We believe that the remaining amounts are adequate to complete our current plan of disposal. However, actual results could differ from our estimates.
We believe our worldwide business, upon completion of the actions covered by the charge, will be significantly more focused and better-positioned to deliver consistent growth in operating profit before facility actions. We estimate that the favorable impact on 1998 operating profit before facility actions related to the 1997 fourth quarter charge was approximately $64 million ($42 million after-tax), including $33 million ($21 million after-tax) from the suspension of depreciation and amortization in 1998 for the stores included in the charge.
As anticipated in our 1997 Annual Report on Form 10-K, the 1998 benefits of our 1997 fourth quarter charge of $64 million were largely offset by incremental spending related to our Year 2000 issues of $27 million and the decline in our Asian businesses of $27 million in 1998 compared to 1997.
See Note 4 to the Consolidated Financial Statements for additional disclosures related to the components of the 1997 fourth quarter charge and to all facility actions.
On January 1, 1999, eleven of the fifteen member countries of the European Economic and Monetary Union ("EMU") adopted the Euro as a common legal currency and fixed conversion rates were established. From that date through June 30, 2002, participating countries will maintain both legacy currencies and the Euro as legal tender. Beginning January 1, 2002, new Euro-denominated bills and coins will be issued and a transition period of up to six months will begin in which legacy currencies will be removed from circulation.
We have Company-owned and franchised businesses in the adopting member countries, which are preparing for the conversion. Expenditures associated with conversion efforts to date have been insignificant. We currently estimate that our spending over the ensuing three-year transition period will be approximately $16 million, related to the conversion in the EMU member countries in which we operate stores. These expenditures primarily relate to capital expenditures for new point-of-sale and back-of-house hardware and software. We expect that adoption of the Euro by the U.K. would significantly increase this estimate due to the size of our businesses there relative to our aggregate businesses in the adopting member countries in which we operate.
The speed of ultimate consumer acceptance of and our competitor's responses to the Euro are currently unknown and may impact our existing plans. However, we know that, from a competitive perspective, we will be required to assess the impacts of product price transparency, potentially revise product bundling strategies and create Euro-friendly price points prior to 2002. We do not believe that these activities will have sustained adverse impacts on our businesses. Although the Euro does offer certain bents to our treasury and procurement activities, these are not currently anticipated to be significant.
We currently anticipate that our suppliers and distributors will continue to invoice us in legacy currencies until late 2001. We expect to begin dual pricing in our restaurants in 2001. We expect to compensate employees in Euros beginning in 2002. We believe that the most critical activity regarding the conversion for our businesses is the completion of the rollout of Euro-ready point-of-sale equipment and software by the end of 2001. Our current plans should enable us to be Euro-compliant prior to the requirements for these activities. Any delays in our ability to complete our plans, or in the ability of our key suppliers to be Euro-compliant, could have a material adverse impact on our results of operations, financial conditions or cash flows.
In 1998, we had unusual charges of $15 million ($3 million after-tax) versus unusual charges in 1997 of $184 million ($165 million after-tax).
Unusual charges in 1998 included the following: (1) an increase in the estimated costs of settlement of certain wage and hour litigation and associated defense and other costs incurred; (2) severance and other exit costs related to strategic decisions to streamline the infrastructure of our international businesses; (3) favorable adjustments to our 1997 fourth quarter charge related to anticipated actions that were not taken, primarily severance; (4) writedown to estimated fair market value less costs to sell of our minority interest in a privately held non-core business, previously carried at cost, now held for sale; and (5) reversals of certain valuation allowances and lease liabilities relating to better-than-expected proceeds from the sale of properties and settlement of lease liabilities associated with properties retained upon the sale of a Non-core Business.
Unusual charges in 1997 included the following: (1) $120 million ($125 million after-tax) of unusual asset impairment and severance charges included in our 1997 fourth quarter charge described above; (2) charges to further reduce the carrying amounts of Non-core Businesses held for disposal to estimated market value, less costs to sell; and (3) charges relating to the estimated costs of settlement of certain wage and hour litigation and the associated defense and other costs incurred.
In 1999, our financial results will be impacted by a number of accounting changes. These changes, which we believe are material in the aggregate, fall into three categories:
Following is a discussion of those changes which have affected or will affect comparability.
