LETTER TO SHAREHOLDERS

Last, but probably most important long-term, is our strategy of focused international growth.  While we've previously planted the flag in over 100 countries, you can count on us to target the areas of greatest opportunity for future development and investment. We plan to substantially increase our return on assets while we focus our company investment in seven key countries.

Having just returned from China and Korea, we can tell you our brands are even more popular in Asia than they are in the United States. Despite the economic slowdowns, our restaurants were absolutely packed! Although we face an uncertain Asian market economy, we intend to leverage our past experience in volatile currency markets like Mexico and Poland, where we learned to stay the course and grow our business for the long-term. Importantly, our international business has experienced, local teams capable of driving impressive new unit and base business growth

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SOLID PROGRESS IN 1997

If you'd ask our financial team, they'd say we had a fair year, based on almost any financial measure. But from our perspective, the most honest thing we can say about '97 is we're glad it's over. Launching one of the biggest spin-offs in history and taking on $4.6 billion of debt was an enormous task. So 1997 was a solid year, but basically it was a year of transition driven on PepsiCo's terms, not ours. We did, however, make a lot of progress in the last three months of the year as a new, independently-traded company.

We established new leadership teams, new management processes and formed the Tricon financial group from scratch. We also made a tough but necessary decision to take a $425 million after-tax charge to ensure we were structured in a manner that would allow us to run the business in the right way for the long term.

By taking this unusual, mostly non-cash, charge we 1) strengthened Pizza Hut's U.S. asset base by closing or refranchising hundreds of marginal stores; and 2) focused our international scale in high-growth markets, while refranchising others. As a result, we eliminated almost all of our cash-losing units at Pizza Hut. And we materially reduced the management task in our international business.

In the midst of all this change, we delivered a strong 14 percent growth in operating profits to $662 million, before interest, income taxes, unusual charges and facility actions. When you factor out $13 million in operating profits from non-core businesses sold in 1997, our core business operating profits (from the worldwide operations of Pizza Hut, Taco Bell and KFC, ) were $649 million, up a solid 10 percent. We also improved our restaurant margins by almost one point and boosted our return on net assets by over three points.

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