
** Reflected the full-year after-tax impact.
The 1997 full-year after-tax gain reflects the tax free gain from the
refranchising of TRICON's restaurants in New Zealand to a new,
independent publicly-traded company.
___________________________________________________________________________
Unusual disposal losses of $15 million ($12 million after-tax) in the
quarter and $54 million ($34 million after-tax) year-to-date, and $26
million ($17 million after-tax) charged in the first quarter of 1996
related to disposal of the non-core U.S. businesses. The 1997 losses
adjusted the carrying amount of the non-core U.S. businesses to their
actual selling prices. The 1996 loss adjusted the carrying amount of HNN
based upon a first quarter 1996 decision to dispose of its operating
assets.
Reported operating profit decreased $1 million or less than 1% in the
quarter and increased $64 million or 12% year-to-date. Ongoing operating
profit, which was adjusted to exclude the unusual disposal losses,
increased $14 million or 7% in the quarter and $92 million or 17% year-to-
date. The increase in ongoing operating profit was due to increased
franchise fees and facility action net gains partially offset by the
increase in general and administrative expenses. The year-to-date also
benefited from increased profits from company-operated restaurants.
- -15-
Interest expense, net
12 Weeks Ended 36 Weeks Ended
% %
($ in millions) 9/6/97 9/7/96 Change 9/6/97 9/7/96 Change
PepsiCo allocation $(50) $(62) (19) $(168) $(192) (13)
External debt (9) (9) - (26) (26) -
Interest expense $(59) $(71) (17) $(194) $(218) (11)
Interest income 2 2 - 6 6 -
Interest expense, net $(57) $(69) (17) $(188) $(212) (11)
___________________________________________________________________________
TRICON's operations have been financed through its operating cash
flows, refranchising of restaurants and investments by and advances from
PepsiCo. TRICON's interest expense includes an allocation of PepsiCo's
interest expense (PepsiCo's weighted average interest rate applied to the
average balance of investments by and advances from PepsiCo to TRICON) and
interest expense on its external debt. TRICON's external debt is primarily
limited to capital lease obligations associated with real estate and, to a
much lesser extent, assumed debt of acquired businesses and international
third-party debt. Interest expense is not necessarily indicative of the
interest expense that TRICON would have incurred as a separate, independent
company or will incur in future periods. See pro forma financial
statements and related notes on pages 8-11. Interest expense, net declined
17% and 11% in the quarter and year-to-date, respectively, reflecting a
lower average balance of net investments by and advances from PepsiCo.
Income Taxes
The 1997 reported effective tax rates of 42.8% in the quarter and
37.2% year-to-date decreased 10 percentage points and 9.8 percentage points
over 1996, respectively. The 1997 ongoing effective tax rates which was
adjusted to exclude the impact of the unusual disposal losses of 40.5% in
the quarter and 37.1% year-to-date decreased 12.3 percentage points and 8.9
percentage points, respectively, compared to the 1996 ongoing effective tax
rates. The decline in the year-to-date ongoing effective tax rate was
primarily due to the tax free gain from the refranchising of TRICON's
restaurants in New Zealand to a new, independent publicly-traded company in
which TRICON has no ownership interest. Excluding the New Zealand gain,
TRICON's year-to-date ongoing effective tax rate would have been 45.9%.
Income tax expense was calculated as if TRICON filed separate income
tax returns. As PepsiCo manages its tax position on a combined basis,
which takes into account the results of all of its businesses, TRICON's
effective tax rate in the future could vary from its historical effective
tax rates. TRICON's future effective tax rate will largely depend on its
tax strategies as a separate, independent company.
- -16-
Net Income
12 Weeks Ended 36 Weeks Ended
% %
($ in millions) 9/6/97 9/7/96 Change 9/6/97 9/7/96 Change
Reported $79 $60 32 $252 $166 52
Ongoing* $91 $60 52 $286 $183 56
NM - Not Meaningful
* Adjusted to exclude the effect of the unusual disposal losses described
in Note 2.
___________________________________________________________________________
International Operations
12 Weeks Ended 36 Weeks Ended
% %
($ in millions) 9/6/97 9/7/96 Change 9/6/97 9/7/96 Change
SYSTEM-WIDE
SALES $1,666 $1,587 5 $4,801 $4,575 5
Revenues $ 550 $ 553 (1) $1,624 $1,574 3
Operating profit* $ 54 $ 43 26 $ 196 $ 103 90
NM - Not Meaningful
* Includes equity income/(loss) but excludes foreign exchange
gains/(losses).
___________________________________________________________________________
System-wide sales increased $79 million in the quarter and $226
million year-to-date reflecting new unit development partially offset by
unfavorable currency translation. Approximately 80% of TRICON's net system-
wide sales growth was attributable to franchise activity.
