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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 20, 1999
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
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TRICON GLOBAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-3951308
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 Gardiner Lane, Louisville, Kentucky 40213
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 874-8300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's Common Stock as of
April 23, 1999 was 153,534,037 shares.
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TRICON GLOBAL RESTAURANTS, INC.
INDEX
Page No.
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Part I. Financial Information
Condensed Consolidated Statement of Income -
12 weeks ended March 20, 1999 and March 21, 1998 3
Condensed Consolidated Statement of Cash Flows -
12 weeks ended March 20, 1999 and March 21, 1998 4
Condensed Consolidated Balance Sheet - March 20, 1999
and December 26, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Independent Accountants' Review Report 35
Part II. Other Information and Signatures 36
2
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
(in millions, except per share data - unaudited)
12 Weeks Ended
-----------------------------
3/20/99 3/21/98
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Revenues
Company sales $ 1,662 $ 1,790
Franchise and license fees 151 132
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1,813 1,922
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Costs and Expenses, net
Company restaurants
Food and paper 528 579
Payroll and employee benefits 463 538
Occupancy and other operating expenses 412 472
---------- ----------
1,403 1,589
General, administrative and other expenses 208 194
Facility actions net gain (34) (29)
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Total costs and expenses, net 1,577 1,754
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Operating Profit 236 168
Interest expense, net 52 69
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Income Before Income Taxes 184 99
Income Tax Provision 78 45
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Net Income $ 106 $ 54
========== ==========
Basic Earnings Per Common Share $ .69 $ .36
========== ==========
Diluted Earnings Per Common Share $ .66 $ .35
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
(in millions - unaudited)
12 Weeks Ended
----------------------------
3/20/99 3/21/98
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Cash Flows - Operating Activities
Net Income $ 106 $ 54
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 95 104
Facility actions net gain (34) (29)
Deferred income taxes (21) (2)
Other non-cash charges and credits, net 46 18
Changes in operating working capital,
excluding effects of acquisitions and
dispositions:
Accounts and notes receivable (24) (4)
Inventories 5 4
Prepaid expenses and other current assets (14) (12)
Deferred income taxes - (11)
Accounts payable and other current
liabilities (213) (103)
Income taxes payable 78 21
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Net change in operating working capital (168) (105)
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Net Cash Provided by Operating Activities 24 40
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Cash Flows - Investing Activities
Capital spending (66) (53)
Refranchising of restaurants 121 121
Acquisition of restaurants (6) -
Sales of property, plant and equipment 3 13
Other, net (10) (15)
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Net Cash Provided by Investing Activities 42 66
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Cash Flows - Financing Activities
Proceeds from Long-term Debt 1 1
Proceeds from Revolving Credit Facility 2,738 2,795
Payments of Revolving Credit Facility (2,818) (2,850)
Payments of Long-term Debt (13) (62)
Short-term borrowings-three months or less, net 9 (14)
Other, net 6 (2)
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Net Cash Used for Financing Activities (77) (132)
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Effect of Exchange Rate Changes on Cash and
Cash Equivalents - (3)
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Net Decrease in Cash and Cash Equivalents (11) (29)
Cash and Cash Equivalents - Beginning of period 121 268
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Cash and Cash Equivalents - End of period $ 110 $ 239
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- -----------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 47 $ 83
Income taxes paid 22 34
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED BALANCE SHEET
TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
(in millions)
3/20/99 12/26/98
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(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 110 $ 121
Short-term investments, at cost 104 87
Accounts and notes receivable, less allowance:
$18 in 1999 and $17 in 1998 181 155
Inventories 63 68
Prepaid expenses and other current assets 71 57
Deferred income taxes 137 137
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Total Current Assets 666 625
Property, Plant and Equipment, net 2,815 2,896
Intangibles Assets, net 620 651
Investments in Unconsolidated Affiliates 162 159
Other Assets 200 200
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Total Assets $ 4,463 $ 4,531
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 1,070 $ 1,283
Income taxes payable 173 94
Short-term borrowings 116 96
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Total Current Liabilities 1,359 1,473
Long-term Debt 3,333 3,436
Other Liabilities and Deferred Credits 775 785
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Total Liabilities 5,467 5,694
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Shareholders' Deficit
Preferred stock, no par value, 250 shares
authorized; no shares issued - -
Common stock, no par value, 750 shares
authorized; 153 shares issued and outstanding
in both 1999 and 1998 1,353 1,305
Accumulated deficit (2,212) (2,318)
Accumulated other comprehensive income (145) (150)
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Total Shareholders' Deficit (1,004) (1,163)
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Total Liabilities and Shareholders' Deficit $ 4,463 $ 4,531
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See accompanying Notes to Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
(Unaudited)
1. Financial Statement Presentation
We have prepared our accompanying unaudited Condensed Consolidated
Financial Statements ("Financial Statements") in accordance with the rules
and regulations of the Securities and Exchange Commission for interim
financial information. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements. Therefore, we suggest that the accompanying
Financial Statements be read in conjunction with the Consolidated Financial
Statements and notes thereto included in our annual report on Form 10-K for
the fiscal year ended December 26, 1998 ("1998 Form 10-K"). Except as
disclosed herein, there has been no material change in the information
disclosed in the notes to our Consolidated Financial Statements included in
the 1998 Form 10-K.
Our Financial Statements include TRICON Global Restaurants, Inc. and its
wholly owned subsidiaries ("TRICON"). The Financial Statements include our
worldwide operations of KFC, Pizza Hut and Taco Bell. References to TRICON
throughout these notes to Financial Statements are made using the first
person notations of "we" or "our."
The preparation of the Financial Statements in conformity with generally
accepted accounting principles requires us to make estimates and
assumptions that affect our reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
Financial Statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from our
estimates.
We have reclassified certain items in the accompanying unaudited Financial
Statements for prior periods to be comparable with the classification
adopted for the 12 weeks ended March 20, 1999. These reclassifications had
no effect on previously reported net income.
In our opinion, the accompanying unaudited Financial Statements include all
adjustments considered necessary to present fairly, when read in
conjunction with the 1998 Form 10-K, our financial position as of March 20,
1999, and the results of our operations and cash flows for the quarters
ended March 20, 1999 and March 21, 1998. 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
-------------------------
3/20/99 3/21/98
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Net income $ 106 $ 54
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Basic EPS:
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Weighted-average common shares outstanding 153 152
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Basic EPS $ .69 $ .36
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Diluted EPS:
------------
Weighted-average common shares outstanding 153 152
Shares assumed issued on exercise of dilutive
share equivalents 26 19
Shares assumed purchased with proceeds of
dilutive share equivalents (18) (17)
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Shares applicable to diluted earnings 161 154
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Diluted EPS $ .66 $ .35
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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 quarter.
3. Items Affecting Comparability of Net Income
The following table summarizes the results of operations for stores held
for disposal at March 20, 1999 or disposed of in 1999 and 1998:
12 Weeks Ended
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3/20/99 3/21/98
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Stores held for disposal at
March 20, 1999 or disposed of
in 1999:
Sales $ 81 $ 92
Restaurant Margin 5 6
Stores disposed of in 1998:
Sales $ - $ 237
Restaurant Margin - 17
We expect that the loss of restaurant margin from the disposal of these
stores will be mitigated by the increased royalty fees for stores
refranchised, lower general and administrative expenses and reduced
interest costs primarily resulting from the reduction of debt by a portion
of the after-tax cash proceeds from our refranchising activities. The
combined restaurant margin reported above includes the benefit from the
suspension of depreciation and amortization of approximately $4 million ($2
million in the U.S. and $2 million in International) and $10 million ($7
million in the U.S. and $3 million in International) for the twelve weeks
ended March 20, 1999 and March 21, 1998, respectively, on stores held for
disposal at March 20, 1999 or disposed of in 1999 and 1998.
7
4. Changes In Accounting Principles and New Accounting Pronouncement
a. Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use
Effective December 27, 1998, we adopted Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 identifies the characteristics of
internal-use software and specifies that once the preliminary project stage
is complete, 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.
Previously, we expensed all such costs as incurred. For the twelve weeks
ended March 20, 1999, we capitalized approximately $2 million of internally
developed software costs and third party software purchases incurred in
1999 associated with all active projects, including those that were in
process at December 27, 1998. We amortize capitalized software costs on a
straight-line basis over relatively short useful lives dependent on facts
and circumstances. The software being developed has not yet been placed in
service and, therefore, is not currently being amortized.
b. Self-Insurance Actuarial Methodology
In 1999, the methodology used by our independent actuary was refined and
enhanced to provide a more reliable estimate of the self-insured portion of
our current and prior years' ultimate loss projections related to workers'
compensation, general liability and automobile liability insurance programs
(collectively "casualty losses"). The primary change to our prior practice
was in the factor we used to increase our independent actuary's ultimate
loss projections, which had a 51% confidence level for each year.
Confidence level means the likelihood that our actual casualty losses will
be equal to or below those estimates. Based on our independent actuary's
opinion, our prior practice produced a very conservative confidence factor
at a higher level than our target of 75%. Our actuary believes our 1999
change will produce estimates at our 75% target confidence level for each
self-insured year. This change in methodology resulted in a one-time
increase to our first quarter 1999 operating results of $8 million ($5
million after-tax).
c. Change in Pension Discount Rate Methodology
In 1999, we changed our method of determining the pension discount rate to
better reflect the assumed investment strategies we would most likely use
to invest any short-term cash surpluses. Accounting for pensions requires
us to develop an assumed interest rate on securities with which the pension
liabilities could be effectively settled. In estimating this discount rate,
we look at rates of return on high-quality corporate fixed income
securities currently available and expected to be available during the
period to the maturity of the pension benefits. As it is impractical to
find an investment portfolio which exactly matches the estimated payment
stream of the pension benefits, we often have projected short-term cash
surpluses. Previously, we assumed that all short-term cash surpluses would
be invested in U.S. government securities. Our new methodology assumes that
our investment strategies would be equally divided between U.S. government
securities and high-quality corporate fixed income securities. The change
in methodology favorably increased our first quarter 1999 operating results
by approximately $1 million ($1 million after-tax).
8
d. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. This Statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset the
related change in fair value on the hedged item in the income statement,
and requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS 133 cannot be applied retroactively. When adopted,
SFAS 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and, at the
company's election, before January 1, 1998).
We have not yet quantified the effects of adopting SFAS 133 on our
financial statements or determined the timing of or method of our adoption
of SFAS 133. However, the adoption of the Statement could increase
volatility in our earnings and other comprehensive income.
5. Long-term Debt
During the quarter ended March 20, 1999, we made net payments of
approximately $80 million under our unsecured Revolving Credit Facility. As
discussed in our 1998 Form 10-K, amounts outstanding under the Revolving
Credit Facility are expected to fluctuate from time to time, but reductions
to our unsecured Term Loan Facility cannot be reborrowed. These payments
reduced amounts outstanding under our Revolving Credit Facility at March
20, 1999 to $1.74 billion from $1.82 billion at year-end 1998. In addition,
we had unused Revolving Credit Facility borrowings available aggregating
$1.35 billion, net of outstanding letters of credit of $166 million. At
March 20, 1999, we had $926 million outstanding under our Term Loan
Facility which was unchanged from year-end 1998. At March 20, 1999, the
weighted average interest rate on our variable rate debt was 6.1%, which
included the effects of the associated interest rate swaps and collars.
Interest expense on the short-term borrowings and long-term debt was $56
million and $73 million for the twelve weeks ended March 20, 1999 and March
21, 1998, respectively.
On March 24, 1999, we entered into an agreement to amend certain terms of
our unsecured Term Loan Facility and unsecured Revolving Credit Facility
(the "Facilities"). This amendment gives us additional flexibility with
respect to acquisitions and other investments, permitted investments and
the repurchase of Common Shares. In addition, we voluntarily reduced our
maximum borrowings under the Revolving Credit Facility from $3.25 billion
to $3.0 billion. As a result of this amendment, we capitalized debt costs
of approximately $2.5 million. These costs will be amortized over the
remaining life of the Facilities. Additionally, an insignificant amount of
our previously deferred debt costs will be written off in the second
quarter of 1999 as a result of this amendment.