REQUIRED CHANGES IN GAAP In 1999, we will adopt Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This Statement will require us to capitalize approximately $12 million of costs of internal software development and of third party software purchases that we would have expensed previously. Amortization or depreciation of amounts capitalized will be dependent on the useful lives of the underlying software assets.
We adopted Emerging Issues Task Force Issue No. 97-11 ("EITF 97-11"), "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" upon its issuance in March 1998. EITF 97-11 limits the capitalization of internal real estate acquisition costs to those site-specific costs incurred from the point in time that the real estate acquisition is probable. We consider acquisition of the property probable upon final site approval. EITF 97-11 resulted in approximately $6 million ($3 million after-tax) of additional expense in the last three quarters of 1998. Amounts of internal real estate acquisition costs capitalized in 1999 will also be further reduced from their 1998 levels by a discretionary policy change we have adopted to limit the types of costs eligible for capitalization to those direct costs described as capitalizable in SOP 98-1. The combined incremental impact on 1999 results of operations for the application of EITF 97-11 and the policy change is expected to be approximately $4 million ($3 million after-tax), almost 50% of which will impact the first quarter.
DISCRETIONARY METHODOLOGY CHANGES In 1999, we will refine and enhance our existing actuarial methodology for estimating the self-insured portion of our casualty losses. Our current practice is to increase our independent actuary's ultimate loss projections, which have a 51% confidence level, by a consistent percentage to improve the confidence level of our loss estimates. Confidence level means the likelihood that our actual losses will be equal to or below those estimates. Based on our independent actuary's opinion, our current practice produces a very conservative confidence factor at a higher level than our target of 75%. Our actuary believes our 1999 change will produce estimates at our 75% target confidence level for each self-insured year. We estimate this change in methodology will increase our 1999 results of operations by $5 million ($3 million after-tax). The majority of this increase will occur in our first 1999 actuarial evaluation which we currently expect to recognize in the first quarter.
Accounting for pensions requires us to develop an assumed interest rate on securities with which the pension liabilities could be effectively settled. In estimating this discount rate, we look at rates of return on high-quality corporate fixed income securities currently available and expected to be available during the period to the maturity of the pension benefits. As it is impractical to find an investment portfolio which exactly matches the estimated payment stream of the pension benefits, we often have projected short-term cash surpluses. Effective for 1999, we changed our method of determining the pension discount rate to better reflect the assumed investment strategies we would most likely use to invest any short-term cash surpluses. Previously, we assumed that all short-term cash surpluses would be invested in U.S. government securities. Our new methodology assumes that our investment strategies would be equally divided between U.S. government securities and high-quality corporate fixed income securities. The change in methodology is estimated to favorably impact 1999 results of operations by approximately $6 million ($4 million after-tax).
BUSINESS STANDARDIZATION CHANGES In 1999, we will begin the standardization of our U.S. people policies, which will require changes by certain of our businesses. Most of these changes are not expected to have a significant financial impact. As part of this process, our vacation policies will be conformed to a fiscal-year-based, earn-as-you-go, use-or-lose policy from policies under which employees' vested vacations were attributable to services rendered in prior years. Over the two-year implementation period for this vacation policy change, the reduction of our accrued vacation liabilities could be as much as $20 million. The total reduction and the portion attributable to 1999 are not determinable at this time, as final decisions regarding specific transition rules including possible vacation buyouts for some of the affected employee groups have not yet been made.
In addition, in 1999, we will focus on standardizing all systems and accounting practices for our U.S. businesses. We currently estimate the results of standardizing our accounting practices will not have a significant impact on our results of operations.
STORE PORTFOLIO PERSPECTIVES
Beginning in 1995, we have been working to reduce our share of total system units by selling our restaurants to existing and new franchisees where their expertise can be leveraged to improve our concepts' overall operational performance, while retaining our ownership of key markets. In addition, we also began an aggressive program to close our underperforming stores. Our portfolio-balancing activity has reduced, and will continue to reduce, our reported revenues and increase the importance of system sales as a key performance measure. Refranchising at appropriate prices frees up invested capital while continuing to generate franchise fees, thereby improving returns. The impact of refranchising gains is expected to decrease over time as we approach a Company/franchise balance more consistent with our major competitors. The following table summarizes our refranchising activities over the last four years:
Our ownership percentage (including joint venture units) of our Core Businesses' total system units decreased by almost 6 percentage points from year-end 1997 and by 12 percentage points from year-end 1996 to 32% at December 26, 1998. This reduction was a result of our portfolio initiatives and the relative number of new points of distribution added and units closed by our franchisees and licensees and by us.
