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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 21, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 1-13163
TRICON GLOBAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-3951308
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 Gardiner Lane, Louisville, Kentucky 40213
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 874-8300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
The number of shares outstanding of the Registrant's Common Stock as of
April 28, 1998 was 152,300,784 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 21, 1998 and March 22, 1997 3
Condensed Consolidated Statement of Cash Flows -
12 weeks ended March 21, 1998 and March 22, 1997 4
Condensed Consolidated Balance Sheet - March 21,
1998 and December 27, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis 12
Independent Accountants' Review Report 25
Part II. Other Information and Signatures 26
2
PART I - FINANCIAL INFORMATION
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data - unaudited)
12 Weeks Ended
----------------------------
3/21/98 3/22/97
----------- ----------
REVENUES
Company restaurants $ 1,790 $ 2,123
Franchise and license fees 131 114
----------- ----------
1,921 2,237
----------- ----------
Costs and Expenses, net
Company restaurants
Food and paper 579 684
Payroll and employee benefits 538 633
Occupancy and other operating expenses 472 572
----------- ----------
1,589 1,889
General, administrative and other expenses 193 198
Facility actions net gain (29) (12)
----------- ----------
Total costs and expenses, net 1,753 2,075
----------- ----------
Operating Profit 168 162
Interest expense, net 69 66
----------- ----------
Income Before Income Taxes 99 96
Income Tax Provision 45 44
----------- ----------
Net Income $ 54 $ 52
=========== ==========
Basic Earnings Per Common Share $ .36
===========
Diluted Earnings Per Common Share $ .35
===========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
TRICON GLOBAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions - unaudited)
12 Weeks Ended
---------------------
3/21/98 3/22/97
--------- --------
Cash Flows - Operating Activities
Net Income $ 54 $ 52
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 104 125
Facility actions net gain (29) (12)
Deferred income taxes (2) (26)
Other noncash charges and credits, net 18 9
Changes in operating working capital,
excluding effects of acquisitions and dispositions:
Accounts and notes receivable (4) (2)
Inventories 4 1
Prepaid expenses, deferred income taxes and
other current assets (23) (88)
Accounts payable and other current liabilities (103) (86)
Income taxes payable 21 54
-------- --------
Net change in operating working capital (105) (121)
-------- --------
Net Cash Provided by Operating Activities 40 27
-------- --------
Cash Flows - Investing Activities
Capital spending (53) (62)
Refranchising of restaurants 121 40
Sales of property, plant and equipment 13 15
Other, net (15) 17
-------- --------
Net Cash Provided by Investing Activities 66 10
-------- --------
Cash Flows - Financing Activities
Proceeds from Long-term Debt 1 24
Payments of Revolving Credit Facility (55) -
Payments of long-term debt (62) -
Short-term borrowings-three months or less, net (14) 36
Decrease in investments by and advances from PepsiCo - (117)
Other, net (2) -
-------- --------
Net Cash Used for Financing Activities (132) (57)
-------- --------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents (3) -
-------- --------
Net Decrease in Cash and Cash Equivalents (29) (20)
Cash and Cash Equivalents - Beginning of year 268 137
-------- --------
Cash and Cash Equivalents - End of period $ 239 $ 117
======== ========
- --------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 83 $ 6
Income taxes paid 34 16
See accompanying Notes to Condensed Consolidated Financial Statements.
4
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
3/21/98 12/27/97
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 239 $ 268
Short-term investments, at cost 49 33
Accounts and notes receivable, less allowance:
$23 in 1998 and $20 in 1997 151 149
Inventories 67 73
Prepaid expenses, deferred income taxes and
other current assets 182 160
----------- -----------
Total Current Assets 688 683
Property, Plant and Equipment, net 3,143 3,261
Intangibles Assets, net 747 812
Investments in Unconsolidated Affiliates 147 143
Other Assets 181 199
----------- -----------
Total Assets $ 4,906 $ 5,098
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 1,156 $ 1,260
Income taxes payable 213 195
Short-term borrowings 113 124
----------- -----------
Total Current Liabilities 1,482 1,579
Long-term Debt 4,425 4,551
Other Liabilities and Deferred Credits 601 588
----------- -----------
Total Liabilities 6,508 6,718
----------- -----------
Shareholders' Deficit
Preferred stock, no par value, 250 shares
authorized; no shares issued - -
Common stock, no par value, 750 shares
authorized; 152 shares issued and outstanding
in 1998 and 1997 1,273 1,271
Accumulated deficit (2,710) (2,763)
Accumulated other comprehensive income -
currency translation adjustment (165) (128)
----------- -----------
Total Shareholders' Deficit (1,602) (1,620)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 4,906 $ 5,098
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
(Unaudited)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial
statements. Therefore, we suggest that the accompanying financial
statements be read in conjunction with the financial statements and notes
thereto included in our annual report on Form 10-K for the fiscal year
ended December 27, 1997 ("10-K"). Except as disclosed herein, there has
been no material change in the information disclosed in the notes to the
consolidated financial statements included in the 10-K. Forward looking
statements contained herein should be read in conjunction with the
cautionary statements contained on page 24.
The condensed consolidated financial statements include TRICON Global
Restaurants, Inc. and its wholly owned subsidiaries. The statements include
the worldwide operations of KFC, Pizza Hut and Taco Bell and, through their
respective disposal dates, the Non-core Businesses disposed of in 1997.
References to TRICON throughout these notes to condensed consolidated
financial statements are made using the first person notations of "we" or
"our." All significant intercompany accounts and transactions have been
eliminated. The accompanying unaudited condensed consolidated financial
statements present our financial position, results of operations and cash
flows as if we had been an independent, publicly owned company for all
periods presented prior to the Spin-off from PepsiCo on October 6, 1997.
Certain allocations in 1997 of previously unallocated PepsiCo interest of
$60 million and general and administrative expenses of $12 million, as well
as computations of separate tax provisions, have been made to facilitate
such presentation. We believe that the bases of allocation of interest and
general and administrative expenses were reasonable based on the facts
available at the date of their allocation. However, based on current
information, such amounts are not indicative of amounts which we would have
incurred if we had been an independent, publicly owned company for 1997.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In our opinion, the accompanying unaudited condensed consolidated financial
statements include all adjustments considered necessary to present fairly,
when read in conjunction with the 10-K, our financial position as of March
21, 1998, and the results of our operations and cash flows for the quarters
ended March 21, 1998 and March 22, 1997. The results of operations for such
interim periods are not necessarily indicative of the results to be
expected for the full year.