9
6. Comprehensive Income
Our quarterly total comprehensive income was as follows:
12 Weeks Ended
---------------------------------
3/20/99 3/21/98
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Net income $ 106 $ 54
Currency translation adjustment 5 (37)
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Total comprehensive income $ 111 $ 17
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7. Reportable Business Segments
Revenues
---------------------------------
12 Weeks Ended
---------------------------------
3/20/99 3/21/98
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U.S. $ 1,366 $ 1,468
International 447 454
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$ 1,813 $ 1,922
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Operating Profit; Interest
Expense, Net; and
Income Before Income Taxes
---------------------------------
12 Weeks Ended
---------------------------------
3/20/99 3/21/98
------------ -------------
U.S. $ 184 $ 126
International 55 42
Facility actions net gain 34 29
Foreign exchange net loss (1) (1)
Unallocated and corporate expenses (36) (28)
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Total Operating Profit 236 168
Interest expense, net 52 69
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Income Before Income Taxes $ 184 $ 99
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Identifiable Assets
---------------------------------
3/20/99 12/26/98
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U.S. $ 2,848 $ 2,942
International 1,460 1,447
Corporate 155 142
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$ 4,463 $ 4,531
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10
8. Commitments And Contingencies
Relationship with Former Parent After Spin-off
----------------------------------------------
As disclosed in our 1998 Form 10-K, in connection with the October 6, 1997
spin-off from PepsiCo (the "Spin-off"), separation and other related
agreements (collectively, "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 our non-core businesses, and the
indemnification of PepsiCo with respect to such liabilities. The non-core
businesses were disposed of in 1997 and consisted of California Pizza
Kitchen, Chevys Mexican Restaurant, D'Angelo's Sandwich Shops, East Side
Mario's and Hot `n Now (collectively the "Non-core Businesses"). Subsequent
to Spin-off, claims have been made by certain Non-core Business franchisees
and a purchaser of one of the businesses. We are disputing the validity of
such claims; however, we believe that any settlement of these claims at
amounts in excess of previously recorded liabilities is not likely to have
a material adverse effect on our results of operations, financial condition
or cash flows.
In addition, we must pay a fee to PepsiCo for all letters of credit,
guarantees and contingent liabilities relating to our businesses under
which PepsiCo remains liable. This obligation ends at the time they are
released, terminated or replaced by a qualified letter of credit covering
the full amount of contingencies under the letters of credit, guarantees
and contingent liabilities. Our fee payments to PepsiCo during the first
quarter of 1999 were immaterial. We have also indemnified PepsiCo for any
costs or losses it incurs with respect to these letters of credit,
guarantees and contingent liabilities. We have not been required to make
any payments under these indemnities.
Under the Separation Agreement, PepsiCo maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for
periods through the Spin-off date. PepsiCo also maintains full control and
absolute discretion regarding common tax audit issues. Although PepsiCo has
contractually agreed to, in good faith, use its best efforts to settle all
joint interests in any common audit issue on a basis consistent with prior
practice, there can be no assurance that determinations so made by PepsiCo
would be the same as we would reach, acting on our own behalf.
We have agreed to certain restrictions on future actions to help ensure
that the Spin-off maintains its tax-free status. Restrictions include,
among other things, limitations on the liquidation, merger or consolidation
with another company, certain issuances and redemptions of our Common
Stock, the granting of stock options and our sale, refranchising,
distribution or other disposition 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. No payments under these indemnities have been required
through the first quarter of 1999. Additionally, under the terms of the tax
separation agreement, PepsiCo is entitled to the federal income tax
benefits related to the exercise after the Spin-off of vested PepsiCo
options held by our employees.
11
Other Commitments and Contingencies
-----------------------------------
We were directly or indirectly contingently liable in the amounts of $349
and $327 million at March 20, 1999 and December 26, 1998, 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 20, 1999, $265 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 $265 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 $392 million. The balance of the contingent liabilities primarily
reflected guarantees to support financial arrangements of certain
unconsolidated affiliates and other restaurant franchisees.
In the first quarter of 1999, and for a significant portion of the three
years ended December 26, 1998, we have been effectively self-insured for
most workers' compensation, general liability and automobile liability
losses, subject to per occurrence and aggregate annual liability
limitations. Prior to the Spin-off in 1997, we participated with PepsiCo in
a guaranteed cost program for certain coverages in 1997. We are also
effectively self-insured for health care claims for eligible participating
employees subject to certain deductibles and limitations. We determine our
liabilities for claims reported and for claims incurred but not reported
based on information provided by our independent actuary.
In July 1998, we entered into severance agreements with certain key
executives which are triggered by a termination, under certain conditions,
of the executive following a change in control of the Company, as defined
in the agreements. Once triggered, the affected executives would receive
twice the amount of their annual base salary and their annual incentive in
a lump sum, outplacement services and a tax gross-up for any excise taxes.
The agreements expire December 31, 2000. Since the timing of any payments
under these agreements cannot be anticipated, the amounts are not
estimable. However, these payments, if required, could be substantial. In
connection with the execution of these agreements, the Compensation
Committee of our Board of Directors has authorized amendment of the
deferred and incentive compensation plans and, following a change in
control, an establishment of rabbi trusts which will be used to provide
payouts under these deferred compensation plans following a change in
control.
We are subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Like some other large retail employers, Pizza Hut and Taco Bell
recently have been faced in a few states with allegations of purported
class-wide wage and hour violations.
On May 11, 1998, a purported class action lawsuit against Pizza Hut, Inc.,
and one of its franchisees, PacPizza, LLC, entitled Aguardo, et al. v.
Pizza Hut, Inc., et al. ("Aguardo"), was filed in the Superior Court of the
State of California of the County of San Francisco. The lawsuit was filed
by three former Pizza Hut restaurant general managers purporting to
represent approximately 1,300 current and former California restaurant
general managers of Pizza Hut and PacPizza. The lawsuit alleges violations
of state wage and hour laws involving unpaid overtime wages and vacation
pay and seeks an unspecified amount in damages. This lawsuit is in the
early discovery phase. A trial date of October 28, 1999 has been set.
12
On October 2, 1996, a class action lawsuit against Taco Bell Corp.,
entitled Mynaf, et al. v. Taco Bell Corp. ("Mynaf"), was filed in the
Superior Court of the State of California of the County of Santa Clara. The
lawsuit was filed by two former restaurant general managers and two former
assistant restaurant general managers purporting to represent all current
and former Taco Bell restaurant general managers and assistant restaurant
general managers in California. The lawsuit alleges violations of
California wage and hour laws involving unpaid overtime wages. The
complaint also includes an unfair business practices claim. The four named
plaintiffs claim individual damages ranging from $10,000 to $100,000 each.
On September 17, 1998, the court certified a class of approximately 3,000
current and former assistant restaurant general managers and restaurant
general managers. Taco Bell petitioned the appellate court to review the
trial court's certification order. The petition was denied on December 31,
1998. Taco Bell has filed a petition for review to the California Supreme
Court which is currently pending. No trial date has been set.
Plaintiffs in the Aguardo and Mynaf lawsuits seek damages, penalties and
costs of litigation, including attorneys' fees, and also seek declaratory
and injunctive relief. We intend to vigorously defend these lawsuits.
However, the outcome of these lawsuits cannot be predicted at this time. We
believe that the ultimate liability, if any, arising from such claims or
contingencies is not likely to have a material adverse effect on our annual
results of operations, financial condition or cash flows. It is, however,
reasonably possible that any ultimate liability could be material to our
year-over-year growth in earnings in the quarter and year recorded.
On August 29, 1997, a class action lawsuit against Taco Bell Corp.,
entitled Bravo, et al. v. Taco Bell Corp. ("Bravo"), was filed in the
Circuit Court of the State of Oregon of the County of Multnomah. The
lawsuit was filed by two former Taco Bell shift managers purporting to
represent approximately 16,000 current and former hourly employees
statewide. The lawsuit alleges violations of state wage and hour laws,
principally involving unpaid wages including overtime, and rest and meal
period violations, and seeks an unspecified amount in damages. Under Oregon
class action procedures, Taco Bell was allowed an opportunity to "cure" the
unpaid wage and hour allegations by opening a claims process to all
putative class members prior to certification of the class. In this cure
process, Taco Bell has currently paid out less than $1 million. On January
26, 1999, the Court certified a class of all current and former shift
managers and crew members who claim one or more of the alleged violations.
A trial date has been tentatively scheduled for the third quarter of 1999.
On February 10, 1995, a class action lawsuit, entitled Ryder, et al. v.
Taco Bell Corp. ("Ryder"), was filed in the Superior Court of the State of
Washington for King County on behalf of approximately 16,000 current and
former Taco Bell employees claiming unpaid wages resulting from alleged
uniform, rest and meal period violations and unpaid overtime. In April
1996, the Court certified the class for purposes of injunctive relief and a
finding on the issue of liability. The trial was held during the first
quarter of 1997 and resulted in a liability finding. In August 1997, the
Court certified the class for purposes of damages as well. Prior to the
damages phase of the trial, the parties reached a court-approved settlement
process in April 1998.
We have provided for the estimated costs of the Bravo and Ryder
litigations, based on a projection of eligible claims, the cost of each
eligible claim and the estimated legal fees incurred by plaintiffs. We
believe the ultimate cost of the Bravo and Ryder cases in excess of the
amounts already provided will not be material to our annual results of
operations, financial condition, or cash flows.
13
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Introduction
TRICON Global Restaurants, Inc. and Subsidiaries (collectively referred to
as "TRICON," the "Company," "we" or "our") became an independent, publicly owned
company on October 6, 1997 (the "Spin-off Date") via a tax free distribution of
our Common Stock (the "Distribution" or "Spin-off") to the shareholders of our
former parent, PepsiCo, Inc. ("PepsiCo"). TRICON is comprised of the worldwide
operations of KFC, Pizza Hut and Taco Bell. The Spin-off marked our beginning as
a company focused solely on the restaurant business and our three
well-recognized concepts, which together have more retail units worldwide than
any other single quick service restaurant ("QSR") company. The following
Management's Discussion and Analysis should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements on page 3 and the
Cautionary Statements on page 34 and our 1998 Form 10-K for the year ended
December 26, 1998 ("1998 Form 10-K"). All Note references herein refer to the
accompanying notes to the Condensed Consolidated Financial Statements.
In our discussion volume is the estimated dollar effect of the
year-over-year change in customer transaction counts from existing and new
products. Effective net pricing includes price increases/decreases and the
effect of changes in product mix. Portfolio effect represents the impact on
operating results related to our refranchising initiative and closure of
underperforming stores. System sales represents our combined sales of Company,
joint ventured, franchised and licensed units. Where actual sales data is not
reported, our franchised and licensed unit sales are estimated. NM in any table
indicates that the percentage is not considered meaningful. B(W) in any table
means % better (worse). In addition, throughout our discussion, we use the terms
restaurants, units and stores interchangeably.
Tabular amounts are displayed in millions except per share and unit count
amounts, or as specifically identified.
The following factors that could impact comparability of operating
performance in the quarter ended March 20, 1999 were previously discussed in our
1998 Form 10-K.
Euro Conversion
---------------
On January 1, 1999, eleven of the fifteen member countries of the European
Economic and Monetary Union ("EMU") adopted the Euro as a common legal currency
and fixed conversion rates were established. From that date through June 30,
2002, participating countries will maintain both legacy currencies and the Euro
as legal tender. Beginning January 1, 2002, new Euro-denominated bills and coins
will be issued and a transition period of up to six months will begin in which
legacy currencies will be removed from circulation.
As disclosed in our 1998 Form 10-K, we have Company and franchised
businesses in the adopting member countries, which are preparing for the
conversion. Expenditures associated with conversion efforts to date have been
insignificant. We currently estimate that our spending over the ensuing
three-year transition period will be approximately $16 million, related to the
conversion in the EMU member countries in which we operate stores. These
expenditures primarily relate to capital expenditures for new point-of-sale and
back-of-house hardware and software to accommodate Euro-denominated
transactions. We expect that adoption of the Euro by the U.K. would
significantly increase this estimate due to the size of our businesses there
relative to our aggregate businesses in the adopting member countries in which
we operate.
14
The speed of ultimate consumer acceptance of and our competitor's responses
to the Euro are currently unknown and may impact our existing plans. However, we
know that, from a competitive perspective, we will be required to assess the
impacts of product price transparency, potentially revise product bundling
strategies and create Euro-friendly price points prior to 2002. We do not
believe that these activities will have sustained adverse impacts on our
businesses. Although the Euro does offer certain benefits to our treasury and
procurement activities, these are not currently anticipated to be significant.
