Tricon Form 10K 2000
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 [FEE REQUIRED] for the fiscal
year ended December 30, 2000 |
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |
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 (State or other jurisdiction of incorporation or organization)
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13-3951308 (I.R.S. Employer Identification No.)
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1441 Gardiner Lane, Louisville,
Kentucky (Address of
principal executive offices)
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40213 (Zip Code)
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Registrant's telephone number, including area code: (502) 874-8300
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Securities registered pursuant to 12(b) of the Act:
| Title of Class Common Stock, no par value
Rights to purchase Series A Participating Preferred Stock,
no par value, of the Registrant
| Name of Each Exchange
On which Registered
New York Stock Exchange
New York Stock Exchange
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Securities registered pursuant to 12(g) of the Act:
| None
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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. [X]
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, 2001 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
$5,446,619,649.
The number of shares outstanding of the
Registrant's Common Stock as of March 19, 2001 was 147,086,677 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 17, 2001, are incorporated by reference into
Part III.
PART I
Item 1. Business.
TRICON Global Restaurants, Inc.
(referred to herein as "Tricon" or the "Company") 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 Form
10-K annual report ("Form 10-K") 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 pages 36 through 37.
- General Development of Business
In January 1997, PepsiCo announced its
decision to spin-off its restaurant businesses 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." (Prior to that date, from September
17, 1997 through October 6, 1997, Tricon's Common Stock was traded on the New York Stock
Exchange on a "when-issued" basis). As used in this Form 10-K, references to Tricon or the
Company include the historical operating results of the businesses and operations
transferred to the Company in the Spin-off. Additionally, throughout this Form 10-K, the
terms "restaurants," "stores" and "units" are used interchangeably.
- Financial Information about Operating Segments
Tricon consists of four operating
segments: KFC, Pizza Hut, Taco Bell and TRICON Restaurants International ("TRI" or "International").
For financial reporting purposes, management considers the three U.S. operating segments
to be similar and, therefore, has aggregated them into a single reportable operating
segment. Operating segment information for the years ended December 30, 2000, December
25, 1999 and December 26, 1998 is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") and the related Consolidated
Financial Statements and footnotes in Part II, Item 7, pages 18 through 37; and Part II,
Item 8, pages 38 through 75, respectively, of this Form 10-K.
- Narrative Description of Business
General
Tricon is the world's largest quick
service restaurant ("QSR") company based on number of system units, with more than 30,400
units in over 100 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 "Concepts"). The four operating companies are KFC, Pizza Hut, Taco Bell
and Tricon Restaurants International. KFC is based in Louisville, Kentucky; Pizza Hut and
Tricon Restaurants International are based in Dallas, Texas; and Taco Bell is based in
Irvine, California.
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Restaurant Concepts
Through its three widely-recognized
Concepts, 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
international affiliates in which we own a non-controlling equity interest ("Unconsolidated
Affiliates").
In each Concept, consumers can dine in
and/or carry out food. In addition, Taco Bell and KFC offer a drive-thru option in many
stores, and Pizza Hut offers a drive-thru option on a much more limited basis. 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.
The franchise program of the Company is
designed to assure consistency and quality. The Company is selective in granting
franchises and is not in the practice of franchising to investor groups or passive
investors. Under the standard franchise agreement, franchisees supply capital-initially
by paying a franchise fee to Tricon, 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.
The Company is actively pursuing the
strategy of multibranding, where two or more of its Concepts are operated in a single
restaurant unit. 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 U.S. and internationally. Through the consolidation of market planning
initiatives across all three of its Concepts, the Company has established multi-year
development plans by trade area to optimize franchise and company penetration of all
three Concepts and to improve returns on its existing asset base. The development of
these multibranded units may be limited, in some instances, by prior development and/or
territory rights granted to franchisees.
As of year-end 2000, there were 1,195
units in the worldwide system housing more than one Concept. Of these, 1,160 units offer
food products from two of the Concepts (a "2n1"), and 35 units offer food products from
each of the Concepts (a "3n1"). On a much more limited basis, the Company is testing
multi-brand options involving one of the Concepts and a restaurant concept not owned by
or affiliated with the Company.
Restaurant Operations
Through its Concepts, Tricon develops,
operates, franchises and licenses a system of both traditional and non-traditional QSR
restaurants. Traditional units feature dine-in, carryout and, in some instances,
drive-thru or delivery services. Non-traditional units, which are typically licensed
outlets, include express units and kiosks which have a more limited menu and operate in
non-traditional locations like airports, gasoline service
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stations, convenience stores, stadiums, amusement parks and colleges,
where a full-scale traditional outlet would not be practical or efficient.
The Company's restaurant management
structure varies by concept and unit size. Generally, each Company restaurant is led by a
restaurant general manager ("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
control 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.
Following is a brief description of each
Concept.
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. KFC now has more than 5,300 units in the U.S., and almost 6,000 units in 84
countries and territories outside the U.S. Approximately 25 percent of the U.S. units and
19 percent of the non-U.S. units are operated by the Company.
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. These products are primarily marketed under
the names Original Recipe, Extra Tasty Crispy and Tender Roast. Other principal entree
items include chicken sandwiches and Colonel's Crispy Strips, and, seasonally, Chunky
Chicken Pot Pies. 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. Restaurant decor
is characterized by the image of the Colonel, and KFC's distinctive packaging includes
the "Bucket" of chicken.
As of year-end 2000, KFC was the leader
in the U.S. chicken QSR segment among companies featuring chicken as their primary
product offering, with a 53 percent market share in that segment which is almost 6 times
that of its closest national competitor.
Pizza Hut
Pizza Hut operates in 88 countries and
territories throughout the world and features a variety of pizzas, which may include The
Big New Yorker, Pan Pizza, Thin 'n Crispy, Pizzeria Stuffed Crust, Hand Tossed, Sicilian
and The Insider, each offered with a variety of different toppings. Pizza Hut also
features beverages
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and, in some restaurants, breadsticks, pasta, salads and sandwiches. The
distinctive Pizza Hut image typically 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. 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 2000, the Concept had almost 8,000
units in the U.S., and more than 4,100 units outside of the U.S. Approximately 23 percent
of the U.S. units and 16 percent of the non-U.S. units are operated by the Company.
As of year-end 2000, Pizza Hut was the
leader in the U.S. pizza QSR segment, with a 22 percent market share in that segment
which is double its closest national competitor.
Taco Bell
Taco Bell operates in 14 countries and
territories throughout the world and specializes in Mexican-style food products,
including various types of tacos, burritos, Gorditas, Chalupas, 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 year-end 2000, there were more than 6,700 Taco Bell units within
the U.S., and approximately 250 units outside of the U.S. Approximately 17 percent of the
U.S. units and 18 percent of the non-U.S. units are operated by the Company.
As of year-end 2000, Taco Bell was the
leader in the U.S. Mexican QSR segment, with a market share in that segment of 72 percent.
International
The international operations of the
three Tricon Concepts are consolidated into a separate operating company, which has
directed its focus toward franchise system growth and concentration of Company
development in those markets in which the Company believes sufficient scale is
achievable. Tricon Restaurants International has developed global systems and tools
designed to improve marketing, operations consistency, product delivery, market planning
and development and franchise support capability.
As of year-end 2000, the Company had
almost 10,400 units in the system outside of the U.S. Approximately 18 percent of the
total non-U.S. units are operated by the Company. In 2000, TRI accounted for 35 percent
of the Company's total system sales and 29 percent of the Company's total revenues.
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 owns non-controlling interests
in Unconsolidated Affiliates who operate as franchisees. As of year-end 2000,
approximately 20 percent of Tricon's worldwide units were operated by the Company,
approximately 63 percent by franchisees, approximately 11 percent by licensees and
approximately 6 percent by Unconsolidated Affiliates.
Refranchising
Beginning in 1995, the Company began
rebalancing the system toward more franchisee ownership to focus its resources on what it believes are high growth potential markets where it
can more efficiently leverage its
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scale. Since the strategy began, the Company has
refranchised 5,895 units: 757 units in 2000, 1,435 units in 1999, 1,373 units in 1998,
1,407 units in 1997, 659 units in 1996 and 264 units in 1995. 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
underperforming stores, the Company's overall ownership of total system units declined 27
percentage points in six years from 47 percent at year-end 1994 to 20 percent at year-end
2000. The refranchising program is expected to be substantially completed in 2001. In the
future, the Company may sell additional stores to, or purchase stores from, franchise or
license operators as it deems appropriate.
Supply and Distribution
The Company is a substantial purchaser
of a number of food and paper products, equipment and other restaurant supplies. In 1996,
to ensure reliable sources, the Company consolidated most of its worldwide food and
supply procurement activities under an internal organization now called Supply Chain
Management, which sources, negotiates contracts and buys specified food and supplies from
hundreds of suppliers in a significant number of countries and territories. Supply Chain
Management monitors market trends and seeks 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.
Effective as of March 1, 1999, the
Company, along with the KFC National Purchasing Cooperative, Inc. and representatives of
the Company's KFC, Pizza Hut and Taco Bell franchisee groups, formed the Unified
FoodService Purchasing Co-op, LLC (the "Unified Co-op") for the purpose of purchasing
certain restaurant products and equipment in the U.S. The core mission of the Unified
Co-op is to provide the lowest possible sustainable store-delivered prices for restaurant
products and equipment. This arrangement combines the purchasing power of the Company and
franchisee restaurants in the U.S., which the Company believes will further leverage the
system's scale to drive cost savings and effectiveness in the purchasing function. In
2000, purchasing volume for the Unified Co-op was approximately $3.6 billion, making it
the largest purchasing cooperative of its kind in the QSR industry. The Company also
believes that the Unified Co-op has resulted (and should continue to result) in an even
closer alignment of interests and a stronger relationship with its franchisee community.
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 not experienced any significant continuous
shortages of supplies, and alternative sources for most of these products are generally
available. 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.
Historically, many food products, paper
and packaging supplies, and equipment used in the operation of the Company's restaurants
were distributed to individual Company units by PepsiCo Food Services ("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 franchisees and licensees
that operate in the three restaurant systems, though principally to Pizza Hut and Taco
Bell franchised/licensed units in the U.S. 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 distribution 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.
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Effective as of November 1, 1998,
Tricon, KFC, Pizza Hut and Taco Bell entered into an amended and restated Sales and
Distribution Agreement with AmeriServe (the "Amended AmeriServe Agreement") which
provided for a two and one-half year extension of the term of the original agreement with
PFS through January 2005, as well as an additional two and one-half year renewal option
that could extend the contract, based on market rates, through July 2007. The Amended
AmeriServe Agreement substantially modified the way in which distribution fees are
calculated, and included incentives for utilizing more efficient distribution practices
by both parties. Under the terms of the Amended AmeriServe Agreement, Company KFC, Pizza
Hut and Taco Bell restaurants in the U.S. could generally not use alternative
distributors.
On January 31, 2000, AmeriServe filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. A plan of reorganization for
AmeriServe (the "POR") was approved by the U.S. Bankruptcy Court on November 28, 2000.
The POR provided for the sale of the AmeriServe U.S. distribution business to McLane
Company, Inc., a subsidiary of Wal-Mart ("McLane"), effective on November 30, 2000. In
connection with this sale, the Company agreed to, among other things, an extension of the
Amended AmeriServe Agreement through October 31, 2010. Beginning on November 30, 2000,
McLane assumed all supply and distribution responsibilities under the Amended AmeriServe
Agreement, as well as under distribution agreements covering a substantial portion of the
Pizza Hut and Taco Bell franchise system, and, to a lesser extent, the KFC franchise
system.
A discussion of the impact of the
AmeriServe bankruptcy on the Company is contained in Note 21 to the Consolidated
Financial Statements on pages 69 through 71.
Tricon, KFC, Pizza Hut, Taco Bell and
TRI have also entered into multi-year agreements with Pepsi-Cola Company regarding the
sale of Pepsi-Cola beverage products at Company stores.
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 core
Concepts. As a result, the non-core restaurant businesses of California Pizza Kitchen,
Chevys Mexican Restaurant, D'Angelo's Sandwich Shops, East Side Mario's and Hot 'n Now
(collectively, the "Non-core Businesses") were sold in 1997. The operations of these
Non-core Businesses were not material to the operations of Tricon.
Trademarks and Patents
The Company has numerous registered
trademarks and service marks. The Company believes that many of these marks, including
its Kentucky Fried Chicken®, KFC®, Pizza Hut® and Taco Bell® trademarks, have significant
value and are materially important to its business. The Company's policy is to pursue
registration of its important trademarks whenever feasible 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 generally last indefinitely. The Company also has certain patents on restaurant
equipment, which, while valuable, are not material to its business.
Working Capital
Information about the Company's working
capital is included in MD&A in Part II, Item 7, pages 18 through 37 of this Form 10-K and
the Consolidated Statements of Cash Flows in Part II, Item 8, pages 38 through 75 of this
Form 10-K.
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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 U.S. government.
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 ("R&D")
The Company operates R&D facilities in
Louisville, Kentucky; Dallas, Texas; and Irvine, California. The Company expensed $24
million in both 2000 and 1999 and $21 million in 1998 for R&D activities. From time to
time, independent suppliers also conduct research and development activities for the
benefit of the Tricon restaurant system.
Environmental Matters
The Company is not aware of any federal,
state or local environmental laws or regulations that will materially affect its earnings
or competitive position, or result in material capital expenditures. However, the Company
cannot predict the effect on its operations of possible future environmental legislation
or regulations. During 2000, there were no material capital expenditures for
environmental control facilities and no such material expenditures are anticipated.
Government Regulation
U.S. 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.
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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 Company is also subject to federal
and state laws governing such matters as employment and pay practices, overtime, tip
credits and working conditions. The bulk of the Company's employees are paid on an hourly
basis at rates related to the federal minimum wage.
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.
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. We believe that 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 U.S. 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 results of operations, capital
expenditures or competitive position.
Employees
As of year-end 2000, the Company employed
over 190,000 persons, approximately 70 percent of whom were part-time employees. Over 65
percent of the Company's employees are employed in the U.S. The Company believes that it
provides working conditions and compensation that compare favorably with those of its
principal competitors. Most Company employees are paid on an hourly basis. 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.
- Financial Information about International and U.S. Operations
Financial information about
International and U.S. markets is incorporated herein by reference from Selected
Financial Data, MD&A and the related Consolidated Financial Statements and footnotes in
Part II, Item 6, page 17; Part II, Item 7, pages 18 through 37; and Part II, Item 8,
pages 38 through 75, respectively, of this Form 10-K.
Item 2. Properties.
As of year-end 2000, Tricon Concepts
owned approximately 1,600 and leased approximately 2,700 units in the U.S.; and TRI owned
approximately 400 and leased approximately 1,400 units outside the U.S. Company
restaurants in the U.S. 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 U.S. generally are leased for significantly shorter initial terms with short
renewal options. Pizza Hut leases TRI's and Pizza Hut's corporate
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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 leases office facilities for
accounting services in both Louisville, Kentucky, and Albuquerque, New Mexico. Additional
information about the Company's properties is included in the Consolidated Financial
Statements and footnotes in Part II, Item 8, pages 38 through 75, of this Form 10-K.
The Company believes that its properties
are generally 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 in the normal course of business. The following is a brief
description of the more significant of these categories of lawsuits and other matters.
Except as stated below, the Company believes that the ultimate liability, if any, in
excess of amounts already provided for in these matters, 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 restaurants
of each of the Concepts are franchised to independent businesses operating under
arrangements with the Concepts. 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.
Suppliers
The Company, through approved
distributors, purchases food, paper, equipment and other restaurant supplies from numerous
independent suppliers throughout the world. These suppliers are required to meet and
maintain the Company's standards and specifications. On occasion, disputes arise between
the Company and its suppliers on a number of issues, including, but not limited to,
compliance with product specifications and the Company's business relationship with
suppliers.
Employees
At any given time, the Company employs
hundreds of thousands of persons, primarily in its restaurants. In addition, thousands of
persons, from time to time, seek employment with the Company and its restaurants. From
time to time, disputes arise regarding employee hiring, compensation, termination and
promotion practices.
Like some other retail employers, Pizza
Hut and Taco Bell recently have been faced in a few states with allegations of purported
class-wide wage and hour violations.
On May 11, 1998, a purported class
action lawsuit against Pizza Hut, Inc., and one of its franchisees, PacPizza, LLC,
entitled Aguardo, et al. v. Pizza Hut, Inc., et al., ("Aguardo") was filed in the
Superior Court of the State of California of the County of San Francisco. The lawsuit was
filed by three former Pizza Hut restaurant general managers purporting to represent
approximately 1,300 current and former California restaurant general managers of Pizza
Hut and PacPizza, LLC. The lawsuit alleges violations of state wage and hour laws
involving unpaid overtime wages and vacation pay and seeks an unspecified amount in
damages. On January 12, 2000, the Court certified a class of approximately 1,300 current
and former restaurant general managers. The Court amended the class on June 1, 2000 to
include approximately 150 additional current and former restaurant general
10
managers. This lawsuit is in the early discovery phase, and no trial date
has been set.
On August 29, 1997, a class action
lawsuit against Taco Bell Corp., entitled Bravo, et al. v. Taco Bell Corp., ("Bravo")
was filed in the Circuit Court of the State of Oregon of the County of Multnomah. The
lawsuit was filed by two former Taco Bell shift managers purporting to represent
approximately 17,000 current and former hourly employees statewide. The lawsuit alleges
violations of state wage and hour laws, principally involving unpaid wages including
overtime, and rest and meal period violations, and seeks an unspecified amount in
damages. Under Oregon class action procedures, Taco Bell was allowed an opportunity to "cure" the
unpaid wage and hour allegations by opening a claims process to all putative class
members prior to certification of the class. In this cure process, Taco Bell has
currently paid out less than $1 million. On January 26, 1999, the Court certified a class
of all current and former shift managers and crew members who claim one or more of the
alleged violations. A trial date of November 2, 1999 was set. However, on November 1,
1999, the Court issued a proposed order postponing the trial and establishing a pre-trial
claims process. The final order regarding the claims process was entered on January 14, 2000.
Taco Bell moved for certification of an immediate appeal of the Court-ordered claims
process and requested a stay of the proceedings. This motion was denied on February 8,
2000. Taco Bell appealed this decision to the Supreme Court of Oregon and the Court
denied Taco Bell's Writ of Mandamus on March 21, 2000. A Court-approved notice and claim
form was mailed to approximately 14,500 class members on January 31, 2000. A Court
ordered pre-trial claims process went forward, and hearings were held for claimants
employed or previously employed in selected Taco Bell restaurants. After the initial
hearings, the damage claims hearings were discontinued. Trial began on January 4, 2001.
On March 9, 2001, the jury reached verdicts on the substantive issues in this matter. A
number of these verdicts were in favor of the Taco Bell position; however, certain issues
were decided in favor of the plaintiffs. A number of procedural issues, including
possible appeals, remain to determine the ultimate damages in this matter.
We have provided for the estimated costs
of the Aguardo and Bravo litigations, based on a projection of eligible claims (including
claims filed to date, where applicable), the cost of each eligible claim, the estimated
legal fees incurred by plaintiffs and the results of settlement negotiations in these and
other wage and hour litigation matters. Although the outcome of these lawsuits cannot be
determined at this time, we believe the ultimate cost of these cases in excess of the
amounts already provided will not be material to our annual results of operations,
financial condition or cash flows. Any provisions have been recorded in unusual items.
On October 2, 1996, a class action
lawsuit against Taco Bell Corp., entitled Mynaf, et al. v. Taco Bell Corp. was
filed in the Superior Court of the State of California of the County of Santa Clara. The
lawsuit was filed by two former restaurant general managers and two former assistant
restaurant general managers purporting to represent all current and former Taco Bell
restaurant general managers and assistant restaurant general managers in California. The
lawsuit alleged violations of California wage and hour laws involving unpaid overtime
wages, and violations of the State Labor Code's record-keeping requirements. The
complaint also included an unfair business practices claim. Plaintiffs claimed individual
damages ranging from $10,000 to $100,000 each. On September 17, 1998, the court certified
a class of approximately 3,000 current and former assistant restaurant general managers
and restaurant general managers. Taco Bell petitioned the appellate court to review the
trial court's certification order. The petition was denied on December 31, 1998. Taco
Bell then filed a petition for review with the California Supreme Court, and the petition
was subsequently denied. Class notices were mailed on August 31, 1999 to over 3,400 class
members. Trial began on January 29, 2001. Before conclusion of the trial, the parties
reached an agreement to settle this matter, and entered into a stipulation of
discontinuance of the case. This settlement agreement is subject to approval by the court
of the terms and conditions of the agreement and notice to the class with an opportunity
to object and be heard. We have provided for the costs of this settlement in unusual
items.
11
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.
Intellectual Property
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.
Other Litigation
In 1993, C&F Meat Packing Co., Inc., a
Chicago meat packing company ("C&F"), filed an action against Pizza Hut in the United
States District court for the Northern District of Illinois entitled C&F Packing Co.,
Inc. v. Pizza Hut, Inc. This lawsuit alleges that Pizza Hut misappropriated various
trade secrets relating to C&F's alleged process for manufacturing a precooked Italian
sausage pizza topping. C&F's trade secret claims against Pizza Hut were originally
dismissed by the trial court on statute of limitations grounds. That ruling was later
overturned by the U.S. Court of Appeals for the Federal Circuit in August 2000 and the
case was remanded to the trial court for further proceedings. On remand, Pizza Hut moved
for summary judgment on its statute of limitations defense. That motion was denied in
January 2001. This lawsuit is in the discovery phase and no trial date has been set.
Similar trade secret claims against another defendant were tried by a jury in late 1998
and the jury returned a verdict for C&F. Judgment on that verdict was affirmed by the U.S.
Court of Appeals for the Federal Circuit in August 2000.
The Company believes that C&F's claims
are without merit and is vigorously defending the case. However, in view of the inherent
uncertainties of litigation, the outcome of this case cannot be predicted at this time.
Likewise, the amount of any potential loss cannot be reasonably estimated.
Item 4. Submission of Matters to a
Vote of Security Holders.
None.
12
Executive Officers of the Registrant
The executive officers of the Company as
of March 19, 2001, and their ages and current positions as of that date are as follows:
Name
| Age
| Position
|
|
|
|
David C. Novak
| 48
| Chairman of the Board and Chief Executive Officer
|
|
|
|
David J. Deno
| 43
| Chief Financial Officer
|
|
|
|
Gregg G. Dedrick
| 41
| Executive Vice President, People and Shared Services
|
|
|
|
Aylwin B. Lewis
| 46
| Executive Vice President, Operations and New Business Development
|
|
|
|
Christian L. Campbell
| 50
| Senior Vice President, General Counsel and Secretary
|
|
|
|
Jonathan D. Blum
| 42
| Senior Vice President - Public Affairs
|
|
|
|
Charles E. Rawley, III
| 50
| Chief Development Officer
|
|
|
|
Brent A. Woodford
| 38
| Vice President and Controller
|
|
|
|
Peter A. Bassi
| 51
| President, Tricon Restaurants International
|
|
|
|
Cheryl A. Bachelder
| 44
| President and Chief Concept Officer, KFC
|
|
|
|
Michael S. Rawlings
| 46
| President and Chief Concept Officer, Pizza Hut
|
|
|
|
Emil J. Brolick
| 53
| President and Chief Concept Officer, Taco Bell
|
|
|
|
Peter R. Hearl
| 49
| Executive Vice President, Tricon Restaurants International
|
|
|
|
Mark S. Cosby
| 42
| Chief Operating Officer, KFC
|
|
|
|
Michael A. Miles, Jr.
| 39
| Chief Operating Officer, Pizza Hut
|
|
|
|
Robert T. Nilsen
| 41
| Chief Operating Officer, Taco Bell
|
David C. Novak is Chairman of the Board
and Chief Executive Officer of Tricon. He has served in this position since January 2001.
From December 1999 to January 2001, Mr. Novak served as Vice Chairman of the Board, Chief
Executive Officer and President of Tricon. From October 1997 to December 1999, he served
as Vice Chairman and President of Tricon. 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.
David J. Deno is Chief Financial
Officer of Tricon. He has served in this position since November 1999. From August 1997
to November 1999, Mr. Deno served as Senior Vice President and Chief Financial Officer of
Tricon Restaurants International. From August 1996 to August 1997, Mr. Deno served as
Senior Vice President and Chief Financial Officer for Pizza Hut. From 1994 to August
1996, Mr. Deno was Division Vice President for the Southeast Division of Pizza Hut. Mr.
Deno joined Pizza Hut in 1991 as Vice President and Controller.
13
Gregg R. Dedrick is Executive Vice
President, People and Shared Services for Tricon. From July 1997 to November 1999, he
served as Senior Vice President and Chief People Officer. 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 a Vice President, Human
Resources for Pizza Hut, and in 1995 he became Senior Vice President of Human Resources
for KFC.
Aylwin B. Lewis is Executive Vice
President, Operations and New Business Development for Tricon. From July 1997 to December
1999, he served as Chief Operating Officer of Pizza Hut. Mr. Lewis previously served as
Senior Vice President, Operations for Pizza Hut, a position he assumed in 1996. 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. Mr. Lewis joined KFC in
1991 as a Regional General Manager.
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.
Jonathan D. Blum is Senior Vice
President of 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, a position
that he held since joining Taco Bell in 1993.
Charles E. Rawley, III is Chief
Development Officer of Tricon. He has served in this position since January 2001. From
1998 to January 2001, he served as President and Chief Operating Officer of KFC, and from
1995 to 1998, he served as Chief Operating Officer of KFC. 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.
Brent A. Woodford is Vice
President and Controller of Tricon. He has served in this position since April 2000. Mr.
Woodford previously served as Controller of Tricon Restaurants International from March
1998 to April 2000. From October 1997 to March 1998, he served as Assistant Controller of
Tricon Restaurants International. From 1993 until October 1997, he held various finance
positions with PepsiCo and KFC's International Restaurant Division. Prior to joining
the Company in 1993, Mr. Woodford was employed by KPMG LLP, A.G. Edwards & Sons, Inc. and
Coopers and Lybrand.
Peter A. Bassi is President of
Tricon Restaurants International. He has served in this position since July 1997. Mr.
Bassi served as Executive Vice President, Asia, of PepsiCo Restaurants International from
February 1996 to July 1997. From 1995 to 1996 he served as Senior Vice President and
Chief Financial Officer at PepsiCo Restaurants International. He served as Senior Vice
President, Finance and Chief Financial Officer at Taco Bell from 1987 to 1994. He joined
Pepsi-Cola Company in 1972 and served in various management positions at Frito-Lay, Pizza
Hut and PepsiCo Food Service International.
Cheryl A. Bachelder is President
and Chief Concept Officer of KFC. She has served in this position since January 2001.
Prior to joining KFC, Ms. Bachelder served as Executive Vice President, Build the Brand
for Domino's Pizza LLC from June 1995 to December 2000. She joined Domino's in May 1995 as
Executive Vice President of Marketing and Product Development. From 1992 to May 1995, Ms.
Bachelder served as President of Bachelder & Associates, a management consulting firm
which she founded. From 1984 to 1992, Ms. Bachelder held various positions with the
Nabisco Foods Group of RJR Nabisco, Inc., including Vice President and General Manager of
the LifeSavers Division.
14
Michael S. Rawlings is President
and Chief Concept Officer of Pizza Hut. He has served in this position 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.
Emil J. Brolick is President and
Chief Concept Officer of Taco Bell. He has served in this position since July 2000. Prior
to joining Taco Bell, Mr. Brolick served as Vice President of New Product Marketing,
Research & Strategic Planning for Wendy's International, Inc. from 1995 to July 2000. From
1988 to 1995, he held various positions at Wendy's including Manager, Planning and
Evaluation and Vice President Strategic Planning and Research.