6
2. EARNINGS PER COMMON SHARE ("EPS")
12 Weeks
Ended
3/21/98
------------
Net income $ 54
============
Basic EPS:
Weighted-average common shares outstanding 152
============
Basic EPS $ .36
============
Diluted EPS:
Weighted-average common shares outstanding 152
Shares assumed issued on exercise of dilutive options 19
Shares assumed purchased with proceeds of dilutive options (17)
------------
Shares applicable to diluted earnings 154
============
Diluted EPS $ .35
============
Unexercised employee stock options to purchase 2.3 million shares of our
common stock as of March 21, 1998 were not included in the computation of
diluted EPS because their exercise prices were greater than the average
market price of our common stock during the 12 weeks ended March 21, 1998.
Additionally, 533,260 of other potential common shares outstanding as of
March 21, 1998 were not included in the computation of diluted EPS because
they were antidilutive.
Basic and diluted EPS data has been omitted for the 12 weeks ended March
22, 1997 since we were not an independent, publicly owned Company with a
capital structure of our own during that period.
3. CHANGES IN ACCOUNTING PRINCIPLES
a. Reporting Comprehensive Income
Effective December 28, 1997, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as our other annual
financial statements. This Statement also requires that we classify items
of other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. Our annual financial statements for prior periods will be
reclassified, as required.
7
Our quarterly total comprehensive income was as follows:
12 Weeks Ended
-------------------------------
3/21/98 3/22/97
------------- -----------
Net income $ 54 $ 52
Currency translation adjustment (37) (4)
------------- -----------
Total comprehensive income $ 17 $ 48
============= ===========
b. Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued in
March 1998. SOP 98-1 identifies the characteristics of internal-use
software and specifies that once the preliminary project stage is complete,
certain external direct costs, certain direct internal payroll and
payroll-related costs and interest costs incurred during the development of
computer software for internal use should be capitalized and amortized. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998, with earlier application encouraged, and must be applied
to internal-use computer software costs incurred in those fiscal years for
all projects, including those projects in progress upon initial application
of this SOP. We currently expense all such costs as incurred. We have not
yet quantified the dollar impact of adopting SOP 98-1; however, when
implemented in 1999, it will result in the capitalization of costs which
would have been previously expensed.
c. Disclosures About Segments of an Enterprise and Related Information
Effective December 28, 1997, we adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" and requires that a public company report annual and interim
financial and descriptive information about its reportable operating
segments. Operating segments, as defined, are components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This statement allows aggregation
of similar operating segments into a single operating segment, in general,
if the businesses are considered similar under the criteria of this
statement. For purposes of applying this statement, our domestic businesses
have been aggregated. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Adoption of
this statement had no impact on our reportable segments as disclosed in our
10-K. Following are the disclosures recommended by the new standard on an
interim basis:
GEOGRAPHIC AREAS
Revenues
------------------------------------
12 Weeks Ended
3/21/98 3/22/97
---------------------------------------------------------------------
United States $ 1,467 $ 1,724
International 454 513
---------------- --------------
$ 1,921 $ 2,237
================ ==============
8
Operating Profit
------------------------------------
12 Weeks Ended
3/21/98 3/22/97
---------------------------------------------------------------------
United States $ 153 $ 132
International 44 44
Foreign exchange net losses (1) (3)
Unallocated corporate expenses (28) (11)
---------------- --------------
$ 168 $ 162
================ ==============
Identifiable Assets
------------------------------------
3/21/98 12/27/97
---------------------------------------------------------------------
United States $ 3,460 $ 3,637
International 1,446 1,461
---------------- --------------
$ 4,906 $ 5,098
================ ==============
Following is a reconciliation of operating profit by segment to income
before income taxes:
For the 12 Weeks Ended March 21, 1998
United Foreign
States International Exchange Unallocated Total
---------- --------------- ------------ --------------- --------
Operating profit $ 153 $ 44 $ (1) $ (28) $ 168
Interest (expense) income, net (3) 1 - (67) (69)
---------- --------------- ------------ --------------- --------
Income (loss) before income taxes
$ 150 $ 45 $ (1) $ (95) $ 99
========== =============== ============ =============== ========
For the 12 Weeks Ended March 22, 1997
United Foreign
States International Exchange Unallocated Total
---------- --------------- ------------ --------------- --------
Operating profit $ 132 $ 44 $ (3) $ (11) $ 162
Interest expense, net (5) (1) - (60) (66)
---------- --------------- ------------ --------------- --------
Income (loss) before income taxes
$ 127 $ 43 $ (3) $ (71) $ 96
========== =============== ============ =============== ========
4. LONG-TERM DEBT
During the quarter, we made net payments of $57 million and $55 million
under our unsecured bank Term Loan Facility and the unsecured Revolving
Credit Facility, respectively. As discussed in our 10-K, amounts
outstanding under the revolving credit facility are expected to fluctuate
from time to time, but term loan reductions cannot be reborrowed. Such
payments reduced amounts outstanding at March 21, 1998 to $1.91 billion and
$2.38 billion from $1.97 billion and $2.44 billion at year end 1997, on the
term facility and revolving facility, respectively.
9
5. COMMITMENTS AND CONTINGENCIES
Relationship with Former Parent After Spin-off
----------------------------------------------
As disclosed in our 1997 10-K, in connection with the October 6, 1997
spin-off from PepsiCo (the "Spin-off"), separation and other related
agreements (the "Separation Agreement") were entered into which contain
certain indemnities to the parties and provide for the allocation of tax
and other assets, liabilities and obligations arising from periods prior to
the Spin-off. The Separation Agreement provided for, among other things,
our assumption of all liabilities relating to the restaurant businesses,
inclusive of the Non-core Businesses disposed of in 1997, and the
indemnification of PepsiCo with respect to such liabilities. Our best
estimates of all such liabilities have been included in the accompanying
condensed consolidated financial statements.
Under the Separation Agreement, PepsiCo maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for
periods through the Spin-off Date. PepsiCo also maintains full control and
absolute discretion regarding common tax audit issues of such entities.