We currently anticipate that our suppliers and distributors will continue
to invoice us in legacy currencies until late 2001. We expect to begin dual
pricing in our restaurants in 2001. We expect to compensate employees in Euros
beginning in 2002. We believe that the most critical activity regarding the
conversion for our businesses is the completion of the rollout of Euro-ready
point-of-sale equipment and software by the end of 2001. Our current plans
should enable us to be Euro-compliant prior to the requirements for these
activities. Any delays in our ability to complete our plans, or in the ability
of our key suppliers to be Euro-compliant, could have a material adverse impact
on our results of operations, financial condition or cash flows.
Year 2000
---------
We have established an enterprise-wide plan to prepare our information
technology systems (IT) and non-information technology systems with embedded
technology applications (ET) for the Year 2000 issue, to reasonably assure that
our critical business partners are prepared and to plan for business continuity
as we enter the coming millennium.
Our plan encompasses the use of both internal and external resources to
identify, correct and test systems for Year 2000 readiness. External resources
include nationally recognized consulting firms and other contract resources to
supplement available internal resources.
The phases of our plan - awareness, assessment, remediation, testing and
implementation - are currently expected to cost $68 to $71 million from 1997
through completion in 2000. The new estimate is higher than our estimate of $62
to $65 million disclosed in our 1998 Form 10-K. We increased our estimate for
costs related to additional resources needed in the remediation and testing
phases and higher than estimated personnel costs, including newly implemented
retention incentives for critical personnel. Our plan contemplates our own IT/ET
as well as assessment and contingency planning relative to Year 2000 business
risks inherent in our material third party relationships. The total cost
represents less than 20% of our total estimated information technology related
expenses over the plan period. We have incurred approximately $43 million from
inception of planned actions through March 20, 1999 of which approximately $8
million has been incurred during 1999. We expect to incur approximately $31
million in 1999 with some additional problem resolution spending in 2000. All
costs related to our Year 2000 plan are expected to be funded through cash flow
from operations.
IT/ET State of Readiness - We have completed our inventory process of
hardware (including desktops), software (third party and internally developed)
and embedded technology applications (collectively "IT/ET applications" as
defined below). However, as we progress through the phases of our plan, we will
continue to refine and improve our process to track the status and
classification of our new and existing IT/ET applications. As a result of
certain of these refinements, we have modified the amounts presented in the
application table presented below. In addition, we have implemented monitoring
procedures designed to insure that new IT/ET investments are Year 2000
compliant.
15
Based on this inventory, we identified the critical IT/ET applications and
are in the process of determining the Year 2000 compliance status of the IT/ET
through third party vendor inquiry or internal processes. We expect to be
substantially complete with the conversion (which includes replacement and
remediation) and unit testing of the majority of critical U.S. systems in the
second quarter of 1999. As disclosed in our 1998 Form 10-K, we extended our
original timeline to late summer for approximately ten critical applications.
However, we have been able to complete remediation and unit testing on six of
these critical applications and still expect to be able to convert, consolidate,
or replace the remaining four applications by late summer. This timetable
reflects certain delays attributable to identified incremental complexities of
the remediation processes as well as slippage in the execution of our
remediation plan. Further delays on these efforts or additional slippage could
be detrimental to our overall state of readiness. We made considerable progress
on our international IT/ET conversion efforts of critical applications during
the first quarter of 1999. Our current plans call for timely conversion of
critical international systems to compliant versions of unmodified third party
applications which are predominant in our international business. We will
continue to closely monitor international progress. We expect to continue
integration testing on remediated, replaced and consolidated U.S.
and international systems throughout 1999.
The following table identifies by category and status the major identified
IT/ET applications at March 20, 1999:
Remediated/
Category Compliant In-Process Not Compliant
------------------------------ --------- ------------- -------------
Third Party Developed Software 614 551 493
Internally Developed Software 209 635 133
Desktop 998 1,412 782
Hardware 553 842 153
ET 976 896 85
Other 252 273 178
--------- --------------- --------------
3,602 4,609 1,824
========= =============== ==============
Note:We have defined the term applications (as used in this Year 2000
discussion) to describe separately identifiable groups of programs,
hardware or ET which can be both logically segregated by business purpose
and separately unit tested as to performance of a single business function.
We will either replace or retire "Not Compliant" applications before
January 1, 2000. "Compliant" applications include only those applications
that are Year 2000 compliant and currently in production. Applications have
been prioritized and are being remediated based on expected impact of
non-remediation. Of the remaining 635 "Remediated/In-Process" applications
in the Internally Developed Software category, which by definition require
internal remediation, less than half have been identified as critical.
Overall, total applications considered "Compliant" increased approximately
14% in the quarter to 36%.
Material Third Party Relationships - We believe that our critical third
party relationships can be subdivided generally into suppliers, banks,
franchisees and other service providers (primarily data exchange partners). We
completed an inventory of U.S. and international restaurant suppliers and have
mailed letters requesting information regarding their Year 2000 status. We are
in the process of collecting the responses from the suppliers and assessing
their Year 2000 risks. Of approximately 600 suppliers considered critical,
approximately 6% are high risk based on their responses and approximately 23%
have not yet responded to inquiries to date. In partnership with a newly formed
systemwide U.S. purchasing cooperative ("Unified Co-op") described in our 1998
Form 10-K, we will develop contingency plans for those U.S. suppliers that are
not
16
deemed Year 2000 compliant. These contingency plans, which we expect to be
completed by mid-1999, include the Unified Co-op sourcing from alternate
compliant suppliers where possible. By mid-1999, we expect to develop
contingency plans for the international suppliers that we believe have
substantial Year 2000 operational risks.
In the first part of 1999, we completed the identification of our U.S.
depository banks and the international banks responsible for processing
restaurant deposits and disbursements ("Depository Banks"). We have sent letters
or obtained other information regarding Year 2000 compliance information from
our primary lending and cash management banks ("Relationship Banks") and our
Depository Banks. We will continue to follow-up with the banks that have not
responded to the request. In addition, we intend to develop contingency plans by
mid-1999 for all critical banks that have not submitted written representation
of Year 2000 readiness.
We have almost 1,200 U.S. and approximately 950 international franchisees.
We have sent information to all U.S. and international franchisees regarding the
business risks associated with Year 2000. In addition, we provided sample IT/ET
project plans and a report of the compliance status of Company restaurants to
the U.S. franchisees. At the end of the first quarter of 1999, we mailed letters
to all U.S. franchisees requesting information regarding their Year 2000 status.
In the U.S., we intend to accumulate survey data and an inventory of
point-of-sale hardware and software in use by our franchisees. We then intend to
contact POS vendors to assist the franchise community in determining Year 2000
compliance. Outside the U.S., our regional franchise offices have started
conducting franchise surveys either through mail or by direct contact. The
survey results will be used to assess the Year 2000 operational risks of our
franchisees.
We have identified third party companies that provide critical data
exchange services and mailed letters to these companies requesting Year 2000
status. We will develop contingency plans for companies that we believe have
significant Year 2000 operational risks. Additionally, we are in the process of
identifying all other third party companies that provide business critical
services. We are planning to follow the same process used for the data exchange
service providers.
The following table indicates by type of third party risk the status of the
readiness process:
Responses Responses Not Yet
Received Received
------------- -------------------
Suppliers 471 136
Relationship Banks 56 22
Depository Banks 286 589
Data Exchange Service Providers 45 87
------------- -------------------
858 834
============= ===================
Note:This table does not include franchisee information since the survey
process is in its initial stage. In addition, we have increased the
number of Data Exchange Service Provider statistics to include service
providers that have been recently identified as critical. The letters
for these providers will be mailed during April 1999.
The forward-looking nature and lack of historical precedent for Year 2000
issues present a difficult disclosure challenge. Only one thing is certain about
the impact of Year 2000 - it is difficult to predict with certainty what truly
will happen after December 31, 1999. We have based our Year 2000 costs and
timetables on our best current estimates, which we derived using numerous
assumptions of future events including the continued availability of certain
resources and other factors. However, we cannot guarantee that these estimates
will be achieved and actual results could differ materially from our plans.
Given our best efforts and execution of remediation, replacement and testing, it
is still possible that there will be disruptions and unexpected business
problems during the early months of 2000. We anticipate making diligent,
reasonable
17
efforts to assess Year 2000 readiness of our critical business partners and will
ultimately develop contingency plans for business critical systems prior to the
end of 1999. However, we are heavily dependent on the continued normal
operations of not only our key suppliers of chicken, cheese, beef, tortillas and
other raw materials and our major food and supplies distributor, but also on
other entities such as lending, depository and disbursement banks and third
party administrators of our benefit plans. Despite our diligent preparation,
unanticipated third party failures, general public infrastructure failures, or
our failure to successfully conclude our remediation efforts as planned could
have a material adverse impact on our results of operations, financial condition
or cash flows in 1999 and beyond. Inability of our franchisees to remit
franchise fees on a timely basis or lack of publicly available hard currency or
credit card processing capability supporting our retail sales stream could also
have material adverse impact on our results of operations, financial condition
or cash flows.
Other Factors Affecting Comparability
Accounting Changes
------------------
In our 1998 Form 10-K, we discussed several accounting and human resource
policy changes (collectively, the "accounting changes") that would impact our
1999 results. These changes, which we believe are material in the aggregate,
fall into three categories:
o required changes in Generally Accepted Accounting Principles ("GAAP"),
o discretionary methodology changes implemented to more accurately measure
certain liabilities, and
o policy changes driven by our accounting and human resource standardization
programs.
Required Changes in GAAP- As more fully described in Note 4, we adopted
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." We capitalized approximately
$2 million of internal software development costs and of third party software
costs that we would have previously expensed. The software being developed has
not yet been placed in service and, therefore, is not currently being amortized.
As noted in our 1998 Form 10-K, we estimate for the full year 1999 we will
capitalize approximately $12 million of internal software development and third
party software costs previously expensed. The remaining impact of this change
will be recognized over the balance of the year.
In addition, we adopted Emerging Issues Task Force Issue No. 97-11 ("EITF
97-11"), "Accounting for Internal Costs Relating to Real Estate Property
Acquisitions" upon its issuance in March 1998, and in the first quarter of 1999,
we also made a discretionary policy change limiting the types of costs eligible
for capitalization to those cost types identified under SOP 98-1 for internally
developed computer software. As noted in our 1998 Form 10-K, we estimate the
full year impact on our 1999 results of operations for the application of EITF
97-11 and the policy change will result in approximately $4 million of
additional expense. In the first quarter of 1999, this change unfavorably
impacted results of operations by approximately $2 million. The estimated
remaining impact, which is related only to the discretionary policy change, will
be recognized over the balance of 1999.
To conform to the Securities and Exchange Commission's April 23, 1998
letter interpretation of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" our store closure accounting policy was changed in 1998. Prior
to April 23, 1998, we recognized store closure costs and generally suspended
depreciation and amortization when we decided to close a restaurant within the
next twelve months. Effective for closure decisions made on or subsequent to
April 23, 1998, we recognize store closure costs when we have closed the
restaurant within the same quarter the closure decision is made. When we decide
to close a restaurant beyond the quarter in which the closure decision is made,
it is reviewed for impairment. The impairment evaluation is based on the
estimated cash flows from continuing use until the expected date of disposal
plus the expected terminal value.
18
This change in accounting resulted in additional depreciation and amortization
in the first quarter of approximately $1 million. The estimated full year impact
of this change is approximately $5 million.
In November 1998, based on evolving interpretation of GAAP regarding the
timing of recognition for certain accruals, we changed our relocation accrual
accounting policy to recognize expenses as incurred. Prior to November 1998, we
expensed relocation expenses upon employee acceptance of our relocation offer.
This change had a favorable impact on our first quarter results of approximately
$1 million. We currently estimate this change will have an insignificant impact
over the balance of 1999.
Discretionary Methodology Changes- As more fully described in Note 4, the
methodology used by our independent actuary was refined and enhanced to provide
a more reliable estimate of the self-insured portion of our current and prior
year's ultimate loss projections related to workers' compensation, general
liability and automobile liability insurance programs (collectively "casualty
loss(es)"). This change in methodology resulted in a one-time increase to our
first quarter 1999 operating results of over $8 million. In our 1998 Form 10-K,
we estimated the impact of the change to be approximately $5 million.
In addition, as more fully described in Note 4, we changed our method of
determining the pension discount rate to better reflect the assumed investment
strategies we would most likely use to invest any short-term cash surpluses. The
pension discount methodology change resulted in a favorable impact of over $1
million to our first quarter results. In our 1998 Form 10-K, we estimated the
change in methodology would favorably impact 1999 results of operations by
approximately $6 million. The remaining impact of $5 million will be recognized
over the balance of 1999.