ADDITIONAL FACTORS EXPECTED TO IMPACT 1999 COMPARSIONS WITH 1998
Our facility actions net gain was $221 million ($129 million after-tax) in 1998 excluding favorable adjustments to our 1997 fourth quarter charge. Facility actions net loss (gain) includes refranchising gains or losses, costs of closing underperforming stores and impairment charges for restaurants we intend to continue to use in the business or to close in a future quarter. Facility actions net gain in 1999 is expected to be half the level of the net gain recognized in 1998. However, if market conditions are favorable, we expect to sell more than the 800-900 units we have currently forecasted which would impact the amount of our net gain for 1999.
We are phasing in certain structural changes to our Executive Income Deferral Program ("EID") during 1999 and 2000 which are further discussed in Note 14 to the Consolidated Financial Statements. One such 1999 change requires all subsequent payouts under the EID to be made only in our Common Stock rather than cash or Common Stock at our option. This restriction applies only if the participant's original deferrals were invested in discounted phantom shares of our Common Stock. Previously for accounting purposes, we were required to assume the payment was made in cash. In 1999, we will no longer expense the appreciation, if any, attributable to the investments in these phantom shares. If this change had been in effect from the beginning of 1998, general and administrative expenses would have been approximately $10 million ($6 million after-tax) lower than reported. The 1999 impact of the change is dependent on movements in the market price of our Common Stock and the effect of forfeitures, if any, and cannot currently be estimated.
In 1999, we expect to incur approximately $5 million ($3 million after-tax) of additional charges related to our unusual charge for our 1998 strategic decision to streamline our international businesses. In 1999, we also expect to incur approximately $3 million ($2 million after-tax) of expenses related to the start-up of a unified food service purchasing cooperative and costs associated with reducing the workforce in our internal purchasing function. In 1998, we incurred $2 million ($1 million after-tax) related to the start-up of the co-op.
In 1998, we completed our relocation of our Wichita, Kansas operations to other facilities. The total cost we incurred in 1998 of $14 million ($9 million after-tax) included termination benefits, relocation costs, early retirement and other expenses related to this relocation. Due to contractual disputes with the proposed buyer, the expected fourth quarter 1998 sale of the facility at a gain to this buyer did not occur and is not considered imminent. We continue to expect to sell the facility at a price which should at least recover its carrying amount, but cannot estimate either the amount or timing of any potential gain at this time.
Certain cost recovery agreements with Ameriserve and PepsiCo reduced our 1998 general, administrative and other ("G&A") costs by approximately $8 million ($5 million after-tax). These agreements were terminated during 1998.
Our Spin-off in 1997, our 1997 fourth quarter charge, the impacts of the disposal of our Non-core Businesses and fluctuations in the number and amount of gains related to refranchised stores represent significant items which complicate year-over-year comparisons.
Prior to October 7, 1997, our historical financial statements were impacted by our lack of history as an independent, publicly owned company. The amounts for certain items, specifically general and administrative expenses, interest expense and income taxes, included in our historical reported results for periods prior to the Spin-off, include allocations or computations which are not indicative of the amounts we would have incurred if we had been an independent, publicly owned company during all periods presented. See Note 2 to the Consolidated Financial Statements.
Additionally, comparative information is impacted by the operations of and disposal charges related to our Non-core Businesses in 1997. These disposal charges included an estimated provision for all expected future liabilities associated with the disposal of our Non-core Businesses. We were required to retain these liabilities as part of the Spin-off. Our best estimates of all such liabilities have been included in the accompanying Consolidated Financial Statements. See Note 19 to the Consolidated Financial Statements. Actual amounts incurred may ultimately differ from these estimates. However, we believe the amounts, if any, in excess of our previously recorded liabilities are not likely to have a material adverse effect on our results of operations, financial condition or cash flow.
Following is a summary of the results of the operations and disposal of our Non-core Businesses: