CONSOLIDATED CASH FLOWS
(Including Core and Non-core Businesses)

 

Net cash provided by operating activities increased $97 million or 14% to $810 million in 1997. This was driven by an increase in net income prior to facility actions net loss and unusual charges recorded in 1997 and an increase in our normal working capital deficit primarily related to higher income tax payables. These increases were partially offset by reduced depreciation and amortization in 1997. The decrease in depreciation and amortization related to refranchisings and store closures and to lower asset costs due to impairment charges.

Net cash provided by operating activities in 1996 decreased $100 million or 12% to $713 million. The decrease was due to reduced income before non-cash charges and credits of $76 million and a $24 million decline in our working capital deficit. The decline in our working capital deficit was primarily due to an unfavorable swing in income taxes payable, partially offset by faster growth in accounts payable and other current liabilities and a favorable swing in inventories. The change in accounts payable and other current liabilities was primarily due to timing of payments.

Net cash provided by investing activities increased $715 million to $466 million in 1997 compared to net cash used for investing activities of $249 million and $597 million in 1996 and 1995, respectively. The 1997 increase was primarily attributable to an increase in proceeds from refranchising of restaurants of $415 million over 1996 and the proceeds from the sale of the Non-core Businesses of $186 million. Capital spending decreased by $79 million or 13%. The decline in net cash used for investing activities in 1996 of $348 million or 58% related to an increase in the proceeds from refranchising activities of $190 million and a reduction in capital spending of $81 million in 1996, which reflected a slowdown of new unit development as part of our initiative to reduce our percentage ownership of total system units.

Net cash used for financing activities more than doubled in 1997 to $1.1 billion, primarily reflecting the net payments to PepsiCo, partially offset by the bank borrowings in connection with the Spin-off. This net use was partially offset by the increase in short-term borrowings of $83 million in 1997 versus a decrease of $80 million in 1996 and payments on the Revolving Credit Facility.

Net cash used for financing activities in 1996 nearly doubled to $422 million primarily reflecting debt payments in 1996 compared to proceeds in 1995 and net cash payments to PepsiCo.

Financing Activities

Our initial debt funding was a $5.25 billion bank credit agreement comprised of a $2 billion senior,

unsecured Term Loan Facility and a $3.25 billion senior, unsecured Revolving Credit Facility which mature on October 2, 2002.   Interest is based principally on the London Interbank Offered Rate ("LIBOR") plus a variable margin as defined in the credit agreement.  As of December 27, 1997, $1.97 billion and $2.44 billion were outstanding on the Term Loan and Revolving Credit Facility, respectively, and we had $692 million in unused revolving credit capacity, net of Letters of Credit of $123 million.  The credit facilities are subject to various affirmative and negative covenants including financial covenants as well as limitations on additional indebtedness including guarantees of indebtedness, cash dividends, aggregate non-U.S. investments, among other things, as defined in the credit agreement.

This substantial indebtedness subjects us to significant interest expense and principal repayment obligations which are limited, in the near term, to prepayment events as defined in the credit agreement.  Our highly leveraged capital structure could also adversely affect our ability to obtain additional financing in the future or to undertake refinancings on terms and subject to conditions that are acceptable to us.

At year-end 1997, we were in compliance with the above noted covenants, and we will continue to closely monitor on an ongoing basis the various operating issues that could, in aggregate, affect our ability to comply with financial covenant requirements.  Such issues include the ongoing economic issues faced by much of Asia as well as the intensely competitive nature of the QSR industry.

A key component of our financing philosophy is to build balance sheet liquidity and to diversify sources of funding.  Consistent with that philosophy, which was discussed with our lenders during syndication of the Term Loan Facility and Revolving Credit Facility, we have taken steps to refinance a portion of our existing bank credit facility.  In that regard, in 1997 we filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 with respect to an offering of $2 billion of senior unsecured debt.  We may offer and sell from time to time, debt securities in one or more series, in amounts, at prices and on terms to be determined by market conditions at the time of sale, as discussed in more detail in the registration statement.  We currently intend to use the net proceeds from an expected issuance and sale of debt securities offered under this shelf registration to reduce term debt under the above-referenced bank credit agreement and for general corporate purposes.   During 1998, we intend to reduce our reliance on bank debt by up to $1 billion throughout a combination of proceeds from the debt securities offered under this shelf registration, proceeds from refranchising activities and a reduction in unused credit facilities.

We use various derivative instruments with the objective of reducing volatility in our borrowing costs.  We have utilized interest rate swap agreements to effectively convert a portion of our variable rate (LIBOR) bank debt to fixed rate.  Subsequent to year-end 1997, we have entered into treasury lock agreements to partially hedge the anticipated issuance of our senior debt securities discussed above.  We have also entered into an interest rate arrangement to limit the range of interest rates on a portion of our variable rate bank debt.  Other derivative instruments may be considered from time to time as well to manage our debt portfolio and to hedge foreign currency exchange exposures.

We believe that cash flows from our ongoing refranchising initiatives and our operating activities will be sufficient to support our capital spending and to service our debt.

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