Accounting and Human Resource Standardization Programs- In the first
quarter of 1999, we began the standardization of our U.S. personnel practices.
As noted in our 1998 Form 10-K, most of these changes are not expected to have a
significant impact on our operating results. Over a two-year implementation
period, our vacation policy is being conformed to a fiscal-year based,
earn-as-you-go, use-or-lose policy. We now estimate the 1999 reduction of our
accrued vacation liabilities at approximately $7 million. We previously
disclosed the reduction could have been as much as $20 million; however, due to
the adoption in the current year of a new transitional policy relating to buyout
provisions and extended carryover elections for certain employees, this estimate
has been reduced to $7 million. At this time, the number of employees to be
offered buyout or extension has been estimated; a final determination will be
made during the fourth quarter. Ultimate determination may impact our current
estimate. The increase in our first quarter operating results related to this
change was approximately $1 million. The estimated remaining impact of $6
million will be recognized over the balance of 1999.
At the beginning of 1999, we began the standardization of accounting
practices in our U.S. operating companies. These changes did not have a
significant impact in the quarter. We currently estimate that standardizing our
accounting practices, which includes our vacation policy change, will favorably
impact our 1999 operating results by approximately $4 million.
19
The current quarter impact and full year estimate relating to these
accounting changes are summarized below:
12 Weeks
Ended Full Year
3/20/99 Estimate
------------- --------------
GAAP $ - $ 3
Methodology 10 14
Standardization - 4
------------- --------------
Pre-tax $ 10 $ 21
============= ==============
After-tax $ 6 $ 13(a)
============= ==============
Per diluted share $ 0.04 $ 0.08(a)
============= ==============
(a) On a proforma basis; the after-tax and per diluted share amounts were
calculated assuming the same effective tax rate and diluted shares in use as of
March 20, 1999.
Additional Factors Disclosed in our 1998 Form 10-K Expected to Impact 1999
Comparison with 1998
---------------------------------------------------------------------------
In the fourth quarter of 1998, we incurred severance and other exit costs
related to strategic decisions to streamline the infrastructure of our
international businesses. We disclosed in our 1998 Form 10-K that we expected to
incur approximately $5 million of additional costs related to this initiative in
1999. We currently estimate we will incur approximately $8 million over the
balance of 1999. Our estimate has been revised to include additional severance
for certain employees. In the first quarter of 1999, we incurred an immaterial
amount related to these planned actions.
In the first quarter of 1999, we incurred approximately $2 million in costs
associated with reducing our workforce in our internal purchasing function. This
workforce reduction was a result of our membership in a newly formed systemwide
U.S. purchasing cooperative. In our 1998 Form 10-K, our full year estimate of
these costs was $3 million. We will incur the remaining $1 million through the
remainder of 1999.
As disclosed in our 1998 Form 10-K, certain cost recovery agreements with
Ameriserve and PepsiCo were terminated in the latter part of 1998. As a result,
our general, administrative and other expenses (G&A) increased $4 million in the
first quarter of 1999. The remaining impact on the year-over-year change in G&A
resulting from the termination of these contracts of $4 million will be
reflected throughout the remainder of 1999.
We are phasing in certain structural changes to our Executive Income
Deferral Program ("EID") during 1999 and 2000. One such 1999 change requires all
payouts under the plan to be made only in our Common Stock versus payouts in
cash or Common Stock at our option. For 1999, this restriction applies only if
the participant's original deferrals were invested in discounted stock units of
our Common Stock. Previously, for accounting purposes, we were required to
assume the payment was to be made in cash. As a result of this change, we no
longer expense the appreciation, if any, attributable to the investments in
these discounted stock units. We expensed approximately $1.6 million and $10
million in appreciation for the first quarter and the full year of 1998,
respectively.
20
Additional Factors Affecting 1999 Comparisons with 1998
-------------------------------------------------------
Based on a valuation by our independent actuary received in the first
quarter of 1999, we recognized approximately $21 million of favorable
adjustments to our self-insured casualty loss reserves. These adjustments
resulted primarily from improved loss trends related to our 1998 casualty losses
across all three of our U.S. operating companies. We believe the favorable
adjustments are a direct result of our investment in safety and security
programs to better manage risk at the store level. We are unable to reliably
estimate the impact of our second 1999 actuarial valuation, which we expect to
receive in the fourth quarter. On a year-to-date basis, the 1999 favorable
casualty insurance adjustments we have recognized are about equal to the total
favorable insurance-related adjustments of $23 million we recognized for all of
1998, which were recorded in the fourth quarter. This comparison will change
based on our fourth quarter 1999 actuarial valuation. In 1997, we recognized
favorable adjustments of approximately $18 million to our casualty loss expense,
primarily in the second quarter. Both the 1998 and 1997 favorable adjustments
included actuarial and other insurance-related components.
In addition, as more fully described in Note 4, our actuary made certain
revisions to its estimation methodology to more closely meet our target 75%
confidence level in its estimate of our ultimate casualty losses.
Our liabilities for casualty losses include the estimated unpaid losses of
all three U.S. operating companies for self-insured programs for years from 1988
to the present. We engage an independent actuary for two primary purposes: 1) to
provide us with estimates of losses for the current year, given our projections
of expected sales, payroll and deliveries, based on each operating company's
loss trends and 2) to value our entire portfolio of self-insured casualty losses
for prior years to assess whether the impact of actual loss development requires
changes to its previous estimates of losses. We use the actuary's current year
valuation as a basis to allocate the current year's loss estimate to each
accounting period. In addition, we use our actuary's current valuation to adjust
our self-insured reserves for prior years to the appropriate levels.
Prior to our Spin-off from PepsiCo, we had our actuary perform valuations
two times a year. However, given the complexities of the Spin-off, we only had
one 1998 valuation which we received and recognized in the fourth quarter of
that year. Since we received another valuation from the actuary in the first
quarter of 1999, we will prospectively adjust our 1999 loss estimates and we
have recognized the $21 million in changes to prior year programs. As a result,
we have a timing difference in our adjustments, from recognizing the entire 1998
favorable adjustment in the fourth quarter to recognizing another favorable
adjustment in the first quarter of 1999. We expect that, beginning in 2000,
valuations will be received and recognized in the second and fourth quarters of
each year.
As noted in our 1998 Form 10-K, casualty loss-related adjustments were
among the drivers of the change in the components of restaurant margin both on a
worldwide and U.S. basis. For the full year 1998 compared to 1997, the increase
in favorable adjustments had a negligible impact on total restaurant margin
growth. However, due to differences in quarterly timing, our actuarial
adjustments favorably impacted our 1998 fourth quarter restaurant margin
disclosed in our earnings release for that quarter attached to our February 25,
1999 Form 8-K. The quarter-over-quarter favorable impact to our 1998 fourth
quarter margin was approximately 80 basis points.
We will continue to periodically make adjustments based on our actuary's
valuations. Due to the inherent volatility of our actuarially-determined
casualty loss estimates, future adjustments are not reliably estimable and may
vary in magnitude with each valuation. When these adjustments significantly
impact our margin growth trends, they will be disclosed.
21
Our first quarter operating results, compared to 1998, were favorably
impacted by an increase in rebates from our suppliers of beverage products
("beverage rebates"). These beverage rebates were driven by new contracts, more
favorable contract terms, increased volumes and retroactive beverage rebates of
approximately $5 million relating to 1998.
1997 Fourth Quarter Charge
--------------------------
In the fourth quarter of 1997, we recorded a $530 million unusual charge
($425 million after-tax). The charge included estimates for (1) costs of closing
underperforming stores, primarily at Pizza Hut and internationally; (2)
reduction to fair market value, less costs to sell, of the carrying amounts of
certain restaurants we intended to refranchise; (3) impairment of certain
restaurants intended to be used in the business; (4) impairment of certain joint
venture investments to be retained; and (5) costs of related personnel
reductions. Of the $530 million charge, approximately $401 million related to
asset writedowns and approximately $129 million related to liabilities,
primarily occupancy-related costs and, to a much lesser extent, severance. The
liabilities were expected to be settled from cash flows provided by operations.
Through March 20, 1999, the amounts utilized apply only to the actions covered
by the charge. Largely as a result of decisions to retain certain stores
originally expected to be disposed of, better-than-expected proceeds from
refranchising and favorable lease settlements on certain closed store leases, we
reversed $65 million of the charge in 1998. In 1999, we will continue to
periodically reevaluate our prior estimates of the fair market value of our
units to be refranchised or closed.
Although we originally expected to refranchise or close all 1,392 units
included in the original charge by year-end 1998, the disposal of 531 units was
delayed. We expect to dispose of the remaining units during 1999. Below is a
summary of the first quarter 1999 activity related to the remaining units from
the 1997 fourth quarter charge:
Total Units
Units Expected to be Included in
Closed Refranchised the Charge
---------- ------------ ------------
Units at December 26, 1998 123 408 531
Units disposed of (47) (89) (136)
Units retained (11) - (11)
Change in method of disposal (14) 14 -
Other 5 1 6
---------- ------------ ------------
Units at March 20, 1999 56 334 390
========== ============ ============
Of the original $530 million charge, approximately $140 million represented
impairment charges for certain restaurants intended to be used in the business
and for certain joint venture investments to be retained, which were recorded as
permanent reductions of the carrying value of those assets. Below is a summary
of the first quarter 1999 activity related to our asset valuation allowances and
liabilities recognized as a result of the 1997 fourth quarter charge:
22
Asset
Valuation
Allowances Liabilities Total
------------ ------------- ----------
Remaining balance at December 26, 1998 $ 97 $ 44 $ 141
Utilizations (19) (7) (26)
(Income) expense impacts:
Completed transactions - - -
Decision changes(a) (1) - (1)
Estimate changes - - -
Other 2 (1) 1
============ ============= ==========
Remaining balance at March 20, 1999 $ 79 $ 36 $ 115
============ ============= ==========
(a) Represents favorable adjustments to our store closure costs of
approximately $1 million relating to decisions to retain certain stores
originally expected to be closed.
We believe that the remaining amounts are adequate to complete our current
plan of disposal. However, actual results could differ from our estimates.
In addition, 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 profit before
facility actions. We estimate that the favorable impact on operating profit
before facility actions related to the 1997 fourth quarter charge for the twelve
weeks ended March 20, 1999 and March 21, 1998 was approximately $6 million ($4
million after-tax) and $13 million ($9 million after-tax), respectively. The
benefits include $3 million ($2 million after-tax) and $8 million ($5 million
after-tax) from the suspension of depreciation and amortization in the first
quarter 1999 and 1998, respectively, for the stores included in the charge.
Store Portfolio Perspectives
----------------------------
For the last several years, we have been working to reduce our share of
total system units by selling Company restaurants to existing and new
franchisees where their expertise can be leveraged to improve our overall
operating performance, while retaining Company ownership of key markets. This
portfolio-balancing activity has reduced, and will continue to reduce, our
reported revenues and increase the importance of system sales as a key
performance measure. Refranchising frees up invested capital while continuing to
generate franchise fees and reduce our G&A, thereby improving returns. We
currently estimate we will be able to refranchise approximately 1,000 stores in
1999 and, our refranchising gains will be slightly greater than 50% of our prior
year gain. However, if market conditions are favorable, we expect to sell more
than the 1,000 units we have currently forecasted which would impact the amount
of our net gain for 1999. We expect the impact of refranchising gains to
decrease over time as we approach a Company/franchise ratio more consistent with
our major competitors.
The following table summarizes the refranchising activities for the first
quarter 1999 and 1998.
12 Weeks Ended
-------------------------------
3/20/99 3/21/98
------------- --------------
Number of units refranchised 224 192(a)
Refranchising proceeds, pre-tax $ 121 $ 121
Refranchising net gain, pre-tax $ 37 $ 29
23
The following table summarizes store closure activities for the first
quarter of 1999 and 1998:
12 Weeks Ended
-------------------------------
3/20/99 3/21/98
------------- --------------
Number of units closed 87 241(a)
Store closure expense $ 1 $ -
(a) Reporting errors at certain of our international operating companies
resulted in overstatements in our prior year reported unit activity. These
reporting errors had no effect on the beginning or ending unit count. The
1998 restated unit activity will be included in future filings where
appropriate.
Our overall Company ownership percentage (including joint ventured units)
of our total system units decreased by 1 percentage point from year-end 1998 and
by 7 percentage points from year-end 1997 to 31% at March 20, 1999. This
reduction was a result of our portfolio initiatives and the relative number of
new points of distribution added and units closed by our franchisees and
licensees and by us.