Although PepsiCo has contractually agreed to, in good faith, use its best
efforts to settle all joint interests in any common audit issue on a
consistent basis with prior practice, there can be no assurance that
determinations so made by PepsiCo would be the same as we would reach,
acting on our own behalf.
We have agreed to certain restrictions on future actions to ensure that the
Spin-off maintains its tax-free status. Restrictions include, among other
things, limitations on the liquidation, merger or consolidation with
another company, certain issuances and redemptions of our Common Stock, the
granting of stock options and certain sales, refranchisings, distributions
or other dispositions of assets. If we fail to abide by such restrictions
or to obtain waivers from PepsiCo and, as a result, the Spin-off fails to
qualify as a tax-free reorganization, we will be obligated to indemnify
PepsiCo for any resulting tax liability, which could be substantial.
Additionally, we have indemnified PepsiCo as to any employer payroll tax it
incurs related to the exercise of vested PepsiCo options held by our
employees after the Spin-off. No indemnifications have been required
through the first quarter of 1998 under these arrangements.
Other Commitments and Contingencies
-----------------------------------
We were directly or indirectly contingently liable in the amounts of $296
million and $302 million at March 21, 1998 and December 27, 1997,
respectively, for certain lease assignments and guarantees. In connection
with these contingent liabilities, after the Spin-off, we were required to
maintain cash collateral balances at certain institutions of approximately
$30 million, which are included in Other Assets in the accompanying
condensed consolidated balance sheet. At March 21, 1998, $213 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 $213 million represented the
present value of the minimum payments of the assigned leases, excluding any
renewal option periods, discounted at our pre-tax cost of debt. On a
nominal basis, the contingent liability resulting from the assigned leases
was $312 million. The balance of the contingent liabilities primarily
reflected guarantees to support financial arrangements of certain
unconsolidated affiliates and other restaurant franchisees.
10
We are currently and, for certain prior years, have been primarily
self-insured for most workers' compensation, general liability and
automotive liability losses, subject to per occurrence and aggregate annual
liability limitations. During the first quarter of 1997, we participated
with PepsiCo in a guaranteed cost program for certain coverages. We are
also primarily self-insured for health care claims for eligible
participating employees, subject to certain deductibles and limitations. We
determine our liability for claims reported and for claims incurred but not
reported on an actuarial basis.
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, Taco Bell recently has
been faced with allegations of purported class-wide wage and hour
violations. We believe that the ultimate liability, if any, in excess of
amounts already recognized arising from such claims or contingencies is not
likely to have a material adverse effect on our results of operations,
financial condition or cash flows.
11
Management's Discussion and Analysis
for the 12 Weeks Ended March 21, 1998
Introduction
On October 6, 1997 (the "Spin-off Date"), the worldwide operations of KFC,
Pizza Hut and Taco Bell (the "Core Business(es)") became an independent,
publicly owned restaurant Company known as TRICON Global Restaurants, Inc.
through a Spin-off from our former parent, PepsiCo, Inc. (the "Spin-off"). The
following Management's Discussion and Analysis should be read in conjunction
with the unaudited Condensed Consolidated Financial Statements on pages 3 - 11
and the Cautionary Statements on page 24 and our filing on Form 10-K for the
year ended December 27, 1997 ("10-K"). For purposes of this Management's
Discussion and Analysis, we include the worldwide operations of the Core
Businesses and our U.S. non-core businesses through their respective dates of
disposal. These non-core businesses consist of California Pizza Kitchen, Chevys
Mexican Restaurant, D'Angelo Sandwich Shop, East Side Mario's, and Hot 'n Now
(collectively, the "Non-core Businesses"), which were disposed of during 1997.
Where significant to the discussion, the impact of the Non-core Businesses has
been separately identified. Though the full-year benefits of the fourth quarter
1997 unusual charge, discussed below, have been and are expected to be
significant, we continue to expect that they will be largely offset in the near
term by the negative impact of adverse economic conditions in Asia and
incremental spending related to Year 2000 issues. However, in the first quarter
of 1998, we believe that the benefits of the fourth quarter charge were
approximately $3 million less than the negative impacts of Asia and Year 2000
spending.
In the following discussion, volume is the estimated dollar effect of the
year-over-year change in customer transaction counts. Effective net pricing
includes price increases/decreases and the effect of product and country mix.
Portfolio effect includes the impact on operating results related to our
refranchising initiative and closure of underperforming stores.
Tabular amounts are displayed in millions except per share and unit count
amounts, or as specifically identified.
Certain factors impacting comparability of operating performance in the
quarter ended March 21, 1998 were anticipated at the prior fiscal year end and
are more fully discussed in the 10-K. Updated information is provided, as
follows.
Asian Economic Events
---------------------
The overall economic turmoil and weakening of local currencies throughout
much of Asia against the U.S. dollar beginning in late 1997 has created, in the
near term, a difficult retail environment. The turmoil encountered in our first
quarter continued to adversely affect the U.S. Dollar value of our foreign
currency denominated sales ("translation") and consumer demand as seen in
reduced transaction counts, both of which have impacted our consolidated results
of operations.
Asian operations in such countries as China, Japan, Korea, Singapore, and
Thailand, among others, comprised approximately 27% of our international system
U.S. dollar translated sales in the first quarter of 1998 versus 31% in the
first quarter of 1997. Asian system sales declined 16% from the comparable
quarter of 1997 primarily due to foreign currency translation and transaction
count declines in certain of our Asian markets. The decline in system sales is
net of the impact of approximately 400 additional units operating in Asia during
this year due to continuing development efforts. Excluding the impact of
translation, Asian system sales were essentially flat. Company revenues declined
by 7% as the impacts of translation and transaction count declines more than
offset the significant impact of new unit development. Excluding the impact of
translation, Company revenues increased approximately 20%. Asian operating
profits declined 45% in 1998
12
and are expected to continue to decline on a comparable basis in the near term.
Excluding the impact of translation, operating profit declined approximately
23%. While we continue to work with our suppliers to reduce costs and focus on
increasing the everyday value of our product offerings, the challenges continue.
We expect to continue to seek out investment opportunities in Asia, drawing from
lessons learned there, and from other countries which encountered similar
economic difficulties in their recent past, such as Mexico. The complexities of
the international environment in which we operate make it difficult to
accurately predict the ongoing effect of currency movements and continuing
economic turmoil on our results of operations. Related effects will be reported
in our financial statements as they become known and are estimable.
Selected highlights of our recent operating results in Asia are as follows:
% B(W)
1998 1997 vs. 1997
------------ ----------- ------------
Systems Sales $ 411 $ 491 (16)
% of International 27% 31%
Revenues $ 75 $ 81 (7)
% of International 17% 16%
Operating Profit $ 12 $ 22 (45)
% of Total International 28% 49%
Year 2000
---------
We have established an enterprise-wide program to prepare our computer
systems and applications for the Year 2000. Work continues to remediate the
domestic and our key international countries' systems as necessary. During the
first quarter, we have undertaken a plan to assess and correct the computer
systems in all other international markets not previously addressed. We continue
to anticipate that the majority of reprogramming and testing will be completed
by the first quarter 1999 for domestic entities and second quarter 1999 for
international entities.
Testing and remediation of all our systems and applications is expected to
cost $40-$45 million from inception in 1997 through completion in 1999. Of these
costs, approximately $10 million had been incurred through March 21, 1998, of
which $6 million was spent in the first quarter of 1998. Approximately $35
million is expected to be incurred in fiscal 1998. All costs are expected to be
funded by cash flows from operations.
Other Factors Affecting Comparability
-------------------------------------
In addition to the above identified near-term risks in our Asian businesses
and costs related to Year 2000 issues, we believe that certain items included in
1997 results of operations are either unlikely to recur in 1998 or are expected
to recur in significantly different magnitudes, thereby affecting future
comparability of results. These items include $24 million in special KFC
franchise contract renewal fees primarily from renewals in the second quarter of
1997 which will not recur in 1998 and the income included in 1997 results
attributable to the Non-core Businesses sold in 1997 of approximately $4 million
($3 million after-tax) in the first quarter of 1997 and $4 million ($3 million
after-tax) in the second quarter of 1997. In addition, 1998 total facility
actions net gain after-tax is expected to be approximately half of the level of
the after-tax net gain recognized in 1997, excluding the fourth quarter 1997
charge, due to the second quarter 1997 tax-free gain of approximately $100
million related to the refranchising of our restaurants in New Zealand through
an initial public offering. Additionally, as disclosed in the 10-K, we are
proceeding with the relocation of our Wichita, Kansas, operations to other
facilities. Although the costs expensed in the first quarter were insignificant,
we expect to incur approximately $5 million of relocation and other costs in
each of the second and third quarters of 1998. These charges are expected to be
offset by the anticipated gain on the sale of the facility in the fourth
quarter.
13
Store Portfolio Perspectives
----------------------------
In the fourth quarter of 1997, we announced a $530 million unusual charge
($425 million after-tax). The charge included (1) costs of closing
underperforming stores during 1998, primarily at Pizza Hut and internationally;
(2) reduction to fair market value, less costs to sell, of the carrying amounts
of restaurants we intend to refranchise in 1998; (3) impairment of certain
restaurants intended to be used in the business; (4) impairment of certain joint
venture investments; and (5) related personnel reductions. Of the $530 million
charge, approximately $440 million related to asset writedowns and approximately
$90 million related to liabilities, primarily occupancy-related costs and
severance. Through March 21, 1998, the amounts utilized to date apply only to
the actions covered by the charge and no material adjustments have been made to
the charge. The charge included reserves related to 1,407 units expected to be
refranchised and/or closed. As of March 21, 1998, 283 units have been closed and
11 units have been refranchised.
The charge is expected to have a favorable impact on future cash flows and
operating profits. We believe our worldwide business, upon completion of the
actions covered by the charge, will be significantly more focused and better
positioned to deliver consistent growth in operating earnings before facility
actions. We estimate that the favorable impact on operating profit related to
the 1997 fourth quarter charge was approximately $13 million in the first
quarter of 1998. For purposes of discussion of their impact on operating
margins, the benefits are generally categorized in two ways. First, as they
relate to stores that have been closed or refranchised, the impact is included
in portfolio effect. Second, as they relate to the absence of depreciation in
1998 for stores which have not yet been closed or refranchised, the impact is a
separately identified component of the change in margins.
Our portfolio initiatives, coupled with the relative number of new points
of distribution added by our franchisees and licensees and by us, have reduced
our overall Company ownership percentage (including joint venture units) of our
Core Businesses' total system units by 1 percentage point from year-end 1997 and
by 7 percentage points from year-end 1996 to 37% at March 21, 1998.
14
Results of Operations
Worldwide
- ---------
12 Weeks Ended
--------------------------------
3/21/98 3/22/97 % B(W)
------------ ------------ ------------
SYSTEM SALES $ 4,557 $ 4,584 (1)
============ ============
REVENUES
Company sales $ 1,790 $ 2,123 (16)
Franchise and license fees 131 114 15
------------ ------------
Total Revenues $ 1,921 $ 2,237 (14)
============ ============
COMPANY RESTAURANT MARGINS
Domestic $ 150 $ 180 (17)
International 51 54 (6)
------------ ------------
Total $ 201 $ 234 (14)
============ ============
% of sales 11.2% 11.0% .2 points
Ongoing operating profit $ 139 $ 150 (7)
Facility actions net gain 29 12 NM
------------ ------------
Operating profit 168 162 4
Interest expense, net 69 66 (5)
Income tax provision 45 44 (2)
------------ ------------
Net Income $ 54 $ 52 4
============ ============
Diluted earnings per share $ .35
============
Pro forma diluted earnings per
share (1) $ .34
============
(1) Assumes the 152 million shares issued at Spin-off and the 2 million
dilutive options for the first quarter of 1998 had been outstanding from
the beginning of fiscal 1997.
NM - Not Meaningful
- --------------------------------------------------------------------------------
WORLDWIDE RESTAURANT UNIT ACTIVITY
Joint
Company Venture Franchised Licensed Total
---------------- ---------- -------------- ----------- ------------
Balance at December 27, 1997 10,117 1,090 15,097 3,408 29,712
New Builds & Acquisitions 64 12 167 139 382
Refranchising & Licensing (198) (6) 202 2 -
Closures (246) (28) (127) (79) (480)
---------------- ---------- -------------- ----------- ------------
Balance at March 21, 1998 9,737(a) 1,068 15,339 3,470 29,614
================ ========== ============== =========== ============
% of Total 32.9% 3.6% 51.8% 11.7% 100.0%
================ ========== ============== =========== ============
(a) Includes 476 units approved for closure, but not yet closed at March 21,
1998.
