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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001041061-98-000004.txt : 19980327
<SEC-HEADER>0001041061-98-000004.hdr.sgml : 19980327
ACCESSION NUMBER: 0001041061-98-000004
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971227
FILED AS OF DATE: 19980326
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TRICON GLOBAL RESTAURANTS INC
CENTRAL INDEX KEY: 0001041061
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812]
IRS NUMBER: 133951308
STATE OF INCORPORATION: NC
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-13163
FILM NUMBER: 98573519
BUSINESS ADDRESS:
STREET 1: 1441 GARDINER LANE
CITY: LOUISVILLE
STATE: KY
ZIP: 40213
BUSINESS PHONE: 5024568300
MAIL ADDRESS:
STREET 1: 1900 COLONEL SANDERS LANE
CITY: LOUISVILLE
STATE: KY
ZIP: 40213
FORMER COMPANY:
FORMER CONFORMED NAME: GREAT AMERICAN RESTAURANT CO
DATE OF NAME CHANGE: 19970618
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K FOR TRICON GLOBAL RESTAURANTS, INC.
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[|X|]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 1-13163
TRICON GLOBAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 13-3951308
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 Gardiner Lane, Louisville, Kentucky 40213
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 874-8300
Name of Each Exchange
Title of Class on which Registered
-------------------------- ------------------------
Securities registered
pursuant to 12(b) of
the Act: Common Stock, no par value New York Stock Exchange
Securities registered
pursuant to 12(g) of
the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock ) held by non-affiliates of the registrant as of March
19, 1998, computed by reference to the closing price of the registrant's Common
Stock on the New York Stock Exchange Composite Tape on such date was
$4,489,735,175.
The number of shares outstanding of the Registrant's Common Stock as of
March 19, 1998 was 152,255,271 shares.
Portions of the definitive proxy statement furnished to shareholders of the
Registrant in connection with the annual meeting of shareholders to be held on
May 19, 1998, are incorporated by reference into Part III.
<PAGE>
PART I
Item 1. Business.
TRICON Global Restaurants, Inc. (referred to in this report as "Tricon")
was incorporated under the laws of the state of North Carolina in 1997. The
principal executive offices of Tricon are located at 1441 Gardiner Lane,
Louisville, Kentucky 40213, and its telephone number at that location is (502)
874-8300.
Tricon, the registrant, together with its restaurant operating companies
and other subsidiaries, is referred to in this report as the Company. Prior to
October 6, 1997, the business of the Company was conducted by PepsiCo, Inc.
("PepsiCo") through various subsidiaries and divisions.
This Form 10-K should be read in conjunction with the Cautionary Statements
on page 35.
(a) General Development of Business
In January 1997, PepsiCo announced its decision to Spin-off its restaurant
business to shareholders as an independent public company (the "Spin-off").
Effective as of October 6, 1997, PepsiCo disposed of its restaurant businesses
by distributing all of the outstanding shares of common stock of Tricon to its
shareholders. Tricon's common stock began trading on the New York Stock Exchange
on October 7, 1997 under the symbol "YUM." As used in this report, references to
Tricon or the Company include the historical operating results of the business
and operations transferred to the Company in the Spin-off and, except where
indicated, include the non-core businesses divested in 1997.
Information about the Spin-off and the non-core businesses is included in
Management's Discussion and Analysis and the related Consolidated Financial
Statements and footnotes in Part II, Item 7, pages 18 through 36; and Part II,
Item 8, pages 36 through 60, respectively, of this Form 10-K.
(b) Financial Information about Industry Segments
Industry segment information for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995 is included in Management's Discussion
and Analysis and the related Consolidated Financial Statements and footnotes in
Part II, Item 7, pages 18 through 36; and Part II, Item 8, pages 36 through 60,
respectively, of this Form 10-K.
(c) Narrative Description of Business
General
Tricon is the world's largest quick service restaurant ("QSR") company
based on number of system units, with almost 30,000 units in 103 countries and
territories. The Tricon organization is currently made up of four operating
companies organized around its three core concepts, KFC, Pizza Hut and Taco
Bell. The four operating companies are KFC, Pizza Hut, Taco Bell and Tricon
Restaurants International ("Tricon International"). KFC is based in Louisville,
Kentucky; Pizza Hut and Tricon International are headquartered in Dallas, Texas;
and Taco Bell is based in Irvine, California.
Restaurant Concepts
Through its three widely-recognized restaurant concepts, KFC, Pizza Hut and
Taco Bell, the Company develops, operates, franchises and licenses a worldwide
system of restaurants which prepare, package and sell a menu of competitively
priced food items. These restaurants are operated by the Company or, under the
terms of franchise or license agreements, by franchisees or licensees who are
independent third parties, or by affiliates operating under joint venture
agreements between the operating companies and local business people.
<PAGE>
The Company's franchise program is designed to assure consistency and
quality, and the Company is selective in granting franchises. Under the standard
franchise agreement, franchisees supply capital - initially by paying a
franchise fee, purchasing or leasing the land and building and purchasing
equipment, signs, seating, inventories and supplies, and over the longer term,
by reinvesting in the business. Franchisees then contribute to the Company's
revenues through the payment of royalties based on a percentage of sales.
The Company believes that it is important to maintain strong and open
relationships with its franchisees and their representatives. To this end, the
Company invests a significant amount of time working with the franchisee
community and their representative organizations on all aspects of the business,
ranging from new products to new equipment to new management techniques.
Each of Tricon's four operating companies is engaged in the operation,
development, franchising and licensing of a system of both traditional and
non-traditional QSR units. Non-traditional units include express units and
kiosks which have a more limited menu and operate in non-traditional locations
like airports, gas and convenience stores, stadiums, amusement parks and
colleges, where a full-scale traditional outlet would not be practical or
efficient. In addition, as of year-end 1997, there were 349 units in the system
housing more than one concept. Of these, 343 units offer both the full KFC menu
and a limited menu of Taco Bell products (a "2n1"), and 6 units offer food
products from each of the concepts (a"3n1").
In each concept, consumers can either dine in or carry out food. In
addition, Taco Bell and KFC offer a drive-through option in many stores. Pizza
Hut and, on a much more limited basis, KFC offer delivery service.
Each concept has proprietary menu items and emphasizes the preparation of
food with high quality ingredients as well as unique recipes and special
seasonings to provide appealing, tasty and attractive food at competitive
prices.
KFC
---
KFC was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early
developer of the quick service food business and a pioneer of the restaurant
franchise concept. The Colonel perfected his secret blend of 11 herbs and spices
for Kentucky Fried Chicken in 1939 and signed up his first franchisee in 1952.
By 1986, when KFC was acquired by PepsiCo, its restaurant system had grown to
nearly 6,600 units in 55 countries. KFC now has more than 5,100 units in the
U.S., and over 5,100 units in 78 countries and territories outside the U.S.
Approximately 36 percent of the U.S. units, and 31 percent of the non-U.S.
units, are operated by the Company or joint ventures in which the Company
participates.
While product offerings vary throughout the worldwide system, all KFC
restaurants offer fried chicken products and many also offer non-fried
chicken-on-the-bone products under the names Original Recipe, Extra Tasty Crispy
and Tender Roast. Other principal entree items include Chunky Chicken Pot Pies,
Colonel's Crispy Strips and various chicken sandwiches. KFC restaurants also
offer a variety of side items, such as biscuits, mashed potatoes and gravy,
coleslaw, corn, Potato Wedges (in the U.S.) and french fries (outside of the
U.S.), as well as desserts and non-alcoholic beverages. Their decor is
characterized by the image of the Colonel and KFC's distinctive packaging
includes the "Bucket" of chicken.
As of year-end 1997, KFC was the leader in the U.S. chicken QSR segment,
with a 55 percent market share in that segment, and a greater than 5 to 1 lead
in terms of system sales over its closest national competitor.
2
<PAGE>
In 1997, KFC's worldwide system sales exceeded $8 billion. KFC's 1997 U.S.
system sales of approximately $4 billion grew by 2 percent over 1996, even
though the number of restaurants in its U.S. system did not materially increase.
This growth was largely due to product promotions, favorable effective net
pricing and increased distribution through home delivery (which factors were
partially offset by lower transaction counts). Average U.S. system sales per
traditional unit in 1997 were $786,000. In 1997, same store sales in Company
stores in the U.S. increased 2 percent. In 1996, same store sales for Company
stores in the U.S. were also strong, increasing 6 percent. Margins for Company
stores in the U.S. increased 1.5 percent in 1997, marking the fourth year in a
row for margin improvements.
Pizza Hut
---------
Pizza Hut operates in 88 countries and territories throughout the world
under the name "Pizza Hut" and features a variety of pizzas, including Pan
Pizza, Thin n' Crispy, Pizzeria Stuffed Crust and Hand Tossed, each offered with
a variety of different toppings. Pizza Hut also features beverages and, in some
restaurants, breadsticks, pasta, salads and sandwiches. The distinctive Pizza
Hut decor features a bright red roof.
The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and
within a year, the first franchise unit was opened. By 1977, when Pizza Hut was
acquired by PepsiCo, its restaurant system had grown to nearly 3,200 units.
Today, Pizza Hut is the largest restaurant chain in the world specializing in
the sale of ready-to-eat pizza products. As of year-end 1997, the concept had
grown to more than 8,600 units in the U.S., and more than 3,800 units outside of
the United States. Approximately 44 percent of the U.S. units, and 45 percent of
the non-U.S. units, are operated by the Company or joint ventures in which the
Company participates.
As of year-end 1997, Pizza Hut was the leader in the U.S. pizza QSR
segment, with a 22 percent market share in that segment, and almost double the
system sales of its closest national competitor.
In 1997, Pizza Hut worldwide system sales exceeded $7.3 billion, of which
approximately $4.7 billion is attributable to U.S. system sales. Average U.S.
system sales per traditional unit in 1997 were $630,000. U.S. same store sales
at Company units decreased 1 percent in 1997 reflecting lower average guest
checks in 1997 and decreasing transaction counts in the first half of the year,
which were partially offset in the second half by quality initiatives,
increasing transaction counts and the introduction of The EDGE pizza. Notably,
same store sales at Company units in the U.S. increased 5 percent in the fourth
quarter over the same period in 1996. Same store sales at Company units in the
U.S. in 1996 decreased 4 percent. In contrast, U.S. same store sales at Company
units had increased a solid 4 percent in 1995 driven by the introduction of new
products, such as Stuffed Crust Pizza. Margins for Company stores decreased 1
percent in 1997.
Pizza Hut has been named America's best pizza chain on many occasions by
numerous newspapers, magazines and consumer publications.
Taco Bell
---------
Taco Bell operates under the name "Taco Bell" and specializes in Mexican
style food products, including various types of tacos and burritos, salads,
nachos and other related items. Taco Bell units feature a distinctive bell logo
on their signage.
The first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey,
California, and in 1964 the first Taco Bell franchise was sold. By 1978, when it
was acquired by PepsiCo, the Taco Bell system had grown to approximately 1,000
units. By year-end 1997, there were more than 6,700 Taco Bell units within the
United States, and more than 170 units outside of the United States.
Approximately 32 percent of the U.S. units, and 42 percent of the non-U.S.
units, are operated by the Company. In 1997, Taco Bell worldwide system sales
3
<PAGE>
exceeded $4.9 billion, of which approximately $4.8 billion is attributable to
U.S. system sales. Average U.S. system sales per traditional unit in 1997 were
$972,000.
Taco Bell is the leader in the U.S. Mexican QSR segment, with a market
share in that segment of 72 percent.
In 1997, U.S. same store sales at Company Taco Bell units increased by 2
percent for the year reflecting the successful Star Wars(TM) and Batman(TM)
promotions, favorable product mix shifts and pricing, which were partially
offset by lower transaction counts. After several years of having achieved above
industry average growth rates, U.S. same store sales at Company Taco Bell units
declined 2 percent and 4 percent in 1996 and 1995, respectively, as a result of
lower transaction counts. Margins for Company stores in the U.S. increased by 3
percentage points in 1997.
Tricon International
--------------------
Recently, the international operations of the three Tricon concepts have
been consolidated into a separate international division (Tricon International),
which has directed its focus toward generating more system growth through
franchisees and concentrating its development of Company units in those markets
with sufficient scale. Tricon International has developed new global systems and
tools designed to improve marketing, operations consistency, product delivery,
market planning and development and franchise support capability.
In 1997, Tricon International accounted for 34 percent of the Company's
total system sales, and 24 percent of the Company's revenues. Tricon
International system sales have grown at a compounded rate of 8 percent over the
past five years.
The Company has over 9,000 units in the system outside of the U.S. This
number has grown at a compounded rate of 10 percent over the past five years.
Approximately 37 percent of the total non-U.S. units are operated by the Company
or joint ventures in which the Company participates.
Operating Structure
In all three of its concepts, the Company either operates units or they are
operated by independent franchisees or licensees. Franchisees can range in size
from individuals owning just a few units to large publicly traded companies. In
addition, the Company has established international joint ventures between
itself and third parties. As of year-end 1997, approximately 38 percent of
Tricon's worldwide units were operated by the Company (including approximately 4
percent by joint ventures in which the Company participates), approximately 51
percent by franchisees, and approximately 11 percent by licensees.
Refranchising
Three years ago, the Company determined that there was a need to rebalance
the system toward more franchisee ownership in order to focus its resources on
what it believes are high growth potential markets where it can more efficiently
leverage its scale. Since the strategy began in mid-1995, the Company has
refranchised 1,418 units in 1997, 659 units in 1996 and 264 units in 1995,
respectively. As a result of the Company's refranchising activity, coupled with
new points of distribution added by franchisees and licensees and the program to
upgrade the asset portfolio by closing under-performing stores, the Company's
overall ownership of total system units (i.e., Company and joint venture units
in which the Company participates) declined 12 percentage points in three years
from 50 percent at year-end 1994 to 38 percent at year-end 1997. The
refranchising program is expected to continue, in the near term, but as the
Company approaches a Company/franchisee balance more consistent with its major
competition, refranchising activity is expected to
4
<PAGE>
substantially decrease over time. The continuation of the program depends on the
Company's ability to identify and offer to qualified franchisees to purchase
Company restaurants at prices considered by the Company to be appropriate. There
can be no assurance as to whether, or to what extent, management will be able to
effect refranchising activities in the future. As of year-end 1997, over 2,300
Company stores had been refranchised as a part of that program, the large
majority to franchisees that were already in the Tricon system.
Competitive Advantages
Global Scale
Powerful Concepts in Growing Food Categories. KFC, Pizza Hut and Taco
Bell are three of the most recognized restaurant concepts in the world. Each is
the U.S. leader in terms of market share and number of units in its respective
food category. The Company believes that the near universal appeal of chicken
and the enormous variety of pizzas provide a strong foundation for global
concept expansion, and that the emerging trend towards Mexican-style foods may
provide additional growth opportunities. In fact, according to a study conducted
by Restaurant Trends in 1997, chicken, pizza and Mexican are among the fastest
growing QSR segments in terms of comparable sales.
Worldwide Capabilities. Tricon is the world's largest QSR Company
measured by system units and, based on available industry data, the second
largest based on system sales. In terms of international locations, the Company
believes that, as of year-end 1997, its total of over 9,000 system units outside
the U.S. was second only to McDonald's Corporation. The Company has global scale
capabilities in marketing, advertising, purchasing and research and development
("R&D"). Tricon believes that its worldwide network of Company and franchise
operations provides a strong foundation from which to expand in existing
markets, enter new markets and launch new products and marketing campaigns. In
many countries and regions, the Company has the scale to use extensive
television advertising, an important factor in increasing brand awareness. The
Company's scale enables it to negotiate superior marketing promotions when
compared to many of its competitors.
Purchasing/Distribution Network. The Company is a substantial purchaser
of a number of food products, and it believes its scale purchasing capabilities
provide it with competitive advantages such as its ability to ensure a
consistent supply of high quality food, ingredients and other supplies at
attractive prices to all of its restaurant concepts. In 1996, to ensure reliable
sources, the Company consolidated most of its worldwide food and supply
procurement activities under a new organization now called Supply Chain
Management, which sources, negotiates contracts for and buys specified food and
supplies from hundreds of suppliers in over 70 countries and territories. Supply
Chain Management develops long-term relationships with key vendors. They monitor
market trends and seek to identify and capitalize on purchasing opportunities
that will enhance the Company's competitive position. The principal products
purchased include beef, cheese, chicken products, cooking oils, corn, flour,
lettuce, paper and packaging materials, pinto beans, pork, seasonings, soft
drink beverage products, and tomato products.
To ensure the wholesomeness of all food products, suppliers are required to
meet or exceed strict quality control standards. Long-term contracts and
long-term vendor relationships have been used to ensure availability of
products. The Company has also entered into commodity futures contracts traded
on national exchanges with the objective of reducing food costs. While such
hedging activity has historically been done on a limited basis, hedging activity
could increase in the future if the Company believes it would result in lower
total costs. The Company has not experienced any significant continuous
shortages of supplies. Prices paid for these supplies may be subject to
fluctuation; when prices increase, the Company may be able to pass on such
increases to its customers, although there is no assurance this can be done in
the future.
5
<PAGE>
Historically, many food products, paper and packaging supplies, and
equipment used in the operation of the Company's restaurants have been
distributed to individual Company units by PFS, which was PepsiCo's restaurant
distribution operation prior to its disposition in 1997 as described below. PFS
also sold and distributed these same items to many franchised and licensed units
that operate in the three restaurant systems, though principally to Pizza Hut
and Taco Bell franchised/licensed units in the United States. In May 1997, KFC,
Pizza Hut and Taco Bell entered into a five year Sales and Distribution
Agreement with PFS to distribute the majority of their food and supplies for
Company stores, subject to PFS maintaining certain performance levels. The Sales
and Distribution Agreement became effective upon the closing of the sale by
PepsiCo of the assets and business of PFS to AmeriServe Food Distribution, Inc.
("AmeriServe"), a subsidiary of Holberg Industries, Inc., pursuant to a
definitive agreement dated as of May 23, 1997, as amended. KFC, Pizza Hut, Taco
Bell and Tricon International have also entered into multi-year agreements with
Pepsi-Cola Company regarding the sale of Pepsi-Cola beverage products at Company
units.
Strong Cash Flow
The Company has generated significant cash flow from operating activities
of $810 million, $713 million and $813 million in 1997, 1996 and 1995,
respectively. The Company has also generated significant cash flow through its
global refranchising program ($770 million, $355 million and $165 million in
1997, 1996 and 1995, respectively) under which it sells Company restaurants to
current and new franchisees. This cash flow has allowed the Company to fund
investment in product innovation and quality, improved operating platforms
leading to improved service, store-level human resources including recruiting
and training, testing alternative modes of distribution and creative marketing
programs, as well as to reduce its indebtedness. During 1997, subsequent to the
Spin-off (October 6, 1997), the Company reduced outstanding indebtedness under
its revolving credit facility by $115 million and paid down its term loan by $32
million. The Company's primary investing activity has been funding capital
spending in excess of $1.8 billion in the aggregate over the last three years.
The Company believes that it will be able to continue to fund significant
capital spending despite the higher cash debt service costs related to its
post-October, 1997 debt capitalization.
Certain Core Competencies
Marketing. The Company believes that it has developed significant
advertising capabilities and has been able to generate substantial interest in
and excitement around its brands. Many of the Company's advertising campaigns
have been recognized in the past with awards acknowledging their creativity,
execution or achievements in creating or maintaining brand awareness. The
Company's size enables it to be a leading advertiser in the food service
industry, which it can leverage to achieve efficiency in national network
television advertising, supplemented with local market television advertising.
As an example, on a consolidated basis, the Company was, as of year-end 1997,
one of the top ten largest buyers of U.S. television network media time. Prior
to consolidation, each of the three Tricon brands ranked in the top 55 for this
purpose.
Tricon's four operating companies implement periodic promotions as they
deem appropriate or desirable in order to maintain and increase their sales and
unit profits. They also rely on radio, newspaper and other print advertising,
in-store point of purchase advertising, and direct mail and newspaper couponing
programs, to attract customers and encourage the purchase of their products. The
Company has developed and utilizes sophisticated marketing research techniques
to measure customer satisfaction and consumer trends.
6
<PAGE>
Quality Assurance. The Quality Assurance Departments at each of
Tricon's four operating companies help ensure that the systems' restaurants
provide high quality, wholesome food products in clean and safe environments.
The systems' restaurants are required to buy food supplies, ingredients,
seasonings, and equipment only from approved suppliers, who are required to meet
or exceed system standards designed to ensure product quality, safety and
consistency. From time to time, the Quality Assurance Departments inspect the
facilities of their suppliers and request samples for testing and other quality
control monitoring and measures. Many of these suppliers, such as poultry
producers, are also subject to some government inspection. In addition,
representatives of the Quality Assurance Departments visit restaurants from time
to time to ensure that food is properly stored, handled and prepared in
accordance with prescribed standards and specifications, as well as to provide
training in food safety and sanitation measures to the restaurant operators. The
Quality Assurance Departments are also responsible for remaining current on
issues related to food safety and interacting with regulatory agencies as may be
required or desirable on these matters.
United States Growth Opportunities
Tricon believes it has many opportunities to achieve growth in sales per
unit and distribution in its U.S. business due to the following:
Daypart Expansion. The Company's strengths in market research and R&D,
combined with underdeveloped dayparts (segments of each business day) in all
three core concepts provide an opportunity to increase the average sales per
unit. According to CREST, in 1997 in the U.S., almost two-thirds of KFC and
approximately three-quarters of Pizza Hut U.S. system store sales occurred
during the dinner occasion. At Taco Bell, approximately half of U.S. system
store sales occurred during the lunch occasion, with about 45 percent occurring
at dinner and the remainder during snacking hours.
Channel Expansion. The Company believes that significant growth
opportunities exist with respect to delivery services. The Company's products,
especially chicken and pizza, are well suited to delivery because their
relatively long holding times allow them to be delivered hot and ready to eat.
Today, Pizza Hut has a well-developed delivery system and 365 KFC units in the
U.S. currently offer some delivery services. In addition, the Company believes
there is opportunity to innovate with respect to the type of unit that best
meets consumer needs. Some of the alternative channels that are under
development include non-traditional units such as Taco Bell Express in venues
such as shopping malls, food courts, airports, gas and convenience stores, and
schools.
Multi-Branding. The Company is actively pursuing the strategy of
multi-branding, whereby two or more of its concepts are operated in a single
restaurant unit. As of year-end 1997, there were 349 system units housing more
than one concept. By combining two or more of its concepts in one location,
particularly those that have complementary daypart strengths, the Company
believes it can generate higher sales volumes from such units, significantly
improve returns on per unit investment, and enhance its ability to penetrate a
greater number of trade areas throughout the United States. Through the
consolidation of market planning initiatives across all three of its concepts,
the Company is establishing multi-year development plans by trade area to
optimize franchise and company penetration of all three brands and to improve
returns on its existing asset base. The Company intends to build approximately
thirty new multi-brand units in the U.S. during 1998. The Company currently
believes that there may be as many as 3,900 system multi-brand unit
opportunities in the U.S. The development of these units may be limited, in some
instances, by prior development and/or territory rights granted to franchisees.
7
<PAGE>
International Growth Opportunities
Focus on Key Growth Markets. Following the Spin-off, the Company
redirected its international ownership strategy to focus on building Company
stores in what it believes are high growth potential markets where it can more
efficiently leverage its scale, while increasing franchise penetration through
franchise development and refranchising in other international markets. As an
example, the Company has demonstrated considerable success in penetrating Asian
emerging markets with some of its highest volume stores in the world being
operated in China. In the future, the Company intends to focus a significant
portion of its new unit capital on this and other potential growth markets.
Underdeveloped Presence. Although the Company and its franchisees have
established a presence in 103 countries and territories, many of these countries
are still underpenetrated considering not only population size and growth, but
also per capita purchasing power. Even in countries which have populations with
similar per capita purchasing power, the ratio of stores per million people is
still far below that found in the U.S., and the Company believes there is
significant opportunity to leverage an increasing demand for convenient, fully
prepared foods.
Scale Advantages. Tricon International has the ability to leverage not only
the scale advantages of administration, purchasing and R&D; but also the
experience of the Company's U.S. operations to quickly identify new product
opportunities for local markets.
Human Resources and Management
The Company believes that high quality, customer-focused restaurant
management is critical to its long-term success. It also believes that its
leadership position, strong results-oriented and recognition culture, and
various training and incentive programs help attract and retain highly motivated
restaurant general managers ("RGMs") who are committed to providing superior
customer satisfaction and outstanding business results. The Company believes
that having a high quality restaurant manager in a unit for a meaningful tenure
is one of the most important factors in a unit's ability to achieve excellent
results in the areas of sales, profits and overall guest satisfaction.
The Company's restaurant management structure varies by concept and unit
size. Generally, each Company restaurant is led by an RGM, together with one or
more assistant managers, depending on the operating complexity and sales volume
of the restaurant. Each restaurant usually has between 10 and 35 hourly
employees, most of whom work part-time. The Company's four operating companies
each issue detailed manuals covering all aspects of their respective operations,
including food handling and product preparation procedures, safety and quality
issues, equipment maintenance, facility standards and accounting procedures. The
restaurant management teams are responsible for the day-to-day operation of each
unit and for ensuring compliance with operating standards. RGMs efforts are
monitored by area managers or market coaches, who work with approximately nine
to eleven restaurants. The Company's restaurants are visited from time to time
by various senior operators within their respective organizations to help ensure
adherence to system standards.
RGMs attend and complete their respective operating company's required
training programs. These programs consist of initial training, as well as
additional continuing development and training programs that may be offered or
required from time to time. Initial manager training programs generally last at
least six weeks and emphasize leadership, business management, supervisory
skills (including training, coaching, and recruiting), product preparation and
production, safety, quality control, customer service, labor management, and
equipment maintenance.
8
<PAGE>
Sale of Non-Core Concepts
In late 1996, the Company set a strategy to focus human and financial
resources on growing the sales and profitability of its three core QSR concepts
- -- KFC, Pizza Hut and Taco Bell. As a result, the non-core restaurant businesses
of California Pizza Kitchen, Chevys Mexican Restaurant, D'Angelo Sandwich Shop,
East Side Mario's and Hot 'n Now were sold in 1997. The operations of these five
non-core businesses were not material to the operations of the Tricon operating
companies.
Information about the five non-core businesses is included in Management's
Discussion and Analysis and the related Consolidated Financial Statements and
footnotes in Part II, Item 7, pages 18 through 36; and Part II, Item 8, pages 36
through 60, respectively, of this Form 10-K.
Trademarks
The Company has numerous registered trademarks and service marks. The
Company believes that many of these marks, including its Kentucky Fried
Chicken(R), Pizza Hut(R) and Taco Bell(R) trademarks, have significant value and
are materially important to its business. The Company's policy is to pursue
registration of its important trademarks whenever possible and to oppose
vigorously any infringement of its trademarks. The use of the Company's
trademarks by franchisees and licensees has been authorized in KFC, Pizza Hut
and Taco Bell franchise and license agreements. Under current law and with
proper use, the Company's rights in its trademarks can last indefinitely. The
Company also has certain patents on restaurant equipment, which, while valuable,
are not material to its business.
Working Capital Practices
Information about the Company's working capital practices is included in
Management's Discussion and Analysis in Part II, Item 7, pages 18 through 36 of
this Form 10-K.
Customers
The Company's business is not dependent upon a single customer or small
group of customers.
Seasonal Operations
The Company does not consider its operations to be seasonal to any material
degree.
Backlog Orders
Company restaurants have no backlog orders.
Government Contracts
No material portion of the Company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
United States government.
9
<PAGE>
Competition
The overall food service industry and the QSR segment are intensely
competitive with respect to food quality, price, service, convenience,
restaurant location and concept. The restaurant business is often affected by
changes in consumer tastes; national, regional or local economic conditions;
currency fluctuations; demographic trends; traffic patterns; the type, number
and location of competing restaurants; and disposable purchasing power. The
Company competes within each market with national and regional chains as well as
locally-owned restaurants, not only for customers, but also for management and
hourly personnel, suitable real estate sites and qualified franchisees.
Research and Development
The Company operates R&D facilities in Louisville, Kentucky, Dallas, Texas
and Irvine, California. In 1997, 1996 and 1995, the Company spent $21 million,
$20 million and $17 million, respectively, on R&D activities.
Government Regulation
United States. The Company is subject to various Federal, state and local
laws affecting its business. Each of the Company's restaurants must comply with
licensing and regulation by a number of governmental authorities, which include
health, sanitation, safety and fire agencies in the state or municipality in
which the restaurant is located. In addition, each of the Tricon operating
companies must comply with various state laws that regulate the franchisor/
franchisee relationship. To date, the Company has not been significantly
affected by any difficulty, delay or failure to obtain required licenses or
approvals.
As a result of the Spin-off and the Company's ensuing deficit in
shareholders' equity, the Tricon operating companies will be required in
approximately 15 states, for the first time, to obtain state registration of
their franchise offerings. Consequently, there may be short periods of time in
some or all of the affected states during which the planned sales of existing
units pursuant to the Company's refranchising program, and the issuance of new
franchises and licenses, will be delayed while this registration process is
proceeding. The Company intends to take all reasonable steps to accelerate this
registration process, and does not anticipate any material delays in unit sales
under its refranchising program as a result of the registration process.
However, if the delay in the registration process is longer than anticipated,
there is a risk that the Company's ability to sell the planned number of units
in 1998 under its refranchising program could be adversely affected.
A small portion of Pizza Hut's net sales is attributable to the sale of
beer and wine. A license is required in most cases for each site that sells
alcoholic beverages (in most cases, on an annual basis) and licenses may be
revoked or suspended for cause at any time. Regulations governing the sale of
alcoholic beverages relate to many aspects of restaurant operations, including
the minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages. The failure of a restaurant which sells alcoholic beverages
to obtain or retain these licenses may adversely affect such restaurant's
revenues and operating profits.
The Company is also subject to Federal and state minimum wage laws
governing such matters as overtime, tip credits and working conditions. Since
the bulk of the Company's employees are paid on an hourly basis at rates related
to the Federal minimum wage, increases in the minimum wage could significantly
increase the Company's labor costs.
The Company is also subject to Federal and state child labor laws which,
among other things, prohibit the use of certain "hazardous equipment" by
employees 18 years of age or younger. The Company has not to date been
materially adversely affected by such laws.
10
<PAGE>
The Company is subject to Federal, state and local environmental laws and
regulations; however, such requirements have not had a material effect on the
Company's operations. The Company continues to monitor its facilities for
compliance with the Americans With Disabilities Act ("ADA") in order to conform
to its requirements. Under the ADA, the Company could be required to expend
funds to modify its restaurants to better provide service to, or make reasonable
accommodation for the employment of, disabled persons. Such expenditures, if
required, would not have a material adverse effect on the Company's operations.
International. Internationally, the Company's restaurants are subject
to national and local laws and regulations which are similar to those affecting
the Company's domestic restaurants, including laws and regulations concerning
labor, health, sanitation and safety. The international restaurants are also
subject to tariffs and regulations on imported commodities and equipment and
laws regulating foreign investment. International compliance with environmental
requirements has not had a material adverse effect on the Company's earnings,
capital expenditures or competitive position.
Employees
At year-end 1997, the Company employed approximately 350,000 persons,
approximately 75 to 80 percent of whom were part-time employees. More than 60
percent of the Company's employees are employed in the United States. The
Company believes that it provides working conditions and compensation that
compare favorably with those of its principal competitors. Employees, other than
restaurant management and certain corporate employees, are paid on an hourly
basis. Less than 1 percent of the Company's U.S. employees are covered by
collective bargaining agreements. The Company's non-U.S. employees are subject
to numerous labor council relationships that vary due to the diverse cultures in
which the Company operates. The Company considers its employee relations to be
good.
(d) Financial Information about Foreign and Domestic Operations
Financial information about foreign and domestic markets is incorporated
herein by reference from Selected Financial Data, Management's Discussion and
Analysis and the related Consolidated Financial Statements and footnotes in Part
II, Item 6, page 17; Part II, Item 7, pages 18 through 36; and Part II, Item 8,
pages 36 through 60, respectively, of this Form 10-K.
Item 2. Properties.
As of year-end 1997, Tricon operating companies owned approximately 3,000
and leased approximately 4,800 restaurants, delivery/carryout units and other
food service units in the United States; and Tricon International owned
approximately 500 and leased approximately 1,800 additional units outside the
United States. Operating company restaurants in the United States which are not
owned are generally leased for initial terms of 15 or 20 years and generally
have renewal options; however, Pizza Hut delivery/carryout units in the United
States generally are leased for significantly shorter initial terms with short
renewal options. Joint ventures in which operating companies are partners and
other consolidated entities own or lease approximately 1,000 restaurants or
units outside the United States. Tricon leases Tricon International's and Pizza
Hut's corporate headquarters in Dallas, Texas. Taco Bell leases its corporate
headquarters in Irvine, California and KFC owns its corporate headquarters and a
research facility in Louisville, Kentucky. In addition, Tricon owns major office
facilities in Wichita, Kansas and leases an office facility for accounting
services in Albuquerque, New Mexico. The Wichita, Kansas facility is under
contract for sale during 1998, when primary operations conducted there are
relocated to Louisville, Kentucky and Dallas, Texas. Additional information
about the Company's properties is included in the Consolidated Financial
Statements and footnotes in Part II, Item 8, pages 36 through 60, of this Form
10-K.
11
<PAGE>
The Company believes that its properties are in good operating condition
and are suitable for the purposes for which they are being used.
Item 3. Legal Proceedings.
The Company is subject to various claims and contingencies related to
lawsuits, taxes, real estate, environmental and other matters arising out of the
normal course of business. The following is a brief description of the more
significant of these categories of lawsuits and other matters. The Company
believes that the ultimate liability, if any, in excess of amounts already
provided for, is not likely to have a material adverse effect on the Company's
annual results of operations, financial condition or cash flows.
Franchising
A substantial number of the Company's restaurants are franchised to
independent business people operating under arrangements with the Company. In
the course of the franchise relationship, occasional disputes arise between the
Company and its franchisees relating to a broad range of subjects, including,
without limitation, quality, service, and cleanliness issues, contentions
regarding grants, transfers or terminations of franchises, territorial disputes
and delinquent payments.
Employees
At any given time, the Company employs thousands of persons, including in
its restaurants. In addition, thousands of persons, from time to time, seek
employment with the Company and its restaurants. In the ordinary course of
business, disputes arise regarding employee hiring, compensation, termination
and promotion practices.
Like some other large retail employers, Taco Bell recently has been faced
with allegations of purported class-wide wage and hour violations. As stated
above, the Company believes that these cases are not material to the Company's
annual results, financial condition or cash flows.
Customers
The Company's restaurants serve a large and diverse cross-section of the
public and in the course of serving so many people, disputes arise regarding
products, service, accidents and other matters typical of large restaurant
systems such as those of the Company.
Trademarks
The Company has registered trademarks and service marks, many of which are
of material importance to the Company's business. From time to time, the Company
may become involved in litigation to defend and protect its use of such
registered marks.
12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Registrant
The executive officers of the Company as of March 19, 1998, and their ages
and current positions as of that date are as follows:
Name Age Position
---- --- --------
Andrall E. Pearson 72 Chairman of the Board and Chief Executive
Officer
David C. Novak 45 Vice Chairman of the Board and President
Robert C. Lowes 52 Chief Financial Officer
Christian L. Campbell 47 Senior Vice President, General Counsel and
Secretary
Robert L. Carleton 57 Senior Vice President and Controller
Jonathan D. Blum 39 Senior Vice President - Public Affairs
Gregg R. Dedrick 38 Chief People Officer
Sandra S. Wijnberg 41 Senior Vice President - Treasurer
Peter A. Bassi 48 President, Tricon Restaurants International
Jeffrey A. Moody 39 President and Chief Concept Officer, KFC U.S.A.
Michael S. Rawlings 43 President and Chief Concept Officer, Pizza Hut
U.S.A.
Peter C. Waller 43 President and Chief Concept Officer, Taco Bell
U.S.A.
Aylwin B. Lewis 43 Chief Operating Officer, Pizza Hut U.S.A.
Thomas E. Davin 40 Chief Operating Officer, Taco Bell U.S.A.
Charles E. Rawley, III 47 Chief Operating Officer, KFC U.S.A.
Andrall E. Pearson became Chairman of the Board of Tricon effective August
15, 1997, and Chief Executive Officer of Tricon effective October 21, 1997. Mr.
Pearson previously served as an operating partner of Clayton, Dubilier & Rice, a
leveraged buy-out firm, from 1993 to 1997. He was President and Chief Operating
Officer of PepsiCo, Inc. from 1971 through 1984 and served on PepsiCo's Board of
Directors for 26 years, retiring in April 1996. From 1985 to 1993 he was a
tenured professor at Harvard Business School. Mr. Pearson is also a member of
the Board of Directors of Tricon, as well as a member of the Boards of Alliant
Food Services, Inc., DBT On-Line, Inc., Kinko's, Inc., May Department Stores
Company, and Travelers Group Inc. He is also a trustee of the New York
University Medical Center and the Good Samaritan Medical Center in Palm Beach,
Florida.
13
<PAGE>
David C. Novak is Vice Chairman of the Board and President of Tricon. He
has served in this position since October 1997. Mr. Novak previously served as
Group President and Chief Executive Officer, KFC and Pizza Hut from August 1996
to July 1997. Mr. Novak joined Pizza Hut in 1986 as Senior Vice President,
Marketing. In 1990, he became Executive Vice President, Marketing and National
Sales, for Pepsi-Cola Company. In 1992 he became Chief Operating Officer,
Pepsi-Cola North America, and in 1994 he became President and Chief Executive
Officer of KFC North America.
Robert C. Lowes is Chief Financial Officer of Tricon. He has served in this
position since August 1997. From July 1995 to July 1997, Mr. Lowes served as
Chief Executive Officer of Burger King, a subsidiary of Grand Metropolitan, a
food and consumer products company. Before becoming Burger King's Chief
Executive Officer, Mr. Lowes held several positions with Grand Metropolitan,
including Deputy Chief Financial Officer, Chief Financial Officer of its Food
Sector, and Chief Executive Officer of its European Foods division. Mr. Lowes
joined Grand Metropolitan in 1989 from Philip Morris and General Foods, where he
served in a number of senior finance capacities, including Vice President,
Controller of Philip Morris, and Group Vice President and Chief Financial
Officer of Oscar Mayer.
Christian L. Campbell is Senior Vice President, General Counsel and
Secretary of Tricon. He has served in this position since September 1997. From
1995 to September 1997, Mr. Campbell served as Senior Vice President, General
Counsel and Secretary of Owens Corning, a building products company. Before
joining Owens Corning, Mr. Campbell served as Vice President, General Counsel
and Secretary of Nalco Chemical Company, in Naperville, Illinois, from 1990
through 1994.
Robert L. Carleton is Senior Vice President and Controller of Tricon. He
has served in this position since May 1997. Mr. Carleton previously served as
Senior Vice President and Controller for PepsiCo from August 1982 to August
1997.
Jonathan D. Blum is Senior Vice President - Public Affairs for Tricon. He
has served in this position since July 1997. Mr. Blum previously served as Vice
President of Public Affairs for Taco Bell U.S.A., a position that he held since
joining Taco Bell in 1993.
Gregg R. Dedrick is Chief People Officer for Tricon. He has served in this
position since July 1997. Mr. Dedrick previously served as Senior Vice
President, Human Resources, for Pizza Hut and KFC, a position he assumed in
1996. Mr. Dedrick joined Pepsi-Cola Company in 1981 and held various
personnel-related positions with Pepsi-Cola from 1981 to 1994. In 1994, he
became Vice President, Human Resources for Pizza Hut, and in 1995 he became
Senior Vice President of Human Resources for KFC.
Sandra S. Wijnberg is Senior Vice President and Treasurer of Tricon. She
has served in this position since August 1997. Ms. Wijnberg previously served as
Senior Vice President of Finance and Chief Financial Officer of KFC from May
1996 to August 1997. Ms. Wijnberg joined PepsiCo in 1994 and served as Vice
President, Corporate Finance and Assistant Treasurer until joining KFC. She was
previously a Principal, Investment Banking Division, of Morgan Stanley & Co.
from 1985 to 1994, and, prior to that, was an Associate, Corporate Finance, at
Shearson Lehman Brothers from 1982 to 1985.
Peter A. Bassi is President, Tricon Restaurants International since July
1997. Mr. Bassi served as Executive Vice President, Asia, of PepsiCo Restaurants
International from February 1996 to July 1997. He joined Pepsi-Cola Company in
1972 and served in various management positions at Frito-Lay, Pizza Hut and
PepsiCo Food Service International. He served as Senior Vice President, Finance
and Chief Financial Officer at Taco Bell from 1987 to 1994. From 1995 to 1996 he
served as Senior Vice President and Chief Financial Officer at PepsiCo
Restaurants International.