Peter R. Hearl is Executive Vice
President of Tricon Restaurants International. He has served in this position since
December 1998. Prior to that, he was Region Vice President for Tricon Restaurants
International in Asia Pacific, a position he assumed in October 1997. From March 1996 to
September 1997, Mr. Hearl was Regional Vice President for Tricon Restaurants
International with responsibility for Australia, New Zealand and South Africa. Prior to
that, he was Regional Vice President for KFC with responsibility for the United Kingdom,
Ireland and South Africa, a position he assumed in January 1995. From September 1993 to
December 1994, Mr. Hearl was Regional Vice President for KFC Europe.
Mark S. Cosby is Chief Operating
Officer of KFC. He has served in this position since January 2001. From September 1997 to
January 2001, Mr. Cosby served as Chief Development Officer of Tricon. From August 1996
to September 1997, Mr. Cosby was Senior Vice President Operations Development for KFC.
From March 1993 to August 1996, he held various positions at KFC including Vice President
of Planning, Vice President of Purchasing, and Vice President of Operations for the North
Central Division. Mr. Cosby joined PepsiCo with Taco Bell in 1988.
Michael A. Miles, Jr. is Chief
Operating Officer of Pizza Hut. He has served in this position since January 2000. From
May 1996 to December 1999, Mr. Miles served as Senior Vice President, Concept Development
and Franchise. From December 1994 to April 1996, he was Division Vice President for Pizza
Hut. Mr. Miles joined PepsiCo in May 1993 as Director of Strategic Planning.
Robert T. Nilsen is Chief
Operating Officer of Taco Bell. He has served in this position since January 2000. From
January 1999 to December 1999, he was Senior Vice President and Managing Director of
Tricon Restaurants International brands in the South Pacific. From October 1997 to
January 1999, he served as Vice President and Managing Director of Tricon Restaurants
International brands in the South Pacific. From April 1996 to October 1997, Mr. Nilsen
was Region Vice President of Tricon Restaurants International with responsibility for
franchise operations across South Asia, the Middle East and Hawaii. From 1995 to April
1996, he was Managing Director for KFC and Pizza Hut in Southern Africa.
Executive officers are elected by and
serve at the discretion of the Board of Directors.
15
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 ("NYSE"). The following sets
forth the high and low NYSE composite closing sale prices by quarter of the Company's
Common Stock.
2000 1999
----------------------------------------------------------------------------------
Quarter High Low High Low
----------------------------------------------------------------------------------
First $ 38.63 $ 25.69 $ 69.50 $ 46.00
Second 35.56 29.00 73.50 50.25
Third 32.38 23.75 56.38 35.75
Fourth 37.38 26.50 45.13 37.69
----------------------------------------------------------------------------------
The approximate number of shareholders
of record of the Company's common stock as of March 19, 2001 was 144,000.
The Company does not presently intend to
pay dividends on its common stock.
16
Item 6. Selected Financial Data.
Selected Financial Data
TRICON Global Restaurants, Inc. and Subsidiaries
(in millions, except per share and unit amounts)
- -------------------------------------------------------------------------------------------------------
Fiscal Year
- -------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Summary of Operations
System sales (a)
U.S. $ 14,514 $ 14,516 $ 14,013 $ 13,502 $ 13,388
International 7,645 7,246 6,607 6,963 6,892
-----------------------------------------------------------
Total 22,159 21,762 20,620 20,465 20,280
-----------------------------------------------------------
Revenues
Company sales(b) 6,305 7,099 7,852 9,112 9,738
Franchise and license fees 788 723 627 578 494
-----------------------------------------------------------
Total 7,093 7,822 8,479 9,690 10,232
-----------------------------------------------------------
Facility actions net gain (loss)(c) 176 381 275 (247) 37
Unusual items(d) (204) (51) (15) (184) (246)
-----------------------------------------------------------
Operating profit 860 1,240 1,028 241 372
Interest expense, net 176 202 272 276 300
-----------------------------------------------------------
Income (loss) before income taxes 684 1,038 756 (35) 72
Net income (loss) 413 627 445 (111) (53)
Basic earnings per common share(e) 2.81 4.09 2.92 N/A N/A
Diluted earnings per common share(e) 2.77 3.92 2.84 N/A N/A
- -------------------------------------------------------------------------------------------------------
Cash Flow Data
Provided by operating activities $ 491 $ 565 $ 674 $ 810 $ 713
Capital spending 572 470 460 541 620
Proceeds from refranchising of restaurants 381 916 784 770 355
- -------------------------------------------------------------------------------------------------------
Balance Sheet
Total assets $ 4,149 $ 3,961 $ 4,531 $ 5,114 $ 6,520
Operating working capital deficit (634) (832) (960) (1,073) (915)
Long-term debt 2,397 2,391 3,436 4,551 231
Total debt 2,487 2,508 3,532 4,675 290
Investments by and advances from PepsiCo - - - - 4,266
- -------------------------------------------------------------------------------------------------------
Other Data
Number of stores at year end(a)
Company 6,123 6,981 8,397 10,117 11,876
Unconsolidated Affiliates 1,844 1,178 1,120 1,090 1,007
Franchisees 19,287 18,414 16,650 15,097 13,066
Licensees 3,163 3,409 3,596 3,408 3,147
System 30,417 29,982 29,763 29,712 29,096
U.S. Company same store sales growth(a)
KFC (3)% 2% 3% 2% 6%
Pizza Hut 1% 9% 6% (1)% (4)%
Taco Bell (5)% - 3% 2% (2)%
Blended (2)% 4% 4% 1% N/A
Shares outstanding at year end (in millions) 147 151 153 152 N/A
Market price per share at year end $ 33.00 $ 37.94 $ 47.63 $ 28.31 N/A
- -------------------------------------------------------------------------------------------------------
N/A - Not Applicable.
TRICON Global Restaurants, Inc. and Subsidiaries ("TRICON") became an
independent, publicly owned company on October 6, 1997 through the spin-off of the
restaurant operations of its former parent, PepsiCo, Inc. ("PepsiCo"), to its
shareholders. The historical consolidated financial data for 1997 and 1996 was prepared
as if we had been an independent, publicly owned company for those periods. To facilitate
this presentation, PepsiCo made certain allocations of its previously unallocated
interest and general and administrative expenses as well as pro forma computations, to
the extent possible, of separate income tax provisions for its restaurant segment. Fiscal
year 2000 includes 53 weeks. Fiscal years 1996 to 1999 include 52 weeks. The selected
financial data should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto.
- Excludes Non-core Businesses.
- Declining company sales are largely the result of our refranchising initiatives.
- 1999 and 1998 include $13 million ($10 million after-tax) and $54 million ($33 million after-tax),
respectively, of favorable adjustments to our 1997 fourth quarter charge which was $410 million ($300 million
after-tax).
- See Note 5 to the Consolidated Financial Statements for a description of unusual items in 2000, 1999 and 1998.
1997 includes $120 million ($125 million after-tax) related to our 1997 fourth quarter charge and an additional $54
million ($34 million after-tax) related to the 1997 disposal of the Non-core Businesses. 1996 includes a $246
million ($189 million after-tax) writedown of our Non-core Businesses. 1999 and 1998 included favorable adjustments
to our 1997 fourth quarter charge of $11 million ($10 million after-tax) and $11 million ($7 million after-tax),
respectively.
- EPS data has been omitted for 1997 and 1996 as our capital structure as an independent, publicly owned company
did not exist.
17
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Introduction
TRICON Global Restaurants, Inc. and
Subsidiaries (collectively referred to as "TRICON" or the "Company") is comprised of the
worldwide operations of KFC, Pizza Hut and Taco Bell ("the Concepts") and is the world's
largest quick service restaurant ("QSR") company based on the number of system units.
Separately, each brand ranks in the top ten among QSR chains in U.S. system sales and
units. Our 10,400 international units make us the second largest QSR company outside the
U.S. TRICON became an independent, publicly owned company on October 6, 1997 (the "Spin-off
Date") via a tax free distribution of our Common Stock (the "Distribution" or "Spin-off")
to the shareholders of our former parent, PepsiCo, Inc. ("PepsiCo").
Throughout Management's Discussion and
Analysis ("MD&A"), we make reference to ongoing operating profit which represents our
operating profit excluding the impact of facility actions net gain, unusual items and our
accounting and human resources policy changes in 1999 (collectively, the "1999 accounting
changes"). See Note 5 to the Consolidated Financial Statements for a detailed discussion
of these exclusions. We use ongoing operating profit as a key performance measure of our
results of operations for purposes of evaluating performance internally and as the base
to forecast future performance. Ongoing operating profit is not a measure defined in
accounting principles generally accepted in the U.S. and should not be considered in
isolation or as a substitution for measures of performance in accordance with accounting
principles generally accepted in the U.S.
In 2000, our international business,
Tricon Restaurants International ("TRI" or "International") accounted for 35% of system
sales, 29% of total revenues and 29% of ongoing operating profit excluding unallocated
and corporate expenses and foreign exchange gains and losses. We anticipate that, despite
the inherent risks and typically higher general and administrative expenses required by
international operations, we will continue to invest in key international markets with
substantial growth potential.
This MD&A should be read in conjunction
with our Consolidated Financial Statements on pages 39-75 and the Cautionary Statements
on pages 36-37. All Note references herein refer to the Notes to the Consolidated
Financial Statements on pages 43-75. Tabular amounts are displayed in millions except per
share and unit count amounts, or as otherwise specifically identified.
Factors Affecting Comparability of 2000 Results to 1999
Impact of AmeriServe Bankruptcy
Reorganization Process
See Note 21 for a complete discussion of
the impact of the AmeriServe Food Distribution, Inc. ("AmeriServe") bankruptcy
reorganization process on the Company.
Kraft Taco Shell Recall
In the fourth quarter of 2000,
allegations were made by a public environmental advocacy group that testing of corn taco
shells, sold by Kraft Foods, Inc. ("Kraft") in grocery stores under a license to use the
Taco Bell brand name, had indicated the presence of genetically modified ("GM") corn
which had only been approved by the applicable U.S. governmental agencies for animal
consumption. In light of the allegations, Kraft recalled this product line. We are not
aware of any evidence that suggests that the GM corn at issue presents any significant
health risk to humans. Nonetheless, consistent with our overall quality assurance
procedures, we have taken significant actions to ensure that our restaurant supply chain
is free of products containing the GM corn in question, and we will continue to take
whatever actions are prudent or appropriate in this regard.
18
Although we are unable to estimate the
amount, we believe that our Taco Bell restaurants have experienced a negative impact on
sales following the allegations and the Kraft recall. We do not currently believe this
sales impact will be sustained over the long term.
Franchisee Financial Condition
Like others in the QSR industry, from
time to time, some of our franchise operators experience financial difficulties with
respect to their franchise operations. At present, certain of our franchise operators,
principally in the Taco Bell system, are facing varying degrees of financial problems,
primarily as a result of declines in store sales in the Taco Bell system, which we
believe have been exacerbated by the grocery product recalls of corn taco shells by Kraft
in the fourth quarter of 2000.
Depending upon the facts and
circumstances of each situation, and in the absence of an improvement in business trends,
there are a number of potential resolutions of these financial issues, including a sale
of some or all of the operator's restaurants to us or a third party, a restructuring of
the operator's business and/or finances, or, in the more unusual cases, bankruptcy of the
operator. It is our practice to proactively work with financially troubled franchise
operators in an attempt to positively resolve their issues.
Taco Bell has established a $15 million
loan program for those franchisees in need of short-term assistance due to the recent
sales declines in the Taco Bell system. Through February 2001, this program has aided
approximately 75 franchisees covering approximately 1,500 Taco Bell restaurants.
Additionally, Taco Bell is in various stages of discussions with a number of other Taco
Bell franchisees and their lenders. We believe that many of these franchisees will
require various types of business and/or financial restructuring. Based on currently
available information, we believe that this group of franchisees represents approximately
1,000 Taco Bell restaurants.
In 2000, we charged approximately $26
million to ongoing operating profit for expenses related to the financial situation of
certain Taco Bell franchisees. These expenses, which relate primarily to allowances for
doubtful franchise and license fee receivables, were reported as general and
administrative expenses. On an ongoing basis, we assess our exposure from
franchise-related risks which include estimated uncollectibility of accounts receivable
related to franchise and license fees, contingent lease liabilities, guarantees to
support certain third party financial arrangements with franchisees and potential claims
by franchisees. The contingent lease liabilities and guarantees are more fully discussed
in the Contingent Liabilities section of Note 21. Although the ultimate impact of these
franchise financial issues cannot be predicted with certainty at this time, we have
provided for our current estimate of the probable exposure to the Company as of December
30, 2000. It is reasonably possible that there will be additional costs which could be
material to quarterly or annual results of operations, financial condition or cash flows.
Based on the information currently
available to us, we have budgeted for an estimate of expenses and capital expenditures
that may be required to address this situation. However, the Taco Bell franchise
financial situation poses certain risks and uncertainties to us. The more significant of
these risks and uncertainties are described below. Significant adverse developments in
this situation, or in any of these risks or uncertainties, could have a material adverse
impact on our quarterly or annual results of operations, financial condition or cash
flows.
We intend to continue to proactively
work with financially troubled franchise operators in an attempt to positively resolve
their issues. However, there can be no assurance that the number of franchise operators
or restaurants experiencing financial difficulties will not change from our current
estimates. Nor can there be any assurance that we will be successful in resolving
financial issues relating to any specific franchise operator. Additionally, there can be
no assurance that resolution of these financial issues will not result in Taco Bell
purchasing a significant number of restaurants from financially troubled Taco Bell
franchise operators.
19
Unusual Items
We recorded unusual items of $204
million ($129 million after-tax), $51 million ($29 million after-tax) and $15 million ($3
million after-tax) in 2000, 1999 and 1998, respectively. See Note 5 for a detailed
discussion of our unusual items.
Fifty-third Week in 2000
Our fiscal calendar results in a
fifty-third week every 5 or 6 years. Fiscal year 2000 included a fifty-third week in the
fourth quarter. The following table summarizes the estimated impact of the fifty-third
week on system sales, revenues and ongoing operating profit:
U.S. International Unallocated Total
----------- -------------- ------------ -----------
System sales $ 230 $ 65 $ - $ 295
=========== ============== ============ ===========
Revenues
Company sales $ 58 $ 18 $ - $ 76
Franchise fees 9 2 - 11
----------- -------------- ------------ -----------
Total Revenues $ 67 $ 20 $ - $ 87
=========== ============== ============ ===========
Ongoing operating profit
Franchise fees $ 9 $ 2 $ - $ 11
Restaurant margin 11 4 - 15
General and administrative
expenses (3) (2) (2) (7)
----------- -------------- ------------ ------------
Ongoing operating profit $ 17 $ 4 $ (2) $ 19
=========== ============== ============ =============
The estimated favorable impact in net
income was $10 million or $0.07 per diluted share.
Store Portfolio Strategy
Beginning in 1995, we have been
strategically reducing our share of total system units by selling Company restaurants to
existing and new franchisees where their expertise can generally be leveraged to improve
our overall operating performance, while retaining Company ownership of key U.S. and
International markets. This portfolio-balancing activity has reduced, and will continue
to reduce, our reported revenues and restaurant profits and has increased the importance
of system sales as a key performance measure. We expect to substantially complete our
refranchising program in 2001.
The following table summarizes our
refranchising activities for the last three years:
2000 1999 1998
--------- ---------- ----------
Number of units refranchised 757 1,435 1,373
Refranchising proceeds, pre-tax $ 381 $ 916 $ 784
Refranchising net gains, pre-tax $ 200 $ 422 $ 279
In addition to our refranchising
program, we have been closing restaurants over the past several years. Restaurants closed
include poor performing restaurants, restaurants that are relocated to a new site within
the
20
same trade area or U.S. Pizza Hut delivery units consolidated with a new
or existing dine-in traditional store within the same trade area.
The following table summarizes Company
store closure activities for the last three years:
2000 1999 1998
--------- ---------- -----------
Number of units closed 208 301 572
Store closure costs (credits)(a) $ 10 $ 13 $ (27)
Impairment charges for stores to be closed in the future $ 6 $ 12 $ 6
- Includes favorable adjustments to our 1997 fourth quarter charge of $9 million in 1999
and $56 million in 1998.
The impact on ongoing operating profit
arising from our refranchising and store closure initiatives as well as the contribution
of Company stores to a new unconsolidated affiliate as described in the Impact of New
Unconsolidated Affiliates section (the "Portfolio Effect"), represents the net of (a) the
estimated reduction in Company sales, restaurant margin and general and administrative
expenses ("G&A"), (b) the estimated increase in franchise fees and (c) the equity income
(loss) from investments in unconsolidated affiliates ("equity income"). The amounts
presented below reflect the estimated impact from stores that were operated by us for all
or some portion of the comparable period in the respective previous year and were no
longer operated by us as of the last day of the respective year.
The following table summarizes the
estimated revenue impact of the Portfolio Effect:
2000
---------------------------------------
U.S. International Worldwide
---------- ------------- ----------
Reduced sales $ (838) $ (246) $ (1,084)
Increased franchise fees 39 13 52
---------- ------------- ----------
Reduction in total revenues $ (799) $ (233) $ (1,032)
========== ============= ==========
1999
---------------------------------------
U.S. International Worldwide
---------- ------------- ----------
Reduced sales $ (1,065) $ (201) $ (1,266)
Increased franchise fees 51 9 60
---------- ------------- ----------
Reduction in total revenues $ (1,014) $ (192) $ (1,206)
========== ============= ==========
21
The following table summarizes the
estimated impact on ongoing operating profit of the Portfolio Effect:
2000
---------------------------------------
U.S. International Worldwide
---------- ------------- ----------
Decreased restaurant margin $ (90) $ (25) $ (115)
Increased franchise fees 39 13 52
Decreased G&A 11 6 17
Equity income (loss) - (1) (1)
---------- ------------ ----------
(Decrease) in ongoing operating
profit $ (40) $ (7) $ (47)
========== ============= ==========
1999
---------------------------------------
U.S. International Worldwide
---------- ------------- ----------
Decreased restaurant margin $ (108) $ (18) $ (126)
Increased franchise fees 51 9 60
Decreased G&A 17 10 27
---------- ------------- ----------
(Decrease) increase in ongoing
operating profit $ (40) $ 1 $ (39)
========== ============= ==========
The estimated interest savings resulting
from the reduction of average debt with the net after-tax cash proceeds from our
refranchising activities largely mitigated the above reduction in ongoing operating
profit.
Results of Operations
Worldwide Results of Operations
% B(W) % B(W)
2000 vs. 1999 1999 vs. 1998
---------- ---------- ---------- ----------
System sales(a) $ 22,159 2 $ 21,762 6
========== ==========
Revenues
Company sales $ 6,305 (11) $ 7,099 (10)
Franchise and license fees 788 9 723 15
---------- ----------
Total Revenues $ 7,093 (9) $ 7,822 (8)
========== ==========
Company restaurant margin $ 954 (13) $ 1,091 3
========== ==========
% of sales 15.1% (0.3) ppts. 15.4% 1.9 ppts.
========== ==========
Ongoing operating profit $ 888 1 $ 881 15
Accounting changes(b) - NM 29 NM
Facility actions net gain 176 (54) 381 38
Unusual items (204) NM (51) NM
---------- ----------
Operating Profit 860 (31) 1,240 21
Interest expense, net 176 13 202 26
Income Tax Provision 271 34 411 (32)
---------- ----------
Net Income $ 413 (34) $ 627 41
========== ==========
Diluted Earnings Per Share $ 2.77 (29) $ 3.92 38
========== ==========
- Represents combined sales of Company, unconsolidated affiliate, franchise
and license restaurants.
- See Note 5 for a discussion of the 1999 accounting changes.
22
Worldwide Restaurant Unit Activity
Unconsolidated
Company Affiliates Franchisees Licensees Total
-------- --------------- ------------ ---------- --------
Balance at Dec. 26, 1998 8,397 1,120 16,650 3,596 29,763
Openings & Acquisitions 323 83 858 586 1,850
Refranchising & Licensing (1,435) (5) 1,443 (3) -
Closures (301) (20) (434) (646) (1,401)
Other (3) - (103) (124) (230)
-------- -------------- ----------- ---------- --------
Balance at Dec. 25, 1999 6,981 1,178 18,414 3,409 29,982
Openings & Acquisitions 370 108 960 324 1,762
Refranchising & Licensing (757) (9) 775 (9) -
Closures (208) (53) (505) (561) (1,327)
Other(a) (263) 620 (357) - -
-------- -------------- ----------- ---------- --------
Balance at Dec. 30, 2000(b) 6,123 1,844 19,287 3,163 30,417
======== ============== =========== ========== ========
% of total 20.1% 6.1% 63.4% 10.4% 100.0%
- Primarily includes 320 Company units and 329 Franchisee units contributed in connection with the formation of a
new unconsolidated affiliate in Canada as well as 57 units acquired by the Company from Unconsolidated Affiliates
and Franchisees.
- Includes 38 Company units approved for closure but not yet closed at December 30, 2000.
Worldwide System Sales
System sales increased $397 million or
2% in 2000, after a 1% unfavorable impact from foreign currency translation. Excluding
the negative impact of foreign currency translation and the favorable impact of the
fifty-third week, system sales increased 1%. This increase was driven by new unit
development, partially offset by store closures and same store sales declines.
In 1999, system sales increased $1.1
billion or 6%. The improvement was driven by new unit development and same store sales
growth. U.S. development was primarily at Taco Bell while International development was
primarily in Asia. The increase was partially offset by store closures.
Worldwide Revenues
Company sales decreased $794 million or
11% in 2000. As expected, the decline in Company sales was primarily due to the Portfolio
Effect partially offset by the favorable impact from the fifty-third week in 2000.
Excluding these items, Company sales increased 4%. This increase was primarily due to new
unit development and favorable Effective Net Pricing, partially offset by volume
declines. Effective Net Pricing includes increases or decreases in price and the effect
of changes in product mix.
Franchise and license fees increased
approximately $65 million or 9% in 2000. The increase was driven by units acquired from
us and new unit development, partially offset by store closures and franchisee same store
sales declines in the U.S. The negative impact of foreign currency translation was
essentially offset by the favorable impact from the fifty-third week in 2000.
Company sales decreased $753 million or
10% in 1999. As expected, the decline in Company sales was due to the Portfolio Effect.
Excluding the Portfolio Effect, Company sales increased 8%. The increase was
23
primarily due to new unit development, favorable Effective Net Pricing
and volume increases in the U.S. and International. The volume increase in the U.S. was
led by the launch of "The Big New Yorker" pizza.
Franchise and license fees grew $96
million or 15% in 1999. The growth was primarily driven by units acquired from us and new
unit development, primarily in Asia and at Taco Bell in the U.S., partially offset by
store closures by franchisees and licensees.
Worldwide Company Restaurant Margin
2000 1999 1998
-------- -------- --------
Company sales 100.0% 100.0% 100.0%
Food and paper 30.8 31.5 32.1
Payroll and employee benefits 27.7 27.6 28.6
Occupancy and other operating expenses 26.4 25.5 25.8
-------- -------- --------
Restaurant margin 15.1% 15.4% 13.5%
======== ======== ========
Restaurant margin as a percentage of
sales decreased approximately 25 basis points in 2000, including the unfavorable impact
of 15 basis points from lapping the 1999 accounting changes. Restaurant margin included
70 basis points related to the favorable impact of the Portfolio Effect. Excluding the
net effect of these items, our base restaurant margin declined approximately 80 basis
points. Approximately 40 basis points of this decrease resulted from the favorable 1999
U.S. insurance-related adjustments of $30 million, which are more fully discussed in Note
21. The remaining decrease was primarily due to a decline in U.S. restaurant margin, as
discussed in the U.S. Restaurant Margin section.
In 1999, our restaurant margin as a
percentage of sales increased approximately 190 basis points. The Portfolio Effect
contributed nearly 50 basis points and accounting changes contributed approximately 15
basis points to our improvement. Excluding these items, our base restaurant margin
increased approximately 125 basis points. This improvement was primarily attributable to
Effective Net Pricing in excess of cost increases (primarily higher wage rates) in the
U.S. Restaurant margin also benefited from improved food and paper cost management in
both the U.S. and certain key International equity markets. Volume increases at Pizza Hut
in the U.S. and in certain key International equity markets were fully offset by volume
declines at Taco Bell and the unfavorable impact of the introduction of lower margin
chicken sandwiches at KFC in the U.S.
Worldwide General & Administrative Expenses
G&A declined $41 million or 4% in 2000.
Excluding the benefit from lapping the 1999 accounting changes, ongoing G&A decreased $59
million or 6%. The decrease was primarily due to lower incentive compensation expense and
Year 2000 costs as well as the favorable impact of the Portfolio Effect. Reduced spending
on conferences also contributed to the decline. The decrease was partially offset by
higher franchise-related expenses, primarily allowances for doubtful franchise and
license fee receivables, as more fully discussed in the Franchisee Financial Condition
section. G&A included Year 2000 spending of approximately $2 million in 2000 as compared
to approximately $30 million in 1999.
In 1999, G&A decreased $21 million or 2%.
Excluding the $18 million favorable impact of the 1999 accounting changes, G&A decreased
$3 million. The favorable impacts of the Portfolio Effect, our fourth quarter 1998
decision to streamline our international business and the absence of costs associated
with relocating certain operations from Wichita, Kansas in 1998 were partially offset by
higher strategic and other
24
corporate expenses. In addition, higher spending on conferences and the
absence of favorable cost recovery agreements with AmeriServe and PepsiCo also partially
offset the decreases discussed above.
Worldwide Other (Income) Expense
2000 1999 1998
--------- ---------- ----------
Equity income $ (25) $ (19) $ (18)
Foreign exchange net loss (gain) - 3 (6)
--------- ---------- ----------
Other (income) expense $ (25) $ (16) $ (24)
========= ========== ==========
Other (income) expense increased $9
million or 55% in 2000. The increase in equity income was primarily due to improved
results of our unconsolidated affiliates in Japan, the United Kingdom and China.
In 1999, other (income) expense declined
$8 million or 31%. The decline was primarily due to foreign exchange losses in 1999
versus gains in 1998 related to U.S. dollar denominated short-term investments in Canada.
Worldwide Facility Actions Net Gain
We recorded facility actions net gain of
$176 million in 2000, $381 million in 1999 and $275 million in 1998. See the Store
Portfolio Strategy section for more details regarding our refranchising and closure
activities and Note 5 for a summary of the components of facility actions net gain by
operating segment.
Impairment charges for stores that will
continue to be used in the business were $8 million in 2000 compared to $16 million in
1999 and $25 million in 1998 reflecting fewer underperforming stores. As a result of the
adoption of the SEC's interpretation of Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets" ("SFAS 121") in 1998, we perform
impairment evaluations when we expect to actually close a store beyond the quarter in
which our closure decision is made. This change resulted in additional impairment charges
of $6 million in 2000, $12 million in 1999 and $6 million in 1998. Under our prior
accounting policy, these impairment charges would have been included in store closure
costs in the quarter in which the closure decision was made.
Worldwide Ongoing Operating Profit
% B(W) % B(W)
2000 vs. 1999 1999 vs. 1998
--------- --------- -------- ---------
U.S. ongoing operating profit $ 742 (9) $ 813 10
International ongoing operating profit 309 16 265 39
Foreign exchange net loss - NM (3) NM
Ongoing unallocated and corporate
expenses (163) 16 (194) (14)
--------- ---------
Ongoing operating profit $ 888 1 $ 881 15
========= =========
The changes in U.S. and International
ongoing operating profit for 2000 and 1999 are discussed in the respective sections below.