- --------------------------------------------------------------------------------
15
System sales, which represents the Core Businesses' combined sales of
Company, joint venture, franchised and licensed units, decreased $27 million or
1% in 1998. Excluding the negative impact of foreign currency translation,
system sales increased by $154 million or 3%. This increase resulted primarily
from the development of new units in the quarter and the 1998 full quarter
effect of 1997 developed units, predominantly by franchisees and licensees.
Domestically, development during the quarter was principally at Pizza Hut and
Taco Bell with international development largely in China. This growth in system
sales was partially offset by store closures.
Revenues decreased $316 million or 14%. Company sales decreased $333
million or 16%. Excluding the negative impact of foreign currency translation,
total revenues decreased $266 million or 12%, and Company sales declined $285
million or 13%. This decrease in Company sales was primarily due to portfolio
actions and the Non-core Businesses which were sold in 1997, which had first
quarter 1997 revenues of $103 million. The decrease in revenues was partially
offset by new unit development and effective net pricing.
Company Restaurant Margins - Worldwide
12 Weeks Ended
---------------------------------
3/21/98 3/22/97
-------------- --------------
Company sales 100.0% 100.0%
Food and paper 32.3% 32.2%
Payroll and employee benefits 30.1% 29.8%
Occupancy and other operating expenses 26.4% 27.0%
-------------- --------------
Company restaurant margins 11.2% 11.0%
============== ==============
Company restaurant margins as a percent of sales increased 20 basis points
for the first quarter of 1998 as compared to the same period in 1997. The
increase was driven by the portfolio effect of facility actions, which
contributed approximately 90 basis points to this improvement. In addition, the
absence in 1998 of depreciation and amortization relating to stores included in
the fourth quarter charge, which have not yet been closed or refranchised at the
end of the quarter, contributed approximately 45 basis points to the net
increase. The positive impact of facility actions and the benefits of the fourth
quarter charge were significantly offset by the margin impact of lower overall
transactions and costs in excess of price increases, primarily labor.
General, Administrative and Other Expenses
12 Weeks Ended
----------------------------
3/21/98 3/22/97 % B(W)
------------ ------------ -------------
Domestic $ 109 $ 132 17
International 55 52 (6)
Unallocated 29 14 NM
------------ ------------
$ 193 $ 198 3
============ ============
General, administrative and other expenses ("G&A") includes general and
administrative expenses, other income and expense, equity income or loss from
investments in unconsolidated affiliates and foreign exchange gains and losses.
16
Included in the 1997 unallocated G&A was a PepsiCo allocation amount of $12
million, reflecting a portion of PepsiCo's shared administrative expenses. The
allocated PepsiCo administrative expenses were based on PepsiCo's total
corporate administrative expenses using a ratio of our revenues to PepsiCo's
revenues. We believe that this basis of allocation was reasonable based on the
facts available at the date of such allocation. Based on our current analysis,
G&A that we incurred during the first quarter of 1998 as an independent,
publicly owned company was approximately $2 million higher than the 1997
allocation from PepsiCo. The 1998 increase is lower than expected due mainly to
delays in staffing positions at TRICON.
G&A decreased $5 million or 3% during 1998. Excluding the effects of the
disposal of our Non-core Businesses, G&A would have increased $3 million or 2%
during 1998. This increase reflected increased investment spending, partially
offset by the benefits of stores sold or closed in 1997. Investment spending
consisted primarily of costs related to spending on Year 2000 issues, as well as
the timing of investments during 1998 in certain key international markets which
predated anticipated savings from the restructuring of the international markets
included in the fourth quarter charge.
Facility Actions Net Gain
12 Weeks Ended
--------------------------------
3/21/98 3/22/97
----------- -------------
Refranchising net gain $ 29 $ 16
Store closure costs - (4)
----------- -------------
Facility actions net gain $ 29 $ 12
=========== =============
Refranchising net gain, which included initial franchise fees of $7 million
and $3 million in 1998 and 1997, respectively, arose from refranchising 204 and
94 units in 1998 and 1997, respectively.
Operating Profits
12 Weeks Ended
--------------------------------
3/21/98 3/22/97 % B(W)
-------------- ------------- --------------
Domestic $ 126 $ 119 6
International 42 45 (7)
Foreign exchange losses (1) (3) 67
Unallocated expenses (28) (11) NM
-------------- -------------
Ongoing operating profit 139 150 (7)
Facility actions net gain 29 12 NM
-------------- -------------
Reported operating profit $ 168 $ 162 4
============== =============
Excluding facility actions net gain, operating profits declined $11 million
or 7%. Excluding the negative impact of currency translation, the decrease in
operating profit was $5 million or 3%. The remaining decrease in operating
profit was driven by the absence in 1998 of the operating profits from the
Non-core Businesses of $5 million. Declines in restaurant margin dollars were
offset by higher franchise fees and reduced general, administrative and other
expenses.
17
Interest Expense, Net
Prior to the Spin-off, our operations were financed through operating cash
flows, refranchising activities and investments by and advances from PepsiCo.
Our 1997 interest expense includes an allocation of $60 million by PepsiCo of
its interest expense (PepsiCo's weighted average interest rate applied to the
average balance of investments by and advances from PepsiCo) and interest on our
external debt for periods prior to the Spin-off. We believe such allocated
interest expense is not indicative of the interest expense that we would have
incurred as an independent, publicly owned Company or will incur in future
periods.
Interest expense increased $3 million or 5% in the first quarter of 1998 as
compared to the same period in 1997. This increase is primarily due to the
higher interest rate on our bank credit agreement, as compared to the PepsiCo
rate used in the allocation process prior to the Spin-off, and also higher
outstanding debt levels.
Income Taxes
12 Weeks Ended
--------------------------------
3/21/98 3/22/97
------------- -----------
Income taxes $ 45 $ 44
Effective tax rate 45.3% 45.8%
Diluted Earnings Per Share
The components of diluted earnings per common share ("EPS") were as follows:
12 Weeks Ended
--------------------------------
3/21/98 3/22/97 (a)
---------- -------------
Operating earnings - Core Businesses $ .25 $ .28
Facility actions net gain .10 .04
---------- -------------
Net income - Core Businesses .35 .32
Operating earnings - Non-core Businesses - .02
---------- -------------
Net income $ .35 $ .34
========== =============
a) Pro forma EPS assumes the 152 million shares issued at Spin-off and the 2
million dilutive options for the first quarter of 1998 had been outstanding
from the beginning of fiscal 1997, as our capital structure as an
independent, publicly owned Company did not exist in that quarter.