14
<PAGE>
Jeffrey A. Moody is President and Chief Concept Officer, KFC U.S.A. since
July 1997. Mr. Moody served as Senior Vice President, Operations, for PepsiCo
Restaurants International from November 1996 to June 1997. Previously, he was
Vice President, Operations for PepsiCo Restaurants International from June 1995
to November 1996. Mr. Moody joined Pizza Hut in 1987 and held various management
positions prior to those mentioned above.
Michael S. Rawlings is President and Chief Concept Officer, Pizza Hut U.S.A
since July 1997. From 1991 to 1996, Mr. Rawlings served as Chairman, President
and Chief Executive Officer of DDB Needham Worldwide Dallas Group, a position he
held following the merger of Tracy-Locke, Inc. into DDB Needham. Previously, Mr.
Rawlings was General Manager and Chief Operating Officer of Tracy-Locke, Inc., a
position he assumed in 1989.
Peter C. Waller is President and Chief Concept Officer, Taco Bell U.S.A.
since July 1997. Mr. Waller served as Senior Vice President of Marketing of Taco
Bell from December 1995 to June 1997. He previously held the position of Senior
Vice President of Marketing for KFC U.S.A. from August 1994 to December 1995. He
joined PepsiCo in 1990 as Managing Director for Western Europe, and subsequently
spent two years as Regional Marketing Director for KFC for the South Pacific and
South Africa.
Aylwin B. Lewis is Chief Operating Officer of Pizza Hut U.S.A. since July
1997. Mr. Lewis previously served as Senior Vice President, Operations for Pizza
Hut, a position he assumed in 1996. Mr. Lewis joined KFC in 1991 as a Regional
General Manager. He served in various positions at KFC, including Senior
Director of Franchising and Vice President of restaurant Support Services,
becoming Division Vice President, Operations for KFC in 1993, and Senior Vice
President, New Concepts for KFC in 1995.
Thomas E. Davin is Chief Operating Officer of Taco Bell U.S.A. since July
1997. Mr. Davin previously served as Vice President, Operations Services for
Taco Bell, a position he assumed in 1996. Mr. Davin joined Pepsi-Co in 1991 as
Director, Mergers and Acquisitions. He served as Zone Vice President for Taco
Bell from 1993 to 1996.
Charles E. Rawley, III is Chief Operating Officer of KFC U.S.A. Mr. Rawley
joined KFC in 1985 as a Director of Operations. He served as Vice President of
Operations for the Southwest, West, Northeast, and Mid-Atlantic Divisions from
1988 to 1994, when he became Senior Vice President, Concept Development for KFC.
Mr. Rawley assumed his current position in 1995.
Executive officers are elected annually by and serve at the discretion of
the Board of Directors.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Company's common stock trades under the symbol YUM and is listed on the
New York Stock Exchange.
The high, low and closing prices for a share of Tricon common stock on the
New York Stock Exchange, as reported by The Dow Jones News/Retrieval Service,
for the fourth quarter of 1997 (from the date of the Spin-off through the end of
the year) were $36.250, $27.875 and $28.313, respectively.
The number of shareholders of record of the Company's common stock as of
March 19, 1998 was 177,926.
15
<PAGE>
Under the terms of its bank credit facility, the Company is currently
limited in its ability to pay dividends on common stock. As a result, the
Company does not presently intend to pay dividends on its common stock, but
instead to use a portion of earnings to pay down existing debt under the bank
credit facility, and to reinvest remaining earnings back into the business.
16
<PAGE>
Item 6. Selected Financial Data.
- --------------------------------------------------------------------------------
Selected Financial Data
(in millions except share and unit amounts)
TRICON Global Restaurants, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------
Pro Forma(1) As Reported
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996 1995 1994(2) 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Summary of Operations
System sales (excluding Non-core Businesses)
U.S. $ 13,500 13,500 13,400 13,200 12,600 11,900
International 7,000 7,000 6,900 6,500 5,600 5,400
---------------------------------------------------------------------------
Total $ 20,500 20,500 20,300 19,700 18,200 17,300
---------------------------------------------------------------------------
Revenues
Company sales $ 8,846 9,112 9,738 9,813 9,170 8,118
Franchise and license fees 567 569 494 437 395 344
---------------------------------------------------------------------------
Total $ 9,413 9,681 10,232 10,250 9,565 8,462
---------------------------------------------------------------------------
Operating profit (3) $ 276 241 372 252 582 645
Interest expense, net 317 276 300 355 341 229
---------------------------------------------------------------------------
(Loss) income before income taxes(3) $ (41) (35) 72 (103) 241 416
Net (loss) income(3) $ (117) (111) (53) (132) 118 238
Pro forma Loss per common share(3) $ (.77) N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flow Data
Provided by operating activities $ 810 713 813 894 1,019
Capital spending $ 543 627 714 1,049 968
Refranchising of restaurants $ 770 355 165 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
Total assets $ 5,098 6,520 6,908 7,387 6,526
Working capital deficit $ (805) (778) (831) (909) (765)
Long-term debt $ 4,551 231 260 267 290
Total debt $ 4,675 290 404 395 416
Investments by and advances from PepsiCo $ - 4,266 4,604 4,962 4,366
- ------------------------------------------------------------------------------------------------------------------------------------
Other Data
Number of restaurants at year-end (excluding Non-core Businesses)
System 29,712 29,096 27,894 26,212 23,927
Company 11,207 12,883 13,466 13,209 11,230
U.S. Company same store sales growth
KFC 2% 6% 7% 2% -
Pizza Hut (1)% (4)% 4% (6)% 5%
Taco Bell 2% (2)% (4)% 2% 6%
Shares outstanding at year-end (in millions) 152 N/A N/A N/A N/A
Market price per share at year-end $ 28 5/16 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A - Not Applicable.
The historical consolidated financial data above includes TRICON Global
Restaurants, Inc. and Subsidiaries as if we had been an independent, publicly
owned company for all periods presented. The selected financial data should be
read in conjunction with the Consolidated Financial Statements and the Notes
thereto.
(1) The pro forma data is derived from the unaudited pro forma financial
information included in Note 16 to the Consolidated Financial Statements.
The pro forma data does not purport to represent what our results of
operations would have been had we operated as an independent, publicly
owned company nor does it give effect to any events other than those
described. The pro forma data also does not purport to project our results
of operations as of any future date or for any future period. The pro forma
data reflects adjustments to eliminate our Non-core Businesses disposed of
in 1997 and to reflect the estimated additional interest expense and
general, administrative and other expenses which we would have incurred as
an independent, publicly owned company.
(2) Fiscal year 1994 consisted of 53 weeks. The fifty-third week increased 1994
revenues by $172 and earnings by approximately $23 ($14 after-tax).
(3) Includes combined facility actions and unusual charges of $421 ($322
after-tax), $209 ($168 after-tax) and $402 ($295 after-tax) for 1997, 1996
and 1995, respectively. On a pro forma basis, 1997 includes combined
facility actions and unusual charges of $367 ($288 after-tax or $1.90 per
share). See Note 4 to the Consolidated Financial Statements.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
On October 6, 1997 (the "Spin-off Date"), the worldwide operations of KFC,
Pizza Hut and Taco Bell (the "Core Business(es)") became an independent,
publicly owned restaurant company known as TRICON Global Restaurants, Inc.
through a spin-off from our former parent, PepsiCo, Inc. (the "Spin-off"). See
Notes 2, 3 and 4. The Spin-off marked the beginning of a company focused solely
on the restaurant business and our three well-recognized brands which together
have more outlets worldwide than any other single quick service restaurant
("QSR") company. Separately, each brand ranks in the top ten among QSR chains
with regard to U.S. system sales and units. Internationally, our 9,000 plus
units make us the second largest QSR company outside the United States.
This Management's Analysis is structured in four major sections. The first
section provides an overview and focuses on items that either significantly
impact comparability or are anticipated to significantly impact future operating
results. The second analyzes results of operations; first on a consolidated
basis and then separately for our U.S. and international businesses. The final
sections address consolidated cash flows and financial condition. Discussion of
certain market risks and our cautionary statements follow these major sections.
This Management's Analysis should be read in conjunction with the
Consolidated Financial Statements on pages 36-60 and the Cautionary Statements
on page 35. All note references herein refer to the Notes to the Consolidated
Financial Statements on pages 41-60. Tabular amounts are displayed in millions
except per share and unit count amounts, or as specifically identified. All pro
forma earnings per share calculations assume that the 152 million shares issued
at Spin-off had been outstanding for all periods presented.
Worldwide Marketplace
Our worldwide businesses operate in highly competitive markets that are
subject to both global and local economic conditions, including the effects of
inflation, commodity price and currency fluctuations, governmental actions and
political instability and its related dislocations. Our operating and investing
strategies are designed, where possible, to mitigate these factors through
focused actions on several fronts, including: (a) enhancing the appeal and value
of our products through brand promotion, product innovation, quality improvement
and prudent pricing actions; (b) providing excellent service to customers; (c)
increasing worldwide availability of our products; (d) forming alliances to
increase market presence and utilize resources more efficiently; and (e)
containing costs through efficient and effective purchasing, distribution and
administrative processes.
In 1997, as a percentage of our Core Businesses, our international business
accounted for 34% of system sales, almost 25% of Company revenues, and 22% of
operating profit before unallocated expenses, foreign exchange losses, facility
actions and unusual charges. We believe that, despite the inherent risks and
generally higher general and administrative costs of operations, key
international markets will continue to be high priority investment targets due
to their substantial growth potential. It is, therefore, important to consider
that movements in currency exchange rates not only result in a related
translation impact on our earnings, but also can result in significant economic
impacts that affect operating results. Changes in exchange rates are often
linked to variability in real growth, inflation, interest rates, governmental
actions and other factors. In addition, material changes may cause us to adjust
our financing, investing and operating strategies; for example, promotions and
product strategies, pricing and decisions concerning capital spending, sourcing
of raw materials and packaging (see discussion on Asia below). The following
paragraphs describe the effect of currency exchange rate movements on our
reported results.
18
<PAGE>
As currency exchange rates change, translation of the income statements of
our international businesses into U.S. dollars affects year-over-year
comparability of operating results. Material effects on comparability of sales
and operating profit arising from translation are identified in Management's
Analysis of operating results. By definition, these translation effects exclude
the impact of businesses in highly inflationary countries, where the accounting
functional currency is the U.S. dollar.
Changes in currency exchange rates can also result in reported foreign
exchange gains and losses, which are included as a component of general,
administrative and other expenses. We reported a net foreign exchange loss of
$16 million in 1997, $5 million in 1996 and $1 million in 1995. These reported
amounts include translation gains and losses arising from remeasurement into
U.S. dollars of the monetary assets and liabilities of businesses in highly
inflationary countries as well as transaction gains and losses. Transaction
gains and losses arise from monetary assets such as receivables and short-term
interest-bearing investments as well as payables (including debt) denominated in
currencies other than a business unit's functional currency.
Asian Economic Events
Asian operations in such countries as China, Japan, Korea, Singapore and
Thailand, among others, comprised approximately 37% of our international system
sales for 1997. The economic turmoil and weakening of currencies throughout much
of Asia against the U.S. dollar during 1997 has created a difficult retail
environment and has had an adverse effect on our operating results beginning
late in 1997. Despite this, we will continue to seek out investment
opportunities in certain parts of Asia. Lessons learned, in the recent past, in
other countries such as Mexico in 1996 and 1995 have helped us identify
opportunities to mitigate the impact of these economic events. These include
working with our suppliers to reduce costs and increasing the value of our
product offerings. The complexities of the international environment in which we
operate make it difficult to accurately predict the ongoing effect of foreign
currency movements on results of operations. Related effects will be reported in
our financial statements as they become known and are estimable.
Selected highlights of our recent operating results in Asia are as follows:
<TABLE>
<CAPTION>
1997 % B(W) (a) 1996
Amount vs. 1996 Amount
------------ ---------------- -----------
<S> <C> <C> <C>
Revenues $ 509 24 $ 412
% of Total International 22% 18%
Operating Profit $ 92 6 $ 87
% of Total International, exclusive of facility actions net loss and
unusual charges 54% 57%
</TABLE>
(a) % B(W) as used above and throughout this Management's Analysis means %
Better (Worse).
Year 2000
We have established an enterprise-wide program to prepare our computer
systems and applications for the Year 2000. We are utilizing both internal and
external resources to identify, correct and test the systems for Year 2000
issues. We anticipate that the majority of domestic reprogramming will be
complete by December 1998, and testing efforts will be concluded in the first
quarter of 1999. TRICON Restaurants International has initiated a program to
assess and correct computer systems for the Year 2000 in five major
international markets. We intend to distribute this program to all other
international markets in early 1998. We anticipate that business-critical
international systems will be reprogrammed and tested by June 1999.
19
<PAGE>
Because third party failures could have a material impact on our ability to
conduct business, confirmations are being requested from our processing vendors
and suppliers to certify that plans are being developed to address the Year 2000
issues. An assessment of our franchisee readiness is also in process. We
anticipate that in the second quarter of 1998, information will be provided to
all franchisees regarding the potential business risks associated with the Year
2000 issues.
Testing and conversion of systems and applications is expected to cost
$40-$45 million from 1997 through 1999. Of these costs, approximately $4 million
had been incurred by year-end 1997 and approximately $35 million is expected to
be incurred in 1998. All costs are expected to be funded by cash flows from
operations.
Though the benefits of the fourth quarter unusual charge, discussed below,
are expected to be significant, we expect that they will be offset in the near
term by the negative impact of fluctuations in Asian currencies and incremental
spending related to Year 2000 issues.
Other Factors Affecting Comparability
In addition to the above identified near-term risks in our Asian businesses
and costs related to Year 2000 issues, we believe that certain items included in
1997 results of operations are either unlikely to recur in 1998 or are expected
to recur in significantly different magnitudes, thereby affecting future
comparability of results. These items, more fully described in the appropriate
sections of Management's Analysis, include the $24 million in special KFC
franchise contract renewal fees primarily from renewals in the first half of
1997, which will not recur in 1998. In addition, 1998 total facility actions
after-tax net gain is expected to be approximately half of the level of the
after-tax net gain recognized in 1997, excluding the fourth quarter charge, due
to the inclusion in the second quarter of 1997 of the tax-free gain of $100
million related to the refranchising of our restaurants in New Zealand through
an initial public offering. During 1997, the non-core businesses, defined below,
generated approximately $10 million ($8 million after-tax) of income before
unusual charges through their dates of disposal in 1997 which will not recur.
As more fully discussed in Notes 3 and 16, we believe that our ongoing
corporate unallocated annual general and administrative expenses as an
independent, publicly owned entity will exceed the annualized amount of the
PepsiCo allocation by approximately $20 million. This expected increase will be
partially offset by non-recurring TRICON start-up costs of approximately $14
million which were incurred in the last three quarters of 1997. Our net interest
expense is expected to be $40 million to $50 million higher in 1998, driven by
the higher outstanding debt levels and higher expected weighted average interest
rates. The increased general and administrative and interest expenses will
primarily be incurred over the first three quarters of 1998.
Subsequent to year-end, we agreed to sell our shared services facility in
Wichita, Kansas. We will relocate most of our Wichita operations to Dallas,
Texas and Louisville, Kentucky. Although we anticipate a gain on the sale when
the transaction closes, currently scheduled for the fourth quarter of 1998, the
majority of the relocation and other costs related to the decision will be
incurred in earlier quarters of 1998. The full year net impact of the sale and
relocation is expected to be immaterial.
Store Portfolio Perspectives
In the fourth quarter, we announced a $530 million unusual charge ($425
million after-tax). See Note 4. The charge included (1) costs of closing
underperforming stores during 1998, primarily at Pizza Hut and internationally;
(2) reduction to fair market value, less costs to sell, of the carrying amounts
of restaurants we intend to refranchise in 1998; (3) impairment of certain
restaurants intended to be used in the business; (4) impairment of certain joint
venture investments; and (5) related personnel reductions. The components of the
charge were as follows:
20
<PAGE>
Store closure costs $ 213
Refranchising losses 136
Impairment charges for stores to be
used in the business 61
-----------
Total facility actions net loss 410
-----------
Impairment of investment in
unconsolidated affiliates 79
Severance and other 41
-----------
Total unusual charges 120
-----------
Total fourth quarter charges $ 530
-----------
The charge is largely non-cash and is expected to have a favorable impact
on future cash flows and operating profits. We believe our worldwide business,
upon completion of the actions covered by the charge, will be significantly more
focused and better positioned to deliver consistent growth in operating earnings
before facility actions.
For more than two 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 concepts' overall
operational performance, while retaining Company ownership of key markets. This
portfolio-balancing activity has, 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, thereby improving returns. We have also actively closed
underperforming units. Restaurant margins and cash flows benefit from the
one-time impact of refranchising gains and the ongoing impact of closing
underperforming Company units. The impact of refranchising gains is expected to
decrease over time.
As a result of our initiatives, coupled with new points of distribution
added by our franchisees and licensees, our overall Company percentage
(including joint venture units) of our Core Businesses' total system units
declined by 6 percentage points from 44% at year-end 1996 to 38% at year-end
1997. We refranchised 1,418 and 659 Company units in 1997 and 1996,
respectively. In addition, we closed 661 and 352 Company units in 1997 and 1996,
respectively, and have approved for closure an additional 697 units at year-end
1997. Total system units grew 2% and 4% in 1997 and 1996, respectively, driven
by new points of distribution added by our franchisees and licensees. As we
approach a Company/franchise balance more consistent with our major competition,
refranchising activity is expected to substantially decrease.
Results of Operations
Comparability
On an overall basis, we lost $111 million in 1997 or $.73 per basic share.
In the context of our Spin-off, comparisons of results of operations for the
year are complex. The fourth quarter charge and the significant level of other
facility actions, including the second quarter refranchising through an initial
public offering of our restaurants in New Zealand, represent significant items
which complicate year-over-year comparisons. In addition, the disposal of our
non-core businesses in 1997 adds complexity.
Our historical financial statements are also impacted by our lack of
history as an independent, publicly owned company. Therefore, the amounts for
certain items such as general and administrative expenses, interest expense and
income taxes, included in our historical reported results for periods prior to
the Spin-off, represent allocations or computations which are not indicative of
the results of operations, financial position and cash flows as if we had been
an independent, publicly owned company during all periods presented. See Notes
2, 3, 4 and 16. In addition, the separation agreement entered into in connection
with the Spin-off specifies that PepsiCo shall make a final determination
regarding the net assets of the restaurant businesses transferred to us at the
Spin-off Date. This determination has been preliminarily completed, but is
subject to our agreement.
21
<PAGE>
The accompanying Consolidated Financial Statements reflect our estimates, based
on available information, of the net assets that should be transferred. The
final approved determination could vary from these estimates. Any changes are
not expected to materially affect future net income.
Additionally, comparative information is impacted by the operations of and
disposal charges related to our non-core restaurant businesses. These disposal
charges included an estimated provision for all expected future liabilities
associated with the disposal of the non-core businesses which we were required
to retain as part of the Spin-off. Actual amounts incurred may ultimately differ
from these estimates. California Pizza Kitchen, Chevys Mexican Restaurant,
D'Angelo Sandwich Shop, East Side Mario's and Hot `n Now (collectively, the
"Non-core Businesses") were sold prior to the Spin-off Date.
Following is a summary of the impacts on our operating results of the
operations and disposal of the Non-core Businesses:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ 268 $ 394 $ 297
% of total revenues 3% 4% 3%
Non-core Businesses operating profit (loss), excluding
disposal and impairment charges 13 (10) (42)
Impairment charges 120
Unusual disposal charges 54 246
Net loss $ (26) $ (200) $ (116)
</TABLE>
The impact of the operations and sale of the Non-core Businesses are more
fully discussed in Note 16. To facilitate comparability of future operating
results, the following analysis of historical results of operations concentrates
on Core Businesses only except where specifically noted.
22
<PAGE>
Worldwide -- Core Business Only
<TABLE>
<CAPTION>
1997
--------------------------------
% B(W) vs. % B(W) vs.
Total Adjusted (1) 1996 (2) 1996 1995
------------ ----------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
SYSTEM SALES $ 20,465 1 $ 20,280 3
============ ============
REVENUES
Company sales $ 8,846 (5) $ 9,347 (2)
Franchise and license fees 567 15 491 13
------------ ------------
Total Revenues $ 9,413 (4) $ 9,838 (1)
============ ============
COMPANY RESTAURANT MARGIN
Domestic $ 777 3 $ 756 (10)
International 242 2 237 8
------------ ------------
Total $ 1,019 3 $ 993 (7)
============ ============
% of sales 11.5% .9 points 10.6% (.6 points)
OPERATING PROFIT
Ongoing operating profit $ 649 $ 649 10 $ 591 (15)
Facility actions net (loss) gain (247) 163 NM 37 NM
Unusual charges (120) NM NM
------------ ----------------- ------------
Operating profit 282 812 29 628 52
INTEREST & INCOME TAXES
Interest expense, net 273 273 7 295 16
Income tax provision 94 199 (7) 186 NM
------------ ----------------- ------------
Net (Loss) Income $ (85) $ 340 $ 193 $ 147 $ 163
============ ================= ============
Pro forma (loss) earnings per basic
share $ (.56) $ 2.24 NM $ .97 NM
============ ================ ===========
</TABLE>
(1) Excluding the effects of the fourth quarter charge.
(2) Computed based on adjusted amounts, if applicable.
NM - Not Meaningful
- --------------------------------------------------------------------------------
WORLDWIDE RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
Joint
Company Venture Franchised Licensed Total
---------------- ---------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 30, 1995 12,540 926 11,901 2,527 27,894
New Builds & Acquisitions 342 86 779 1,039 2,246
Refranchising & Licensing (659) 640 19 -
Closures (347) (5) (254) (438) (1,044)
---------------- ---------- -------------- ------------ -------------
Balance at Dec. 28, 1996 11,876 1,007 13,066 3,147 29,096
New Builds & Acquisitions 280 123 972 731 2,106
Refranchising & Licensing (1,407) (11) 1,410 8 -
Closures (632) (29) (351) (478) (1,490)
---------------- ---------- -------------- ------------ -------------
Balance at Dec. 27, 1997 10,117(a) 1,090 15,097 3,408 29,712
================ ========== ============== ============ =============
</TABLE>
(a) Includes 697 units approved for closure but not yet closed at December 27,
1997.
- --------------------------------------------------------------------------------
23
<PAGE>
System sales, which represents the combined sales of the Company, joint
venture, franchised and licensed units, increased $185 million or 1% in 1997.
Excluding the negative impact of foreign currency translation, system sales
increased by $525 million or 3%. The increase before the effects of foreign
currency translation reflected the development of new units, primarily by
franchisees and licensees. Domestic development was primarily at Taco Bell and
international development was primarily in Asia. This growth in system sales was
partially offset by store closures. The 1996 increase of $548 million or 3% in
system sales related to new unit growth in franchised and licensed operations
and new Company units, primarily in international markets. The overall system
sales growth was partially offset by store closures.
Revenues decreased $425 million or 4% in 1997. Company sales decreased $501
million or 5% in 1997. The decrease was driven primarily by fewer Company units
as a result of our refranchising initiatives and store closures. This decline
was partially offset by higher effective net pricing. Franchise and license fees
increased $76 million or 15% in 1997 primarily due to an increased number of
franchised units, an increase in continuing fees related to our refranchising
activities and renewal fees received under a special KFC U.S. franchise contract
renewal. This increase in franchise and license fees was partially offset by the
unfavorable effects of foreign currency translation.
Total revenues decreased $114 million or 1% in 1996 primarily attributable
to a decline of $172 million, or 2%, in Company sales, partially offset by a 13%
increase in franchise and license fees. The decrease in Company sales was driven
by volume declines, partially due to lapping the strong volume increases in 1995
resulting from the successful introduction of Stuffed Crust Pizza by Pizza Hut
in the U.S. The decline also reflects unfavorable impact of fewer U.S. Company
units in 1996 as compared to 1995 as a result of our refranchising initiatives
and store closures. These declines were partially offset by higher effective net
pricing, improved same store sales at KFC in the domestic market and new Company
units, primarily in international markets. The increase in franchise and license
fees in 1996 primarily reflected new franchise and license units and the
continuing franchise fees from refranchised restaurants.
Restaurant Margin - Worldwide
1997 1996 1995
-------------- -------------- ---------------
Company sales 100.0% 100.0% 100.0%
Food and paper 32.4 33.1 33.0
Payroll and employee
benefits 28.5 28.5 28.2
Occupancy and other
operating expenses 27.6 27.8 27.6
-------------- -------------- ---------------
Restaurant margin 11.5% 10.6% 11.2%
============== ============== ===============
Company restaurant margins as a percent of sales increased 90 basis points
for 1997. The increase in restaurant margin in 1997 was partially driven by
effective net pricing in excess of increased costs, primarily labor. The other
primary factor impacting margin was the positive impact of refranchising and
closing underperforming units which contributed about 60 basis points of the
improvement. This margin increase was partially offset by lower overall
transactions. 1997 also benefited from lower commodity costs primarily related
to favorable cheese and chicken prices.
Company restaurant margins decreased in 1996, primarily attributable to
increased costs, primarily labor. In addition, lower volumes contributed to the
decline in margin. These decreases were partially offset by higher effective net
pricing, reduced depreciation and amortization relating to the impairment
charges previously taken and the positive impact of refranchising and closing
underperforming units.
24
<PAGE>
General, Administrative and Other Expenses
% B(W) vs. % B(W) vs.
1997 1996 1996 1995
------------ ------------- ------------ -------------
Domestic $ 556 (1) $ 548 (10)
International 289 (6) 273 (7)
Unallocated 92 (30) 71 (45)
------------ ------------
$ 937 (5) $ 892 (11)
============ ============
General, administrative and other expenses ("G&A") includes general and
administrative expenses, other income and expense, equity income or loss from
investments in unconsolidated affiliates and foreign exchange gains and losses.
Included in the unallocated G&A is a PepsiCo allocation amount of $37
million, $53 million and $52 million in 1997 (through the Spin-off Date), 1996
and 1995, respectively, reflecting a portion of PepsiCo's shared administrative
expenses. The amounts of PepsiCo's administrative expenses allocated to us by
PepsiCo were based on PepsiCo's total corporate administrative expenses using
the ratio of our revenues to PepsiCo's revenues. We believe that this basis of
allocation was reasonable based on the facts available at the date of such
allocation. Based on our current analysis, we also believe that the G&A expenses
we would have incurred as an independent, publicly owned company would have been
approximately $20 million higher than the annualized allocation from PepsiCo.
The $45 million or 5% increase in G&A in 1997 reflected increased
investment spending, TRICON start-up costs, higher incentive compensation,
increased litigation-related costs and higher foreign exchange losses.
Investment spending consisted primarily of costs related to improving and
updating administrative systems, including initial spending on Year 2000 issues,
as well as investments during 1997 in certain key international markets. These
higher expenses were partially offset by the lapping of a reorganization charge
that Pizza Hut took in 1996, overall lower project spending and field overhead,
particularly at Pizza Hut, and the favorable impact of divested units.
The $89 million or 11% increase in G&A in 1996 reflected increased
spending, led by multiple U.S. initiatives to improve customer service and to
support growth in our principal international markets. Customer service
initiatives included expanding the number and training of personnel supervising
the restaurant managers, as well as project spending against market-related
programs.
Facility Actions Net Loss (Gain)
1997
----------------------
Excluding
4th Quarter
Total Charge 1996 1995
--------- ----------- -------- ---------
Refranchising gains, net $ (112) $ (248) $ (139) $ (93)
Store closure costs 248 35 40 38
Impairment charges for stores
to be used in the
business 111 50 62 337
--------- ----------- -------- ---------
Facility actions net loss (gain) $ 247 $ (163) $ (37) $ 282
========= =========== ======== =========
25
<PAGE>
Refranchising gains, which included initial franchise fees of $41 million,
$22 million and $8 million in 1997, 1996 and 1995, respectively, as well as a
$100 million tax-free gain from refranchising our restaurants in New Zealand
through an initial public offering, arose from the refranchising of 1,418,
659 and 264 units in 1997, 1996 and 1995, respectively.
Store closure costs are provided upon management's decision to close a
unit. These costs included the estimated cost of closing an additional 697 units
approved for closure in 1997, which were not yet closed at December 27, 1997. We
closed 661, 352 and 267 units in 1997, 1996 and 1995, respectively.
Impairment charges in 1997 of $50 million and in 1996 of $62 million
resulted from our semi-annual impairment evaluations of each restaurant which
will continue to be used in the business that initially met our "two-year
history of operating losses" primary impairment indicator or due to other
changes in circumstances. The $337 million charge in 1995 was related to 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" ("SFAS 121"), which we believe requires periodic impairment
evaluations at the restaurant level. Previously, impairment was evaluated and
measured if a restaurant concept was incurring operating losses and was expected
to incur operating losses in the future.
Operating Profits
% B(W) vs. % B(W) vs.
1997 1996 1996 1995
----------- ---------- ---------- ---------
Domestic $ 605 17 $ 516 (17)
International 170 13 151 26
Foreign exchange losses (16) NM (5) NM
Unallocated expenses (110) (55) (71) (45)
----------- ----------
Ongoing operating profit $ 649 10 $ 591 (15)
=========== ==========
NM - Not Meaningful
Exclusive of the fourth quarter charge and other facility actions,
operating profits increased $58 million or 10% in 1997. Excluding the negative
impact of unfavorable currency translation, the increase in operating profit was
$67 million or 11%. This increase in 1997 relates primarily to higher franchise
fees and improved restaurant margins, partially offset by an increase in
unallocated expenses primarily reflecting an increase in general, administrative
and other expenses.
Operating profits, exclusive of facility actions, decreased $103 million or
15% in 1996. The decrease in 1996 is due primarily to an increase in general,
administrative and other expenses and a decline in restaurant margins, partially
offset by higher franchise fees.
Interest Expense, Net
Prior to the Spin-off, our operations were financed through operating cash
flows, refranchising activities and investments by and advances from PepsiCo. At
the Spin-off Date, a bank credit agreement replaced the financing previously
provided by PepsiCo and, additionally, funded a dividend to PepsiCo. See Notes 3
and 9. Our interest expense includes an allocation by PepsiCo of its interest
expense (PepsiCo's weighted average interest rate applied to the average balance
of investments by and advances from PepsiCo) and interest on our external debt
for all periods prior to the Spin-off. We believe such allocated interest
expense is not indicative of the interest expense that we would have incurred as
an independent, publicly owned company or will incur in future periods. See Note
16. Subsequent to the Spin-off Date, our interest cost consists primarily of
interest
26
<PAGE>
expense related to our bank credit agreement and interest on other third party
debt, including capital leases, most of which existed at the Spin-off Date.
Interest expense decreased in 1997 primarily due to the lower outstanding
amount of PepsiCo-provided financing. Such impact is partially offset by the
higher interest rate on our bank credit agreement, as compared to the PepsiCo
rate used in the allocation process, and also higher outstanding debt levels.
Interest expense decreased in 1996 primarily due to the lower outstanding
amount of PepsiCo-provided financing and a lower weighted average interest rate
than in 1995.
Income Taxes
For periods prior to the Spin-off, income tax expense was calculated, to
the extent possible, as if we filed income tax returns separate from PepsiCo. As
PepsiCo managed its tax position on a consolidated basis, which takes into
account the results of all its businesses, our effective tax rate in the future
could vary significantly from our calculated historical effective tax rates. Our
future effective tax rate will largely depend on our structure and tax
strategies as an independent, publicly owned company.
Income Taxes and Effective Tax Rate
1997 1996 1995
------------- ----------- -------------
Core Business Actual
Income taxes $ 94 $ 186 $ 77
Effective tax rate NM 55.9% NM
Ongoing*
Income taxes $ 205 $ 186 $ 170
Effective tax rate 46.7% 55.9% 45.1%
* Adjusted to exclude the effects of the 1997 fourth quarter charge, the 1997
$100 million tax-free gain associated with the New Zealand initial public
offering and the initial impact of adopting SFAS 121 in 1995. See Note 4.
NM - Not Meaningful
The following reconciles the U.S. Federal statutory tax rate to our ongoing
effective rate:
1997 1996 1995
----------- -------- --------
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal
tax benefit 4.5 2.6 2.3
Foreign and U.S. tax effects
attributable to foreign operations 5.5 16.3 6.6
Other, net 1.7 2.0 1.2
----------- -------- --------
Ongoing effective tax rate 46.7% 55.9% 45.1%
=========== ======== ========
The 1997 ongoing effective tax rate decreased 9.2 points to 46.7%. The
decrease in the 1997 ongoing effective tax rate was primarily due to the
decrease in taxes attributable to foreign operations, partially offset by an
increase in state taxes. The foreign decrease was due to the absence of the
adjustment recorded in 1996 to establish a valuation allowance, which is more
fully described below, as well as a decrease in adjustments related to prior tax
years. The increase in state tax was primarily due to an increase in adjustments
related to prior tax years.
27
<PAGE>
The increase in the 1996 ongoing effective tax rate related to an increase
in taxes attributable to foreign operations, due in part to adjustments related
to prior tax years, and the establishment of a valuation allowance due to a
change in judgement as to the expected realization of certain foreign deferred
tax assets resulting from a larger than expected net operating loss during 1996
and forecasted continuing operating losses for the next several years in a
foreign jurisdiction.
The effective tax rate attributable to foreign operations varied from
year-to-year but in each year was higher than the U.S. Federal statutory tax
rate. This was primarily due to foreign tax rate differentials, including
foreign withholding tax paid without benefit of the related foreign tax credit
for U.S. income tax purposes and losses of foreign operations for which no tax
benefit could be currently recognized.
Earnings (Loss) Per Share
The components of basic earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Core Businesses operating earnings $ 1.34 $ .83 $ 1.29
Fourth quarter charge (2.80)
Other facility actions net gain (loss) .90 .14 (1.40)
------------- ------------ -------------
Core Businesses net (loss) earnings per share (.56) .97 (.11)
Non-core Businesses operating earnings (loss) .05 (.08) (.22)
Non-core Businesses facility actions net loss and unusual
charges (.22) (1.24) (.54)
------------- ------------ -------------
Net loss per share $ (.73) $ (.35) $ (.87)
============= ============ =============
</TABLE>
Domestic -- Core Business Only
<TABLE>
<CAPTION>
1997 1996
----------------------------- -------------------------------
% B(W) vs. % B(W) vs.
Amount 1996 Amount 1995
------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
SYSTEM SALES $ 13,502 1 $ 13,388 1
============ ============
REVENUES
Company sales $ 6,728 (7) $ 7,224 (5)
Franchise and license fees 367 20 306 15
------------ ------------
Total Revenues $ 7,095 (6) $ 7,530 (4)
============ ============
COMPANY RESTAURANT MARGIN $ 777 3 $ 756 (10)
============ ============
% of sales 11.6% 1.1 points 10.5% (.6 points)
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
U.S. RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
Company Franchised Licensed Total
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at Dec. 30, 1995 10,087 7,484 2,340 19,911
New Builds & Acquisitions 185 263 966 1,414
Refranchising & Licensing (609) 598 11 -
Closures (267) (108) (414) (789)
-------------- -------------- ------------ -------------
Balance at Dec. 28, 1996 9,396 8,237 2,903 20,536
New Builds & Acquisitions 141 324 731 1,196
Refranchising & Licensing (1,199) 1,191 8 -
Closures (516) (155) (475) (1,146)
-------------- -------------- ------------ -------------
Balance at Dec. 27, 1997 7,822(a) 9,597 3,167 20,586
============== ============== ============ =============
</TABLE>
(a) Includes 540 units approved for closure, but not yet closed at December 27,
1997.
System sales increased $114 million or 1% in 1997 primarily reflecting
higher volumes from new unit activity, principally by franchisees and licensees
at Taco Bell, partially offset by closure of underperforming units.
The 1996 increase of $189 million or 1% in system sales primarily related
to new unit growth in franchised and licensed operations. The overall system
sales growth was reduced by store closures.
Revenues decreased $435 million or 6% in 1997 primarily due to Company
sales decreases of $496 million or 7%. The decrease was driven primarily by
fewer Company units, primarily at Pizza Hut and Taco Bell, as a result of our
refranchising initiative and store closures. The decline was partially offset by
higher overall effective net pricing. This pricing impact occurred primarily at
Taco Bell, which exceeded lower prices at Pizza Hut.
Franchise and license fees increased $61 million or 20% in 1997 primarily
due to an increase in continuing fees related to our refranchising activities
and new unit development at Pizza Hut and Taco Bell and to renewal fees of $24
million under a special KFC franchise contract renewal. Substantially all of
KFC's franchisees renewed their franchise agreements, typically for 20-years,
during 1997. As part of the special renewal program at KFC, certain
participating franchisees also committed to attain over the next several years
certain facility standards based on physical assessment of that franchisee's
restaurants. We believe such upgrades of the franchised facilities will
ultimately result in higher system sales and, therefore, higher franchise fees.
Same store sales are measured for our U.S. Company units. Same store sales
at KFC increased 2% in 1997 driven by product promotions, favorable effective
net pricing and increased delivery sales, partially offset by lower transaction
counts. Same store sales at Pizza Hut decreased 1% for 1997, rebounding from a
7% decline through the second quarter. At Pizza Hut, lower average guest checks
in 1997 and decreasing transaction counts in the first half of the year were
partially offset in the second half by quality initiatives, increasing
transaction counts and the introduction of "The Edge" Pizza. Taco Bell same
store sales increased 2% in 1997 reflecting the successful Star Wars and Batman
promotions, favorable product mix shifts and pricing, offset by lower
transaction counts.
29
<PAGE>
Total 1996 revenues decreased $335 million or 4% primarily due to Company
sales decreases of $374 million or 5%. The decrease was driven by volume
declines, partially due to lapping the second quarter 1995 introduction of
Stuffed Crust Pizza, and the unfavorable impact of fewer Company units due to
refranchisings and closures. These declines were partially offset by higher
effective net pricing. Same store sales decreased 4% and 2% in 1996 at Pizza Hut
and Taco Bell, respectively, reflecting lower transaction counts. KFC's same
store sales increased 6% in 1996 due primarily to the impact of new products
such as Tender Roast Chicken, Colonel's Crispy Strips and Chunky Chicken Pot
Pies.
Franchise and license fees increased $39 million or 15% in 1996 due
primarily to an increase in the number of franchised and licensed units from new
unit development, primarily at Taco Bell, and our refranchising activities.
Restaurant Margin - Domestic
1997 1996 1995
--------- ---------- --------
Company sales 100.0% 100.0% 100.0%
Food and paper 31.1 32.1 32.3
Payroll and employee
benefits 30.3 30.0 29.5
Occupancy and other
operating expenses 27.0 27.4 27.1
========= ========== ========
Restaurant margin 11.6% 10.5% 11.1%
========= ========== ========
The increase in margin of 110 basis points in 1997 was driven almost
equally by effective net pricing in excess of increased costs, primarily labor,
and the positive impact of closing and refranchising lower-margin units at Pizza
Hut and Taco Bell. This improvement was partially offset by the effect of
reduced transaction counts. The increased labor costs were due to the increased
minimum wage in the U.S. and to costs incurred to improve customer satisfaction,
partially offset by favorable actuarial adjustments to workers' compensation
liabilities. In 1997, we also benefited from lower commodity costs primarily
related to favorable cheese and chicken prices.
The margin decrease in 1996 was attributable to increased costs, primarily
labor, and lower volumes. These impacts were partially offset by higher
effective net pricing, reduced depreciation and amortization relating to the
SFAS 121 charges previously taken and the positive impact of refranchising and
closing underperforming units.
Operating profits for domestic operations, exclusive of the fourth quarter
charge and other facility actions were $605 million, $516 million and $624
million for 1997, 1996 and 1995, respectively. The increase of $89 million or
17% in 1997 was due primarily to higher franchise fees and improved restaurant
margins, partially offset by an increase in general, administrative and other
expenses.
The decrease in 1996 of $108 million or 17% was due to a decrease in
restaurant margins and an increase in general, administrative and other
expenses.
30
<PAGE>
International - Core Business Only
1997 1996
----------------------- -------------------------
% B(W) vs. % B(W) vs.
Amount 1996 Amount 1995
---------- ----------- ---------- ------------
SYSTEM SALES $ 6,963 1 $ 6,892 6
========== ==========
REVENUES
Company sales $ 2,118 * $ 2,123 11
Franchise and license fees 200 8 185 11
---------- -----------
Total Revenues $ 2,318 * $ 2,308 11
========== ===========
COMPANY RESTAURANT MARGIN $ 242 2 $ 237 8
========== ============
% of sales 11.4% .2 points 11.2% (.3 points)
*Less than 1%.