Worldwide Results of Operations
12 Weeks Ended
--------------------------------
3/20/99 3/21/98 % B(W)
------------ ------------ ----------
SYSTEM SALES $ 4,806 $ 4,557 5
============ ============
REVENUES
Company sales $ 1,662 $ 1,790 (7)
Franchise and license fees 151 132 14
------------ ------------
Total Revenues $ 1,813 $ 1,922 (6)
============ ============
COMPANY RESTAURANT MARGIN $ 259 $ 201 29
============ ============
% of sales 15.6% 11.2% 4.4 pts.
============ ============
Ongoing operating profit $ 202 $ 139 46
Facility actions net gain 34 29 18
------------ ------------
Operating profit 236 168 41
Interest expense, net 52 69 24
Income tax provision 78 45 (74)
------------ ------------
Net Income $ 106 $ 54 96
============ ============
Diluted earnings per share $ .66 $ .35 88
============ ============
24
Worldwide Restaurant Unit Activity
Joint
Company Ventured Franchised Licensed Total
--------------- ------------ --------------- ----------- -----------
Balance at December 26, 1998 8,397 1,120 16,650 3,596 29,763
New Builds & Acquisitions(a) 65 8 189 113 375
Refranchising & Licensing (221) (3) 228 (4) -
Closures and Divestitures(a) (82) (5) (89) (117) (293)
--------------- ------------ --------------- ----------- -----------
Balance at March 20, 1999 8,159(b) 1,120(b) 16,978 3,588 29,845
=============== ============ =============== =========== ===========
(a) Company new builds and acquisitions and franchise closures and divestitures
include 9 International stores acquired by the Company from franchisees.
(b) Includes 81 Company and 4 Joint Ventured units approved for closure, but
not yet closed at March 20, 1999 of which 56 were included in our 1997
fourth quarter charge.
- --------------------------------------------------------------------------------
Worldwide System Sales and Revenues
System sales increased $249 million or 5%. The increase was driven by new
unit development, led by TRICON Restaurants International ("TRI") and U.S. Taco
Bell franchisees and same store sales growth. The increase was partially offset
by store closures, primarily at TRI and Pizza Hut.
Revenues decreased $109 million or 6%. Company sales decreased $128 million
or 7%. The decline in Company sales was primarily due to the portfolio effect.
The decrease was partially offset by favorable effective net pricing, new unit
development and volume increases led by Pizza Hut's new product, "The Big New
Yorker" in the U.S. and Canada. Franchise and license fees increased $19 million
or 14%. The increase was driven by units acquired from us, new unit development
and same store sales growth, partially offset by store closures.
Worldwide Company Restaurant Margin
12 Weeks Ended
---------------------------------
3/20/99 3/21/98
--------------- --------------
Company sales 100.0% 100.0%
Food and paper 31.7 32.3
Payroll and employee benefits 27.9 30.1
Occupancy and other operating expenses 24.8 26.4
--------------- --------------
Company restaurant margin 15.6% 11.2%
=============== ==============
Our restaurant margin as a percentage of sales grew approximately 435 basis
points in the quarter as compared to the first quarter of 1998. Portfolio effect
contributed approximately 40 basis points and the adoption of the accounting
changes, which were primarily driven by our actuarial methodology change,
contributed approximately 35 basis points to our improvement. In addition, the
suspension of depreciation and amortization relating to stores still operating
during the quarter that were included in our 1997 fourth quarter charge
contributed just over 25 basis points to both our 1999 and 1998 restaurant
margins. Excluding the portfolio effect and accounting changes, our restaurant
margin grew approximately 360 basis points. The increase included approximately
125 basis points related to favorable actuarial adjustments, primarily for 1998
casualty losses, arising from improved casualty loss trends across all three of
our U.S. operating companies. The remaining improvement was largely due to
effective net pricing in excess of cost increases, primarily commodity costs and
labor, increased beverage rebates in the U.S. and higher volume. The increase in
commodity costs, primarily due to higher cheese, produce, chicken and pizza
dough costs, was partially offset by higher beverage rebates and declines in
other commodity costs. Retroactive beverage rebates for 1998
25
contributed approximately 30 basis points to restaurant margin. Increased labor
costs in the quarter were the result of higher incentive compensation at Pizza
Hut and other wage increases. The higher volume was primarily due to Pizza Hut's
new product, "The Big New Yorker."
Worldwide General, Administrative and Other Expenses
G&A increased $14 million or 7% in the quarter and included the following:
12 Weeks Ended
-----------------------------
3/20/99 3/21/98 % B(W)
------------ ------------ -------------
G&A $ 213 $ 199 (7)
Equity income from investments
in unconsolidated affiliates (6) (6) -
Foreign exchange net loss 1 1 -
------------ ------------
$ 208 $ 194 (7)
============ ============
The increase in G&A primarily reflected higher spending at Pizza Hut and
Taco Bell on biennial conferences to support our RGM is #1 initiative and higher
Year 2000 and system standardization investment spending. These increases were
partially offset by the favorable impacts of our portfolio effect.
In addition, as previously discussed in our 1998 Form 10-K, G&A increased
$4 million due to the absence of certain cost recovery agreements with
Ameriserve and PepsiCo that were terminated in 1998 and $2 million related to
costs associated with reducing our workforce in our internal purchasing
function. This workforce reduction was a result of our membership in a newly
formed systemwide U.S. purchasing cooperative. These two items were more than
offset by favorable accounting changes of $4 million and reduced TRI spending of
$4 million associated with our fourth quarter 1998 strategic decision to
streamline our international businesses.
Worldwide Facility Actions Net Gain
12 Weeks Ended
----------------------------------
3/20/99 3/21/98
------------- -------------
Refranchising gains, net $ 37 $ 29
Store closure costs (1)(a) -
Impairment charge for stores to
be closed in the future (2) -
------------- -------------
Facility actions net gain $ 34 $ 29
============= =============
(a) Includes favorable adjustments to our 1997 fourth quarter charge of
approximately $1 million relating to decisions to retain certain stores
originally expected to be closed.
Refranchising net gains, which included initial franchise fees of $7
million both in 1999 and 1998, arose from refranchising 224 and 192 units in
1999 and 1998, respectively.
26
Worldwide Operating Profits
12 Weeks Ended
----------------------------
3/20/99 3/21/98 % B(W)
------------ ------------ --------
U.S. $ 184 $ 126 46
International 55 42 32
Foreign exchange net loss (1) (1) -
Unallocated and corporate expenses (36) (28) (27)
------------ ------------
Ongoing operating profit 202 139 46
Facility actions net gain 34 29 18
------------ ------------
Reported operating profit $ 236 $ 168 41
============ ============
Ongoing operating profit increased $63 million or 46%. The increase was
driven by our improvement in restaurant margin and higher franchise fees. These
increases were partially offset by higher G&A spending. Ongoing operating
profits in 1999 include benefits related to our 1997 fourth quarter charge of $6
million compared to benefits in the prior year of $13 million. Included in those
benefits are suspended depreciation and amortization of $3 million and $8
million for the first quarter of 1999 and 1998, respectively. In addition, 1999
includes $4 million of benefits related to our 1998 fourth quarter strategic
decision to streamline our international businesses. In addition, our operating
profit was increased by approximately $10 million related to the accounting
changes described earlier on page 18.
Unallocated and corporate expenses increased $8 million or 27%. The
increase was driven by higher Year 2000 and system standardization investment
spending.
Worldwide Interest Expense, Net
12 Weeks Ended
----------------------------
3/20/99 3/21/98 % B/(W)
------------ ------------ ----------
Interest expense $ 56 $ 73 23
Interest income (4) (4) -
------------ ------------
Interest expense, net $ 52 $ 69 24
============ ============
Our net interest expense decreased approximately $17 million or 24%. The
decrease was primarily due to a decline in our outstanding debt levels in 1999
as compared to 1998.
Worldwide Income Taxes
12 Weeks Ended
----------------------------
3/20/99 3/21/98
------------ ------------
Income taxes $ 78 $ 45
Effective tax rate 42.3% 45.3%
The decrease in our effective tax rate compared to 1998 is primarily due to
the favorable shift in the mix of the components of our taxable income and a
decrease in state income taxes.
27
Diluted Earnings Per Share
The components of diluted earnings per common share ("EPS") were as follows:
12 Weeks Ended(a)
----------------------------
3/20/99 3/21/98
------------ ------------
Operating earnings excluding
accounting changes $ .50 $ .25
Accounting changes .04(b) -
Facility actions net gain .12 .10
------------ ------------
Net income $ .66 $ .35
============ ============
(a) All computations based on diluted shares of 161 million and 154 million at
March 20, 1999 and March 21, 1998, respectively.
(b) Includes the impact of required changes in GAAP, discretionary methodology
changes and our accounting and human resources policy standardization
programs previously discussed.
U.S. Results of Operations
12 Weeks Ended
----------------------------
3/20/99 3/21/98 % B(W)
------------ ------------ ----------
SYSTEM SALES $ 3,220 $ 3,057 5
============ ============
REVENUES
Company sales $ 1,264 $ 1,381 (9)
Franchise and license fees 102 87 17
------------ ------------
Total Revenues $ 1,366 $ 1,468 (7)
============ ============
COMPANY RESTAURANT MARGIN $ 204 $ 150 36
============ ============
% of sales 16.1% 10.9% 5.2 pts.
============ ============
OPERATING PROFIT(1) $ 184 $ 126 46
============ ============
(1) Excludes facility actions net gain
- --------------------------------------------------------------------------------
U.S. Restaurant Unit Activity
Company Franchised Licensed Total
--------------- ------------- ----------- ------------
Balance at December 26, 1998(a) 6,232 10,862 3,275 20,369
New Builds & Acquisitions 19 86 102 207
Refranchising & Licensing (173) 171 2 -
Closures and Divestitures (70) (44) (113) (227)
--------------- ------------- ----------- ------------
Balance at March 20, 1999 6,008(b) 11,075 3,266 20,349
=============== ============= =========== ============
(a) A total of 114 units have been reclassified from U.S. to International to
reflect the transfer of management responsibility.
(b) Includes 75 Company units approved for closure, but not yet closed at March
20, 1999, of which 51 units were included in the 1997 fourth quarter
charge.
- --------------------------------------------------------------------------------
28
U.S. System Sales and Revenues
System sales increased $163 million or 5%. The increase was driven by same
store sales growth and new unit development, led by Taco Bell franchisees. The
increase in same store sales was primarily due to favorable effective net
pricing and volume increases led by Pizza Hut's new product, "The Big New
Yorker." The increase was partially reduced by store closures primarily at Pizza
Hut.
Revenues decreased $102 million or 7%. Company sales decreased $117 million
or 9%. The decline in Company sales was primarily due to the portfolio effect.
The decrease was partially offset by favorable effective net pricing, volume
increases led by "The Big New Yorker" and new unit development. Franchise and
license fees increased $15 million or 17%. The increase was driven by units
acquired from us, new unit development and same store sales growth, partially
offset by store closures.
We measure same store sales only for our U.S. Company units. Same store
sales at Pizza Hut increased 14%. The improvement was primarily driven by
increased volume resulting from the launch of "The Big New Yorker." Same store
sales at KFC grew 4%. The increase was primarily due to favorable effective net
pricing and volume growth aided by successful promotions of "Honey Bar-B-Que
Wings", a combination of "Extra Crispy Chicken" and "Honey Bar-B-Que Wings" and
"Popcorn Chicken." Same store sales at Taco Bell increased 4%. The improvement
was largely due to favorable effective net pricing, which was partially offset
by volume declines.
U.S. Company Restaurant Margin
12 Weeks Ended
-----------------------------------
3/20/99 3/21/98
---------------- --------------
Company sales 100.0% 100.0%
Food and paper 30.5 31.2
Payroll and employee benefits 29.6 31.9
Occupancy and other operating expenses 23.8 26.0
---------------- --------------
Company restaurant margin 16.1% 10.9%
================ ==============
Our restaurant margin as a percentage of sales grew approximately 520 basis
points in the quarter as compared to the first quarter of 1998. Portfolio effect
contributed approximately 35 basis points and the adoption of the accounting
changes, which were primarily driven by our actuarial methodology change,
contributed approximately 50 basis points to our improvement. In addition, the
suspension of depreciation and amortization relating to stores still operating
during the quarter that were included in our 1997 fourth quarter charge
contributed approximately 15 basis points to both our 1999 and 1998 restaurant
margins. Excluding the portfolio effect and accounting changes, our restaurant
margin grew approximately 435 basis points. The increase included approximately
165 basis points related to favorable actuarial adjustments, primarily for 1998
casualty losses, arising from improved casualty loss trends across all three of
our U.S. operating companies. The remaining improvement was largely due to
effective net pricing in excess of cost increases, primarily commodity costs and
labor, increased beverage rebates and higher volume. The increase in commodity
costs, primarily due to higher cheese, produce, chicken and pizza dough costs,
was partially offset by higher beverage rebates and declines in other commodity
costs. Retroactive beverage rebates for 1998 contributed approximately 40 basis
points to restaurant margin. Increased labor costs in the quarter were the
result of higher incentive compensation at Pizza Hut and other wage increases.
