Pizza Hut 1999 Annual Report Download - page 37

has advised us that it intends to prepare and file with the
Bankruptcy Court a plan of reorganization in the future.
TRICON, the purchasing cooperative for the TRICON system
and key representatives of the TRICON franchise community
are working closely together to proactively address the bank-
ruptcy situation and develop appropriate contingency plans.
It is our intention to take all actions reasonably necessary and
prudent to ensure continued supply of restaurant products
and equipment to the TRICON system, and to minimize any
incremental costs or exposures related to the AmeriServe
bankruptcy. The significant actions that we have taken to date
are described below.
On February 2, 2000, we and another major AmeriServe
customer agreed to provide a $150 million interim “debtor-in-
possession” revolving credit facility (the “Facility”) to
AmeriServe. We initially committed to provide up to $100 mil-
lion under this Facility. However, we have reached an
agreement in principle to assign $30 million of our commitment
to a third party, reducing our total commitment under the
Facility to $70 million. AmeriServe has advised us that it is
actively seeking to arrange alternative debtor-in-possession
financing to replace the Facility.
In addition to our participation in the Facility, to help ensure
that our supply chain continues to remain open, we have
begun to purchase (and take title to) supplies directly from sup-
pliers (the “temporary direct purchase program”) for use in our
restaurants, as well as for resale to our franchisees and
licensees who previously purchased supplies from AmeriServe.
AmeriServe has agreed, for the same fee in effect prior to the
bankruptcy filing, to continue to be responsible for distributing
the supplies to us and our participating franchisee and licensee
restaurants as well as providing ordering, inventory, billing and
collection services for us. To date, this arrangement has been
effective in ensuring supplies to our restaurants, and we have
not experienced any significant supply interruption.
Further, we have commenced contingency planning and
believe that we can arrange with an alternative distributor or
distributors to meet the needs of the TRICON restaurant system
if AmeriServe is no longer able to adequately service our restau-
rants or if otherwise permitted by the Bankruptcy Court.
As in most bankruptcies involving a primary supplier or dis-
tributor, the AmeriServe bankruptcy poses certain risks and
uncertainties to us, as well as to our franchisees that rely on
AmeriServe to distribute products to their restaurants. The
more significant of these risks and uncertainties are described
below. Significant adverse developments in any of these risks
or uncertainties could have a material adverse impact on our
results of operations, cash flow or financial condition.
We expect to incur costs in connection with our temporary direct
purchase program, including the cost of additional debt incurred
to finance the inventory purchases and to carry the receivables
arising from inventory sales. While we believe that adequate
inventory control and collections systems are in place, we may
also incur costs related to the possibility of inventory obsoles-
cence and uncollectible receivables from our franchisees. We
expect to mitigate, if not fully offset, these costs through dis-
counts granted by suppliers for prompt payments. We also
expect to incur certain one-time unusual costs as a result of the
AmeriServe bankruptcy, primarily consisting of professional fees.
We intend to continue to work with AmeriServe and our suppli-
ers to meet our supply needs while AmeriServe seeks to
reorganize. Due to the uncertainties surrounding AmeriServe’s
reorganization, we cannot predict the ultimate impact, if any, on
our businesses. There can be no assurance that the Facility will
be sufficient to meet AmeriServe’s cash requirements or that we
will be able to fully recover the amount advanced under the
Facility. There can be no assurance that AmeriServe will be suc-
cessful in arranging replacement debtor-in-possession financing
on satisfactory terms, or that a plan of reorganization for
AmeriServe will ultimately be confirmed, or if confirmed, what
the plan will provide. Additionally, there can be no assurance that
AmeriServe will be able to maintain our supply line indefinitely
without additional financing or at our current contractual rates.
We currently have a multi-year contract with AmeriServe
which is subject to the Bankruptcy Court procedures during
the reorganization process. As stated above, we believe that
we can arrange with an alternative distributor or distributors
to meet the needs of the TRICON restaurant system if
AmeriServe is no longer able to adequately service our restau-
rants or if otherwise permitted by the Bankruptcy Court. We
could, however, experience some short-term delays due to
the time required to qualify and contract with, and transition
the business to, other distributors. There can be no assur-
ance that the cost of these alternatives would be at the same
rates we currently pay AmeriServe.
We believe that we may have a set-off or recoupment claim
against amounts we owe AmeriServe under our distribution
contract that would allow us to recover certain costs and dam-
ages that we have incurred (or may incur) as a result of
AmeriServe’s failure to perform its contractual obligations to
our restaurants both prior to and after the bankruptcy filing.
While we intend to assert this claim, there can be no assur-
ance that we will be successful.
Without regard to the final outcome of the AmeriServe bank-
ruptcy proceedings, it is our intention to take whatever steps
are reasonably required to ensure continued supply of restau-
rant products and equipment to the TRICON system. To the
extent we incur any ongoing incremental costs as a result of
the AmeriServe bankruptcy or actions related thereto, we
intend to mitigate those costs to the maximum extent possible
through other reasonable management actions.
Impact of New Ventures. Consistent with our strategy to
focus our capital on key international markets, we entered into
agreements in the fourth quarter of 1999 to form new ventures
during 2000 in Canada and Poland with our largest franchisees
in those markets. We intend to contribute approximately 300
restaurants in Canada and 50 restaurants in Poland in
exchange for an equity interest in each venture. These units
represented approximately 18% of total International Company 35