Domestic
- --------
12 Weeks Ended
------------------------------
3/21/98 3/22/97 % B(W)
------------ -------------- -------------
SYSTEM SALES $ 3,057 $ 2,996 2
============ ==============
REVENUES
Company sales $ 1,381 $ 1,653 (16)
Franchise and license fees 86 71 21
------------ --------------
Total Revenues $ 1,467 $ 1,724 (15)
============ ==============
COMPANY RESTAURANT MARGINS $ 150 $ 180 (17)
============ ==============
% of sales 10.9% 10.9% -
- --------------------------------------------------------------------------------
18
U.S. RESTAURANT UNIT ACTIVITY
Company Franchised Licensed Total
--------------- ------------- ----------- ------------
Balance at December 27, 1997 7,822 9,597 3,167 20,586
New Builds & Acquisitions 7 51 139 197
Refranchising & Licensing (182) 180 2 -
Closures (214) (49) (79) (342)
--------------- ------------- ----------- ------------
Balance at March 21, 1998 7,433(a) 9,779 3,229 20,441
=============== ============= =========== ============
% of Total 36.4% 47.8% 15.8% 100.0%
=============== ============= =========== ============
(a) Includes 345 units approved for closure, but not yet closed at March 21,
1998.
- --------------------------------------------------------------------------------
System sales from Core Businesses increased $61 million or 2% in 1998 due
primarily to new unit activity during the quarter predominantly by franchisees
and licensees at Pizza Hut and Taco Bell and the 1998 full quarter effect of
1997 developed units. This increase was partially offset by store closures.
Revenues decreased $257 million or 15% in 1998. Company sales declined $272
million or 16% in 1998. Excluding the effect of the Non-core Businesses, Company
sales declined $170 million or 11%. This decline was principally attributable to
portfolio actions at Pizza Hut and Taco Bell. This decline was partially offset
by new unit development and positive same store sales at Pizza Hut and KFC.
Same store sales are measured for our U.S. Company units. Same store sales
at KFC increased 4% in 1998 driven by strong product promotions, such as Honey
Barbecue Wings and Original Recipe, which led to overall increases in
transactions. Same store sales at Pizza Hut increased 5% for 1998 primarily due
to increased traffic and higher average guest checks at traditional and delivery
units driven by the introduction in the fourth quarter of 1997 of "The Edge"
Pizza. Taco Bell same store sales declined 3%. This decline was attributable to
lower transactions versus the prior year somewhat offset by higher average guest
checks. The decline in transactions relates to the highly successful Star Wars
promotion in 1997.
Company Restaurant Margins - Domestic
12 Weeks Ended
---------------------------------
3/21/98 3/22/97
---------------- -------------
Company sales 100.0% 100.0%
Food and paper 31.2% 31.0%
Payroll and employee benefits 31.9% 31.6%
Occupancy and other operating expenses 26.0% 26.5%
---------------- -------------
Company restaurant margins 10.9% 10.9%
================ =============
Margins, excluding the portfolio effect of facility actions, declined 110
basis points primarily as a result of lower overall transactions and costs in
excess of price increases, principally for labor and food. The absence in 1998
of depreciation and amortization relating to stores included in the fourth
quarter charge which have not yet been closed or refranchised favorably impacted
margins by approximately 30 basis points. The increased labor costs were due to
the increased minimum wage in the U.S. and to costs incurred to increase the
management complement in certain of our restaurants. The increase in food costs
was primarily a result of higher cheese prices.
19
Operating profits increased $7 million or 6% in 1998 primarily as a result
of higher franchise revenues and reduced general, administrative and other
expenses, offset by lower restaurant margin dollars.
International
- -------------
12 Weeks Ended
------------------------------
3/21/98 3/22/97 % B(W)
-------------- ------------ ------------
SYSTEM SALES $ 1,500 $ 1,588 (6)
============== ============
REVENUES
Company sales $ 409 $ 470 (13)
Franchise and license fees 45 43 5
-------------- ------------
Total Revenues $ 454 $ 513 (12)
============== ============
COMPANY RESTAURANT MARGINS $ 51 $ 54 (6)
============== ============
% of sales 12.5% 11.5% 1.0 point
- --------------------------------------------------------------------------------
INTERNATIONAL RESTAURANT UNIT ACTIVITY
Joint
Company Venture Franchised Licensed Total
------------- ----------- -------------- ----------- ------------
Balance at December 27, 1997 2,295 1,090 5,500 241 9,126
New Builds & Acquisitions 57 12 116 - 185
Refranchising & Licensing (16) (6) 22 - -
Closures (32) (28) (78) - (138)
------------- ----------- -------------- ----------- ------------
Balance at March 21, 1998 2,304(a) 1,068 5,560 241 9,173
============= =========== ============== =========== ============
% of Total 25.1% 11.7% 60.6% 2.6% 100.0%
============= =========== ============== =========== ============
(a) Includes 131 units approved for closure, but not yet closed at March 21,
1998.
- --------------------------------------------------------------------------------
System sales decreased $88 million or 6% in 1998. Foreign currency
translation declines and store closures were partially offset by new unit
development. Exclusive of the negative impact of foreign currency translation,
system sales increased $93 million or 6% in 1998.
Revenues decreased $59 million or 12% in 1998. Exclusive of the negative
impact of foreign currency translation, revenues decreased $9 million or 2%.
Company sales in 1998 decreased $61 million or 13%. In Asia, the adverse
economic conditions resulted in reduced transaction counts which were partially
offset by new unit development of approximately 160 units. Exclusive of the
negative impact of foreign currency translation, Company sales decreased $13
million or 3%. This decrease was driven primarily by portfolio actions offset by
new units. Franchise and license fees increased $2 million or 5% in 1998
primarily from new unit development and refranchising partially offset by the
negative impact of foreign currency translation.