The higher volume was primarily due to "The Big New Yorker."
29
U.S. Operating profits, excluding facility actions net gain, grew $58
million or 46% in the quarter. The increase was driven by restaurant margin
improvement and higher franchise and license fees, partially offset by higher
G&A expenses. The increase in G&A was primarily due to higher spending at Pizza
Hut and Taco Bell on biennial conferences to support our RGM is #1 initiative.
Operating profits included benefits related to our 1997 fourth quarter charge of
approximately $2 million compared to $7 million in the prior year of which $2
million in 1999 and $5 million in 1998 related to the suspension of depreciation
and amortization for the stores included in the charge. In addition, our
operating profit was increased by approximately $10 million related to the
accounting changes described earlier on page 18.
International Results of Operations
12 Weeks Ended
------------------------------
3/20/99 3/21/98 % B(W)
-------------- ------------ -------------
SYSTEM SALES $ 1,586 $ 1,500 6
============== ============
REVENUES
Company sales $ 398 $ 409 (3)
Franchise and license fees 49 45 9
-------------- ------------
Total Revenues $ 447 $ 454 (2)
============== ============
COMPANY RESTAURANT MARGIN $ 55 $ 51 8
============== ============
% of sales 13.8% 12.5% 1.3 pts.
============== ============
OPERATING PROFIT(1) $ 55 $ 42 32
============== ============
(1) Excludes facility action net gain
- --------------------------------------------------------------------------------
International Restaurant Unit Activity
Joint
Company Ventured Franchised Licensed Total
-------------- ------------ -------------- ------------ ------------
Balance at December 26, 1998(a) 2,165 1,120 5,788 321 9,394
New Builds & Acquisitions(b) 46 8 103 11 168
Refranchising & Licensing (48) (3) 57 (6) -
Closures and Divestitures(b) (12) (5) (45) (4) (66)
-------------- ------------ -------------- ------------ ------------
Balance at March 20, 1999 2,151(c) 1,120(c) 5,903 322 9,496
============== ============ ============== ============ ============
(a) A total of 114 units have been reclassified from U.S. to International to
reflect the transfer of management responsibility.
(b) Company new builds and acquisitions and franchise closures and divestitures
include 9 International stores acquired by the Company from franchisees.
(c) Includes 6 Company and 4 Joint Ventured units approved for closure, but not
yet closed at March 20, 1999, of which 5 units were included in our 1997
fourth quarter charge.
- --------------------------------------------------------------------------------
International System Sales and Revenues
System sales increased $86 million or 6%. Excluding the impact of foreign
currency translation, system sales increased $72 million or 5%. The improvement
was driven by new unit development by franchisees and same store sales growth,
partially offset by store closures.
30
Revenues declined $7 million or 2%. Company sales decreased $11 million or
3%. The decline in Company sales was primarily due to the portfolio effect,
partially offset by new unit development and favorable effective net pricing.
Franchise and license fees rose $4 million or 9%. The increase was driven by new
unit development, same store sales growth and units acquired from us, partially
offset by store closures by franchisees and licensees. Foreign currency
translation did not have a significant impact on the growth of international
revenues.
International Company Restaurant Margin
12 Weeks Ended
---------------------------------
3/20/99 3/21/98
-------------- --------------
Company sales 100.0% 100.0%
Food and paper 35.8 35.9
Payroll and employee benefits 22.3 24.0
Occupancy and other operating expenses 28.1 27.6
-------------- --------------
Company restaurant margin 13.8% 12.5%
============== ==============
Our restaurant margin as a percentage of sales increased approximately 135
basis points in the quarter with portfolio effect contributing approximately 50
basis points. In addition, the suspension of depreciation and amortization
relating to our 1997 fourth quarter charge contributed approximately 65 and 70
basis points to 1999 and 1998 restaurant margin, respectively. Excluding the
portfolio effect and the benefits of the fourth quarter charge, our restaurant
margin improved by approximately 80 basis points. The improvement was primarily
due to favorable effective net pricing in excess of costs in China, Korea and
Puerto Rico and strong sales growth in Puerto Rico and Korea. While sales growth
was strong in Mexico, cost increases and the negative impact of foreign currency
translation resulted in lower restaurant margins. Margin improvement was
adversely impacted by volume declines in China and Singapore. The overall impact
of foreign currency translation in the quarter was immaterial.
International Operating profits, excluding facility actions net gain, grew
$13 million or 32% in the quarter. The improvement was driven by a decline in
G&A and increases in franchise fees and restaurant margin. Operating profits
included approximately $4 million of benefits related to our fourth quarter 1998
strategic decision to streamline our international businesses. In addition,
operating profits included benefits related to our 1997 fourth quarter charge of
approximately $4 million compared to $6 million in the prior year. Our 1997
fourth quarter charge benefits included $1 million and $3 million related to
depreciation suspension for 1999 and 1998, respectively. Foreign currency
translation and accounting changes did not have a significant impact on the
growth in international operating profit.
Consolidated Cash Flows
Net cash provided by operating activities decreased $16 million to $24
million in the quarter. Excluding net changes in working capital, net income
before facility actions and all other non-cash charges grew $47 million from
$145 million to $192 million despite the over 1,500 unit decline in Company
restaurants due to our portfolio activities, since the same quarter last year.
This increase was more than offset by a decrease in our working capital deficit
which is typical in the restaurant industry. The decline in our working capital
deficit was the result of decreased accounts payable and increased accounts
receivable, partially offset by increased income taxes payable. The decline in
accounts payable is a result of seasonal timing as well as the decline in the
number of our restaurants. As expected, the refranchising of our restaurants and
the offsetting increase in franchised units has caused accounts receivable to
rise. The increase in income taxes payable is based on the current quarter's tax
provision versus the timing of payments.
31
Cash provided by investing activities decreased $24 million to $42 million
in the quarter. The decline was attributable to higher capital spending as well
as the acquisition of restaurants, partially offset by lower proceeds from the
sales of property, plant and equipment and a decrease in cash used for other
investing activities. During the quarter, we acquired nine stores from a former
international franchisee. The decline in cash used for other investing is
primarily driven by currency translation adjustments. Although the number of
stores refranchised in the current quarter increased over the same quarter last
year, refranchising proceeds were flat due to the mix of units sold.
Net cash used for financing activities decreased $55 million to $77 million
in the quarter. The decline was primarily due to lower net payments on debt
partially offset by increased short-term borrowings. The reduction in debt
payments is primarily due to timing and cash availability. Cash from operations
and refranchising proceeds has enabled us to pay down over $1.3 billion of debt
since the Spin-off.
Financing Activities
During the first quarter of 1999, we made net payments of approximately $80
million under our unsecured Revolving Credit Facility. As discussed in our 1998
Form 10-K, amounts outstanding under the Revolving Credit Facility are expected
to fluctuate from time to time, but Term Loan Facility reductions cannot be
reborrowed. These payments reduced amounts outstanding under our Revolving
Credit Facility at March 20, 1999 to $1.74 billion from $1.82 billion at year
end 1998. In addition, we had unused revolving credit agreement borrowings
available aggregating $1.35 billion, net of outstanding letters of credit of
$166 million. At March 20, 1999, we had $926 million outstanding under our Term
Loan Facility which was unchanged from year-end 1998. 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.
On March 24, 1999, we entered into an agreement to amend certain terms of
our senior, unsecured Term Loan Facility and Unsecured Revolving Credit Facility
("Facilities"). This amendment gives us additional flexibility with respect to
acquisitions and other investments, permitted investments and repurchase of
Common Shares. In addition, we voluntarily reduced our maximum borrowings under
the Revolving Credit Facility from $3.25 billion to $3.0 billion. As a result of
this amendment, we capitalized debt costs of approximately $2.5 million. These
costs will be amortized over the remaining life of the Facilities. Additionally,
an insignificant amount of our previously deferred debt costs will be written
off in the second quarter of 1999 as a result of this amendment.
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 1999, 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.
32
We use various derivative instruments with the objective of reducing
volatility in our borrowing costs. We have utilized interest rate swap
agreements to effectively convert a portion of our variable rate (LIBOR) bank
debt to fixed rate. We previously entered into treasury lock agreements to
partially hedge the anticipated issuance of our senior Unsecured Notes which
occurred in May 1998. 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 20, 1999, our weighted average interest rate was 6.1%. 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 cash, short-term
investments and short-term borrowings, is typical of restaurant operations where
the majority of sales are for cash and food and supply inventories are
relatively small. Our terms of payment to suppliers generally range from 10-30
days. Our operating working capital deficit declined 18% to $791 million at
March 20, 1999 from $960 million at December 26, 1998. This decline primarily
reflected a decrease in accounts payable and other current liabilities due to
both seasonal fluctuations and fewer Company restaurants resulting from our
portfolio initiatives, partially offset by increased income taxes payable.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk of Financial Instruments
Our primary market risk exposure with regard to financial instruments is to
changes in interest rates, principally in the United States. In addition, an
immaterial portion of our debt is denominated in foreign currencies which
exposes us to market risk associated with exchange rate movements. Historically,
we have 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 20, 1999, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $16 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 20, 1999. In addition, the fair value of our interest rate derivative
contracts would increase approximately $19 million, and the fair value of our
unsecured Notes would decrease approximately $33 million. Fair value was
determined by discounting the projected interest rate swap cash flows.
33
Cautionary Statements
From time to time, in both written reports and oral statements, we present
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The statements include those identified by such words as "may,"
"will," "expect," "believe," "plan" and other similar terminology. These
"forward-looking statements" reflect our current expectations and are based upon
data available at the time of the statements. Actual results involve risks and
uncertainties, including both those specific to the Company and those specific
to the industry, and could differ materially from expectations.
Company risks and uncertainties include, but are not limited to, the
limited experience of our management group in operating the Company as an
independent, publicly owned business; potentially substantial tax contingencies
related to the Spin-off, which, if they occur, require us to indemnify PepsiCo;
our substantial debt leverage and the attendant potential restriction on our
ability to borrow in the future, as well as the substantial interest expense and
principal repayment obligations; potential unfavorable variances between
estimated and actual liabilities including accruals for wage and hour litigation
and the liabilities related to the sale of the Non-core Businesses; our failure
or the failure of critical business partners to achieve timely, effective Year
2000 remediation; our ability to complete our conversion plans or the ability of
our key suppliers to be Euro-compliant; our potential inability to identify
qualified franchisees to purchase the 390 Company units remaining from the
fourth quarter 1997 charge as well as other units at prices we consider
appropriate under our strategy to reduce the percentage of system units we
operate; volatility of actuarially determined casualty loss estimates and
adoption of new or changes in accounting policies and practices.
Industry risks and uncertainties include, but are not limited to, global
and local business 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; consumer preferences, spending patterns and demographic trends;
political or economic instability in local markets; and currency exchange rates.
34
Independent Accountants' Review Report
The Board of Directors
TRICON Global Restaurants, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of TRICON
Global Restaurants, Inc. and Subsidiaries ("TRICON") as of March 20, 1999 and
the related condensed consolidated statements of income and cash flows for the
twelve weeks ended March 20, 1999 and March 21, 1998. 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 26, 1998, and
the related consolidated statements of operations, cash flows and shareholders'
deficit for the year then ended not presented herein; and in our report dated
February 10, 1999 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 26, 1998, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG LLP
Louisville, Kentucky
April 27, 1999
35
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
EXHIBITS
--------
Exhibit 10.6 Credit Agreement dated as of October 2, 1997
among Tricon, the lenders party thereto, The
Chase Manhattan Bank, as Administrative Agent,
and Chase Manhattan Bank as Issuing Bank, which
is incorporated herein by reference from Exhibit
10 to Tricon's Quarterly Report on Form 10-Q
for the quarter ended September 6, 1997, as
amended by Amendment No. 1 thereto (filed
herewith).
