Pizza Hut 2000 Annual Report Download - page 29

TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES 27
Depending upon the facts and circumstances of each
situation, and in the absence of an improvement in business
trends, there are a number of potential resolutions of these
financial issues, including a sale of some or all of the opera-
tor’s restaurants to us or a third party, a restructuring of the
operator’s business and/or finances, or, in the more unusual
cases, bankruptcy of the operator. It is our practice to proac-
tively work with financially troubled franchise operators in
an attempt to positively resolve their issues.
Taco Bell has established a $15 million loan program
for those franchisees in need of short-term assistance due to
the recent sales declines in the Taco Bell system. Through
February 2001, this program has aided approximately 75
franchisees covering approximately 1,500 Taco Bell restaurants.
Additionally, Taco Bell is in various stages of discussions with
a number of other Taco Bell franchisees and their lenders. We
believe that many of these franchisees will require various types
of business and/or financial restructuring. Based on currently
available information, we believe that this group of franchisees
represents approximately 1,000 Taco Bell restaurants.
In 2000, we charged approximately $26 million to ongoing
operating profit for expenses related to the financial situation
of certain Taco Bell franchisees. These expenses, which relate
primarily to allowances for doubtful franchise and license fee
receivables, were reported as general and administrative
expenses. On an ongoing basis, we assess our exposure from
franchise-related risks which include estimated uncollectibil-
ity of accounts receivable related to franchise and license fees,
contingent lease liabilities, guarantees to support certain third
party financial arrangements with franchisees and potential
claims by franchisees. The contingent lease liabilities and
guarantees are more fully discussed in the Contingent Liabili-
ties section of Note 21. Although the ultimate impact of these
franchise financial issues cannot be predicted with certainty
at this time, we have provided for our current estimate of the
probable exposure to the Company as of December 30, 2000.
It is reasonably possible that there will be additional costs
which could be material to quarterly or annual results of
operations, financial condition or cash flows.
Based on the information currently available to us, we have
budgeted for an estimate of expenses and capital expenditures
that may be required to address this situation. However, the
Taco Bell franchise financial situation poses certain risks and
uncertainties to us. The more significant of these risks and
uncertainties are described below. Significant adverse develop-
ments in this situation, or in any of these risks or uncertainties,
could have a material adverse impact on our quarterly or
annual results of operations, financial condition or cash flows.
We intend to continue to proactively work with financially
troubled franchise operators in an attempt to positively resolve
their issues. However, there can be no assurance that the
number of franchise operators or restaurants experiencing
financial difficulties will not change from our current estimates.
Nor can there be any assurance that we will be successful in
resolving financial issues relating to any specific franchise
operator. Additionally, there can be no assurance that resolu-
tion of these financial issues will not result in Taco Bell
purchasing a significant number of restaurants from financially
troubled Taco Bell franchise operators.
Unusual Items
We recorded unusual items of $204 million ($129 million
after-tax), $51 million ($29 million after-tax) and $15 million
($3 million after-tax) in 2000, 1999 and 1998, respectively.
See Note 5 for a detailed discussion of our unusual items.
Fifty-third Week in 2000
Our fiscal calendar results in a fifty-third week every 5 or 6
years. Fiscal year 2000 included a fifty-third week in the
fourth quarter. The following table summarizes the estimated
impact of the fifty-third week on system sales, revenues and
ongoing operating profit:
Inter-
U.S. national Unallocated Total
System sales $230 $65 $«– $295
Revenues
Company sales $÷58 $18 $«– $÷76
Franchise fees 92–11
Total Revenues $÷67 $20 $«– $÷87
Ongoing operating profit
Franchise fees $÷÷9 $÷2 $«– $÷11
Restaurant margin 114–15
General and administrative
expenses (3) (2) (2) (7)
Ongoing operating profit $÷17 $÷4 $(2) $÷19
The estimated favorable impact in net income was $10 mil-
lion or $0.07 per diluted share.