Ongoing unallocated and corporate
expenses decreased $31 million or 16% in 2000. The decline was primarily due to lower
Year 2000 spending and lower incentive compensation expense.
25
In 1999, ongoing unallocated and
corporate expenses increased $25 million or 14%. The increase was driven by higher
strategic and other corporate spending, system standardization investment spending and
the absence of favorable cost recovery agreements from AmeriServe and PepsiCo. These
increases were partially offset by the absence of costs associated with relocating
certain of our operations from Wichita, Kansas in 1998.
Worldwide Interest Expense, Net
2000 1999 1998
--------- ---------- ---------
Interest expense $ 190 $ 218 $ 291
Interest income (14) (16) (19)
--------- ---------- ---------
Interest expense, net $ 176 $ 202 $ 272
========= ========== =========
Our net interest expense decreased $26
million or 13%. The decline was due to a lower average debt outstanding in 2000 as
compared to 1999, partially offset by an increase in interest rates on our variable rate
debt. As discussed in Note 21, the interest expense on incremental borrowings related to
the AmeriServe bankruptcy reorganization process of $9 million has been included in
unusual items.
In 1999, our net interest expense
decreased $70 million or 26%. The decline was primarily due to the reduction of debt
through use of after-tax cash proceeds from our refranchising activities and cash from
operations.
Worldwide Income Taxes
2000 1999 1998
--------- --------- ---------
Reported
Income taxes $ 271 $ 411 $ 311
Effective tax rate 39.6% 39.5% 41.1%
Ongoing(a)
Income taxes $ 268 $ 267 $ 210
Effective tax rate 37.7% 39.3% 42.3%
- Excludes the effects of facility actions net gain, unusual items and the 1999 accounting changes. See Note 5
for a discussion of these exclusions.
The following table reconciles the U.S.
federal statutory tax rate to our ongoing effective tax rate:
2000 1999 1998
------ ------ ------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit 2.2 2.3 2.8
Foreign and U.S. tax effects attributable to
foreign operations (1.0) 1.5 6.3
Adjustments relating to prior years 1.3 0.8 (1.7)
Other, net 0.2 (0.3) (0.1)
------ ------ ------
Ongoing effective tax rate 37.7% 39.3% 42.3%
====== ====== ======
The 2000 ongoing effective tax rate
decreased 1.6 percentage points to 37.7%. The decrease in the ongoing effective tax rate
was primarily due to a reduction in the tax on our international operations, including
the initial benefits of becoming eligible in 2000 to claim substantially all of our
available foreign income tax credits for foreign taxes paid in 2000 against our U.S.
income tax liability. This decrease was partially offset by adjustments relating to prior
years.
26
In 2000, the effective tax rate
attributable to foreign operations was lower than the U.S. federal statutory rate due to
our ability to claim foreign taxes paid against our U.S. income tax liability. The
effective tax rate attributable to foreign operations in 1999 and 1998 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.
The 1999 ongoing effective tax rate
decreased 3.0 percentage points to 39.3%. The decrease in the ongoing effective tax rate
was primarily due to a one-time favorable international benefit in Mexico. The recent
pattern of profitability in Mexico and expectations of future profitability have allowed
us to reverse a previous valuation allowance against deferred tax assets. This will
enable us to reduce future cash tax payments in Mexico.
Diluted Earnings Per Share
The components of diluted earnings per
common share ("EPS") were as follows:
2000(a) 1999(a)
------------------------ -----------------------
Diluted Basic Diluted Basic
---------- ----------- ---------- ----------
Ongoing operating earnings $ 2.98 $ 3.02 $ 2.58 $ 2.69
Accounting changes - - 0.11 0.12
Facility actions net gain(b) 0.66 0.67 1.41 1.47
Unusual items(c) (0.87) (0.88) (0.18) (0.19)
---------- ----------- ---------- ----------
Total $ 2.77 $ 2.81 $ 3.92 $ 4.09
========== =========== ========== ==========
- See Note 4 for the number of shares used in these calculations.
- Includes favorable adjustments to our 1997 fourth quarter charge of $0.06 per diluted share in 1999.
- Includes favorable adjustments to our 1997 fourth quarter charge of $0.07 per diluted share in 1999.
U.S. Results of Operations
% B(W) % B(W)
2000 vs. 1999 1999 vs. 1998
---------- ----------- ---------- ---------
System sales $ 14,514 - $ 14,516 4
========== ==========
Revenues
Company sales $ 4,533 (14) $ 5,253 (13)
Franchise and license fees 529 7 495 16
---------- ----------
Total Revenues $ 5,062 (12) $ 5,748 (11)
========== ==========
Company restaurant margin $ 687 (17) $ 825 1
========== ==========
% of sales 15.2% (0.5) ppts. 15.7% 2.1 ppts
========== ==========
Ongoing operating profit $ 742 (9) $ 813 10
========== ==========
27
U.S. Restaurant Unit Activity
Company Franchisees Licensees Total
-------- ----------- --------- ---------
Balance at Dec. 26, 1998 6,232 10,862 3,275 20,369
Openings & Acquisitions 155 432 539 1,126
Refranchising & Licensing (1,170) 1,167 3 -
Closures (230) (248) (593) (1,071)
Other (3) (103) (124) (230)
-------- ----------- --------- ---------
Balance at Dec. 25, 1999 4,984 12,110 3,100 20,194
Openings & Acquisitions 143 366 303 812
Refranchising & Licensing (672) 681 (9) -
Closures (153) (295) (521) (969)
-------- ----------- --------- ---------
Balance at Dec. 30, 2000(a) 4,302 12,862 2,873 20,037
======== =========== ========= =========
% of total 21.5% 64.2% 14.3% 100.0%
- Includes 37 Company units approved for closure, but not yet closed at December 30, 2000.
U.S. System Sales
System sales were essentially flat in
2000. Excluding the favorable impact of the fifty-third week in 2000, system sales
decreased 2%. The decrease was due to same stores sales declines at Taco Bell and KFC as
well as store closures, partially offset by new unit development.
In 1999, system sales increased $503 million
or 4%. The improvement was driven by new unit development and same store sales growth.
These increases were partially offset by store closures.
U.S. Revenues
Company sales decreased $720 million or
14%. As expected, the decline in Company sales was due to the Portfolio Effect partially
offset by the favorable impact from the fifty-third week in 2000. Excluding these items,
Company sales increased 1% in 2000. This increase was primarily due to new unit
development and favorable Effective Net Pricing almost fully offset by volume declines.
In 2000, U.S. blended Company same store
sales for our three Concepts decreased 2%. The decline in transactions of 4% was
partially offset by favorable Effective Net Pricing of 2%. Same store sales at Pizza Hut
increased 1%. Favorable Effective Net Pricing of 3% was partially offset by transaction
declines of 2%. Same store sales at KFC decreased 3%, primarily due to transaction
declines. Same store sales at Taco Bell decreased 5% as a result of transaction declines.
Franchise and license fees grew $34
million or 7% in 2000. Excluding the favorable impact from the fifty-third week in 2000,
franchise and license fees increased 5%. The increase was driven by units acquired from
us and new unit development, partially offset by franchisee same store sales declines and
store closures.
In 1999, Company sales declined $760
million or 13%. As expected, the decline in Company sales was due to the Portfolio
Effect. Excluding the Portfolio Effect, Company sales increased 6%. This increase was
primarily due to new unit development, favorable Effective Net Pricing and volume
increases led by the launch of "The Big New Yorker" pizza.
28
In 1999, U.S. blended same stores sales
for our three Concepts increased 4%. Favorable Effective Net Pricing of 5% was partially
offset by a 1% decline in transactions. Same store sales at Pizza Hut increased 9% in
1999. The improvement was primarily driven by an increase in transactions of over 5%,
resulting from the launch of "The Big New Yorker." The growth at Pizza Hut was also aided
by Effective Net Pricing of over 3%. Same store sales at KFC grew 2%. The increase was
almost equally driven by Effective Net Pricing and transaction growth. Same store sales
at Taco Bell were flat as an increase in Effective Net Pricing of approximately 4% was
fully offset by transaction declines.
Franchise and license fees increased $69
million or 16% in 1999. The increase was driven by units acquired from us, new unit
development and franchisee same store sales growth, primarily at Pizza Hut. These
increases were partially offset by store closures.
U.S. Company Restaurant Margin
2000 1999 1998
------- ------- -------
Company sales 100.0% 100.0% 100.0%
Food and paper 28.6 30.0 31.0
Payroll and employee benefits 30.8 29.8 30.4
Occupancy and other operating expenses 25.4 24.5 25.0
------- ------- -------
Restaurant margin 15.2% 15.7% 13.6%
======= ======= =======
Restaurant margin as a percentage of
sales decreased approximately 55 basis points in 2000, including the unfavorable impact
of nearly 25 basis points from lapping the 1999 accounting changes. Restaurant margin
included 70 basis points related to the favorable impact of the Portfolio Effect.
Excluding these items, our base restaurant margin declined approximately 100 basis
points. This decrease included approximately 60 basis points resulting from the absence
of favorable 1999 insurance-related adjustments of $30 million, which are more fully
discussed in Note 21. The remaining decrease was due to a shift to lower margin chicken
sandwiches at KFC and volume declines at Taco Bell, partially offset by Effective Net
Pricing. Favorable commodity costs, primarily cheese, were almost fully offset by higher
occupancy and other costs as well as increased wage rates.
In 1999, our restaurant margin as a
percentage of sales increased approximately 210 basis points. The Portfolio Effect
contributed approximately 45 basis points and accounting changes contributed nearly 25
basis points to the improvement. Excluding these items, our base restaurant margin grew
approximately 140 basis points. The increase was primarily attributable to favorable
Effective Net Pricing. Labor cost increases, primarily driven by higher wage rates, were
almost fully offset by lower food and paper costs as improved product cost management
resulted in lower overall beverage and distribution costs. The improvement also included
approximately 15 basis points from retroactive beverage rebates related to 1998
recognized in 1999. In addition, an increase in favorable insurance-related adjustments
over 1998 contributed approximately 10 basis points to our improvement. See Note 21 for
additional information regarding our insurance-related adjustments. All of these
improvements were partially offset by volume declines at Taco Bell and the unfavorable
impact of the introduction of lower margin chicken sandwiches at KFC.
U.S. Ongoing Operating Profit
Ongoing operating profit declined $71 million
or 9% in 2000. Excluding the negative impact of the Portfolio Effect and the favorable
impact from the fifty-third week in 2000, ongoing operating profit decreased
approximately 6%. The decrease was primarily due to a 100 basis point decline in base
restaurant margin and lower franchise and license fees (excluding the Portfolio Effect),
partially offset by reduced G&A. The decrease in G&A was largely due to lower incentive
compensation, decreased professional fees and lower spending at Pizza Hut and Taco Bell
on conferences. The G&A declines were partially offset by higher
29
franchise-related expenses, primarily allowances for doubtful franchise
and license fee receivables, as more fully discussed in the Franchisee Financial
Condition section.
In 1999, ongoing operating profit
increased $73 million or 10%. Excluding the negative impact of the Portfolio Effect,
ongoing operating profit increased 15%. The increase was due to base restaurant margin
improvement of 140 basis points and higher franchise fees primarily from new unit
development, partially offset by higher G&A, net of field G&A savings from the Portfolio
Effect. This increase in G&A was largely due to higher spending on conferences at Pizza
Hut and Taco Bell.
International Results of Operations
% B(W) % B(W)
2000 vs. 1999 1999 vs. 1998
---------- --------- ---------- ---------
System sales $ 7,645 6 $ 7,246 10
========== ==========
Revenues
Company sales $ 1,772 (4) $ 1,846 -
Franchise and license fees 259 14 228 13
---------- ----------
Total Revenues $ 2,031 (2) $ 2,074 2
========== ==========
Company restaurant margin $ 267 - $ 266 11
========== ==========
% of sales 15.1% 0.7 ppts. 14.4% 1.4 ppts.
========== ==========
Ongoing operating profit $ 309 16 $ 265 39
========== ==========
International Restaurant Unit Activity
Unconsolidated
Company Affiliates Franchisees Licensees Total
--------- -------------- ------------ ---------- -------
Balance at Dec. 26, 1998 2,165 1,120 5,788 321 9,394
Openings & Acquisitions 168 83 426 47 724
Refranchising & Licensing (265) (5) 276 (6) -
Closures (71) (20) (186) (53) (330)
-------- -------------- ----------- --------- -------
Balance at Dec. 25, 1999 1,997 1,178 6,304 309 9,788
Openings 227 108 594 21 950
Refranchising & Licensing (85) (9) 94 - -
Closures (55) (53) (210) (40) (358)
Other(a) (263) 620 (357) - -
-------- -------------- ----------- --------- -------
Balance at Dec. 30, 2000(b) 1,821 1,844 6,425 290 10,380
======== ============== =========== ========= =======
% of Total 17.5% 17.8% 61.9% 2.8% 100.0%
- Primarily includes 320 Company units and 329 Franchisee units contributed in connection with the formation of a
new unconsolidated affiliate in Canada as well as 57 units acquired by the Company from Unconsolidated Affiliates
and Franchisees.
- Includes 1 Company unit approved for closure, but not yet closed at December 30, 2000.
30
International System Sales
System sales increased $399 million or
6% in 2000, after a 2% unfavorable impact from foreign currency translation. Excluding
the negative impact of foreign currency translation and the favorable impact of the
fifty-third week in 2000, system sales increased 7%. This increase was driven by new unit
development, led by China, Korea and Japan and same store sales growth. The increase was
partially offset by store closures.
In 1999, system sales increased $639
million or 10%, including a 2% favorable impact from foreign currency translation. This
increase was largely driven by strong performance in Asia, where system sales increased
$426 million or 19%, including a 10% favorable impact of foreign currency translation. In
1999, the economy in Asia began to show signs of a steady recovery after the overall
economic turmoil and weakening of local currencies against the U.S. dollar that began in
late 1997. The increase in system sales in Asia was driven by new unit development and
same store sales growth. Outside of Asia, the improvement was driven by new unit
development and same store sales growth. The increases were partially offset by store
closures primarily by franchisees in Canada, Latin America and Japan.
International Revenues
Company sales decreased $74 million or
4% in 2000, after a 3% unfavorable impact from foreign currency translation. As expected,
the decline in Company sales was primarily due to the Portfolio Effect partially offset
by the favorable impact from the fifty-third week in 2000. Excluding all three of these
items, Company sales increased 11% primarily due to new unit development and favorable
Effective Net Pricing.
Franchise and license fees increased
approximately $31 million or 14% in 2000, after a 3% unfavorable impact from foreign
currency translation. Excluding the negative impact of foreign currency translation and
the favorable impact from the fifty-third week in 2000, franchise and license fees
increased 16%. The increase was driven by new unit development, units acquired from us
and franchisee same store sales growth. These increases were partially offset by store
closures.
Company sales increased less than 1% in
1999. Excluding the Portfolio Effect, Company sales increased 13% largely driven by the
strong performance in Asia. The increase was primarily due to new unit development,
favorable Effective Net Pricing and volume increases.
Franchise and license fees rose $27
million or 13% in 1999. The increase in franchise and license fees was driven by new unit
development, franchisee same store sales growth and units acquired from us. New unit
development was primarily in Asia. These increases were partially offset by store
closures.
International Company Restaurant Margin
2000 1999 1998
------- ------- -------
Company sales 100.0% 100.0% 100.0%
Food and paper 36.5 36.0 35.8
Payroll and employee benefits 19.5 21.0 22.6
Occupancy and other operating expenses 28.9 28.6 28.6
------- ------- -------
Restaurant margin 15.1% 14.4% 13.0%
======= ======= =======
Restaurant margin as a percentage of
sales increased approximately 65 basis points in 2000. Excluding the Portfolio Effect of
approximately 70 basis points, base restaurant margin was essentially flat.
Restaurant margin as a percentage of
sales increased approximately 140 basis points in 1999. Excluding the favorable impact of
foreign currency translation, restaurant margin increased approximately 130 basis
31
points. Portfolio Effect contributed approximately 50 basis points.
Excluding these items, our base restaurant margin grew approximately 80 basis points. The
improvement was driven by volume increases in China, Korea and Australia and favorable
Effective Net Pricing in excess of cost increases, primarily in the United Kingdom,
Puerto Rico and Korea. Our growth in 1999 was partially offset by volume decreases in
Taiwan and Poland. In addition to the factors described above, restaurant margin
benefited from improved cost management, primarily in China.
International Ongoing Operating Profit
Ongoing operating profit grew $44
million or 16% in 2000, after a 2% unfavorable impact from foreign currency translation.
Excluding the negative impacts of the Portfolio Effect and foreign currency translation
and the favorable impact from the fifty-third week in 2000, ongoing operating profit grew
19%. Higher franchise and license fees and Company new unit development drove the
increase.
In 1999, ongoing operating profit grew
$74 million or 39%, including a 3% favorable impact from foreign currency translation.
The increase in operating profit was driven by our base margin improvement of
approximately 80 basis points, higher franchise and license fees and a decline in G&A. Ongoing
operating profit benefited from the economic recovery in Asia. Operating profit in Asia
increased $55 million or 84%, including a 12% favorable impact from foreign currency
translation. Additionally, ongoing operating profit included benefits of approximately
$15 million principally from our 1998 fourth quarter decision to streamline our
international infrastructure in Asia, Europe and Latin America.
Consolidated Cash Flows
Net cash provided by operating
activities decreased $74 million to $491 million primarily due to unusual charges
associated with the AmeriServe bankruptcy reorganization process. Changes in operating
working capital reflected a net use of cash of $207 million. The primary drivers of the
net use were receivables from the AmeriServe bankruptcy estate and franchisee receivables
arising from the Company's program to temporarily purchase food and supply inventories
directly from third party suppliers for the TRICON system and sell a portion of these
supplies to franchisees and licensees (the "Temporary Direct Purchase Program") related
to the AmeriServe bankruptcy reorganization process. These items resulted in a net cash
usage of approximately $135 million of working capital. See Note 21 for a discussion of
the AmeriServe bankruptcy reorganization process.
Excluding the AmeriServe-related items
noted above, our operating working capital deficit reflects a decrease of $63 million
versus a decrease of $128 million in the prior year. Our operating working capital
deficit, which excludes cash, short-term investments and short-term borrowings, is
typical of restaurant operations where the majority of sales are for cash while payment
to suppliers carry longer payment terms, generally from 10-30 days. The lower working
capital deficit reduction in 2000 is the result of refranchising significantly fewer
restaurants in 2000 versus 1999, as well as a change in payment terms in our distribution
agreement from 30 to 15 days.
In 1999, net cash provided by operating
activities decreased $109 million to $565 million. The decline was primarily due to a
$128 million decrease in our working capital deficit. This decrease was driven by our
portfolio activities which resulted in a significant reduction in accounts payable and
other accrued liabilities partially offset by higher accounts receivable.
Net cash used in investing activities
was $237 million in 2000, compared to net cash provided by investing activities of $522
million in 1999. The decline in cash flow from investing activities was primarily due to
lower gross refranchising proceeds as a result of selling fewer restaurants to
franchisees in 2000 versus
32
1999, increased capital spending related to development and funding of
AmeriServe during its bankruptcy reorganization process.
In 1999, net cash provided by investing
activities increased $220 million to $522 million. The majority of the increase is due to
higher gross refranchising proceeds and proceeds from the sale of international
short-term investments in connection with a planned tax-efficient repatriation to the U.S.
Although we report gross proceeds in our
Consolidated Statements of Cash Flows, we also consider refranchising proceeds on an "after-tax" basis.
We define after-tax proceeds as gross refranchising proceeds less the settlement of
working capital liabilities (primarily accounts payable and property taxes) related to
the units refranchised and payment of taxes on the gains. The after-tax proceeds can be
used to pay down debt or repurchase shares. After-tax proceeds were approximately $261
million in 2000 which reflects a 62% decrease from 1999. This decrease was due to the
refranchising of significantly fewer restaurants in 2000. After-tax proceeds were
approximately $683 million in 1999, a 13% increase versus 1998. The increase was
principally due to a greater number of units refranchised as well as the mix of
restaurants sold and the level of taxable gains from each refranchising.
Net cash used in financing activities
was $207 million compared to $1.1 billion last year. Less cash was available for
financing activities in 2000 due to a net cash use from investing activities as described
above, and a use of cash to fund increased share repurchases as more fully discussed in
Note 18. Accordingly, we repaid less debt in 2000 than 1999.
In 1999, net cash used in financing
activities was essentially unchanged versus 1998 at $1.1 billion. Payments on our
unsecured Term Loan Facility and our unsecured Revolving Credit Facility totaled $1.0
billion.
In 1999, our Board of Directors
authorized the repurchase of up to $350 million of our outstanding Common Stock,
excluding applicable transaction fees. This Share Repurchase Program was completed in
2000. During 2000, we repurchased over 6.4 million shares for approximately $216 million.
During 1999, we repurchased over 3.3 million shares for approximately $134 million. See
Note 18.
On February 14, 2001, our Board of
Directors authorized a new Share Repurchase Program, as more fully described in Note 18.
The new Share Repurchase Program authorizes us to repurchase, over the next two years, up
to $300 million of our outstanding Common Stock, excluding applicable transaction fees.
We have not repurchased any shares under this Program as of March 9, 2001.
Financing Activities
Our primary bank credit agreement, as
amended in 2000 and 1999, is comprised of a senior, unsecured Term Loan Facility and a $3
billion senior unsecured Revolving Credit Facility (collectively referred to as the "Credit
Facilities"), both of which mature on October 2, 2002. Amounts outstanding under our
Revolving Credit Facility are expected to fluctuate, but Term Loan Facility reductions
may not be reborrowed. At December 30, 2000, we had unused Revolving Credit Facility
borrowings available aggregating $1.8 billion, net of outstanding letters of credit of
$190 million. We believe that we will be able to refinance a portion of our Credit
Facilities with publicly issued bonds within the next twelve months. As a result of this
refinancing, we are likely to experience an increase in our interest rates, subject to
rates available at the time of refinancing. We also believe we will be able to replace or
refinance the remaining Credit Facilities prior to maturity with new borrowings which
will reflect the market conditions or terms available at that time.
The Credit Facilities subject us to
significant interest expense and principal repayment obligations, which are limited in
the near term, to prepayment events as defined in the credit agreement. Interest on the
Credit
33
Facilities is based principally on the London Interbank Offered Rate ("LIBOR")
plus a variable margin factor as defined in the credit agreement. Therefore, our future
borrowing costs may fluctuate depending upon the volatility in LIBOR. We currently
mitigate a portion of our interest rate risk through the use of derivative financial
instruments. See Notes 11 and 13 and our market risk discussion for further discussions
of our interest rate risk.
Consolidated Financial Condition
Assets increased $188 million or 5% to
$4.1 billion. The increase is primarily attributable to the increase in receivables
arising from the impact of the AmeriServe bankruptcy reorganization process as more fully
discussed in Note 21.
Liabilities decreased $50 million or 1%
to $4.5 billion.
Excluding the impact of the
aforementioned increase in accounts receivable arising from the AmeriServe bankruptcy
reorganization process, our working capital deficit decreased 8% to approximately $769
million at December 30, 2000 from $832 million at December 25, 1999. The decline was
primarily due to a reduction in accounts payable related to fewer Company restaurants as
a result of our portfolio actions, a change in payment terms to our new primary U.S.
distributor of food and paper and a reduction in accrued compensation. These decreases
were partially offset by an increase in accrued income taxes.
We believe the Company has adequate
financial resources to meet its requirements in 2001 and beyond.
Other Significant Known Events, Trends or Uncertainties Expected to
Impact 2001 Ongoing Operating
Profit Comparisons with 2000
Impact of New Unconsolidated
Affiliates
Consistent with our strategy to focus
our capital on key international markets, we entered into an agreement in 1999 to form a
new venture during 2000 in Canada with our largest franchisee in that market. During the
third quarter of 2000, we contributed 320 restaurants in exchange for a 50% equity
interest in the venture. These stores represented approximately 16% of the total
International Company restaurants at the time of the formation of the new venture.
Including the stores contributed by our partner, the new venture had approximately 650
restaurants at the time of formation. We did not record any gain or loss on the transfer
of assets to this new venture.
Previously, the results from the
restaurants we contributed to the Canadian venture were consolidated. The impact of this
transaction on operating results is similar to the Portfolio Effect of our refranchising
activities. Consequently, this transaction will result in a decline in our Company sales,
restaurant margin dollars and G&A expenses as well as higher franchise fees and equity
income. In addition to the Portfolio Effect, franchise fees will be higher since the
royalty rate was increased for those stores contributed by our partner to this venture.
The overall impact from the formation of this venture on 2000 ongoing operating profit
was slightly favorable. Had this venture been formed at the beginning of 2000, our
International Company sales would have declined approximately 10% compared to the
reported decline of 4% for the year ended December 30, 2000.
In addition, we anticipate contributing
about 50 restaurants to a new venture in Poland to be formed in 2001. We believe the
impact on ongoing operating profit from the formation of the venture will not be
significant.
34
Impact of the Consolidation of an
Unconsolidated Affiliate
Beginning in fiscal 2001, we will
consolidate a previously unconsolidated affiliate in our Consolidated Financial
Statements as a result of a change in our intent to temporarily retain control of this
affiliate. While we believe that the overall impact on our ongoing operating profit will
not be significant, this change is expected to result in higher Company sales, restaurant
margin dollars and G&A as well as decreased franchise fees and equity income. Had this
change occurred at the beginning of 2000, our International Company sales would have
increased approximately 2% compared to the reported decline of 4% for the year ended
December 30, 2000.
Change in Casualty Loss Estimates
Due to the inherent volatility of our
actuarially-determined casualty loss estimates, it is reasonably possible that we will
experience changes in estimated losses which could be material to our growth in ongoing
operating profit in 2001. See Note 21 for a discussion of our casualty loss programs and
estimates.
Euro Conversion
On January 1, 1999, eleven of the
fifteen member countries of the European Economic and Monetary Union ("EMU") adopted the
Euro as a common legal currency and fixed conversion rates were established. Greece has
since adopted the single currency on January 1, 2001, taking the total adopting countries
to twelve. From January 1, 1999 through no later than February 28, 2002, all adopting
countries will maintain a period of dual currency, where both legacy currencies and the
Euro can be used in day-to-day credit transactions. Beginning January 1, 2002, new
Euro-denominated bills and coins will be issued, and a transition period of up to two
months will begin during which local currencies will be removed from circulation.
We have Company and franchised
businesses in the adopting member countries, which are preparing for the conversion. To
date, expenditures associated with our conversion efforts have been relatively
insignificant, totaling under $2 million. These expenditures have been concentrated
mainly on consulting expenses for initial impact studies and head office accounting
systems. We currently estimate that the total spending over the transition period will be
approximately $5 million related to the conversion in the EMU member countries in which
we operate stores. This is a reduction from our previous estimate of $10 million,
primarily due to the refranchising of Company stores in certain EMU countries.
Approximately 45% of these expenditures relate to capital expenditures for new
point-of-sale and back-of-restaurant hardware and software to accommodate
Euro-denominated transactions. We believe that adoption of the Euro by the United Kingdom
would significantly increase this estimate due to the size of our businesses there
relative to our aggregate businesses in the adopting member countries in which we operate.
The pace of ultimate consumer acceptance
of and our competitors' responses to the Euro are currently unknown and may impact our
existing plans. However, we know that, from a competitive perspective, we will be
required to assess the impacts of product price transparency, potentially revise product
bundling strategies and create Euro-friendly price points prior to 2002. We do not
believe that these activities will have sustained adverse impacts on our businesses.
Although the Euro does offer certain benefits to our treasury and procurement activities,
these are not currently anticipated to be significant.