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 15 Letter from KPMG LLP regarding Unaudited Interim
Financial Information (Accountants'
Acknowledgment)
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K dated April 28, 1999
attaching our first quarter 1999 earnings release of April 28,
1999.
36
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, duly authorized officer of the registrant.
TRICON GLOBAL RESTAURANTS, INC.
-------------------------------
(Registrant)
Date: May 3, 1999
/s/ Robert L. Carleton
-----------------------------
Senior Vice President and Controller
(Principal Accounting Officer)
37
EXHIBIT 10.6
EXECUTION COPY
AMENDMENT dated as of March 11, 1999, to the Credit
Agreement dated as of October 2, 1997 (the "Credit Agreement"),
among TRICON GLOBAL RESTAURANTS, INC. (the "Borrower"), the
Lenders party thereto, and THE CHASE MANHATTAN BANK, as
Administrative Agent (the "Administrative Agent"). Capitalized
terms used and not defined herein shall have the meanings
assigned to such terms in the Credit Agreement.
WHEREAS the Borrower has requested the Lenders to amend the Credit
Agreement as set forth herein; and
WHEREAS the undersigned Lenders are willing to approve such amendment,
subject to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in this
Amendment and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Amendments. (a) the definition of "Permitted Investments" in
Section 1.01 of the Credit Agreement is hereby amended, as of the Amendment
Effective Date (as defined below), as follows:
(i) paragraph (d) is deleted and replaced with the following: "(d)
fully collateralized repurchase agreements (i) with a term ending
on the next Business Day for direct obligations of, or
obligations the principal of and interest on which are
unconditionally guaranteed by, the United States of America (or
by any agency thereof to the extent such obligations are backed
by the full faith and credit of the United Sates of America) and
entered into with a financial institution satisfying the criteria
described in clause (c) above, or (ii) with a term of not more
than 30 days for securities described in clause (a) above and
entered into with a financial institution satisfying the criteria
described in clause (c) above;";
(ii) paragraph (e) is amended by deleting the word "and" after "(d);";
[NYCORP;777465.6:4443d:03/24/1999--3:35p]->
(iii) paragraph (f) is relettered as paragraph (g); and
(iv) a new paragraph (f) is inserted as follows: "(f) investments in
(i) tax-exempt bonds issued by U.S. state or local government
entities rated AA - or above by S&P and Aa3 or above by Moody's
and maturing within one year from the date of acquisition thereof
and (ii) mutual funds with assets of at least $5,000,000,000 and
that invest 100% of their assets in securities described in
clause (a) above or subclause (i) of this clause (f); and".
(b) Section 1.01 of the Credit Agreement is hereby amended, as of the
Amendment Effective Date, by inserting in the appropriate alphabetical
order, "'System Unit' means any restaurant operated under the name Kentucky
Fried Chicken, KFC, Pizza Hut or Taco Bell."
(c) Section 2.02(c) of the Credit Agreement is hereby amended, as of
the Amendment Effective Date, as follows:
(i) "$2,500,000" in the first sentence is replaced with "$1,000,000";
(ii) "$15,000,000" in the first sentence is replaced with
"$10,000,000";
(iii)"Each Swingline Loan shall be in an amount that is in an
integral multiple of $1,000,000 and not less than $5,000,000" is
replaced with "Each Swingline Loan shall be in an amount that is
in an integral multiple of $1,000,000 and not less than
$1,000,000"; and
(iv) "a total of ten Eurodollar Revolving Borrowings and Eurodollar
Term Borrowings outstanding" is replaced with "a total of fifteen
Eurodollar Revolving Borrowings and Eurodollar Term Borrowings
outstanding".
(d) Section 2.11(d) of the Credit Agreement is hereby amended, as of
the Amendment Effective Date, by replacing "$2,500,000" with "$1,000,000"
and replacing "$15,000,000" with "$10,000,000".
[NYCORP;777465.6:4443d:03/24/1999--3:35p]->
3
(e) Section 6.04 of the Credit Agreement is hereby amended, as of the
Amendment Effective Date, as follows:
(i) Clause (i) of Section 6.04 is amended by deleting the word "and"
immediately after "business;";
(ii) Clause (j) of Section 6.04 is relettered clause "(l)" and
"$50,000,000" is replaced with "$150,000,000";
(iii) a new clause (j) and (k) are inserted as follows:
"(j) investments by the Borrower or any of its Subsidiaries to
the extent the consideration for such investments consists solely of
common stock of the Borrower;"
"(k) purchases by the Borrower or any of its Subsidiaries of any
restaurant from a franchisee or licensee operating under any license
granted by the Borrower or any of its Subsidiaries or any interest in
a joint venture of the Borrower or any of its Subsidiaries that
engages in businesses that the Borrower and its Subsidiaries would be
permitted to engage in, in each case for consideration consisting of
cash or common stock of the Borrower; provided that after giving
effect to such purchase, percentage ownership of System Units by the
Borrower and its Subsidiaries does not exceed 37.5% of the total
System Units; and"
(f) Section 6.06 of the Credit Agreement is hereby amended, as of the
Amendment Effective Date, by replacing the following language:
"(e) the Borrower may declare and make Restricted Payments in any
fiscal year that do not exceed 50% of Consolidated Net Income for such
fiscal year; provided that the Borrower may, on a one time basis,
declare and pay dividends in an aggregate amount not exceeding
$50,000,000 in any one twelve month period following the Effective
Date even if such dividends exceed 50% of Consolidated Net Income for
the fiscal year during which such dividends are paid; provided further
that in no event shall the aggregate amount of Restricted Payments
made on and after the Effective Date pursuant to clause (e) above and
[NYCORP;777465.6:4443d:03/24/1999--3:35p]->
4
the foregoing proviso exceed 50% of the cumulative Consolidated Net
Income since the Effective Date."
with:
"(e) the Borrower may make Restricted Payments not otherwise
permitted by the foregoing clauses of this Section in an aggregate
amount not exceeding $200,000,000 plus 50% of cumulative Consolidated
Net Income since the Effective Date."
(g) Section 9.01(a) of the Credit Agreement is hereby amended, as of
the Amendment Effective Date, by replacing "(502) 454-2410" with "(502)
874-2410".
SECTION 2. Representations and Warranties. The Borrower represents and
warrants to each of the Lenders, on and as of the date hereof, that:
(a) The representations and warranties of each Loan Party set forth in
each Loan Document, after giving effect to this Amendment, are true and
correct on and as of the date hereof except to the extent that any such
representations and warranties expressly relate to an earlier date in which
case any such representations and warranties shall be true and correct at
and as of such earlier date.
(b) Before and after giving effect to this Amendment, no Default has
occurred and is continuing.
SECTION 3. Applicable Law. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 4. Conditions of Effectiveness. This Amendment shall become
effective only when the Administrative Agent shall have received duly executed
counterparts of this Amendment which, when taken together, bear the signatures
of the Borrower and the Required Lenders (the date on which this Amendment so
becomes effective being herein called the "Amendment Effective Date"). Unless
and until this Amendment becomes effective, the Credit Agreement shall continue
in full force and effect in accordance with the provisions thereof and the
rights and obligations of the parties thereto shall not be affected hereby.
[NYCORP;777465.6:4443d:03/24/1999--3:35p]->
5
SECTION 5. Amended Credit Agreement. Any reference in the Credit Agreement,
or in any documents or instruments required thereunder or annexes or schedules
thereto, referring to the Credit Agreement shall be deemed to refer to the
Credit Agreement as amended by this Amendment. As used in the Credit Agreement,
the terms "Agreement", "this Agreement", "herein", "hereinafter", "hereto",
"hereof" and words of similar import shall, unless the context otherwise
requires, mean the Credit Agreement as amended by this Amendment. Except as
expressly modified by this Amendment, the terms and provisions of the Credit
Agreement are hereby confirmed and ratified in all respects and shall remain in
full force and effect.
SECTION 6. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall constitute an original but all of which when
taken together shall constitute but one contract. Delivery of an executed
counterpart of a signature page by facsimile transmission shall be effective as
delivery of a manually executed counterpart of this Amendment.
SECTION 7. Expenses. The Borrower agrees to reimburse the Administrative
Agent for its reasonable out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and disbursements of Cravath,
Swaine & Moore, counsel for the Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first written above.
TRICON GLOBAL RESTAURANTS, INC.,
by
/s/ Sandra S. Wijnberg
----------------------------------
Name: Sandra S. Wijnberg
Title: SVP & Treasurer
6
THE CHASE MANHATTAN BANK, individually
and as
Administrative Agent and
Swingline Lender,
by
/s/ Karen M. Sharf
----------------------------
Name: Karen M. Sharf
Title: Vice President
CHASE MANHATTAN BANK DELAWARE,
as Issuing Agent,
by
/s/ Michael P. Handago
----------------------------
Name: Michael P. Handago
Title: Vice President
CITIBANK, N.A.,
by
/s/ Thomas F. Bruscino
----------------------------
Name: Thomas F. Bruscino
Title: Vice President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
by
/s/ Robert Bottamedi
----------------------------
Name: Robert Bottamedi
Title: Vice President
NATIONSBANK, N.A.,
by
/s/ Richard G. Parkhurst,Jr.
----------------------------
Name: Richard G. Parkhurst,Jr.
Title: Senior Vice President
7
DAI ICHI KANGYO BANK LTD,
by
/s/ Timothy White
----------------------------
Name: Timothy White
Title: Senior Vice President
FUJI BANK LIMITED,
by
/s/ Raymond Ventura
----------------------------
Name: Raymond Ventura
Title: Vice President & Manager
INDUSTRIAL BANK OF JAPAN, LTD.
by
/s/ William Kennedy
----------------------------
Name: William Kennedy
Title: Vice President
THE LONG-TERM CREDIT BANK OF
JAPAN, LIMITED, NEW YORK
BRANCH,
by
/s/ Junichi Ebihara
----------------------------
Name: Junichi Ebihara
Title: Deputy General Manager
THE SANWA BANK LTD, NEW YORK
BRANCH,
by
/s/ Dominic J. Sorresso
----------------------------
Name: Dominic J. Sorresso
Title: Vice President
8
THE SUMITOMO BANK LTD.,
by
/s/ J. Bruce Meredith
----------------------------
Name: J. Bruce Meredith
Title: Senior Vice President
MARINE MIDLAND BANK, N.A.,
by
/s/ Kim P. Leary
----------------------------
Name: Kim P. Leary
Title: Vice President
CREDIT SUISSE FIRST BOSTON,
by
/s/ Robert N. Finney
----------------------------
Name: Robert N. Finney
Title: Managing Director
by
/s/ David W. Kratovil
----------------------------
Name: David W. Kratovil
Title: Director
GOLDMAN SACHS CREDIT PARTNERS
L.P.,
by
/s/ Edward Forst
----------------------------
Name: Edward Forst
Title: Managing Director
PNC BANK, KENTUCKY, INC.,
by
/s/ Paula K. Fryland
----------------------------
Name: Paula K. Fryland
Title: Vice President
9
ROYAL BANK OF CANADA,
by
/s/ David A. Barsalou
----------------------------
Name: David A. Barsalou
Title: Senior Manager
THE YASUDA TRUST AND BANKING
COMPANY, LTD.,
by
/s/ Junichiro Kawamura
----------------------------
Name: Junichiro Kawamura
Title: Vice President
FLEET NATIONAL BANK,
by
/s/ Steve Kalin
----------------------------
Name: Steve Kalin
Title: Vice President
BANCA DI ROMA,
by
/s/ S.F. Paley
----------------------------
Name: S.F. Paley
Title: Vice President
by
/s/ Nicola Dell'Edera
----------------------------
Name: Nicola Dell'Edera
Title: Assistant Treasurer
10
BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION,
by
/s/ Richard G. Parkhurst, Jr.
----------------------------
Name: Richard G. Parkhurst, Jr.