INTERNATIONAL RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
Joint
Company Venture Franchised Licensed Total
-------------- ------------ --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 30, 1995 2,453 926 4,417 187 7,983
New Builds & Acquisitions 157 86 516 73 832
Refranchising & Licensing (50) 42 8 -
Closures (80) (5) (146) (24) (255)
-------------- ------------ --------------- ------------ ----------
Balance at Dec. 28, 1996 2,480 1,007 4,829 244 8,560
New Builds & Acquisitions 139 123 648 910
Refranchising & Licensing (208) (11) 219 -
Closures (116) (29) (196) (3) (344)
-------------- ------------ --------------- ------------ ----------
Balance at Dec. 27, 1997 2,295 (a) 1,090 5,500 241 9,126
============== ============ =============== ============ ==========
</TABLE>
(a) Includes 157 units approved for closure, but not yet closed at December 27,
1997.
System sales increased $71 million or 1% in 1997. Exclusive of the negative
impact of foreign currency translation, system sales increased $411 million or
6% in 1997. This growth was driven by new unit development, partially offset by
store closures. Franchisee activity drove system unit development with
approximately 50% of that activity occurring in Asia. The increase of $359
million in 1996 primarily represented new unit growth by franchisees.
Revenues increased $10 million or less than 1% in 1997. Exclusive of the
negative impact of foreign currency translation, revenues increased $86 million
or 4%. This increase relates primarily to higher effective net pricing, new unit
development in Asia and an increase in franchise fees attributable to
development offset by store closures. Company sales in 1997 decreased $5 million
or less than 1%. Exclusive of the negative impact of foreign currency
translation, Company sales increased $66 million or 3%. This increase was driven
primarily by higher effective net pricing and unit development partially offset
by the effect of refranchising our restaurants in New Zealand through an initial
public offering in the second quarter. Franchise and license fees
31
<PAGE>
increased $15 million or 8% in 1997 primarily from new unit development and
restaurants refranchised in New Zealand and Canada.
Revenues increased $221 million or 11% in 1996. Increases in Company sales
of $202 million or 11% were driven by the favorable impact of additional Company
units, higher effective net pricing and increased volumes. The increase in
franchise and license revenue of $19 million or 11% in 1996 primarily reflected
new unit development.
Restaurant Margin - International
1997 1996 1995
-------- -------- ---------
Company sales 100.0% 100.0% 100.0%
Food and paper 36.5 36.3 35.7
Payroll and employee benefits 22.7 23.2 23.3
Occupancy and other operating expenses 29.4 29.3 29.5
-------- -------- ---------
Restaurant margin 11.4% 11.2% 11.5%
======== ======== =========
The improvement in margin in 1997 was primarily due to effective net
pricing in excess of cost increases, primarily labor, offset by volume declines.
Foreign currency translation and portfolio activity did not have a significant
impact on restaurant margin. The 30 basis point decrease in 1996 over 1995
reflected increases in variable costs partially offset by effective net pricing
and the reduced depreciation and amortization relating to SFAS 121 charges
previously taken.
Operating profits, exclusive of the fourth quarter charge and other
facility actions, were $170 million, $151 million and $120 million for 1997,
1996 and 1995, respectively. The increase of $19 million or 13% in 1997 was
primarily driven by new units, higher restaurant margins and increased franchise
fees, partially offset by an increase in general, administrative and other
expenses and the unfavorable effect of currency translation. Exclusive of the
unfavorable effect of currency translation, the increase in 1997 operating
profit was $28 million or 19%.
The increase in 1996 of $31 million or 26% reflected net additional Company
units, increased volumes and reduced depreciation and amortization relating to
the SFAS 121 charges previously taken, partially offset by an increase in
general, administrative and other expenses and restaurant margin declines.
Consolidated Cash Flows
(Including Core and Non-core Businesses)
Graph: Net Cash Provided by Operating Activities and Refranchising of
Restaurants vs. Capital Spending
1997 1996 1995
---------- ---------- ----------
Net cash provided by operating activities $ 810 $ 713 $ 813
Refranchising of restaurants 770 355 165
---------- ---------- ----------
$ 1,580 $ 1,068 $ 978
========== ========== ==========
Capital spending $ 541 $ 620 $ 701
========== ========== ==========
32
<PAGE>
Net cash provided by operating activities increased $97 million or 14% to
$810 million in 1997. This was driven by an increase in net income prior to
facility actions net loss and unusual charges recorded in 1997 and an increase
in our normal working capital deficit primarily related to higher income tax
payables. These increases were partially offset by reduced depreciation and
amortization in 1997. The decrease in depreciation and amortization related to
refranchisings and store closures and to lower asset costs due to impairment
charges.
Net cash provided by operating activities in 1996 decreased $100 million or
12% to $713 million. The decrease was due to reduced income before non-cash
charges and credits of $76 million and a $24 million decline in our working
capital deficit. The decline in our working capital deficit was primarily due to
an unfavorable swing in income taxes payable partially offset by faster growth
in accounts payable and other current liabilities and a favorable swing in
inventories. The change in accounts payable and other current liabilities was
primarily due to timing of payments.
Net cash provided by investing activities increased $715 million to $466
million in 1997 compared to net cash used by investing activities of $249
million and $597 million in 1996 and 1995, respectively. The 1997 increase was
primarily attributable to an increase in proceeds from refranchising of
restaurants of $415 million over 1996 and the proceeds from the sale of the
Non-core Businesses of $186 million. Capital spending decreased by $79 million
or 13%. The decline in net cash used for investing activities in 1996 of $348
million or 58% related to an increase in the proceeds from refranchising
activities of $190 million and a reduction in capital spending of $81 million in
1996, which reflected a slow down of new unit development as part of our
initiative to reduce our percentage ownership of total system units.
Net cash used for financing activities more than doubled in 1997 to $1.1
billion, primarily reflecting the net payments to PepsiCo, partially offset by
the bank borrowings in connection with the Spin-off. This net use was partially
offset by the increase in short-term borrowings of $83 million in 1997 versus a
decrease of $80 million in 1996 and payments on the Revolving Credit Facility.
Net cash used for financing activities in 1996 nearly doubled to $422
million primarily reflecting debt payments in 1996 compared to proceeds in 1995
and net cash payments to PepsiCo.
Financing Activities
Our initial debt funding was a $5.25 billion bank credit agreement
comprised of a $2 billion senior, unsecured Term Loan Facility and a $3.25
billion senior, unsecured Revolving Credit Facility which mature on October 2,
2002. Interest is based principally on the London Interbank Offered Rate
("LIBOR") plus a variable margin as defined in the credit agreement. As of
December 27, 1997, $1.97 billion and $2.44 billion were outstanding on the Term
Loan and Revolving Credit Facility, respectively, and we had $692 million in
unused revolving credit capacity, net of Letters of Credit of $123 million. The
credit facilities are subject to various affirmative and negative covenants
including financial covenants as well as limitations on additional indebtedness
including guarantees of indebtedness, cash dividends, aggregate non-U.S.
investments, among other things, as defined in the credit agreement.
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.
33
<PAGE>
At year-end 1997, we were in compliance with the above noted covenants, and
we will continue to closely monitor on an ongoing basis the various operating
issues that could, in aggregate, affect our ability to comply with financial
covenant requirements. Such issues include the ongoing economic issues faced by
much of Asia as well as the intensely competitive nature of the QSR industry.
A key component of our financing philosophy is to build balance sheet
liquidity and to diversify sources of funding. Consistent with that philosophy,
which was discussed with our lenders during syndication of the Term Loan
Facility and Revolving Credit Facility, we have taken steps to refinance a
portion of our existing bank credit facility. In that regard, in 1997 we filed
with the Securities and Exchange Commission a shelf registration statement on
Form S-3 with respect to an offering of $2 billion of senior unsecured debt. We
may offer and sell from time to time debt securities in one or more series, in
amounts, at prices and on terms to be determined by market conditions at the
time of sale, as discussed in more detail in the registration statement. We
currently intend to use the net proceeds from an expected issuance and sale of
debt securities offered under this shelf registration to reduce term debt under
the above-referenced bank credit agreement and for general corporate purposes.
During 1998, we intend to reduce our reliance on bank debt by up to $1 billion
through a combination of proceeds from the debt securities offered under this
shelf registration, proceeds from refranchising activities and a reduction in
unused credit facilities.
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. Subsequent to year-end 1997, we have entered into treasury
lock agreements to partially hedge the anticipated issuance of our senior debt
securities discussed above. We have also entered into an interest rate
arrangement to limit the range of interest rates on a portion of our variable
rate bank debt. Other derivative instruments may be considered from time to time
as well to manage our debt portfolio and to hedge foreign currency exchange
exposures.
We believe that cash flows from our ongoing refranchising initiatives and
our operating activities will be sufficient to support our capital spending and
to service our debt.
Consolidated Financial Condition
(Including Core and Non-core Businesses)
Assets decreased $1.4 billion or 22% to $5.1 billion at year-end 1997. The
decline was principally due to the fourth quarter charge, refranchising and
store closures and the disposal of the Non-core Businesses, partially offset by
an increase in cash.
Liabilities increased $4.4 billion to $6.7 billion at year-end 1997
primarily reflecting the $4.55 billion borrowing under our bank credit
agreement, partially offset by a lower net deferred tax liability. The lower net
deferred tax liability results primarily from the higher deferred tax assets
principally related to the fourth quarter charge.
Our operating working capital deficit, which excludes short-term
investments, short-term borrowings and non-core assets held for disposal, is
typical of restaurant operations where the majority of sales are for cash. The
modest $27 million increase in our operating working capital deficit to $805
million at year-end 1997 primarily reflected an increase in current liabilities
related to the fourth quarter charge.
34
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Derivative Instruments
Our policy prohibits the use of derivative instruments for trading purposes
and we have procedures in place to monitor and control their use. Our current
use of derivative instruments is primarily limited to interest rate swaps and
commodity futures contracts.
Interest rate swaps are entered into with the objective of converting
variable to fixed rate debt thereby reducing volatility in borrowing costs. In
1997, we entered into interest rate swaps to effectively convert a portion of
our variable rate bank debt to fixed rate. Payment dates and the floating rates
on the swaps match those of the underlying bank debt. Our credit risk related to
interest rate swaps is dependent upon both the movement in interest rates and
the possibility of non-payment by swap counterparties. We mitigate credit risk
by only entering into the swap agreements with high credit-quality
counterparties and netting swap payments within each contract.
Commodity futures contracts traded on national exchanges are entered into
with the objective of reducing food costs. While this hedging activity has
historically been limited, hedging activity could increase in the future if we
believe it would result in lower total costs. Open contracts, deferred gains and
losses and realized gains and losses were not significant for all years
presented.
Market Risk
Our primary market risk exposure with regard to financial instruments is to
changes in interest rates, principally in the United States. In addition, a
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 December 27, 1997, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $33 million in annual pre-tax
earnings. The estimated reduction is based upon the unhedged portion of our
variable rate debt and assumes no change in the volume or composition of debt at
December 27, 1997. In addition, the fair value of our interest rate derivative
contracts would increase approximately $25 million. Fair value was determined by
discounting the projected interest rate swap cash flows.
Cautionary Statements
From time to time, in both written reports and oral statements, we present
"forward-looking statements" within the meaning of Federal and state securities
laws, including those identified by such words as "may," "will," "expect,"
"believe," "plan" and other similar terminology. These "forward-looking
statements" reflect our current expectations and are based upon data available
at the time of the statements. Actual results involve risks and uncertainties,
including both those specific to the Company and those specific to the industry,
and could differ materially from expectations.
Company risks and uncertainties include but are not limited to the lack of
experience of our management group in operating the Company as an independent,
publicly owned business; potentially substantial tax contingencies related to
the Spin-off, which, if they occur, require us to indemnify PepsiCo; our
substantial debt leverage and the attendant potential restriction on our ability
to borrow in the future, as well as the substantial interest expense and
principal repayment obligations; potential unfavorable variances between
estimated and actual liabilities both as contained in the PepsiCo-prepared
balance sheet for the restaurant businesses as of the Spin-off Date and related
to the sale of the Non-core Businesses; third party failures to
35
<PAGE>
achieve timely, effective Year 2000 remediation; and the potential inability to
identify qualified franchisees to purchase Company restaurants at prices we
consider appropriate under our strategy to reduce the percentage of system units
we operate.
Industry risks and uncertainties include, but are not limited to, global
and local business and economic and political conditions; legislation and
governmental regulation; competition; success of operating initiatives and
advertising and promotional efforts; volatility of commodity costs and increases
in minimum wage and other operating costs; availability and cost of land and
construction; adoption of new or changes in accounting policies and practices;
consumer preferences, spending patterns and demographic trends; political or
economic instability in local markets; and currency exchange rates.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL INFORMATION
Item 8 (a) (1) - (2)
Page Reference
----------------
Item 8 (a) (1) Financial Statements
Consolidated Statement of Operations for the fiscal
years ended December 27, 1997, December 28,
1996 and December 30, 1995 37
Consolidated Statement of Cash Flows for the fiscal
years ended December 27, 1997, December 28,
1996 and December 30, 1995 38
Consolidated Balance Sheet at December 27, 1997 and
December 28, 1996 39
Consolidated Statement of Shareholders' (Deficit)
Equity for the fiscal years ended December 27,
1997, December 28, 1996 and December 30, 1995 40
Notes to Consolidated Financial Statements 41
Management's Responsibility for Financial Statements 61
Report of Independent Auditors, KPMG Peat Marwick LLP 62
Item 8 (a) (2) Financial Statement Schedules
No schedules are required because either the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the above listed
financial statements or the notes thereto.
36
<PAGE>
Consolidated Statement of Operations
(in millions)
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996 and December 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Company sales $ 9,112 $ 9,738 $ 9,813
Franchise and license fees 569 494 437
------------- ------------ --------------
9,681 10,232 10,250
------------- ------------ --------------
Costs and Expenses, net
Company restaurants
Food and paper 2,949 3,215 3,242
Payroll and employee benefits 2,614 2,793 2,784
Occupancy and other operating expenses 2,494 2,711 2,713
------------- ------------ --------------
8,057 8,719 8,739
General, administrative and other expenses 962 932 857
Facility actions net loss (gain) 247 (37) 402
Unusual charges 174 246
------------- ------------ --------------
Total costs and expenses, net 9,440 9,860 9,998
------------- ------------ --------------
Operating Profit 241 372 252
Interest expense, net 276 300 355
------------- ------------ --------------
(Loss) Income Before Income Taxes (35) 72 (103)
Income Tax Provision 76 125 29
------------- ------------ --------------
Net Loss $ (111) $ (53) $ (132)
============= ============ ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
Consolidated Statement of Cash Flows
(in millions)
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996 and December 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows - Operating Activities
Net loss $ (111) $ (53) $ (132)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization 536 621 671
Facility actions net loss (gain) 247 (37) 402
Unusual charges 174 246
Deferred income taxes (138) (150) (233)
Other non-cash charges and credits, net 65 73 68
Changes in operating working capital, excluding effects of acquisitions and
dispositions
Accounts and notes receivable (22) (16) (12)
Inventories 3 27 (22)
Prepaid expenses, deferred income taxes and other current assets (2) 10
Accounts payable and other current liabilities 13 85 25
Income taxes payable 43 (81) 36
--------- ----------- ----------
Net change in operating working capital 37 13 37
--------- ----------- ----------
Net Cash Provided by Operating Activities 810 713 813
--------- ----------- ----------
Cash Flows - Investing Activities
Capital spending (541) (620) (701)
Refranchising of restaurants 770 355 165
Sales of non-core businesses 186
Sales of property, plant and equipment 40 45 43
Other, net 11 (29) (104)
--------- ----------- ----------
Net Cash Provided by (Used for) Investing Activities 466 (249) (597)
--------- ----------- ----------
Cash Flows - Financing Activities
Proceeds from Term Loan Facility 2,000
Proceeds from Revolving Credit Facility 2,550
Payments on Revolving Credit Facility (115)
Payments of long-term debt (65) (57) (17)
Short-term borrowings-three months or less, net 83 (80) 25
Decrease in investments by and advances from PepsiCo (3,281) (285) (226)
Dividend to PepsiCo (2,369)
Other, net 59
--------- ----------- ----------
Net Cash Used for Financing Activities (1,138) (422) (218)
--------- ----------- ----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (7) 1 (2)
--------- ----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 131 43 (4)
Cash and Cash Equivalents - Beginning of Year 137 94 98
--------- ----------- ----------
Cash and Cash Equivalents - End of Year $ 268 $ 137 $ 94
========= =========== ==========
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 64 $ 34 $ 48
Income taxes paid 210 325 253
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
38
<PAGE>
Consolidated Balance Sheet
(in millions)
TRICON Global Restaurants, Inc. and Subsidiaries
December 27, 1997 and December 28, 1996
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 268 $ 137
Short-term investments, at cost 33 50
Accounts and notes receivable, less allowance: $20 in 1997 and $9 in 1996 149 125
Inventories 73 88
Prepaid expenses, deferred income taxes and other current assets 160 229
Non-core assets held for disposal 333
----------- -----------
Total Current Assets 683 962
Property, Plant and Equipment, net 3,261 4,050
Intangible Assets, net 812 1,100
Investments in Unconsolidated Affiliates 143 228
Other Assets 199 180
----------- -----------
Total Assets $ 5,098 $ 6,520
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current Liabilities
Accounts payable and other current liabilities $ 1,260 $ 1,200
Income taxes payable 195 157
Short-term borrowings 124 59
----------- -----------
Total Current Liabilities 1,579 1,416
Long-term Debt 4,551 231
Other Liabilities and Deferred Credits 555 434
Deferred Income Taxes 33 200
----------- -----------
Total Liabilities 6,718 2,281
----------- -----------
Shareholders' (Deficit) Equity
Preferred stock, no par value, 250 shares authorized; no shares issued
Common stock, no par value, 750 shares authorized; 152 shares issued and outstanding
in 1997 1,271
Investments by and advances from PepsiCo 4,266
Accumulated deficit (2,763)
Currency translation adjustment (128) (27)
----------- -----------
Total Shareholders' (Deficit) Equity (1,620) 4,239
----------- -----------
Total Liabilities and Shareholders' (Deficit) Equity $ 5,098 $ 6,520
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE>
Consolidated Statement of Shareholders' (Deficit) Equity
(in millions)
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 27, 1997, December 28, 1996 and December 30, 1995
<TABLE>
<CAPTION>
Issued
Common Stock Investments by Currency
----------------------- Accumulated and Advances Translation
Shares Amount Deficit from PepsiCo Adjustment Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - $ - $ - $ 4,962 $ 40 $ 5,002
----------------------------------------------------------------------------------------
Net investments by and advances
from PepsiCo (226) (226)
Currency translation adjustment (69) (69)
Net loss (132) (132)
----------------------------------------------------------------------------------------
Balance at December 30, 1995 4,604 (29) 4,575
----------------------------------------------------------------------------------------
Net investments by and advances
from PepsiCo (285) (285)
Currency translation adjustment 2 2
Net loss (53) (53)
----------------------------------------------------------------------------------------
Balance at December 28, 1996 4,266 (27) 4,239
----------------------------------------------------------------------------------------
Net investments by and advances
from PepsiCo (1,150) (1,150)
Net income prior to Spin-off 283 283
Spin-off dividend and partial
repayment of advances (2,369) (2,131) (4,500)
Issuance of shares of common
stock, no par value, in
connection with the Spin-off 152 -
Contribution to capital of
remaining unpaid advances 1,268 (1,268) -
Stock option exercises 3 3
Currency translation adjustment (101) (101)
Net loss after Spin-off (394) (394)
----------------------------------------------------------------------------------------
Balance at December 27, 1997 152 $ 1,271 $ (2,763) $ - $ (128) $ (1,620)
========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
40
<PAGE>
Notes to Consolidated Financial Statements
(tabular amounts in millions, except share data)
Note 1 - Description of Business
TRICON Global Restaurants, Inc. and Subsidiaries (collectively referred to
as "TRICON" or the "Company") is the world's largest quick service restaurant
company based on the number of system units, with more than 29,000 restaurants
in 103 countries and territories. References to TRICON throughout these
Consolidated Financial Statements are made using the first person notations of
"we" or "our." The worldwide business of our core concepts, KFC, Pizza Hut and
Taco Bell, include the operations, development, franchising, and licensing of a
system of both traditional and non-traditional quick service restaurant units
featuring dine-in, carryout, and in some instances drive-thru or delivery
service. Each concept has proprietary menu items and emphasizes the preparation
of food with high quality ingredients as well as unique recipes and special
seasonings to provide appealing, tasty, and attractive food at competitive
prices. We also previously operated other non-core concepts disposed of in 1997,
which included California Pizza Kitchen ("CPK"), Chevys Mexican Restaurant
("Chevys"), D'Angelo Sandwich Shop ("D'Angelo"), East Side Mario's ("ESM") and
Hot `n Now ("HNN") (collectively, the "Non-core Businesses"). As of year-end
1997, 38% of total worldwide units were operated by us or international joint
ventures in which we participate and 62% by our franchisees and licensees.
Approximately 31% of our system units are located outside the United States.
Three years ago, we determined that the system should be rebalanced toward
franchising and that underperforming units should be closed and, to that end,
over 2,300 units have been refranchised and 1,300 units have been closed through
December 27, 1997. We expect to continue to develop new Company and franchised
units both domestically and internationally and to continue to refranchise
existing Company restaurants.
On October 6, 1997 (the "Spin-off Date"), we became a publicly owned
company via a tax-free distribution of our Common Stock (the "Distribution" or
"Spin-off") to the shareholders of our former parent, PepsiCo, Inc. ("PepsiCo").
A description of the Spin-off and certain transactions with PepsiCo is included
in Note 3.
Note 2 - Summary of Significant Accounting Policies
Preparation of the accompanying Consolidated Financial Statements in
conformity with generally accepted accounting principles requires us to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from our estimates.
Principles of Consolidation and Basis of Preparation. The accompanying
Consolidated Financial Statements present our financial position, results of
operations and cash flows as if we had been an independent, publicly owned
company for all periods presented. Certain allocations of previously unallocated
PepsiCo interest and general and administrative expenses, as well as
computations of separate tax provisions, have been made to facilitate such
presentation. See Note 3. The Consolidated Financial Statements prior to October
6, 1997 represent the former combined worldwide operations of KFC, Pizza Hut and
Taco Bell and the Non-core Businesses disposed of in 1997. Intercompany accounts
and transactions have been eliminated. Investments in unconsolidated affiliates
in which we exercise significant influence but do not control are accounted for
by the equity method, and our share of the net income or loss of our
unconsolidated affiliates and foreign exchange losses is included in general,
administrative and other expenses.
Fiscal Year. Our fiscal year ends on the last Saturday in December and, as
a result, a fifty-third week is added every five or six years. Fiscal years
1997, 1996 and 1995 comprise 52 weeks. The first, second and third quarters of
each year include 12 weeks each, while the fourth quarter includes 16 weeks.
41
<PAGE>
Direct Marketing Costs. Direct marketing costs are reported in occupancy
and other operating expenses in the Consolidated Statement of Operations and
include costs of advertising and other marketing activities. Direct marketing
costs are charged to expense ratably in relation to revenues over the year in
which incurred. Advertising expenses were $544 million, $571 million and $570
million in 1997, 1996 and 1995, respectively.
Research and Development Expenses. Research and development expenses, which
are expensed as incurred, were $21 million, $20 million and $17 million in 1997,
1996 and 1995, respectively.
Stock-Based Employee Compensation. As permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), we measure stock-based employee compensation cost for financial statement
purposes in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations
("APB Opinion No. 25") and include pro forma information in Note 13.
Accordingly, compensation cost for the stock option grants to our employees is
measured as the excess of the quoted market price of our common stock at the
grant date over the amount the employee must pay for the stock. Our policy is to
generally grant stock options at the fair market value of the underlying common
stock at the date of grant.
Loss per Common Share. Historical loss per share has been omitted since we
were not an independent, publicly owned company with a capital structure of our
own for any of the fiscal years presented in the accompanying Consolidated
Statement of Operations.
Net loss per share for the fourth quarter of 1997, included in Note 18, is
computed by dividing the net loss by the weighted average number of shares
outstanding. In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options.
Additionally, the dilutive effects of options are not included when losses from
continuing operations exist.
Derivative Instruments. From time to time, we utilize interest rate swaps
to hedge our exposure to fluctuations in variable interest rates. The interest
differential to be paid or received on an interest rate swap is recognized as an
adjustment to interest expense as the differential occurs. The interest
differential not yet settled in cash is reflected in the accompanying
Consolidated Balance Sheet as a receivable or payable under the appropriate
current asset or liability caption. If an interest rate swap position was to be
terminated, the gain or loss realized upon termination would be deferred and
amortized to interest expense over the remaining term of the underlying debt
instrument it was intended to modify or would be recognized immediately if the
underlying debt instrument was settled prior to maturity.
Gains and losses on futures contracts that are designated and effective as
hedges of future commodity purchases are deferred and included in the cost of
the related raw materials when purchased. Changes in the value of futures
contracts that we use to hedge commodity purchases are highly correlated to the
changes in the value of the purchased commodity. If the degree of correlation
between the futures contracts and the purchase contracts were to diminish such
that the two were no longer considered highly correlated, subsequent changes in
the value of the futures contracts would be recognized in income.
Cash and Cash Equivalents. Cash equivalents represent funds temporarily
invested (with original maturities not exceeding three months) as part of
managing day-to-day operating cash receipts and disbursements.
Inventories. Inventories are valued at the lower of cost (computed on the
first-in, first-out method) or net realizable value.
42
<PAGE>
Property, Plant and Equipment. Property, plant and equipment ("PP&E") are
stated at cost less accumulated depreciation and amortization, except for PP&E
that have been impaired, for which the carrying amount is reduced to estimated
fair market value which becomes the new cost basis. Depreciation and
amortization is calculated on a straight-line basis over the estimated useful
lives of the assets as follows: 5 to 25 years for buildings and improvements and
3 to 20 years for machinery and equipment. Depreciation and amortization expense
was $460 million, $521 million and $555 million in 1997, 1996 and 1995,
respectively.
Intangible Assets. Intangible assets include both identifiable intangibles
and goodwill arising from the allocation of purchase prices of businesses
acquired. Amounts assigned to identifiable intangibles are based on independent
appraisals or internal estimates. Goodwill represents the residual purchase
price after allocation to all identifiable net assets. Intangible assets are
stated at historical allocated cost less accumulated amortization, except for
intangibles that have been impaired, for which the carrying amount is reduced to
estimated fair market value which becomes the new cost basis. Intangible assets
are amortized on a straight-line basis as follows: 20 years for reacquired
franchise rights, 3 to 34 years for trademarks and other identifiable
intangibles and 20 years for goodwill. Amortization expense was $70 million, $95
million and $109 million in 1997, 1996 and 1995, respectively.
Impairment of Long-Lived Assets to be Held and Used in the Business. We
review our long-lived assets related to each restaurant to be held and used in
the business semi-annually for impairment, or whenever events or changes in
circumstances indicate that the carrying amount of a restaurant may not be
recoverable. We evaluate restaurants using a "two-year history of operating
losses" as our primary indicator of potential impairment. An impaired restaurant
is written down to its estimated fair market value based on the best information
available. We generally measure estimated fair market value by discounting
estimated future cash flows. Considerable management judgment is necessary to
estimate discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
Impairment of Investments in Unconsolidated Affiliates and
Enterprise-Level Goodwill. Our methodology for determining and measuring
impairment of our investments in unconsolidated affiliates and enterprise-level
goodwill was changed in 1996 to conform with the methodology we use for our
restaurants except (a) the recognition test for an investment in an
unconsolidated affiliate compares the carrying amount of the investment to a
forecast of our share of the unconsolidated affiliate's undiscounted cash flows
including interest and taxes, compared to undiscounted cash flows before
interest and taxes used for restaurants and (b) enterprise-level goodwill is
evaluated at a country level instead of by individual restaurant. The change in
methodology had no impact in 1996. Also, impairment charges related to
investments in unconsolidated affiliates are recorded when other circumstances
indicate that a decrease in value of the investment has occurred which is other
than temporary.
Pre-opening Costs. Costs associated with opening a new restaurant are
expensed as incurred.
Refranchising Gains (Losses). Refranchising gains (losses) include gains or
losses on sales of Company restaurants to new and existing franchisees and the
related initial franchise fees. Direct administrative costs of refranchising are
included in the gain or loss calculation. Gains on restaurant refranchisings are
recognized when the sale transaction closes, the franchisee has a minimum amount
of the purchase price in at-risk equity and we are satisfied that the franchisee
can meet its financial obligations. Otherwise, refranchising gains are deferred
until those criteria have been met. Losses on restaurant refranchisings are
recognized when a decision is made to refranchise a store within the next twelve
months and the estimated fair value less costs to sell is less than the carrying
amount of the store.
43
<PAGE>
Store Closure Costs. Store closure costs are recognized when a decision is
made to close a restaurant within the next twelve months. Store closure costs
include the cost of writing-down (impairing) the carrying amount of a
restaurant's assets to estimated fair market value less costs of disposal, and
the net present value of any remaining operating lease payments after the
expected closure date, net of estimated sub-lease income.
Franchise and License Fees. Franchise or license agreements are executed
for each point of distribution and provide the terms of the arrangement with the
franchisee/licensee. The franchise and certain license agreements require the
franchisee/licensee to pay an initial, non-refundable fee. The agreements also
require continuing fees based upon a percentage of sales. Subject to franchisor
approval and payment of a renewal fee, a franchise agreement may generally be
renewed upon expiration.
Initial fees are recognized as revenue when we have substantially performed
all initial services required by the franchising/licensing agreement, which is
generally upon opening of a store. Continuing fees are recognized as earned with
an appropriate provision for estimated uncollectible amounts. Renewal fees are
recognized in earnings when a renewal agreement becomes effective.
Direct costs incurred to secure and perform the required services under the
franchise and license agreements, which are not material, are charged to expense
as incurred.
Reclassifications. Certain items have been reclassified in the accompanying
Consolidated Financial Statements for prior periods in order to be comparable
with the classification adopted for the fiscal year ended December 27, 1997.
Such reclassifications had no effect on previously reported net income.
Note 3 - Spin-Off from and Transactions with Former Affiliates
On the Spin-off Date, we became an independent, publicly owned restaurant
company encompassing the combined worldwide operations of KFC, Pizza Hut and
Taco Bell (the "Core Business(es)") as well as the Non-core Businesses which
were disposed of prior to the Spin-off.
Spin-off and relationship after the Spin-off. At the Spin-off Date, our
common shares were distributed to the record date holders of PepsiCo common
shares at a ratio of one share for each ten outstanding PepsiCo shares. After
the Spin-off, PepsiCo had no ownership in us. Immediately after the Spin-off,
however, certain of our shares were held by the PepsiCo pension trust on behalf
of PepsiCo employees. We have entered into separation and other related
agreements (the "Separation Agreement"), outlined below, governing the Spin-off
transaction and our subsequent relationship with PepsiCo. Such agreements
provide 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. In addition, KFC, Pizza Hut and Taco Bell have each entered into a
multi-year agreement with Pepsi-Cola Company, a wholly owned subsidiary of
PepsiCo, regarding the purchase of beverage products. We have also signed a
multi-year agreement with PFS, a former distribution affiliate, for the
distribution of certain products and supplies to U.S. Company units. Neither
contract is for quantities expected to exceed normal usage.
The Separation Agreement provided for, among other things, our assumption
of all liabilities relating to the restaurant businesses, inclusive of the
Non-core Businesses, and the indemnification of PepsiCo with respect to such
liabilities. The Separation Agreement provided that we pay, prior to the
Spin-off, $4.5 billion to PepsiCo as repayment of certain amounts due to PepsiCo
and as a dividend. The net investment by and advances from PepsiCo were
preliminarily determined to be approximately $3.4 billion at the Spin-off Date.
The amount we repaid to PepsiCo in connection with the Spin-off was
approximately $2.1 billion and the dividend we paid was approximately $2.4
billion. PepsiCo contributed to our capital its remaining unpaid advances of
approximately $1.3 billion, as provided by the Separation Agreement. The
Agreement also specifies that PepsiCo shall make a final determination regarding
the net assets of the restaurant businesses transferred to us at the Spin-off
Date.
44
<PAGE>
This determination has been preliminarily completed, but is subject to our
agreement. The accompanying Consolidated Financial Statements reflect our
estimates, based on available information, of the net assets that should be
transferred. The final approved determination could vary from these estimates.
Any changes are not expected to materially affect future net income.
In addition, a fee will be paid to PepsiCo for all letters of credit,
guarantees and contingent liabilities relating to our businesses under which
PepsiCo remains liable until such time as they are released, terminated or
replaced by a qualified letter of credit covering the full amount of such
contingencies under such letters of credit, guarantees and contingent
liabilities. Payments for such fees to PepsiCo during 1997 totaled less than $1
million. We have indemnified PepsiCo for any costs or losses incurred with
respect to such letters of credit, guarantees and contingent liabilities.
In connection with the Spin-off, PepsiCo received a ruling from the
Internal Revenue Service (the "IRS") to the effect, among other things, that the
Spin-off would qualify as a tax-free reorganization under Sections 355 and 368
of the Internal Revenue Code of 1986, as amended. Such a ruling, while generally
binding upon the IRS, is subject to certain factual representations and
assumptions provided by PepsiCo. The Company has agreed to certain restrictions
on its future actions to provide further assurances that the Spin-off will
qualify as tax-free. 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 the sale,
refranchising, distribution or other disposition of assets. If we fail to abide
by such restrictions or 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.
Under the separation agreements, PepsiCo maintains full control and
absolute discretion with regard to any combined or consolidated tax filings for
periods through the Spin-off Date. PepsiCo also maintains full control and
absolute discretion regarding common tax audit issues of such entities. Although
PepsiCo has contractually agreed to, in good faith, use its best efforts to
settle all joint interests in any common audit issue on a consistent basis with
prior practice, there can be no assurance that determinations so made by PepsiCo
would be the same as we would reach, acting on our own behalf.
The separation agreements specify methods for allocation of assets,
liabilities and responsibilities with respect to certain existing employee
compensation and benefit plans and programs. Such allocations have been
preliminarily completed for current and retired employees of the restaurant
businesses. In addition, all vested PepsiCo options held by our employees were
not converted to TRICON options. We have agreed to indemnify PepsiCo as to any
employer payroll tax it incurs related to the exercise of such options after the
Spin-off. Certain provisions of the agreements also govern the transfer of
employees between the parties during the transition period ending in 1998. We
have also agreed on arrangements between the parties with respect to certain
internal software, third-party agreements, telecommunications services and
computing services.
Allocations and Determination of Common Costs in Historical Financial
Statements. Prior to the Spin-off, our operations were financed through our
operating cash flows, refranchising proceeds and investments by and advances
from PepsiCo. For this reason, our historical financial statements include
interest expense on our external debt plus an allocation of interest expense
which had not previously been separately allocated by PepsiCo. These interest
allocations were based on PepsiCo's weighted average interest rate applied to
the average annual balance of investments by and advances from PepsiCo.
Additionally, our historical financial statements include an allocation of
PepsiCo's previously unallocated general and administrative expenses. These
allocations were based on our revenue as a percent of PepsiCo's total revenue.
45
<PAGE>
The amounts, by year, of the historical allocations described above are as
follows:
1997
through
Spin-off Date 1996 1995
- --------------------------------------------------------------------------------
Interest allocated $ 188 $ 275 $ 316
PepsiCo weighted-average interest rate 6.1% 6.2% 6.6%
General and administrative expense allocated $ 37 $ 53 $ 52
We believe that the bases of allocation of interest and general and
administrative expenses were reasonable based on the facts available at the date
of their allocation. However, based on current information, such amounts are not
indicative of amounts which we would have incurred if we had been an
independent, publicly owned entity for all periods presented. As noted in the
accompanying Consolidated Balance Sheet, our capital structure changed as a
result of the Distribution to PepsiCo and bears little relationship to the
average net outstanding investments by and advances from PepsiCo as the $4.5
billion in borrowings to fund the dividend and repayments exceed the net
aggregate balance owed to PepsiCo at the Spin-off Date. We will be required to
add personnel and incur other costs to perform services previously provided by
PepsiCo. The full cost reflective of our capital structure and our personnel
complement will be included in our Consolidated Statement of Operations as
incurred. See Note 16.
For periods prior to the Spin-off, income tax expense was calculated, to
the extent possible, as if we had filed separate income tax returns. As PepsiCo
managed its tax position on a consolidated basis, which takes into account the
results of all of its businesses, our effective tax rate in the future could
vary significantly from our historical effective tax rates. Our future effective
tax rate will be largely dependant on our structure and tax strategies as a
separate entity.
Note 4 - Items Affecting Comparability of Net Loss
Certain large charges (credits) are identified below due to either their
inherent variability or unusual nature to enhance comparability of periods
presented. Facility actions net loss (gain) reflects both our initiative to
reduce our percentage ownership of total system units by selling Company
restaurants to new and existing franchisees and our committing to close
underperforming stores. Impairment charges for restaurants we intend to continue
to use in the business are also included in facility actions net loss (gain).
Unusual charges are primarily related to the 1997 fourth quarter charge and the
1996 decision to dispose of our Non-core Businesses.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ------------------------- -------------------------
Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax
---------- ------------ ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Facility actions net loss
(gain)(a) $ 247 $ 163 $ (37) $ (21) $ 402 $ 295
Unusual charges(b) 174 159 246 189 - -
</TABLE>
(a) Includes $410 million ($300 million after-tax) related to 1997 fourth
quarter charges.
(b) Includes $120 million ($125 million after-tax) related to 1997 fourth
quarter charges and an additional $54 million ($34 million after-tax)
related to the 1997 disposal of the Non-core Businesses.
46
<PAGE>
1997 Fourth Quarter Charges U.S. International Worldwide
- --------------------------- ---------- -------------- -------------
Store closure costs $ 141 $ 72 $ 213
Refranchising losses 77 59 136
Impairment charges for stores to
be used in the business 12 49 61
---------- -------------- -------------
Total facility actions net loss 230 180 410
---------- -------------- -------------
Impairment of investments in
unconsolidated affiliates 79 79
Severance and other 18 23 41
---------- -------------- -------------
Total unusual charges 18 102 120
---------- -------------- -------------
Total fourth quarter charges $ 248 $ 282 $ 530
========== ============== =============
The fourth quarter charge of $530 million ($425 million after-tax)
represents actions taken to refocus our business. The charge included (1)
underperforming store closures, primarily at Pizza Hut and internationally; (2)
restaurants we intend to refranchise whose carrying amounts were reduced to fair
market value, less costs to sell; (3) impairment of certain restaurants intended
to be used in the business; (4) impairment of certain joint ventures; and (5)
related personnel reductions.
<TABLE>
<CAPTION>
1997
(Excluding 4th
Facility Actions Net Loss (Gain) 1997 Qtr. Action) 1996 1995
- -------------------------------- ------------ ------------------- ------------- ------------
<S> <C> <C> <C> <C>
U.S.
Refranchising gains(a) $ (67) $ (144) $ (134) $ (89)
Store closure costs 154 13 45 26
Impairment charges for stores to be used in the
business 59 47 54 320
------------ ------------------- ------------- ------------
Facility actions net loss (gain) 146 (84) (35) 257
------------ ------------------- ------------- ------------
International
Refranchising gains(a)(b) (45) (104) (5) (4)
Store closure costs, net 94 22 (5) 12
Impairment charges for stores to be used in the
business 52 3 8 137
------------ ------------------- ------------- ------------
Facility actions net loss (gain) 101 (79) (2) 145
------------ ------------------- ------------- ------------
Worldwide
Refranchising gains(a)(b) (112) (248) (139) (93)
Store closure costs 248 35 40 38
Impairment charges for stores to be used in the
business 111 50 62 457
------------ ------------------- ------------- ------------
Facility actions net loss (gain) $ 247 $ (163) $ (37) $ 402
============ =================== ============= ============
</TABLE>
(a) Includes initial franchise fees in the U.S. of $39 million, $22 million and
$8 million in 1997, 1996 and 1995, respectively, and in International of $2
million in 1997. See Note 5.
(b) Includes a tax-free gain of $100 million in 1997 from refranchising our
restaurants in New Zealand through an initial public offering.
47
<PAGE>
The impairment charges in 1997 and 1996 resulted from our semi-annual
impairment evaluations of each restaurant to be used in the business. We early
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), as of the beginning of the fourth quarter of 1995. The initial,
non-cash charge of $457 million ($324 million after-tax), $120 million of which
related to our Non-core Businesses, resulted from our evaluating and measuring
impairment of restaurants to be used in the business at the individual
restaurant level. Previously, we evaluated and measured impairment if a
restaurant concept was incurring operating losses and was expected to incur
operating losses in the future.