We currently anticipate that our
suppliers and distributors will continue to invoice us in local currencies until late
2001. We expect to begin dual pricing in our restaurants in late 2001. We expect to
compensate employees in Euros beginning in 2002. We believe that the most critical
activity regarding the conversion for our businesses is the completion of the rollout of
Euro-ready point-of-sale equipment and software by the end of 2001. Our current plans
should enable us to be Euro-compliant prior to the requirements for these changes. Any
delays in our ability to complete our plans, or in the ability of our key suppliers to be
Euro-compliant, could have a material adverse impact on our results of operations,
financial condition or cash flows.
35
Quantitative and Qualitative Disclosures About Market Risk of Financial
Instruments
Market Risk of Financial Instruments
Our primary market risk exposure with
regard to financial instruments is to changes in interest rates, principally in the
United States. We attempt to minimize this risk and lower our overall borrowing costs
through utilization of derivative instruments such as interest rate swaps, collars and
forward rate agreements.
We are also exposed to the impact of
foreign currency rate fluctuations. We attempt to minimize the risk exposure to foreign
currency rate fluctuations on our investments in foreign operations by financing those
investments with local currency debt when practical. We also use forward contracts on a
limited basis to reduce our exposure to foreign currency rate fluctuations on foreign
currency denominated financial instruments and significant foreign currency denominated
cash flows. Additionally, certain foreign currency denominated cash, cash equivalents and
short-term investments are subject to tax considerations and local regulatory
restrictions which limit our ability to utilize these funds outside the country in which
they are held.
At December 30, 2000, a hypothetical 100
basis point increase in short-term interest rates would result in a reduction of $19
million in annual income before income taxes. 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 30, 2000. In addition, the fair value of our interest
rate derivative contracts would decrease approximately $11 million in value to us, and
the fair value of our Senior Unsecured Notes would decrease approximately $25 million.
Fair value was determined by discounting the projected cash flows.
New Accounting Pronouncement
See Note 2.
Cautionary Statements
From time to time, in both written
reports and oral statements, we present "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The statements include those identified by such words
as "may," "will," "expect," "anticipate," "believe," "plan" and other similar terminology.
These "forward-looking statements" reflect our current expectations and are based upon
data available at the time of the statements. Actual results involve risks and
uncertainties, including both those specific to the Company and those specific to the
industry, and could differ materially from expectations.
Company risks and uncertainties include,
but are not limited to, potentially substantial tax contingencies related to the
Spin-off, which, if they occur, require us to indemnify PepsiCo, Inc.; our substantial
debt leverage and the attendant potential restriction on our ability to borrow in the
future, as well as our substantial interest expense and principal repayment obligations;
our ability to replace or refinance the Credit Facilities at reasonable rates; potential
unfavorable variances between estimated and actual liabilities including the liabilities
related to the sale of the non-core businesses; the ongoing business viability of our key
distributor of restaurant products and equipment in the U.S. and our ability to ensure
adequate supply of restaurant products and equipment in our stores; our ability to
complete our Euro conversion plans or the ability of our key suppliers to be
Euro-compliant; the ongoing financial viability of our franchisees and licensees, our
potential inability to identify qualified franchisees to purchase restaurants at prices
we consider appropriate under our strategy to reduce the percentage of system units we
operate; volatility of actuarially determined casualty loss estimates and adoption of new
or changes in accounting policies and practices.
36
Industry risks and uncertainties
include, but are not limited to, global and local business, economic and political
conditions; legislation and governmental regulation; competition; success of operating
initiatives and advertising and promotional efforts; volatility of commodity costs and
increases in minimum wage and other operating costs; availability and cost of land and
construction; consumer preferences, spending patterns and demographic trends; political
or economic instability in local markets and currency exchange rates.
37
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL INFORMATION
Item 8 (a) (1) - (2)
Item 8(a)(1) Consolidated Financial Statements
| Page Reference
|
|
|
Consolidated Statements of Income for the fiscal years ended December 30, 2000,
December 25, 1999 and December 26, 1998
| 39
|
|
|
Consolidated Statements of Cash Flows for the fiscal years
ended December 30, 2000, December 25, 1999 and December 26, 1998
| 40
|
|
|
Consolidated Balance Sheets at December 30, 2000 and December 25, 1999
| 41
|
|
|
Consolidated Statements of Shareholders' Deficit and
Comprehensive Income for the fiscal years ended
December 30, 2000, December 25, 1999 and December 26, 1998
| 42
|
|
|
Notes to Consolidated Financial Statements
| 43
|
|
|
Management's Responsibility for Financial Statements
| 76
|
|
|
Report of Independent Auditors
| 77
|
|
|
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 notes thereto.
38
Consolidated Statements of Income
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 30, 2000, December 25, 1999 and December 26, 1998
(in millions, except per share amounts)
- -----------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------
Revenues
Company sales $ 6,305 $ 7,099 $ 7,852
Franchise and license fees 788 723 627
---------- ---------- ---------
7,093 7,822 8,479
---------- ---------- ---------
Costs and Expenses, net
Company restaurants
Food and paper 1,942 2,238 2,521
Payroll and employee benefits 1,744 1,956 2,243
Occupancy and other operating expenses 1,665 1,814 2,030
---------- ---------- ---------
5,351 6,008 6,794
General and administrative expenses 879 920 941
Other (income) expense (25) (16) (24)
Facility actions net (gain) (176) (381) (275)
Unusual items 204 51 15
---------- ---------- ---------
Total costs and expenses, net 6,233 6,582 7,451
---------- ---------- ---------
Operating Profit 860 1,240 1,028
Interest expense, net 176 202 272
---------- ---------- ---------
Income Before Income Taxes 684 1,038 756
Income Tax Provision 271 411 311
---------- ---------- ---------
Net Income $ 413 $ 627 $ 445
========== ========== =========
Basic Earnings Per Common Share $ 2.81 $ 4.09 $ 2.92
========== ========== =========
Diluted Earnings Per Common Share $ 2.77 $ 3.92 $ 2.84
========== ========== =========
See accompanying Notes to Consolidated Financial Statements.
39
Consolidated Statements of Cash Flows
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 30, 2000, December 25, 1999 and December 26, 1998
(in millions)
2000 1999 1998
- ------------------------------------------------------------------------------------------
Cash Flows - Operating Activities
Net income $ 413 $ 627 $ 445
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 354 386 417
Facility actions net gain (176) (381) (275)
Unusual items 120 45 15
Other liabilities and deferred credits (5) 65 58
Deferred income taxes (51) (16) 3
Other non-cash charges and credits, net 43 66 117
Changes in operating working capital,
excluding effects of acquisitions and dispositions:
Accounts and notes receivable (161) (28) (8)
Inventories 11 6 4
Prepaid expenses and other current assets (3) (13) (20)
Accounts payable and other current liabilities (94) (215) 10
Income taxes payable 40 23 (92)
----------- ---------- ----------
Net change in operating working capital (207) (227) (106)
----------- ---------- ----------
Net Cash Provided by Operating Activities 491 565 674
----------- ---------- ----------
Cash Flows - Investing Activities
Capital spending (572) (470) (460)
Proceeds from refranchising of restaurants 381 916 784
Acquisition of restaurants (24) (6) -
AmeriServe funding, net (70) - -
Short-term investments (21) 39 (57)
Sales of property, plant and equipment 64 51 58
Other, net 5 (8) (23)
----------- ---------- ----------
Net Cash (Used in) Provided
by Investing Activities (237) 522 302
----------- ---------- ----------
Cash Flows - Financing Activities
Proceeds from Notes - - 604
Revolving Credit Facility activity,
by original maturity
More than three months - proceeds - - 400
More than three months - payments - - (900)
Three months or less, net 82 (860) (120)
Proceeds from long-term debt - 4 4
Payments of long-term debt (99) (180) (1,068)
Short-term borrowings-three months or less, net (11) 21 (53)
Repurchase shares of common stock (216) (134) -
Other, net 37 30 13
----------- ---------- ----------
Net Cash Used in Financing Activities (207) (1,119) (1,120)
----------- ---------- ----------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (3) - (3)
----------- ---------- ----------
Net Increase (Decrease) in Cash
and Cash Equivalents 44 (32) (147)
Cash and Cash Equivalents - Beginning of Year 89 121 268
----------- ---------- ----------
Cash and Cash Equivalents - End of Year $ 133 $ 89 $ 121
=========== ========== ==========
Supplemental Cash Flow Information
Interest paid $ 194 $ 212 $ 303
Income taxes paid 252 340 310
Significant Non-Cash Investing and
Financing Activities
Issuance of promissory note to acquire
an unconsolidated affiliate $ 25 - -
Contribution of non-cash net assets to
an unconsolidated affiliate 67 - -
- ------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------
40
Consolidated Balance Sheets
TRICON Global Restaurants, Inc. and Subsidiaries
December 30, 2000 and December 25, 1999
(in millions)
2000 1999
- ------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 133 $ 89
Short-term investments, at cost 63 48
Accounts and notes receivable, less allowance:
$82 in 2000 and $13 in 1999 302 161
Inventories 47 61
Prepaid expenses and other current assets 68 68
Deferred income tax assets 75 59
---------- --------
Total Current Assets 688 486
Property, Plant and Equipment, net 2,540 2,531
Intangible Assets, net 419 527
Investments in Unconsolidated Affiliates 257 170
Other Assets 245 247
--------- --------
Total Assets $ 4,149 $ 3,961
========== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 978 $ 1,085
Income taxes payable 148 96
Short-term borrowings 90 117
---------- --------
Total Current Liabilities 1,216 1,298
Long-term Debt 2,397 2,391
Other Liabilities and Deferred Credits 848 825
Deferred Income Taxes 10 7
---------- --------
Total Liabilities 4,471 4,521
---------- --------
Shareholders' Deficit
Preferred stock, no par value, 250 shares authorized;
no shares issued - -
Common stock, no par value, 750 shares authorized;
147 and 151 shares issued in 2000 and 1999, respectively 1,133 1,264
Accumulated deficit (1,278) (1,691)
Accumulated other comprehensive income (177) (133)
---------- --------
Total Shareholders' Deficit (322) (560)
---------- --------
Total Liabilities and Shareholders' Deficit $ 4,149 $ 3,961
========== ========
See accompanying Notes to Consolidated Financial Statements.
41
Consolidated Statements of Shareholders' Deficit and Comprehensive Income
TRICON Global Restaurants, Inc. and Subsidiaries
Fiscal years ended December 30, 2000, December 25, 1999 and December 26, 1998
(in millions)
Issued Accumulated
Common Stock Other
----------------- Accumulated Comprehensive
Shares Amount Deficit Income Total
---------------------------------------------------------
Balance at December 27, 1997 152 $ 1,271 $ (2,763) $ (128) $ (1,620)
---------------------------------------------------------
Net income 445 445
Foreign currency translation adjustment (20) (20)
Minimum pension liability adjustment
(includes tax of $1 million) (2) (2)
---------
Comprehensive Income 423
Adjustment to opening equity related to
net advances from PepsiCo 12 12
Stock option exercises (includes tax
benefits of $3 million) 1 22 22
--------------------------------------------------------
Balance at December 26, 1998 153 $ 1,305 $ (2,318) $ (150) $ (1,163)
--------------------------------------------------------
Net income 627 627
Foreign currency translation adjustment 15 15
Minimum pension liability adjustment
(includes tax of $1 million) 2 2
---------
Comprehensive Income 644
Adjustment to opening equity related to
net advances from PepsiCo 7 7
Repurchase of shares of common stock (3) (134) (134)
Stock option exercises (includes tax
benefits of $14 million) 1 39 39
Compensation-related events 47 47
--------------------------------------------------------
Balance at December 25, 1999 151 $ 1,264 $ (1,691) $ (133) $ (560)
--------------------------------------------------------
Net income 413 413
Foreign currency translation adjustment (44) (44)
---------
Comprehensive Income 369
Repurchase of shares of common stock (6) (216) (216)
Stock option exercises (includes tax
benefits of $5 million) 2 46 46
Compensation-related events 39 39
--------------------------------------------------------
Balance at December 30, 2000 147 $ 1,133 $ (1,278) $ (177) $ (322)
========================================================
See accompanying Notes to Consolidated Financial Statements.
42
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 comprised of the
worldwide operations of KFC, Pizza Hut and Taco Bell (the "Concepts") and is the world's
largest quick service restaurant company based on the number of system units, with over
30,000 units in over 100 countries and territories. Approximately 34% of our system units
are located outside the U.S. References to TRICON throughout these Consolidated Financial
Statements are made using the first person notations of "we," "us "or "our." Through our
widely-recognized Concepts, TRICON develops, operates, franchises and licenses a system
of both traditional and non-traditional quick service restaurants. Our traditional
restaurants feature dine-in, carryout and, in some instances, drive-thru or delivery
service. Non-traditional units, which are principally licensed outlets, include express
units and kiosks which have a more limited menu and operate in non-traditional locations
like airports, gasoline service stations, convenience stores, stadiums, amusement parks
and colleges, where a full-scale traditional outlet would not be practical or efficient.
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
restaurant businesses which were disposed of in 1997, which included California Pizza
Kitchen, Chevys Mexican Restaurant, D'Angelo's Sandwich Shops, East Side Mario's and Hot 'n
Now (collectively, the "Non-core Businesses").
Note 2 - Summary of Significant Accounting Policies
Our preparation of the accompanying
Consolidated Financial Statements in conformity with accounting principles generally
accepted in the U.S. requires us to make estimates and assumptions that affect reported
amounts of assets and liabilities, 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 the estimates.
Principles of Consolidation and Basis of
Preparation. TRICON was created as an independent, publicly owned company on October 6,
1997 (the "Spin-off Date") via a tax-free distribution by our former parent, PepsiCo,
Inc. ("PepsiCo"), of our Common Stock (the "Distribution" or "Spin-off") to its
shareholders. 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. Our share of the net income or loss of those
unconsolidated affiliates and net foreign exchange gains or losses are included in other
(income) expense.
Internal Development Costs and Abandoned
Site Costs. We capitalize direct costs associated with the site acquisition and
construction of a Company unit on that site, including direct internal payroll and
payroll-related costs and direct external costs. Only those site-specific costs incurred
subsequent to the time that the site acquisition is considered probable are capitalized.
We consider acquisition probable upon final site approval. If we subsequently make a
determination that a site for which internal development costs have been capitalized will
not be acquired or developed, any previously capitalized internal development costs are
expensed at this date and included in general and administrative 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 year 2000 included 53 weeks. Fiscal years 1999 and 1998 included 52 weeks.
The first three quarters of each fiscal year consist of 12 weeks and the fourth quarter
consists of 17
43
weeks in fiscal years with 53 weeks and 16 weeks in fiscal years with 52
weeks. Our subsidiaries operate on similar fiscal calendars with period end dates suited
to their businesses. Period end dates are within one week of TRICON's period end date
with the exception of our international businesses, which close one period or one month
earlier to facilitate consolidated reporting.
Direct Marketing Costs. We report
substantially all of our direct marketing costs in occupancy and other operating
expenses. We charge direct marketing costs to expense ratably in relation to revenues
over the year in which incurred and, in the case of advertising production costs, in the
year first shown. Deferred direct marketing costs, which are classified as prepaid
expenses, consist of media and related advertising production costs which will generally
be used for the first time in the next fiscal year. To the extent we participate in
independent advertising cooperatives, we expense our contributions as incurred. At the
end of 2000 and 1999, we had deferred marketing costs of $8 million and $3 million,
respectively. Our advertising expenses were $325 million, $385 million and $435 million
in 2000, 1999 and 1998, respectively. The decline in our advertising expense is primarily
due to fewer Company stores as a result of our refranchising program.
Research and Development Expenses.
Research and development expenses, which we expense as incurred, were $24 million in both
2000 and 1999 and $21 million in 1998.
Stock-Based Employee Compensation. 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. We include pro forma information in Note
15 as required by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Accordingly, we measure compensation cost for
the stock option grants to the employees as the excess of the average market price of the
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 average market price of the underlying
Common Stock at the date of grant.
Derivative Instruments. As discussed in
the New Accounting Pronouncement Not Yet Adopted section which follows, we have not yet
adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") as of December 30, 2000. In all years presented, our treatment of derivative
instruments is as follows.
We utilize interest rate swaps, collars
and forward rate agreements to hedge our exposure to fluctuations in interest rates. We
recognize the interest differential to be paid or received on interest rate swap and
forward rate agreements as an adjustment to interest expense as the differential occurs.
We recognize the interest differential to be paid or received on an interest rate collar
as an adjustment to interest expense when the interest rate falls below or rises above
the collared range. We reflect the recognized interest differential not yet settled in
cash in the accompanying Consolidated Balance Sheets as a current receivable or payable.
If we terminate an interest rate swap, collar or forward rate position, any 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.
Each period, we recognize in income
foreign exchange gains and losses on forward contracts that are designated and effective
as hedges of foreign currency receivables or payables as the differential occurs. These
gains or losses are largely offset by the corresponding gain or loss recognized in income
on the currency translation of the receivable or payable, as both amounts are based upon
the same exchange rates. We reflect the recognized foreign currency differential for
forward contracts not yet settled in cash on the accompanying Consolidated Balance Sheets
each period as a current receivable or payable. Each period, we recognize in income the
change in fair value of foreign exchange gains and losses on forward contracts that are
entered into to mitigate the foreign exchange risk of certain forecasted foreign currency
denominated royalty receipts. We
44
reflect the fair value of these forward contracts not yet settled on the
Consolidated Balance Sheets as a current receivable or payable. If a foreign currency
forward contract is terminated prior to maturity, the gain or loss recognized upon
termination would be immediately recognized in income.
We defer gains and losses on futures and
options contracts that are designated and effective as hedges of future commodity
purchases and include them in the cost of the related raw materials when purchased.
Changes in the value of futures and options contracts that we use to hedge components of
our commodity purchases are highly correlated to changes in the value of the purchased
commodity attributable to the hedged component. If the degree of correlation were to
diminish such that the two were no longer considered highly correlated, we would
immediately recognize subsequent changes in the value of the futures and option contracts
in income.
Cash and Cash Equivalents. Cash
equivalents represent funds we have temporarily invested (with original maturities not
exceeding three months) as part of managing our day-to-day operating cash receipts and
disbursements.
Inventories. We value our inventories at
the lower of cost (computed on the first-in, first-out method) or net realizable value.
Property, Plant and Equipment. We state
property, plant and equipment ("P&E") at cost less accumulated depreciation and
amortization, impairment writedowns and valuation allowances. We calculate depreciation
and amortization on a straight-line basis over the estimated useful lives of the assets
as follows: 5 to 25 years for buildings and improvements, 3 to 20 years for machinery and
equipment and 3 to 7 years for capitalized software costs. As discussed further below, we
suspend depreciation and amortization on assets related to restaurants that are held for
disposal. Our depreciation and amortization expense was $319 million, $345 million and
$372 million in 2000, 1999 and 1998, respectively.
Intangible Assets. Intangible assets
include both identifiable intangibles and goodwill arising from the allocation of
purchase prices of businesses acquired. Where appropriate, intangible assets are
allocated to individual restaurants at the time of acquisition. We base amounts assigned
to identifiable intangibles on independent appraisals or internal estimates. Goodwill
represents the residual purchase price after allocation to all identifiable net assets.
Our intangible assets are stated at historical allocated cost less accumulated
amortization and impairment writedowns. We amortize intangible assets on a straight-line
basis as follows: up to 20 years for reacquired franchise rights, 3 to 34 years for
trademarks and other identifiable intangibles and up to 20 years for goodwill. As
discussed further below, we suspend amortization on intangible assets allocated to
restaurants that are held for disposal. Our amortization expense was $38 million, $44
million and $52 million in 2000, 1999 and 1998, respectively.
Franchise and License Fees. We execute
franchise or license agreements for each point of distribution which sets out the terms
of our arrangement with the franchisee or licensee. Our franchise and certain license
agreements require the franchisee or licensee to pay an initial, non-refundable fee and
continuing fees based upon a percentage of sales. Subject to our approval and payment of
a renewal fee, a franchisee may generally renew its agreement upon its expiration. Our
direct costs of the sales and servicing of franchise and license agreements are charged
to general and administrative expenses as incurred.
We recognize initial fees as revenue
when we have performed substantially all initial services required by the franchise or
license agreement, which is generally upon opening of a store. We recognize continuing
fees as earned with an appropriate provision for estimated uncollectible amounts, which
is included in general and administrative expenses. We recognize renewal fees in income
when a renewal agreement becomes effective. We include initial fees collected upon the
sale of a restaurant to a franchisee in refranchising gains (losses). Fees for
development rights are capitalized and amortized over the life of the development
agreement.
45
Refranchising Gains (Losses).
Refranchising gains (losses) includes the gains or losses from the sales of our
restaurants to new and existing franchisees and the related initial franchise fees,
reduced by transaction costs and direct administrative costs of refranchising. In
executing our refranchising initiatives, we most often offer groups of restaurants. We
recognize gains on restaurant refranchisings 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, we defer
refranchising gains until those criteria have been met. We only consider the stores in
the group "held for disposal" when the group is expected to be sold at a loss. We
recognize estimated losses on restaurants to be refranchised and suspend depreciation and
amortization when: (a) we make a decision to refranchise stores; (b) the estimated fair
value less costs to sell is less than the carrying amount of the stores; and (c) the
stores can be immediately removed from operations. When we make a decision to retain a
store previously held for refranchising, we revalue the store at the lower of its net
book value at our original disposal decision date less normal depreciation and
amortization during the period held for disposal or its current fair market value. This
value becomes the store's new cost basis. We charge (or credit) any difference between
the store's carrying amount and its new cost basis to refranchising gains (losses). When
we make a decision to close a store previously held for refranchising, we reverse any
previously recognized refranchising loss and then record the store closure costs as
described below. For groups of restaurants expected to be sold at a gain, we typically do
not suspend depreciation and amortization until the sale is probable. For practical
purposes, we treat the closing date as the point at which the sale is probable.
Refranchising gains (losses) also include charges for estimated exposures related to
those partial guarantees of franchisee loan pools and contingent lease liabilities which
arose from refranchising activities. These exposures are more fully discussed in Note 21.
Store Closure Costs. Effective for
closure decisions made on or subsequent to April 23, 1998, we recognize the cost of
writing down the carrying amount of a restaurant's assets as store closure costs when we
have closed or replaced the restaurant within the same quarter our decision is made.
Store closure costs also include costs of disposing of the assets as well as other
facility-related expenses from previously closed stores. These costs are expensed as
incurred. Additionally, we record a liability for the net present value of any remaining
operating lease obligations after the expected closure date, net of estimated sublease
income, if any, at the date the closure is considered probable.
Considerable management judgment is
necessary to estimate future cash flows. Accordingly, actual results could vary
significantly from the estimates.
Impairment of Long-Lived Assets. We
review our long-lived assets related to each restaurant to be held and used in the
business, including any allocated intangible assets, 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. Based on the best
information available, we write down an impaired restaurant to its estimated fair market
value, which becomes its new cost basis. We generally measure estimated fair market value
by discounting estimated future cash flows. In addition, after April 23, 1998, when we
decide to close a store beyond the quarter in which the closure decision is made, it is
reviewed for impairment and depreciable lives are adjusted. The impairment evaluation is
based on the estimated cash flows from continuing use until the expected disposal date
plus the expected terminal value.
Considerable management judgment is
necessary to estimate future cash flows. Accordingly, actual results could vary
significantly from our 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 is similar to the methodology we use for our restaurants
except: (a) the recognition
46
test for an investment in an unconsolidated affiliate compares the
carrying amount of our investment to a forecast of our share of the unconsolidated
affiliate's undiscounted cash flows after interest and taxes instead of undiscounted cash
flows before interest and taxes used for our restaurants; and (b) enterprise-level
goodwill is generally evaluated at a country level instead of by individual restaurant.
Also, we record impairment charges related to investments in unconsolidated affiliates
whenever other circumstances indicate that a decrease in the value of an investment has
occurred which is other than temporary.
Considerable management judgment is
necessary to estimate future cash flows. Accordingly, actual results could vary
significantly from our estimates.
New Accounting Pronouncement Not Yet
Adopted. In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
133. SFAS 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses to offset
the related change in fair value on the hedged item in the Consolidated Statements of
Income or be deferred through Accumulated Other Comprehensive Income until a hedged
forecasted transaction affects earnings. SFAS 133 requires that a company formally
document, designate and assess the effectiveness of transactions to receive hedge
accounting treatment. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended certain provisions
of SFAS 133.
As required, we adopted these statements
on December 31, 2000, which is the beginning of our 2001 fiscal year. The transition
adjustments resulting from the adoption of SFAS 133 were not significant. In addition,
the adoption of these statements could increase volatility in our earnings and other
comprehensive income.
Note 3 - Comprehensive Income
Accumulated Other Comprehensive Income
of $177 million and $133 million as of December 30, 2000 and December 25, 1999,
respectively, consisted entirely of foreign currency translation adjustment.
The changes in foreign currency
translation adjustment are as follows:
2000 1999 1998
---------- --------- ---------
Foreign currency translation adjustment
arising during the period $ (44) $ 15 $ (21)
Less: Foreign currency translation adjustment
included in net income - - 1
---------- --------- ---------
Net foreign currency translation adjustment $ (44) $ 15 $ (20)
========== ========= =========
47
Note 4 - Earnings Per Common Share ("EPS")
2000 1999 1998
---------- --------- ---------
Net income $ 413 $ 627 $ 445
========== ========= =========
Basic EPS:
Weighted-average common shares outstanding 147 153 153
========== ========= =========
Basic EPS $ 2.81 $ 4.09 $ 2.92
========== ========= =========
Diluted EPS:
Weighted-average common shares outstanding 147 153 153
Shares assumed issued on exercise of dilutive
share equivalents 19 24 20
Shares assumed purchased with proceeds of dilutive
share equivalents (17) (17) (17)
---------- --------- ---------
Shares applicable to diluted earnings 149 160 156
========== ========= =========
Diluted EPS $ 2.77 $ 3.92 $ 2.84
========== ========= =========
Unexercised employee stock options to
purchase approximately 10.8 million, 2.5 million and 1.0 million shares of our Common
Stock for the years ended December 30, 2000, December 25, 1999 and December 26, 1998,
respectively, were not included in the computation of diluted EPS because their exercise
prices were greater than the average market price of our Common Stock during the year.
Note 5 - Items Affecting Comparability of Net Income
Accounting Changes
In 1998 and 1999, we adopted several
accounting and human resource policy changes (collectively, the "accounting changes")
that impacted our 1999 operating profit. These changes, which we believe are material in
the aggregate, fall into three categories:
- required changes in accounting principles generally accepted in the U.S. ("GAAP"),
- discretionary methodology changes implemented to more accurately measure certain liabilities and
- policy changes driven by our human resource and accounting standardization programs.
Required Changes in GAAP - Effective
December 27, 1998, we adopted Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
identifies the characteristics of internal-use software and specifies that once the
preliminary project stage is complete, direct external costs, certain direct internal
payroll and payroll-related costs and interest costs incurred during the development of
computer software for internal use should be capitalized and amortized. Previously, we
expensed all software development and procurement costs as incurred. In 1999, we
capitalized approximately $13 million of internal software development costs and third
party software costs that we would have previously expensed. The amortization of computer
software assets that became ready for their intended use in 1999 was insignificant.
In addition, we adopted Emerging Issues
Task Force Issue No. 97-11 ("EITF 97-11"), "Accounting for Internal Costs Relating to
Real Estate Property Acquisitions," upon its issuance in March 1998. EITF 97-11 limits the
capitalization of internal real estate acquisition costs to those site-specific costs
incurred subsequent to the time that the real estate acquisition is probable. We consider
acquisition of the property probable upon final site approval. In the first quarter of
1999, we also made a discretionary policy change limiting the types of costs eligible for
capitalization to those direct cost types described as capitalizable under SOP 98-1.
