Refranchising gains, which included initial franchise fees of $44 million, $41 million and $22 million in 1998, 1997 and 1996, respectively, as well as a $100 million tax-free gain from refranchising our restaurants in New Zealand through an initial public offering in 1997, resulted from the refranchising of 1,389 units in 1998, 1,418 units in 1997 and 659 units in 1996.

Prior to April 23, 1998, we provided store closure costs when we made the decision to close a unit. At that time, in response to the Securities and Exchange Commission’s ("SEC") interpretation of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), we changed our store closure accounting policy. For closure decisions made subsequent to April 23, 1998, we only recognize any required asset impairment as a component of store closure costs when we have closed the restaurant within the same quarter the closure decision is made. The impact of this change reduced 1998 store closure costs by $4 million which was more than offset by increased impairment described in next paragraph. We closed 661 units in both 1998 and 1997, and 352 units in 1996.

Impairment charges were $31 million in 1998. Prior to April 23, 1998, our impairment charges resulted from our normal semi-annual evaluation of stores which we will continue to use in the business. Stores that meet our "two-year history of operating losses," our primary impairment indicator, or which we believe may be impaired due to other changes or circumstances are evaluated for impairment. In 1998, upon adoption of the SEC’s interpretation of SFAS 121, we also perform impairment evaluations when we expect to actually close a store beyond the quarter in which our closure decision is made. This change resulted in additional impairment charges of $6 million in 1998. We believe the overall decrease in impairment in 1998 was significantly impacted by 1997 decisions included in our fourth quarter charge to dispose of certain stores which may have otherwise been impaired in our evaluations, and improved performance primarily at Pizza Hut in the U.S. Impairment charges of $50 million in 1997 and $62 million in 1996 resulted from our semi-annual impairment evaluations of restaurants.

 

Ongoing operating profits increased $96 million or 14% in 1998. Excluding the negative impact of foreign  currency translation, ongoing operating profits increased $120 million or 18%. The increase was driven by higher franchise fees and reduced G&A, partially offset by the absence in 1998 of the Non-core Businesses’ operating profit of $13 million and the special 1997 KFC renewal fees of $24 million. Ongoing operating profits in 1998 included benefits from our 1997 fourth quarter charge of approximately $64 million of which $33 million related to the suspension of depreciation and amortization for stores included in the charge. The benefits from our 1997 fourth quarter charge were almost completely offset by incremental 1998 Year 2000 spending of $27 million and the decline in Asia profits of $27 million in 1998 compared to 1997.

Unallocated and corporate expenses increased $82 million or 93% in 1998. The increase was primarily due to spending on Year 2000 compliance and remediation efforts, costs to relocate our processing center from Wichita to other facilities and expenses incurred as an independent, publicly owned company, as well as, additional expenses related to the efforts to improve and standardize operating, administrative and accounting systems.

Ongoing operating profits increased $91 million or 16% in 1997. Excluding the negative impact of foreign currency translation, ongoing operating profits increased $97 million or 17%. The increase relates primarily to increased franchise fees driven by the special 1997 KFC renewal fees of $24 million and improved restaurant margin, partially offset by an increase in unallocated and corporate expenses. The increase was driven primarily by increased investment spending related to improving and updating administrative systems including initial spending on Year 2000 compliance and remediation efforts, TRICON start-up costs and higher incentive compensation.