20
Company Restaurant Margins - International
12 Weeks Ended
------------------------------------
3/21/98 3/22/97
---------------- ----------------
Company sales 100.0% 100.0%
Food and paper 35.9% 36.5%
Payroll and employee benefits 24.0% 23.4%
Occupancy and other operating expenses 27.6% 28.6%
---------------- ----------------
Company restaurant margins 12.5% 11.5%
================ ================
The 100 basis points improvement in margin in 1998 was driven by the
absence in 1998 of depreciation and amortization relating to stores which have
not yet been closed or refranchised which contributed approximately 90 basis
points of the improvement. The margin impact of the deleveraging effect of
reduced transaction counts and the impact of adverse foreign currency
translation declines in Asia were essentially offset by margin improvements in
the balance of International markets.
Operating profits, excluding facility actions, decreased $3 million or 7%.
Improved restaurant margins and new unit development were more than offset by
adverse foreign currency translation and increases in general and administrative
expenses. For key markets, the impact of reduced transaction counts and foreign
currency translation declines in Asia was partially offset by profit growth in
Mexico, Great Britain, and Spain. Exclusive of the negative impact of foreign
currency translation, operating profit increased $3 million or 7%.
Consolidated Cash Flows
Net cash provided by operating activities increased $13 million or 48% to
$40 million in 1998 due to lower utilization for working capital primarily
related to the absence of deposits on insurance programs in 1998. Excluding the
working capital difference, net cash provided by operating activities were
relatively constant between years.
Net cash provided by investing activities increased $56 million to $66
million in 1998. The increase was primarily attributable to higher proceeds from
refranchising of restaurants of $81 million over 1997 and decreased capital
spending. The increase was partially offset by a decrease in cash flow from
other investing activities.
Net cash used for financing activities more than doubled in the first
quarter of 1998 to $132 million, an increase of $75 million. This increase
related to higher payments on debt in the current quarter as well as reduced
borrowings in the quarter.
Financing Activities
--------------------
To fund the Spin-off, we negotiated a $5.25 billion bank credit agreement
comprised of a $2 billion senior, unsecured Term Loan Facility and a $3.25
billion senior, unsecured Revolving Credit Facility which mature on October 2,
2002. Interest is based principally on the London Interbank Offered Rate
("LIBOR") plus a variable margin as defined in the credit agreement. As of March
21, 1998, $1.91 billion and $2.38 billion were outstanding on the Term Loan and
Revolving Credit Facility, respectively, and we had approximately $717 million
in unused revolving credit capacity, net of Letters of Credit of $153 million.
The credit facilities are subject to various affirmative and negative covenants
including financial covenants as well as limitations on additional indebtedness
including guarantees of indebtedness, cash dividends, aggregate non-U.S.
investments, among other things, as defined in the credit agreement.
21
This substantial indebtedness subjects us to significant interest expense
and principal repayment obligations which are limited, in the near term, to
prepayment events as defined in the credit agreement. Our highly leveraged
capital structure could also adversely affect our ability to obtain additional
financing in the future or to undertake refinancings on terms and subject to
conditions that are acceptable to us.
At the end of the first quarter of 1998, we were in compliance with the
above noted covenants, and we will continue to closely monitor on an ongoing
basis the various operating issues that could, in aggregate, affect our ability
to comply with financial covenant requirements. Such issues include the ongoing
economic issues faced by much of Asia as well as the intensely competitive
nature of the quick service restaurant industry.
A key component of our financing philosophy is to build balance sheet
liquidity and to diversify sources of funding. Consistent with that philosophy,
which was discussed with our lenders during syndication of the Term Loan
Facility and Revolving Credit Facility, we have taken steps to refinance a
portion of our existing bank credit facility. In that regard, in 1997 we filed
with the Securities and Exchange Commission a shelf registration statement on
Form S-3 with respect to an offering of $2 billion of senior unsecured debt. We
may offer and sell from time to time debt securities in one or more series, in
amounts, at prices and on terms to be determined by market conditions at the
time of sale, as discussed in more detail in the registration statement. We
currently intend to use the net proceeds from an expected issuance and sale of
debt securities offered under this shelf registration to reduce term debt under
the above-referenced bank credit agreement and for general corporate purposes.
During 1998, we intend to reduce our reliance on bank debt by up to $1 billion
through a combination of proceeds from the debt securities offered under this
shelf registration, proceeds from refranchising activities and a reduction in
unused credit facilities. In early May, pursuant to our shelf registration, we
expect to issue $350 million 7.45% Notes due May 15, 2005 and $250 million 7.65%
Notes due May 15, 2008. The proceeds will be used to reduce existing borrowings
under our unsecured Term Loan Facility and unsecured Revolving Credit Facility.
We use various derivative instruments with the objective of reducing
volatility in our borrowing costs. We have utilized interest rate swap
agreements to effectively convert a portion of our variable rate (LIBOR) bank
debt to fixed rate and have also entered into treasury lock agreements to
partially hedge the anticipated issuance of our senior debt securities discussed
above. We have also entered into interest rate arrangements to limit the range
of effective interest rates on a portion of our variable rate bank debt. At
March 21, 1998, our weighted average interest rate was 6.6%. Other derivative
instruments may be considered from time to time as well to manage our debt
portfolio and to hedge foreign currency exchange exposures.
Though we anticipate that cash flows from both operating and refranchising
activities will be lower than prior year levels, we believe they will be
sufficient to support our expected increased capital spending and debt service
requirements.
Consolidated Financial Condition
Our operating working capital deficit, which excludes short-term
investments and short-term borrowings, is typical of restaurant operations where
the majority of sales are for cash. Our operating working capital deficit
declined 9% to $730 million at March 21, 1998 from $805 million at December 27,
1997. This decline primarily reflected a seasonal decrease in accounts payable
and other current liabilities, and fewer Company units this year.
22
Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Our primary market risk exposure with regard to financial instruments is to
changes in interest rates, principally in the United States. In addition, an
immaterial portion of our debt is denominated in foreign currencies which
exposes us to market risk associated with exchange rate movements. Historically,
we have not used derivative financial instruments to manage our exposure to
foreign currency rate fluctuations since the market risk associated with our
foreign currency denominated debt was not considered significant.
At March 21, 1998, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $28 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 21, 1998. In addition, the fair value of our interest rate derivative
contracts would increase approximately $48 million. Fair value was determined by
discounting the projected interest rate swap cash flows.