Prior to
48
the adoption of EITF 97-11, all pre-acquisition real estate activities
were considered capitalizable. This change unfavorably impacted our 1999 operating profit
by approximately $3 million.
To conform to the Securities and
Exchange Commission's April 23, 1998 interpretation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," our store
closure accounting policy was changed in 1998. Effective for closure decisions made on or
subsequent to April 23, 1998, we recognize store closure costs when we have closed the
restaurant within the same quarter the closure decision is made. When we decide to close
a restaurant beyond the quarter in which the closure decision is made, it is reviewed for
impairment. The impairment evaluation is based on the estimated cash flows from
continuing use until the expected date of disposal plus the expected terminal value. If
the restaurant is not fully impaired, we continue to depreciate the assets over their
estimated remaining useful life. Prior to April 23, 1998, we recognized store closure
costs and generally suspended depreciation and amortization when we decided to close a
restaurant within the next twelve months. In fiscal year 1999, this change resulted in
additional depreciation and amortization of approximately $3 million through April 23,
1999.
Discretionary Methodology Changes - In
1999, the methodology used by our independent actuary was refined and enhanced to provide
a more reliable estimate of the self-insured portion of our current and prior years' ultimate
loss projections related to workers' compensation, general liability and automobile
liability insurance programs (collectively "casualty loss(es)"). Our prior practice was
to apply a fixed factor to increase our independent actuary's ultimate loss projections
which was at the 51% confidence level for each year to approximate our targeted 75%
confidence level. Confidence level means the likelihood that our actual casualty losses
will be equal to or below those estimates. Based on our independent actuary's opinion,
our prior practice produced a very conservative confidence factor at a level higher than
our target of 75%. Our actuary now provides an actuarial estimate at our targeted 75%
confidence level in the aggregate for all self-insured years. The change in methodology
resulted in a one-time increase in our 1999 operating profit of over $8 million.
At the end of 1998, we changed our
method of determining the pension discount rate to better reflect the assumed investment
strategies we would most likely use to invest any short-term cash surpluses. Accounting
for pensions requires us to develop an assumed interest rate on securities with which the
pension liabilities could be effectively settled. In estimating this discount rate, we
look at rates of return on high-quality corporate fixed income securities currently
available and expected to be available during the period to maturity of the pension
benefits. As it is impractical to find an investment portfolio which exactly matches the
estimated payment stream of the pension benefits, we often have projected short-term cash
surpluses. Previously, we assumed that all short-term cash surpluses would be invested in
U.S. government securities. Our new methodology assumes that our investment strategies
would be equally divided between U.S. government securities and high-quality corporate
fixed income securities. The pension discount methodology change resulted in a one-time
increase in our 1999 operating profit of approximately $6 million.
Human Resource and Accounting
Standardization Programs - In 1999, our vacation policies were conformed to a
calendar-year based, earn-as-you-go, use-or-lose policy. The change provided a one-time
favorable increase in our 1999 operating profit of approximately $7 million. Other
accounting policy standardization changes by our three U.S. Concepts provided a one-time
favorable increase in our 1999 operating profit of approximately $1 million.
49
Our 1999 operating results included the
favorable impact of approximately $29 million ($18 million after-tax or $0.11 per diluted
share) from these accounting changes. The estimated impact is summarized below:
1999
----------------------------------
Restaurant Operating
Margin G&A Profit
---------- --------- ---------
U.S. $ 11 $ 4 $ 15
Unallocated - 14 14
---------- --------- ---------
Total $ 11 $ 18 $ 29
========== ========= =========
1997 Fourth Quarter Charge
In the fourth quarter of 1997, we
recorded a $530 million unusual charge ($425 million after-tax). The charge included
estimates for (a) costs of closing stores, primarily at Pizza Hut and Tricon Restaurants
International; (b) reductions to fair market value, less costs to sell, of the carrying
amounts of certain restaurants we intended to refranchise; (c) impairments of certain
restaurants intended to be used in the business; (d) impairments of certain investments
in unconsolidated affiliates to be retained; and (e) costs of related personnel
reductions. Below is a summary of the 1999 and 1998 activity related to our asset
valuation allowances and liabilities recognized as a result of the 1997 fourth quarter
charge:
Asset
Valuation
Allowances Liabilities Total
---------- ----------- -------
Balance at December 27, 1997 $ 261 $ 129 $ 390
Amounts used (131) (54) (185)
(Income) expense impacts:
Completed transactions (27) (7) (34)
Decision changes (22) (17) (39)
Estimate changes 15 (7) 8
Other 1 - 1
---------- ----------- -------
Balance at December 26, 1998 97 44 141
Amounts used (87) (32) (119)
(Income) expense impacts:
Completed transactions (5) - (5)
Decision changes 1 (3) (2)
Estimate changes (7) (9) (16)
Other 1 - 1
---------- ----------- -------
Balance at December 25, 1999 $ - $ - $ -
========== =========== =======
During 1999 and 1998, we continued to
re-evaluate our prior estimates of the fair market value of units to be refranchised or
closed and other liabilities arising from the charge. In 1999, we recorded favorable
adjustments of $13 million ($10 million after-tax) and $11 million ($10 million
after-tax) included in facility actions net gain and unusual items, respectively. In
1998, favorable adjustments of $54 million ($33 million after-tax) and $11 million ($7
million after-tax) were included in facility actions net gain and unusual items,
respectively. The 1999 and 1998 adjustments primarily related to decisions to retain
certain stores originally expected to be disposed of, lower-than-expected losses from
stores disposed of, favorable lease settlements with certain lessors related to stores
closed and changes in estimated costs.
50
Our operating profit reflects the
benefit from the suspension of depreciation and amortization of approximately $12 million
($7 million after-tax) and $33 million ($21 million after-tax) in 1999 and 1998,
respectively, for stores held for disposal. The benefits from the suspension of
depreciation and amortization related to stores that were operating at the end of the
respective periods ceased when the stores were refranchised or closed or a subsequent
decision was made to retain the stores.
Facility Actions Net Gain
Facility actions net gain consists of
three components as described in Note 2:
- Refranchising gains (losses),
- Store closure costs (credits), and
- Impairment of long-lived assets for restaurants we intend to continue to use in the business and, since
April 23, 1998, restaurants we intend to close beyond the quarter in which the closure decision is made.
The components of facility actions net
gain for 2000, 1999 and 1998 were as follows:
2000 1999 1998
-------- ------------------------ ------------------------
(Excluding (Excluding
1997 4th Qtr. 1997 4th Qtr.
Charge Charge
Total Total Adjustments) Total Adjustments)
-------- -------- ------------- -------- -------------
U.S.
Refranchising net gains(a) $ (202) $ (405) $ (396) $ (275) $ (249)
Store closure costs (credits) 6 5 15 (9) 27
Impairment charges for stores
that will continue to be used
in the business 3 6 6 23 23
Impairment charges for stores
to be closed in the future 5 9 9 5 5
-------- -------- ------------- -------- -------------
Facility actions net gain (188) (385) (366) (256) (194)
-------- -------- ------------- -------- -------------
International
Refranchising net (gains)
losses(a) 2 (17) (22) (4) (32)
Store closure costs (credits) 4 8 7 (18) 2
Impairment charges for stores
that will continue to be used
in the business 5 10 10 2 2
Impairment charges for stores
to be closed in the future 1 3 3 1 1
-------- -------- ------------- -------- -------------
Facility actions net (gain) loss 12 4 (2) (19) (27)
-------- -------- ------------- -------- -------------
Worldwide
Refranchising net gains(a) (200) (422) (418) (279) (281)
Store closure costs (credits) 10 13 22 (27) 29
Impairment charges for stores
that will continue to be used
in the business(b) 8 16 16 25 25
Impairment charges for stores
to be closed in the future(b) 6 12 12 6 6
-------- -------- ------------- -------- -------------
Facility actions net gain $ (176) $ (381) $ (368) $ (275) $ (221)
======== ======== ============= ======== =============
Facility actions net gain,
after-tax $ (98) $ (226) $ (216) $ (162) $ (129)
======== ======== ============= ======== =============
51
- Includes initial franchise fees in the U.S. of $17 million in 2000,
$38 million in 1999 and $39 million in 1998, and in International of $3 million, $7 million and $5 million in
2000, 1999 and 1998, respectively. See Note 6.
- Impairment charges for 2000 and 1999 were recorded against the following asset categories:
2000 1999
---------- ----------
Property, plant and equipment $ 12 $ 25
Intangible assets:
Goodwill - 1
Reacquired franchise rights 2 2
---------- ----------
Total impairment $ 14 $ 28
========== ==========
The following table summarizes the 2000
and 1999 activity related to all stores disposed of or held for disposal including the
stores that were covered by the fourth quarter 1997 charge. We believe that the remaining
carrying amounts are adequate to complete our disposal actions.
Asset
Impairment
Allowances Liabilities
---------- -----------
Carrying amount at December 26, 1998 $ 127 $ 77
Amounts used (100) (36)
(Income) expense impact:
New decisions 9 15
Estimate/decision changes (20) 15
Other 4 -
---------- -----------
Carrying amount at December 25, 1999 $ 20 $ 71
Amounts used (10) (22)
(Income) expense impact:
New decisions 14 5
Estimate/decision changes (4) (7)
Other - 3
---------- -----------
Carrying amount at December 30, 2000 $ 20 $ 50
========== ===========
The carrying values of assets held for
disposal, which were all located in the U.S., were $2 million and $40 million at December
30, 2000 and December 25, 1999, respectively. These assets included restaurants and in
1999, our idle processing facility in Wichita, Kansas, which was sold in 2000 for its
approximate net book value.
The following table summarizes Company
sales and restaurant margin related to stores held for disposal at December 30, 2000 or
disposed of through refranchising or closure during 2000, 1999 and 1998. Restaurant
margin represents Company sales less the cost of food and paper, payroll and employee
benefits and occupancy
52
and other operating expenses. These amounts do not include the impact of
Company stores that have been or are expected to be contributed to new unconsolidated
affiliates.
2000 1999 1998
--------- -------- ---------
Stores held for disposal or disposed of in 2000:
Sales $ 408 $ 750 $ 690
Restaurant margin 55 97 92
Stores disposed of in 1999 and 1998:
Sales $ 659 $ 1,825
Restaurant margin 66 192
The margin reported above reflects a
benefit from the suspension of depreciation and amortization of approximately $2 million,
$9 million and $32 million in 2000, 1999 and 1998, respectively. The loss of restaurant
margin from the disposal of these stores was largely mitigated by (a) increased franchise
fees from stores refranchised; (b) lower field general and administrative expenses; and
(c) the estimated interest savings from the reduction of average debt with net after-tax
refranchising proceeds.
Unusual Items
2000 1999 1998
----------- ---------- -----------
U.S. $ 29 $ 13 $ 12
International 8 3 4
Unallocated 167 35 (1)
----------- ---------- -----------
Worldwide $ 204 $ 51 $ 15
=========== ========== ===========
After-tax $ 129 $ 29 $ 3
=========== ========== ===========
Unusual items in 2000 included: (a) $170
million of charges and direct incremental costs related to the AmeriServe Food
Distribution, Inc. ("AmeriServe") bankruptcy reorganization process; (b) an increase in
the estimated costs of settlement of certain wage and hour litigation and associated
defense costs incurred in 2000; (c) costs associated with the formation of an
unconsolidated affiliate in Canada; and (d) the reversal of excess provisions arising
from the resolution of a dispute associated with the disposition of our Non-core
Businesses. See Note 21 for further discussion of the AmeriServe bankruptcy
reorganization process and wage and hour litigation.
Unusual items in 1999 included: (a)
the write-off of approximately $41 million owed to us by AmeriServe at the AmeriServe
bankruptcy petition date; (b) an increase in the estimated costs of settlement of certain
wage and hour litigation and associated defense and other costs incurred in 1999; (c)
favorable adjustments to our 1997 fourth quarter charge; (d) the write-down to estimated
fair market value less cost to sell of our idle Wichita processing facility; (e) costs
associated with the formation of unconsolidated affiliates in Canada and Poland; (f) the
impairment of enterprise-level goodwill in one of our international businesses; and (g)
severance and other exit costs related to strategic decisions to streamline the
infrastructure of our international business.
Unusual items in 1998 included: (a) an
increase in the estimated costs of settlement of certain wage and hour litigation and
associated defense and other costs incurred in 1998; (b) severance and other exit costs
related to strategic decisions to streamline the infrastructure of our international
businesses; (c) favorable adjustments to our 1997 fourth quarter charge related to
anticipated actions that were not taken, primarily severance; (d) the writedown to
estimated fair market value less costs to sell our minority interest in a privately held
Non-core Business, previously carried at cost; and (e) reversals of certain impairment
allowances and
53
lease liabilities relating to better-than-expected proceeds from the sale
of properties and settlement of lease liabilities associated with properties retained
upon the sale of a Non-core Business.
Note 6 - Franchise and License Fees
2000 1999 1998
---------- ----------- ----------
Initial fees, including renewal fees $ 48 $ 71 $ 67
Initial franchise fees included in
refranchising gains (20) (45) (44)
---------- ----------- ----------
28 26 23
Continuing fees 760 697 604
---------- ----------- ----------
$ 788 $ 723 $ 627
========== =========== ==========
Note 7 - Other (Income) Expense
2000 1999 1998
---------- ----------- ----------
Equity income from investments in
unconsolidated affiliates $ (25) $ (19) $ (18)
Foreign exchange net loss (gain) - 3 (6)
---------- ----------- ----------
$ (25) $ (16) $ (24)
========== =========== ==========
Note 8 - Property, Plant and Equipment, net
2000 1999
---------- ----------
Land $ 543 $ 572
Buildings and improvements 2,469 2,553
Capital leases, primarily buildings 82 102
Machinery and equipment 1,522 1,598
---------- ----------
4,616 4,825
Accumulated depreciation and amortization (2,056) (2,279)
Impairment allowances (20) (15)
---------- ----------
$ 2,540 $ 2,531
========== ==========
Note 9 - Intangible Assets, net
2000 1999
---------- ----------
Reacquired franchise rights $ 264 $ 326
Trademarks and other identifiable intangibles 102 124
Goodwill 53 77
---------- ----------
$ 419 $ 527
========== ==========
In determining the above amounts, we
have subtracted accumulated amortization of $415 million for 2000 and $456 million for
1999.
54
Note 10 - Accounts Payable and Other Current Liabilities
2000 1999
---------- -----------
Accounts payable $ 326 $ 375
Accrued compensation and benefits 209 281
Other current liabilities 443 429
---------- -----------
$ 978 $ 1,085
========== ===========
Note 11 -Short-term Borrowings and Long-term Debt
2000 1999
---------- -----------
Short-term Borrowings
Current maturities of long-term debt $ 10 $ 47
International lines of credit 68 45
Other 12 25
---------- -----------
$ 90 $ 117
========== ===========
Long-term Debt
Senior, unsecured Term Loan Facility,
due October 2002 $ 689 $ 774
Senior, unsecured Revolving Credit Facility,
expires October 2002 1,037 955
Senior, Unsecured Notes, due May 2005 (7.45%) 351 352
Senior, Unsecured Notes, due May 2008 (7.65%) 251 251
Capital lease obligations (see Note 12) 74 97
Other, due through 2010 (6% - 11%) 5 9
---------- -----------
2,407 2,438
Less current maturities of long-term debt (10) (47)
---------- -----------
$ 2,397 $ 2,391
========== ===========
Our primary bank credit agreement, as
amended in 2000 and 1999, is comprised of a senior, unsecured Term Loan Facility and a $3
billion senior unsecured Revolving Credit Facility (collectively referred to as the "Credit
Facilities") both of which mature on October 2, 2002. Amounts outstanding under our
Revolving Credit Facility are expected to fluctuate, but Term Loan Facility reductions
may not be reborrowed.
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 Credit Facilities contain
affirmative and negative covenants including, among other things, limitations on certain
additional indebtedness, guarantees of indebtedness, cash dividends, aggregate non-U.S.
investment and certain other transactions, as defined in the agreement. The Credit
Facilities require prepayment of a portion of the proceeds from certain capital market
transactions and refranchising of restaurants.
Interest on amounts borrowed is
payable at least quarterly at variable rates, based principally on the London Interbank
Offered Rate ("LIBOR") plus a variable margin factor. At December 30, 2000 and December
25, 1999, the weighted average interest rate on our variable rate debt was 7.2% and 6.6%,
respectively, which includes the effects of associated interest rate swaps. See Note 13
for a discussion of our use of derivative instruments, our management of credit risk
inherent in derivative instruments and fair value information related to debt and
interest rate swaps.
At December 30, 2000, we had unused
borrowings available under the Revolving Credit Facility of approximately $1.8 billion,
net of outstanding letters of credit of $190 million. Under the terms of the
55
Revolving Credit Facility, we may borrow up to $3.0 billion less
outstanding letters of credit. We pay a facility fee on the Revolving Credit Facility.
The facility fee rate and the aforementioned variable margin factor are determined based
on the more favorable of our leverage ratio or third-party senior debt ratings as defined
in the agreement.
In 1997, we filed a shelf registration
statement with the Securities and Exchange Commission with respect to offerings of up to
$2 billion of senior unsecured debt. In May 1998, we issued $350 million 7.45% Unsecured
Notes due May 15, 2005 and $250 million 7.65% Unsecured Notes due May 15, 2008
(collectively referred to as the "Notes"). Interest commenced on November 15, 1998 and is
payable semi-annually thereafter. The effective interest rate on the 2005 Notes and the
2008 Notes is 7.6% and 7.8%, respectively.
Interest expense on the short-term
borrowings and long-term debt was $190 million, $218 million and $291 million in 2000,
1999 and 1998, respectively. As more fully discussed in Note 21, interest expense of $9
million on incremental borrowings related to the AmeriServe bankruptcy reorganization
process has been included in unusual items.
The annual maturities of long-term debt
through 2005 and thereafter, excluding capital lease obligations, are 2001 - $2.4
million; 2002 - $1.7 billion; 2003 - $1 million; 2004 - $0.2 million; 2005 - $352 million
and $251 million thereafter.
Note 12 -Leases
We have non-cancelable commitments under
both capital and long-term operating leases, primarily for our restaurants. Capital and
operating lease commitments expire at various dates through 2087 and, in many cases,
provide for rent escalations and renewal options. Most leases require us to pay 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
---------- ----------- ---------- ----------
2001 $ 12 $ 194 $ 2 $ 10
2002 12 176 2 9
2003 11 154 1 8
2004 11 137 1 7
2005 10 127 1 6
Thereafter 94 630 9 37
---------- ----------- ---------- ----------
$ 150 $ 1,418 $ 16 $ 77
========== =========== ========== ==========
At year-end 2000, the present value of
minimum payments under capital leases was $74 million.
56
The details of rental expense and income
are set forth below:
2000 1999 1998
---------- ---------- ----------
Rental expense
Minimum $ 253 $ 263 $ 308
Contingent 28 28 25
---------- ---------- ----------
$ 281 $ 291 $ 333
========== ========== ==========
Minimum rental income $ 18 $ 20 $ 18
========== ========== ==========
Contingent rentals are generally based
on sales levels in excess of stipulated amounts contained in the lease agreements.
Note 13 - 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. Our use of derivative instruments has included interest rate
swaps, collars and forward rate agreements. In addition, we utilize on a limited basis,
foreign currency forward contracts and commodity futures and options contracts. Our
interest rate and foreign currency derivative contracts are entered into with financial
institutions while our commodity contracts are generally exchange traded.
We enter into interest rate swaps,
collars, and forward rate agreements with the objective of reducing our exposure to
interest rate risk for a portion of our debt and to lower our overall borrowing costs.
Reset dates and the floating rate indices on the swaps and forward rate agreements match
those of the underlying bank debt. Accordingly, any change in market value associated
with the swaps and forward rate agreements is offset by the opposite market impact on the
related debt. At December 30, 2000 and December 25, 1999, we had outstanding pay-fixed
interest rate swaps with notional amounts of $450 million and $800 million, respectively.
At December 30, 2000 we also had outstanding pay-variable interest rate swaps with
notional amounts of $350 million. 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. We had an aggregate receivable under
the related swaps of $0.9 million and $0.4 million at December 30, 2000 and December 25,
1999, respectively. The swaps mature at various dates through 2005.
During 2000 and 1999, we entered into
interest rate collars to reduce interest rate sensitivity on a portion of our variable
rate bank debt. Interest rate collars effectively lock in a range of interest rates by
establishing a cap and floor. Reset dates and the floating index on the collars match
those of the underlying bank debt. If interest rates remain within the collared cap and
floor, no payments are made. If rates rise above the cap level, we receive a payment. If
rates fall below the floor level, we make a payment. At December 30, 2000 and December
25, 1999, we did not have any outstanding interest rate collars.
We enter into foreign currency exchange
contracts with the objective of reducing our exposure to earnings and cash flow
volatility associated with foreign currency fluctuations. In 2000 and 1999, we entered
into forward contracts to hedge our exposure related to certain foreign currency
receivables and payables. The notional amount and maturity dates of these contracts match
those of the underlying receivables or payables. Accordingly, any change in market value
associated with the forward contracts is offset by the opposite market impact on the
related receivables or payables. At December 30, 2000 and December 25, 1999, we had
outstanding forward contracts related to certain foreign currency receivables and
payables with notional
57
amounts of $13 million and $9 million, respectively. Our net receivable
under the related forward agreements, all of which terminate in 2001, was insignificant
at December 30, 2000 and December 25, 1999.
In 2000, we entered into forward
contracts to reduce our exposure to cash flow volatility associated with certain
forecasted foreign currency denominated royalties. These forward contracts are short-term
in nature, with termination dates matching royalty payments forecasted to be received
within the next twelve months. At December 30, 2000, we had outstanding forward contracts
associated with forecasted royalty cash flows with notional amounts of $3 million. Our
net receivable for these contracts as of December 30, 2000 was insignificant.
Our credit risk from the interest rate
swap, collar and forward rate agreements and foreign exchange contracts is dependent both
on the movement in interest and currency rates and possibility of non-payment by
counterparties. We mitigate credit risk by entering into these agreements with
high-quality counterparties, netting swap and forward rate payments within contracts and
limiting payments associated with the collars to differences outside the collared range.
Open commodity future and option
contracts and deferred gains and losses at year-end 2000 and 1999, as well as gains and
losses recognized as part of cost of sales in 2000, 1999 and 1998, were not significant.
Concentrations of Credit Risk
Accounts receivable consists primarily
of amounts due from franchisees and licensees. Concentrations of credit risk with respect
to accounts receivable generally are limited due to a large number of franchisees and
licensees. At December 30, 2000, accounts receivable included amounts due from
franchisees related to the temporary direct purchase program, which is more fully
described in Note 21.
Fair Value
Excluding the financial instruments
included in the table below, the carrying amounts of our other financial instruments
approximate fair value.
The carrying amounts and fair values of
TRICON's financial instruments are as follows:
2000 1999
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Debt
Short-term borrowings and long-term debt,
excluding capital leases $ 2,413 $ 2,393 $ 2,411 $ 2,377
Debt-related derivative instruments
Open contracts in an asset position - (24) - (3)
---------- ---------- ---------- ----------
Debt, excluding capital leases $ 2,413 $ 2,369 $ 2,411 $ 2,374
========== ========== ========== ==========
Guarantees and letters of credit $ - $ 51 $ - $ 27
========== ========== ========== ==========
We estimated the fair value of debt,
debt-related derivative instruments, guarantees and letters of credit using market quotes
and calculations based on market rates. See Note 2 for recently issued accounting
pronouncements relating to derivative financial instruments.
58
Note 14 - Pension and Postretirement Medical Benefits
Pension Benefits
We sponsor noncontributory defined
benefit pension plans covering substantially all full-time U.S. salaried employees,
certain hourly employees and certain international employees. Benefits are based on years
of service and earnings or stated amounts for each year of service.
Postretirement Medical Benefits
Our postretirement plans provide health
care benefits, principally to U.S. retirees and their dependents. These plans include
retiree cost sharing provisions. Employees are eligible for benefits if they meet age and
service requirements and qualify for retirement benefits.
The components of net periodic benefit
cost are set forth below:
Pension Benefits
------------------------------------
2000 1999 1998
----------- ----------- ----------
Service cost $ 19 $ 20 $ 21
Interest cost 24 22 20
Expected return on plan assets (25) (24) (21)
Amortization of prior service cost 1 1 -
Amortization of transition (asset) obligation - - (2)
Recognized actuarial loss - - 2
----------- ----------- ----------
Net periodic benefit cost $ 19 $ 19 $ 20
=========== =========== ==========
Additional (gain) loss recognized due to:
Curtailment $ (4) $ (4) $ -
Special termination benefits - - 3
Postretirement Medical Benefits
--------------------------------------
2000 1999 1998
----------- ----------- ----------
Service cost $ 2 $ 2 $ 2
Interest cost 3 3 3
Amortization of prior service cost (1) (2) (2)
----------- ----------- ----------
Net periodic benefit cost $ 4 $ 3 $ 3
=========== =========== ==========
Additional (gain) loss recognized due to:
Curtailment $ (1) $ (1) $ (3)
Special termination benefits - - 1
Prior service costs are amortized on a
straight-line basis over the average remaining service period of employees expected to
receive benefits. Curtailment gains have generally been recognized in facility actions
net gain.
59
The change in benefit obligation and
plan assets and reconciliation of funded status is as follows:
Postretirement
Pension Benefits Medical Benefits
2000 1999 2000 1999
----------- ----------- ---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 315 $ 315 $ 45 $ 38
Service cost 19 20 2 2
Interest cost 24 22 3 3
Plan amendments - 6 - -
Curtailment (gain) (5) (5) (2) (1)
Benefits and expenses paid (19) (24) (3) (2)
Actuarial loss (gain) 17 (19) 3 5
----------- ----------- ---------- ----------
Benefit obligation at end of year $ 351 $ 315 $ 48 $ 45
----------- ----------- ---------- ----------
Change in plan assets
Fair value of plan assets at beginning
of year $ 290 $ 259
Actual return on plan assets 39 51
Employer contributions 4 5
Benefits paid (19) (23)
Administrative expenses (1) (2)
----------- -----------
Fair value of plan assets at end of year $ 313 $ 290
----------- -----------
Reconciliation of funded status
Funded status $ (38) $ (25) $ (48) $ (45)
Unrecognized actuarial (gain) loss (30) (35) 5 3
Unrecognized prior service costs 5 7 (1) (2)
----------- ----------- ---------- ----------
Accrued benefit liability at year-end $ (63) $ (53) $ (44) $ (44)
=========== =========== ========== ==========
Other comprehensive income attributable
to change in additional minimum liability
recognition $ - $ (3)
Additional year-end information for
pension plans with benefit obligations in
excess of plan assets
Benefit obligation $ 42 $ 31
Fair value of plan assets - -
Additional year-end information for pension
plans with accumulated benefit obligations in
excess of plan assets
Benefit obligation $ 42 $ 31
Accumulated benefit obligation 21 12
Fair value of plan assets - -
60
The assumptions used to compute the information above are set forth
below:
Pension Benefits Postretirement Medical Benefits
------------------------- -------------------------------
2000 1999 1998 2000 1999 1998
------ ------- ------ ------ ------ -------
Discount rate 8.0% 7.8% 6.8% 8.3% 7.6% 7.0%
Long-term rate of return on plan
assets 10.0% 10.0% 10.0% - - -
Rate of compensation increase 5.0% 5.5% 4.5% 5.0% 5.5% 4.5%
We have assumed the annual increase in
cost of postretirement medical benefits was 8.0% in 2000 and will be 7.5% in 2001. We are
assuming the rate will decrease to an ultimate rate of 5.5% by 2007 and remain at that
level thereafter. There is a cap on our medical liability for certain retirees, which is
expected to be reached between the years 2001-2004; at that point our cost for a retiree
will not increase.
