SYSTEM SALES   increased $155 million or 1% in 1998. Excluding the negative impact of foreign currency translation, system sales increased by $871 million or 4%. The increase reflected the development of new units, primarily by franchisees and licensees and positive same store sales growth. U.S. development was primarily at Taco Bell and international development was primarily in Asia. This growth in system sales was partially offset by store closures.

System sales increased $185 million or 1% in 1997. Excluding the negative impact of foreign currency translation, system sales increased $525 million or 3%. New unit growth by franchisees and licensees as well as new Company units, primarily in international markets, was partially offset by store closures.

REVENUES  decreased $1.2 billion or 13% in 1998. Company sales decreased $1.3 billion or 14%. Included in 1997 revenues were the Non-core Businesses’ revenues of $268 million. Excluding the negative impact of foreign currency translation and revenues from the Non-core Businesses, revenues decreased $755 million or 8% and Company sales decreased $821 million or 9%. The decrease in Company sales was primarily due to the portfolio effect partially offset by new unit development and effective net pricing. Franchise and license fees increased $43 million or 7% in 1998. Excluding the negative impact of foreign currency translation and the special 1997 KFC renewal fees of $24 million, franchise and license fees increased $89 million or 16%. The increase 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.

Revenues decreased $547 million or 5% in 1997. Company sales decreased $626 million or 6% in 1997. The Non-core Businesses contributed $268 million and $394 million in 1997 and 1996, respectively. Excluding the negative impact of foreign currency translation, revenues decreased $465 million or 5% and Company sales decreased $555 million or 6%. The decrease in Company sales was primarily due to the portfolio effects partially offset by higher effective net pricing. Franchise and license fees increased $79 million or 16% in 1997. Excluding the negative impact of foreign currency translation and the special 1997 KFC renewal fees of $24 million, franchise and license fees increased $65 million or 13%. The increase was primarily driven by new unit development and units acquired from us, partially offset by store closures by franchisees and licensees.


Our restaurant margin as a percent of sales increased almost 190 basis points for 1998. Portfolio effect contributed approximately 65 basis points and the suspension of depreciation and amortization relating to our 1997 fourth quarter charge contributed approximately 55 basis points to our improvement. Excluding the portfolio effect and the benefits of the fourth quarter charge, our restaurant margin increased approximately 70 basis points. The improvement was largely due to effective net pricing in excess of increased costs, primarily labor. Labor increases were driven by higher wage rates, primarily the September 1997 minimum wage increase, an increase in the management complement in our Taco Bell restaurants and lower favorable insurance-related adjustments in 1998. The decrease in occupancy and other operating expenses related primarily to higher spending in 1997 on improving store condition and quality initiatives at Taco Bell and Pizza Hut as well as an increase in higher favorable insurance-related adjustments in 1998. These favorable items were partially offset by increased store refurbishment expenses at KFC in 1998.

Our restaurant margin as a percent of sales increased approximately 110 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. Portfolio effect contributed approximately 55 basis points and the Non-core Businesses contributed approximately 20 basis points of our improvement. In 1997, we also benefited from lower commodity costs primarily related to favorable cheese and chicken prices. This margin increase was partially offset by lower volumes.


Our core G&A increased $3 million in 1998. The increase reflected higher investment spending offset by the favorable impacts of stores sold or closed, decreased restaurant support center and field operating overhead and foreign currency translation. Our investment spending consisted primarily of costs related to spending on Year 2000 compliance and remediation efforts of $31 million in 1998 versus $4 million in 1997, along with the costs to relocate our processing center from Wichita to other existing restaurant support centers of $14 million. In addition, we experienced increased administrative expenses as an independent, publicly owned company and incurred additional expenses related to continuing efforts to improve and standardize administrative and accounting systems.

Included in our 1997 and 1996 core G&A were PepsiCo allocations of $37 million and $53 million, respectively, reflecting a portion of PepsiCo’s shared administrative expenses prior to the Spin-off. The allocated PepsiCo administrative expenses were based on PepsiCo’s total corporate administrative expenses using a ratio of our revenues to PepsiCo’s revenues. We believe this basis of allocation was reasonable based on the facts available at the date of such allocation.

However, our ongoing G&A as an independent, publicly owned company in 1998 exceeded the annualized amount of the 1997 PepsiCo allocation by approximately $30 million. The 1998 increase was partially offset by the absence of non-recurring TRICON start-up costs of approximately $14 million which were incurred in 1997. The 1998 increased expenses were higher than the $20 million we estimated in our 1997 Annual Report on Form 10-K, primarily due to increased incentive and stock-based compensation. These increased compensation costs are due to better-than-expected operating results, as well as strong growth in the market value of our Common Stock for the second half of 1998, partially offset by delays in staffing positions at TRICON.

Equity income from investments in our unconsolidated affiliates increased $10 million in 1998. This increase was due primarily to lower amortization relating to the impact of the joint venture investment impairment included in our 1997 fourth quarter charge and, to a lesser extent, the impact of new unit development primarily by our joint venture in the United Kingdom. Net foreign exchange gains were $6 million in 1998 compared to net foreign exchange losses of $16 million in 1997. This improvement was due primarily to non-recurring 1997 foreign exchange losses, predominantly in Thailand and the Netherlands, and to foreign exchange gains in 1998 primarily due to U.S. dollar denominated short-term investments in Canada.

Our core G&A increased $30 million or 3% in 1997 reflecting increased investment spending, TRICON start-up costs, higher incentive compensation and increased litigation-related costs. Investment spending consisted primarily of costs related to improving and updating administrative systems, including initial spending of $4 million on Year 2000 compliance and remediation efforts, as well as investments in certain key international markets. These higher expenses were partially offset by the lapping of a reorganization charge for Pizza Hut in 1996, overall lower project spending and field overhead, particularly at Pizza Hut, and the favorable impacts of stores sold or closed.