Pizza Hut 2001 Annual Report Download - page 57

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We have assumed the annual increase in cost of postretirement
medical benefits was 8.0% for non-Medicare eligible retirees
and 12.0% for Medicare eligible retirees in 2001 and will be
7.5% and 11.0%, respectively, in 2002. We are assuming the
rates for non-Medicare and Medicare eligible retirees will
decrease to an ultimate rate of 5.5% by 2008 and 2010, respec-
tively, and remain at that level thereafter. There is a cap on our
medical liability for certain retirees. The cap for Medicare eligi-
ble retirees was reached in 2000 and the cap for non-Medicare
eligible retirees is expected to be reached between the years
2010–2012; once the cap is reached, our annual cost per retiree
will not increase.
Assumed health care cost trend rates have a significant effect
on the amounts reported for our postretirement health care plans.
A one percent increase or decrease in the assumed health care
cost trend rates would have increased or decreased our accumu-
lated postretirement benefit obligation at December 29, 2001 by
approximately $3 million. The impact on our 2001 benefit cost
would not have been significant.
EMPLOYEE STOCK-BASED
COMPENSATION
At year-end 2001, 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 (“YUMBUCKS”) and the TRICON
Global Restaurants, Inc. SharePower Plan (“SharePower”).
We may grant awards of up to 7.6 million shares and 22.5
million shares of stock under the 1999 LTIP and the 1997 LTIP,
respectively. 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 perform-
ance units. Potential awards to employees and non-employee
directors under the 1997 LTIP include stock appreciation rights,
restricted stock and performance restricted stock units. Prior to
January 1, 2002, we also could grant stock options and incen-
tive stock options under the 1997 LTIP. We have issued only
stock options and performance restricted stock units under the
1997 LTIP and have issued only stock options under the 1999 LTIP.
We may grant stock options under the 1999 LTIP to pur-
chase shares at a price equal to or greater than the average
market price of the stock on the date of grant. New option
grants under the 1999 LTIP can have varying vesting provisions
and exercise periods. Previously granted options under the 1997
LTIP and 1999 LTIP vest in periods ranging from immediate to
2006 and expire ten to fifteen years after grant.
16
NOTE
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.
YUMBUCKS options granted have a four year vesting period and
expire ten years after grant. We may grant options to purchase
up to 7.0 million shares of stock at a price equal to or greater
than the average market price of the stock under SharePower
on the date of grant. SharePower grants have not been made
since Spin-off. Previously granted SharePower options 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 SharePower. We converted the options at amounts and exer-
cise 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.
The following table reflects pro forma net income and earn-
ings per common share had we elected to adopt the fair value
approach of SFAS 123.
2001 2000 1999
Net Income
As reported $ 492 $ 413 $ 627
Pro forma 462 379 597
Basic Earnings per Common Share
As reported $3.36 $ 2.81 $ 4.09
Pro forma 3.15 2.58 3.90
Diluted Earnings per Common Share
As reported $3.24 $ 2.77 $ 3.92
Pro forma 3.04 2.55 3.73
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 num-
ber 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 dur-
ing 2001, 2000 and 1999 as of the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions:
2001 2000 1999
Risk-free interest rate 4.7% 6.4% 4.9%
Expected life (years) 6.0 6.0 6.0
Expected volatility 32.7% 32.6% 29.7%
Expected dividend yield 0.0% 0.0% 0.0%