Assumed health care cost trend rates
have a significant effect on the amounts reported for our post-retirement health care
plans. A one percent increase in the assumed health care cost trend rates would have
increased our accumulated postretirement benefit obligation at December 30, 2000 by $2.7
million. The impact on our 2000 benefit expense would not have been significant.
Note 15 - Employee Stock-Based Compensation
At year-end 2000, we had four stock
option plans in effect: the TRICON Global Restaurants, Inc. Long-Term Incentive Plan ("1999
LTIP"), the 1997 Long-Term Incentive Plan ("1997 LTIP"), the TRICON Global Restaurants,
Inc. Restaurant General Manager Stock Option Plan ("YUMBUCKS") and the TRICON Global
Restaurants, Inc. SharePower Plan ("SharePower").
We may grant options to purchase up to
7.6 million and 22.5 million shares of stock under the 1999 LTIP and 1997 LTIP,
respectively, at a price equal to or greater than the average market price of the stock
on the date of grant. New option grants can have varying vesting provisions and exercise
periods. Previously granted options vest in periods ranging from immediate to 2006 and
expire ten to fifteen years after grant. Potential awards to employees and non-employee
directors under the 1999 LTIP include stock options, incentive stock options, stock
appreciation rights, restricted stock, stock units, restricted stock units, performance
shares and performance units. Potential awards to employees and non-employee directors
under the 1997 LTIP include stock options, incentive stock options, stock appreciation
rights, restricted stock and performance restricted stock units. We have issued only
stock options and performance restricted stock units under the 1997 LTIP and have issued
only stock options under the 1999 LTIP.
We may grant options to purchase up to
7.5 million shares of stock under YUMBUCKS at a price equal to or greater than the
average market price of the stock on the date of grant. YUMBUCKS options granted have a
four year vesting period and expire ten years after grant. We do not anticipate that any
further SharePower grants will be made although options previously granted could be
outstanding through 2006.
At the Spin-off Date, we converted
certain of the unvested options to purchase PepsiCo stock that were held by our employees
to TRICON stock options under either the 1997 LTIP or SharePower. We converted the
options 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, our converted options vest in periods ranging from one to
ten years and expire ten to fifteen years after grant.
61
The following table reflects pro forma
net income and earnings per common share had we elected to adopt the fair value approach
of SFAS 123.
2000 1999 1998
---------- ---------- -----------
Net Income
As reported $ 413 $ 627 $ 445
Pro forma 379 597 425
Basic Earnings per Common Share
As reported $ 2.81 $ 4.09 $ 2.92
Pro forma 2.58 3.90 2.79
Diluted Earnings per Common Share
As reported $ 2.77 $ 3.92 $ 2.84
Pro forma 2.55 3.73 2.72
The effects of applying SFAS 123 in the
pro forma disclosures are not likely to be representative of the effects on pro forma net
income for future years because variables such as the number of option grants, exercises
and stock price volatility included in these disclosures may not be indicative of future
activity.
We estimated the fair value of each
option grant made during 2000, 1999 and 1998 as of the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions:
2000 1999 1998
----- ------ ------
Risk-free interest rate 6.4% 4.9% 5.5%
Expected life (years) 6.0 6.0 6.0
Expected volatility 32.6% 29.7% 28.8%
Expected dividend yield 0.0% 0.0% 0.0%
A summary of the status of all options
granted to employees and non-employee directors as of December 30, 2000, December 25,
1999 and December 26, 1998, and changes during the years then ended is presented below
(tabular options in thousands):
December 30, 2000 December 25, 1999 December 26, 1998
--------------------- ---------------------- ----------------------
Wtd. Avg. Wtd. Avg. Wt. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- ---------- ---------- ---------
Outstanding at beginning of year 24,166 $ 31.18 22,699 $ 26.16 15,245 $ 23.03
Granted at price equal to average
market price 7,860 30.33 5,709 49.07 12,084 29.37
Exercised (1,829) 21.84 (1,273) 19.51 (962) 18.93
Forfeited (3,518) 33.99 (2,969) 31.94 (3,668) 25.60
-------- --------- --------- ---------- ---------- ---------
Outstanding at end of year 26,679 $ 31.20 24,166 $ 31.18 22,699 $ 26.16
========= ========= ========= ========== ========== =========
Exercisable at end of year 7,622 $ 24.59 3,665 $ 22.44 3,006 $ 21.16
========= ========= ========= ========== ========== =========
Weighted average fair value
of options at date of grant $ 13.48 $ 19.20 $ 11.65
========= ========= ==========
62
The following table summarizes
information about stock options outstanding and exercisable at December 30, 2000 (tabular
options in thousands):
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Contractual Exercise Exericse
Exercise Prices Options Life Price Options Price
- ----------------- -------- ----------- --------- -------- ---------
$0.01 - 17.80 1,395 3.91 $ 15.22 1,394 $ 15.22
22.02 - 29.84 9,692 6.23 25.74 4,659 24.38
30.28 - 34.47 10,799 8.44 30.97 1,292 31.47
35.13 - 46.97 4,307 8.16 44.53 272 42.71
72.75 486 8.26 72.75 5 72.75
-------- --------
26,679 7,622
======== ========
In November 1997, we granted two awards
of performance restricted stock units of TRICON's Common Stock to our Chief Executive
Officer ("CEO"). The awards were made under the 1997 LTIP and may be paid in Common Stock
or cash at the discretion of the Compensation Committee of the Board of Directors.
Payments of the awards of $2.7 million and $3.6 million are contingent upon the CEO's
continued employment through January 25, 2001 and 2006, respectively, and our attainment
of certain pre-established earnings thresholds, as defined. We expense these awards over
the performance periods stipulated above. The annual amount included in earnings for
2000, 1999 and 1998 was $1.3 million.
During 2000 and 1999, modifications were
made to certain 1997 LTIP and Sharepower options held by terminated employees. These
modifications resulted in additional compensation expense of an insignificant amount in
2000 and $5.0 million in 1999 with a corresponding increase in our Common Stock account.
Note 16 -Other Compensation and Benefit Programs
We sponsor two deferred compensation
benefit programs, the Executive Income Deferral Program and the Restaurant Deferred
Compensation Plan (the "EID Plan" and the "RDC Plan," respectively) for eligible employees
and non-employee directors. The EID Plan allows participants to defer receipt of all or a
portion of their annual salary and incentive compensation. The RDC Plan allows
participants to defer a portion of their annual salary. As defined by the benefit
programs, we credit the amounts deferred with earnings based on certain investment
options selected by the participants.
The EID Plan includes an investment
option that allows participants to defer certain incentive compensation to purchase
phantom shares of our Common Stock at a 25% discount from the average market price at the
date of deferral (the "Discount Stock Account"). Participants bear the risk of forfeiture
of both the discount and any amounts deferred if they voluntarily separate from
employment during the two year vesting period. We expense the intrinsic value of the
discount over the vesting period.
We phased in certain program changes to
the EID Plan during 1999 and 2000. These changes included limiting investment options,
primarily to phantom shares of our Common Stock, and requiring the distribution of
investments in the TRICON Common Stock investment options to be paid in shares of our
Common Stock. Due to these changes, in 1998 we agreed to credit a one time premium to
participant accounts on January 1, 2000. The premium totaled approximately $3 million and
was equal to 10% of the participants' account balances as of December 31, 1999, excluding
(a) investments in the Discount Stock Account and (b) deferrals made in 1999.
63
Prior to January 1, 1999, we recognized
as compensation expense all investment appreciation or depreciation within the EID Plan.
Subsequent to January 1, 1999, we no longer recognize as compensation expense the
appreciation or depreciation, if any, attributable to investments in the Discount Stock
Account since these investments can only be settled in shares of our Common Stock. For
1998, we expensed $9 million related to appreciation attributable to investments in the
Discount Stock Account. We also reduced our liabilities by $21 million related to
investments in the Discount Stock Account and increased the Common Stock Account by the
same amount at January 1, 1999.
Subsequent to January 1, 2000, we no
longer recognized as compensation expense the appreciation or depreciation, if any,
attributable to investments in the phantom shares of our Common Stock, since these
investments can only be settled in shares of our Common Stock. For 1999, we recorded a
benefit of $3 million related to depreciation of investments in phantom shares of our
Common Stock impacted by the January 2000 plan amendment. We also reduced our liabilities
by $12 million related to investments in the phantom shares of our Common Stock and
increased the Common Stock Account by the same amount at January 1, 2000.
Our obligations under the EID Plan as of
the end of 2000 and 1999 were $27 million and $50 million, respectively. We recognized
compensation expense of $6 million in both 2000 and 1999 and $20 million in 1998 for the
EID Plan.
Investment options in the RDC Plan
consist of phantom shares of various mutual funds and TRICON Common Stock. During 1998,
RDC participants also became eligible to purchase phantom shares of our Common Stock
under YUMSOP as defined below. We recognize compensation expense for the appreciation or
depreciation, if any, attributable to all investments in the RDC Plan as well as for our
matching contribution. Our obligations under the RDC program as of the end of 2000 and
1999 were $10 million and $6 million, respectively. We recognized annual compensation
expense of $1 million in 2000, 1999 and 1998 for the RDC Plan.
We sponsor a contributory plan to
provide retirement benefits under the provisions of Section 401(k) of the Internal
Revenue Code ("401(k) Plan") for eligible full-time U.S. salaried and certain hourly
employees. Participants may elect to contribute up to 15% of their eligible compensation
on a pre-tax basis. We are not required to make contributions to the Plan. In 1998, a
Stock Ownership Program ("YUMSOP") was added to the TRICON Common Stock investment
option. Under YUMSOP, we make a partial discretionary matching contribution equal to a
predetermined percentage of each participant's contribution to the TRICON Common Stock
Fund. We determine our percentage match at the beginning of each year based on the
immediate prior year performance of our Concepts. We recognized as compensation expense
our total matching contribution of $4 million in both 2000 and 1999 and $1 million in
1998.
Note 17 - Shareholders' Rights Plan
On July 21, 1998, our Board of Directors
declared a dividend distribution of one right for each share of Common Stock outstanding
as of August 3, 1998 (the "Record Date"). Each right initially entitles the registered
holder to purchase a unit consisting of one one-thousandth of a share (a "Unit") of
Series A Junior Participating Preferred Stock, without par value, at a purchase price of
$130 per Unit, subject to adjustment. The rights, which do not have voting rights, will
become exercisable for our Common Stock ten business days following a public announcement
that a person or group has acquired, or has commenced or intends to commence a tender
offer for, 15% or more, or 20% or more if such person or group owned 10% or more on the
adoption date of this plan, of our Common Stock. In the event the rights become
exercisable for Common Stock, each right will entitle its holder (other than the
Acquiring Person as defined in the Agreement) to purchase, at the right's then-current
exercise price, TRICON Common Stock having a value of twice the exercise price of the
right. In the event the rights become exercisable for Common Stock and thereafter we are
64
acquired in a merger or other business combination, each right will
entitle its holder to purchase, at the right's then-current exercise price, common stock
of the acquiring company having a value of twice the exercise price of the right.
We can redeem the rights in their
entirety, prior to becoming exercisable, at $0.01 per right under certain specified
conditions. The rights expire on July 21, 2008, unless we extend that date or we have
earlier redeemed or exchanged the rights as provided in the Agreement.
This description of the rights is
qualified in its entirety by reference to the Rights Agreement between TRICON and
BankBoston, N.A., as Rights Agent, dated as of July 21, 1998 (including the exhibits
thereto).
Note 18 - Share Repurchase Program
In 1999, our Board of Directors
authorized the repurchase of up to $350 million of our outstanding Common Stock,
excluding applicable transaction fees. This Share Repurchase Program was completed in
2000. During 2000, we repurchased over 6.4 million shares for approximately $216 million
at an average price per share of $34. During 1999, we repurchased over 3.3 million shares
for approximately $134 million at an average price of $40 per share. In total, we
repurchased approximately 9.8 million shares at an average price of $36.
On February 14, 2001, our Board of
Directors authorized a new Share Repurchase Program. The new Share Repurchase Program
authorizes us to repurchase, over a two-year period, up to $300 million of our
outstanding Common Stock, excluding applicable transaction fees. Based on market
conditions and other factors, repurchases may be made from time to time in the open
market or through privately negotiated transactions, at the discretion of the Company.
Note 19 - Income Taxes
The details of our income tax provision
(benefit) are set forth below:
2000 1999 1998
---------- ---------- ----------
Current: Federal $ 215 $ 342 $ 231
Foreign 66 46 55
State 41 39 22
---------- ---------- ----------
322 427 308
---------- ---------- ----------
Deferred: Federal (11) (18) (2)
Foreign (9) 17 10
State (31) (15) (5)
---------- ---------- ----------
(51) (16) 3
---------- ---------- ----------
$ 271 $ 411 $ 311
========== ========== ==========
Taxes payable were reduced by $5
million, $14 million, and $3 million in 2000, 1999 and 1998, respectively, as a result of
stock option exercises. In addition, goodwill and other intangibles were reduced by $2
million and $22 million in 2000 and 1999, respectively, as a result of the settlement of
a disputed claim with the Internal Revenue Service relating to the deductibility of
reacquired franchise rights and other intangibles. These reductions were offset by
reductions in deferred and accrued taxes payable.
In 2000, valuation allowances that
relate to deferred tax assets in certain states and foreign countries were reduced by $35
million ($23 million, net of federal tax) and $6 million, respectively, as a result of
making a
65
determination that it is more likely than not that these assets will be
utilized in the current and future years. In 1999, valuation allowances that related to
deferred tax assets in certain foreign countries were reduced by $13 million as a result
of establishing a pattern of profitability.
U.S. and foreign income before income
taxes are set forth below:
2000 1999 1998
---------- ---------- ----------
U.S. $ 518 $ 876 $ 617
Foreign 166 162 139
---------- ---------- ----------
$ 684 $ 1,038 $ 756
========== ========== ==========
The reconciliation of income taxes
calculated at the U.S. federal tax statutory rate to our effective tax rate is set forth
below:
2000 1999 1998
------ ------- -------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit 3.7 3.0 2.8
Foreign and U.S. tax effects attributable to
foreign operations (0.4) 1.7 4.4
Effect of unusual items (0.5) (0.5) (0.6)
Adjustments relating to prior years 1.6 0.4 (1.1)
Other, net 0.2 (0.1) 0.6
------ ------- -------
Effective income tax rate 39.6% 39.5% 41.1%
====== ======= =======
The details of 2000 and 1999 deferred
tax liabilities (assets) are set forth below:
2000 1999
---------- ----------
Intangible assets and property, plant and equipment $ 184 $ 170
Other 35 25
---------- ----------
Gross deferred tax liabilities $ 219 $ 195
========== ==========
Net operating loss and tax credit carryforwards $ (137) $ (140)
Employee benefits (82) (91)
Self-insured casualty claims (55) (38)
Stores held for disposal - (12)
Various liabilities and other (219) (178)
---------- ----------
Gross deferred tax assets (493) (459)
Deferred tax assets valuation allowances 132 173
---------- ----------
Net deferred tax assets (361) (286)
---------- ----------
Net deferred tax (assets) liabilities $ (142) $ (91)
========== ==========
Reported in Consolidated Balance Sheets as:
Deferred income tax assets $ (75) $ (59)
Other assets (78) (51)
Accounts payable and other current liabilities 1 12
Deferred income taxes 10 7
---------- ----------
$ (142) $ (91)
========== ==========
66
Our valuation allowance related to
deferred tax assets decreased by $41 million in 2000 primarily due to the previously
discussed change in circumstances related to deferred tax assets in certain states and
foreign countries.
A determination of the unrecognized
deferred tax liability for temporary differences related to our investments in foreign
subsidiaries and investments in foreign unconsolidated affiliates that are essentially
permanent in duration is not practicable.
We have available net operating loss and
tax credit carryforwards totaling $856 million at December 30, 2000 to reduce future tax
of TRICON and certain subsidiaries. The carryforwards are related to a number of foreign
and state jurisdictions. Of these carryforwards, $13 million expire in 2001 and $760
million expire at various times between 2002 and 2020. The remaining $83 million of
carryforwards do not expire.
Note 20 -Reportable Operating Segments
We are engaged principally in
developing, operating, franchising and licensing the worldwide KFC, Pizza Hut and Taco
Bell concepts. KFC, Pizza Hut and Taco Bell operate throughout the U.S. and in 84, 87 and
13 countries and territories outside the U.S., respectively. Our five largest
international markets based on ongoing operating profit in 2000 are Australia, China,
Japan, Korea and the United Kingdom. At December 30, 2000, we had 10 investments in
unconsolidated affiliates outside the U.S. which operate KFC and/or Pizza Hut
restaurants, the most significant of which are operating in Canada, Japan and the United
Kingdom.
We identify our operating segments based
on management responsibility within the U.S. and International. For purposes of applying
SFAS No. 131 "Disclosure About Segments of An Enterprise and Related Information" we
consider our three U.S. Concept operating segments to be similar and therefore have
aggregated them into a single reportable operating segment. Other than the U.S., no
individual country represented 10% or more of our total revenues, profits or assets.
Revenues
-------------------------------------
2000 1999 1998
---------- ---------- ----------
United States $ 5,062 $ 5,748 $ 6,439
International 2,031 2,074 2,040
---------- ---------- ----------
$ 7,093 $ 7,822 $ 8,479
========== ========== ==========
Operating Profit; Interest Expense, Net;
and Income Before Income Taxes
-------------------------------------
2000 1999 1998
---------- ----------- ----------
United States $ 742 $ 828 $ 740
International(a) 309 265 191
Foreign exchange (loss) gain - (3) 6
Unallocated and corporate expenses (163) (180) (169)
Facility actions net gain (b) 176 381 275
Unusual items(b) (204) (51) (15)
---------- ----------- ----------
Total Operating Profit 860 1,240 1,028
Interest expense, net 176 202 272
---------- ----------- ----------
Income before income taxes $ 684 $ 1,038 $ 756
========== =========== ==========
67
Depreciation and Amortization
-------------------------------------
2000 1999 1998
---------- ----------- ----------
United States $ 231 $ 266 $ 300
International 110 110 104
Corporate 13 10 13
---------- ----------- ----------
$ 354 $ 386 $ 417
========== =========== ==========
Capital Spending
-------------------------------------
2000 1999 1998
---------- ----------- ----------
United States $ 370 $ 315 $ 305
International 192 139 150
Corporate 10 16 5
---------- ----------- ----------
$ 572 $ 470 $ 460
========== =========== ==========
Identifiable Assets
------------------------
2000 1999
---------- -----------
United States $ 2,400 $ 2,444
International(c) 1,501 1,367
Corporate(d) 248 150
---------- -----------
$ 4,149 $ 3,961
========== ===========
Long-Lived Assets(e)
------------------------
2000 1999
---------- -----------
United States $ 2,101 $ 2,143
International 828 874
Corporate 30 41
---------- -----------
$ 2,959 $ 3,058
========== ===========
- Includes equity income of unconsolidated affiliates of $25 million, $22 million and $18 million in 2000, 1999
and 1998, respectively.
- See Note 5 for a discussion by reportable operating segment of facility actions net gain and unusual items.
- Includes investment in unconsolidated affiliates of $257 million and $170 million for 2000 and 1999,
respectively.
- Primarily includes accounts receivable arising from the AmeriServe bankruptcy reorganization process as further
discussed in Note 21, PP&E related to our office facilities and restricted cash.
- Includes PP&E, net and Intangible Assets, net.
See Note 5 for additional operating
segment disclosures related to impairment and the carrying amount of assets held for
disposal.
68
Note 21 - Commitments and Contingencies
Impact of AmeriServe Bankruptcy Reorganization Process
Overview
We and our franchisees and licensees are
dependent on frequent replenishment of food ingredients and paper supplies required by
our restaurants. We and a large number of our franchisees and licensees operated under
multi-year contracts, which have now been assumed by McLane Company, Inc. ("McLane"),
which required the use of AmeriServe to purchase and make deliveries of most of these
supplies. AmeriServe filed for protection under Chapter 11 of the U.S. Bankruptcy Code on
January 31, 2000. A plan of reorganization for AmeriServe (the "POR") was approved by the
U.S. Bankruptcy Court on November 28, 2000.
During the AmeriServe bankruptcy
reorganization process, we took a number of actions to ensure continued supply to our
system. These actions, which are described below, have resulted in a total net expense of
$170 million in 2000, which has been recorded as unusual items. Based upon the actions
contemplated by the POR which have been completed to date and other currently available
information, we believe the ultimate cost of the AmeriServe bankruptcy reorganization
process will not materially exceed the amounts already provided. A summary of the expense
is as follows:
DIP Facility $ 70
Gross Settlement Amount 246
Less: Dismissed Payables (101)
Residual Assets (86)
-------
Net Settlement Amount 59
TDPP and Other 41
Bankruptcy Causes of Action -
--------
$ 170
========
Each of the amounts in this table is
more fully described below.
DIP Facility
On February 2, 2000, AmeriServe was
provided with a $150 million interim debtor-in-possession ("DIP") revolving credit
facility (the "DIP Facility"). Through a series of transactions, our effective net
commitment under the DIP Facility was $70 million. At November 30, 2000, the total DIP
commitment had essentially been funded.
Replacement Lien
During the bankruptcy reorganization
process, we consented to a cash collateral order by the U.S. Bankruptcy Court under which
the pre-petition secured lenders of AmeriServe agreed to allow certain AmeriServe
pre-petition collateral (principally inventory and receivables) to be used in the normal
course of business. In exchange, we agreed to grant a lien ("Replacement Lien") to these
lenders on inventory that we purchased and the receivables resulting from the sale of
this inventory under the Temporary Direct Purchase Program described below.
69
AmeriServe POR
The POR provided for the sale of the
AmeriServe U.S. distribution business to McLane effective on November 30, 2000. In
connection with this sale, we have agreed to (a) an extension of the sales and
distribution agreement for U.S. Company-owned stores (the "Distribution Agreement")
through October 31, 2010; (b) a five-percent increase in distribution fees under the
Distribution Agreement; and (c) a reduction in our payment terms for supplies from 30 to
15 days. Beginning on November 30, 2000 (the closing date of the sale), McLane assumed
all supply and distribution responsibilities under our Distribution Agreement, as well as
under the distribution agreements of most of our franchisees and licensees previously
serviced by AmeriServe.
Under the terms of the POR, TRICON
provided approximately $246 million to AmeriServe (the "Gross Settlement Amount") to
facilitate a global settlement with holders of allowed secured and administrative
priority claims in the bankruptcy. In exchange, TRICON will receive the proceeds from the
liquidation of AmeriServe's remaining inventory, accounts receivable and certain other
assets (the "Residual Assets"). We have currently estimated these proceeds to be
approximately $86 million and have recorded a receivable from the AmeriServe bankruptcy
estate in this amount. We expect that these proceeds will be primarily realized over the
next twelve months. Through March 9, 2001, we have collected approximately $29 million.
The POR also released us from any
further obligations or claims under the Replacement Lien and provided for the dismissal
of the legal action filed by AmeriServe against TRICON seeking payment of the $101
million in pre-petition trade accounts payable to AmeriServe (the "Dismissed Payables").
As previously disclosed, we had accrued for, but withheld payment of the Dismissed
Payables.
In addition, the POR grants TRICON a
priority right to proceeds (up to a maximum of $220 million) from certain litigation
claims and causes of action held by the AmeriServe bankruptcy estate, including certain
avoidance and preference actions (collectively, the "Bankruptcy Causes of Action"). We
expect that any such proceeds, the potential amounts of which are not yet reasonably
estimable, will be primarily realized over the next twelve to twenty-four months. These
recoveries, if any, will be recorded as unusual items as they are realized.
Temporary Direct Purchase Program
During the bankruptcy reorganization
process, to help ensure that our supply chain remained open, we purchased supplies
directly from suppliers for use in our restaurants, as well as for resale to our
franchisees and licensees who previously purchased supplies from AmeriServe (the "Temporary
Direct Purchase Program" or "TDPP"). AmeriServe agreed, for the same fee in effect prior
to the bankruptcy filing, to continue to be responsible for distributing supplies to us
and our participating franchisee and licensee restaurants. Operations under the TDPP
ceased on November 30, 2000, the date on which McLane purchased AmeriServe's U.S.
distribution business.
In connection with the TDPP, we
incurred approximately $41 million of costs, principally related to allowances for
estimated uncollectible receivables from our franchisees and licensees and the
incremental interest cost arising from the additional debt required to finance the
inventory purchases and the receivables arising from supply sales to our franchisees and
licensees. These costs also included inventory obsolescence and certain general and
administrative expenses. Under SFAS No. 45, "Accounting for Franchise Fee Revenue," the
results of these agency distribution activities are reported on a net basis in the
Consolidated Statement of Income.
70
At December 30, 2000, our remaining
receivables from franchisees and licensees for sales of supplies under the TDPP were
approximately $52 million, net of related allowances for doubtful accounts. The Company
intends to vigorously pursue collection of these receivables. Through March 9, 2001, we
have collected approximately $43 million. On November 30, 2000, we sold our remaining
inventories to McLane at an amount approximating book value. We have no remaining
payables to suppliers under the TDPP.
Other
We have incurred and will continue to
incur other incremental costs (principally professional fees) as a result of the
AmeriServe bankruptcy reorganization process which are being charged as incurred to
unusual items. We expect that these costs, though substantially reduced from pre-POR
levels, will continue until the affairs of the estate can be substantially concluded;
however, we do not expect that these costs, net of any recoveries from the Bankruptcy
Causes of Action, will be material to our annual results of operations, financial
condition or cash flows.
Other Commitments and Contingencies
Contingent Liabilities
We were directly or indirectly
contingently liable in the amounts of $401 million and $386 million at year-end 2000 and
1999, respectively, for certain lease assignments and guarantees. At December 30, 2000,
$333 million represented contingent liabilities to lessors as a result of assigning our
interest in and obligations under real estate leases as a condition to the refranchising
of Company restaurants and the contribution of certain Company restaurants to a new
venture in Canada. The $333 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 $513 million. The remaining amounts of the contingent liabilities primarily
relates to our guarantees to support financial arrangements of certain unconsolidated
affiliates and franchisees. The contingent liabilities related to financial arrangements
of franchisees include partial guarantees of franchisee loan pools originated primarily
in connection with the Company's refranchising programs. In support of these guarantees,
we have posted $22 million of letters of credit and $10 million in cash collateral. The
cash collateral balances are included in Other Assets. Also, TRICON provides a standby
letter of credit under which TRICON could potentially be required to fund a portion (up
to $25 million) of one of the franchisee loan pools discussed above. Any such funding
under the standby letter of credit would then be fully secured by franchisee loan
collateral. We have provided for our estimated probable exposures under these contingent
liabilities largely through charges to refranchising gains (losses).
Casualty Loss Programs and Estimates
We are currently self-insured for a
portion of our current and prior years' casualty losses, property losses and certain other
insurable risks. To mitigate the cost of our exposures for certain casualty losses, we
make annual decisions to either retain the risks of loss up to certain maximum per
occurrence or aggregate loss limits negotiated with our insurance carriers or to fully
insure those risks. Since the Spin-off, we have elected to retain the risks subject to
insured limitations. In addition, we also purchased insurance in 1998 to limit the cost
for certain of our retained risks for the years 1994 to 1996.