Unusual Charges
Exclusive of the fourth quarter charge, unusual charges include $54 million
in 1997 and $246 million in 1996 resulting from our 1996 decision to dispose of
our remaining Non-core Businesses. The 1996 charge represented the reduction of
the carrying amounts of the Non-core Businesses to estimated fair market value,
less costs to sell. The estimated fair market value was initially determined by
using estimated selling prices based upon the opinion of an investment banking
firm retained to assist in the selling activity. The 1997 charge adjusted the
carrying amount of the Non-core Businesses to their actual selling prices less
costs to sell. In accordance with the terms of certain of these transactions and
the PepsiCo Separation Agreement, we retained and are holding for disposal
certain properties and operating lease liabilities. No value has been assigned
to these properties and all the lease liabilities, net of the expected sublease
recoveries, have been fully accrued. The Non-core Businesses contributed $268
million, $394 million and $297 million to revenues in 1997, 1996 and 1995,
respectively. Excluding the unusual disposal charges in 1997 and 1996 and the
$120 million initial impact of adopting SFAS 121 in 1995, the Non-core
Businesses realized income of $10 million ($8 million after-tax) in 1997, and
incurred losses of $15 million ($12 million after-tax) and $45 million ($37
million after-tax) in 1996 and 1995, respectively.
Note 5 - Franchise and License Fees
Franchise and certain license arrangements for our traditional and
non-traditional points of distribution, respectively, provide for initial fees.
The agreements also require continuing fees based upon a percentage of sales.
Initial franchise fees from refranchising activities arise from an initiative we
adopted in late 1994 to reduce our percentage ownership of total system units by
selling Company units to new and existing franchisees. As disclosed in Note 2,
initial franchise fees from the refranchising activities are included as part of
refranchising gains.
1997 1996 1995
- --------------------------------------------------------------------------------
Initial fees, including renewal fees $ 86 $ 43 $ 28
Initial franchise fees from
refranchising activities (41) (22) (8)
------------ ----------- ---------
45 21 20
Continuing fees 524 473 417
------------ ----------- ---------
$ 569 $ 494 $ 437
============ =========== =========
48
<PAGE>
Note 6 - Property, Plant and Equipment, net
1997 1996
- --------------------------------------------------------------------------------
Land $ 834 $ 933
Buildings and improvements 3,163 3,394
Capital leases, primarily buildings 152 206
Machinery and equipment 2,040 2,319
----------- -----------
6,189 6,852
Accumulated depreciation and amortization (2,928) (2,802)
----------- -----------
$ 3,261 $ 4,050
=========== ===========
Note 7 - Intangible Assets, net
1997 1996
- --------------------------------------------------------------------------------
Reacquired franchise rights $ 544 $ 764
Trademarks and other identifiable intangibles 132 165
Goodwill 136 171
----------- -----------
$ 812 $ 1,100
=========== ===========
Accumulated amortization, included in the amounts above, was $508 million
and $550 million at year-end 1997 and 1996, respectively.
Note 8 - Accounts Payable and Other Current Liabilities
1997 1996
- --------------------------------------------------------------------------------
Accounts payable $ 453 $ 526
Accrued compensation and benefits 294 261
Other accrued taxes 103 121
Other current liabilities 410 292
----------- ----------
$ 1,260 $ 1,200
=========== ===========
49
<PAGE>
Note 9 - Short-term Borrowings and Long-term Debt
1997 1996
- --------------------------------------------------------------------------------
Short-term Borrowings
Current maturities of long-term debt $ 19 $ 26
Other 105 33
------------- -------------
$ 124 $ 59
============= =============
Long-term Debt
Senior, unsecured Term Loan Facility,
due October 2002 $ 1,968 $ -
Senior, unsecured Revolving Credit Facility,
expires October 2002 2,435 -
Capital lease obligations (see Note 10) 140 222
Other, due through 2010 (7.8% and 8.2%) 27 35
------------- -------------
4,570 257
Less current maturities of long-term debt (19) (26)
------------- -------------
$ 4,551 $ 231
============= =============
On October 2, 1997, we entered into a $5.25 billion bank credit agreement
comprised of a $2 billion senior, unsecured Term Loan Facility and a $3.25
billion senior, unsecured Revolving Credit Facility which mature on October 2,
2002.
The facilities are guaranteed by our principal U.S. subsidiaries. Proceeds
of $4.5 billion of the initial $4.55 billion borrowed under the facilities were
used to make the Distribution to PepsiCo. The $50 million of additional proceeds
has been used to provide cash collateral securing certain obligations previously
secured by PepsiCo, to pay fees and expenses related to the Distribution and the
bank credit facilities, and for general corporate purposes. Interest on amounts
borrowed is payable at least quarterly at rates which are variable, based
principally on the London Interbank Offered Rate ("LIBOR") plus a variable
margin factor as defined in the credit agreement. At December 27, 1997, the
weighted average interest rate was 6.6% which includes the effects of associated
interest rate swaps. See Note 11 for a discussion of our use of interest rate
swaps, our management of inherent credit risk and fair value information related
to debt and interest rate swaps.
At year-end 1997, we had unused revolving credit agreement borrowings
available aggregating $692 million. We pay a facility fee on the revolving
credit facility. The margin factor and facility fee rate is determined based on
our leverage ratio or third-party senior debt ratings as defined in the
agreement. Facility fees accrued at December 27, 1997 were $1.3 million.
The credit facilities are subject to various covenants including financial
covenants relating to maintenance of specific leverage and fixed charge coverage
ratios. In addition, the facilities contain affirmative and negative covenants
including, among other things, limitations on certain additional indebtedness
including guarantees of indebtedness, cash dividends, aggregate non-U.S.
investment and certain other transactions, as defined in the agreement. At
December 27, 1997, we are in compliance with all covenants governing our credit
facilities. The credit facilities contain mandatory prepayment terms for certain
capital market transactions and sales of restaurants as defined in the
agreement. Once the Term Loan has been repaid in full, mandatory prepayments may
be required of the revolving credit agreement which would reduce the facility
availability. Absent this circumstance, under the terms of the Revolving Credit
Facility, we may borrow up to $3.25 billion until maturity. The Revolving Credit
Facility is also reduced for letters of credit. Amounts borrowed under the Term
Loan Facility that are prepaid may not be reborrowed.
50
<PAGE>
The annual maturities of long-term debt through 2002, excluding capital
lease obligations, are 1998 - $5 million; 1999 - $12 million; 2000 - $4 million;
2001 - $3 million and 2002 - $4.4 billion.
Note 10 - Leases
We have non-cancelable commitments under both capital and long-term
operating leases, primarily for Company restaurants. Capital and operating lease
commitments expire at various dates through 2067 and, in many cases, provide for
rent escalations and renewal options. Most leases require payment of related
executory costs, which include property taxes, maintenance and insurance.
Future minimum commitments and sublease receivables under non-cancelable leases
are set forth below:
Commitments Sublease Receivables
---------------------------- ------------------------------
Direct
Capital Operating Financing Operating
----------- -------------- ------------- -----------
1998 $ 26 $ 253 $ 3 $ 12
1999 24 219 2 11
2000 23 190 2 9
2001 21 170 2 8
2002 20 152 2 7
Later Years 153 801 15 38
----------- -------------- ------------- -----------
$ 267 $ 1,785 $ 26 $ 85
=========== ============== ============= ===========
At year-end 1997, the present value of minimum payments under capital
leases was $140 million, after deducting $127 million representing imputed
interest.
The details of rental expense and income are set forth below:
1997 1996 1995
----------- ----------- ----------
Rental expense
Minimum $ 317 $ 312 $ 309
Contingent 30 32 27
----------- ----------- ----------
$ 347 $ 344 $ 336
=========== =========== ==========
Minimum rental income $ 19 $ 16 $ 8
=========== =========== ==========
Contingent rentals are based on sales in excess of levels stipulated in the
lease agreements.
Note 11 - Financial Instruments
Derivative Instruments
Our policy prohibits the use of derivative instruments for trading
purposes, and we have procedures in place to monitor and control their use. As
of December 27, 1997, our use of derivative instruments was limited to interest
rate swaps entered into with financial institutions and commodity futures
contracts traded on national exchanges.
51
<PAGE>
Interest rate swaps are entered into with the objective of reducing our
exposure to interest rate risk. During 1997, we entered into interest rate swaps
to effectively convert a portion of our variable rate bank debt to fixed rate.
Reset dates and the floating rate index on the swaps match those of the
underlying bank debt. Accordingly, any market risk or opportunity associated
with swaps is offset by the opposite market impact on the related debt. Credit
risk from the swap agreements is dependent both on the movement in interest
rates and the possibility of non-payment by swap counterparties. We mitigate
credit risk by only entering into swap agreements with high credit-quality
counterparties and by netting swap payments within each contract. At December
27, 1997, we had entered into interest rate swaps with notional amounts of $1
billion. Under the contracts, we agree with other parties to exchange, at
specified intervals, the difference between variable-rate and fixed-rate amounts
calculated on a notional principal amount. At December 27, 1997, the average pay
rate was 5.97%. The payables under the related swaps aggregated $.2 million at
December 27, 1997. The swaps mature at various dates through 2001.
Open commodity future contracts and deferred gains and losses at year-end
1997 and 1996, as well as gains and losses recognized as part of cost of sales
in 1997, 1996 and 1995 were not significant.
Fair Value
Except for guarantees issued by us and interest rate swaps outstanding, the
carrying amounts of our financial instruments approximate fair value. The fair
value of our guarantees issued was $18 million in 1997 and $13 million in 1996
compared to carrying amounts of $0. The fair value of our interest rate swaps
was $1.5 million compared to a carrying amount of $.2 million.
Note 12 - Pension Plans and Other Benefit Programs
We sponsor noncontributory defined benefit pension plans covering
substantially all full-time U.S. salaried employees and certain hourly employees
and noncontributory defined benefit pension plans covering certain international
employees. Prior to the Spin-off, the participants in the plans were covered by
plans with similar benefits, sponsored by PepsiCo. Under an agreement with
PepsiCo, we have assumed or retained pension liabilities related to
substantially all of our participants. Assets of the PepsiCo plans have been
allocated in accordance with regulatory rules between the PepsiCo plans and our
plans. Benefits generally are based on years of service and compensation or
stated amounts for each year of service. All plans but one are funded and
contributions to U.S. plans are made in amounts not less than minimum statutory
funding requirements nor more than the maximum amount that can be deducted for
U.S. income tax purposes. The U.S. plans' assets consist principally of equity
securities, government and corporate debt securities and other fixed-income
obligations.
The components of net pension expense for U.S. plans are set forth below.
Net periodic pension expense for international plans was immaterial.
1997 1996 1995
- --------------------------------------------------------------------------------
Service cost of benefits earned $ 18 $ 15 $ 12
Interest cost on projected benefit obligation 17 15 12
Return on plan assets:
Actual gain (60) (26) (44)
Deferred gain 41 9 29
Amortization of net transition gain (4) (4) (4)
Net other amortization 1 1
- --------------------------------------------------------------------------------
Net pension expense $ 13 $ 10 $ 5
- --------------------------------------------------------------------------------
52
<PAGE>
Reconciliations of the funded status of the U.S. plans to the pension
liability recognized in the Consolidated Balance Sheet are set forth below.
Amounts related to international plans were immaterial.
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation
Vested benefits $ (194) $ (121) $ (6) $ (17)
Non-vested benefits (26) (23) (1) (5)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (220) (144) (7) (22)
Effect of projected compensation increases (40) (31) (19) (13)
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (260) (175) (26) (35)
Plan assets at fair value 270 209 14
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) projected benefit
obligation 10 34 (26) (21)
Unrecognized prior service cost (benefit) (1) 4 3
Unrecognized net (gain) loss (14) (28) 8 11
Unrecognized net transition (gain) loss (2) (6)
Adjustment required to recognize minimum liability (4)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension liability $ (7) $ - $ (14) $ (11)
===========================================================================================================================
</TABLE>
The assumptions used to compute the information above are set forth below:
1997 1996 1995
- --------------------------------------------------------------------------------
Expected long-term rate of
return on plan assets 10.0% 10.0% 10.0%
Discount rate - projected
benefit obligation 7.1% 7.7% 7.7%
Future compensation growth rate 5.2 - 6.6% 5.2 - 6.6% 5.2 - 6.6%
- --------------------------------------------------------------------------------
We also sponsor certain deferred compensation benefit programs for eligible
employees and non-employee directors that allow participants to defer receipt of
portions of their annual salary and incentive compensation. Amounts deferred are
credited with earnings based on certain phantom investment options selected by
the participants, as defined by the benefit program. These earnings amounts are
expensed as incurred. Our obligations under these programs as of year-end 1997
and 1996 were $37 million and $29 million, respectively. In late 1997, a new
investment option allowed participants to defer certain incentive compensation
earned in 1997 into the purchase of phantom shares of TRICON Common Stock at a
25% discount from fair market value at the date of deferral in 1998.
Participants bear the risk of forfeiture if they voluntarily separate from
employment during the two year vesting period. The intrinsic value of the
discount will be expensed over the vesting period stipulated by the benefit
program. Amounts expensed under these programs for all periods presented were
not significant.
Note 13 - Employee Stock-Based Compensation
(tabular options in thousands)
At year-end 1997, we had two stock option plans in effect, the 1997
Long-Term Incentive Plan ("LTIP") and the TRICON Global Restaurants, Inc.
SharePower Plan ("SharePower"). Options to purchase up to 22.5 million shares of
stock may be granted under the LTIP at a price equal to or greater than the
market value of the stock on the date of grant. New options granted can have
varying vesting provisions and exercise periods. Options granted subsequent to
the Spin-off vest in periods ranging from immediate to 2006 and expire ten to
53
<PAGE>
fourteen years after grant. Potential awards to employees and non-employee
directors under the LTIP include stock options, performance units, incentive
stock options, stock appreciation rights and restricted stock. Only LTIP stock
options and restricted stock have been issued since the Spin-off. Additionally,
it is not anticipated that any further grants will be made pursuant to the
SharePower plan although options previously granted could be outstanding through
2006. We account for these plans under APB Opinion No. 25, as permitted by SFAS
123.
At the Spin-off Date, certain of the options to purchase PepsiCo stock that
were held by our employees were converted to TRICON stock options under either
the LTIP or the SharePower plan. The options were converted at amounts and
exercise prices that maintained the amount of unrealized stock appreciation that
existed immediately prior to the Spin-off. The vesting dates and exercise
periods of the options were not affected by the conversion. Based on their
original PepsiCo grant date, TRICON converted options vest in periods ranging
from one to ten years and expire ten to fifteen years after grant.
Had compensation cost for all TRICON option grants subsequent to the
Spin-off to employees and non-employee directors been determined consistent with
SFAS 123, our net loss for 1997 would have increased from $111 million to $112
million. The pro forma net loss may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, which was only a partial year in 1997, and additional options
may be granted in varying quantities in future years. SFAS 123 pro forma loss
per share data is not meaningful as we were not an independent, publicly owned
company prior to the Spin-off.
The fair value of each option grant made subsequent to the Spin-off was
estimated as of the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in fiscal 1997:
Risk-free interest rate 5.79%
Expected life 6.6 years
Expected volatility 27.5%
Expected dividend yield 0%
A summary of the status of all options granted to employees and
non-employee directors at December 27, 1997, and changes during the year then
ended is presented in the table below:
December 27, 1997
-----------------------------------
Wtd. Avg.
Options Ex. Price
--------------- --------------
Outstanding at beginning of year - $ -
Conversion of PepsiCo options 13,951 21.48
Granted at price equal to market 872 32.95
Granted at price greater than market 1,334 31.63
Exercised (112) 24.80
Forfeited (800) 20.84
--------------- --------------
Outstanding at end of year 15,245 $ 23.03
=============== ==============
Exercisable at end of year 1,251 $ 23.84
=============== ==============
Weighted average of fair value of
options granted $ 13.37
===============
54
<PAGE>
The following table summarizes information about all stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ------------------------------------
Weighted
Average Weighted Weighted
Range of Exercise Remaining Average Average
Prices Options Contractual Life Exercise Price Options Exercise Price
- --------------------- ----------------- ----------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ .01 - 17.80 3,994 6.80 years $ 14.96 91 $ 9.49
22.02 - 29.40 9,044 8.29 24.37 1,144 24.87
30.41 - 34.47 2,207 10.12 32.15 16 31.63
----------------- ---------------
15,245 1,251
================= ===============
</TABLE>
In November 1997, we granted two awards of restricted performance units of
TRICON's Common Stock to our Vice Chairman/President. The awards were made under
the LTIP and may be paid in Common Stock of TRICON or cash at the discretion of
the Board of Directors. Payment of the awards, totaling $6.3 million, is
contingent upon continued employment through January 25, 2001 and 2006,
respectively, and the attainment by TRICON of certain pre-established earnings
thresholds, as defined. The awards are being expensed over the performance
periods stipulated above; the amount included in earnings in 1997 was not
significant.
Note 14 - Income Taxes
The details of the income tax provision are set forth below:
1997 1996 1995
- --------------------------------------------------------------------------------
Current: Federal $ 106 $ 154 $ 179
Foreign 77 93 59
State 31 28 24
------------- ------------ ------------
214 275 262
------------- ------------ ------------
Deferred: Federal (66) (127) (168)
Foreign (59) (5) (55)
State (13) (18) (10)
------------- ------------ ------------
(138) (150) (233)
------------- ------------ ------------
$ 76 $ 125 $ 29
============= ============ ============
U.S. and foreign (loss) income before income taxes are set forth below:
1997 1996 1995
- -----------------------------------------------------------------------
U.S. $ 13 $ (21) $ 72
Foreign (48) 93 (175)
------------- ------------ ------------
$ (35) $ 72 $ (103)
============= ============ ============
55
<PAGE>
A reconciliation of income taxes calculated at the U.S. Federal tax statutory
rate to our income tax provision is set forth below:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at the U.S. Federal statutory rate of 35% $ (12) $ 25 $ (36)
State income tax, net of Federal tax benefit 20 7 7
Foreign and U.S. tax effects attributable to foreign operations 24 49 26
Effect of unusual charges 79 28
Effect of the New Zealand IPO (41)
Initial impact of adopting SFAS 121 28
Nondeductible amortization of U.S. goodwill 6 9 11
Federal tax credits (2) (2) (8)
Other, net 2 9 1
---------------- ---------------- ---------------
Income tax provision $ 76 $ 125 $ 29
================ ================ ===============
Effective income tax rate (217.1)% 173.6% (28.2)%
================ ================ ===============
</TABLE>
The details of the 1997 and 1996 deferred tax liabilities (assets) are set forth
below:
1997 1996
- --------------------------------------------------------------------------------
Intangible assets and property, plant
and equipment $ 253 $ 250
Other 5 15
-------------- -------------
Gross deferred tax liabilities $ 258 $ 265
============== =============
Net operating loss and tax credit
carryforwards $ (89) $ (117)
Employee benefits (48) (56)
Casualty claims (57) (69)
Fourth quarter charge (105)
Various liabilities and other (141) (126)
-------------- -------------
Gross deferred tax assets (440) (368)
Deferred tax assets valuation allowance 111 138
-------------- -------------
Net deferred tax assets (329) (230)
-------------- -------------
Net deferred tax (asset) liability $ (71) $ 35
============== =============
Included in:
Prepaid expenses, deferred income taxes
and other current assets $ (92) $ (165)
Other assets (12)
Deferred income taxes 33 200
-------------- -------------
$ (71) $ 35
============== =============
The valuation allowance related to deferred tax assets decreased by $27
million in 1997 primarily due to the disposal of the Non-core Businesses.
The determination of the unrecognized deferred tax liability for temporary
differences related to investments in foreign subsidiaries and foreign corporate
joint ventures that are essentially permanent in duration is not practicable.
56
<PAGE>
Net operating loss carryforwards totaling $307 million at year-end 1997 are
available to reduce future tax of TRICON and certain subsidiaries and are
related to a number of foreign and state jurisdictions. Of these carryforwards,
$20 million expire in 1998, $221 million expire at various times between 1999
and 2012 and $66 million may be carried forward indefinitely.
Note 15 - Business Segments
We are engaged principally in developing, operating, franchising and
licensing the worldwide KFC, Pizza Hut and Taco Bell concepts. We also
previously operated other non-core U.S. concepts, including CPK, Chevys,
D'Angelo, ESM and HNN, all of which were sold in 1997 prior to the Spin-off. See
Note 4.
KFC, Pizza Hut and Taco Bell operate throughout the U.S. and in 78, 87 and
15 countries and territories outside the U.S., respectively. Principal
international markets include Australia, Canada, China, Japan, Korea, Mexico,
Poland, Puerto Rico, and the U.K. At year-end 1997, we had investments in
several unconsolidated affiliates outside the U.S. which operate KFC and Pizza
Hut restaurants, the most significant of which are corporate joint ventures
located in Japan and the U.K.
57
<PAGE>
GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------
Revenues
-------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
United States $ 7,363 $ 7,924 $ 8,163
International 2,318 2,308 2,087
----------------- ---------------- ---------------
$ 9,681 $ 10,232 $ 10,250
================= ================ ===============
Operating Profit
-------------------------------------------------------
1997(a) 1996(a) 1995(a)
- --------------------------------------------------------------------------------
United States $ 397 $ 304 $ 328
International (30) 144 (26)
Foreign exchange (16) (5) (1)
Unallocated corporate
expenses (110)(b) (71) (b) (49)(b)
----------------- ---------------- ---------------
$ 241 $ 372 $ 252
================= ================ ===============
Identifiable Assets
------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
United States $ 3,637 $ 4,566 $ 4,883
International 1,461 1,954 2,025
----------------- ---------------- ---------------
$ 5,098 $ 6,520 $ 6,908
================= ================ ===============
Depreciation and Amortizaion
------------------------------------------------------
1997 1996 1995
- ------------------------- ----------------- - ---------------- - ---------------
United States $ 393 $ 472 $ 519
International 143 149 152
----------------- ---------------- ---------------
$ 536 $ 621 $ 671
================= ================ ===============
Capital Spending
------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
United States $ 385 $ 466 $ 530
International 158 161 184
----------------- ---------------- ---------------
$ 543 $ 627 $ 714
================= ================ ===============
(a) Includes the fourth quarter charge in 1997 of $530 million (United States -
$248 million, International - $282 million), other unusual charges related
to disposal of the Non-core Businesses in 1997 and 1996 of $54 million and
$246 million, respectively, in the United States and the initial impact of
adopting SFAS 121 in 1995 of $457 million (United States - $320 million,
International - $137 million). See Note 4.
(b) Includes amounts allocated by PepsiCo prior to the Spin-off of $37 million,
$53 million and $52 million in 1997, 1996 and 1995, respectively.
The financial data reported above is materially consistent with restaurant
segment information previously reported by PepsiCo. Adjustments have been made
to these amounts primarily to remove the impact of the restaurant distribution
business previously included by PepsiCo in its restaurant segment, and to
include the investment in and our equity income (loss) of unconsolidated
affiliates within the international segment. This change was made to align our
reporting with the way we view our international business.
58
<PAGE>
Note 16 - Pro Forma Financial Information (Unaudited)
As discussed in Note 3, we became an independent, publicly owned company on
October 6, 1997 as a result of the Spin-off from PepsiCo. In connection with the
Spin-off, we paid $4.5 billion to PepsiCo as repayment of certain amounts due to
PepsiCo and as a dividend. Such payment was funded by advances of $4.55 billion
under a five-year $5.25 billion bank credit agreement drawn on October 6, 1997.
See Note 9. The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Spin-off and related transactions
had occurred at the beginning of fiscal 1997:
As Reported Pro Forma Pro Forma
1997 Adjustments 1997
---------------- ---------------- -------------
Total revenues $ 9,681 $ (268) $ 9,413
Total costs and expenses 9,440 (303) 9,137
Operating profit 241 35 276
Interest expense, net 276 41 317
Loss before income taxes (35) (6) (41)
Net loss (111) (6) (117)
Loss per common share (.73) (.77)
These unaudited pro forma results have been prepared for informational
purposes only and include the following adjustments to historical results:
(1) Elimination of the effect of our Non-core Businesses.
(2) Additional estimated general, administrative and other expenses of $20
million, which we would have incurred as an independent, publicly owned
company, based on our analysis, partially offset by non-recurring TRICON
start-up costs of approximately $14 million.
(3) Elimination of the PepsiCo interest expense allocation of $188 million and
recording of interest expense of $232 million based on the $4.55 billion of
external debt.
(4) Estimation of the income tax impact for the pro forma adjustments (1), (2)
and (3).
The shares used to compute pro forma loss per common share were based upon
152 million shares, assuming the shares issued at Spin-off had been outstanding
from the beginning of fiscal 1997. The dilutive effect of any options has been
excluded due to the loss from operations, as required by SFAS 128.
Pro forma balance sheet information has not been provided as the Spin-off
and related transactions have been reflected in the accompanying 1997
Consolidated Balance Sheet.
These unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the transactions
occurred at the beginning of fiscal 1997 or of our future results of operations.
Note 17 - Commitments and Contingencies
We are subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. We believe that the ultimate liability, if any, in excess of amounts
already recognized arising from such claims or contingencies is not likely to
have a material adverse effect on our annual results of operations, financial
condition or cash flows.
59
<PAGE>
We were directly or indirectly contingently liable in the amounts of $302
million and $150 million at year-end 1997 and 1996, respectively, for certain
lease assignments and guarantees. In connection with these contingent
liabilities, after the Spin-off Date, we were required to maintain cash
collateral balances at certain institutions of approximately $30 million, which
is included in Other Assets in the accompanying Consolidated Balance Sheet. At
year-end 1997, $200 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 $200 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
$294 million. The balance of the contingent liabilities primarily reflected
guarantees to support financial arrangements of certain unconsolidated
affiliates and other restaurant franchisees.
We are currently and, for a significant portion of the prior three years
ended December 27, 1997, have been primarily self-insured for most workers'
compensation, general liability and automotive liability losses, subject to per
occurrence and aggregate annual liability limitations. During 1997, prior to the
Spin-off, we participated with PepsiCo in a guaranteed cost program for certain
coverages. We are also primarily self-insured for health care claims for
eligible participating employees subject to certain deductibles and limitations.
We determine our liability for claims reported and for claims incurred but not
reported on an actuarial basis.
Note 18 - Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Company sales $ 2,123 $ 2,214 $ 2,164 $ 2,611 $ 9,112
Franchise and license fees 114 139 136 180 569
Total costs and expenses 2,075 2,121 2,105 3,139 9,440
Operating profit (loss) 162 232 195 (348) 241
Net income (loss) 52 121 79 (363) (111)
Loss per common share (a) (2.39)
Net income (loss) attributable to:
Facility actions net gain (loss) 6 65 43 (277) (163)
Unusual charges (22) (12) (125) (159)
</TABLE>
(a) Earnings per share data has not been provided for periods prior to the
fourth quarter of 1997 as we were not an independent, publicly owned
Company prior to the Spin-off.
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Company sales $ 2,171 $ 2,271 $ 2,329 $ 2,967 $ 9,738
Franchise and license fees 102 111 119 162 494
Total costs and expenses 2,127 2,199 2,252 3,282 9,860
Operating profit (loss) 146 183 196 (153) 372
Net income (loss) 40 66 60 (219) (53)
Net (loss) income attributable to:
Facility actions net gain (loss) 28 13 15 (35) 21
Unusual charges (17) (172) (189)
</TABLE>
See Note 4 for details of facility actions net gain (loss) and unusual charges.
60
<PAGE>
Management's Responsibility for Financial Statements
To Our Shareholders:
We are responsible for the preparation, integrity and fair presentation of the
Consolidated Financial Statements, related notes and other information included
in this annual report. The financial statements were prepared in accordance with
generally accepted accounting principles and include certain amounts based upon
our estimates and assumptions, as required. Other financial information
presented in the annual report is derived from the financial statements.
We maintain a system of internal control over financial reporting, designed to
provide reasonable assurance as to the reliability of the financial statements,
as well as to safeguard assets from unauthorized use or disposition. The system
is supported by formal policies and procedures, including an active Code of
Conduct program intended to ensure employees adhere to the highest standards of
personal and professional integrity. Our internal audit function monitors and
reports on the adequacy of and compliance with the internal control system, and
appropriate actions are taken to address significant control deficiencies and
other opportunities for improving the system as they are identified.
The financial statements have been audited and reported on by our independent
auditors, KPMG Peat Marwick LLP, who were given free access to all financial
records and related data, including minutes of the meetings of the Board of
Directors and Committees of the Board. We believe that management
representations made to the independent auditors were valid and appropriate.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, provides oversight to our financial reporting process and our
controls to safeguard assets through periodic meetings with our independent
auditors, internal auditors and management. Both our independent auditors and
internal auditors have free access to the Audit Committee.
Although no cost-effective internal control system will preclude all errors and
irregularities, we believe our controls as of December 27, 1997 provide
reasonable assurance that our assets are reasonably safeguarded.
Robert C. Lowes
Chief Financial Officer
61
<PAGE>
Report of Independent Auditors
The Board of Directors
TRICON Global Restaurants, Inc.:
We have audited the accompanying consolidated balance sheet of TRICON Global
Restaurants, Inc. and Subsidiaries ("TRICON") as of December 27, 1997 and
December 28, 1996, and the related consolidated statements of operations, cash
flows and shareholders' (deficit) equity for each of the years in the three-year
period ended December 27, 1997. These consolidated financial statements are the
responsibility of TRICON's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TRICON as of
December 27, 1997 and December 28, 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 27,
1997, in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, TRICON in 1995
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
KPMG Peat Marwick LLP
Louisville, Kentucky
February 12, 1998
62
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding directors is incorporated by reference from the
Company's definitive proxy statement which will be filed with the Securities and
Exchange Commission no later than 120 days after December 27, 1997.
Information regarding executive officers of the Company is included in Part
I.
Item 11. Executive Compensation.
Information regarding executive compensation is incorporated by reference
from the Company's definitive proxy statement which will be filed with the
Securities and Exchange Commission no later than 120 days after December 27,
1997. Information appearing in the sections entitled "Compensation Committee
Report on Executive Compensation" and "Performance Graph" contained in the
Company's definitive proxy statement shall not be deemed to be incorporated by
reference in this report, notwithstanding any general statement contained herein
incorporating portions of such proxy statement by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the Company's definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 27, 1997.
Item 13. Certain Relationships and Related Transactions.
Tricon and PepsiCo have entered into certain agreements, described below,
governing their relationship subsequent to the Spin-off and providing for the
allocation of tax and certain other liabilities and obligations arising from
periods prior to and after the Spin-off. The following summarizes the material
terms of such agreements, but is qualified by reference to the text of such
agreements.
Separation Agreement
PepsiCo and Tricon have entered into a Separation Agreement (the
"Separation Agreement"), which provides for, among other things, certain
services, records and personnel which PepsiCo and Tricon will make available to
each other after the Spin-off. To facilitate an orderly transition, PepsiCo may
continue to provide, for up to 12 months, certain services to Tricon, with the
related costs and expenses being paid by Tricon. The Separation Agreement also
provides for the assumption by Tricon of liabilities relating to PepsiCo's
restaurant businesses and the indemnification of PepsiCo with respect to such
liabilities. Pursuant to the terms of the Separation Agreement, Tricon was
required to (and did) pay to PepsiCo prior to the Spin-off the sum of $4.5
billion as repayment of certain amounts due to PepsiCo from Tricon and a
dividend. The Separation Agreement also specifies that PepsiCo shall make a
final determination regarding net assets of the restaurant businesses
transferred to the Company at the Spin-off date. This determination has been
preliminarily completed, but is subject to agreement by the Company.
63
<PAGE>
Tax Separation Agreement
PepsiCo and Tricon have entered into a Tax Separation Agreement (the "Tax
Separation Agreement"), on behalf of themselves and their respective
consolidated groups, that reflects each party's rights and obligations with
respect to payments and refunds of taxes that are attributable to periods
beginning prior to and including the Spin-off and taxes resulting from
transactions effected in connection with the Spin-off. The Tax Separation
Agreement also expresses each party's intention with respect to certain tax
attributes of Tricon after the Spin-off. The Tax Separation Agreement provides
for payments between the two companies for certain tax adjustments made after
the Spin-off that cover pre-Spin-off tax liabilities. Other provisions cover the
handling of audits, settlements, stock options, elections, accounting methods
and return filing in cases where both companies have an interest in the results
of these activities.
Pursuant to the Tax Separation Agreement, Tricon has agreed to refrain from
engaging in certain transactions for two years following the Spin-off without
the prior written consent of PepsiCo. Transactions subject to this restriction
include, among other things, the liquidation, merger or consolidation with
another company, certain issuances and redemptions of Tricon Common Stock, the
granting of stock options, the sale, refranchising, distribution or other
disposition of assets in a manner that would adversely affect the tax
consequences of the Spin-off or any transaction effected in connection with the
Spin-off, and the discontinuation of certain businesses. If the Company fails to
abide by this restriction and, as a result, the Spin-off fails to qualify as a
tax-free reorganization, the Company will be obligated to indemnify PepsiCo for
any resulting tax liability, which could be substantial.
Employee Programs Agreement
PepsiCo and Tricon have entered into an Employee Programs Agreement, which
allocates assets, liabilities and responsibilities between them with respect to
certain employee compensation and benefit plans and programs and certain other
related matters.
Telecommunications, Software and Computing Services Agreement
PepsiCo and Tricon have entered into a Telecommunications, Software and
Computing Services Agreement setting forth the arrangements between the parties
with respect to internal software, third-party agreements, telecommunications
services and computing services.
Beverage Agreements
KFC, Pizza Hut, Taco Bell and Tricon International have each entered into a
multi-year agreement with Pepsi-Cola Company regarding the sale of Pepsi-Cola
beverage products at Company units worldwide.
Certain Letters of Credit, Guarantees and Contingent Liabilities
Pursuant to the Separation Agreement, Tricon agreed to use its best efforts
to release, terminate or replace, prior to the Spin-off, all letters of credit,
guarantees and contingent liabilities relating to PepsiCo's restaurant
businesses under which PepsiCo is liable. Nevertheless, after the Spin-off,
PepsiCo remains liable on certain of such letters of credit, guarantees and
contingent liabilities which were not able to be released, terminated or
replaced prior to the Spin-off. Pursuant to the Separation Agreement, from and
after the Spin-off, Tricon will pay a fee to PepsiCo with respect to any such
letters of credit, guarantees and contingent liabilities until such time as they
are released, terminated or replaced by a qualified letter of credit with a
maximum drawing amount equal to the full amount of all remaining obligations and
foreseeable claims under such letters of credit, guarantees and contingent
liabilities. At all times Tricon is required to indemnify PepsiCo with respect
to such letters of credit, guarantees and contingent liabilities.
64
<PAGE>
Information about the agreements described above is included in
Management's Discussion and Analysis and the related Consolidated Financial
Statements and footnotes in Part II, Item 7, pages 18 through 36; and Part II,
Item 8 pages 36 through 60, respectively, of this Form 10-K.
Information regarding certain relationships and related transactions is
also incorporated by reference from the Company's definitive proxy statement
which will be filed with the Securities and Exchange Commission no later than
120 days after December 27, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements: Consolidated financial statements filed as part
of this report are listed under Part II, Item 8 of this Form 10-K.
(2) Financial Statement Schedules: No schedules are required because
either the required information is not present or not present in
amounts sufficient to require submission of the schedule, or because
the information required is included in the financial statements or
the related notes thereto filed as a part of this report.
(3) Exhibits: The exhibits listed in the accompanying Index to Exhibits
are filed as part of this report. The Index to Exhibits specifically
identifies each management contract or compensatory plan required to
be filed as an exhibit to this Form 10-K.
(b) One report on Form 8-K was filed during the quarter ended December 27,
1997. This report attached a copy of a press release dated December 9,
1997, announcing certain strategic actions to be taken by the Company
during the fourth quarter.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 25, 1998
TRICON GLOBAL RESTAURANTS, INC.
By: /s/ Andrall E. Pearson
---------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ---------------------- --------------
/s/ Andrall E. Pearson Chairman of the Board March 25, 1998
- ---------------------------- and Chief Executive
Andrall E. Pearson Officer (principal
executive officer)
/s/ Robert C. Lowes Chief Financial March 25, 1998
- ---------------------------- Officer (principal
Robert C. Lowes financial officer)
/s/ Robert L. Carleton Senior Vice President March 25, 1998
- ---------------------------- and Controller
Robert L. Carleton (principal accounting
officer)
/s/ D. Ronald Daniel Director March 25, 1998
- ----------------------------
D. Ronald Daniel
/s/ James Dimon Director March 25, 1998
- ----------------------------
James Dimon
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Signature Title Date
- --------- ---------- ----------------
/s/ Massimo Ferragamo Director March 25, 1998
- --------------------------------
Massimo Ferragamo
/s/ Robert Holland, Jr. Director March 25, 1998
- --------------------------------
Robert Holland, Jr.
/s/ Sidney Kohl Director March 25, 1998
- --------------------------------
Sidney Kohl
/s/ Kenneth G. Langone Director March 25, 1998
- --------------------------------
Kenneth G. Langone
/s/ David C. Novak Vice Chairman of the March 25, 1998
- -------------------------------- Board and President
David C. Novak
/s/ Jackie Trujillo Director March 25, 1998
- --------------------------------
Jackie Trujillo
/s/ Robert J. Ulrich Director March 25, 1998
- --------------------------------
Robert J. Ulrich
/s/ Jeanette S. Wagner Director March 25, 1998
- --------------------------------
Jeanette S. Wagner
/s/ John L. Weinberg Director March 25, 1998
- --------------------------------
John L. Weinberg
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TRICON Global Restaurants, Inc.
Exhibit Index
(Item 14)
Exhibit
Number Description of Exhibits
3.1* Restated Articles of Incorporation of TRICON Global Restaurants, Inc.
3.2* Bylaws of TRICON Global Restaurants, Inc.
4.** Form of Indenture.
10.1 Separation Agreement between PepsiCo, Inc. and TRICON Global
Restaurants, Inc. effective as of August 26, 1997, and the First
Amendment thereto dated as of October 6, 1997.
10.2 Tax Separation Agreement between PepsiCo, Inc. and TRICON
Global Restaurants, Inc. effective as of August 26, 1997.
10.3 Employee Programs Agreement between PepsiCo, Inc. and TRICON
Global Restaurants, Inc. effective as of August 26, 1997.
10.4 Telecommunications, Software and Computing Services Agreement
between PepsiCo, Inc. and TRICON Global Restaurants, Inc. effective
as of August 26, 1997.
10.5 Sales and Distribution Agreement between PFS, Pizza Hut, Taco Bell
and KFC effective as of May 6, 1997.
10.6*** Credit Agreement dated as of October 2, 1997 among TRICON
Global Restaurants, Inc., the lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent, and Chase Manhattan Bank as
Issuing Bank.
10.7+ TRICON Global Restaurants, Inc. Director Deferred Compensation
Plan, as effective October 7, 1997.
10.8+ TRICON Global Restaurants, Inc. 1997 Long Term Incentive
Plan, as effective October 7, 1997.
10.9+ TRICON Global Restaurants, Inc. 1997 Executive Incentive
Compensation Plan, as effective October 7, 1997.
10.10+ TRICON Global Restaurants, Inc. 1998 Executive Incentive
Compensation Plan, as effective October 7, 1997.
10.11+ TRICON Global Restaurants, Inc. Executive Income Deferral
Program, as effective October 7, 1997.
10.12+ TRICON Global Restaurants, Inc. Long Term Savings Program, as
effective October 7, 1997.
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10.13+ TRICON Global Restaurants, Inc. Restaurant Deferred Compensation Plan,
as effective October 7, 1997. (Draft)
10.14+ TRICON Global Restaurants, Inc. Pension Equalization Plan, as
effective October 7, 1997.
10.15+ Employment Agreement between TRICON Global Restaurants, Inc. and
Andrall E. Pearson dated as of June 25, 1997, and subsequently
amended as of October 20, 1997.
10.16+ Terms of Employment Agreement between TRICON Global Restaurants,
Inc. and Robert L. Carleton.
10.17 Form of Directors' Indemnification Agreement
12.1 Computation of ratio of earnings to fixed charges
21.1 Active Subsidiaries of TRICON Global Restaurants, Inc.
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
* Incorporated herein by reference from exhibits filed with the Registrant's
Registration Statement on Form 10 (File No. 1-13163) filed under the
Securities Exchange Act of 1934.
** Incorporated herein by reference from Exhibit 4.1 filed with the
Registrant's Registration Statement on Form S-3 (File No. 333-42969) filed
with the Commission on December 22, 1997, and Amendment No. 1 thereto filed
with the Commission on February 5, 1998.
*** Incorporated herein by reference from Exhibit 10 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
6, 1997.
+ Indicates a management contract or compensatory plan.
