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 grant.

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.

FRANCHISE 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 store’s new cost basis. We charge (or credit) any difference between the store’s 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.