Effective August 16, 1999, we made
changes to our U.S. and portions of our International property and casualty loss
programs. For fiscal year 2000 and the period from August 16, 1999 through fiscal year
end, 1999, we bundled our risks for casualty losses, property losses and various other
insurable risks into one risk pool with a single maximum loss limit. Certain losses in
excess of the single maximum loss limit are covered
71
under reinsurance agreements. Since all of these risks have been pooled
and there are no per occurrence limits for individual claims, it is possible that we may
experience increased volatility in property and casualty losses on a quarter to quarter
basis. This would occur if an individual large loss is incurred either early in a program
year or when the latest actuarial projection of losses for a program year is
significantly below our aggregate loss retention. A large loss is defined as a loss in
excess of $2 million which was our predominant per occurrence casualty loss limit under
our previous insurance program.
We have accounted for our retained
liabilities for casualty losses, including reported and incurred but not reported claims,
based on information provided by our independent actuary. Effective August 16, 1999,
property losses are also included in our actuary's valuation. Prior to that date,
property losses were based on our internal estimates.
Actuarial valuations are performed and
resulting adjustments to current and prior years' self-insured casualty losses, property
losses and other insurable risks, are made in the second and fourth quarters of each
fiscal year. The adjustments recorded to our casualty loss reserves in 2000 were
insignificant. We recorded favorable adjustments of $30 million in 1999 and $23 million
in 1998. The 1999 and 1998 adjustments resulted primarily from improved loss trends
related to 1998 casualty losses at all three of our U.S. Concepts. In addition, the
favorable insurance adjustments in 1998 included the benefit of the insurance transaction
to limit the cost for certain of our retained risk for the years 1994 to 1996.
We will continue to make adjustments
both based on our actuary's periodic valuations as well as whenever there are significant
changes in the expected costs of settling large claims that have occurred since the last
actuarial valuation was performed. Due to the inherent volatility of our actuarially
determined casualty loss estimates, it is reasonably possible that we could experience
changes in estimated losses which could be material to our growth in net income in 2001.
We believe that, since we record our reserves for casualty losses at a 75% confidence
level, we have mitigated the potential negative impact of adverse development and/or
volatility.
Change of Control Severance Agreements
In September 2000, the Compensation
Committee of the Board of Directors approved renewing severance agreements with certain
key executives (the "Agreements") that were set to expire on December 31, 2000. These
Agreements are triggered by a termination, under certain conditions, of the executive's
employment following a change in control of the Company, as defined in the Agreements. If
triggered, the affected executives would generally receive twice the amount of both their
annual base salary and their annual incentive in a lump sum, outplacement services and a
tax gross-up for any excise taxes. These Agreements have a three-year term and
automatically renew each January 1 for another three-year term unless the Company elects
not to renew the Agreements. Since the timing of any payments under these Agreements
cannot be anticipated, the amounts are not estimable. However, these payments, if made,
could be substantial. In the event of a change of control, rabbi trusts would be
established and used to provide payouts under existing deferred and incentive
compensation plans.
Wage and Hour Litigation
We are subject to various claims and
contingencies related to lawsuits, taxes, environmental and other matters arising out of
the normal course of business. Like certain other large retail employers, Pizza Hut and
Taco Bell have been faced in certain states with allegations of purported class-wide wage
and hour violations.
On May 11, 1998, a purported class
action lawsuit against Pizza Hut, Inc., and one of its franchisees, PacPizza, LLC,
entitled Aguardo, et al. v. Pizza Hut, Inc., et al., ("Aguardo"), was filed in the
Superior Court of the State of California of the County of San Francisco. The lawsuit was
filed by three former Pizza Hut
72
restaurant general managers purporting to represent approximately 1,300
current and former California restaurant general managers of Pizza Hut and PacPizza, LLC.
The lawsuit alleges violations of state wage and hour laws involving unpaid overtime
wages and vacation pay and seeks an unspecified amount in damages. On January 12, 2000,
the Court certified a class of approximately 1,300 current and former restaurant general
managers. The Court amended the class on June 1, 2000 to include approximately 150
additional current and former restaurant general managers. This lawsuit is in the early
discovery phase, and no trial date has been set.
On August 29, 1997, a class action
lawsuit against Taco Bell Corp., entitled Bravo, et al. v. Taco Bell Corp. ("Bravo"), was
filed in the Circuit Court of the State of Oregon of the County of Multnomah. The lawsuit
was filed by two former Taco Bell shift managers purporting to represent approximately
17,000 current and former hourly employees statewide. The lawsuit alleges violations of
state wage and hour laws, principally involving unpaid wages including overtime, and rest
and meal period violations, and seeks an unspecified amount in damages. Under Oregon
class action procedures, Taco Bell was allowed an opportunity to "cure" the unpaid wage
and hour allegations by opening a claims process to all putative class members prior to
certification of the class. In this cure process, Taco Bell has currently paid out less
than $1 million. On January 26, 1999, the Court certified a class of all current and
former shift managers and crew members who claim one or more of the alleged violations. A
trial date of November 2, 1999 was set. However, on November 1, 1999, the Court issued a
proposed order postponing the trial and establishing a pre-trial claims process. The
final order regarding the claims process was entered on January 14, 2000. Taco Bell moved
for certification of an immediate appeal of the Court-ordered claims process and
requested a stay of the proceedings. This motion was denied on February 8, 2000. Taco
Bell appealed this decision to the Supreme Court of Oregon and the Court denied Taco Bell's
Writ of Mandamus on March 21, 2000. A Court-approved notice and claim form was mailed to
approximately 14,500 class members on January 31, 2000. A Court ordered pre-trial claims
process went forward, and hearings were held for claimants employed or previously
employed in selected Taco Bell restaurants. After the initial hearings, the damage claims
hearings were discontinued. Trial began on January 4, 2001. On March 9, 2001, the jury
reached verdicts on the substantive issues in this matter. A number of these verdicts
were in favor of the Taco Bell position; however, certain issues were decided in favor of
the plaintiffs. A number of procedural issues, including possible appeals, remain to
determine the ultimate damages in this matter.
We have provided for the estimated costs
of the Aguardo and Bravo litigations, based on a projection of eligible claims (including
claims filed to date, where applicable), the cost of each eligible claim, the estimated
legal fees incurred by plaintiffs and the results of settlement negotiations in these and
other wage and hour litigation matters. Although the outcome of these lawsuits cannot be
determined at this time, we believe the ultimate cost of these cases in excess of the
amounts already provided will not be material to our annual results of operations,
financial condition or cash flows. Any provisions have been recorded in unusual items.
On October 2, 1996, a class action
lawsuit against Taco Bell Corp., entitled Mynaf, et al. v. Taco Bell Corp. ("Mynaf"), was
filed in the Superior Court of the State of California of the County of Santa Clara. The
lawsuit was filed by two former restaurant general managers and two former assistant
restaurant general managers purporting to represent all current and former Taco Bell
restaurant general managers and assistant restaurant general managers in California. The
lawsuit alleged violations of California wage and hour laws involving unpaid overtime
wages, and violations of the State Labor Code's record-keeping requirements. The
complaint also included an unfair business practices claim. Plaintiffs claimed individual
damages ranging from $10,000 to $100,000 each. On September 17, 1998, the court certified
a class of approximately 3,000 current and former assistant restaurant general managers
and restaurant general managers. Taco Bell petitioned the appellate court to review the
trial court's certification order. The petition was denied on December 31, 1998. Taco
Bell then filed a petition for review with the California Supreme Court, and the petition
was subsequently denied. Class notices were mailed on August 31, 1999 to over 3,400 class
members. Trial began on January 29, 2001. Before conclusion of the trial, the parties
reached an agreement to settle this matter, and entered into
73
a stipulation of discontinuance of the case. This settlement agreement is
subject to approval by the court of the terms and conditions of the agreement and notice
to the class with an opportunity to object and be heard. We have provided for the costs
of this settlement in unusual items.
Other Litigation
C&F Packing Co., Inc. v. Pizza Hut,
Inc.
This action was originally filed in 1993 by C&F Packing Co., Inc., a Chicago meat packing
company ("C&F"), in the United States District court for the Northern District of
Illinois. This lawsuit alleges that Pizza Hut misappropriated various trade secrets
relating to C&F's alleged process for manufacturing a precooked Italian sausage pizza
topping. C&F's trade secret claims against Pizza Hut were originally dismissed by the
trial court on statute of limitations grounds. That ruling was later overturned by the
U.S. Court of Appeals for the Federal Circuit in August 2000 and the case was remanded to
the trial court for further proceedings. On remand, Pizza Hut moved for summary judgment
on its statute of limitations defense. That motion was denied in January 2001. This
lawsuit is in the discovery phase and no trial date has been set. Similar trade secret
claims against another defendant were tried by a jury in late 1998 and the jury returned
a verdict for C&F. Judgment on that verdict was affirmed by the U.S. Court of Appeals for
the Federal Circuit in August 2000.
TRICON believes that C&F's claims are
without merit and is vigorously defending the case. However, in view of the inherent
uncertainties of litigation, the outcome of this case cannot be predicted at this time.
Likewise, the amount of any potential loss cannot be reasonably estimated.
Obligations to PepsiCo After Spin-off
In connection with the October 6, 1997
Spin-off from PepsiCo, we entered into separation and other related agreements (the "Separation
Agreements"), governing the Spin-off transaction and our subsequent relationship with
PepsiCo. These agreements provide certain indemnities to PepsiCo.
The Separation Agreements provided for,
among other things, our assumption of all liabilities relating to the restaurant
businesses, including the Non-core Businesses, and our indemnification of PepsiCo with
respect to these liabilities. We have included our best estimates of these liabilities in
the accompanying Consolidated Financial Statements. Subsequent to Spin-off, claims were
made by certain Non-core Business franchisees and a purchaser of one of the businesses.
To date, we have resolved these disputes within amounts previously recorded.
In addition, we have indemnified PepsiCo
for any costs or losses it incurs with respect to all letters of credit, guarantees and
contingent liabilities relating to our businesses under which PepsiCo remains liable. As
of December 30, 2000, PepsiCo remains liable for approximately $139 million related to
these contingencies. This obligation ends at the time PepsiCo is released, terminated or
replaced by a qualified letter of credit. We have not been required to make any payments
under this indemnity.
Under the Separation Agreements, PepsiCo
maintains full control and absolute discretion with regard to any combined or
consolidated tax filings for periods through October 6, 1997. PepsiCo also maintains full
control and absolute discretion regarding any common tax audit issues. Although PepsiCo
has contractually agreed to, in good faith, use its best efforts to settle all joint
interests in any common audit issue on a basis consistent with prior practice, there can
be no assurance that determinations made by PepsiCo would be the same as we would reach,
acting on our own behalf. Through December 30, 2000, there have not been any
determinations made by PepsiCo where we would have reached a different determination.
We also agreed to certain restrictions
on our actions to help ensure that the Spin-off maintained its tax-free status. These
restrictions, which were generally applicable to the two-year period following the
Spin-off Date,
74
included among other things, limitations on any liquidation, merger or
consolidation with another company, certain issuances and redemptions of our Common
Stock, our granting of stock options and our sale, refranchising, distribution or other
disposition of assets. If we failed to abide by these restrictions or to obtain waivers
from PepsiCo and, as a result, the Spin-off fails to qualify as a tax-free
reorganization, we will be obligated to indemnify PepsiCo for any resulting tax
liability, which could be substantial. No payments under these indemnities have been
required or are expected to be required. Additionally, PepsiCo is entitled to the federal
income tax benefits related to the exercise after the Spin-off of vested PepsiCo options
held by our employees. We expense the payroll taxes related to the exercise of these
options as incurred.
Note 22 - Selected Quarterly Financial Data (Unaudited)
2000
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------
Revenues:
Company sales $ 1,425 $ 1,480 $ 1,470 $ 1,930 $ 6,305
Franchise and license fees 172 176 188 252 788
--------------------------------------------------------------
Total revenues 1,597 1,656 1,658 2,182 7,093
Total costs and expenses, net 1,355 1,436 1,526 1,916 6,233
Operating profit 242 220 132 266 860
Net income 120 106 59 128 413
Diluted earnings per common share 0.80 0.71 0.40 0.86 2.77
Operating profit attributable to:
Facility actions net gain 47 66 3 60 176
Unusual items (4) (72) (92) (36) (204)
Net income attributable to:
Facility actions net gain 26 39 3 30 98
Unusual items (2) (47) (57) (23) (129)
- ---------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------
Revenues:
Company sales $ 1,662 $ 1,723 $ 1,639 $ 2,075 $ 7,099
Franchise and license fees 151 163 173 236 723
--------------------------------------------------------------
Total revenues 1,813 1,886 1,812 2,311 7,822
Total costs and expenses, net 1,577 1,537 1,435 2,033 6,582
Operating profit 236 349 377 278 1,240
Net income 106 179 197 145 627
Diluted earnings per common share 0.66 1.10 1.23 0.93 3.92
Operating profit attributable to:
Accounting changes 10 6 5 8 29
Facility actions net gain 34 133 144 70 381
Unusual items - (4) (3) (44) (51)
Net income attributable to:
Accounting changes 6 4 3 5 18
Facility actions net gain 19 80 84 43 226
Unusual items - (2) (3) (24) (29)
- ---------------------------------------------------------------------------------------------------
See Note 5 for details of facility actions net gain, unusual items and the
1999 accounting changes.
75
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 accounting principles generally accepted in the United States
of America 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 Consolidated Financial Statements
have been audited and reported on by our independent auditors, KPMG 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 30, 2000 provide reasonable assurance that our assets are reasonably safeguarded.
/s/David J. Deno
Chief Financial Officer
76
Report of Independent Auditors
The Board of Directors
TRICON Global Restaurants, Inc.:
We have audited the accompanying
consolidated balance sheets of TRICON Global Restaurants, Inc. and Subsidiaries ("TRICON")
as of December 30, 2000 and December 25, 1999, and the related consolidated statements of
income, cash flows and shareholders' deficit and comprehensive income for each of the
years in the three-year period ended December 30, 2000. 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 auditing standards generally accepted in the United States of America. 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 30, 2000 and December 25, 1999, and the
results of its operations and its cash flows for each of the years in the three-year
period ended December 30, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Louisville, Kentucky
February 13, 2001, except as to Note 18
which is as of February 14, 2001
and Note 21 which is as of March 9, 2001
77
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 Form 10-K.
|
|
|
|
| (3)
| Exhibits: The exhibits listed in the accompanying Index to Exhibits are filed as part of this Form
10-K. 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)
|
| Reports on Form 8-K
|
|
|
|
| (1)
| We filed a Current Report on Form 8-K dated September 19, 2000 attaching a press release dated September 14,
2000 announcing the proposed plan of reorganization that AmeriServe Food Distribution, Inc. filed with
the U.S. Bankruptcy Court.
|
|
|
|
| (2)
| We filed a Current Report on Form 8-K dated October 12, 2000 attaching our third quarter earnings release dated
October 11, 2000.
|
|
|
|
| (3)
| We filed a Current Report on Form 8-K dated November 16, 2000 attaching a press release dated November 15, 2000
announcing our 2001 earnings expectations and strategies as well as reconfirming our ongoing operating
EPS expectation for the full-year 2000.
|
|
|
|
| (4)
| We filed a Current Report on Form 8-K dated December 4, 2000 attaching a press release dated December 1, 2000
announcing that McLane Company, Inc. a subsidiary of Wal-Mart Stores, Inc. has finalized its purchase
of the U.S. distribution business of AmeriServe Food Distribution, Inc.
|
78
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Form 10-K annual report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 28, 2001
TRICON GLOBAL RESTAURANTS, INC.
By: /s/ David C. Novak
Pursuant to the requirements of the
Securities Exchange Act of 1934, this Form 10-K annual 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/ David C. Novak David C. Novak
| Chairman of the Board, Chief Executive Officer and President (principal executive officer)
| March 28, 2001
|
|
|
|
/s/ Andrall E. Pearson Andrall E. Pearson
| Founding Chairman
| March 28, 2001
|
|
|
|
/s/ David J. Deno David J. Deno
| Chief Financial Officer (principal financial officer)
| March 28, 2001
|
|
|
|
/s/ Brent A. Woodford Brent A. Woodford
| Vice President and Controller (principal accounting officer)
| March 28, 2001
|
|
|
|
/s/ D. Ronald Daniel D. Ronald Daniel
| Director
| March 28, 2001
|
|
|
|
/s/ James Dimon James Dimon
| Director
| March 28, 2001
|
|
|
|
/s/ Massimo Ferragamo Massimo Ferragamo
| Director
| March 28, 2001
|
79
|
|
|
|
/s/ Robert Holland, Jr. Robert Holland, Jr.
| Director
| March 28, 2001
|
|
|
|
/s/ Sidney Kohl Sidney Kohl
| Director
| March 28, 2001
|
|
|
|
/s/ Kenneth G. Langone Kenneth G. Langone
| Director
| March 28, 2001
|
|
|
|
/s/ Jackie Trujillo Jackie Trujillo
| Director
| March 28, 2001
|
|
|
|
/s/ Robert J. Ulrich Robert J. Ulrich
| Director
| March 28, 2001
|
|
|
|
/s/ Jeanette S. Wagner Jeanette S. Wagner
| Director
| March 28, 2001
|
|
|
|
/s/ John L. Weinberg John L. Weinberg
| Director
| March 28, 2001
|
80
TRICON Global Restaurants, Inc.
Exhibit Index
(Item 14)
Exhibit Number
| Description of Exhibits
|
|
|
3.1
| Restated Articles of Incorporation of Tricon,
which are incorporated herein by reference from Exhibit 3.1 to Tricon's
Annual Report on Form 10-K for the fiscal year ended December 26, 1998.
|
|
|
3.2
| Amended and restated Bylaws of Tricon, which are incorporated herein by reference
from Exhibit 3.2 to Tricon's Annual Report on Form 10-K for the fiscal
year ended December 26, 1998.
|
|
|
4.1*
| Indenture, dated as of May 1, 1998, between Tricon and The First National Bank of Chicago, pertaining
to 7.45% Senior Notes and 7.65% Senior Notes due May 15, 2005 and May 15, 2008, respectively, which is
incorporated herein by reference from Exhibit 4.1 to Tricon's Report on Form 8-K filed with the
Commission on May 13, 1998.
|
|
|
4.2
| Rights Agreement, dated as of July 21, 1998, between Tricon and BankBoston, N.A., which is
incorporated herein by reference from Exhibit 4.01 to Tricon's Quarterly Report on Form 10-Q for the
quarter ended June 13, 1998.
|
|
|
10.1
| Separation Agreement between PepsiCo, Inc. and Tricon. effective as of August 26, 1997, and the First
Amendment thereto dated as of October 6, 1997, which is incorporated herein by reference from Exhibit
10.1 to Tricon's Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
|
|
|
10.2
| Tax Separation Agreement between PepsiCo, Inc. and Tricon effective as of August 26, 1997, which is
incorporated herein by reference from Exhibit 10.2 to Tricon's Annual Report on Form 10-K for the
fiscal year ended December 27, 1997.
|
|
|
10.3
| Employee Programs Agreement between PepsiCo, Inc. and Tricon effective as of August 26, 1997, which is
incorporated herein by reference from Exhibit 10.3 to Tricon's Annual Report on Form 10-K for the
fiscal year ended December 27, 1997.
|
|
|
10.4
| Telecommunications, Software and Computing Services Agreement between PepsiCo, Inc. and Tricon
effective as of August 26, 1997, which is incorporated herein by reference from Exhibit 10.4 to
Tricon's Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
|
|
|
10.5
| Amended and Restated Sales and Distribution Agreement between AmeriServe Food Distribution, Inc.,
Tricon, Pizza Hut, Taco Bell and KFC, effective as of November 1, 1998, which is incorporated
herein by reference from Exhibit 10 to Tricon's Annual Report on Form 10-K for the fiscal year ended
December 26, 1998, as amended by the First Amendment thereto (as filed herewith).
|
|
|
81
|
|
|
10.6
| Credit Agreement dated as of October 2, 1997 among Tricon, the lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent, and Chase Manhattan Bank as Issuing Bank, which is
incorporated herein by reference from Exhibit 10 to Tricon's Quarterly Report on Form 10-Q for the
quarter ended September 6, 1997, as amended by Amendment No. 1 hereto which is incorporated herein by
reference from Exhibit 10.6 to TRICON's Quarterly Report on Form 10-Q for the quarter ended March 20,
1999, as amended by Amendment No. 2 hereto, which is incorporated herein by reference from Tricon's Annual Report on Form 10-K
for the fiscal year ended December 25, 1999.
|
|
|
10.7
| Tricon Director Deferred Compensation Plan, as effective October 7, 1997, which is incorporated herein
by reference from Exhibit 10.7 to Tricon's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997.
|
|
|
10.8
| Tricon 1997 Long Term Incentive Plan, as effective October 7, 1997, which is incorporated herein by
reference from Exhibit 10.8 to Tricon's Annual Report on Form 10-K for the fiscal year ended December
27, 1997.
|
|
|
10.9
| Tricon Executive Incentive Compensation Plan, as effective January 1, 1999,
as amended, which is incorporated herein by reference from Tricon's Annual Report on Form 10-K
for the fiscal year ended December 25, 1999.
|
|
|
10.10
| Tricon Executive Income Deferral Program, as effective October 7, 1997, which is incorporated herein
by reference from Exhibit 10.11 to Tricon's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997.
|
|
|
10.13
| Tricon Pension Equalization Plan, as effective October 7, 1997, which is incorporated herein by
reference from Exhibit 10.14 to Tricon's Annual Report on Form 10-K for the fiscal year ended December
27, 1997.
|
|
|
10.15
| Terms of Employment Agreement between Tricon and Robert L. Carleton, which is incorporated herein by
reference from Exhibit 10.16 to Tricon's Annual Report on Form 10-K for the fiscal year ended December
27, 1997.
|
|
|
10.16
| Form of Directors' Indemnification Agreement, which is incorporated herein by reference from Exhibit
10.17 to Tricon's Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
|
|
|
10.17
| Amended and restated form of Severance Agreement (in the event of a change in control) (as filed
herewith).
|
|
|
10.18
| Tricon 1999 Long Term Incentive Plan, as effective May 20, 1999, which is incorporated herein
by reference from Tricon's Annual Report on Form 10-K for the fiscal year ended December 25, 1999.
|
|
|
10.19
| Employment Agreement between Tricon and Christian L. Campbell, dated as of September 3, 1997, which is
incorporated herein by reference from Exhibit 10.19 to Tricon's Annual Report on Form 10-K for fiscal
year ended December 26, 1998.
|
|
|
82
|
|
|
10.20
| Tricon Purchasing Coop Agreement, dated as of March 1, 1999, between Tricon and the Unified
FoodService Purchasing Coop, LLC, which is incorporated herein by reference from Exhibit 10.20 to
Tricon's Annual Report on Form 10-K for fiscal year ended December 26, 1998.
|
|
|
12.1
| Computation of ratio of earnings to fixed charges.
|
|
|
21.1
| Active Subsidiaries of Tricon.
|
|
|
23.1
| Consent of KPMG LLP.
|
|
|
_________________
|
|
|
|
*
| Neither Tricon nor any of its subsidiaries is party to any other long-term debt instrument under which securities
authorized exceed 10 percent of the total assets of Tricon and its subsidiaries on a consolidated basis. Copies
of instruments with respect to long-term debt of lesser amounts will be furnished to the Commission upon request.
|
|
|
| Indicates a management contract or compensatory plan.
|
83
Exhibit 10.5
FIRST AMENDMENT AGREEMENT
First Amendment Agreement effective as
of the Closing Date (as defined below) by and between AmeriServe Food Distribution, Inc.,
a Delaware corporation ("AmeriServe"), TRICON Global Restaurants, Inc., a North Carolina
corporation, Pizza Hut, Inc., a Delaware corporation, Taco Bell Corp., a California
corporation, Kentucky Fried Chicken Corporation, a Delaware corporation, and Kentucky
Fried Chicken of Southern California, Inc., a Delaware corporation (as successor to
Kentucky Fried Chicken of California, Inc.) (collectively, the "Tricon Parties").
WHEREAS, the parties hereto are parties
to the Amended and Restated Sales and Distribution Agreement dated as of November 1,
1998, a copy of which is attached hereto as Exhibit A (the "Distribution Agreement"),
pursuant to which AmeriServe has been appointed as the exclusive distributor of certain
restaurant products sold to company-owned Pizza Hut, Taco Bell and KFC restaurants in the
continental United States; and
WHEREAS, on or about January 31, 2000,
AmeriServe and its affiliates that are debtors and debtors-in-possession in the
Bankruptcy Cases (defined below) filed voluntary petitions under chapter 11 of title 11
of the United States Code, 11 U.S.C. §§101-1330 in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"), styled In re AmeriServe
Food Distribution, Inc., et al.,Case No. 00-358 (PJW) (the "Bankruptcy Cases"); and
WHEREAS, solely to facilitate the sale
of certain of the assets of AmeriServe comprising its U.S. distribution business to
McLane Company, Inc. (the "Sale Transaction"), the Tricon Parties have agreed to certain
modifications of the Distribution Agreement as set forth herein, which modifications the
Tricon Parties are not obligated to make and would not have agreed to in the absence of
the Sale Transaction; and
WHEREAS, the Tricon Parties acknowledge
that they will have received good and valuable consideration in exchange for the
modifications set forth herein.
NOW, THEREFORE, the parties hereto
hereby agree as follows:
- Section 4(a) of the Distribution Agreement is hereby amended by substituting the phrase "15 calendar days" for
the phrase "30 calendar days" where such phase appears in the first sentence thereof, effective as of the Closing Date.
- Section 5(b) of the Distribution Agreement is hereby amended by adding the following at the end thereof,
effective as of the Closing Date:
"Notwithstanding the foregoing, Buyer will use its reasonable best efforts to provide flexibility to
Seller with respect to 24 hour/day and 7 day/week delivery options, subject to the black out periods
described in Exhibit H attached hereto or such other black out periods which are previously agreed to
in writing by Seller and the regional managers of the Exclusive Restaurants and the minimum service
levels set forth in Section 6 of this Agreement."
- Section 9 of the Distribution Agreement is hereby deleted in its entirety and is replaced by the following,
effective as of the Closing Date:
"9. Term.
This Agreement is for a term beginning on the Effective Date and ending on January 11, 2005
(the 'Initial Term'), and shall automatically be extended thereafter, subject to the terms and
conditions set forth herein, through October 10, 2010 (the 'Extension Term')."
- Section 17 of the Distribution Agreement is hereby deleted in its entirety and is replaced by the following,
effective as of the Closing Date:
"Seller acknowledges that the KFC National Purchasing Cooperative, Inc., organizations representing
KFC, Taco Bell and Pizza Hut franchisees, and Buyer have established the Unified Foodservice
Purchasing Co-op, LLC (the 'Unified Coop') to purchase goods and equipment, including Restaurant
Products and Exclusive Restaurant Products, for Buyer-owned and operated and franchisee-owned and
operated restaurants, including Exclusive Restaurants. Seller also acknowledges that Buyer has
designated the Unified Coop as an SCM Party and Buyer has appointed and designated the Unified Coop,
on an exclusive basis, to administer purchasing programs on behalf of restaurant operators for all
restaurants located in the United States, including Exclusive Restaurants.
Seller has entered into a Distributor Participation Agreement with the Unified Coop in form and
substance satisfactory to the Unified Coop. Consistent with the provisions of Paragraph 13(b) of this
Agreement, Buyer and Seller each consent to the disclosure of the terms of this Agreement and any
information provided for in this Agreement to the Unified Coop. Buyer and Seller each agree that the
designation of the Unified Coop as an SCM Party is not in violation of the assignment provisions
contained in Paragraph 16(d) of this Agreement. 'The Service Fee,' as defined in Paragraph 4 of the
Distributor Participation Agreement will replace "the costs of SCM allocated to the Exclusive
Restaurant Products" referred to in clause (y) in Section 3(a) of this Agreement."