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EXHIBIT 10.1
SEPARATION AGREEMENT
SEPARATION AGREEMENT, dated as of August 26, 1997 (as amended, supplemented
or otherwise modified, this "Agreement"), by and between PepsiCo, Inc., a North
Carolina corporation ("PepsiCo"), and TRICON Global Restaurants, Inc., a North
Carolina corporation ("TRICON") and, as of the date hereof, a wholly-owned
subsidiary of PepsiCo.
W I T N E S S E T H :
WHEREAS, PepsiCo has engaged in the restaurant business through various of
its subsidiaries and affiliates (PepsiCo and its subsidiaries and affiliates
(other than the members of the TRICON Group (as such term is hereinafter
defined)) are collectively referred to herein as the "PepsiCo Group");
WHEREAS, PepsiCo has decided to consolidate the assets and operations of
its worldwide KFC, Pizza Hut and Taco Bell businesses (collectively, the
"Restaurant Businesses") into TRICON and TRICON's subsidiaries and affiliates
(TRICON and its subsidiaries and affiliates are collectively referred to herein
as the "TRICON Group"), and to distribute the Common Stock of TRICON on a
ten-for-one basis to the holders of PepsiCo Capital Stock (the "Distribution");
and
WHEREAS, on or before October 6, 1997 (the "Distribution Date"), PepsiCo
will transfer to the Agent (as such term is hereinafter defined), for the
benefit of the holders of record of PepsiCo Capital Stock at the close of
business on September 19, 1997 (the "Record Date"), without any consideration
being paid by such holders, the shares of TRICON Common Stock then owned by
PepsiCo;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the Parties (as such term is defined in Section 16 hereof) hereby agree as
follows:
Section 1. The Distribution. On or prior to the Distribution Date, PepsiCo
will transfer to BankBoston, N.A., as distribution agent (the "Agent"), for the
benefit of holders of record of PepsiCo Capital Stock at the close of business
on the Record Date, the shares of TRICON Common Stock then owned by PepsiCo,
together with an irrevocable voting rights proxy in favor of the Agent. Prior to
the Distribution Date, the Parties shall take such action with respect to the
TRICON Common Stock as is required to complete the Distribution on the basis of
one share of TRICON Common Stock for every ten shares of PepsiCo Capital Stock
outstanding at the close of business on the Record Date. PepsiCo shall instruct
the Agent to distribute such TRICON shares to the holders of record of PepsiCo
Capital Stock at the close of business on the Record Date. All of the shares of
TRICON so issued shall be fully paid and nonassessable. The Distribution shall
be effective as of 11:59:59 p.m. on the Distribution Date.
Section 2. Governance Documents. TRICON shall take all action necessary
such that, on the Distribution Date, the Restated Articles of Incorporation and
Bylaws of TRICON shall be substantially in the forms filed with the Securities
and Exchange Commission as exhibits to the Form 10 relating to the Distribution
(as amended, supplemented or otherwise modified, the "Form 10").
Section 3. Books, Records, Services and Access to Information. (a) Except
as otherwise provided in the attachments hereto, for a period of up to twelve
months from and after the Distribution Date (or such shorter period as set forth
on Schedule A hereto), each Party shall make available to the other, during
normal business hours and in a manner which will not unreasonably interfere with
such Party's business, the services set forth on Schedule A hereto (collectively
"Transitional Services") to the extent that the same are reasonably
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required to assist in effecting an orderly transition following the
Distribution. Except as otherwise provided in the attachments hereto, the
initial terms upon which Transitional Services shall be provided to TRICON or
PepsiCo, as the case may be, are set forth on Schedule A hereto.
(b) From and after the Distribution Date, PepsiCo shall afford TRICON
and its authorized employees and representatives reasonable access
(including access to persons or firms possessing relevant information and
records) and reasonable duplicating rights during normal business hours to,
or, at PepsiCo's option, copies of, all records, books, contracts,
instruments, data and other information (collectively, "Information")
within the PepsiCo Group's possession relating to any member of the TRICON
Group, insofar as such access or copies are reasonably required by TRICON.
(c) TRICON shall afford to PepsiCo and its authorized employees and
representatives reasonable access (including access to persons or firms
possessing relevant information and records) and reasonable duplicating
rights during normal business hours to, or, at TRICON's option, copies of,
all Information within the TRICON Group's possession relating to any member
of the PepsiCo Group, insofar as such access or copies are reasonably
required by PepsiCo.
(d) Within 45 days after the Distribution Date, each of PepsiCo and
TRICON shall provide the other with such indices or descriptions of
Information as it may maintain relating to the other or the other's
subsidiaries or affiliates. Information may be required under this Section
3, without limitation, for audit, accounting, claims, litigation and tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations. In lieu of retaining any specific Information, either Party
may, in writing, offer to deliver such Information to the other Party. If
such offer is not accepted within 90 days, the Information so offered shall
be retained or destroyed in accordance with PepsiCo's Record Retention
Policy. If such offer is accepted, the Party accepting delivery shall pay
the reasonable out-of-pocket costs of the delivery. Each Party shall
maintain the Information in accordance with the manner it treats similar
material relating to its ongoing business.
(e) At all times from and after the Distribution Date, each Party will
use its reasonable best efforts to make available to the other, upon
written request, its officers, directors, employees and agents as witnesses
to the extent that the same may reasonably be required in connection with
any legal, administrative or other proceedings in which the requesting
Party may from time to time be involved.
(f) Except as otherwise specifically provided for herein, a Party
providing Information, Transitional Services or witnesses to the other
hereunder shall be entitled to receive from the recipient, upon the
presentation of appropriate invoices therefor, payments for such amounts
relating to supplies, disbursements, and such other costs and out-of-pocket
expenses as are provided for on Schedule A hereto, or which may be
reasonably incurred in providing such Information, Transitional Services or
witnesses. Invoices shall be due and payable within thirty (30) days of
receipt. Interest shall accrue on any unpaid amount at the rate of eight
percent (8%) per annum.
(g) PepsiCo shall arrange for the transportation of existing corporate
records in its possession relating exclusively to the Restaurant
Businesses, including original corporate minute books, stock ledgers and
certificates, and corporate seals of each corporation included in the group
of which TRICON is the parent corporation, and all active agreements, deeds
to real property, active litigation files and filings with foreign
governments, if any, to TRICON's address set forth in Section 23 hereof.
PepsiCo shall provide TRICON with lists of trademarks, patents and
copyrights of TRICON and its subsidiaries.
Section 4. Confidentiality. Each member of the PepsiCo Group and the TRICON
Group shall hold, and cause each of their respective officers, employees,
agents, consultants and advisors to hold, in strict confidence, all non-public
Information concerning the other Party furnished it by such other Party or its
representatives pursuant to this Agreement, unless compelled to disclose such
Information by judicial or
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administrative process or, in the opinion of counsel, by other requirements of
law (in which case such Party shall promptly notify the other Party so that the
other Party may seek a protective or other appropriate remedy); and each Party
shall not release or disclose such Information to any other person, except its
auditors, attorneys, financial advisors, bankers and other consultants and
advisors who shall be bound by the provisions of this Section 4. Each Party
shall be deemed to have satisfied its obligations hereunder with respect to
confidential Information supplied by the other Party if it exercises the same
care as it does with respect to preserving the confidentiality of its own
similar information.
Section 5. Indemnification. (a) Effective on the Distribution Date, TRICON
agrees to indemnify and hold harmless each member of the PepsiCo Group and each
of their respective officers, directors, employees and agents from and against
any and all losses, liabilities, claims, suits, damages, costs and expenses
(including, without limitation, reasonable attorneys' fees and any and all
expenses reasonably incurred in investigating, preparing or defending against
any pending or seriously threatened litigation or claim) (collectively,
"Losses") arising out of or related in any manner to any item set forth on
Schedule B hereto. Similarly, effective on the Distribution Date, except as
otherwise provided in the attachments hereto, PepsiCo agrees to indemnify and
hold harmless each member of the TRICON Group and each of their respective
officers, directors, employees and agents from and against any and all Losses
arising out of or related in any manner to any item set forth on Schedule C
hereto.
(b) If any action is brought or any claim is made against a Party or
person in respect of which indemnity may be sought pursuant to subsection
5(a) above (the "Indemnitee"), the Indemnitee shall, within ten days after
the receipt of information indicating that an action or claim is likely,
notify in writing the Party from whom indemnification is sought (the
"Indemnitor") of the institution of the action or the making of the claim,
and the Indemnitor shall have the right, and at the request of the
Indemnitee, shall have the obligation, to assume the defense of the action
or claim, including the employment of counsel. If the Indemnitor assumes
the defense of the action or claim, the Indemnitor shall be entitled to
settle the action or claim on behalf of the Indemnitee without the prior
written consent of the Indemnitee unless such settlement would materially
affect the ongoing business or employment of the Indemnitee.
(c) The Indemnitee shall have the right to employ its own counsel, but
the fees and expenses of that counsel shall be the responsibility of the
Indemnitee unless (i) the employment of that counsel shall have been
authorized in writing by the Indemnitor in connection with the defense of
the action or claim; (ii) the Indemnitor shall not have employed counsel to
have charge of the defense of such action or claim; or (iii) such
Indemnitee shall have reasonably concluded that there may be defenses
available to it which are different from or additional to those available
to the Indemnitor (in which case the Indemnitor shall not have the right to
direct any different defense of the action or claim on behalf of the
Indemnitee). The Indemnitee shall, in any event, be kept fully informed of
the defense of any such action or claim. Except as expressly provided
above, in the event that the Indemnitor shall not previously have assumed
the defense of an action or claim, at such time as the Indemnitor does
assume the defense of the action or claim, the Indemnitor shall not
thereafter be liable to any Indemnitee for legal or other expenses
subsequently incurred by the Indemnitee in investigating, preparing or
defending against such action or claim.
(d) Anything in this Section 5 to the contrary notwithstanding, the
Indemnitor shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that if after due
notice the Indemnitor refuses to defend a claim or action, the Indemnitee
shall have the right to defend and/or settle such claim or action, and the
indemnitee shall not be precluded from making a claim against the
Indemnitor for reasonable expenses and liabilities resulting from such
defense and/or settlement in accordance with this Section 5.
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(e) Notwithstanding the foregoing provisions of this Section 5, there
may be particular actions or claims which reasonably could result in both
Parties being liable to the other under the indemnification provisions of
this Agreement. In such events, the Parties shall endeavor, acting
reasonably and in good faith, to agree upon a manner of conducting the
defense and settlement of the action or claim with a view to minimizing the
legal expenses and associated costs that might otherwise be incurred by the
Parties, such as, by way of illustration only, agreeing to use the same
legal counsel
(f) The indemnification provisions of this Section 5 shall not inure
to the benefit of any third party By way of illustration only, an insurer
who would otherwise be obligated to pay any claim shall not be relieved of
the responsibility with respect thereto, or, solely by Virtue of the
indemnification provisions hereof, have any subrogation rights with respect
thereto, it being expressly understood and agreed that no insurer or any
other third party shall be entitled to a "windfall" (i.e., a benefit they
would not be entitled to receive in the absence of the indemnification
provisions) by virtue of these indemnification provisions.
Section 6. Taxes. PepsiCo and TRICON have entered into a Tax Separation
Agreement, substantially in the form attached hereto as Attachment 1 (as
amended, supplemented or otherwise modified, the "Tax Agreement"), regarding
their respective rights and obligations with respect to taxes of the TRICON
Group for all periods through the Distribution Date and certain other
tax-related matters. In the event of a conflict between the terms of the Tax
Agreement and the terms of this Agreement, the terms of the Tax Agreement shall
govern.
Section 7. Employee Benefits. PepsiCo and TRICON have entered into an
Employee Programs Agreement, substantially in the form attached hereto as
Attachment 2 (as amended, supplemented or otherwise modified, the "Employee
Programs Agreement"), which allocates assets, liabilities and responsibilities
between them with respect to certain employee compensation and benefit plans and
programs and certain other related matters. In the event of a conflict between
the Employee Programs Agreement and the terms of this Agreement, the terms of
the Employee Programs Agreement shall govern.
Section 8. Telecommunications, Software and Computing Services. PepsiCo and
TRICON will enter into a Telecommunications, Software and Computing Services
Agreement, substantially in the form attached hereto as Attachment 3 (as
amended, supplemented or otherwise modified, the "T,S&C Agreement"), setting
forth the arrangements between the Parties with respect to internal software,
third party agreements, telecommunications services and computing services. In
the event of a conflict between the T,S&C Agreement and the terms of this
Agreement, the terms of the T,S&C Agreement shall govern.
Section 9. Transfer of Entities, Operations, Assets and Liabilities. (a)
Except as set forth on Schedule D hereto, prior to the Distribution Date?
PepsiCo and TRICON shall use reasonable efforts to cause the entities,
operations, assets and corresponding liabilities of the Restaurant Businesses to
be included as part of the TRICON Group. Both Parties agree to take such action
as may be necessary or appropriate, prior to the Distribution Date, to cause all
such restaurant-related assets and liabilities (including, without limitation,
all agreements relating thereto), except as provided on Schedule D hereto, to be
properly conveyed or assigned to TRICON or the appropriate subsidiary or
affiliate of TRICON. Except as otherwise provided in this Agreement (including,
without limitation, the Schedules and Attachments hereto), PepsiCo shall bear
the reasonable costs of such conveyances.
(b) Except as expressly provided herein, TRICON agrees to assume and
pay all contracts, obligations and liabilities of each member of the
PepsiCo Group associated in any way with the Restaurant Businesses and/or
the Casual Dining Businesses (as such term is hereinafter defined), whether
accrued, absolute, contingent or otherwise, and whether due or to become
due, including, without limitation, all obligations of any member of the
PepsiCo Group acting as a guarantor of obligations associated in any way
with any of the Restaurant Businesses and/or the Casual Dining Businesses,
and all obligations under leases and
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other executory contracts and liabilities, whether arising as a result of
the transactions contemplated hereby, existing on the date hereof, or based
on facts or actions arising on or prior to the Distribution Date, whether
or not such obligations shall have been disclosed herein, and whether or
not reflected on the opening balance sheet of the TRICON Group prepared
pursuant to Section 13 hereof (the "Opening Balance Sheet "). For purposes
of this Agreement, the term "Casual Dining Businesses" shall mean
California Pizza Kitchen, Chevy's Mexican Restaurants, Chimayo Grill,
D'Angelo Sandwich Shops, East Side Mario's and Hot 'n Now.
(c) In the event that the transfer of all such assets and liabilities
is not accomplished by the Distribution Date, the Parties agree that TRICON
shall have de facto control and equitable ownership of the entities,
operations and assets, and de facto responsibility for the obligations and
liabilities, intended to be transferred to the TRICON Group; provided,
however, that if any uncompleted steps financially affect either PepsiCo or
TRICON, the Parties agree to use their respective best efforts to equitably
resolve any such financial impact
(d) This Section 9 shall not inure to the benefit of any third party.
Section 10. Letters of Credit, Guarantees and Contingent Liabilities. (a)
TRICON shall use its best efforts to cause the beneficiaries of all of the
PepsiCo Group's letters of credit, guarantees and other contingent liabilities
relating to any of the Restaurant Businesses or the Casual Dining Businesses
(including, without limitation, commercial letters of credit, financing
guarantees, performance guarantees, lease guarantees, comfort letters, insurance
and workers' compensation liabilities, and the letters of credit, guarantees and
other contingent liabilities identified on Schedule E hereto) (collectively, the
"Restaurant Contingent Liabilities") which will not have expired on or prior to
the Distribution Date, to release and terminate all such Restaurant Contingent
Liabilities on or prior to the Distribution Date and, where necessary or
appropriate, to accept substitute letters of credit, guarantees or contingent
liabilities issued for the account of TRICON or to post sufficient cash
collateral on behalf of TRICON. TRICON hereby agrees to provide to PepsiCo,
prior to the Distribution Date, a schedule (the "PHI Contingent Liability
Schedule") listing all of Pizza Hut, Inc. 's letters of credit, guarantees and
other contingent liabilities relating to any of the Restaurant Businesses or the
Casual Dining Businesses which have not been released, terminated or replaced
with a Qualified Letter of Credit (as such term is hereinafter defined). The PHI
Contingent Liability Schedule shall supplement, and be incorporated by reference
into, Schedule E hereto. From and after the Distribution Date, TRICON will pay a
fee based upon the maximum exposure related to any Restaurant Contingent
Liabilities which were not released, terminated or replaced prior to the
Distribution Date. Such fee will be structured as follows: (i) for the first
year following the Distribution Date, the fee will be consistent with the
pricing of TRICON's senior credit facility as in effect from time to time and
will be expressed as a percentage of the value of the underlying exposure, and
(ii) thereafter, the fee will be equal to the current market value, as
determined by The Chase Manhattan Bank, for replacing all such Restaurant
Contingent Liabilities that have not yet been released, terminated or replaced
by a Qualified Letter of Credit. Such fee shall be payable monthly in advance
until such time as each such Restaurant Contingent Liability has been released,
terminated or replaced by a Qualified Letter of Credit. Notwithstanding the
foregoing, TRICON shall at all times indemnify and hold harmless each member of
the PepsiCo Group from and against all losses, liabilities and obligations
incurred with respect to such Restaurant Contingent Liabilities. Without
limiting the foregoing, TRICON shall, upon demand, reimburse PepsiCo within ten
days for any amounts actually paid by any member of the PepsiCo Group with
respect to any such Restaurant Contingent Liabilities.
(b) For purposes of this Agreement, the term "Qualified Letter of
Credit" shall mean an irrevocable, transferable letter of credit issued to
PepsiCo or its relevant subsidiary or affiliate by a bank that is an A
Credit (as such term is hereinafter defined), substantially in the form
attached as Schedule F hereto, with a term extending to the last possible
expiration date of the Restaurant Contingent Liabilities covered thereby
and with a maximum drawing amount that shall equal the full amount of all
remaining obligations and foreseeable claims under the Restaurant
Contingent Liabilities covered thereby (assuming the exercise of all
extension
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options with respect to the underlying obligations). In the event of any
change in the law regarding letters of credit generally that affects the
language in a Qualified Letter of Credit, TRICON shall, at the request of
PepsiCo, provide a new Qualified Letter of Credit containing modifying
language as approved by PepsiCo. The language contained in the form of
letter of credit attached as Schedule F hereto shall be deemed to be
approved by, PepsiCo. For purposes of this Agreement, the term "A Credit"
shall mean a corporation or banking association whose long-term debt
obligations are rated A+ or A1 or better by Standard & Poor's or by
Moody's, respectively, or their successors in interest that are "nationally
recognized statistical rating organizations."
(c) TRICON agrees that no member of the TRICON Group shall modify,
amend or extend (including, without limitation, pursuant to any existing
option to extend) any of the leases for property of the TRICON Group which
have been guaranteed by a member of the PepsiCo Group (including, without
limitation, the leases identified on Schedule G hereto) (collectively, the
"Leases") so as to increase or in any way enlarge the duration of any of
the obligations or liabilities of any member of the PepsiCo Group pursuant
to those guarantees without first obtaining the prior written approval of
PepsiCo, which approval may be withheld by PepsiCo in its sole discretion.
TRICON hereby agrees to provide to PepsiCo, prior to the Distribution Date,
a schedule (the "PHI Lease Schedule") listing each lease for property of
the TRICON Group which has been guaranteed by Pizza Hut, Inc. The PHI Lease
Schedule shall supplement, and be incorporated by reference into, Schedule
G hereto. TRICON further agrees that no member of the TRICON Group shall
default under or breach any of the Leases so as to cause or give rise to
any claims, actions, suits or proceedings against any member of the PepsiCo
Group arising out of such guarantees, and hereby agrees to indemnify and
hold harmless each member of the PepsiCo Group from and against all such
liabilities, costs and expenses (including, without limitation, reasonable
attorneys' fees and any and all expenses reasonably incurred in
investigating, preparing or defending against any pending or seriously
threatened litigation or claim) associated therewith in accordance with
Section 5 hereof. TRICON shall immediately notify PepsiCo, in writing, of
any allegation or claim asserted by any person or entity which might give
rise to any liability or obligation of any member of the PepsiCo Group
under any such guarantee.
Section 11. Insurance. (a) All policies of liability, fire, workers'
compensation and other forms of insurance maintained by the PepsiCo Group
insuring the products, properties, assets and/or operations of the TRICON Group
shall continue in full force and effect up to and through the Distribution Date,
and except as set forth on Schedule H hereto, shall be terminated effective
11:59:59 p.m. on the Distribution Date. Any refunds of prepaid premiums with
respect to such terminated insurance shall be for PepsiCo's account. PepsiCo
shall be responsible for obtaining such initial insurance coverage for TRICON
from and after the Distribution Date in such amounts as are agreed upon by the
Parties. TRICON shall be liable for payment of all premiums with respect to such
initial insurance coverage and all subsequent coverage which TRICON thereafter
elects to obtain. For purposes of this Section, insurance coverage does not
include any insurance for plans described in the Employee Programs Agreement,
but does include ERISA fidelity bonds and/or fiduciary insurance.
(b) With respect to any insurance programs relating to the TRICON
Group (including, without limitation, any casualty insurance programs such
as public and products liability insurance, insured or self-insured
workers' compensation insurance and automobile liability insurance), TRICON
shall be liable for payment of all claims arising out of incidents, known
or unknown, reported or unreported, which occur prior to, on or after the
Distribution Date. Any reserves under these insurance programs relating to
the TRICON Group for periods ending prior to, on or after the Distribution
Date shall be for the account of TRICON. Such reserves shall be included as
liabilities of TRICON, and any charge or credit to the reserves shall be
for TRICON's account.
Section 12 Banking and Other Arrangements. The responsibility for bank
accounts used exclusively by the TRICON Group shall be transferred from PepsiCo
to TRICON on or prior to the Distribution Date. Normal procedures will be
followed for receipts and disbursements funding prior to the Distribution Date
as set forth on Schedule I hereto.
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Section 13. Procedures for Closing and Delivery of Books and Balance Sheet
and Payment of Certain Amounts to PepsiCo. Financial statements of TRICON as of
the Distribution Date, which shall be summaries of the combined accounting
ledgers of the TRICON Group as of the close of the tenth accounting period of
the 1997 fiscal year, and which shall include an Opening Balance Sheet, shall be
prepared by PepsiCo within 45 days after the Distribution Date and reviewed and
agreed to by TRICON within 15 days after such financial statements are prepared.
Each Party shall bear its own expenses in connection with the preparation and
review of such financial statements. PepsiCo and TRICON agree that the
principles for determining the Opening Balance Sheet are as follows:
(a) Total Assets shall be determined through the normal reporting
process using U.S. generally accepted accounting principles ("GAAP") as
applied on a basis substantially consistent with the basis used in the
preparation of the financial statements of TRICON presented in the Form 10
and standard PepsiCo definitions and accounting practice, consistently
applied.
(b) Non-Interest Bearing Liabilities shall be determined through the
normal reporting process using GAAP as applied on a basis substantially
consistent with the basis used in the preparation of the financial
statements of TRICON presented in the Form 10 and standard PepsiCo
definitions and accounting practice, consistently applied. Accrued tax
liabilities shall be treated in accordance with the provisions of the Tax
Agreement.
(c) Net Assets is the sum of total assets less non-interest bearing
liabilities. Net Assets shall be determined in accordance with the
following capitalization procedure:
(i) Short and Long-Term Debt shall be determined through the
normal reporting process using GAAP as applied on a basis
substantially consistent with the basis used in the preparation of the
financial statements of TRICON presented in the Form 10 and standard
PepsiCo definitions and accounting practice, consistently applied. The
Opening Balance Sheet will reflect at least $4.5 billion of debt
obligations to be incurred by TRICON on or prior to the Distribution
Date; and $4.5 billion of the proceeds of such debt obligations will
be transferred to PepsiCo on or prior to the Distribution Date as
repayment of certain amounts due to PepsiCo from the TRICON Group and
a dividend.
(ii) Stockholders' Equity of TRICON will equal the difference
between the total Net Assets less the Short and Long-Term Debt on
TRICON's Opening Balance Sheet as of the Distribution Date.
Any amounts due PepsiCo by the TRICON Group related to
intercompany accounts (other than those accounts which are defined as
intercompany trade receivables and payables in accordance with PepsiCo
financial policies) or other promissory notes in excess of the amount
set forth in (i) immediately above, which will cover repayment of
certain amounts due to PepsiCo from the TRICON Group, will be
capitalized by PepsiCo.
Section 14. Operation Until Closing. TRICON agrees, on behalf of itself and
each member of the TRICON Group, that through the Distribution Date the
Restaurant Businesses shall be operated in the ordinary course of business,
consistent with past practice.
Section 15. De-Identification. As soon as practicable after the
Distribution Date, and in no event later than 120 days after such Date, TRICON
shall eliminate all exterior and interior signage and other identification in
its possession or control, and cease using any letterhead, which identifies
TRICON or any other entity within the TRICON Group as a subsidiary or affiliate
of PepsiCo.
7
<PAGE>
Section 16. Parties. As used in this Agreement, the term "Parties" shall
include the PepsiCo Group and its successors, and the TRICON Group and its
successors. Each of PepsiCo and TRICON agrees that it shall cause each of its
subsidiaries and affiliates to comply fully with the terms of this Agreement.
Section 17. Expenses. Except as set forth on Schedule J hereto or as
otherwise provided in this Agreement (including, without limitation, the
Schedules and Attachments hereto), all expenses in connection with the
Distribution shall be borne by PepsiCo and all expenses in connection with the
ongoing operations and/or businesses of the TRICON Group shall be borne by
TRICON.
Section 18. Tax Gross-Up. If any amount paid by any member of the PepsiCo
Group or the TRICON Group, as the case may be, pursuant to this Agreement
results in any increased Tax liability or reduction of any Tax Asset of the
TRICON Group or the PepsiCo Group, respectively, then PepsiCo or TRICON, as
appropriate, shall indemnify the other Party and hold it harmless from and
against any interest or penalty attributable to such increased Tax liability or
the reduction of such Tax Asset and shall pay to the other Party, in addition to
amounts otherwise owed, the After-Tax Amount. Capitalized terms used in this
Section 18 but not otherwise defined in this Agreement shall have the meanings
assigned to such terms in the Tax Agreement.
Section 19. Survival. All of the provisions of this Agreement shall survive
the Distribution Date.
Section 20. Other Provisions. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina, may not be
assigned by either Party without the written consent of the other, and shall
bind and inure to the benefit of the Parties hereto and their respective
successors and permitted assignees. This Agreement may not be amended,
supplemented or otherwise modified except by an agreement in writing signed by
PepsiCo and TRICON. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
Section 21. Arbitration. (a) Except as otherwise provided in the
attachments hereto, any controversy or claim arising out of or relating to this
Agreement, or the breach hereof, shall be settled by arbitration in accordance
with the then prevailing Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") as such rules may be modified herein.
(b) An award rendered in connection with an arbitration pursuant to
this Section shall be final and binding and judgment upon such an award may
be entered and enforced in any court of competent jurisdiction.
(c) The forum for arbitration under this Section shall be agreed upon
by the Parties, or, failing such agreement, shall be New York, New York.
(d) Arbitration shall be conducted by a single arbitrator selected
jointly by PepsiCo and TRICON. If within 30 days after a demand for
arbitration is made, PepsiCo and TRICON are unable to agree on a single
arbitrator, three arbitrators shall be appointed. Within 30 days after such
inability to agree, PepsiCo and TRICON shall each select one arbitrator and
those two arbitrators shall then select a third arbitrator unaffiliated
with either Party. In connection with the selection of the third
arbitrator, consideration shall be given to familiarity with corporate
divestiture transactions and experience in dispute resolution between
parties, as a judge or otherwise. If the arbitrators selected by PepsiCo
and TRICON cannot agree on the third arbitrator within such 30 day period,
they shall promptly thereafter discuss the qualifications of such third
arbitrator with the AAA prior to selection of such arbitrator, which
selection shall be in accordance with the Commercial Arbitration Rules of
the AAA.
(e) If an arbitrator cannot continue to serve, a successor to an
arbitrator selected by PepsiCo or TRICON, as the case may be, also shall be
selected by the same Party, and a successor to the neutral arbitrator
8
<PAGE>
shall be selected as specified in subsection (d) of this Section. A full
rehearing will be held only if the neutral arbitrator is unable to continue
to serve or if the remaining arbitrators unanimously agree that such a
rehearing is appropriate.
(f) The arbitrator or arbitrators shall be guided, but not bound, by
the Federal Rules of Evidence and by the procedural rules, including
discovery provisions, of the Federal Rules of Civil Procedure. Any
discovery shall be limited to information directly relevant to the
controversy or claim in arbitration.
Section 22. Limitation on Subsequent Activities. PepsiCo agrees, without
any separately bargained for consideration, but rather as an integral part of
the transfer of the Restaurant Businesses to the TRICON Group and the
Distribution provided for in this Agreement, that it shall not directly, through
a subsidiary or affiliate, or otherwise, through October l, 2000, open anywhere
in the United States or Canada a restaurant substantially identical to the
restaurant concepts operated by the TRICON Group at the opening of business on
the day following the Distribution Date. PepsiCo acknowledges that the remedy at
law for any breach of the foregoing covenant would be inadequate and in the
event of any such breach TRICON shall be entitled to injunctive relief.
Section 23. Notices. Any notice, demand, claim or other communication under
this Agreement shall be in writing and shall be deemed to have been given (i)
upon the delivery thereof if delivered personally (including, without
limitation, by courier), (ii) three days after being sent by certified mail,
return receipt requested, postage prepaid, or (iii) upon receipt of confirmation
of a telecopy transmission, in each case to the Parties at the following
addresses (or at such other address as a Party may specify by notice to the
other):
If to PepsiCo:
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577-1444
Telecopy No.: (914) 253-3123
Attention: General Counsel
If to TRICON:
TRICON Global Restaurants, Inc.
1441 Gardiner Lane
Louisville, KY 40213
Telecopy No.: (502) 456-8300
Attention: General Counsel
9
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed as of the date and year first above written.
PepsiCo, Inc.
By /s/ Karl M. von der Heyden
-----------------------------------
Karl M. von der Heyden
Chief Financial Officer
TRICON Global Restaurants, Inc.
By /s/ Andrall E. Pearson
-----------------------------------
Andrall E. Pearson
Chairman of the Board
10
<PAGE>
INDEX TO SCHEDULES AND ATTACHMENTS
SCHEDULES
Schedule A - Transitional Services
Schedule B - TRICON Indemnification Obligations
Schedule C - PepsiCo Indemnification Obligations
Schedule D - Restaurant Entities, Operations, Assets and Liabilities not
being Transferred to the TRICON Group
Schedule E - Letters of Credit, Guarantees and Other Contingent Liabilities
Issued by the PepsiCo Group
Schedule F - Form of Qualified Letter of Credit
Schedule G - Restaurant Leases which have been Guaranteed by the PepsiCo
Group
Schedule H - Restaurant Insurance which will not be Terminated as of the
Distribution Date
Schedule I - Restaurant Funding Structure Prior to the Distribution Date
Schedule J - Expenses
ATTACHMENTS
Attachment 1 - Tax Separation Agreement
Attachment 2 - Employee Programs Agreement
Attachment 3 - Telecommunications, Software and Computing Services Agreement
11
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
TRANSITIONAL SERVICES
<S> <C> <C> <C>
Expected
Department Date Service Cost Estimate or
Providing Service Services Provided to TRICON Will Terminate Billing Procedure
- -------------------------------------------------------------------------------------------------------------
Treasury - Global Cash Desk and Operations training 10/31/97 T&E Expenses will be
Cash Management for all software packages and daily charged to TRICON
and Operations transactional activity
- -------------------------------------------------------------------------------------------------------------
Guarantee Tracking 10/31/97 N/A
- -------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
SCHEDULE B
TRICON INDEMNIFICATION OBLIGATIONS
Items with respect to which TRICON will indemnify the PepsiCo Group in
accordance with Section 5 of this Separation Agreement:
(1) All Losses arising out of or related in any manner to any of the
Restaurant Businesses, as such businesses have been conducted in the past, are
currently conducted or may in the future be conducted, whether or not such
Losses are asserted prior to the Distribution Date and whether or not such
Losses are based upon PepsiCo or any of its subsidiaries or affiliates being a
direct party to a transaction or agreement.
(2) All Losses arising out of or related in any manner to any of the Casual
Dining Businesses and/or any other restaurant business in which PepsiCo or any
of its subsidiaries or affiliates has been involved, as such businesses were
conducted by any member of the PepsiCo Group or the TRICON Group, whether or not
such Losses are asserted prior to the Distribution Date and whether or not such
Losses are based upon PepsiCo or any of its subsidiaries or affiliates being a
direct party to a transaction or agreement.
(3) All Losses arising out of or related in any manner to any letters of
credit, guarantees or contingent liabilities relating to (i) any of the
Restaurant Businesses, the Casual Dining Businesses and/or any other restaurant
business in which PepsiCo or any of its subsidiaries or affiliates has been
involved, or (ii) any obligations of any member of the TRICON Group (including,
without limitation, commercial letters of credit, financing guarantees,
performance guarantees, lease guarantees, comfort letters, and insurance and
workers' compensation liabilities), whether or not such Losses are asserted
prior to the Distribution Date.
(4) All Losses arising out of or related in any manner to (i) the Borrower
Receivable Purchase and Sale Agreement, dated as of December 13, 1995, among
Taco Bell Corp., as Seller, Corporate Asset Funding Company, Inc., as Investor,
and Citicorp North America, Inc., as Investor Agent, or (ii) the Parent
Undertaking Agreement, dated as of December 13, 1995, related thereto.
(5) All Losses arising out of or related in any manner to (i) the
Commitment Letter, dated August 26, 1997 (the "Commitment Letter"), among
TRICON, PepsiCo, The Chase Manhattan Bank, Chase Securities Inc., Citibank,
N.A., Citicorp Securities, Inc., Morgan Guaranty Trust Company of New York, J.P.
Morgan Securities, Inc., NationsBank, N.A., and NationsBanc Capital Markets,
Inc., (ii) the Summary of Terms and Conditions referred to therein (the "Term
Sheet"), and/or (iii) any of the credit facilities referred to in the Commitment
Letter and/or the Term Sheet.
13
<PAGE>
SCHEDULE C
PEPSICO INDEMNIFICATION OBLIGATIONS
Items with respect to which PepsiCo will indemnify the TRICON Group in
accordance with Section 5 of this Separation Agreement:
(1) All Losses arising out of or related in any manner to either of the
Pepsi-Cola or Frito-Lay businesses, as such businesses have been conducted in
the past, are currently conducted or may in the future be conducted, whether or
not such Losses are asserted prior to the Distribution Date.
(2) All Losses arising out of or related in any manner to any contingent
liabilities relating to (i) either of the Pepsi-Cola or Frito-Lay businesses, or
(ii) any obligations of any member of the PepsiCo Group, whether or not such
Losses are asserted prior to the Distribution Date.
14
<PAGE>
SCHEDULE D
RESTAURANT ENTITIES, OPERATIONS, ASSETS AND LIABILITIES
NOT BEING TRANSFERRED TO THE TRICON GROUP
Entities
- --------
Pizza Hut, Inc., a Delaware corporation
Bell Taco Funding Syndicate, an Australian partnership (financing vehicle) PFS
de Mexico S.A. de C.V., a corporation organized under the laws of Mexico
Kentucky Fried Chicken Nederland, B.V., a corporation organized under the laws
of the Netherlands
PepsiCo do Brasil Ltda.
United Food Companies Restaurants S. A.
Mapumar
Entities not solely in the restaurant business
Operations
- ----------
None
Assets
- ------
None
Liabilities
- -----------
None
15
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE E
LETTERS OF CREDIT, GUARANTEES AND OTHER
CONTINGENT LIABILITIES ISSUED BY THE PEPSICO,INC. GROUP1
<S> <C> <C> <C> <C> <C> <C>
L/C, Guarantee
or Contingent Issue Expiry
Liability No. Obligor Beneficiary Date Date Amount Description
- ------------- ------- ----------- ---- ---- ------ -----------
G 95-l ST PepsiCo, Inc. A.J.N./S.D.K. 1/25/90 3/31/15 12,178,460.00 USD On behalf of PHI: Guarantee to cover
Realty lease obligation entered into as a
result of acquiring Pizza Hut of
Cincinnati.
G 94-1 ST PepsiCo, Inc. A.J.N./S.D K. 1/25/90 3/31/15 2,335,951.00 USD On behalf of PHI: Guarantee to cover
Realty lease obligation entered into as a
result of acquiring Pizza Hut of
Cincinnati.
G 570-1 NST PepsiCo, Inc. Alan and 12/20/82 On behalf of TBC: Guarantee of
Herman Rubin performance.
G 96-1 ST PepsiCo, Inc. Anthony J. 1/25/90 3/31/15 1,616,857.00 USD On behalf of PHI: Guarantee to cover
Nikert and lease obligation entered into as a
Joan A. Nickert result of acquiring Pizza Hut of
Cincinnati.
G 203-1 NST PepsiCo, Inc. Anthony J. 2/1/92 3/25/05 On behalf of PHI: Guarantee of put
Nickert and option given to property owners of
Joan A. Nickert leased facilities as part of
settlement agreement between Pizza
Hut, Inc. and the Nickert group.
</TABLE>
1Pizza Hut, Inc. obligations will be included on a supplement to this schedule.
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
L/C, Guarantee
or Contingent Issue Expiry
Liability No. Obligor Beneficiary Date Date Amount Description
- ------------- ------- ----------- ---- ---- ------ -----------
CL 1712-1 Pizza Hut, Inc. Banco Popular 12/18/96 8,500,000.00 USD Comfort letter in connection with Banco
de Puerto Rico Popular's financing of Horizon Foods of
the Adirondacks, LLC (franchisee). In
case of default Pizza Hut will not
unreasonably withhold its consent to an
interim substitute franchisee and will
provide reasonable management
assistance to such approved person.
G 1732-4 PepsiCo, Inc. Banco Safra, 6/23/97 6/23/99 1,700,000.00 USD On behalf of PRI: To cover bank
S.A. guarantees or surety bond issued in
connection with federal tax lawsuits
against UFC.
G 1117-7 PepsiCo, Inc. Bank of 10/17/96 10/17/97 5,000,000.00 USD On behalf of KFC: Renewal for
America NT & general working capital and to support
SA trade finance facilities
G 1784-1 PepsiCo, Inc. Bank of Boston 7/25/97 10/4/97 500,000.00 USD On behalf of PRI: Temporary
Guarantee for Brazil Restaurant
NewCo. Must be replaced with Tricon
Guarantee.
G 1790-1 PepsiCo, Inc. Bank of Boston 8/1/97 8/1/98 500,000.00 USD On behalf of PRI: Brazil overdraft for
cash collections/ disbursement account
CL 1198-1 Pizza Hut, Inc. Branch Bank & 5/9/94 Pizza Hut agrees to the following
Trust conditions for loans given by Branch
Bank & Trust to franchisee Charles
Scott. (A) Pizza Hut will supply copies
of all notices of delinquency, default,
or termination of Franchise Agreements
(B) Pizza Hut will permit the bank to
cure any monetary defaults under the
Franchise Agreement (C) If franchisee
defaults, Pizza Hut allows the
continued operation of the store with
Pizza Hut's approval and Pizza Hut
will provide reasonable management
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
assistance (D) If default occurs, Pizza
Hut will not unreasonably withhold
approval for a franchisee of candidates
proposed by the bank.
G 1379-1 PepsiCo, Inc. Brian J. 1/1/95 1/1/05 5,000,000.00 USD On behalf of PHI: Guarantee on behalf
McLaughlin of Delops, Inc. a wholly-owned
subsidiary of Pizza Hut, Inc.,
supporting a non-negotiable promissory
note dated Feb. 3, 1994. The note is
between Delfran, Inc. and McLaughlin.
NPV buy-out of previous employment
contract.
G 1543-1 PepsiCo, Inc. CAFCO- 12/13/95 20,000,000.00 USD On behalf of TBI: Guarantee
Citicorp established to guarantee a pool of
loans to Taco-Bell from various
franchisees. See folder for details
regarding liability and payment
schedule
G 520-5 PepsiCo, Inc. Chase 2/17/97 2/17/98 7,000,000.00 USD On behalf of TBI: Backing for a
Manhattan $1MM L/C facility for Taco Bell.
Bank Delaware L/C's to be issued to NY and New
England municipalities, typically
in amounts under $25M for construction
projects involving wated and/or waste
considerations.
G 1457-1 PepsiCo, Inc. Citibank 9/14/95 9/14/98 25,000.00 USD On behalf of PHI: Guarantee to
customs for import duties on behalf of
Mr. Rafalat
G 1692-1 PepsiCo, Inc. Citibank 11/25/96 12/31/97 40,000,000.00 BEF On behalf of PRI: Guarantee for
increased working capital needs
G 1788-1 PepsiCo, Inc. Citibank 6/18/97 6/18/98 4,500,000.00 DEM On behalf of PRI: Credit line to
enable repayment of 1) Soc. Gen.
