(tabular amounts in millions, except share data)

TRICON Global Restaurants, Inc. and Subsidiaries (collectively referred to as "TRICON" or the "Company") 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. TRICON is the world’s largest quick service restaurant company based on the number of system units, with more than 29,000 restaurants in 101 countries and territories. References to TRICON throughout these Consolidated Financial Statements are made using the first person notations of "we" or "our." The worldwide business of our core businesses of KFC, Pizza Hut and Taco Bell ("Core Business(es)"), include the operations, development and franchising and licensing of a system of both traditional and non-traditional quick service restaurant units featuring dine-in, carryout and, in some instances, drive-thru or delivery service. Each Core Business has proprietary menu items and emphasizes the preparation of food with high quality ingredients as well as unique recipes and special seasonings to provide appealing, tasty and attractive food at competitive prices. We also previously operated other non-core concepts disposed of in 1997, which included California Pizza Kitchen, Chevys Mexican Restaurant, D’Angelo’s Sandwich Shops, East Side Mario’s and Hot ’n Now (collectively, the
"Non-core Businesses"). As of year-end 1998, 32% of total worldwide units were operated by us or international joint ventures in which we participate and 68% by our franchisees and licensees. Approximately 31% of our system units are located outside the U.S. In late 1994, we determined that each Core Business system should be rebalanced toward franchising and that underperforming units should be closed and, since that time, 3,730 units have been refranchised and 1,941 units have been closed through December 26, 1998.

Our preparation of the accompanying Consolidated Financial Statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PREPARATION.   The accompanying Consolidated Financial Statements present our financial position, results of operations and cash flows as if we had been an independent, publicly owned company for all prior periods presented. 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 general, administrative and other expenses. The Consolidated Financial Statements prior to the Spin-off Date represent the combined worldwide operations of the Core Businesses and the Non-core Businesses disposed of in 1997.

In addition, PepsiCo made certain allocations of its previously unallocated interest and general and administrative expenses related to the years ended 1997 and 1996, as well as computations of separate tax provisions for its restaurant segment, to facilitate the presentation.

Prior to the Spin-off, our operations were financed through our operating cash flows, refranchising proceeds and investments by and advances from PepsiCo. For this reason, our historical financial statements prior to the Spin-off include interest expense on our relatively insignificant external debt plus an allocation of interest expense which had not previously been allocated by PepsiCo. PepsiCo based its interest allocations on its weighted average interest rate applied to the average annual balance of investments by and advances from PepsiCo.

PepsiCo based its allocations of general and administrative expenses on our revenue as a percent of PepsiCo’s total revenue.

The amounts, by year, of the historical allocations described above are as follows:

 

 

 

 

We believe that the bases of allocation of interest expense and general and administrative expenses were reasonable based on the facts and circumstances available at the date of their allocation. However, based on current information, such amounts are not indicative of amounts which we would have incurred as an independent, publicly owned company for all periods presented.

In addition, as noted in our Consolidated Statement of Shareholders’ (Deficit) Equity and Comprehensive Income, our capital structure changed in 1997 as a result of the Distribution and bears little relationship to the average net outstanding investments by and advances from PepsiCo prior to the Spin-off. In connection with the Spin-off, we borrowed $4.55 billion to fund a dividend and repayments to PepsiCo, which exceeded the net aggregate balance owed at the Spin-off Date by $1.1 billion.