|STOCK-BASED EMPLOYEE COMPENSATION. We measure stock-based employee compensation cost for financial
statement purposes in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations and
include pro forma information in Note 13 as required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, we measure compensation cost for the stock option grants to our
employees as the excess of the average market price of our Common Stock at the grant date
over the amount the employee must pay for the stock. Our policy is to generally grant
stock options at the average market price of the underlying Common Stock at the date of
EARNINGS (LOSS) PER
COMMON SHARE. In the accompanying
Consolidated Statement of Operations, we have omitted loss per share information for 1997
and 1996 as our capital structure as an independent, publicly owned company did not exist
in those years.
DERIVATIVE INSTRUMENTS. From time to time, we utilize interest rate swaps and collars to
hedge our exposure to fluctuations in variable interest rates.
We recognize the interest differential to be paid or received on an interest rate swap
as an adjustment to interest expense as the differential occurs. We recognize the interest
differential to be paid or received on an interest rate collar as an adjustment to
interest expense only if the interest rate falls below or exceeds the contractual collared
range. We reflect the recognized interest differential not yet settled in cash in the
accompanying Consolidated Balance Sheet as a current receivable or payable. If we were to
terminate an interest rate swap or collar position, any gain or loss realized upon
termination would be deferred and amortized to interest expense over the remaining term of
the underlying debt instrument it was intended to modify or would be recognized
immediately if the underlying debt instrument were settled prior to maturity.
We defer gains and losses on futures contracts that are designated and effective as
hedges of future commodity purchases and include them in the cost of the related raw
materials when purchased. Changes in the value of futures contracts that we use to hedge
commodity purchases are highly correlated to the changes in the value of the purchased
commodity. If the degree of correlation between the futures contracts and the purchase
contracts were to diminish such that the two were no longer considered highly correlated,
we would recognize in income subsequent changes in the value of the futures contracts.
CASH AND CASH EQUIVALENTS. Cash equivalents
represent funds we have temporarily invested (with original maturities not exceeding three
months) as part of managing our day-to-day operating cash receipts and disbursements.
INVENTORIES. We value our inventories at the lower of cost (computed on the
first-in, first-out method) or net realizable value.
PROPERTY, PLANT AND
EQUIPMENT. We state property,
plant and equipment ("PP&E") at cost less accumulated depreciation and
amortization, impairment writedowns and valuation allowances. We calculate depreciation
and amortization on a straight-line basis over the estimated useful lives of the assets as
follows: 5 to 25 years for buildings and improvements and 3 to 20 years for machinery and
equipment. We suspend depreciation and amortization on assets related to restaurants that
are held for disposal. Our depreciation and amortization expense was $372 million, $460
million and $521 million in 1998, 1997 and 1996, respectively.
INTANGIBLE ASSETS. Intangible assets include both identifiable intangibles and
goodwill arising from the allocation of purchase prices of businesses acquired. Where
appropriate, the intangibles are allocated to the individual store level at the times of
acquisition. We base amounts assigned to identifiable intangibles on independent
appraisals or internal estimates. Goodwill represents the residual purchase price after
allocation to all identifiable net assets. Our intangible assets are stated at historical
allocated cost less accumulated amortization, impairment writedowns and valuation
allowances. We amortize intangible assets on a straight-line basis as follows: 20 years
for reacquired franchise rights, 3 to 34 years for trademarks and other identifiable
intangibles and 20 years for goodwill. We suspend amortization on intangible assets
allocated to restaurants that are held for disposal. Our amortization expense was $52
million, $70 million and $95 million in 1998, 1997 and 1996, respectively.
AND LICENSE FEES. We execute franchise or license agreements
covering each point of distribution which provide the terms of our arrangement with the
franchisee/licensee. Our franchise and certain license agreements generally require the
franchisee/licensee to pay an initial, non-refundable fee. Our agreements also require
continuing fees based upon a percentage of sales. Subject to our approval and payment of a
renewal fee, a franchisee may generally renew its agreement upon its expiration.
We recognize initial fees as revenue when we have performed substantially all initial
services required by the franchising/licensing agreement, which is generally upon opening
of a store. We recognize continuing fees as earned with an appropriate provision for
estimated uncollectible amounts. We recognize renewal fees in earnings when a renewal
agreement becomes effective. We include initial fees collected upon the sale of a
restaurant to a franchisee in refranchising gains (losses).
Our direct costs of the sales and servicing of
franchise and license agreements are charged to expense as incurred.
REFRANCHISING GAINS (LOSSES). Refranchising gains (losses) include gains or losses on sales
of our restaurants to new and existing
franchisees and the related initial franchise fees. We include direct administrative costs
of refranchising in the gain or loss calculation. We recognize gains on restaurant
refranchisings when the sale transaction closes, the franchisee has a minimum amount of
the purchase price in at-risk equity and we are satisfied that the franchisee can meet its
financial obligations. Otherwise, we defer refranchising gains until those criteria have
been met. We recognize estimated losses on restaurants to be refranchised and suspend
depreciation and amortization when: (1) we make a decision to refranchise a store; (2) the
estimated fair value less costs to sell is less than the carrying amount of the store; and
(3) the store can be immediately removed from operations. When we make a decision to
retain a store previously held for refranchising, we revalue the store at the lower of its
net book value at our original disposal decision date less normal depreciation during the
period held for disposal or its current fair market value. This value becomes the
stores new cost basis. We charge (or credit) any difference between the stores
carrying amount and its new cost to refranchising gains (losses). When we make a decision
to close a store previously held for refranchising, we reverse any previously recognized
refranchising loss and then record the store closure costs as described below.