Overdraft and 2) Intercompany payables.
Original approval on memo signed by
PRT and KvdH.
G 1087-6 PepsiCo, Inc. Citibank 12/31/96 12/31/97 5000,000.00 USD On behalf of PRI: Renewal of credit
Line to be utilized for CAPEX needs
CL 1233-1 PepsiCo Citibank 4/29/94 A letter of understanding between Pizza
Restaurants Hut, Inc., Taco Bell Corp. and
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
International Kentucky Fried Chicken International
Holding, Inc. ("PepsiCo, Inc. Group")
and Citicorp. The PepsiCo, Inc. Group
provides Citicorp the exclusive right
to develop a franchisee financing
program for PepsiCo, Inc. Group's
franchisees in Latin America (including
Mexico, the Caribbean Countries,
Central and South America). Citicorp
will offer to new and existing
franchisees of the PepsiCo, Inc. Group
secured term loans and leases for new
store development, image enhancements,
refinancing and takeout financing.
Responsibilities of the parties under
the financing program are included
in the letter of understanding.
G 1188-4 PepsiCo, Inc. Citibank 11/29/96 11/29/97 3,000,000.00 TTD On behalf of PRl: Overdraft facility to
accommodate timing of cash flows.
CL 652-1 Pizza Hut, Inc. Citicorp 3/15/86 CIC will provide for the benefit of new
Industrial and exising franchisees of Pizza Hut,
Credit, Inc. Inc., a financing facility for the
granting of secured loans covering
equipment and other personal property.
In the event of default by a
franchisee, Pizza Hut, Inc. will use
its best efforts at its own expense to
assist CIC in locating other Pizza Hut,
Inc. franchisees capable of assuming
the CIC loan.
G 1530-1 PepsiCo, Inc. Citicorp 12/20/95 12/20/98 3,000,000.00 USD On behalf of TBC: Loan for the sale of
Leasing restaurants for franchise.
G 1791-1 PepsiCo, Inc. Citicorp North 8/1/97 8/1/98 2,000,000.00 USD On behalf of PRI: Overdraft facility
America established to bridge equity fundings.
G 586-1 PepsiCo, Inc. Commonwealth 8/29/88 On behalf of TBC: Guarantee of
of Virginia Performance
LC 888-1 PepsiCo, Inc. Crestar Bank 9/29/92 9/29/98 124,488.00 USD
G 1482-2 PepsiCo, Inc. Dredsner Bank, 10/18/96 10/17/97 1,000,000.00 DEM On behalf of PHI: Renewal of
A.G. guarantee to support borrowings of
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nudelmacher GmbH
G 1282-2 PepsiCo, Inc. Dredsner Bank 10/21/96 10/21/97 7,500,000.00 DEM On behalf of PRI: Renewal of rent
guarantees
G 1264-4 PepsiCo, Inc. Dredsner Bank 10/21/96 10/21/97 7,500,000.00 On behalf of PRI: Renewal of credit
line for Pizza Hut GMHB & COKG
(legal change in entity name from Pizza
Hut GmbH & Co. KG to PepsiCo, Inc.
Restaurants International Ltd. & Co.
KG as of 1/2/96)
G 1265-4 PepsiCo, Inc. Dredsner Bank 10/21/96 10/21/97 7,500,000.00 DEM On behalf of PRI: Renewal of rent
guarantees
CL 1633-1 PepsiCo, Inc. First Boston 5/17/96 5/17/99 On behalf of PHI: Midland Food
Mortgage Services has applied to First Boston
Capital Corp. Mortgage Capital Corp. for loans or
lines of credit that will be secured
in part by a lien on some or all the
assets of the franchise.
CL 1594-1 PepsiCo, Inc. First Boston 1/22/96 1/22/98 On behalf of PHI: Midland Food Service
Mortgage has applied to First Boston Mortgage
Capital Corp. Capital Corp. for loans or lines of
credit that will be secured in part by
a lien on some or all the assets of the
franchisee.
G 1187-1 PepsiCo, Inc. First National 9/6/94 10/30/99 700,000.00 USD On behalf of PHI: To finance 80% of
Bank of the lower cost or appraised value of
Commerce any new store locations of Borrower.
Appraisals to be ordered by Bank and
subject to Bank's review and approval.
G 401-1 PepsiCo, Inc. First National 3/15/79 2/15/99 On behalf of TBC: Lease guarantee
Realty & between First National Realty and
Development Development Company and Taco Bell
Company
G 161-1 PepsiCo, Inc. Franchise 9/1/92 On behaIf of KFC: This is Guarantee
Finance Corp of Performance with KFC and the State
of America of Minnesota.
CL 653-1 Pizza Hut, Inc. Franchise 4/12/88 Letter of understanding regarding
Finance Corp acquisition of land, building and
of America equipment by Franchise Finance
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Corporation for lease to PH franchisees.
Pizza Hut will cooperate in marketing
the financing programs to franchisees.
In the event of default by franchisee,
Pizza Hut will use best efforts to find
a replacement and has the option to run
the restaurant, but has no requirement
to invest.
CL 1544-1 Pizza Hut, Inc. Franchise Tycorp Pizza Inc. and its affiliates
Mortgage (collectively the franchisee) has
Acceptance applied to franchise mortgage acceptance
company llc (the lender)for loans or
lines of credit (the loan) that will be
secured in part by a lien on some or
all of the assets of the franchisee.
Pizza Hut, Inc. (PHI) has entered to
a franchise agreement dated December 21,
1995 (the franchise agreement) with the
franchise for the operations of several
Pizza Hut restaurants in the
Charlottesville and Greensboro DMAs.
The Franchisee's grant of security
interests to the lender in assets other
than the franchise agreement and
related right licensed by PHI will not
constitute a default under the franchise
agreement that could be construed as
prohibiting those security interests.
CL 1593-1 Pizza Hut, Inc. Franchise 12/21/95 12/21/97 Tycorp Pizza Inc. and its affiliates
Mortgage (collectively the franchisee) has
Acceptance applied to Franchise Mortgage Acceptance
Comp. LLC Company for loans or lines of credit
that will be secured in part by a lien
on some or all the assets of the
franchisee.
G 1176-1 PepsiCo, Inc. Frank G. 2/21/92 12/31/99 841,662.00 USD On behalf of PHI: Promissory Note
Lampo issued to seller in acquisition of Lampo
(franchisee in Texas), payments are for
deferred purchase price.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
LC 1210-2 PepsiCo, Inc. Fuji Bank 4/18/95 4/18/98 300,000.00 On behalf of TBC: Requirements
Limited in connection with Workers'
Compensation.
LC 1748-1 PepsiCo, Inc. Fuji Bank 1/1/95 1/1/98 30,562,800.00 USD On behalf of PHI: Established on
Limited behalf of Risk Management for
insurance purposes.
LC 1750-1 PepsiCo, Inc. Fuji Bank 4/1/94 4/1/98 568,165.00 USD On behalf of PHI: Established on
Limited behalf of Risk Management for
insurance purposes.
LC 1747-1 PepsiCo, Inc. Fuji Bank 1/1/95 1/1/98 1,000,000.00 USD On behalf of TBC: Established on
Limited behalf of Risk Management for
insurance purposes
LC 1749-1 PepsiCo, Inc. Fuji Bank 4/1/94 4/l/98 568,165.00 USD On behalf of TBC: Established on
behalf of Risk Management for
insurance purposes
LC 1098-1 PepsiCo, Inc. Fuji Bank 1/1/95 1/1/98 38,000,000.00 USD On behalf of PHI: Established on
behalf of Risk Management for
insurance purposes
G 1706-1 PepsiCo, Inc. ING Bank 1/8/97 1/8/98 8,000,000.00 USD On behalf of PHI: Guarantee for
Warsaw working capital and to repay high
priced commercial paper
G 193-1 PepsiCo, Inc. Jeffery White 8/7/91 1,050,000.00 USD On behalf of TBC: To enter into a
non-competition Agreement with
Jeffrey C. White, a shareholder.
G 1225-1 PepsiCo, Inc. John S. Lampo 2/21/92 12/31/99 2,141,132.00 USD On behalf of PHI: Support
Promissory Note
G 1101-1 PepsiCo, Inc. Larry O. Hahn 2/1/94 2/1/04 4,500,000.00 USD On behalf of TBC: Support
and Valentine Promissory Note. Contact Mike
Hahn Eberhard for accounting.
G 1174-1 PepsiCo, Inc. Luke Raffino 2/21/92 12/31/99 1,891,367.00 USD On behalf of PHI: Promissory Note
issued to seller in connection
with acquisition of Lampo
(franchisee) units in Texas.
G 126-5 PepsiCo, Inc. Midland Bank 12/6/96 12/6/97 3,750,000.00 GBP On behalf of PHI: Renewal of
Plc guarantee to fund working capital
of the PH JV. This is a Guarantee
of Performance between Taco Bell
and a franchisee.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
G 1500-2 PepsiCo, Inc. Midland Bank 11/6/96 11/6/97 1,500,000.00 GBP On behalf of PRI: Renewal of
Plc guarantee to support overdraft
limit for PHI for participation
in UK Cash Pool
G 1271-3 PepsiCo, Inc. Midland Bank 11/28/96 11/28/97 2,000,000.00 GBP On behalf of KFC: Renewal of
Plc corporate guarantee to support
local overdraft facility
G 1368-1 PepsiCo, Inc. NationsBank, 3/31/95 1/15/00 4,386,023.21 USD On behalf of PHI: 2 part loan.
National Loan A is to satisfy existing
Association indebtedness of borrower to
(Carolinas) SouthTrust Bank of Georgia approx
$4,384,875.78. Loan B is to
satisfy existing indebtedness to
Pizza Hut Text and backup of
Guaranty on file
G 85- I PepsiCo, Inc. NEK Partners 1/25/90 3/31/15 5,390,862.00 USD On behalf of PHI: To cover lease
obligation of 20 properties
acquired in relation to PHC-Tri/L
acquisition. Guaranty will expire
on the earlier of exercise of
purchase option on leased
properties or 3/31/15 (end of term
of lease and renewal options plus
30 days).
G 86-1 PepsiCo, Inc. NEK Partners 1/25/90 3/3 l/14 178,800.00 USD On behalf of PHI: To cover
assignment of ground leases issued
in relation to the PHC-Tri/L
acquisition.
G 87-1 PepsiCo, Inc. NEK Partners 1/25/90 6/30/04 50,400.00 USD On behalf of PHI: Assignment of
ground lease - PHC-Tri-L
acquisition
G 92-1 PepsiCo, Inc. NEK Partners 1/25/90 8/31/20 440,000.00 USD On behalf of PHI: Assignment of
ground leases - PHC-Tri-L
Acquisition
G 93-1 PepsiCo, Inc. NEK Partners 1/25/90 3/31/15 3,732,436.00 USD On behalf of PHI: To cover lease
obligation entered into as a
result of acquiring PHC-Tri/L
G 89-1 PepsiCo, Inc. NEK Partners 1/25/90 3/31/15 2,730,753.00 USD On behalf of PHI: To cover lease
obligation entered into as a
result of acquiring PHC-Tri/L.
G 91-1 PepsiCo, Inc. NEK Partners 1/25/90 8/31/14 637,056.00 USD On behalf of PHI: Assignment of
ground leases - PHC/ Tri-L
acquisition
G 1083-1 PepsiCo, Inc. Norwest Bank 2/15/94 500,000.00 USD On behalf of PHI: Guaranty to
support Master equipment lease
equipment
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
G 1502-3 PepsiCo, Inc. Oversea- 11/6/96 11/6/97 3,000,000.00 SGD On behalf of PRI: Working capital,
Chinese overdraft and LC facilities for PH
Banking Singapore
Corporation
Limited
G 90-1 PepsiCo, Inc. Patrician 1/25/90 3/31/09 721,480.00 USD On behalf of PHI: Assignment of
Center leases - PHC/Tri-L acquisition
Associates
G 1022-2 PepsiCo, Inc. Pepsi-Cola 6/9/94 159,692,189 DEM On behalf of PHI: Pepsi-Cola GmbH
GmbH needs the same guaranty for 1992 to
avoid a qualification of their
local statutory accounts.
G 612-1 PepsiCo, Inc. Pizza Hut 3/24/93 On behalf of PHI: Franchise
Franchisees Guaranty.
G 620-1 PepsiCo, Inc. Pizza Hut 3/24/93 On behalf of PHI: License Guaranty.
Franchisees
G 621-1 PepsiCo, Inc. Pizza Hut 3/24/93 On behalf of PHI: Guaranty of
Franchisees Performance.
G 391-1 PepsiCo, Inc. Reliance 1/1/91 18,700,000.00 USD On behalf of KFC: Premium
Insurance Agreement
Company
G 329-1 PepsiCo, Inc. Robert B 10/31/91 10/31/01 1,560,000.00 USD On behalf of KFC: Guaranty for
Soloman fixed promissory note (non-
comptetition agreement)supplied by
KFC.
G 537-1 PepsiCo, Inc. Robert Lee 4/1/83 1/1/00 On behalf of TBC: To support
Schick franchise agreement in the State of
Michigan.
G 550-1 PepsiCo, Inc. Ronald and 12/13/82 On behalf of TBC: To support
Mary franchise agreement for Taco Bell.
MacLuckie and
David and Leeannna
Bruns
LC 985-1 PepsiCo, Inc. Royal Bank of 1/1/93 183,309.99 CAD On behalf of TCB
Canada
G 1175-1 PepsiCo, Inc. Sam J. Lampo 2/21/92 12/31/99 1,113,165.00 USD On behalf of PHI: Promissory Note
issued to seller in acquisition of
Lampo (franchisee in Texas),
payments are for
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
deferred purchase price.
CL 664-l PepsiCo, Inc. Security 7/16/87 7/10/11 Taco Bell is aware of the financing
National Bank transaction. If franchisee
defaults, Taco Bell may find a
substitute franchisee or may assume
the obligations
G 211-1 PepsiCo, Inc. Solomon Real 10/28/91 15,063,810.00 USD On behalf of KFC: Lease Agreement
Estate
Investment
Company
Limited
Partnership
G 567-1 PepsiCo, Inc. State of 7/12/83 On behalf of TBC: Guaranty of
Cailfornia, Performance.
Department of
Industrial Revenue
G 566-1 PepsiCo, Inc. State of Hawaii 8/29/88 On behalf of TBC: Guaranty of
Performance
G 1455-1 PepsiCo, Inc. State of Illinois 9/13/95 On behalf of PHI: Performance
guaranty for the performance of
all obligations under the Illinois
Franchise Disclosure Act.
G 273-1 PepsiCo, Inc. State of Illinois 1/25/90 On behalf of KFC: Franchise
agreements for KFC in State of
Illinois for UFOC requirements.
G 555-1 PepsiCo, Inc. State of Illinois 8/29/88 On behalf of TBC: Guaranty of
Performance.
G 556-l PepsiCo, Inc. State of Indiana 7/12/83 On behalf of TBC: Guarantee of
Performance.
G 557-1 PepsiCo, Inc. State of 8/29/88 On behalf of TBC: Guaranty of
Maryland Performance.
G 847-1 PepsiCo, Inc. State of 8/11/93 On behalf of PHI: Performance
Minnesota guaranty for the State of
Minnesota.
G 528-l PepsiCo, Inc. State of 9/15/92 On behalf of KFC: Performance
Minnesota Guaranty for KFC in favor of the
State of Delaware.
G 558-1 PepsiCo, Inc. State of 8/29/88 On behalf of TBC: Guaranty of
Minnesota Performance
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
G 559-1 PepsiCo, Inc. State of New 7/12/83 On behalf of TBC: Guaranty of
York, County Office Performance.
G 560-1 PepsiCo, Inc. State of North 7/12/83 On behalf of TBC: Guarantee of
Dakota Performance.
G 561-1 PepsiCo, Inc. State of Oregon 7/12/83 On behalf of TBC: Guaranty of
Performance.
G 562-1 PepsiCo, Inc. State of Rhode 8/29/88 On behalf of Guaranty of
Island Performance.
G 563-1 PepsiCo, Inc. State of South 8/29/88 On behalf of TBC: Guarantee of
Dakota Performance
G 564-1 PepsiCo, Inc. State of 7/12/83 On behalf of TBC: Guarantee of
Washington Performance.
G 565-1 PepsiCo, Inc. State of 8/29/88 On behalf of TBC: Guaranty of
Wisconsin Performance.
G 249-1 PepsiCo, Inc. State of 8/1/92 On behalf of PHI: Pizza Hut
Wisconsin performance guaranty for Franchise
Agreements in State of Wisconsin.
G 445-1 PepsiCo, Inc. State of 6/6/83 6/6/03 On behalf of PHI: Guaranty of
Wisconsom Performance
G 149-1 PepsiCo, Inc. Taco Bell 4/18/84 On behalf of TBC: This is a guarantee
of performance between Taco Bell and
a franchisee.
CL 650-1 Pizza Hut, Inc. Tennyson 5/15/85 Pizza Hut is aware that Tennyson
Enterprises/ Enterprises has applied for a loan
Norwest Bank from Norwest Bank.
G 808-1 PepsiCo, Inc. Texas 7/7/93 4/30/98 2,800,000.00 USD On behalf of PHI: In support of loan
Commerce for Espinoza's Pizza Company, Ltd. by
Bank Pizza Management, Inc. for a lien in
all assets that Espinoza's is giving
a lien in all assets that they are
purchasing.
G 1529-1 PepsiCo, Inc. Texas 12/20/95 12/20/00 1,050,000.00 USD On behalf of PHI: Pizza Hut Aragon
Commerce Bank Refranchising
CL 1545-1 Pizza Hut, Inc. Texas 12/21/95 Peak Interest L.L.C (the franchisee)
Commerce has applied for loans or leins of
National credit (the loan) that will be
Association secured in part by a lien on some or
all of the assets of the franchisee.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
G 340-1 PepsiCo, Inc. The Bank of 4/26/89 12/30/09 12,250,000.00 USD On behalf of KFC: KFC Minority Loan
Tokyo - Guaranty Program with Various Banks,
Mitsubishi, amount has been reduced from $35MM
Ltd. to 35% of $35MM which is now $12.5MM.
G 1697-1 PepsiCo, Inc. The Chase 12/20/96 12/31/98 5,500,000.00 USD On behalf of PRI: To fund working
Manhattan Bank capital
G 1703-1 PepsiCo, Inc. The Hongkong, 12/17/96 12/17/97 2,000,000.00 USD On behalf of PRI: Loan facility to fund
and Shanghai store expansion and general working
Banking capital under Hongkong Bank
Corporation "Umbrella Facility"
Limited
G 1683-1 PepsiCo, Inc. The Hongkong 10/10/96 10/10/97 2,000,000.00 USD On behalf of KFC: Loan facility to
and Shanghai fund store expansion and general
Banking working capital under Hongkong Bank
Corporation "umbrella facility"
Limited
G 1682-1 PepsiCo, Inc. The Hongkong 10/10/96 10/10/97 500,000.00 USD On behalf of KFC: Loan facility to
and Shanghai fund store expansion and general
Banking working capital under Hongkong Bank
Corporation "umbrella facility"
Limited
G 1681-1 PepsiCo, Inc. The Hongkong 10/10/96 10/10/97 1,000,000.00 USD On behalf of KFC: Loan facility to
and Shanghai fund store expansion and general
Banking working capital under Hongkong Bank
Corporation "Umbrella facility"
Limited
G 1680-1 PepsiCo, Inc. The Hongkong 10/10/96 10/10/97 2,000,000. USD On behalf of KFC: Loan facility to
and Shanghai fund store expansion and general
Banking working capital under Hongkong Bank
Corporation "Umbrella facility"
Limited
G 1679-1 PepsiCo, Inc. The Hongkong 10/10/96 10/10/97 2,000,000.00 USD On behalf of KFC: Loan facility to
and Shanghai fund store expansion and general
Banking working capital under Hongkong Bank
Corporation "Umbrella facility"
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
G 1677-1 PepsiCo, Inc. The Hongkong 10/10/96 10/10/97 500,000.00 USD On behalf of KFC: Loan facility to
and Shanghai fund store expansion and general
Banking working capital under Hongkong Bank
Corporation Limited "Umbrella facility"
G 1648-1 PepsiCo, Inc. The Hongkong 12/6/96 12/6/97 l,000,000.00 USD On behalf of PRI: Renewal to fund
and Shanghai new stores and working capital.
Banking Change of entity name from Kentucky
Corporation Fried Chicken (Shenzhen) to Shenzhen
Limited Kentucky Co. Ltd.
G 266-1 PepsiCo, Inc. Uniform 8/1/92 On behalf of TBC: Franchise
Franchise performance guaranty for Taco Bell
Offering required as disclosure documents for
Circulars multi-state and non-/ Offering
Circulars.
LC 1743-1 PepsiCo, Inc. Union Bank of 3/1/95 3/1/98 4,320,000.00 USD On behalf of TBC: Established on
Switzerland behalf of Risk Management for
insurance purposes
LC 1099-1 PepsiCo, Inc. Union Bank of 1/1/94 1/1/98 14,000,000.00 USD On behalf of TBC: Workman's
Switzerland Compensation
LC 1742-1 PepsiCo, Inc. Union Bank of 1/1/96 1/1/98 3,809,000.00 USD On behalf of TBC: Established on
Switzerland behalf of Risk Management for
insurance purposes
G 1182-1 PepsiCo, Inc. Union National 6/1/94 6/1/99 1,000,000.00 USD On behalf of PHI: Third Party on
Bank of behalf of franchisee expansion, contact
Wichita M. Eberhard.
G 302-1 PepsiCo, Inc. Virginia State 10/12/89 On behalf of KFC: KFC UFOC
Corporation required filing as part of the Franchise
Comission agreement with the Commonwealth of
Virginia. (Evergreen)
G 1260-3 PepsiCo, Inc. Volksbank 10/21/96 10/21/97 1,500,000.00 DEM On behalf of PHI: Renewal of rent
Ludwigsburg guarantee of Nudelmacher GmbH
eG
G 1336-3 PepsiCo, Inc. Westpac 1/1/97 1/1/98 50,000,000.00 AUD On behalf of PRI: Renewal of existing
Banking working capital and facilities for the
Corporation PepsiCo, Inc. Australia Group's
operations
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
G 1696-1 PepsiCo, Inc. Westpac 12/13/96 12/12/97 65,000,000.00 AUD On behalf of PRI: Local borrowing to
Banking part repay BTFS debt with PHA to meet
Corporation thin capitalization requirements
PepsiCo, Inc. Travelers/ N/A N/A 9,000,000 USD Taco Bell Surety Bonds
Aetena
PepsiCo, Inc. Firemens Fund N/A N/A 3,000,000 USD Pizza Hut Surety Bonds
PepsiCo, Inc. Federal N/A N/A 3,000,000 USD KFC Surety Bonds
Insurance
PepsiCo, Inc. Texas 8/15/97 10/6/97 1,000,000 USD Guarantee to support the franchise
Commerce lending program administered by Texas
Bank Commerce Bank.
PepsiCo, Inc. The Bank of 8/15/97 10/6/97 10,000,000 USD Guarantee to support the franchise
Nova Scotia lending program administered by Texas
Commerce Bank.
</TABLE>
29
<PAGE>
Schedule 1
to
Irrevocable Standby Letter of Credit
No. XXXXX
L/C, Guarantee or
Contingent Obligation
Number Beneficiary Amount Expiry Date
- --------------------- ----------- ------ -----------
30
<PAGE>
Annex 1
to
Irrevocable Standby Letter of Credit
No. XXXXX
Form of Sight Draft
[Insert date]
US$
-----------------------
Pay to the order of the undersigned the amount of $ drawn on [Insert name of
bank] as issuer of Irrevocable Standby Letter of Credit No. XXXXX, dated
- ----------- XXXXX, to Account No. , [Insert name of bank]. ------
PepsiCo, Inc.
By:
--------------------------------------
Title:
31
<PAGE>
Annex 2
to
Irrevocable Standby Letter of Credit
No. XXXXX
Drawing Certificate
[Insert name of bank]
[Insert address of bank]
Attention:
------------------------------
Gentlemen:
The undersigned individual, a duly authorized officer of PepsiCo, Inc.,
hereby certifies as follows with respect to that certain Letter of Credit No.
XXXXX ("L/C") dated XXXXXX issued by [Insert name and address of bank] in favor
of PepsiCo, Inc.:
The amount of this drawing represents funds due PepsiCo, Inc. as
reimbursement for the drawing(s) under the following letter(s) of credit,
guarantee(s) or other contingent liabilit(ies) set forth on Schedule "1" to
Letter of Credit No. XXXXX and PepsiCo, Inc. is entitled to receive the
amount of the sight draft accompanying this certificate:
L/C, Guarantee or
Contingent
Obligation Number Beneficiary Amount Expiry Date
- ----------------- -------------- ------ ------------
[Insert relevant information]
In witness whereof, the beneficiary has executed and delivered this
Certificate as of the ---- day of --------- ,--- .
PepsiCo, Inc.
By:
-------------------------
Title:
32
<PAGE>
SCHEDULE G
RESTAURANT LEASES WHICH HAVE BEEN
GUARANTEED BY THE PEPSICO GROUP
---------------------------------
Guarantee Maturity Effective
Lessee Number Seq Date Date Lessor
- ------ --------- ---- -------- ------ --------------------
KFC of California 211 1 10/28/11 10/28/91 Solomon Real Estate
20 Hempstead Ave., Hempstead, NY, Nassau County
210 E. Main St, Montauk Hwy, Bayshore, NY, Suffolk County
479 N. Main St., Freeport, NY, Nassau County
1164 Jericho Tnpk, Commack (Smithtown, NY), Suffolk County
508 E. Main St., Patchogue, NY, Suffok County
5002 Hempstead Tnpk, Farmingdale, NY, Nassau County
155 W. Suffolk Ave., Central Islip, NY, Suffolk County
1453 Forest Park Ave., Staten Island, NY, Richmond, NY
56 Glen Cove Rd., Greenvale, NY, Nassau County
221 Jericho Tnpk, Huntington, NY, Suffolk County
705 Old Country Road, Westbury, NY, Nassau County
910 Broadway, Amityville, NY, Suffolk County
1617 Deer Park Ave., Deer Park, NY, Suffolk County
1550 Straight Path, Wyandanch, NY, Suffolk County
Nudelmacher GmbH 1260 3 10/21/97 10/21/96 Volksbank Ludwigsburg eG
Friedrich-Ebert-Str. 120, 45473 Mulheim, Germany
Pizza Hut of Cincinnati 87 1 6/30/04 1/25/90 NEK Partners
8341 Beechmont Ave., Anderson Township, Hamilton County, Ohio
Pizza Hut of Cincinnati 203 1 3/25/05 2/1/92 Anthony J. Nickert and
Joan A. Nickert
Pizza Hut of Cincinnati 90 1 3/31/09 1/25/90 Patrician Center Associates
K Mart, Edgewood, KY
Pizza Hut of Cincinnati 86 1 3/31/14 1/25/90 NEK Partners
Eight Mile Rd., Anderson Township, Hamilton County, Ohio
Taco Bell Corp. 401 1 2/15/99 3/15/79 First National Realty
Hilltop Plaza, Bolingbrook, IL
33
<PAGE>
SCHEDULE H
RESTAURANT INSURANCE WHICH WILL NOT BE
TERMINATED AS OF THE DISTIBUTION DATE
----------------------------------------
Insured Policy Type Insurance Company Policy Number Policy Term
- ------- ----------- ----------------- ------------- -----------
Taco Bell Contaminated National Union Fire 649-6350 2/1/97-2/28/98
Products Insurance
Taco Bell Surety Bond Travelers/Aetna 86S100605626 Continuous
KFC Surety Bond Federal Insurance All Surety Bonds Continuous
Pizza Hut Surety Bond Firemans Fund All Surety Bonds Continuous
34
<PAGE>
SCHEDULE I
RESTAURANT FUNDING STRUCTURE
PRIOR TO THE DISTRIBUTION DATE
------------------------------
Current Funding Structure:
- -------------------------
Disbursements Funded by
Wire from PepsiCo Master
Cash Collected via Cash Concentration Concentration Account into a
and Drawdown Wires PepsiCo Master Disbursement
Miscellaneous Depository PepsiCo Funding Account
Accounts Master Concentration
Account-Chase
PepsiCo Master
Taco Bell Pizza Hut KFC Disbursement Funding Account
Concentration Concentration Concentration
Account- Account - Chase Account - Chase Automatic Funding
Wachovia
Taco Bell
Disbursement
Accounts
Pizza Hut
Disbursement
Accounts
KFC
Disbursement
Accounts
35
<PAGE>
Funding Structure Just Prior to Distribution Date (on or about 9/22/97):
- ------------------------------------------------------------------------
PepsiCo
Master Concentration
Account - Chase
Money Moves Automatically via Zero Balance Accounts
Disbursements Funded by Wire
from TRICON Master
Cash Collected via Cash Concentration and Concentration Account into a
Drawdown Wires TRICON Master Disbursement
Funding Account
Miscellaneous Depository TRICON
Accounts Master Concentration
Account - Chase
TRICON Master
Taco Bell Pizza Hut KFC Disbursement Funding
Concentration Concentration Concentration Account
Account - Account - Chase Account - Chase
Wachovia
Automatic Funding
Taco Bell
Disbursement
Accounts
Pizza Hut
Disbursement
Accounts
KFC
Disbursement
Accounts
36
<PAGE>
Anticipated Funding Structure Post Distribution Date:
- -----------------------------------------------------
Disbursements Funded by Wire
from TRICON Master
Cash Collected via ACH Debits and Drawdown Concentration Account into a
Wires TRICON Master Disbursement
Miscellaneous Depository TRICON Funding Account
Accounts Master Concentration
Account - Chase
TRICON Master
Taco Bell Pizza Hut KFC Disbursement Funding
Concentration Concentration Concentration Account
Account - Account - Chase Account - Chase
Wachovia
Automatic Funding
Taco Bell
Disbursement
Accounts
Pizza Hut
Disbursement
Accounts
KFC
Disbursement
Accounts
37
<PAGE>
SCHEDULE J
EXPENSES
--------
TRICON shall bear the following expenses in connection with the
Distribution:
1. The fees and expenses in connection with the TRICON bank credit facilities.
2. Special management incentive arrangements (the Stay/Performance bonuses)
for the management of KFC, Pizza Hut, Taco Bell and PRI which are
incremental to the regular division bonuses.
3. Rating agency fees and expenses.
38
<PAGE>
FIRST AMENDMENT TO
SEPARATION AGREEMENT
FIRST AMENDMENT, dated as of October 6, 1997 (this "Amendment"), to the
Separation Agreement, dated as of August 26, 1997 (as amended, supplemented or
otherwise modified from time to time, the "Separation Agreement"; capitalized
terms used but not otherwise defined in this Amendment shall have the meanings
assigned to such terms in the Separation Agreement), by and between PepsiCo,
Inc., a North Carolina corporation ("PepsiCo"), and TRICON Global Restaurants,
Inc., a North Carolina corporation ("TRICON").
W I T N E S S E T H:
WHEREAS, pursuant to the Separation Agreement, PepsiCo has agreed to make
available to TRICON certain Transitional Services set forth on Schedule A
thereto in accordance with the terms and provisions of the Separation Agreement;
and
WHEREAS, TRICON has requested that PepsiCo provide certain additional
services to TRICON in accordance with the terms and provisions of the Separation
Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto hereby agree as follows:
Section 1. Amendment to Schedule A. Schedule A to the Separation Agreement
is hereby amended by deleting such Schedule in its entirety and substituting in
lieu thereof Schedule A to this Amendment.
Section 2. Limited Effect. Except as expressly amended herein, the
Separation Agreement shall continue to be, and shall remain, in full force and
effect in accordance with its terms.
Section 3. Counterparts. This Amendment may be executed in counterparts,
each of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
Section 4. Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of North Carolina.
1
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be duly executed as of the date and year first above written.
PepsiCo, Inc.
By /s/ Karl M. von der Heyden
-----------------------------------
Karl M. von der Heyden
Vice Chairman and
Chief Financial Officer
TRICON Global Restaurants, Inc.
By /s/ Andrall E. Pearson
-----------------------------------
Andrall E. Pearson
Chairman of the Board
2
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
TRANSITIONAL SERVICES
<S> <C> <C> <C>
Expected
Department Date Service Cost Estimate or
Providing Service Services Provided to TRICON Will Terminate Billing Procedure
- ----------------- ----------------------------- --------------- ----------------
Treasury - Global Cash Desk and Operations training 10/31/97 T&E Expenses will be
Cash Management for all software packages and daily charged to TRICON.
and Operations transactional activity.
Guarantee Tracking. 10/31/97 N/A
Corporate Payroll Processing and payment of payroll to 12/27/97 PepsiCo will send invoice to the TRICON Director
(Contacts: J. Vetrone TRICON foreign service employees and of Corporate Accounting and Analysis 4 business
x2160; S. Lobel x 2156) third country national employees. days in advance of PepsiCo payment. TRICON
Currently, there are 36 such employees. payment will be due by check or wire transfer
Record and deposit all related no later than PepsiCo paycheck date. Amount of
withholding and employer taxes. invoice will be actual amount of payroll and
employer taxes plus $750 per pay period. Current
estimate of costs is approximately $1,500,000
per two week pay period.
International Personnel Benefits Enrollment for foreign service 12/31/97 PepsiCo will send an invoice for any balance to
Administration employees, Compensation Planning, Dave Pace's attention for payment on a monthly
International Personnel System. basis.
Price Waterhouse - Tax Equalization Services. 12/31/97 PepsiCo will send an invoice for any balance to
Tax Equalization Dave Pace's attention for payment on a monthly
basis.
PCNA Relocation Relocation services for international 12/31/97 Relocation invoices will be sent to Dave Pace's
employees. attention for payment on a monthly basis.
</TABLE>
3
<PAGE>
EXHIBIT 10.2
TAX SEPARATION AGREEMENT
This Agreement is entered into as of the 26th day of August, 1997 between
PepsiCo, Inc. ("PepsiCo"), a North Carolina corporation, on behalf of itself and
the members of the PepsiCo Group, and TRICON Global Restaurants, Inc.
("TRICON"), a North Carolina corporation, on behalf of itself and the members of
the TRICON Group.
WITNESSETH:
WHEREAS, pursuant to the tax laws of various jurisdictions, certain members
of the TRICON Group, as defined below, presently file certain tax returns on an
affiliated, consolidated, combined, unitary, fiscal unity or other group basis
(including as permitted by Section 1501 of the Internal Revenue Code of 1986, as
amended (the "Code")) with certain members of the PepsiCo Group, as defined
below (each such group, a "Consolidated Group");
WHEREAS, PepsiCo and TRICON intend to enter into a Separation Agreement
dated as of August 26, 1997 (the "Separation Agreement"), providing for the
distribution by PepsiCo to its shareholders of all of the common stock of TRICON
that is held by PepsiCo (the "Distribution") and certain other matters;
WHEREAS, PepsiCo and TRICON desire to set forth their agreement on the
rights and obligations of PepsiCo, TRICON and the members of the PepsiCo Group
and the TRICON Group, respectively, with respect to the handling and allocation
of federal, state, local and foreign Taxes incurred in Taxable periods beginning
prior to the Distribution Date, Taxes resulting from transactions effected in
connection with the Distribution including but not limited to the distribution
of certain borrowing proceeds by TRICON to PepsiCo (the "Restructuring") and
various other Tax matters;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties agree as follows:
1. Definitions
(a) As used in this Agreement:
"Affiliate" of any Person shall mean (i) any individual, corporation,
partnership or other entity directly or indirectly owning more than 50 percent
(by vote or value) of, owned more than 50 percent (by vote or value) by, or
under more than 50 percent (by vote or value) common ownership with, such
Person, and (ii) any entity that is entitled to the benefit of any Tax Asset of
such Person under applicable law, any entity with any Tax Asset to which such
Person is entitled to the benefit of under applicable law, or any entity which
is entitled or required to transfer or assign income, revenues, receipts, or
gains to such Person under applicable law.
"After-Tax Amount" shall mean an additional amount necessary to reflect the
hypothetical Tax consequences of the receipt or accrual of any payment, using
the maximum statutory rate (or rates, in the case of an item that affects more
than one Tax) applicable to the recipient of such payment for the relevant year,
reflecting for example, the effect of the deductions available for interest paid
or accrued and for Taxes such as state and local income Taxes.
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"Consolidated Group" shall have the meaning ascribed to it in the first
"whereas" clause in this Agreement; provided, however, that "Consolidated Group"
shall also include (i) PepsiCo or any Affiliate of PepsiCo that filed (or will
file) any Pre-Distribution Period Returns that reflect the income, assets or
operations of a Restaurant Business and (ii) any Affiliate of TRICON that filed
(or will file) any Pre-Distribution Period Returns that reflect the income,
assets or operations of a Non-Restaurant Business.
"Distribution" shall mean the distribution by PepsiCo of all of the common
stock of TRICON that is held by PepsiCo to PepsiCo's shareholders pursuant to
the Separation Agreement.
"Distribution Date" shall mean the date on which the Distribution shall be
effected.
"Federal Tax" shall mean any Tax imposed under Subtitle A of the Code and
any related penalty imposed under Subtitle F of the Code.
"Final Determination" shall mean (i) with respect to Federal Taxes, (A) a
"determination" as defined in Section 1313(a) of the Code, or (B) the date of
acceptance by or on behalf of the IRS of Form 870-AD (or any successor form
thereto), as a final resolution of Tax liability for any Taxable period, except
that a Form 870-AD (or successor form thereto) that reserves the right of the
taxpayer to file a claim for refund or the right of the IRS to assert a further
deficiency shall not constitute a Final Determination with respect to the item
or items so reserved; (ii) with respect to Taxes other than Federal Taxes, any
final determination of liability in respect of a Tax that, under applicable law,
is not subject to further appeal, review or modification through proceedings or
otherwise; (iii) with respect to any Tax, any final disposition by reason of the
expiration of the applicable statute of limitations; or (iv) with respect to any
Tax, the payment of Tax by PepsiCo, TRICON, or any member of the PepsiCo Group
or the TRICON Group, whichever is responsible for payment of such Tax under
applicable law, with respect to any item disallowed or adjusted by a Taxing
Authority, provided that the provisions of Section 8 hereof have been complied
with, or, if such section is inapplicable, that the party responsible under the
terms of this Agreement for such Tax is notified by the party paying such Tax
that it has determined that no action should be taken to recoup such disallowed
item, and the other party agrees with such determination.
"IRS" shall mean the Internal Revenue Service.
"LIBOR" shall be determined on the basis of the offered rates for deposits
in U.S. Dollars for a period of 30 days which appear on the Reuters Screen LIBO
Page as of 11:00 a.m., London time. If at least two rates appear on the Reuters
Screen LIBO Page, the rate will be the arithmetic mean of such rates.
"Non-Restaurant Business" shall mean any business other than a Restaurant
Business.
"PepsiCo Group" shall mean, with respect to any Taxable period, PepsiCo and
its Affiliates (including their predecessors and successors) at any time prior
to the Distribution other than those Affiliates comprising the TRICON Group.
"PepsiCo Tax Liability" shall mean, with respect to any Consolidated Group
and any Taxable period, the PepsiCo Group's share of the Tax liability of such
Consolidated Group, computed as if the relevant members of the PepsiCo Group
were not and never were part of such Consolidated Group, but rather were a
separate affiliated group of corporations filing a similar group Return
(provided, however, that transactions with any member of the TRICON Group
included in such Consolidated Group shall not be taken into account until the
first Taxable period in which such transaction is required to be taken into
account for Tax purposes under applicable law). Such computation shall be made
(A) without regard to
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the income, deductions (including net operating loss and capital loss
deductions) and credits in any year of any member of the TRICON Group, except to
the extent that a payment was made to any member of the TRICON Group with
respect thereto, (B) by taking account of any Tax Asset of the PepsiCo Group,
(C) with regard to net operating loss and capital loss carryforwards and
carrybacks and minimum Tax credits from earlier years of the PepsiCo Group and
without reduction for any such losses, carryforwards, carrybacks or credits used
by any member of the TRICON Group, (D) by applying the maximum applicable
statutory Tax rate in effect under applicable law during the relevant year, and
(E) reflecting the positions, elections and accounting methods used by the
Consolidated Group in preparing the relevant Return for the Consolidated Group.
Notwithstanding anything to the contrary in this Agreement, any gain recognized
upon the disposition of PepsiCo Food Systems shall be treated as a PepsiCo Tax
Liability.
"PepsiCo Vice President, Tax" shall include any successor position or
title.
"Person" shall have the meaning ascribed to it in Section 7701(a)(1) of the
Code.
"Post-Distribution Period" shall mean any taxable period (or portion
thereof) beginning after the close of business on the Distribution Date.