Title: Senior Vice President
THE BANK OF NOVA SCOTIA,
by
/s/ Todd S. Meller
----------------------------
Name: Todd S. Meller
Title: Senior Relationship Manager
BANQUE NATIONALE DE PARIS,
by
/s/ Arnaud Collin du Bocage
----------------------------
Name: Mr. Arnaud Collin du Bocage
Title: EVP & General Manager
by
/s/ Jo Ellen Bender
----------------------------
Name: Jo Ellen Bender
Title: Senior Vice President
CREDIT AGRICOLE INDOSUEZ,
by
/s/ Katherine L. Abbott
----------------------------
Name: Katherine L. Abbott
Title: First Vice President
by
/s/ David Bouhl
----------------------------
Name: David Bouhl
Title: Head of Corporate Banking
Chicago
NBD BANK, N.A.,
by
/s/ Randall K. Stephens
----------------------------
Name: Randall K. Stephens
Title: First Vice President
11
FIRST UNION NATIONAL BANK,
by
/s/ Irene Rosen Marks
----------------------------
Name: Irene Rosen Marks
Title: Vice President
BAYERISCHE HYPOTHEKEN-UND
VEREINSBANK A.G.,NEW YORK BRANCH,
by
/s/ Alan C. Babcock
----------------------------
Name: Alan C. Babcock
Title: Managing Director
by
/s/ Ivana Albanese-Rizzo
----------------------------
Name: Ivana Albanese-Rizzo
Title: Director
THE MITSUBISHI TRUST AND BANKING CORPORATION,
by
/s/ Toshihiro Hayashi
----------------------------
Name: Toshihiro Hayashi
Title: Senior Vice President
NATIONAL CITY BANK OF KENTUCKY,
by
/s/ J. Page Walker
----------------------------
Name: J. Page Walker
Title: Vice President
12
NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK
AND/OR CAYMAN ISLANDS BRANCH,
by
/s/ Stephen K. Hunter
----------------------------
Name: Stephen K. Hunter
Title: Senior Vice President
by
/s/ Josef Haas
----------------------------
Name: Josef Haas
Title: Vice President
SAKURA BANK LTD,
by
/s/ Yasuhiro Terada
----------------------------
Name: Yasuhiro Terada
Title: Senior Vice President
STANDARD CHARTERED BANK,
by
/s/ Marianne Murray
----------------------------
Name: Marianne Murray
Title: Senior Vice President
by
/s/ Peter G.R. Dodds
----------------------------
Name: Peter G.R. Dodds
Title: SVP Senior Credit Officer
THE SUMITOMO TRUST & BANKING
CO., LTD., NEW YORK BRANCH,
by
----------------------------
Name:
Title:
13
SUMMIT BANK,
by
/s/ Carter E. Evans
----------------------------
Name: Carter E. Evans
Title: Vice President
SUNTRUST BANKS INC.,
by
/s/ Charles J. Johnson
----------------------------
Name: Charles J. Johnson
Title: Vice President
by
/s/ Sean McLaren
----------------------------
Name: Sean McLaren
Title: Banking Officer
THE TOKAI BANK, LIMITED,
NEW YORK BRANCH,
by
/s/ Shinichi Nakatani
----------------------------
Name: Shinichi Nakatani
Title: Assistant General Manager
THE TOYO TRUST & BANKING CO.,
LTD.,
by
/s/ K. Yamauchi
----------------------------
Name: K. Yamauchi
Title: Vice President
WACHOVIA BANK,
by
/s/ John B. Tibe
----------------------------
Name: John B. Tibe
Title: Vice President
14
HIBERNIA NATIONAL BANK,
by
/s/ Kristie L. Peychaud
----------------------------
Name: Kristie L. Peychaud
Title: Banking Officer
NATIONAL BANK OF KUWAIT SAK,
by
/s/ Muhannad Kamal
----------------------------
Name: Muhannad Kamal
Title: General Manager
by
/s/ Robert J. McNeill
----------------------------
Name: Robert J. McNeill
Title: Executive Manager
CHAN HWA COMMERICAL BANK, LTD.,
NEW YORK BRANCH,
by
----------------------------
Name:
Title:
NORTHERN TRUST COMPANY,
by
/s/ Christina L. Jakuc
----------------------------
Name: Christina L. Jakuc
Title: Second Vice President
15
CRESTAR BANK,
by
/s/ C. Gray Key
----------------------------
Name: C. Gray Key
Title: Vice President
FIFTH THIRD BANK,
by
/s/ Anthony M. Buehler
----------------------------
Name: Anthony M. Buehler
Title: AVP
BANK OF LOUISVILLE,
by
/s/ John Barr
----------------------------
Name: John Barr
Title: Senior Vice President
THE BANK OF NEW YORK,
by
/s/ Edward J. Dougherty
----------------------------
Name: Edward J. Dougherty
Title: Vice President
BANK OF SCOTLAND,
by
/s/ Annie Chin Tat
----------------------------
Name: Annie Chin Tat
Title: Senior Vice President
16
THE BANK OF TOKYO-MITSUBISHI
TRUST COMPANY,
by
/s/ Friedrich N. Wilms
----------------------------
Name: Friedrich N. Wilms
Title: Vice President
BANKBOSTON, N.A.,
by
/s/ Todd Dahlstrom
----------------------------
Name: Todd Dahltsrom
Title: Director
BARCLAYS BANK PLC,
by
----------------------------
Name:
Title:
CCHIAO TUNG BANK COMPANY,
LIMITED,
by
/s/ Kuang-Si Shiu
----------------------------
Name: Kuang-Si Shiu
Title: Senior Vice President
& General Manager
CITY NATIONAL BANK,
by
/s/ Patrick M. Cassidy
----------------------------
Name: Patrick M. Cassidy
Title: Vice President
17
COMMERZBANK AG, NEW YORK BRANCH,
by
/s/ Andrew R. Campbell
----------------------------
Name: Andrew R. Campbell
Title: Assistant Vice President
by
/s/ G. Rod McWalters
----------------------------
Name: G. Rod McWalters
Title: Vice President
COMPAGNIE FINANCIERE DE CIC ET
DE L'UNION EUROPEENNE,
by
/s/ Brian O'Leary
----------------------------
Name: Brian O'Leary
Title: Vice President
by
/s/ Marcus Edward
----------------------------
Name: Marcus Edward
Title: Vice President
CREDIT LYONNAIS,
by
/s/ Lee E. Greve
----------------------------
Name: Lee E. Greve
Title: First Vice President
ERSTE BANK,
by
/s/ Rima Terradista
----------------------------
Name: Rima Terradista
Title: Vice President
by
/s/ John S. Runnion
----------------------------
Name: John S. Runnion
Title: First Vice President
FIRST SECURITY BANK, N.A.,
by
/s/ Troy A. Akagi
----------------------------
Name: Troy A. Akagi
Title: Vice President
18
FIRSTRUST BANK,
by
/s/ Edward D'Ancona
----------------------------
Name: Edward D'Ancona
Title: Senior Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION,
by
/s/ William E. Magee
----------------------------
Name: William E. Magee
Title: Duly Authorized
Signatory
GULF INTERNATIONAL BANK, B.S.C.,
by
/s/ Thomas E. Fitzherbert
----------------------------
Name: Thomas E. Fitzherbert
Title: Vice President
by
/s/ Issa N. Baconi
----------------------------
Name: Issa N. Baconi
Title: Senior Vice President
& Branch Manager
ING BANK N.V.,
by
/s/ Peter Nabney
----------------------------
Name: Peter Nabney
Title: Country Manager
by
/s/ David Owens
----------------------------
Name: David Owens
Title: Manager
MERCANTILE BANK, NATIONAL ASSOCIATION,
by
/s/ Elizabeth W. Vahlkamp
----------------------------
Name: Elizabeth W. Valkamp
Title: Vice President
19
MITSUI TRUST & BANKING CO., LTD.,
by
/s/ Margaret Holloway
----------------------------
Name: Margaret Holloway
Title: Vice President & Manager
NATEXIS BANQUE BFCE,
by
/s/ Frank H. Madden
----------------------------
Name: Frank H. Madden
Title: Vice President
by
/s/ G. Kevin Dooley
----------------------------
Name: G. Kevin Dooley
Title: Vice President &
Group Manager
NATIONAL WESTMINSTER BANK, PLC,
by
/s/ Jeremy Hood
----------------------------
Name: Jeremy Hood
Title: Vice President
PARIBAS,
by
/s/ Ann B. McAllon
----------------------------
Name: Ann B. McAllon
Title: Vice President
by
/s/ Brian F. Hewitt
----------------------------
Name: Brian F. Hewitt
Title: Vice President
PINEHURST TRADING, INC.,
by
/s/ Kelly C. Walker
----------------------------
Name: Kelly C. Walker
Title: Vice President
20
REPUBLIC NATIONAL BANK OF NEW YORK,
by
/s/ Garry Weiss
----------------------------
Name: Garry Weiss
Title: First Vice President
by
/s/ Theodore R. Koerr
----------------------------
Name: Theodore R. Koerr
Title: First Vice President
SPS TRADES
by
----------------------------
Name:
Title:
STB DELAWARE FUNDING TRUST I,
by
/s/ Donald C. Hargadon
----------------------------
Name: Donald C. Hargadon
Title: Assistant Vice President
SENIOR DEBT PORTFOLIO,
BY: BOSTON MANAGEMENT AND
RESEARCH AS INVESTMENT
ADVISOR
by
----------------------------
Name:
Title:
SOCIETE GENERALE,
by
/s/ Eric E.O. Siebert Jr.
----------------------------
Name: Eric E.O. Siebert Jr.
Title: Director
21
FIRST STAR BANK, N.A.,
by
----------------------------
Name:
Title:
TRANSAMERICA OCCIDENTAL LIFE INSURANCE,
by
/s/ John M. Casparian
----------------------------
Name: John M. Casparian
Title: Investment Officer
UNION BANK OF CALIFORNIA, N.A.,
by
/s/ Hagop V. Jazmadarian
----------------------------
Name: Hagop V. Jazmadarian
Title: Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
by
/s/ Andreas Schroeter
----------------------------
Name: Andreas Schroeter
Title: Director
by
/s/ Walter T. Duffy III
----------------------------
Name: Walter T. Duffy III
Title: Vice President
EXHIBIT 12
TRICON Global Restaurants, Inc.
Ratio of Earnings to Fixed Charges Years Ended 1998-1994
and 12 Weeks Ended March 20, 1999 and March 21, 1998
(in millions except ratio amounts)
53
52 Weeks Weeks 12 Weeks
------------------------------------------- --------- -----------------------
1998 1997 1996 1995 1994 3/20/99 3/21/98
-------- -------- -------- -------- --------- ---------- ----------
Earnings:
Income from continuing operations before
income taxes and cumulative effect of
accounting changes 756 (35) 72 (103) 241 184 99
Unconsolidated affiliates' interests,
net (a) 1 (1) (6) - (1) (2) (1)
Interest expense (a) 291 290 310 368 349 56 69
Interest portion of net rent expense (a) 105 118 116 109 108 21 24
-------- -------- -------- -------- --------- ---------- ----------
Earnings available for fixed charges 1,153 372 492 374 697 259 191
======== ======== ======== ======== ========= ========== ==========
Fixed Charges:
Interest Expense (a) 291 290 310 368 349 56 69
Interest portion of net rent expense (a) 105 118 116 109 108 21 24
-------- -------- -------- -------- --------- ---------- ----------
Total Fixed Charges 396 408 426 477 457 77 93
======== ======== ======== ======== ========= ========== ==========
Ration of Earnings to Fixed
Charges (b) (c) (d) 2.91x .91x 1.15x .78x 1.53x 3.37x 2.06x
(a) Included in earnings for the years 1994 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 for years 1994-1997 and that portion of rental expense
that approximates interest. For a description of the PepsiCo allocations,
see the Notes to the Consolidated Financial Statements included in our 1998
Form 10-K.
(b) Included the impact of unusual, disposal and other charges of $15 million
($3 million after-tax) in 1998, $184 million ($165 million after tax) in
1997, $246 million ($189 million after tax) in 1996 and $457 million ($324
million after tax) in 1995. Excluding the impact of such charges, the ratio
of earnings to fixed charges would have been 2.95x, 1.36x, 1.73x and 1.74x
for the fiscal years ended 1998, 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
1998. 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 27,
1999 included within the Quarterly Report on Form 10-Q of TRICON Global
Restaurants, Inc. for the twelve weeks ended March 20, 1999, and incorporated by
reference in the following Registration Statements:
Description Registration Statement Number
Form S-3
Initial Public Offering of Debt Securities 333-42969
Form S-8s
Restaurant Deferred Compensation Plan 333-36877
Executive Income Deferral Program 333-36955
TRICON Long-Term Incentive Plan 333-36895
Share Power Stock Option Plan 333-36961
TRICON Long-Term Savings Program 333-36893
Restaurant General Manager Stock Option Plan 333-64547
Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
KPMG LLP
Louisville, Kentucky
May 3, 1999