RESULTS OF OPERATION

Comparability

On an overall basis, we lost $111 million in 1997 or $.73 per basic share. In the context of our Spin-off, comparisons of results of operations for the year are complex. The fourth quarter charge and the significant level of other facility actions, including the second quarter refranchising through an initial public offering of our restaurants in New Zealand, represent significant items which complicate year-over-year comparisons. In addition, the disposal of our non-core businesses in 1997 adds complexity.

Our historical financial statements are also impacted by our lack of history as an independent, publicly owned company. Therefore, the amounts for certain items such as general and administrative expenses, interest expense and income taxes, included in our historical reported results for periods prior to the Spin-off, represent allocations or computations which are not indicative of the results of operations, financial position and cash flows as if we had been an independent, publicly owned company during all periods presented. See Notes 2, 3, 4 and 16. In addition, the separation agreement entered into in connection with the Spin-off specifies that PepsiCo shall make a final determination regarding the net assets of the restaurant businesses transferred to us at the Spin-off Date. This determination has been preliminarily completed, but is subject to our agreement. The accompanying Consolidated Financial Statements reflect our estimates, based on available information, of the net assets that should be transferred. The final approved determination could vary from these estimates. Any changes are not expected to materially affect future net income.

Additionally, comparative information is impacted by the operations of and disposal charges related to our non-core restaurant businesses. These disposal charges included an estimated provision for all expected future liabilities associated with the disposal of the non-core businesses which we were required to retain as part of the Spin-off. Actual amounts incurred may ultimately differ from these estimates.California Pizza Kitchen, Chevys Mexican Restaurant, D'Angelo Sandwich Shop, East Side Mario's and Hot 'n Now (collectively, the "Non-core Businesses") were sold prior to the Spin-off Date.

Following is a summary of the impacts on our operating results of the operations and disposal of the Non-core Businesses:

1997 1996 1995
Revenues $ 268 $ 394 $ 297
% of total revenues 3% 4% 3%
Non-core Businesses operating
  profit (loss), excluding disposal
  and impairment charges
13 (10) (42)
Impairment charges 120
Unusual disposal charges 54 246
Net loss $ (26) $(200) $(116)

The impact of the operations and sale of the Non-core Businesses is more fully discussed in Note 16. To facilitate comparability of future operating results, the following analysis of historical results of operations concentrates on Core Businesses only except where specifically noted.

Worldwide - Core Business Only

1997

Total

Adjusted (1) % B(W)
vs. 1996(2)

1996

% B(W)
vs. 1995
SYSTEM SALES $20,465 1 $20,280 3
Revenues
Company sales $ 8,846 (5) $ 9,347 (2)
Franchise and license fees 567
_____

15
_____
491
_____
13
  Total Revenues $ 9,413 (4) $ 9,838 (1)
Company Restaurant Margin
Domestic $    777 3 $   756 (10)
International 242
_____
2
_____
237
_____
8
  Total $ 1,019 3 $   993 (7)
% of sales 11.5% .9 points 10.6% (.6 points)
Operating Profit
Ongoing operating profit

$   649

$    649

10

$   591

(15)
Facility actions net (loss) gain (247) 163 NM 37 NM
Unusual charges (120)
_____

_____
NM
_____

_____
NM

  Operating profit

282 812 29 628 52
Interest & Income Taxes
Interest expense, net 273 273 7 295 16
Income tax provision 94
_____
199
_____
(7)
_____
186
_____
NM
Net(Loss)/Income $    (85) $    340 $   193 $    147 $ 163
Pro forma (loss) earnings
  per basic share

   $ (.56)

$  2.24

NM

$   .97

NM

2(1)  Excluding the effects of the fourth quarter charge.
(2)  Computed based on adjusted amounts, if applicable.
NM - Not Meaningful

Worldwide Restaurant Unit Activity

Company

Joint Ventures

Franchised

Licensed

Total

Balance at Dec. 30, 1995

12,540

926

11,901

2,527

27,894

  New Builds & Acquisitions

342

86

779

1,039

2,246

  Refranchising and licensing

(659)

640

19

-

  Closures

(347)

(5)

(254)

(438)

(1,044)

Balance at Dec. 28, 1996

11,876

1,007

13,066

3,147

29,096

  New Builds & Acquisitions

280

123

972

731

2,106

  Refranchising and licensing

(1,407)

(11)

1,410

8

-

  Closures

(632)

(29)

(351)

(478)

(1,490)

Balance at December 27, 1997

10,117(a)

1,090

15,097

3,408

29,712

(a) Includes 697 units approved for closure but not yet closed at December 27, 1997

System sales, which represents the combined sales of the Company, joint venture, franchised and licensed units,increased $185 million or 1% in 1997.  Excluding the negative impact of foreign currency translation, system sales increased by $525 million or 3%. The increase before the effects of foreign currency translation reflected the development of new units, primarily by franchisees and licensees. Domestic development was primarily at Taco Bell and international development was primarily in Asia.This growth in system sales was partially offset by store closures.The 1996 increase of $548 million or 3% in system sales related to new unit growth in franchised and licensed operations and new Company units, primarily in international markets. The overall system sales growth was partially offset by store closures.