"Pre-Distribution Period" shall mean any Taxable period end on or before
the close of business on the Distribution Date; provided that if a Taxable
period ending after the Distribution Date contains any days which fall prior to
or on the Distribution Date, any portion of such Taxable period up to and
including the Distribution Date shall also be included in the Pre-Distribution
Period.
"Prime" shall mean the rate announced from time to time as "prime" by Chase
Manhattan Bank as its prime rate with respect to the applicable currency.
"Restaurant Business" shall mean any business activity associated with the
operation, development, franchising and licensing of restaurants (including the
casual dining restaurants and PepsiCo Food Systems), as determined by the
PepsiCo Vice President, Tax in accordance with past practice.
"Restructuring" shall have the meaning ascribed to it in the third
"whereas" clause in this Agreement; provided, however, that "Restructuring"
shall exclude any normal business operations (including refranchising and the
disposition of any aircraft).
"Return" shall mean any Tax return, statement, report, form, election,
claim or surrender (including estimated Tax returns and reports, extension
requests and forms, and information returns and reports) required to be filed
with any Taxing Authority.
"Tax" (and the correlative meaning, "Taxes," "Taxing" and "Taxable") shall
mean (A) any tax imposed under Subtitle A of the Code, or any net income, gross
income, gross receipts, alternative or add-on minimum, sales, use, business and
occupation, value-added, trade, goods and services, ad valorem, franchise,
profits, license, business royalty, withholding, payroll, employment, capital,
excise, transfer, recording, severance, stamp, occupation, premium, property,
asset, real estate acquisition, environmental, custom duty, or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest and any penalty, addition to tax or additional amount
imposed by a Taxing Authority; (B) any liability of a member of the PepsiCo
Group or the TRICON Group, as the case may be, for the payment of any amounts of
the type described in clause (A) for any Taxable period resulting from such
member being a part of a Consolidated Group pursuant to the application of
Treasury Regulation Section 1.1502-6 or any similar provision applicable under
state,
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local or foreign law; or (C) any liability of a member of the PepsiCo Group or
the TRICON Group for the payment of any amounts described in clause (A) as a
result of any express or implied obligation to indemnify any other party.
"Tax Asset" shall mean any net operating loss, net capital loss, investment
Tax credit, Foreign Tax credit, target jobs Tax credit, low income housing
credit, research and experimentation credit, charitable deduction, or any other
loss, credit or Tax attribute, including additions to basis of property and
attributes which reduce or offset value-added Tax liability, which could reduce
any Tax (domestic or foreign), including, without limitation, deductions,
credits, or alternative minimum net operating loss carryforwards related to
alternative minimum Taxes.
"Tax Packages" shall mean one or more packages of information that are (i)
reasonably necessary for the purpose of preparing Returns of any Consolidated
Group with respect to a Pre-Distribution Period and (ii) completed in all
material respects in accordance with the standards that PepsiCo has established
for its subsidiaries with respect to the relevant Pre-Distribution Period.
"Tax Proceeding" shall mean any Tax audit, dispute or proceeding (whether
administrative or judicial).
"Taxing Authority" shall mean any governmental authority (domestic or
foreign), including, without limitation, any state, municipality, political
subdivision or governmental agency, responsible for the imposition of any Tax.
"TRICON Group" shall mean TRICON and its Affiliates immediately after the
Distribution Date, including any predecessors thereto; provided, however, that
for purposes of determining whether an entity is a member of the TRICON Group, a
transfer of beneficial ownership of an entity shall be treated as a transfer of
title, regardless of whether title has actually passed; provided further, that
to the extent that PepsiCo or an Affiliate of PepsiCo or an Affiliate of TRICON
conducted both a Restaurant Business and a Non-Restaurant Business, the
Restaurant Business shall be treated for purposes of this Agreement as a
separate corporation that is a member of the TRICON Group and the Non-Restaurant
Business shall be treated for purposes of this Agreement as a separate
corporation that is a member of the PepsiCo Group; provided further, that if
with respect to any Pre-Distribution Period (or portion thereof) any Affiliate
of PepsiCo was involved solely in the conduct of a Restaurant Business, such
member shall be treated as a member of the TRICON Group for such
Pre-Distribution Period (or portion thereof); and provided further, that if with
respect to any Pre-Distribution Period (or portion thereof) any Affiliate of
TRICON was not involved in the conduct of a Restaurant Business, such member
shall not be treated as a member of the TRICON Group for such Pre-Distribution
Period (or portion thereof).
"TRICON Tax Liability" shall mean, with respect to any Consolidated Group
and any Taxable period, the TRICON Group's share of the Tax liability of such
Consolidated Group, computed as if the relevant members of the TRICON Group were
not and never were part of such Consolidated Group, but rather were a separate
affiliated group of corporations filing a similar group Return (provided,
however, that transactions with any member of the PepsiCo Group included in such
Consolidated Group shall not be taken into account until the first Taxable
period in which such transaction is required to be taken into account for Tax
purposes under applicable law). Such computation shall be made (A) without
regard to the income, deductions (including net operating loss and capital loss
deductions) and credits in any year of any member of the PepsiCo Group, except
to the extent that a payment was made to any member of the PepsiCo Group with
respect thereto, (B) by taking account of any Tax Asset of the TRICON Group,
including net operating loss and capital loss carryforwards and carrybacks and
minimum Tax credits from earlier years of the TRICON Group except to the extent
that such losses, carryforwards, carrybacks or credits have been used by any
member of the PepsiCo Group for purposes of computing the PepsiCo
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Tax Liability, (C) by applying the maximum applicable statutory Tax rate in
effect under applicable law during the relevant year, and (D) reflecting the
positions, elections and accounting methods used by the Consolidated Group in
preparing the relevant Return for the Consolidated Group. Notwithstanding the
foregoing, in the jurisdictions of the United Kingdom, Canada, Australia, Mexico
and New Zealand, the TRICON Tax Liability shall be determined in accordance with
PepsiCo's past policy for the sharing of Tax liabilities and losses and other
Tax benefits. For purposes of the preceding sentence, in the event of any
adjustment that increases the Tax liability of the relevant Consolidated Group
in any of those jurisdictions, such increase shall be allocated proportionately
among the legal entities impacted by such adjustment.
(b) Any term used in this Agreement which is not defined in this Agreement
shall, to the extent the context requires, have the meaning assigned to it in
the Code or the applicable Treasury regulations thereunder (as interpreted in
administrative pronouncements and judicial decisions) or in comparable
provisions of applicable law.
2. Administrative and Compliance Matters.
(a) Sole Tax sharing Agreement. Any and all existing Tax sharing agreements
or arrangements, written or unwritten, between any member of the PepsiCo Group
and any member of the TRICON Group shall be or shall have been terminated as of
the date of this Agreement. As of the date of this Agreement, neither the
members of the TRICON Group nor the members of the PepsiCo Group shall have any
further rights or liabilities thereunder, and this Agreement shall be the sole
Tax sharing agreement between the members of the TRICON Group and the members of
the PepsiCo Group. Notwithstanding the foregoing, if any such termination is not
binding on any Taxing Authority, the TRICON Group shall hold the affected member
of the PepsiCo Group harmless against any adverse effect which would have been
avoided if such termination had been given effect by such Taxing Authority.
(b) Designation of Agent. TRICON and each member of the TRICON Group, and
PepsiCo and each member of the PepsiCo Group, as the case may be, in each case
with respect to any Consolidated Group of which such Person is a member, hereby
irrevocably authorize PepsiCo or TRICON, as the case may be, and consistent with
past practice and applicable law, to designate a member of the PepsiCo Group or
the TRICON Group, as appropriate, or a successor of such member, as its agent,
coordinator, and administrator, for the purpose of taking any and all actions
(including the execution of waivers of applicable statutes of limitation)
necessary or incidental to the filing of any Return, any amended Return, or any
claim for refund (even where an item or Tax Asset giving rise to an amended
Return or refund claim arises in a Post-Distribution Period), credit or offset
of Tax or any other proceedings, and for the purpose of making payments to, or
collecting refunds from, any Taxing Authority, in each case relating only to any
Pre-Distribution Period. Such designated member of the PepsiCo Group or the
TRICON Group, as the case may be, as agent, covenants to TRICON or PepsiCo,
respectively, that it shall be responsible to see that all such administrative
matters relating thereto shall be handled promptly and appropriately.
(c) Pre-Distribution Period Returns. With respect to a Consolidated Group,
the member of the PepsiCo Group or the TRICON Group, as applicable, that is
required by applicable law to file the Returns for all Pre-Distribution Periods
will prepare such Returns with the assistance of the TRICON Group or the PepsiCo
Group, respectively. With respect to each Consolidated Group, either a member of
the PepsiCo Group or a member of the TRICON Group, as consistent with past
practice and applicable law, will file the Pre-Distribution Period Returns for
such Consolidated Group. PepsiCo and the members of the PepsiCo Group shall have
the right with respect to any Consolidated Group Returns to determine (x) the
manner in which such returns, documents or statements shall be prepared and
filed, including, without limitation, the manner in which any item of income,
gain, loss, deduction or credit
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shall be reported; provided, however, that such returns, documents or statements
shall be prepared in accordance with past practice (unless such past practice is
no longer permissible under the Code or other applicable law), (y) whether any
extensions should be requested, and (z) subject to the third and fourth
sentences of the definition of TRICON Tax Liability, the elections, including
claims and surrenders for U.K. group relief and any similar foreign offsetting
procedures, that will be made by any member of the PepsiCo Group or the TRICON
Group. In addition, with respect to all Pre-Distribution Periods, except as
provided in Section 8(b), PepsiCo and the members of the PepsiCo Group shall
have the right to (i) contest, compromise or settle any adjustment or deficiency
proposed, asserted or assessed as a result of any audit of any consolidated
return filed by the PepsiCo Group or the TRICON Group, (ii) file, prosecute,
compromise or settle any claim for refund, (iii) determine whether any refunds
to which the PepsiCo Group may be entitled shall be received by way of refund or
credited against the tax liability of the PepsiCo Group and (iv) determine
whether a deposit will be made with a Taxing Authority to stop the running of
interest. With respect to the 1997 Tax year, TRICON and the members of the
TRICON Group shall prepare and deliver to PepsiCo all Tax Packages no later than
the due date prescribed for the members of the PepsiCo Group.
3. Tax Sharing.
(a) General. For each Taxable period of each Consolidated Group during
which income, profits, gains, net worth, receipts, sales, loss or credit against
Tax of at least one member of each of the TRICON Group and the PepsiCo Group are
includible in a Return of such Consolidated Group, the TRICON Group or the
PepsiCo Group, as appropriate, shall pay, as provided in this Section 3, to the
PepsiCo Group or the TRICON Group, respectively, an amount equal to the TRICON
Tax Liability or the PepsiCo Tax Liability, as appropriate, for such Taxable
period, if any. Any Return filed by an entity described in clause (i) of the
definition of Consolidated Group shall be treated as required to be filed by the
PepsiCo Group and any payment made prior to the Distribution with respect to
such Return shall be treated as having been made by the PepsiCo Group. Any
Return filed by an entity described in clause (ii) of the definition of
Consolidated Group shall be treated as required to be filed by the TRICON Group
and any payment made prior to the Distribution with respect to such Return shall
be treated as having been made by the TRICON Group.
(b) Estimated Payments. Not later than 3 days after a member of the PepsiCo
Group or a member of the TRICON Group, as the case may be, makes an estimated
Tax payment with respect to a Taxable period of a Consolidated Group, whether or
not such payment is made prior to the Distribution, the PepsiCo Group shall (i)
in good faith determine the amount of the TRICON Tax Liability or the PepsiCo
Tax Liability, as appropriate, pursuant to this Agreement and (ii) deliver a
written statement to TRICON reflecting the determination described above. Not
later than three days after receipt of such statement, the TRICON Group shall
pay to the PepsiCo Group or the PepsiCo Group shall pay to the TRICON Group, as
appropriate, the amount so determined in accordance with Section 9 hereof.
(c) Payment of Taxes at Year-End.
(i) Not later than 5 business days before a member of the PepsiCo
Group or a member of the TRICON Group, as the case may be, is required to
file a Return (after taking extensions into account) with respect to any
Consolidated Group for which payments are to be made under this Agreement,
whether or not such Return is filed prior to the Distribution, the PepsiCo
Group shall deliver to the TRICON Group a written statement setting forth
the difference between (x) the TRICON Tax Liability or the PepsiCo Tax
Liability, as appropriate, for such Return, and (y) the aggregate amount of
payments with respect to the TRICON Tax Liability or the PepsiCo Tax
Liability, as appropriate, for such year made pursuant to Section 3(b) or
otherwise, including estimated Tax payments made by way of intercompany
account transfers. Not later than the date such Return is required to be
filed, the TRICON
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Group shall pay to the PepsiCo Group or the PepsiCo Group shall pay to the
TRICON Group, as appropriate, in accordance with Section 9 hereof, an amount
equal to such difference, if any; provided, however, that to the extent such
payment is to be made to the TRICON Group and is attributable to a claim for
refund of Taxes previously paid to a Taxing Authority, the PepsiCo Group will
not be required to make such payment to the TRICON Group.
(ii) With respect to each Return described in Section 3(a) above and
previously filed by a Consolidated Group, and for which the TRICON Tax
Liability or the PepsiCo Tax Liability, as the case may be, has not been
satisfied in full or for which the TRICON Group has not paid the PepsiCo
Group in full for a benefit derived from the use of a Tax Asset of the
PepsiCo Group, the TRICON Group shall pay to the PepsiCo Group or the
PepsiCo Group shall pay to the TRICON Group, as appropriate, within 30 days
of demand therefor, the amount in respect of such Return as determined by
the PepsiCo Vice President, Tax.
(d) Certain Other Matters.
(i) With respect to each Consolidated Group, the TRICON Group
shall pay to the PepsiCo Group the actual benefit received by such
Consolidated Group from the use of any Tax Asset of the PepsiCo Group
or any Tax Asset attributable to the Restaurant Business which is
reattributed to PepsiCo pursuant to Treasury Regulation ss.1.1
502-20(g) or any comparable provision of applicable law, or in the
event that California Pizza Kitchen ("CPK") is a member of the TRICON
Group, the use of any Pre-Distribution Period Tax Asset of CPK (the
"CPK Tax Asset"), including, without limitation, any Tax Asset that is
reattributed to TRICON pursuant to Treasury Regulation Section
1.1502-20(g), whether arising in a Pre-Distribution Period or a
Post-Distribution Period. TRICON agrees that if CPK is a member of the
TRICON Group, any disposition of CPK will be effected as a stock
transfer and an election shall be made to reattribute the net
operating losses attributable to CPK to TRICON pursuant to Treasury
Regulation Section 1.1502-20(g). Such benefit shall be considered
equal to the excess of the amount of Tax that would have been payable
to a Taxing Authority (or of the Tax refund that would have been
receivable) by such Consolidated Group in the absence of such Tax
Asset over the amount of Tax actually payable to a Taxing Authority
(or of the Tax refund actually receivable) by such Consolidated Group.
Payment of the amount of such benefit shall be made within 30 days of
the receipt by any member of the TRICON Group of any refund, credit or
other offset attributable thereto from the relevant Taxing Authority
and the future Returns of the PepsiCo Group shall be adjusted to
reflect such use. Notwithstanding the definition of TRICON Tax
Liability or any other provision in this Agreement, any loss
recognized upon any disposition of the casual dining restaurants or
any disposition of assets thereof shall be treated as a Tax Asset of
the PepsiCo Group.
(ii) If, subsequent to the payment by the TRICON Group to the
PepsiCo Group of any amount referred to in Section 3(d)(i) above,
there shall be (A) a Final Determination which results in a
disallowance or a reduction of the Tax Asset so used or (B) a
reduction in the amount of the benefit realized by the TRICON Group
from such Tax Asset as a result of a Final Determination or the use by
the TRICON Group of a Tax Asset of a member of the TRICON Group, the
PepsiCo Group shall repay to the TRICON Group the amount which would
not have been payable to the PepsiCo Group pursuant to Section 3(d)(i)
had the amount of the benefit been determined in light of such event.
In addition, the PepsiCo Group shall hold each member of the TRICON
Group harmless for any penalty or interest payable by any member of
the TRICON Group as a result of any such event referred to in the
preceding sentence, unless such event is attributable to any action of
any member of the TRICON Group. Any amounts payable under this Section
3(d)(ii) shall be paid by the PepsiCo Group within 30 days after
receipt of written notice from the TRICON Group.
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(e) Treatment of Adjustment.
(i) Except as provided in clause (iii) below if any
adjustment is made in, or if a Taxing Authority assesses any
deficiency with respect to, a Return of a Consolidated Group
filed by a member of the TRICON Group which would have increased
the PepsiCo Tax Liability under Section 3(c)(i), then within 30
days after a Final Determination of the adjustment, the PepsiCo
Group shall pay to the TRICON Group the difference between all
payments actually made under Section 3(c)(i) and all payments
that would have been made under Section 3(c)(i) taking such
adjustment into account.
(ii) If any adjustment is made in, or if a Taxing Authority
assesses any deficiency with respect to, a Return of a
Consolidated Group filed by a member of the PepsiCo Group which
would have increased the TRICON Tax Liability under Section
3(c)(i), then within 30 days after any member of the PepsiCo
Group makes a payment to a Taxing Authority or makes a deposit
with a Taxing Authority to stop the running of interest with
respect to such adjustment, the TRICON Group shall pay to the
PepsiCo Group the difference between all payments actually made
under Section 3(c)(i) and all payments that would have been made
under Section 3(c)(i) taking such adjustment into account.
(iii) If any adjustment made in, or any deficiency assessed
with respect to a Return of a Consolidated Group results in a
reduction in the amount of the benefit realized by the PepsiCo
Group from a Tax Asset of the TRICON Group (whether or not the
TRICON Group was paid in respect of such benefit), the TRICON
Group shall, within 30 days after receipt of written notice from
the PepsiCo Group, pay to the PepsiCo Group the amount of such
reduction. In addition, the TRICON Group shall hold each member
of the PepsiCo Group harmless for any penalty or interest payable
by any member of the TRICON Group as a result of any such
reduction.
(iv) Any refunds or credits of Tax (including a return of a
deposit described in Section 3(e)(ii)) received by a member of
the TRICON Group relating to a Pre-Distribution Period, shall be
paid by such member of the TRICON Group to the PepsiCo Group
within 30 days of receipt; provided that no such payment shall be
required to the extent such refund or credit is attributable to
(x) a Tax Asset of the PepsiCo Group for which payment has
previously been made by the TRICON Group, or (y) an adjustment
for which payment in respect thereof has previously been made
pursuant to Section 3(e)(i) or 3(e)(ii).
4. Certain Representations and Covenants.
(a) (i) TRICON Representations. TRICON and each member of the TRICON Group
represent that as of the date hereof, and covenants that on the Distribution
Date, there is no plan or intention (A) to liquidate TRICON or to merge or
consolidate TRICON, or any member of the TRICON Group conducting an active trade
or business relied upon in connection with the Restructuring or the
Distribution, with any other person subsequent to the Distribution, (B) to sell,
refranchise or otherwise dispose of any asset, or close any restaurant unit, of
TRICON or any member of the TRICON Group subsequent to the Distribution, in a
manner that would result in any increased Tax liability or reduction of any Tax
Asset of the PepsiCo Group or any member thereof, (C) to take any action
inconsistent with the information and representations furnished to the IRS or
any other Taxing Authority in connection with the request for a private letter
ruling (or any comparable pronouncement by a Taxing Authority under applicable
law) with respect to the Distribution or the Restructuring, regardless of
whether such information and representations were included in the ruling or
pronouncement issued by the IRS or other Taxing Authority, (D) to enter into any
negotiations, agreements, or arrangements with respect to transactions or events
(including stock issuances, pursuant to the exercise of options or otherwise,
option grants, the adoption of, or authorization of shares under, a stock option
plan, capital contributions, or acquisitions, but not including the
Distribution) which, if treated as consummated before the proposed
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distribution, would result in PepsiCo not having "control" of TRICON within the
meaning of sections 355(a)(1)(A) and 368(c) of the Code at the time of the
Distribution, (E) to make any change in equity structure that would result in
PepsiCo not having such "control" (except for the Distribution), (F) to
repurchase stock of TRICON in a manner contrary to the requirements of Revenue
Procedure 96-30 or in a manner contrary to the representations made in
connection with the request for a private letter ruling with respect to the
Distribution, (G) to take any action that contravenes any existing gain
recognition agreement or other agreement with a Taxing Authority to which any
member of the TRICON Group or the PepsiCo Group is a party or (H) to enter into
any negotiations, agreements, or arrangements with respect to transactions or
events (including stock issuances, pursuant to the exercise of options or
otherwise, option grants, the adoption of, or authorization of shares under, a
stock option plan, capital contributions, or acquisitions, but not including the
Distribution) which may cause the Distribution to be treated as part of a plan
pursuant to which one or more Persons acquire directly or indirectly TRICON
stock representing a "50-percent or greater interest" within the meaning of
Section 355(d)(4) of the Code.
(ii) TRICON and PepsiCo Representations. Each of TRICON, PepsiCo and
the members of the TRICON Group and the PepsiCo Group, respectively,
represents that as of the date hereof, and covenants that on the
Distribution Date, neither TRICON, PepsiCo nor the members of the TRICON
Group or PepsiCo Group, respectively (as applicable), is aware of any
present plan or intention by the current shareholders of PepsiCo to sell,
exchange, transfer by gift, or otherwise dispose of any of their stock in,
or securities of, PepsiCo or TRICON subsequent to the Distribution. In
making this representation, the parties hereto recognize that the shares of
PepsiCo are, and the shares of TRICON will be, listed on certain stock
exchanges and regular public trading in such shares can be expected.
(b) TRICON Covenants. TRICON covenants to PepsiCo that, without the prior
written consent of the PepsiCo Vice President, Tax, (i) during the two-year
period following the Distribution Date neither TRICON, nor any member of the
TRICON Group conducting an active trade or business relied upon in connection
with the Restructuring or the Distribution, will liquidate, merge or consolidate
with any other person, (ii) during the two-year period following the
Distribution Date TRICON will not sell, refranchise exchange, distribute or
otherwise dispose of its assets or those of any member of the TRICON Group, or
close any of its restaurant units or those of any member of the TRICON Group, in
a manner that would result in any increased Tax liability or reduction of any
Tax Asset of the PepsiCo Group or any member thereof, (iii) following the
Distribution, TRICON will, for a minimum of two years, continue the active
conduct of the historic business conducted by TRICON throughout the five year
period prior to the Distribution, (iv) TRICON will not, nor will it permit any
member of the TRICON Group to, take any action inconsistent with the information
and representations furnished to the IRS or any other Taxing Authority in
connection with the request for a private letter ruling (or any comparable
pronouncement by a Taxing Authority under applicable law) with respect to the
Distribution or the Restructuring, regardless of whether such information and
representations were included in the ruling or pronouncement issued by the IRS
or other Taxing Authority, (v) TRICON will not take any action that contravenes
any existing gain recognition agreement or other agreement with a Taxing
Authority to which any member of the TRICON Group or the PepsiCo Group is a
party, (vi) TRICON will not repurchase stock of TRICON in a manner contrary to
the requirements of Revenue Procedure 96-30 or in a manner contrary to the
representations made in connection with the request for a private letter ruling
with respect to the Distribution, (vii) on or after the Distribution Date TRICON
will not, nor will it permit any member of the TRICON Group to, make or change
any accounting method, amend any Return or take any Tax position on any Return,
take any other action, omit to take any action or enter into any transaction
that results in any increased Tax liability or reduction of any Tax Asset of the
PepsiCo Group or any member thereof in respect of any Pre-Distribution Period,
and (viii) during the applicable period provided in Section 355(e)(2)(B) of the
Code with respect to the Distribution, it will not enter into any transaction or
make any change in its equity structure (including stock issuances, pursuant to
the exercise of options or otherwise, options grants, the adoption of, or
authorization of shares under, a stock option plan, capital contributions, or
acquisitions, but not including the Distribution) which may cause the
Distribution to be treated as part of a plan pursuant to which one or more
Persons acquire directly or indirectly TRICON stock representing a "50-percent
or greater interest" within the meaning of Section 355(d)(4) of the Code. TRICON
also covenants to PepsiCo that during the two-year period following the
Distribution Date, TRICON will not enter into any transaction affecting, or that
could affect, the ownership of the equity interests in TRICON, or make any
change in its equity structure (including stock issuances, pursuant to the
exercise of options or otherwise, the adoption of, or authorization of
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shares under, a stock option plan, capital contributions, or acquisitions, but
not including the Distribution) unless TRICON provides the PepsiCo Vice
President, Tax with written notification of such transaction, and the PepsiCo
Vice President, Tax consents to such transaction; provided, however, that if
such consent is not given, the PepsiCo Vice President, Tax agrees to seek an
unqualified opinion of counsel from counsel chosen by the PepsiCo Vice
President, Tax, that such transaction or change in equity structure, together
with any prior transactions or changes in equity structure (including stock
issuances, pursuant to the exercise of options or otherwise, option grants, the
adoption of, or authorization of shares under, a stock option plan, capital
contributions, or acquisitions, but not including the Distribution), if treated
as consummated before the Distribution, would not result in PepsiCo not having
"control" of TRICON within the meaning of Sections 355(a)(1)(A) and 368(c) of
the Code at the time of the Distribution. Upon the receipt of such opinion,
TRICON shall be entitled to enter into such transaction or make such change in
its equity structure. If such an opinion is not obtained, TRICON shall not be
entitled to enter into such transaction or make such change in its equity
structure. The PepsiCo Vice President, Tax agrees that either (i) consent or
(ii) an opinion of counsel will be delivered to TRICON within 15 days of
TRICON's written notification to PepsiCo of such transaction. TRICON covenants
to PepsiCo that during the two-year period following the Distribution Date,
TRICON will not issue any stock options with respect to shares that have not
been authorized. In no event will TRICON enter into any transaction or make any
change in equity structure (including stock issuances, pursuant to the exercise
of options or otherwise, option grants, the adoption of, or authorization of
shares under, a stock option plan, capital contributions, or acquisitions, but
not including the Distribution) during the two year period following the
Distribution which, if treated as consummated before the Distribution, would
result in PepsiCo not having "control" of TRICON within the meaning of Sections
355(a) (1)(A) and 368(c) of the Code at the time of the Distribution. For
purposes of the preceding sentence, any option authorized under a stock option
plan will be treated as having been granted. TRICON shall provide to PepsiCo, on
the first business day of every month, commencing on November 3, 1997, a
certificate describing any transaction or change in equity structure described
in the second sentence of this Section 4(b) and any option grants which occurred
during the preceding month. TRICON agrees that PepsiCo is to have no liability
for any tax resulting from any action referred to in this Section 4(b) and
agrees to indemnify and hold harmless the PepsiCo Group against any such tax.
TRICON shall also bear all Costs incurred by PepsiCo in connection with
obtaining any opinion of counsel or in connection with PepsiCo's determination
of whether or not to grant any written consent required under this Section 4(b).
(c) Deductions and Certain Taxes Related to Options. The PepsiCo Vice
President, Tax shall determine whether the PepsiCo Group or the TRICON Group
shall file Returns claiming (x) the Tax deductions attributable to the exercise
of options to purchase stock of PepsiCo which are held by employees or former
employees of the TRICON Group and (y) any other similar compensation related Tax
deductions. If it is determined that the PepsiCo Group shall claim all such Tax
deductions, (i) the PepsiCo Group shall be entitled to any such Tax deductions,
(ii) the Returns of the PepsiCo Group and the TRICON Group shall reflect the
entitlement of the PepsiCo Group to such deductions, (iii) to the extent any
such deductions are disallowed because a Taxing Authority determines that TRICON
should have claimed such deductions, the TRICON Group shall pay to the PepsiCo
Group an amount equal to the Tax paid by the PepsiCo Group as a result of such
disallowance, (iv) within 1 day of the exercise of any option described in
clause (x) of the preceding sentence, or within 1 day of any other event that
would result in a compensation related Tax deduction, as the case may be, the
TRICON Group will pay
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to the PepsiCo Group an amount equal to the liability of the PepsiCo Group under
the Federal Insurance Contributions Act, the Federal Unemployment Tax Act or any
state employment tax law in connection with the exercise of such an option,
except to the extent such Tax is withheld from a payment to the employee and
remitted to a Taxing Authority on the employee's behalf. If it is determined
that the TRICON Group shall claim all such Tax deductions, (i) the Returns of
the PepsiCo Group and the TRICON Group shall reflect such determination, (ii)
not later than 3 days prior to the due date of any Tax Return, TRICON shall
notify the PepsiCo Vice President, Tax of the amount of Tax deductions it
intends to claim with respect to such options or other compensation related Tax
deductions, (iii) the TRICON Group shall pay to the PepsiCo Group an amount
equal to the product of the amount of the related deductions and the sum of the
PepsiCo Group's applicable statutory federal Tax rate and state and local Tax
rate net of any federal Tax benefit attributable to state and local Taxes for
the relevant Tax period, as determined by the PepsiCo Vice President, Tax, and
such payment, with respect to each such deduction, shall be made not later than
3 days prior to the due date of the estimated Tax payment immediately following
when any member of the TRICON Group becomes entitled to any refund, credit or
other offset attributable to such deduction, (iv) TRICON and each member of the
TRICON Group will indemnify the PepsiCo Group against any Tax liability of the
PepsiCo Group under the Federal Insurance Contributions Act or the Federal
Unemployment Tax Act incurred in connection with the exercise of such an option
or the occurrence of any other event resulting in a compensation related Tax
deduction, as the case may be, except for the extent such Tax is withheld from a
payment to the employee and remitted to a Taxing Authority on the employee's
behalf, and (v) to the extent such deduction is disallowed because a Taxing
Authority determines that PepsiCo should have claimed such deduction, the
PepsiCo Group will file an amended Return claiming such deduction, and the
PepsiCo Group shall pay to the TRICON Group the actual benefit received by the
PepsiCo Group in respect of such deduction to the extent that TRICON has
previously made a payment to PepsiCo pursuant to the immediately preceding
clause (iii) attributable to such deduction. For purposes of the immediately
preceding clause (i), the PepsiCo Vice President, Tax will have the right to
determine the amount of such Tax deductions attributable to the exercise of such
options or other compensation related Tax deductions that will be claimed by the
TRICON Group on any Tax Return; provided, however, that PepsiCo will indemnify
TRICON and the members of the TRICON Group against any Tax liability for any
disallowed deductions to the extent the amount of deductions claimed on any Tax
return exceeds the amount of deductions in the notice described in the
immediately preceding clause (ii) provided that TRICON has previously made a
payment to PepsiCo pursuant to the immediately preceding clause (iii)
attributable to such deductions. For purposes of the immediately preceding
clause (v), such benefit shall be considered equal to the excess of the amount
of Tax that would have been payable to a Taxing Authority (or of the Tax refund
that would have been receivable) by the PepsiCo Group in the absence of such
deduction over the amount of Tax actually payable to a Taxing Authority (or of
the Tax refund actually receivable) by the PepsiCo Group. Payment of the amount
of such benefit shall be made within 30 days of the receipt by any member of the
PepsiCo Group of any refund, credit or other offset attributable thereto from
the relevant Taxing Authority.
5. Indemnities.
(a) TRICON Indemnity. TRICON and each member of the TRICON Group will
jointly and severally indemnify PepsiCo and the members of the PepsiCo Group
that were members of a Consolidated Group that included such TRICON Affiliate
against and hold them harmless from:
(i) any Tax liability of the TRICON Group and any Tax liability
attributable to the Restructuring except for any Tax liability described in
Section 5(b)(ii);
(ii) any liability or damage resulting from a breach by TRICON or any
member of the TRICON Group of any representation or covenant made by TRICON
herein;
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(iii) any Tax liability resulting from the Distribution and
attributable to any action of TRICON or any member of the TRICON Group,
without regard to whether the PepsiCo Vice President, Tax has consented to
such action;
(iv) any Tax liability resulting from the recapture, pursuant to
Section 904(f) of the Code, of an overall foreign loss for a
Pre-Distribution Period to the extent that the PepsiCo Vice President, Tax
determines that such loss is attributable to operations of the Restaurant
Business in a Pre-Distribution Period; and
(v) all liabilities, costs, expenses (including, without limitation,
reasonable expenses of investigation and attorneys' fees and expenses),
losses, damages, assessments, settlements or judgments arising out of or
incident to the imposition, assessment or assertion of any Tax liability or
damage described in (i), (ii), (iii), or (iv) including those incurred in
the contest in good faith in appropriate proceedings relating to the
imposition, assessment or assertion of any such Tax, liability or damage.
(b) PepsiCo Indemnity. PepsiCo and each member of the PepsiCo Group will
jointly and severally indemnify TRICON and the members of the TRICON Group that
were members of a Consolidated Group that included such PepsiCo Affiliate
against and hold them harmless from:
(i) any Tax liability of the PepsiCo Group and any Tax liability
resulting from the Distribution, other than any such liabilities described
in Section 5(a);
(ii) with respect to the Restructuring, any Tax liability attributable
to the distribution of certain borrowing proceeds by TRICON to PepsiCo
described in Section 13 of the Separation Agreement and any current Taxes
attributable to the Restructuring and shown as due on any Return for the
period up to and including the Distribution Date and filed within 12 months
of the Distribution Date; provided, however, that PepsiCo shall have
complete discretion in determining the amount of such Tax liabilities to be
shown on such Returns;
(iii) any liability or damage resulting from a breach by PepsiCo or
any member of the PepsiCo Group of any representation or covenant made by
PepsiCo herein; and
(iv) all liabilities, costs, expenses (including, without limitation,
reasonable expenses of investigation and attorneys' fees and expenses),
losses, damages, assessments, settlements or judgments arising out of or
incident to the imposition, assessment or assertion of any Tax liability or
damage described in (i) or (ii) including those incurred in the contest in
good faith in appropriate proceedings relating to the imposition,
assessment or assertion of any such Tax, liability or damage. If a member
of the PepsiCo Group ceases to be an Affiliate of PepsiCo as a result of a
sale of its stock to a third party (whether or not treated as a sale or
exchange of stock for Tax purposes), such member of the PepsiCo Group shall
be released from its obligations under this Agreement upon such sale and
neither PepsiCo nor any member of the PepsiCo Group shall have any
obligation to indemnify TRICON or any member of the TRICON Group under
Section 5(b)(iii) for any liability or damage attributable to actions taken
by such Affiliate after such sale.
(c) Discharge of Indemnity. TRICON, PepsiCo and the members of the TRICON
Group and PepsiCo Group, respectively, shall discharge their obligations under
Sections 5(a) and 5(b) hereof, respectively, by paying the relevant amount
within 30 days of demand therefor. The PepsiCo Group shall be entitled to make
such a demand at any time after a member of the PepsiCo Group makes a payment or
deposit in respect of a Tax for which any member of the TRICON Group has an
obligation under Section 5(a). The TRICON Group shall be entitled to make such a
demand at any time after a Final
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Determination of an obligation of any member of the PepsiCo Group under Section
5(b). Any such demand shall include a statement showing the amount due under
Section 5(a) or 5(b), as the case may be. Calculation mechanics relating to
items described in Section 5(a)(i) and 5(b)(i) are set forth in Section 3(c).
Notwithstanding the foregoing, if either TRICON, PepsiCo or any member of the
TRICON Group or PepsiCo Group disputes in good faith the fact or the amount of
its obligation under Section 5(a) or Section 5(b), then no payment of the amount
in dispute shall be required until any such good faith dispute is resolved in
accordance with Section 16 hereof; provided, however, that any amount not paid
within 30 days of demand therefor shall bear interest as provided in Section 9.
(d) Tax Benefits. If an indemnification obligation of any member of the
PepsiCo Group or any member of the TRICON Group, as the case may be, under this
Section 5 with respect to a Consolidated Group arises in respect of an
adjustment that makes allowable to a member of the TRICON Group or a member of
the PepsiCo Group, respectively, any deduction, amortization, exclusion from
income or other allowance (a "Tax Benefit") which would not, but for such
adjustment, be allowable, then any payment by any member of the PepsiCo Group or
any member of the TRICON Group, respectively, pursuant to this Section 5 shall
be an amount equal to (x) the amount otherwise due but for this subsection (d),
minus (y) the present value of the product of the Tax Benefit multiplied (i) by
the maximum applicable federal, foreign or state, as the case may be, corporate
tax rate in effect at the time such Tax Benefit becomes allowable to a member of
the TRICON Group or a member of the PepsiCo Group (as the case may be) or (ii)
in the case of a credit, by 100 percent. The present value of such product shall
be determined by discounting such product from the time the Tax Benefit becomes
allowable at a rate equal to Prime.
(e) For purposes of this Section 5, in the case of Taxes that are imposed
on a periodic basis and are payable for a Tax period that includes (but does not
end on) the Distribution Date, the portion of such Tax related to the portion of
such Tax period ending on the Distribution Date shall (x) in the case of any
Taxes other than Taxes based upon or related to income, sales, gross receipts,
wages, capital expenditures or expenses, be deemed to be the amount of such Tax
for the entire Tax period multiplied by a fraction the numerator of which is the
number of days in the Tax period ending on the Distribution Date and the
denominator of which is the number of days in the entire Tax period, and (y) in
the case of any Tax based upon or related to income, sales, gross receipts,
wages, capital expenditures or expenses, be deemed equal to the amount which
would be payable if the relevant Tax period ended on the Distribution Date.
6. Guarantees. PepsiCo or TRICON, as the case may be, shall guarantee the
obligations of each member of the PepsiCo Group or the TRICON Group,
respectively, under this Agreement.
7. Communication and Cooperation
(a) Consult and Cooperate. TRICON and PepsiCo shall consult and cooperate
(and shall cause each member of the TRICON Group or the PepsiCo Group,
respectively, to cooperate) fully at such time and to the extent reasonably
requested by the other party in connection with all matters subject to this
Agreement. Such cooperation shall include, without limitation,
(i) the retention and provision on reasonable request of any and all
information including all books, records, documentation or other
information pertaining to Tax matters relating to the PepsiCo Group and the
TRICON Group, any necessary explanations of information, and access to
personnel, until one year after the expiration of the applicable statute of
limitation (giving effect to any extension, waiver, or mitigation thereof);
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(ii) the execution of any document that may be necessary or helpful in
connection with any required Return or in connection with any audit,
proceeding, suit or action; and
(iii) the use of the parties' best efforts to obtain any documentation
from a governmental authority or a third party that may be necessary or
helpful in connection with the foregoing.
(b) Provide Information. PepsiCo and TRICON shall keep each other fully
informed with respect to any material development relating to the matters
subject to this Agreement.
(c) Tax Attribute Matters. PepsiCo and TRICON shall promptly advise
each other with respect to any proposed Tax adjustments relating to a
Consolidated Group, which are the subject of an audit or investigation, or are
the subject of any proceeding or litigation, and which may affect any Tax
liability or any Tax attribute of PepsiCo, TRICON, the PepsiCo Group, the TRICON
Group or any member of the TRICON Group or the PepsiCo Group (including, but not
limited to, basis in an asset or the amount of earnings and profits).
8. Audits and Contest.
(a) Notwithstanding anything in this Agreement to the contrary, PepsiCo
shall have full control over all matters relating to any Return or any Tax
Proceeding relating to any Tax matters of at least one member of the PepsiCo
Group. TRICON may, at its own expense, participate in any such Tax Proceeding.
Except as provided in Section 8(b), PepsiCo shall have absolute discretion with
respect to any decisions to be made, or the nature of any action to be taken,
with respect to any matter described in the preceding sentence.
(b) (i) No settlement of any Tax Proceeding relating to any matter which
would cause a payment obligation under Sections 5(a) or 5(b) shall be accepted
or entered into by or on behalf of the party entitled to receive a payment under
either Section 5(a) or 5(b), whichever is applicable, unless the party
ultimately responsible for such payment under either Section 5(a) or 5(b),
whichever is applicable (the "Indemnitor"), consents thereto in writing (which
consent shall not be unreasonably withheld or delayed); provided, however, that,
notwithstanding anything to the contrary in this Agreement, PepsiCo may settle
any Tax Proceeding if it determines, in its sole judgment, that TRICON is not
cooperating in such Tax Proceeding; . If the Indemnitor does not respond to the
indemnified party's request for consent within 30 days, the Indemnitor will be
deemed to have consented to the settlement.
(ii) Upon request, during the course of any Tax Proceeding relating to
a Tax liability or damage described in Section 5(a), TRICON shall from time
to time furnish PepsiCo with evidence reasonably satisfactory to PepsiCo of
TRICON's ability to pay the amount for which it is responsible pursuant to
Section 5(a). If at any time during such Tax Proceeding PepsiCo determines
that
TRICON could not pay such amount, then TRICON shall be required to furnish
a guarantee or performance bond satisfactory to PepsiCo in an amount equal to
the amount for which TRICON is responsible pursuant to Section 5(a). If TRICON
fails to furnish such guarantee or bond, PepsiCo may settle the Tax proceeding
without TRICON's consent, and TRICON shall remain obligated to indemnify PepsiCo
pursuant to Section 5(a).
