Pizza Hut 2003 Annual Report Download - page 45

Yum! Brands Inc. 43.
We have guaranteed certain lines of credit and
loans of Unconsolidated Affiliates totaling $28 million at
December 27, 2003. Our Unconsolidated Affiliates had total
revenues of over $1.5 billion for the year ended December 27,
2003 and assets and debt of approximately $858 million
and $41 million, respectively, at December 27, 2003.
OTHER SIGNIFICANT KNOWN EVENTS,
TRENDS OR UNCERTAINTIES EXPECTED TO IMPACT
2004 OPERATING PROFIT COMPARISONS WITH 2003
New Accounting Pronouncements Not Yet Adopted
See Note 2.
Canada Unconsolidated Affiliate Dissolution
On November 10, 2003 our Unconsolidated Affiliate that
previously operated 479 KFC, 236 Pizza Hut and 18
Taco Bell restaurants in Canada was dissolved. We owned
50% of this Unconsolidated Affiliate prior to its dissolution
and accounted for our interest under the equity method.
Upon dissolution, the Company assumed operation and
acquired all associated assets of the Pizza Huts, as well
as 17 Taco Bells and 5 KFCs. The Company also acquired
the real estate associated with 140 KFCs for which the
Company will not be the operator. Our former partner in the
Unconsolidated Affiliate acquired full ownership of all other
assets, as well as the franchise rights to operate 474 KFCs
and one Taco Bell. Our former partner retained 10 KFCs and
sold the remainder of these assets and franchise rights
acquired to a newly-formed, publicly-held Income Trust in
Canada, of which our former partner now holds a minority
interest. The Company leases land and buildings for KFCs
it does not operate to the Income Trust under operating and
capital lease agreements through 2018. The Company will
continue to receive a franchise royalty from the KFCs oper-
ated by our former partner and the Income Trust.
The Company realized an immaterial gain upon dissolu-
tion of the Unconsolidated Affiliate. This gain was realized
as the fair value of our increased ownership in the assets
received was greater than our carrying value in those
assets, and was net of expenses associated with the
dissolution of the Unconsolidated Affiliate.
The impact of the restructuring on our 2003 results of
operations was not significant. As a result of the restruc-
turing, 2004 Company sales are expected to increase by
approximately $165 million and franchise fees are expected
to decrease by approximately $10 million. The impact on
net income is not expected to be material.
Amendment of Sale-Leaseback Agreements
As discussed in Note 14 and on page 33 of this MD&A,
in 2003 we amended two sale-leaseback agreements
assumed in our 2002 acquisition of YGR. We estimate the
impact of these amendments in 2004 to be a decrease in
restaurant profit of $8 million and a decrease in interest
expense of $10 million.
Puerto Rico Business Held for Sale
Our Puerto Rican business has been held for sale since the
fourth quarter of 2002. While a sale of the Puerto Rican
business has not yet occurred, we continue to believe that
it is probable that a sale will occur during 2004. Sales
and restaurant profits of the Puerto Rican business were
$187 million and $34 million in 2003.
Contingent Lease Guarantees
Under terms of our separation agreements at the time of
the Spin-off, we indemnified PepsiCo for any losses incurred
related to their guarantees of lease agreements of certain
non-core businesses which were sold prior to the Spin-
off. Two of these businesses, Chevys Mexican Restaurant
(Chevys) and Hot ’n Now (HNN) filed for bankruptcy protec-
tion in October 2003 and January 2004, respectively. While
we cannot presently determine our liability under these
indemnities, if any, we do not expect the amount to have a
material impact on our Consolidated Financial Statements.
Any costs incurred will be charged to AmeriServe and other
charges (credits). See Note 24 for further discussion.
Pension Plan Funded Status
Certain of our employees are covered under noncontributory
defined benefit pension plans. The most significant of these
plans was amended in 2001 such that employees hired
after September 30, 2001 are no longer eligible to partici-
pate. As of our September 30, 2003 measurement date,
these plans had a projected benefit obligation (“PBO”) of
$629 million, an accumulated benefit obligation (“ABO”) of
$563 million and a fair value of plan assets of $438 million.
As a result of the $125 million underfunded status of the
plans relative to the ABO at September 30, 2003, we have
recorded a $101 million charge to shareholders’ equity (net
of tax of $61 million) as of December 27, 2003.
The PBO and ABO reflect the actuarial present value
of all benefits earned to date by employees. The PBO
incorporates assumptions as to future compensation
levels while the ABO reflects only current compensation
levels. Due to the relatively long time frame over which
benefits earned to date are expected to be paid, our
PBO and ABO are highly sensitive to changes in discount
rates. We measured our PBO and ABO using a discount
rate of 6.25% at September 30, 2003. A 50 basis point
increase in this discount rate would have decreased our
PBO by approximately $58 million at September 30, 2003.
Conversely, a 50 basis point decrease in this discount rate
would have increased our PBO by approximately $60 million
at September 30, 2003.
Our expected long-term rate of return on plan assets is
8.5%. We believe that this assumption is appropriate given
the composition of our plan assets and historical market
returns thereon. Given no change to the market-related
value of our plan assets as of September 30, 2003, a one
percentage point increase or decrease in our expected rate
of return on plan assets assumption would decrease or