Revenues declined $3 million in the quarter and increased $50 million
year-to-date. The quarter reflected the effects of unfavorable currency
translation and reduced volumes, partially offset by higher effective net
pricing and increased franchise fees. In the quarter, the effect of
refranchising TRICON's restaurants in New Zealand was fully offset by new
unit development, particularly in Asia. Year-to-date the higher effective
net pricing, net new units (which were partially offset by the
refranchising of New Zealand) and increased franchise fees were partially
offset by the effects of unfavorable foreign currency translation, lower
volumes and one less four-week accounting period for Canada and Korea in
the first quarter of 1997. Canada and Korea conformed their reporting
cycle to that of all other countries to facilitate the quarterly closing
process.
Operating profit increased $11 million and $93 million for the quarter
and year-to-date, respectively. The profit growth primarily reflected
increased net gains from facility actions as summarized below, and
increased franchise fees. New unit development was fully offset in the
- -17-
quarter and partially offset year-to-date by the absence of profits from
the New Zealand units. Year-to-date increased profits from company-
operated stores, driven by higher effective net pricing in excess of cost
increases and transaction declines was fully offset by increased
administrative expenses.
Net Facility Actions
12 Weeks Ended 36 Weeks Ended
($ in millions) 9/6/97 9/7/96 Change 9/6/97 9/7/96 Change
Refranchising gains $(9) $(1) $ (8) $(98) $(3) $(95)
Store closure costs - (3) 3 23 (5) 28
Recurring impairment
charges - - - 1 2 (1)
Facility actions net
gains $(9) $(4) $ (5) $(74) $(6) $(68)
Combined Cash Flows
TRICON's capital investments and acquisitions have been financed by
cash flow from operations, refranchising of restaurants, or investments by
and advances from PepsiCo. Under PepsiCo's centralized cash management
system, PepsiCo deposits to TRICON's bank accounts sufficient cash to meet
TRICON's daily obligations and withdraws excess funds from those accounts.
These transactions are included in investments by and advances from PepsiCo
in the Condensed Combined Balance Sheet.
The debt levels prior to the Distribution are not indicative of the
debt levels of TRICON as a separate, independent company. Subsequent to
the quarter, TRICON obtained advances of $4.55 billion under a $5.25
billion bank credit agreement. The agreement consists of two components:
a $2 billion senior, unsecured five-year term loan facility and a $3.25
billion senior, unsecured five-year revolving credit facility. The
advances were primarily used to make a $4.5 billion cash distribution to
PepsiCo representing a dividend and repayment of certain amounts due. A
portion of the remainder of the advances was used to provide letters of
credit to replace certain letters of credit previously provided by PepsiCo.
Interest on amounts borrowed is payable quarterly at rates which are
variable based principally on either the London Interbank Offered Rate
(LIBOR) or the prime rate for interest periods selected by TRICON plus an
applicable margin factor as defined in the agreement. TRICON expects to
utilize interest rate swaps or other fixed rate debt instruments in the
future to mitigate its exposure to interest rate risk. TRICON also pays a
commitment fee on the unused portion of the revolving facility. The margin
factor and the commitment fee rate are determined based on TRICON's
leverage ratio or senior debt ratings as defined in the agreement. The
facilities contain mandatory prepayment terms for certain capital market
transactions and sales of restaurants as defined in the agreement.
Management believes that cash flows from its refranchising initiatives and
from its operating activities in excess of capital spending will be
sufficient to fund its debt payments and future growth.
- -18-
Combined cash flow activity in 1997 primarily reflected a greater
reduction in investments by and advances from PepsiCo of $541 million and
reduced cash inflows from operating activities of $75 million. These uses
of cash were substantially offset by increased cash proceeds from
refranchising of restaurants of $296 million, a favorable swing in net debt
activities of $175 million, as well as proceeds of $91 million from the
sale of non-core businesses.
Net cash provided by operating activities decreased $75 million to
$473 million in 1997. The decrease was due to working capital cash
outflows in 1997 compared to inflows in 1996, partially offset by increased
income before noncash charges and credits. The unfavorable change in
working capital primarily reflected an unfavorable swing in accounts
payable and other current liabilities, reflecting the absence of casualty
insurance liabilities in 1997 resulting from a change to third party
premium-based insurance in 1997 compared to self insurance in 1996 and
timing of payments.
Net cash provided for by (used for) investing activities reflected a
favorable swing of $441 million, primarily reflecting increased proceeds
from refranchising of restaurants, proceeds from the sale of non-core
business and reduced capital spending.
Net cash used for financing activities increased $366 million to $836
million in 1997. This reflected a greater reduction in investments by and
advances from PepsiCo, partially offset by the favorable swing in net debt
activities in 1997.