(iii) Notwithstanding anything to the contrary in this Agreement, in
the event a Tax Proceeding involves an issue that is common to both the
PepsiCo Group and the TRICON Group, including but not limited to the
pending litigation regarding Section 1253 of the Code, PepsiCo shall use
its best efforts to settle such issues on behalf of the PepsiCo Group and
the TRICON Group on a consistent basis.
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(iv) Notwithstanding anything to the contrary in this Agreement, with
respect to any Tax Proceeding involving issues solely related to a TRICON
Tax liability, TRICON shall have control over such Tax Proceeding.
(v) With respect to any Tax Proceeding that relates to a TRICON Tax
liability, PepsiCo agrees to act in good faith on behalf of TRICON and the
members of the TRICON Group in settling such Tax Proceeding.
(c) The indemnified party agrees to give notice to the Indemnitor of the
assertion of any claim, or the commencement of any suit, action or proceeding in
respect of which indemnity may be sought hereunder within 30 days of such
assertion or commencement, or such earlier time that would allow the Indemnitor
to timely respond to such claim, suit action or proceeding.
(d) With respect to Returns relating to Taxes solely attributable to the
TRICON Group, TRICON and the members of the TRICON Group shall have full control
over all matters relating to any Tax Proceeding in connection therewith. TRICON
and the members of the TRICON Group shall have absolute discretion with respect
to any decisions to be made, or the nature of any action to be taken, with
respect to any matter described in the preceding sentence.
9. Payments. All payments to be made hereunder shall be made in immediately
available funds. Except as otherwise provided, all payments required to be
made pursuant to this Agreement will be due 30 days after the receipt of
notice of such payment or, where no notice is required, 30 days after the
fixing of liability or the resolution of a dispute. Payments shall be
deemed made when received. Any payment that is not made by the PepsiCo
Group when due shall bear interest at LIBOR minus 10 basis points, as
quoted from time to time, for each day until paid. Any payment that is not
made by the TRICON Group when due shall bear interest at LIBOR plus 75
basis points, as quoted from time to time, for each day until paid. If,
pursuant to a Final Determination, any amount paid by PepsiCo or the
members of the PepsiCo Group or TRICON or the members of the TRICON Group,
as the case may be, pursuant to this Agreement results in any increased Tax
liability or reduction of any Tax Asset of TRICON or any member of the
TRICON Group or PepsiCo or any member of the PepsiCo Group, respectively,
then PepsiCo or TRICON, as appropriate, shall indemnify the other party and
hold it harmless from any interest or penalty attributable to such
increased Tax liability or the reduction of such Tax Asset and shall pay to
the other party, in addition to amounts otherwise owed, the After-Tax
Amount. With respect to any payment required to be made under this
Agreement, the PepsiCo Vice President, Tax has the right to designate, by
written notice to TRICON, which member of the TRICON Group or the PepsiCo
Group, as the case may be, will make or receive such payment and in which
currency such payment will be made.
10. Notices. Any notice, demand, claim, or other communication under this
Agreement shall be in writing and shall be deemed to have been given upon
the delivery or mailing thereof, as the case may be, if delivered
personally or sent by certified mail, return receipt requested, postage
prepaid, to the parties at the following addresses (or at such other
address as a party may specify by notice to the other):
If to PepsiCo or the PepsiCo Group, to:
Matthew McKenna
Vice President, Tax
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, New York 10577-1444
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If to TRICON or the TRICON Group, to:
Steve Feilmeier
Vice President, Tax
TRICON Global Restaurants, Inc.
1441 Gardiner Lane
Louisville, KY 40213
11. Costs and Expenses.
(i) Except as expressly set forth in this Agreement, each party shall
bear its own costs and expenses incurred pursuant to this Agreement. For
purposes of this Agreement, costs and expenses shall include, but not be
limited to, reasonable attorney fees, accountant fees and other related
professional fees and disbursements. Notwithstanding anything to the
contrary in this Agreement, the TRICON Group will be responsible for its
allocable portion, as determined by the PepsiCo Vice President, Tax, of (i)
all costs and expenses attributable to filing any Return that reflects the
income, assets or operations of the TRICON Group and any Return required to
be filed in connection with the Restructuring, and (ii) all costs and
expenses incurred by PepsiCo in complying with the provisions of Section 7
of this Agreement.
(ii) With respect to all Tax Proceedings, including pending litigation
with any Taxing Authority, costs shall be allocated in good faith by the
PepsiCo Vice President, Tax. Each party hereto shall be liable for its
allocable portion of such costs as provided in Section 5.
12. Effectiveness: Termination and Survival. This Agreement shall become
effective upon the consummation of the Distribution. All rights and
obligations arising hereunder with respect to a Pre-Distribution Tax Period
shall survive until they are fully effectuated or performed and, provided,
further, that notwithstanding anything in this Agreement to the contrary,
this Agreement shall remain in effect and its provisions shall survive for
one year after the full period of all applicable statutes of limitation
(giving effect to any extension, waiver or mitigation thereof) and, with
respect to any claim hereunder initiated prior to the end of such period,
until such claim has been satisfied or otherwise resolved.
13. Section Headlines. The headings contained in this Agreement are inserted
for convenience only and shall not constitute a part hereof or in any way
affect the meaning or interpretation of this Agreement.
14. Entire Agreement: Amendments and Waivers.
(a) Entire Agreement. This Agreement contains the entire understanding of
the parties hereto with respect to the subject matter contained herein. No
alteration, amendment, modification, or waiver of any of the terms of this
Agreement shall be valid unless made by an instrument signed by an authorized of
officer of each of PepsiCo and TRICON, or in the case of a waiver, by the party
against whom the waiver is to be effective.
(b) Amendments and Waivers. No failure or delay by any party in exercising
any right, power or privilege hereunder shall operate as a waiver hereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any right, power or privilege. This
Agreement shall not be waived, amended or otherwise modified except in writing,
duly executed by all of the parties hereto.
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15. Governing Law and Interpretation. This Agreement shall be construed and
enforced in accordance with the laws of the State of North Carolina without
giving effect to laws and principles relating to conflicts of law.
16. Dispute Resolution. If the parties hereto are unable to resolve any
disagreement or dispute relating to this Agreement, including but not
limited to whether a transaction is part of the Restructuring and whether a
Tax liability is a PepsiCo Tax Liability or a TRICON Tax Liability, such
dispute shall be resolved in good faith by the PepsiCo Vice President, Tax.
17. Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same Agreement.
18. Assignments; Third Party Beneficiaries. Except as provided below, this
Agreement shall be binding upon and shall inure only to the benefit of the
parties hereto and their respective successors and assigns, by merger,
acquisition of assets or otherwise (including but not limited to any
successor of a party hereto succeeding to the Tax attributes of such party
under applicable law). This Agreement is not intended to benefit any person
other than the parties hereto and such successors and assigns, and no such
other person shall be a third party beneficiary hereof. If, during the
period beginning on the Distribution Date and ending upon the expiration of
the survival period set forth in Section 12, any corporation becomes an
Affiliate of TRICON, such Affiliate shall be bound by the terms of this
Agreement and TRICON shall provide evidence to PepsiCo of such Affiliate's
agreement to be bound by the terms of this Agreement.
19. Authorization. etc. Each of the parties hereto hereby represents and
warrants that it has the power and authority to execute, deliver and
perform this Agreement, that this Agreement has been duly authorized by all
necessary corporate action on the part of such party, that this Agreement
constitutes a legal, valid and binding obligation of each such party, and
that the execution, delivery and performance of this Agreement by such
party does not contravene or conflict with any provision or law or of its
charter or bylaws or any agreement, instrument or order binding on such
party.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the day and year first written above.
PepsiCo on its own behalf and
on behalf of the members of the
PepsiCo Group.
By: /s/ Karl M. von der Heyden
---------------------------------------------
Karl M. von der Heyden
Chief Financial Officer
TRICON on its own behalf and
on behalf of the members of the
TRICON Group
By: /s/ Andrall E. Pearson
---------------------------------------------
Andrall E. Pearson
Chairman of the Board
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EXHIBIT 10.3
EMPLOYEE PROGRAMS AGREEMENT
between PepsiCo, Inc.
and
TRICON Global Restaurants, Inc.
Dated as of August 26, 1997
TABLE OF CONTENTS
1 DEFINITIONS AND REFERENCES................................................1
1.1 DEFINITIONS........................................................1
(a) 414(l)(1) Amount...............................................1
(b) Action.........................................................1
(c) Agreement......................................................2
(d) ASO Contract...................................................2
(e) Award..........................................................2
(f) Casual Dining Businesses.......................................2
(g) Bulk Asset Transfer............................................2
(h) Close of the Distribution Date.................................2
(i) Code...........................................................2
(j) Conversion Formula.............................................2
(k) Deferral Programs..............................................2
(l) Distribution...................................................2
(m) Distribution Date..............................................3
(n) DRIP...........................................................3
(o) ERISA..........................................................3
(p) Executive Programs.............................................3
(q) Foreign Plan...................................................3
(r) Governmental Authority.........................................3
(s) Group Insurance Policy.........................................3
(t) Health and Welfare Plans.......................................3
(u) Hiring Company.................................................4
(v) HMO............................................................4
(w) HMO Agreements.................................................4
(x) Immediately after the Distribution Date........................4
(y) Individual Agreement...........................................4
(z) Indemnitor.....................................................4
(aa) Initial Asset Transfer........................................4
(bb) Liabilities...................................................5
(cc) Long-Term Incentive Plan......................................5
(dd) LTD VEBA......................................................5
(ee) Master Trust..................................................5
(ff) Material Feature..............................................5
(gg) Participating Company.........................................5
(hh) Pension Equalization Plan.....................................5
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(ii) Pension Plan..................................................6
(jj) PepsiCo Capital Stock.........................................6
(kk) PepsiCo Executive.............................................6
(ll) PepsiCo Group.................................................6
(mm) PepsiCo Leave of Absence Programs.............................6
(nn) Person........................................................6
(oo) Plan..........................................................6
(pp) Prior Company.................................................6
(qq) Record Date...................................................7
(rr) Reimbursement Plans...........................................7
(ss) Restaurant Businesses.........................................7
(tt) Salaried Employee.............................................7
(uu) Savings Plan..................................................7
(vv) Separation Agreement..........................................7
(ww) SharePower Plan...............................................7
(xx) Short-Term Incentive Plan.....................................7
(yy) Stock Option Incentive Plan...................................8
(zz) Stock Purchase Plan...........................................8
(aaa) Subsequent Asset Transfer....................................8
(bbb) Subsidiary...................................................8
(ccc) Transferred Individual.......................................8
(ddd) Transition Individual........................................9
(eee) Transition Period............................................9
(fff) TRICON Common Stock.........................................10
(ggg) TRICON Group................................................10
1.2 REFERENCES........................................................10
2 GENERAL PRINCIPLES.......................................................11
2.1 ASSUMPTION OF LIABILITIES.........................................11
2.2 TRICON PARTICIPATION IN PEPSICO PLANS.............................11
(a) Participation in PepsiCo Plans and
PepsiCo Restaurant Health and Welfare Plans...................11
(b) PepsiCo's General Obligations as Plan Sponsor.................12
(c) TRICON's General Obligations as Participating Company.........12
(d) Termination of Participating Company Status...................12
2.3 ESTABLISHMENT OF TRICON PLANS.....................................12
2.4 TERMS OF PARTICIPATION BY TRANSFERRED INDIVIDUALS.................13
2.5 RESTRICTION ON PLAN AMENDMENTS....................................13
3 DEFINED BENEFIT PLANS....................................................14
3.1 ESTABLISHMENT OF MIRROR PENSION TRUSTS............................14
3.2 PIZZA HUT PENSION PLANS...........................................14
3.3 ASSUMPTION OF PENSION PLAN AND PENSION EQUALIZATION
PLAN LIABILITIES AND ALLOCATION OF INTERESTS IN THE PEPSICO
PENSION TRUST.....................................................14
(a) Assumption of Liabilities by TRICON Pension Plan..............14
(b) Asset Allocations and Transfers...............................14
3.4 ACTION IN EVENT OF PBGC INTERVENTION..............................16
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4 DEFINED CONTRIBUTION PLANS...............................................17
4.1 SAVINGS PLAN......................................................17
(a) Savings Plan Trust............................................17
(b) Assumption of Liabilities and Transfer of Assets..............17
(c) Non-Employer Stock Funds......................................17
(d) Miscellaneous Funds...........................................18
4.2 ESOP..............................................................18
5 HEALTH AND WELFARE PLANS.................................................19
5.1 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES.................19
5.2 ESTABLISHMENT OF MIRROR LTD VEBA..................................19
5.3 LTD VEBA ASSET TRANSFERS..........................................19
5.4 CONTRIBUTIONS TO, INVESTMENTS OF, AND DISTRIBUTIONS FROM VEBAS....20
5.5 VENDOR CONTRACTS..................................................20
(a) ASO Contracts, Group Insurance Policies, HMO Agreements
and Letters of Understanding..................................20
(b) Effect of Change in Rates.....................................21
(c) Management of the ASO Contracts, Group Insurance
Policies, HMO Agreements, Letters of Understanding
and other Vendor Contracts....................................21
5.6 PEPSICO SALARY CONTINUATION.......................................21
5.7 POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS.................22
5.8 COBRA AND HIPAA...................................................22
5.9 LEAVE OF ABSENCE PROGRAMS.........................................22
5.10 PEPSICO WORKERS' COMPENSATION PROGRAM............................22
5.11 PEPSICO PRIVATE LINE EMPLOYEE ASSISTANCE PROGRAM.................23
5.12 POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS......................23
(a) Continuance of Elections, Co-Payments and Maximum Benefits....23
(b) Administration................................................23
(c) Other Post-Distribution Transitional Rules....................24
5.13 APPLICATION OF ARTICLE 5 TO THE TRICON GROUP.....................24
6 EXECUTIVE PROGRAMS.......................................................25
6.1 ASSUMPTION OF OBLIGATIONS.........................................25
6.2 SHORT-TERM INCENTIVE PLANS........................................25
6.3 LONG-TERM INCENTIVE PLAN AND STOCK OPTION INCENTIVE PLAN..........25
(a) Transferred Individuals Who Are Active Employees of TRICON....25
(b) Transferred Individuals Who Are Not Active Employees of
TRICON........................................................27
6.4 DEFERRAL PROGRAMS.................................................27
(a) PepsiCo Executive Income Deferral Program.....................27
(b) PepsiCo Performance Share Unit Deferral Program...............28
(c) PepsiCo Option Gains Deferral Program.........................28
6.5 RESTAURANT DEFERRED COMPENSATION PLAN.............................28
6.6 EXECUTIVE LOAN PROGRAM............................................28
6.7 STOCK OPTION INCENTIVE PLAN RECORDKEEPING ACCOUNTS................29
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7 MISCELLANEOUS BENEFITS...................................................30
7.1 SHAREPOWER PLAN...................................................30
(a) Treatment of Outstanding Grants Under PepsiCo SharePower
Plan..........................................................30
(b) Recordkeeping Accounts........................................30
7.2 STOCK PURCHASE PLAN...............................................31
(a) Transfer of PepsiCo Capital Stock.............................31
(b) Transfer of TRICON Common Stock...............................31
8 TRANSITIONAL ARRANGEMENTS................................................32
8.1 TRANSITION INDIVIDUALS/RECOGNITION OF SERVICE.....................32
8.2 PENSION PLANS.....................................................32
(a) Assumption of Liabilities/Noncommencement of Pensions.........32
(b) Asset/Liability Allocations and Transfers.....................32
8.3 SAVINGS PLAN......................................................33
8.4 HEALTH AND WELFARE PLANS..........................................33
(a) Continuance of Elections, Co-Payments, and Maximum Benefits...33
(b) Reimbursement Plans...........................................33
8.5 EXECUTIVE PROGRAMS................................................33
(a) Long-Term Incentive Plan and Stock Option Incentive Plan......33
(b) Restaurant Deferred Compensation Plan.........................34
(c) Deferral Programs.............................................34
8.6 SHAREPOWER PLANS..................................................34
8.7 STOCK PURCHASE PLANS..............................................34
8.8 SHORT-TERM INCENTIVE PLAN.........................................34
9 GENERAL..................................................................35
9.1 PAYMENT OF AND ACCOUNTING TREATMENT FOR EXPENSES AND BALANCE
SHEET AMOUNTS.....................................................35
(a) Expenses......................................................35
(b) Balance Sheet Amounts.........................................35
9.2 SHARING OF PARTICIPANT INFORMATION................................35
9.3 RESTRICTIONS ON EXTENSION OF OPTION EXERCISE PERIODS,
AMENDMENT OR MODIFICATION OF OPTION TERMS AND CONDITIONS..........35
9.4 NON-SOLICITATION OF EMPLOYEES.....................................36
9.5 REPORTING AND DISCLOSURE AND COMMUNICATIONS TO PARTICIPANTS.......36
9.6 PLAN AUDITS.......................................................36
(a) Audit Rights with Respect to the Allocation or Transfer of
Plan Assets...................................................36
(b) Audit Rights With Respect to Information Provided.............37
(c) Audits Regarding Vendor Contracts.............................37
9.7 BENEFICIARY DESIGNATIONS..........................................37
9.8 REQUESTS FOR INTERNAL REVENUE SERVICE RULINGS AND UNITED
STATES DEPARTMENT OF LABOR OPINIONS...............................38
(a) Cooperation...................................................38
(b) Applications..................................................38
9.9 FIDUCIARY AND RELATED MATTERS.....................................38
9.10 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES......38
9.11 COLLECTIVE BARGAINING............................................39
9.12 CONSENT OF THIRD PARTIES..................................... ...39
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9.13 FOREIGN PLANS....................................................39
9.14 EFFECT IF DISTRIBUTION DOES NOT OCCUR............................39
9.15 RELATIONSHIP OF PARTIES..........................................39
9.16 AFFILIATES.......................................................40
9.17 ARBITRATION......................................................40
9.18 INDEMNIFICATION..................................................40
9.19 NOTICES..........................................................42
9.20 INTERPRETATION...................................................42
9.21 GOVERNING LAW/EXECUTION..........................................42
APPENDIX A PEPSICO EXECUTIVE PROGRAMS......................................43
APPENDIX B HEALTH AND WELFARE PLANS........................................44
APPENDIX C FOREIGN PLANS...................................................46
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EMPLOYEE PROGRAMS AGREEMENT
This EMPLOYEE PROGRAMS AGREEMENT, dated as of August 26, 1997, is by and
between PepsiCo, Inc., a North Carolina corporation ("PepsiCo"), and TRICON
Global Restaurants, Inc., a North Carolina corporation ("TRICON").
WHEREAS, PepsiCo has decided to consolidate the assets and operations of
its worldwide KFC, Pizza Hut and Taco Bell businesses (collectively, the
"Restaurant Businesses") into TRICON and TRICON's subsidiaries and affiliates
and to distribute the Common Stock of TRICON to the holders of PepsiCo Capital
Stock (the "Distribution"); and
WHEREAS, PepsiCo and TRICON have entered into a Separation Agreement, dated
as of the date of this agreement (the "Separation Agreement"), and certain other
agreements that will govern certain matters relating to the Distribution and the
relationship of PepsiCo and TRICON and their respective Subsidiaries following
the Distribution; and
WHEREAS, pursuant to the Separation Agreement, PepsiCo and TRICON have
agreed to enter into this Agreement for the purpose of allocating assets,
liabilities, and responsibilities with respect to certain employee compensation
and benefit plans and programs between them;
NOW, THEREFORE, in consideration of the mutual promises contained herein
and in the Separation Agreement, the Parties (as that term is defined in the
Separation Agreement) agree as follows:
ARTICLE
1
DEFINITIONS AND REFERENCES
1.1 DEFINITIONS
For purposes of this Agreement, capitalized terms used (other than the
formal names of PepsiCo Plans (as defined below)) and not otherwise defined
shall have the respective meanings assigned to them below or as assigned to them
in the Separation Agreement (as defined above):
(a) 414(l)(1) Amount
"414(l)(1) Amount" means, the minimum amount necessary to fund vested
benefits under the PepsiCo Pension Plan and the TRICON Pension Plan on a
"termination basis" (as that term is defined in Treas. Reg. ss.
1.414(l)-1(b)(5)) in accordance with the actuarial assumptions described in
Section 3.3.
(b) Action
"Action" means any demand, action, cause of action, suit, countersuit,
arbitration, inquiry, proceeding, or investigation by or before any Governmental
Authority or any arbitration or mediation tribunal, pending or threatened, known
or unknown.
(c) Agreement
"Agreement" means this Employee Programs Agreement, including all the
attached Appendices.
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(d) ASO Contract
"ASO Contract" means an administrative services only contract, related
prior practice, or related understanding with a third-party administrator that
pertains to any PepsiCo Health and Welfare Plan, PepsiCo Restaurants Health and
Welfare Plan, or TRICON Health and Welfare Plan.
(e) Award
"Award" means an award under a Long-Term Incentive Plan or a Short-Term
Incentive Plan or, as the context or facts may require, any other award under
another incentive or special bonus, incentive, or award program or arrangement.
(f) Casual Dining Businesses
"Casual Dining Businesses" has the meaning given that term under the
Separation Agreement.
(g) Bulk Asset Transfer
"Bulk Asset Transfer" is defined in Section 3.3(b)(2).
(h) Close of the Distribution Date
"Close of the Distribution Date" means 11:59:59 P.M., Eastern Daylight Time
on the Distribution Date.
(i) Code
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor federal income tax law. Reference to a specific Code provision also
includes any proposed, temporary, or final regulation in force under that
provision.
(j) Conversion Formula
"Conversion Formula" means the appropriate formula described in the Form
10, filed with the Securities and Exchange Commission by PepsiCo in connection
with the Distribution, which shall be applied for adjusting the exercise price
and award size of PepsiCo stock options under the PepsiCo Long-Term Incentive
Plan, PepsiCo SharePower Plan and PepsiCo Stock Option Incentive Plan or for
determining the exercise price and number of TRICON stock options issued as a
result of the conversion of PepsiCo options granted under the PepsiCo Long-Term
Incentive Plan, the PepsiCo Stock Option Incentive Plan and the PepsiCo
SharePower Plan, as applicable.
(k) Deferral Programs
"Deferral Programs," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo, Inc. Executive Income Deferral Program, the PepsiCo, Inc.
Performance Share Unit Deferral Program, and the PepsiCo, Inc. Option Gains
Deferral Program. When immediately preceded by "TRICON" or when the applicable
Hiring Company or Prior Company is a member of the TRICON Group, "Deferral Plan"
means the executive income deferral program, performance share unit deferral
program and the option gains deferral program to be established by TRICON
pursuant to Section 2.3.
(l) Distribution
"Distribution" has the meaning given that term under the Separation
Agreement.
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(m) Distribution Date
"Distribution Date" has the meaning given that term under the Separation
Agreement.
(n) DRIP
"DRIP," when immediately preceded by "PepsiCo" or when the applicable
Hiring Company or Prior Company is a member of the PepsiCo Group, means the
PepsiCo Dividend Reinvestment Plan. When immediately preceded by "TRICON" or
when the applicable Hiring Company or Prior Company is a member of the TRICON
Group, "DRIP" means the dividend reinvestment plan or program to be established
by TRICON.
(o) ERISA
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended. Reference to a specific provision of ERISA also includes any proposed,
temporary, or final regulation in force under that provision.
(p) Executive Programs
"Executive Programs," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the executive benefit and nonqualified plans, programs, and arrangements
established, maintained, agreed upon, or assumed by a member of the PepsiCo
Group for the benefit of employees and former employees of members of the
PepsiCo Group before the Close of the Distribution Date, including the plans and
programs listed in Appendix A. When immediately preceded by "TRICON" or when the
applicable Hiring Company or Prior Company is a member of the TRICON Group,
"Executive Programs" means the executive benefit plans and programs to be
established by TRICON pursuant to Section 2.3 that correspond to the respective
PepsiCo Executive Programs including those plans and programs listed in Appendix
A.
(q) Foreign Plan
"Foreign Plan," when immediately preceded by "PepsiCo," means a Plan
maintained by the PepsiCo Group or when immediately preceded as "TRICON," a plan
maintained by the TRICON Group, in either case for the benefit of employees who
are compensated under a payroll which is administered outside the 50 United
States, its territories and possessions, and the District of Columbia.
(r) Governmental Authority
"Governmental Authority" means any federal, state, local, foreign, or
international court, government, department, commission, board, bureau, agency,
official, or other regulatory, administrative, or governmental authority,
including the Department of Labor, the Internal Revenue Service, and the Pension
Benefit Guaranty Corporation.
(s) Group Insurance Policy
"Group Insurance Policy" means a group insurance policy issued in
connection with any PepsiCo Health and Welfare Plan, PepsiCo Restaurants Health
and Welfare Plan, or any TRICON Health and Welfare Plan, as applicable.
(t) Health and Welfare Plans
"Health and Welfare Plans," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the health and welfare
3
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benefit plans, programs, and policies which are sponsored by PepsiCo. When
immediately preceded by "PepsiCo Restaurant," "Health and Welfare Plans" means
the benefit plans, programs and policies listed in the first part of Appendix B
to this Agreement that are sponsored by a member of the TRICON Group for periods
immediately before the Close of the Distribution Date, and such other welfare
plans or programs as may apply to any such member's employees, retirees and
dependents for such periods. When immediately preceded by "TRICON" or when the
applicable Hiring Company or Prior Company is a member of the TRICON Group,
"Health and Welfare Plans" means benefit plans, programs, and policies listed in
the second part of Appendix B to this Agreement which are sponsored by a member
of the TRICON Group for periods Immediately after the Distribution Date.
(u) Hiring Company
"Hiring Company," with respect to a Transition Individual described in
Section 1.1(ddd)(1) or (4), means a member of the PepsiCo Group, and, with
respect to a Transition Individual described in Section 1.1(ddd)(2) or (3),
means a member of the TRICON Group.
(v) HMO
"HMO" means a health maintenance organization that provides benefits under
the PepsiCo Health and Welfare Plans, PepsiCo Restaurants Health and Welfare
Plans, or the TRICON Health and Welfare Plans, as applicable.
(w) HMO Agreements
"HMO Agreements" means contracts, letter agreements, practices, and
understandings with HMOs that provide medical services under the PepsiCo Health
and Welfare Plans, PepsiCo Restaurants Health and Welfare Plans, and TRICON
Health and Welfare Plans, as applicable.
(x) Immediately after the Distribution Date
"Immediately after the Distribution Date" means 12:00 A.M., Eastern
Daylight Time on the day after the Distribution Date.
(y) Individual Agreement
"Individual Agreement" means an individual contract or agreement (whether
written or unwritten) entered into between a member of the PepsiCo Group or a
member of the TRICON Group and any employee that establishes the right of such
individual to special compensation or benefits, special bonuses, supplemental
pension benefits, hiring bonuses, loans, guaranteed payments, special
allowances, tax equalization payments, special expatriate compensation payments,
disability benefits, or share units granted (and payable in the form of cash or
otherwise) under individual phantom share agreements, or that provides benefits
similar to those identified in Appendix A.
(z) Indemnitor
"Indemnitor" is defined in Section 9.18.
(aa) Initial Asset Transfer
"Initial Asset Transfer" is defined in Section 3.3(b)(2).
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(bb) Liabilities
"Liabilities" means any and all losses, claims, charges, debts, demands,
actions, costs and expenses (including administrative and related costs and
expenses of any Plan, program, or arrangement), of any nature whatsoever,
whether absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising.
(cc) Long-Term Incentive Plan
"Long-Term Incentive Plan," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo, Inc. 1987 Long-Term Incentive Plan, the PepsiCo, Inc. 1994
Long-Term Incentive Plan, and any other long-term incentive or stock-based
incentive plans assumed by a member of the PepsiCo Group by reason of merger,
acquisition, or otherwise. When immediately preceded by "TRICON" or when the
applicable Hiring Company or Prior Company is a member of the TRICON Group,
"Long-Term Incentive Plan" means the long-term incentive plan to be established
by TRICON pursuant to Section 2.3.
(dd) LTD VEBA
"LTD VEBA," when immediately preceded by "PepsiCo," means the PepsiCo Long
Term Disability Benefit Trust. When immediately preceded by "TRICON," "LTD VEBA"
means the welfare benefit fund to be established by TRICON pursuant to Section
5.2 that corresponds to the PepsiCo LTD VEBA. (ee) Master Trust
"Master Trust," when immediately preceded by "PepsiCo", means the master
trusts evidenced by the PepsiCo, Inc. Master Trust Agreement dated February 1,
1978 and the PepsiCo, Inc. Special Master Trust Agreement dated September 11,
1985, as amended from time to time, and currently associated with, among other
plans, the PepsiCo Pension Plan and the Pizza Hut Pension Plan. When immediately
preceded by "TRICON," "Master Trust" means the master trust(s) to be established
by TRICON pursuant to Section 3.1 that corresponds to the PepsiCo Master Trust.
(ff) Material Feature
"Material Feature" means any feature of a Plan that could reasonably be
expected to be of material importance to the sponsoring employer or the
participants and beneficiaries of the Plan, which could include, depending on
the type and purpose of the particular Plan, the class or classes of employees
eligible to participate in such Plan, the nature, type, form, source, and level
of benefits provided by the employer under such Plan and the amount or level of
contributions, if any, required to be made by participants (or their dependents
or beneficiaries) to such Plan.
(gg) Participating Company
"Participating Company" means any Person (other than an individual) that is
participating in a Plan sponsored by a member of the PepsiCo Group or a member
of the TRICON Group, as the context requires.
(hh) Pension Equalization Plan
"Pension Equalization Plan," when immediately preceded by "PepsiCo" or when
the applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Pension Equalization Plan. When immediately preceded by
"TRICON" or when the applicable Hiring Company
5
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or Prior Company is a member of the TRICON Group, "Pension Equalization Plan"
means the plan to be established by TRICON pursuant to Section 2.3 that
corresponds to the PepsiCo Pension Equalization Plan.
(ii) Pension Plan
"Pension Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Salaried Employees Retirement Plan. When immediately preceded
by "TRICON" or when the applicable Hiring Company or Prior Company is a member
of the TRICON Group, "Pension Plan" means the plan to be established by TRICON
pursuant to Section 2.3 that corresponds to the PepsiCo Pension Plan. When
immediately preceded by "Pizza Hut," "Pension Plan" means the Pizza Hut Hourly
Employees Pension Plan.
(jj) PepsiCo Capital Stock
"PepsiCo Capital Stock" has the meaning given that term in the Separation
Agreement.
(kk) PepsiCo Executive
"PepsiCo Executive" means an employee or former employee of a member of the
PepsiCo Group or a member of the TRICON Group, who immediately before the Close
of the Distribution Date is or was eligible to participate in or receive a
benefit under any PepsiCo Executive Program.
(ll) PepsiCo Group
"PepsiCo Group" has the meaning given that term under the Separation
Agreement.
(mm) PepsiCo Leave of Absence Programs
"PepsiCo Leave of Absence Programs" means the leave of absence programs
offered from time to time under the personnel policies and practices of PepsiCo
and leaves offered in accordance with the Family and Medical Leave Act of 1993,
as amended.
(nn) Person
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity, and any Governmental Authority.
(oo) Plan
"Plan," when immediately preceded by "PepsiCo" or "TRICON," means any plan,
policy, program, payroll practice, on-going arrangement, contract, trust,
insurance policy or other agreement or funding vehicle, whether written or
unwritten, providing benefits to employees, or former employees of the PepsiCo
Group or the TRICON Group, as applicable.
(pp) Prior Company
"Prior Company," with respect to a Transition Individual described in
Section 1.1(ddd)(1) or (4), means a member of the TRICON Group and, with respect
to a Transition Individual described in Section 1.1(ddd)(2) or (3), means a
member of the PepsiCo Group.
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(qq) Record Date
"Record Date" has the meaning given that term under the Separation
Agreement.
(rr) Reimbursement Plans
"Reimbursement Plans," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Inc. health care reimbursement account plan that is part of
the PepsiCo Employees Health Care Program and the PepsiCo, Inc. Dependent Care
Reimbursement Account Plan, as applicable. When immediately preceded by "TRICON"
or when the applicable Hiring Company or Prior Company is a member of the TRICON
Group, "Reimbursement Account Plans" means the health care reimbursement account
plan and the dependent care reimbursement account plan to be established by
TRICON pursuant to Section 2.3 that corresponds to the corresponding PepsiCo
Reimbursement Plan.
(ss) Restaurant Businesses
"Restaurant Businesses" is defined in the second paragraph of the preamble
of this Agreement.
(tt) Salaried Employee
"Salaried Employee" means any individual who is an eligible employee within
the meaning of the PepsiCo Pension Plan or the TRICON Pension Plan, as
applicable.
(uu) Savings Plan
"Savings Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Long Term Savings Program. When immediately preceded by
"TRICON" or when the applicable Hiring Company or Prior Company is a member of
the TRICON Group, "Savings Plan" means the TRICON Long Term Savings Program to
be established by TRICON pursuant to Section 2.3.
(vv) Separation Agreement
"Separation Agreement" is defined in the third paragraph of the preamble of
this Agreement.
(ww) SharePower Plan
"SharePower Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo SharePower Stock Option Plan. When immediately preceded by
"TRICON" or when the applicable Hiring Company or Prior Company is a member of
the TRICON Group, "SharePower Plan" means the stock option plan to be
established by TRICON pursuant to Section 2.3.
(xx) Short-Term Incentive Plan
"Short-Term Incentive Plan," when immediately preceded by "PepsiCo," means
the PepsiCo, Inc. 1994 Executive Incentive Compensation Plan, the PepsiCo, Inc.
Executive Incentive Plan, the Middle Management Incentive Compensation Plan, and
any other special compensation, bonus and incentive compensation programs. When
immediately preceded by "TRICON," "Short-Term Incentive Plan" means the
executive incentive compensation plan, executive incentive plan, the middle
management compensation plan and any other special compensation, bonus and
incentive compensation programs to be established by TRICON pursuant to Section
2.3.
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(yy) Stock Option Incentive Plan
"Stock Option Incentive Plan" when immediately preceded by "PepsiCo" or
when the applicable Hiring Company or Prior Company is a member of the PepsiCo
Group, means the "PepsiCo, Inc. 1995 Stock Option Incentive Plan" and any
predecessor plans. When immediately preceded by "TRICON" or when the applicable
Hiring Company or Prior Company is a member of the TRICON Group, "Stock Option
Incentive Plan" means the stock option incentive plan established by TRICON
pursuant to Section 2.3.
(zz) Stock Purchase Plan
"Stock Purchase Plan," when immediately preceded by "PepsiCo" or when the
applicable Hiring Company or Prior Company is a member of the PepsiCo Group,
means the PepsiCo Capital Stock Purchase Plan. When immediately preceded by
"TRICON" or when the applicable Hiring Company or Prior Company is a member of
the TRICON Group, "Stock Purchase Plan" means the employee stock purchase plan
to be established by TRICON pursuant to Section 2.3.
(aaa) Subsequent Asset Transfer
"Subsequent Asset Transfer" is defined in Section 3.3(b)(2).
(bbb) Subsidiary
"Subsidiary" of any Person means any corporation or other organization
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such Person or by any one or more of its
Subsidiaries, or by such Person and one or more of its Subsidiaries; provided,
however, that no Person that is not directly or indirectly wholly owned by any
other Person shall be a Subsidiary of such other Person unless such other Person
controls, or has the right, power, or ability to control, that Person.
(ccc) Transferred Individual
"Transferred Individual" means any individual who, as of the Close of the
Distribution Date: (1) is either then actively employed by, or then on a leave
of absence from, a member of the TRICON Group; or (2) is neither then actively
employed by, nor then on a leave of absence from, a member of the TRICON Group,
but (A) whose most recent (through the Close of the Distribution Date) active
employment with PepsiCo or a past or present affiliate of PepsiCo was with an
entity or a corporate division of the Restaurant Businesses, the Casual Dining
Businesses, and the predecessors of any such entities, to the extent such
information is available, and who has not had an intervening period of
employment covered by an agreement under which assets and liabilities with
respect to the individual were or are to be transferred from a PepsiCo Pension
Plan, or (B) who otherwise is identified pursuant to a methodology approved by
PepsiCo and TRICON, which methodology shall be consistent with the intent of the
parties that former employees of PepsiCo or a past or present affiliate of
PepsiCo will be aligned with the entity for which they most recently (through
the Close of the Distribution Date) worked and based upon the business of such
entity. An alternate payee under a qualified domestic relations order (within
the meaning of Code ss. 414(p) and ERISA ss. 206(d)), alternate recipient under
a qualified medical child support order (within the meaning of ERISA ss.
609(a)), beneficiary or covered dependent, in each case, of an employee or
former employee described in (1) or (2) above shall also be a Transferred
Individual with respect to that employee's or former employee's benefit under
the applicable Plans. Such an alternate payee, alternate recipient, beneficiary,
or covered dependent shall not otherwise be
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considered a Transferred Individual with respect to his or her own benefits
under any applicable Plans unless he or she is a Transferred Individual by
virtue of either of the first two sentences of this definition. In addition,
PepsiCo, in its sole discretion, may designate any other individuals, or group
of individuals, as Transferred Individuals. An individual may be a Transferred
Individual pursuant to this definition regardless of whether such individual is,
as of the Distribution Date, alive, actively employed, on a temporary leave of
absence from active employment, on layoff, terminated from employment, retired
or on any other type of employment or post-employment status relative to a
PepsiCo or TRICON Plan, and regardless of whether, as of the Close of the
Distribution Date, such individual is then receiving any benefits from a PepsiCo
or TRICON Plan. Transferred Individual includes any individual who is on an
international assignment whether paid on a U.S. payroll or a payroll outside the
U.S. if such individual otherwise falls within any of the above categories.
(ddd) Transition Individual
"Transition Individual" means any individual who:
(1) is a Transferred Individual who during the Transition Period
becomes an employee of a member of the PepsiCo Group, without an
intervening period of employment, as a result of transfer arranged by
PepsiCo and TRICON; or
(2) is an employee of a member of the PepsiCo Group as of the
Distribution Date (and is not a Transferred Individual) who during the
Transition Period becomes an employee of a member of the TRICON Group,
without an intervening period of employment, as a result of a transfer
arranged by PepsiCo and TRICON; or
(3) is a Transferred Individual who during the Transition Period (A)
becomes an employee of a member of the PepsiCo Group, and (B) subsequently
becomes an employee of a member of the TRICON Group, in each case without
an intervening period of employment and as a result of a transfer arranged
by PepsiCo and TRICON; or
(4) is an employee of a member of the PepsiCo Group as of the
Distribution Date (and is not a Transferred Individual) who during the
Transition Period (A) becomes an employee of a member of the TRICON Group,
and (B) subsequently becomes an employee of a member of the PepsiCo Group,
in each case without an intervening period of employment and as a result of
a transfer arranged by PepsiCo and TRICON.
An alternate payee under a qualified domestic relations order, (within
the meaning of Code ss. 414(p) and ERISA ss. 206(d)), alternate recipient
under a qualified medical child support order, (within the meaning of ERISA
ss. 609(a)), beneficiary or covered dependent, in each case, of an
individual described in clause (1), (2), (3), or (4) of this definition
shall also be a Transition Individual with respect to that individual's
benefit under the applicable Plans. Such an alternate payee, alternate
recipient, beneficiary, and covered dependent shall not otherwise be
considered a Transition Individual with respect to his or her own benefits
under any applicable Plans, unless he or she is a Transition Individual by
virtue of clause (1), (2), (3), or (4) of this definition.
(eee) Transition Period
"Transition Period" means the period beginning Immediately after the
Distribution Date and ending on December 31, 1998.
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(fff) TRICON Common Stock
"TRICON Common Stock" has the meaning given that term in the Separation
Agreement.
(ggg) TRICON Group
"TRICON Group" has the meaning given that term under the Separation
Agreement.
1.2 REFERENCES
Unless the context clearly indicates otherwise, reference to a particular
Article, Section, or subsection means the Article, Section, or subsection so
delineated in this Agreement.
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ARTICLE
2
GENERAL PRINCIPLES
2.1 ASSUMPTION OF LIABILITIES
TRICON hereby assumes and agrees to pay, perform, fulfill, and discharge,
in accordance with their respective terms, all of the following (regardless of
when or where such Liabilities arose or arise or were or are incurred): (i) all
Liabilities to or relating to Transferred Individuals arising out of or
resulting from employment by a member of the PepsiCo Group before becoming
Transferred Individuals (including Liabilities under PepsiCo Plans and TRICON
Plans); (ii) all other Liabilities to or relating to Transferred Individuals and
other employees