- Section A of Exhibit D to the Distribution Agreement is hereby deleted in its entirety and is replaced by the
following, effective as of January 1, 2001:
"A. The prices for the Exclusive Restaurant Products (including fresh produce but excluding
softdrinks and Promotional Items (as defined below)) shall be the Landed Cost plus the SCM
costs or service fee, as applicable, described in Sections 3(a) and 17 plus the per case
charge indicated below:
Pizza Hut $1.66/case
Taco Bell $1.99/case
KFC $1.74/case
- Section B of Exhibit D to the Distribution Agreement is hereby deleted in its entirety and is replaced by the
following, effective as of January 1, 2001:
- Section IV of Exhibit E to the Distribution Agreement is hereby amended by substituting the phrase "benchmark"
for the phrase "bid" where it appears therein, and by substituting the phrase "benchmarking" for the phrase "bidding"
where it appears therein, each effective as of the Closing Date.
- Subsection IV.A.1. of Exhibit E to the Distribution Agreement is hereby amended by adding the following after
the last sentence thereof, effective as of the Closing Date:
"In developing the standard freight rates, the SCM Party will continue to use similar practices as
demonstrated in 1999 and 2000. After receiving freight rates from the vendors, the SCM Party will
contract, at its discretion, with one or two nationally recognized third party logistics firms to
provide benchmark freight rates by lane. The SCM Party will use its reasonable best efforts to ensure
the process is performed independently and objectively to preclude any financial gain by the third
party logistics firms for providing understated benchmark freight rates."
- Section V of Exhibit E to the Distribution Agreement is hereby deleted in its entirely, effective as of the
Closing Date.
- In connection with and as part of the Sale Transaction, The Tricon Parties consent to AmeriServe's assumption
and assignment to McLane, of the Distribution Agreement as modified by this First Amendment, and agree that: (i) at the
Closing Date, the Distribution Agreement as amended by this First Amendment shall be deemed assumed by AmeriServe and
assigned to McLane, and (ii) other than McLane's promise to perform in accordance with the terms of the Distribution
Agreement as amended by the First Amendment, no adequate assurance as to future performance under the United States
Bankruptcy Code shall be required in connection with the Sale Transaction. The Tricon Parties consent to the assumption
and assignment of the Distribution Agreement, as amended by this First Amendment, shall not constitute a waiver of any
claims and/or legal or equitable remedies as against AmeriServe (including, without limitation, rights of recoupment or
setoff) arising out of or related to any prior breach of the Distribution Agreement by AmeriServe, it being understood
that such claims and/or remedies are expressly retained by and for the benefit of the Tricon Parties and that,
notwithstanding the assumption and assignment of the Distribution Agreement, as modified by this First Amendment, there
has been no cure of any pre-existing defaults under the Distribution Agreement, provided, that the assumption and
assignment shall not diminish or elevate in any way the status or priority of the Tricon Parties' claims or remedies
against AmeriServe that arose prior to AmeriServe's bankruptcy.
- This First Amendment to the Distribution Agreement shall become effective upon both its execution by the
parties hereto and the final closing of the Sale Transaction (the "Closing Date"), provided that such Sale Transaction
has received all requisite approvals of the Bankruptcy Court.
[PAGE END]
IN WITNESS WHEREOF, the parties hereto
have duly executed this First Amendment Agreement to the Distribution Agreement as of
_______________, 2000.
AMERISERVE FOOD DISTRIBUTION, INC.
By: /s/ Kevin J. Rogan
Name: Kevin J. Rogan
Title: Senior Vice President
| MCLANE COMPANY, INC.
By: /s/ James L. Kent
Name: James L. Kent
Title: Senior Vice President
|
TRICON GLOBAL RESTAURANTS, INC.
KENTUCKY FRIED CHICKEN OF SOUTHERN CALIFORNIA, INC.
KENTUCKY FRIED CHICKEN CORPORATION
PIZZA HUT, INC.
TACO BELL CORP.
By: /s/ Aylwin B. Lewis
In his Capacity as Executive Officer
Pursuant to Section 16(a) of
The Distribution Agreement
Name: Aylwin B. Lewis
Title: Executive Vice President
Exhibit 10.17
SEVERANCE AGREEMENT
THIS AGREEMENT, dated December 20, 2000,
is made by and between Tricon Global Restaurants, Inc., a North Carolina corporation (the
Company"), and
(the "Executive").
WHEREAS, the Company considers it
essential to the best interests of its shareholders to foster the continued employment of
key management personnel; and
WHEREAS, the Board recognizes that, as
is the case with many publicly held corporations, the possibility of a Change in Control
exists and that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management personnel to
the detriment of the Company and its shareholders; and
WHEREAS, the Board has determined that
appropriate steps should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the Executive, to their
assigned duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the
premises and the mutual covenants herein contained, the Company and the Executive hereby
agree as follows:
- Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section
hereof.
- Term of Agreement. The Term of this Agreement shall commence on January 1, 2001 and continue for three years;
however, on January 1, 2002 and each January 1 thereafter, the Term shall automatically be extended for an additional three years
unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the
Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no
earlier than the third anniversary of the date of such Change in Control.
- Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in
consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein,
to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1
hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second
sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company
following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any
right to be retained in the employ of the Company.
- The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in
the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest
of (i) a date which is six (6) months from the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death or Disability, or (iv)
the termination by the Company of the Executive's employment for any reason.
- Compensation Other Than Severance Payments.
5.1 Following a Change in Control and
during the Term, and during any period that the Executive fails to perform the
Executive's full-time duties with the Company as a result of incapacity due to physical
or mental illness, the Company shall pay the Executive's full salary to the Executive at
the rate in effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or benefit
plan, program or arrangement maintained by the Company during such period, until the
Executive's employment is terminated by the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the
Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect
immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event
or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of
Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior
to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event
or circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the
Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments
become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's
retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date
of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or
circumstance constituting Good Reason.
- Severance Payments.
6.1 Subject to Section 6.2 hereof, if (i) the Executive's employment is terminated following a Change in Control
and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without
Good Reason, the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1
("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5
hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in
Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the
Company without Cause after the occurrence of a Potential Change in Control and prior to a Change in Control (whether or not a Change
in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the
Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason
after the occurrence of a Potential Change in Control and prior to a Change in Control (whether or not a Change in Control ever
occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the
Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason after the occurrence of a
Potential Change in Control and such termination or the circumstance or event which constitutes Good Reason is otherwise in
connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any
determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be
presumed to be correct unless the Company establishes by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of
Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive
a lump sum severance payment, in cash, equal to two times the sum of (i) the Executive's base salary as in effect
immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event
or circumstance constituting Good Reason and (ii) the target annual incentive compensation for the Executive in respect of
the fiscal year in which the Change in Control occurred, or, if higher, the actual incentive compensation the Executive
earned for the fiscal year preceding the year in which the Executive's employment is terminated.
(B) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the
Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation
which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the
Date of Termination under any such plan and which has not yet been paid or deferred pursuant to a deferral plan maintained
by the Company, and (ii) and, notwithstanding any provision of the Company's annual incentive plan to the contrary, a cash
lump sum amount equal to a pro rata portion to the Date of Termination of the aggregate value of the annual incentive
compensation award to the Executive for the then uncompleted fiscal year under such plan, assuming achievement of
performance goals at the target level, or, if higher, assuming continued achievement of such performance goals at the level
achieved through the Date of Termination.
(C) The Company shall provide the Executive with outplacement services suitable to the
Executive's position for a period of one year or, if earlier, until the first acceptance by the Executive of an offer of
employment.
6.2 (A) Whether or not the Executive
becomes entitled to the Severance Payments, if any payment or benefit received or to be
received by the Executive in connection with a Change in Control or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, any Person whose actions result in a
Change in Control or any Person affiliated with the Company or such Person) (all such
payments and benefits, excluding the Gross-Up Payment, being hereinafter called "Total
Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the
provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive
an additional amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be
equal to the Total Payments. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the Gross-Up
Payment is to be made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Executive's residence on the Date of
Termination (or if there is no Date of Termination, then the date on which the Gross-up
Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in
federal income tax which could be obtained from deduction of such state and local taxes.
(B) In the event that, after giving
effect to any redeterminations described in subsection (D) of this Section 6.2, the Total
Payments do not exceed by more than ten percent (10%) the largest amount that would
result in no portion of the Total Payments being subject to the Excise Tax, then
subsection (A) of this Section 6.2 shall not apply and Severance Payments shall first be
reduced (if necessary, to zero) in the manner elected by the Executive to the extent
necessary so that no portion of the Total Payments will be subject to the Excise Tax.
(C) For purposes of determining whether
any of the Total Payments will be subject to the Excise Tax and the amount of such Excise
Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the
meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting firm
which was, immediately prior to the Change in Control, the Company's independent auditor
(the "Auditor"), such other payments or benefits (in whole or in part) do not constitute
parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all
"excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be
treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable compensation for services
actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of
the Base Amount allocable to such reasonable compensation, or are otherwise not subject
to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or
benefit shall be determined by the Auditor in accordance with the principles of sections
280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3
hereof, the Company shall provide the Executive with its calculation of the amounts
referred to in this Section 6.2(C) and such supporting materials as are reasonably
necessary for the Executive to evaluate the Company's calculations. If the Executive
disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax
Counsel with respect to the matter in dispute shall prevail.
(D) In the event that (i) amounts are
paid to the Executive pursuant to subsection (A) of this Section 6.2, (ii) the Excise Tax
is finally determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, and (iii) after giving effect to such redetermination,
the Total Payments are to be reduced pursuant to subsection (B) of this Section 6.2, the
Executive shall repay to the Company, within ten (10) business days following the time
that the amount of such reduction in Excise Tax is finally determined, the portion of the
Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and employment
taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that
such repayment results in (i) no portion of the Total Payments being subject to the
Excise Tax and (ii) a dollar-for-dollar reduction in the Executive's taxable income and
wages for purposes of federal, state and local income and employment taxes) plus interest
on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of
the Code. In the event that (x) the Excise Tax is determined to exceed the amount taken
into account hereunder at the time of the termination of the Executive's employment
(including by reason of any payment the existence or amount of which cannot be determined
at the time of the Gross-Up Payment) and (y) after giving effect to such redetermination,
the Total Payments should not have been reduced pursuant to subsection (B) of this
Section 6.2, the Company shall make an additional Gross-Up Payment in respect of such
excess and in respect of any portion of the Excise Tax with respect to which the Company
had not previously made a Gross-Up Payment (plus any interest, penalties or additions
payable by the Executive with respect to such excess and such portion) within ten (10)
business days following the time that the amount of such excess is finally determined.
6.3 The payments provided in subsections
(A), (C) and (D) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later
than the tenth day following the Date of Termination; provided, however, that if the
amounts of such payments, and the limitation on such payments set forth in Section 6.2
hereof, cannot be finally determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined in good faith by the Executive or, in
the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of
the minimum amount of such payments to which the Executive is clearly entitled and shall
pay the remainder of such payments (together with interest on the unpaid remainder (or on
all such payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof
can be determined but in no event later than the thirtieth (30th) day after the Date of
Termination. In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall constitute a loan by the
Company to the Executive, payable on the tenth (10th) business day after demand by the
Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of
the Code). At the time that payments are made under this Agreement, the Company shall
provide the Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from Tax Counsel, the
Auditor or other advisors or consultants (and any such opinions or advice which are in
writing shall be attached to the statement). The Company shall bear the entire cost of
any opinions, advice or similar expenses associated with Sections 6.2 or 6.3 hereof.
6.4 The Company also shall pay to the
Executive all legal fees and expenses incurred by the Executive in disputing in good
faith any issue hereunder relating to the termination of the Executive's employment, in
seeking in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent attributable to
the application of section 4999 of the Code to any payment or benefit provided hereunder.
Such payments shall be made within ten (10) business days after delivery of the
Executive's written requests for payment accompanied with such evidence of fees and
expenses incurred as the Company reasonably may require.
- Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. After a
Change in Control and during the Term (or under the circumstances described in the second
sentence of section 6.1 hereof), any purported termination of the Executive's employment
(other than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with Section 10 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated. Further, a
Notice of Termination for Cause is required to include a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board which was called and held for the
purpose of considering such termination (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be heard before
the Board) finding that, in the good faith opinion of the Board, the Executive was guilty
of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of
Termination," with respect to any purported termination of the Executive's employment
after a Change in Control and during the Term, shall mean (i) if the Executive's
employment is terminated for Disability, thirty (30) days after Notice of Termination is
given (provided that the Executive shall not have returned to the full-time performance
of the Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in the
Notice of Termination (which, in the case of a termination by the Company, shall not be
less than thirty (30) days (except in the case of a termination for Cause) and, in the
case of a termination by the Executive, shall not be less than fifteen (15) days nor more
than sixty (60) days, respectively, from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If
within fifteen (15) days after any Notice of Termination is given, or, if later, prior to
the Date of Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be extended until the earlier
of (i) the date on which the Term ends or (ii) the date on which the dispute is finally
resolved, either by mutual written agreement of the parties or by a final judgment, order
or decree of an arbitrator or a court of competent jurisdiction (which is not appealable
or with respect to which the time for appeal therefrom has expired and no appeal has been
perfected); provided, however, that the Date of Termination shall be extended by a notice
of dispute given by the Executive only if such notice is given in good faith and the
Executive pursues the resolution of such dispute with reasonable diligence.
7.4 Compensation During Dispute. If a
purported termination occurs following a Change in Control and during the Term and the
Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in which the
Executive was participating when the notice giving rise to the dispute was given, until
the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts
paid under this Section 7.4 are in addition to all other amounts due under this Agreement
(other than those due under Section 5.2 hereof) and shall not be offset against or reduce
any other amounts due under this Agreement.
- No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the
Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive
by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in
this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.
- Successors; Binding Agreement.
9.1 In addition to any obligations
imposed by law upon any successor to the Company, the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place. Failure of
the Company to obtain such assumption and agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the Executive to
compensation from the Company in the same amount and on the same terms as the Executive
would be entitled to hereunder if the Executive were to terminate the Executive's
employment for Good Reason after a Change in Control, except that, for purposes of
implementing the foregoing, the date on which any such succession becomes effective shall
be deemed the Date of Termination.
9.2 This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive hereunder
(other than amounts which, by their terms, terminate upon the death of the Executive) if
the Executive had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the executors, personal
representatives or administrators of the Executive's estate.
- Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement
shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the
final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished
to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:
|
Tricon
Global Restaurants, Inc. 1441 Gardiner Lane Louisville, KY 40213 Attention: General
Counsel |
- Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance
with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements
or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either
party; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's
employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change
in Control, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of Kentucky, without reference to its principles of
conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the
Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term
(including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration.
- Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity
or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
- Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same instrument.
- Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this
Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific
provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days
after notification by the Board that the Executive's claim has been denied.
14.2 Any further dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively by
arbitration in Louisville, Kentucky in accordance with the rules of the American
Arbitration Association then in effect; provided, however, that the
evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of
this Agreement to the contrary, the Executive shall be entitled to seek specific
performance of the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this Agreement.
- Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act.
(E) "Board" shall mean the Board of Directors of the Company.
(F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued
failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from
the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is
delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and
(ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the
best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company
that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause
exists.
(G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following
paragraphs shall have occurred:
- any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities beneficially owned by such Person any securities acquired directly from the
Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding
securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in
clause (i) of paragraph (III) below; or
- the following individuals cease for any reason to constitute a majority of the number of
directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or threatened election contest,
including but not limited to a consent solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company's shareholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors
on the date hereof or whose appointment, election or nomination for election was previously so approved or
recommended; or
- there is consummated a merger or consolidation of the Company or any direct or indirect
subsidiary of the Company with any other corporation, other than (i) a merger or consolidation immediately following
which those individuals who, immediately prior to the consummation of such merger or consolidation, constituted the
Board, constitute a majority of the board of directors of the Company or the surviving or resulting entity or any
parent thereof, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of
the Company (not including in the securities beneficially owned by such Person any securities acquired directly from
the Company or its Affiliates) representing 20% or more of the combined voting power of the Company's then
outstanding securities,
Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred by virtue of the consummation of any transaction or series of integrated
transactions immediately following which the record holders of the common stock of the
Company immediately prior to such transaction or series of transactions continue to have
substantially the same proportionate ownership in an entity which owns all or
substantially all of the assets of the Company immediately following such transaction or
series of transactions.
(H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
(I) "Company" shall mean Tricon Global Restaurants, Inc. and, except in determining under Section 15(G) hereof
whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
(J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof.
(K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if,
as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time
performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the
Executive shall not have returned to the full-time performance of the Executive's duties.
(L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
(M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code.
(N) "Executive" shall mean the individual named in the first paragraph of this Agreement.
(O) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without
the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances
described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through
(VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or
(VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in
respect thereof:
- the assignment to the Executive of any duties inconsistent with the Executive's status as an
executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's
responsibilities from those in effect immediately prior to the Change in Control;
- a reduction by the Company in the Executive's annual base salary or target incentive award
or incentive award opportunity as in effect on the date hereof or as the same may be increased from time to time;
- the relocation of the Executive's principal place of employment to a location more than 50
miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's
requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation
thereof) except for required travel on the Company's business to an extent substantially consistent with the
Executive's present business travel obligations;
- the failure by the Company to pay to the Executive any portion of the Executive's current
compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred
compensation program of the Company, within seven (7) days of the date such compensation is due;
- the failure by the Company to continue in effect any compensation plan in which the Executive
participates immediately prior to the Change in Control which is material to the Executive's total compensation,
including but not limited to the Company's or any substitute plans adopted prior to the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such
plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of
benefits provided and the level of the Executive's participation relative to other participants, as existed
immediately prior to the Change in Control;
- the failure by the Company to continue to provide the Executive with benefits substantially
similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical,
health and accident, or disability plans in which the Executive was participating immediately prior to the Change in
Control (except for across the board changes similarly affecting all executives of the Company and all executives of
any Person in control of the Company), the taking of any other action by the Company which would directly or
indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by
the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the
number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in
accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or
- any purported termination of the Executive's employment which is not effected pursuant to a
Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such
purported termination shall be effective.
The Executive's right to terminate the
Executive's employment for Good Reason shall not be affected by the Executive's
incapacity due to physical or mental illness. The Executive's continued employment shall
not constitute consent to, or a waiver of rights with respect to, any act or failure to
act constituting Good Reason hereunder.
For purposes of any determination
regarding the existence of Good Reason, any claim by the Executive that Good Reason
exists shall be presumed to be correct unless the Company establishes to the Board by
clear and convincing evidence that Good Reason does not exist.
(P) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof.
(Q) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof.
(R) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the
Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive
with supplemental retirement benefits.
(S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections
13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their ownership of stock of the Company.
(T) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the
following paragraphs shall have occurred:
- the Company enters into an agreement, the consummation of which would result in the
occurrence of a Change in Control;
- the Company or any Person publicly announces an intention to take or to consider taking
actions which, if consummated, would constitute a Change in Control;
- any Person becomes the Beneficial Owner, directly or indirectly, of securities of the
Company representing 15% or more of either the then outstanding shares of common stock of the Company or the
combined voting power of the Company's then outstanding securities (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or its affiliates), excluding, however, any
entity or group which, as of July 21, 1998, has on file with the Securities and Exchange Commission a Form 13D or
13G indicating ownership aggregating 10% or more of the then outstanding shares of common stock of the Company or
the combined voting power of the Company's then outstanding securities; or
- the Board adopts a resolution to the effect that, for purposes of this Agreement, a
Potential Change in Control has occurred.
(U) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof.
(V) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof.
(W) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or
termination described therein).
(X) "Total Payments" shall mean those payments so described in Section 6.2 hereof.
|
TRICON
GLOBAL RESTAURANTS, INC. |
|
By:
Name:
Title:
Address:
(Please print carefully)
|
EXHIBIT 12
TRICON Global Restaurants, Inc.
Ratio of Earnings to Fixed Charges Years Ended 2000-1996
(in millions except ratio amounts)
53
Weeks ----------- 52 Weeks -----------
--------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ----- ------ ------
Earnings:
Pretax income from continuing operations
before cumulative effect of accounting
changes(a) 684 1,038 756 (35) 72
Minority interests in consolidated subsidiaries - - - - (1)
Unconsolidated affiliates' interests,
net(a) (13) (12) (10) (3) (6)
Interest expense(a) 190 218 291 290 310
Interest portion of net rent expense(a) 87 90 105 118 116
-------- ------- ----- ------- -------
Earnings available for fixed charges 948 1,334 1,142 370 491
======== ======= ====== ======= =======
Fixed Charges:
Interest Expense(a) 190 218 291 290 310
Interest portion of net rent expense(a) 87 90 105 118 116
-------- ------- ------- ------ --------
Total Fixed Charges 277 308 396 408 426
======== ======= ======== ======= =======
Ratio of Earnings to Fixed
Charges(b)(c) 3.42x 4.33x 2.88x 0.91x 1.15x
- Included in earnings for the years 1996 through 1997 are certain allocations related to overhead costs and interest expense
from PepsiCo. For purposes of these ratios, earnings are calculated by adding to (subtracting from) pretax income from continuing
operations before income taxes and cumulative effect of accounting changes the following: fixed charges, excluding capitalized
interest; (minority interests in consolidated subsidiaries); (equity income (loss) from unconsolidated affiliates); and distributed
income from unconsolidated affiliates. Fixed charges consist of interest on borrowings, the allocation of PepsiCo's interest
expense for years 1996-1997 and that portion of rental expense that approximates interest.
- Included the impact of unusual items of $204 million ($129 million after-tax) in 2000, $51 million ($29 million
after-tax) in 1999, $15 million ($3 million after-tax) in 1998, $184 million ($165 million after-tax) in 1997, and $246 million
($189 million after-tax) in 1996. Excluding the impact of such charges, the ratio of earnings to fixed charges would have been
4.16x, 4.49x, 2.92x, 1.36x, and 1.73x for the fiscal years ended 2000, 1999, 1998, 1997, and 1996, respectively.
- For the fiscal year December 27, 1997, earnings were insufficient to cover fixed charges by approximately $38 million.
Earnings in 1997 includes a charge of $530 million ($425 million after-tax) taken in the fourth quarter to refocus our business.
Exhibit 21.1
SUBSIDIARIES OF TRICON
AS OF DECEMBER 31, 2000 (1)
Name of Subsidiary |
State or
Country of Incorporation |
|
|
A & M Food Services, Inc.
|
Nevada |
Calny, Inc. |
Delaware |
Changsha KFC Co., Ltd. |
China |
Chengdu KFC |
China |
Chongqing KFC Co., Ltd. |
China |
Dalian Kentucky Fried Chicken Co., Ltd. |
China |
El KrAm, Inc |
Iowa |
Glenharney Insurance Company |
Vermont |
Guangdong KFC Co., Ltd. |
China |
Hangzhou KFC |
China |
Kentucky Fried Chicken (Great Britain) Limited |
United Kingdom |
Kentucky Fried Chicken Beijing Co., Ltd. |
China |
Kentucky Fried Chicken Corporate Holdings Ltd. |
Delaware |
Kentucky Fried Chicken Corporation |
Delaware |
Kentucky Fried Chicken de Mexico, S.A. de C.V. |
Mexico |
Kentucky Fried Chicken Espana, S.L. |
Spain |
Kentucky Fried Chicken Global B.V. |
Netherlands |
Kentucky Fried Chicken International Holdings, Inc. |
Delaware |
Kentucky Fried Chicken Japan Ltd. |
Japan |
Kentucky Fried Chicken of California, Inc. |
Delaware |
Kentucky Fried Chicken Worldwide B.V. |
Netherlands |
KFC Corporation |
Delaware |
KFC Enterprises, Inc. |
Delaware |
KFC France SAS |
France |
KFC International (Thailand) Ltd. |
Thailand |
KFC Management Pte. Ltd. |
Singapore |
KFC National Management Company |
Delaware |
KFC of America, Inc. |
California |
KFC Pty. Ltd. |
Australia |
KFCC/TRICON Holdings Ltd. |
Canada |
Nanjing KFC Co. Ltd. |
China |
PCNZ Investments Ltd. |
Mauritius |
PCNZ Ltd. |
Mauritius |
PepsiCo Eurasia Limited |
Delaware |
PHM de Mexico S.A. de C.V. |
Mexico |
Pizza Belgium B.V.B.A. |
Belgium |
Pizza France S.N.C. |
France |
Pizza Hut (U.K.) Ltd. |
United Kingdom |
Pizza Hut International (UK) Ltd. |
United Kingdom |
Pizza Hut International, LLC |
Delaware |
Pizza Hut Korea Co., Ltd. |
Korea |
Pizza Hut Mexicana S.A. de C.V. |
Mexico |
Pizza Hut of America, Inc. |
Delaware |
Pizza Hut Singapore Pte. Ltd. |
Singapore |
Pizza Hut West, Inc. |
California |
Pizza Hut, Inc. |
California |
Pizza Huts of the Northwest, Inc. |
Minnesota |
Pizza Management, Inc. |
Texas |
Priszm Brandz LP |
Canada |
Qingdao Kentucky Fried Chicken Co. Ltd. |
China |
Red Raider Pizza Company |
Delaware |
Restaurant Holdings Ltd. |
United Kingdom |
SEPSA S.N.C. |
France |
Shanghai Kentucky Fried Chicken |
China |
Shanghai Pizza Hut Co. Ltd. |
China |
Shenyang KFC Co., Ltd. |
China |
Shenzhen KFC Co., Ltd. |
China |
Spizza 30 S.A.S. |
France |
Suzhou KFC |
China |
Taco Bell Corp. |
California |
Taco Bell of America, Inc. |
Delaware |
Taco Bell of California, Inc. |
California |
Taco Caliente, Inc. |
Arizona |
Taco Del Sur, Inc. |
Georgia |
Taco Enterprises, Inc. |
Michigan |
TB Holdings |
California |
TBLD Corp. |
California |
Tenga Taco, Inc. |
Florida |
Tianjin KFC Co. |
China |
Tricon Aviation Services, Inc. |
Delaware |
Tricon (China) Investment Company, Ltd. |
China |
Tricon (Shanghai) Consulting Co., Ltd. |
China |
Tricon Franchise (Canada) LP |
Canada |
Tricon Global Restaurants (Canada), Inc. |
Canada |
Tricon Global Restaurants S.A. de C.V. |
Mexico |
Tricon International Participations S.a.r.l. |
Luxembourg |
Tricon Restaurant Services Group, Inc. |
Delaware |
TRICON Restaurants (Taiwan) Co., Ltd. |
Taiwan |
TRICON Restaurants Australia Pty Ltd. |
Australia |
Tricon Restaurants International (India) Pvt. Ltd. |
India |
Tricon Restaurants International Ltd. & Co. K.G. |
Germany |
Tricon Restaurants International, Inc. |
Delaware |
Tricon Restaurants International, Ltd. |
Cayman Islands |
Tricon Restaurants International (PR), Inc. |
Cayman Islands |
Tricon Restaurants Poland Sp.Zo.o. |
Poland |
Tricon Restaurants South Africa Pty. Ltd. |
South Africa |
Tricon Singapore Holdings Pte. Ltd. |
Singapore |
Upper Midwest Pizza Hut, Inc. |
Delaware |
Wuhan KFC Co. Ltd. |
China |
Wuxi KFC Co., Ltd. |
China |
Xiamen - KFC Co., Ltd. |
China |
|
|
Note: