Pizza Hut 2008 Annual Report Download - page 134

12
Our operating results are closely tied to the success of our Concepts’ franchisees.
We receive significant revenues in the form of royalties from our franchisees. Because a significant and growing portion
of our restaurants are run by franchisees, the success of our business is increasingly dependent upon the operational and
financial success of our franchisees. While our franchise agreements set forth certain operational standards and
guidelines, we have limited control over how our franchisees’ businesses are run, and any significant inability of our
franchisees to operate successfully could adversely affect our operating results through decreased royalty payments. For
example, franchisees may not have access to the financial or management resources that they need to open or continue
operating the restaurants contemplated by their franchise agreements with us. In addition, franchisees may not be able to
find suitable sites on which to develop new restaurants or negotiate acceptable lease or purchase terms for the sites, obtain
the necessary permits and government approvals or meet construction schedules.
In addition, although in certain instances we require franchisees to meet certain financial criteria on an ongoing basis or in
order to grow, franchisees' levels of indebtedness are generally not within our control. If our franchisees incur too much
debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, it could result in financial
distress or even possible insolvency or bankruptcy. If a significant number of our franchisees become financially
distressed, this could harm our operating results through reduced or delayed royalty payments or increased rent
obligations for leased properties on which we are contingently liable.
Our results and financial condition could be affected by the success of our refranchising program.
We are in the process of a refranchising program, which could reduce the percentage of company ownership in the U.S.,
excluding licensees, from approximately 19% at the end of 2008 to potentially less than 10% by the end of 2010. Our
ability to execute this plan will depend on, among other things, whether we receive fair offers for our restaurants, whether
we can find viable and suitable buyers and how quickly we can agree to terms with potential buyers. In addition, some
lenders have increased lending requirements or otherwise reduced the amount of loans they are making generally or to the
restaurant industry in particular. To the extent potential buyers are unable to obtain financing at attractive prices – or
unable to obtain financing at any price – our refranchising program could be delayed.
Once executed, the success of the refranchising program will depend on, among other things, selection of buyers who can
effectively operate our restaurants, our ability to limit our exposure to contingent liabilities in connection with the sale of
our restaurants, and whether the resulting ownership mix of Company-operated and franchisee-operated restaurants allows
us to meet our financial objectives. In addition, refranchising activity could vary significantly from quarter-to-quarter and
year-to-year and that volatility could impact our reported earnings.
We could be party to litigation that could adversely affect us by increasing our expenses or subjecting us to significant
money damages and other remedies.
Like others in the restaurant industry, we are susceptible to claims filed by customers alleging that we are responsible for
an illness or injury they suffered at or after a visit to our restaurants. Regardless of whether any claims against us are
valid, or whether we are ultimately held liable, such litigation may be expensive to defend and may divert time and money
away from our operations and hurt our performance. A judgment for significant monetary damages in excess of any
insurance coverage could adversely affect our financial condition or results of operations. Any adverse publicity resulting
from these allegations may also adversely affect our reputation, which in turn could adversely affect our results.
In addition, the restaurant industry has been subject to claims that relate to the nutritional content of food products, as well
as claims that the menus and practices of restaurant chains have led to the obesity of some customers. We may also be
subject to this type of claim in the future and, even if we are not, publicity about these matters (particularly directed at the
quick service and fast-casual segments of the industry) may harm our reputation and adversely affect our results.
Form 10-K