Revenues decreased $425 million or 4% in 1997. Company sales decreased $501 million or 5% in 1997. The decrease was driven primarily by fewer Company units as a result of our refranchising initiatives and store closures.This decline was partially offset by higher effective net pricing. Franchise and license fees increased $76 million or 15% in 1997, primarily due to an increased number of franchised units, an increase in continuing fees related to our refranchising activities and renewal fees received under a special KFC U.S. franchise contract renewal. This increase in franchise and license fees was partially offset by the unfavorable effects of foreign currency translation.

Total revenues decreased $114 million or 1% in 1996, primarily attributable to a decline of $172 million, or 2%, in Company sales,partially offset by a 13% increase in franchise and license fees.The decrease in Company sales was driven by volume declines, partially due to lapping the strong volume increases in 1995 resulting from the successful introduction of Stuffed Crust Pizza by Pizza Hut in the U.S.The decline also reflects the unfavorable impact of fewer U.S. Company units in 1996 as compared to 1995 as a result of our refranchising initiatives and store closures. These declines were partially offset by higher effective net pricing, improved same store sales at KFC in the domestic market and new Company units, primarily in international markets.The increase in franchise and license fees in 1996 primarily reflected new franchise and license units and the continuing franchise fees from refranchised restaurants.

Restaurant Margin­Worldwide

1997 1996 1995
Company sales 100.0% 100.0% 100.0%
Food and paper 32.4 33.1 33.0
Payroll and employee benefits 28.5 28.5 28.2
Occupancy and other
  operating expenses
27.6 27.8 827.6
Restaurant margin 11.5% 10.6% 11.2%

Company restaurant margins as a percent of sales increased 90 basis points for 1997. The increase in restaurant margin in 1997 was partially driven by effective net pricing in excess of increased costs, primarily labor. The other primary factor impacting margin was the positive impact of refranchising and closing underperforming units which contributed about 60 basis points of the improvement.This margin increase was partially offset by lower overall transactions. 1997 also benefited from lower commodity costs primarily related to favorable cheese and chicken prices.

Company restaurant margins decreased in 1996, primarily attributable to increased costs, primarily labor. In addition, lower volumes contributed to the decline in margin. These decreases were partially offset by higher effective net pricing, reduced depreciation and amortization relating to the impairment charges previously taken and the positive impact of refranchising and closing underperforming units.

General, Administrative and Other Expenses
1997 % B(W)
vs. 1996
1996 % B(W)
vs. 1995
Domestic $556 (1) $548 (10)
International 289 (6) 273 (7)
Unallocated 92 (30) 71 (45)
$937 (5) $892 (11)

General, administrative and other expenses ("G&A") includes general and administrative expenses, other income and expense, equity income or loss from investments in unconsolidated affiliates and foreign exchange gains and losses.

Included in the unallocated G&A is a PepsiCo allocation amount of $37 million, $53 million and $52 million in 1997 (through the Spin-off Date), 1996 and 1995, respectively, reflecting a portion of PepsiCo's shared administrative expenses. The amounts of PepsiCo's administrative expenses allocated to us by PepsiCo were based on PepsiCo's total corporate administrative expenses using the ratio of our revenues to PepsiCo's revenues. We believe that this basis of allocation was reasonable based on the facts available at the date of such allocation. Based on our current analysis, we also believe that the G&A expenses we would have incurred as an independent, publicly owned company would have been approximately $20 million higher than the annualized allocation from PepsiCo.

The $45 million or 5% increase in G&A in 1997 reflected increased investment spending, TRICON start-up costs, higher incentive compensation, increased litigation-related costs and higher foreign exchange losses. Investment spending consisted primarily of costs related to improving and updating administrative systems, including initial spending on Year 2000 issues, as well as investments during 1997 in certain key international markets. These higher expenses were partially offset by the lapping of a reorganization charge that Pizza Hut took in 1996, overall lower project spending and field overhead, particularly at Pizza Hut, and the favorable impact of divested units.

The $89 million or 11% increase in G&A in 1996 reflected increased spending, led by multiple U.S. initiatives to improve customer service and to support growth in our principal international markets. Customer service initiatives included expanding the number and training of personnel supervising the restaurant managers, as well as project spending against market-related programs.

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