Pizza Hut 1999 Annual Report Download - page 58

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$2.5 million, respectively. The effects of a one percentage
point increase or decrease in the assumed health care cost
trend rates on total service and interest cost components are
not significant.
At the end of 1998, we changed the method for determining
our pension and postretirement medical benefit discount rate
to better reflect the assumed investment strategies we
would most likely use to invest any short-term cash
surpluses. See Note 5.
Employee Stock-Based Compensation
At year-end 1999, we had four stock option plans
in effect: the TRICON Global Restaurants, Inc. Long-
Term Incentive Plan (“1999 LTIP”), the 1997 Long-Term
Incentive Plan (“1997 LTIP”), the TRICON Global Restaurants,
Inc. Restaurant General Manager Stock Option Plan (“YUM-
BUCKS”) and the TRICON Global Restaurants, Inc.
SharePower Plan (“SharePower”).
We may grant options to purchase up to 7.6 million and 22.5
million shares of stock under the 1999 LTIP and 1997 LTIP,
respectively, at a price equal to or greater than the average mar-
ket price of the stock on the date of grant. New options we
grant can have varying vesting provisions and exercise periods.
Previously granted options vest in periods ranging from imme-
diate to 2006 and expire ten to fourteen years after grant.
Potential awards to employees and non-employee directors
under the 1999 LTIP include stock options, incentive stock
options, stock appreciation rights, restricted stock, stock units,
restricted stock units, performance shares and performance
units. Potential awards to employees and non-employee direc-
tors under the 1997 LTIP include stock options, incentive stock
options, stock appreciation rights, restricted stock and per-
formance restricted stock units. We have issued only stock
options and performance restricted stock units under the 1997
LTIP and have yet to grant any awards under the 1999 LTIP.
We may grant options to purchase up to 7.5 million shares of
stock under YUMBUCKS at a price equal to or greater than the
average market price of the stock on the date of grant. YUM-
BUCKS options granted have a four year vesting period and
expire ten years after grant. We do not anticipate that any
further SharePower grants will be made although options
previously granted could be outstanding through 2006.
At the Spin-off Date, we converted certain of the unvested
options to purchase PepsiCo stock that were held by our
employees to TRICON stock options under either the 1997
LTIP or the SharePower. We converted the options at amounts
and exercise prices that maintained the amount of unrealized
stock appreciation that existed immediately prior to the Spin-
off. The vesting dates and exercise periods of the options were
not affected by the conversion. Based on their original PepsiCo
grant date, our converted options vest in periods ranging from
one to ten years and expire ten to fifteen years after grant.
Had we determined compensation cost for all TRICON option
grants to employees and non-employee directors consistent
with SFAS 123, our net income (loss) and basic and diluted
earnings per Common Share would have been reduced
(increased) to the pro forma amounts indicated below:
1999 1998 1997
Net Income (Loss)
As reported $ 627 $ 445 $ (111)
Pro forma 597 425 (112)
Basic Earnings
per Common Share
As reported $ 4.09 $ 2.92
Pro forma 3.90 2.79
Diluted Earnings
per Common Share
As reported $ 3.92 $ 2.84
Pro forma 3.73 2.72
SFAS 123 pro forma loss per Common Share data for 1997 is
not meaningful as we were not an independent, publicly owned
company with a capital structure of our own for the entire year.
The effects of applying SFAS 123 in the pro forma disclosures
are not likely to be representative of the effects on pro forma net
income for future years because variables such as the number
of option grants, exercises and stock price volatility included in
these disclosures may not be indicative of future activity.
We estimated the fair value of each option grant made during
1999, 1998 and 1997 subsequent to the Spin-off as of the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1999 1998 1997
Risk-free interest rate 4.9% 5.5% 5.8%
Expected life (years) 6.0 6.0 6.6
Expected volatility 29.7% 28.8% 27.5%
Expected dividend yield 0.0% 0.0% 0.0%
note 15