23
Cautionary Statements
From time to time, in both written reports and oral statements, we present
"forward-looking statements" within the meaning of Federal and state securities
laws, including those identified by such words as "may," "will," "expect,"
"believe," "plan" and other similar terminology. These "forward-looking
statements" reflect our current expectations and are based upon data available
at the time of the statements. Actual results involve risks and uncertainties,
including both those specific to the Company and those specific to the industry,
and could differ materially from expectations.
Company risks and uncertainties include but are not limited to the lack of
experience of our management group in operating the Company as an independent,
publicly owned business; potentially substantial tax contingencies related to
the Spin-off, which, if they occur, require us to indemnify PepsiCo; our
substantial debt leverage and the attendant potential restriction on our ability
to borrow in the future, as well as the substantial interest expense and
principal repayment obligations; potential unfavorable variances between
estimated and actual liabilities including those related to the sale of the
Non-core Businesses; third party failures to achieve timely, effective Year 2000
remediation; and the potential inability to identify and offer to qualified
franchisees to purchase Company restaurants at prices we consider appropriate
under our strategy to reduce the percentage of system units we operate.
Industry risks and uncertainties include, but are not limited to, global
and local business and economic and political conditions; legislation and
governmental regulation; competition; success of operating initiatives and
advertising and promotional efforts; volatility of commodity costs and increases
in minimum wage and other operating costs; availability and cost of land and
construction; adoption of new or changes in accounting policies and practices;
consumer preferences, spending patterns and demographic trends; political or
economic instability in local markets; and currency exchange rates.
24
Independent Accountants' Review Report
--------------------------------------
The Board of Directors
TRICON Global Restaurants, Inc. and Subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of TRICON
Global Restaurants, Inc. and Subsidiaries ("TRICON") as of March 21, 1998 and
the related condensed consolidated statements of income and cash flows for the
twelve weeks ended March 21, 1998 and March 22, 1997. These financial statements
are the responsibility of TRICON's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of TRICON as of December 27, 1997, and
the related consolidated statements of operations, cash flows and shareholders'
(deficit) equity for the year then ended not presented herein; and in our report
dated February 12, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 27, 1997,
is fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Our report, referred to above, contains an explanatory paragraph that states
that TRICON in 1995 adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
KPMG Peat Marwick LLP
Louisville, Kentucky
April 24, 1998
25
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 Peat Marwick 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 April 28, 1998
attaching our first quarter 1998 earnings release of April 27,
1998.
26
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, 1998
/s/ Robert L. Carleton
---------------------------------------------
Senior Vice President and
Controller and Chief Accounting Officer
(Principal Accounting Officer)
27
EXHIBIT 12.1
TRICON Global Restaurants, Inc.
Ratio of Earnings to Fixed Charges Years Ended 1997-1993
and 12 Weeks Ended March 21, 1998 and March 22, 1997
(in millions except ratio amounts)
53 Weeks 52 Weeks
52 Weeks 12 Weeks
------------------------------- ------------ ---------- -----------------------
1997 1996 1995 1994 1993 3/21/98 3/22/97
-------- -------- -------- ------------ ---------- ---------- ----------
Earnings:
Income from continuing operations
before income taxes and cumulative
effect of accounting changes (35) 72 (103) 241 416 99 96
Unconsolidated affiliates' interests,
net (a) (1) (6) - (1) (3) (1) (3)
Interest expense (a) 290 310 368 349 238 69 66
Interest portion of net rent expense (a) 109 109 109 108 87 20 23
-------- -------- -------- ------------ ---------- ---------- ----------
Earnings available for fixed charges 363 485 374 697 738 187 182
======== ======== ======== ============ ========== ========== ==========
Fixed Charges:
Interest Expense (a) 290 310 368 349 238 69 66
Interest portion of net rent expense 109 109 109 108 87 20 23
(a)
-------- -------- -------- ------------ ---------- ---------- ----------
Total Fixed Charges 399 419 477 457 325 89 89
======== ======== ======== ============ ========== ========== ==========
Ration of Earnings to Fixed
Charges (b) (c) (d) .91x 1.16x .78x 1.53x 2.27x 2.10x 2.05x
(a) Included in earnings for the years 1993 through 1997 are certain
allocations related to overhead costs and interest expense from PepsiCo.
For purposes of these ratios, earnings are calculated by adding to
(subtracting from) income from continuing operations before income taxes
and cumulative effect of accounting changes the following: fixed charges,
excluding capitalized interest; and losses and (undistributed earnings)
recognized with respect to less than 50% owned equity investments. Fixed
charges consist of interest on borrowings, the allocation of PepsiCo's
interest expense and that portion of rental expense that approximates
interest. For a description of the PepsiCo allocations, see the notes to
the consolidated financial statements included in the 10-K.
(b) Included the impact of unusual, disposal and other charges of $174 million
($159 million after tax) in 1997, $246 million ($189 million after tax) in
1996 and $457 ($324 after tax) in 1995. Excluding the impact of such
charges, the ratio of earnings to fixed charges would have been 1.35x,
1.74x and 1.74x for the fiscal years ended 1997, 1996 and 1995,
respectively.
(c) The Company is contingently liable for obligations of certain franchisees
and other unaffiliated parties. Fixed charges associated with such
obligations aggregated approximately $17 million during the fiscal year
1997. Such fixed charges, which are contingent, have not been included in
the computation of the ratios.
(d) For the fiscal years December 27, 1997 and December 30, 1995, earnings were
insufficient to cover fixed charges by approximately $36 million and $103
million, respectively. Earnings in 1997 includes a charge of $530 million
($425 million after-tax) taken in the fourth quarter to refocus our
business. Earnings in 1995 included the noncash charge of $457 million
($324 million after-tax) for the initial adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
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 24,
1998 included within the Quarterly Report on Form 10-Q of TRICON Global
Restaurants, Inc. for the twelve weeks ended March 21, 1998, and incorporated by
reference in the following Registration Statements:
Description Registration Statement Number
Form S-3
Initial Public Offering of Debt Securities 333-42969
Form S-8s
Restaurant Deferred Compensation Plan 333-36877
Executive Income Deferral Program 333-36955
TRICON Long-Term Incentive Plan 333-36895
Share Power Stock Option Plan 333-36961
TRICON Long-Term Savings Program 333-36893
Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
KPMG Peat Marwick LLP
Louisville, Kentucky
May 1, 1998