Earnings before interest, income taxes, depreciation and amortization
(EBITDA) is a key internal measure used to evaluate cash flow that
investors may want to consider as an indication of cash available for debt
repayment and to fund additional investments. EBITDA is not a measure
defined by generally accepted accounting principles. This measure is
provided as a supplement, and not as an alternative to cash flows from
operating, investing and financing activities as defined by generally
accepted accounting principles; nor is it provided as an alternative to net
income as defined by generally accepted accounting principles.
36 Weeks Ended
($ in millions) 9/6/97 9/7/96
Net income $ 252 $ 166
Interest 188 212
Income taxes 149 147
Depreciation and
amortization 379 426
$ 968 $ 951
The $17 million increase in EBITDA primarily reflected an $86 million
increase in net income partially offset by a $47 million reduction in
depreciation and amortization expense and $24 million in reduced interest
expense. The reduction in depreciation and amortization expense was
primarily attributable to the absence of depreciation and amortization
related to closures and refranchisings and a result of the decision to
dispose of non-core businesses.
- -19-
Combined Financial Condition
TRICON's negative operating working capital position, which reflects
the cash sales nature of TRICON's operations, effectively provides
additional capital for investment. Operating working capital, which
excludes short-term investments, non-core assets held for disposal and
short-term borrowings, was a negative $600 million and $778 million for
1997 and 1996, respectively. TRICON expects that the amount of negative
working capital will decline over time as a result of the refranchising and
closure of company-operated units.
The $178 million decrease primarily reflected a $160 million increase in
prepaid expenses, deferred income taxes and other current assets and a $114
million decline in accounts payable and other current liabilities,
partially offset by a $92 million increase in income taxes payable. The
increase in prepaid expenses, deferred income taxes and other current
assets primarily reflected an increase in deferred tax assets and a 1997
premium deposit for U.S. casualty insurance. A comparable premium was not
made in 1996 because TRICON was largely self-insured.
The declines in Property, Plant and Equipment and Intangible Assets
included the effects of facility actions, in addition to depreciation and
amortization in excess of capital spending.
See the Pro Forma Condensed Combined Balance Sheet, which gives effect to
TRICON's capital structure.
Cautionary Statements
From time to time, in both written reports and oral statements,
PepsiCo and TRICON may discuss expectations regarding TRICON's future
performance. These "forward-looking statements" are based on currently
available competitive, financial and economic data and TRICON's operating
plans. They are also inherently uncertain and investors must recognize that
events could turn out to be significantly different than what was expected.
In addition, as discussed in Management's Discussion and Analysis:
- - TRICON's ability to execute its refranchising initiatives (page 12) is
subject to the continued interest and ability of existing and new
franchisees to purchase TRICON's restaurants at prices TRICON
considers appropriate.
- - TRICON began operating as a separate, independent entity on October 6,
1997. As a result, future performance will be impacted significantly
by actions of a newly-formed management team and the implementation of
its strategic objectives.
- -20-
<audit-report>
Independent Accountants' Review Report
The Board of Directors
TRICON Global Restaurants, Inc.:
We have reviewed the accompanying condensed combined balance sheet of
TRICON Global Restaurants, Inc. (TRICON) as of September 6, 1997 and the
related condensed combined statement of operations for the twelve and
thirty-six weeks ended September 6, 1997 and September 7, 1996, and the
condensed combined statement of cash flows for the thirty-six weeks ended
September 6, 1997 and September 7, 1996. These financial statements are
the responsibility of TRICON's management.
We conducted our review 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 review, we are not aware of any material modifications that
should be made to the condensed combined 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 combined balance sheet of TRICON as of December 28, 1996,
and the related combined statements of operations, shareholders' equity,
and cash flows for the year then ended not presented herein; and in our
report dated June 30, 1997, we expressed an unqualified opinion on those
combined financial statements. In our opinion, the information set forth
in the accompanying condensed combined balance sheet as of December 28,
1996, is fairly presented, in all material respects, in relation to the
combined balance sheet from which it has been derived.
Our report, referred to above, contains an explanatory paragraph that
states that TRICON in 1995 adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," and in 1994 changed its method for
calculating the market-related value of pension plan assets used in the
determination of pension expense and adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits".
KPMG Peat Marwick LLP
Louisville, Kentucky
October 21, 1997
- -21-
</audit-report>
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 24.
(b) Reports on Form 8-K
None
- -22-
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, duly authorized officer of the registrant.
TRICON GLOBAL RESTAURANTS, INC.
(Registrant)
Date: October 21, 1997 Robert L. Carleton
Senior Vice President and
Controller and Chief Accounting Officer
- -23-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
Exhibit 10 Material Contracts - Credit Agreements
Exhibit 15 Letter from KPMG Peat Marwick LLP
regarding Unaudited Interim Financial
Information (Accountants' Acknowledgment)
Exhibit 27 Financial Data Schedule
- -24-