Pizza Hut 2004 Annual Report Download - page 44

are฀self-insured.฀The฀majority฀of฀our฀recorded฀liability฀for฀self-
insured฀employee฀health฀and฀property฀and฀casualty฀losses฀
represents฀estimated฀reserves฀for฀incurred฀claims฀that฀have฀
yet฀to฀be฀filed฀or฀settled.
OFF-BALANCE฀SHEET฀ARRANGEMENTS
We฀had฀provided฀approximately฀$16฀million฀of฀partial฀guar-
antees฀ of฀ two฀ franchisee฀ loan฀ pools฀ related฀ primarily฀ to฀
the฀Company’s฀historical฀refranchising฀programs฀ and,฀to฀ a฀
lesser฀extent,฀franchisee฀development฀of฀new฀restaurants,฀
at฀December฀25,฀2004.฀In฀support฀of฀these฀guarantees,฀we฀
posted฀$4฀million฀of฀letters฀of฀credit฀at฀December฀25,฀2004.฀
We฀also฀provided฀a฀standby฀letter฀of฀credit฀of฀$18฀million฀at฀
December฀25,฀ 2004,฀under฀ which฀ we฀ could฀ potentially฀ be฀
required฀to฀fund฀a฀portion฀of฀one฀of฀the฀franchisee฀loan฀pools.฀
The฀ total฀ loans฀ outstanding฀ under฀ these฀ loan฀ pools฀ were฀
approximately฀$90฀million฀at฀December฀25,฀2004.
Any฀ funding฀ under฀ the฀ guarantees฀ or฀ letters฀ of฀ credit฀
would฀be฀secured฀by฀the฀franchisee฀loans฀and฀any฀related฀
collateral.฀We฀believe฀that฀we฀have฀appropriately฀provided฀for฀
our฀estimated฀probable฀exposures฀under฀these฀contingent฀
liabilities.฀ These฀ provisions฀ were฀ primarily฀ charged฀ to฀ net฀
refranchising฀loss฀(gain).฀New฀loans฀are฀not฀currently฀being฀
added฀to฀either฀loan฀pool.
We฀have฀guaranteed฀certain฀lines฀of฀credit฀and฀loans฀of฀
unconsolidated฀affiliates฀totaling฀$34฀million฀at฀December฀25,฀
2004.฀Our฀unconsolidated฀affiliates฀had฀total฀ revenues฀of฀
over฀ $1.7฀billion฀ for฀ the฀ year฀ ended฀ December฀25,฀ 2004฀
and฀ assets฀ and฀ debt฀ of฀ approximately฀ $884฀million฀ and฀
$49฀million,฀respectively,฀at฀December฀25,฀2004.
OTHER฀SIGNIFICANT฀KNOWN฀EVENTS,฀TRENDS฀
OR฀UNCERTAINTIES฀EXPECTED฀TO฀IMPACT฀2005฀
OPERATING฀PROFIT฀COMPARISONS฀WITH฀2004
New฀Accounting฀Pronouncements฀Not฀Yet฀Adopted฀ Upon฀
the฀adoption฀of฀Statement฀of฀Financial฀Accounting฀Standards฀
No.฀ 123฀ (Revised฀ 2004),฀ “Share-Based฀ Payment”฀ (“SFAS฀
123R”)฀in฀2005,฀we฀will฀be฀required฀to฀recognize฀compen-
sation฀cost฀in฀the฀financial฀statements฀for฀all฀share-based฀
payments฀to฀our฀employees,฀including฀grants฀of฀stock฀options,฀
based฀on฀the฀fair฀value฀ of฀the฀share-based฀awards฀on฀the฀
date฀of฀grant.฀The฀fair฀value฀of฀the฀share-based฀awards฀will฀be฀
determined฀using฀option฀pricing฀models฀and฀assumptions฀that฀
appropriately฀reflect฀the฀specific฀circumstances฀of฀the฀awards.฀
Compensation฀cost฀will฀be฀recognized฀over฀the฀vesting฀period฀
based฀on฀the฀fair฀value฀of฀awards฀that฀actually฀vest.
SFAS฀ 123R฀ is฀ effective฀ at฀ the฀ beginning฀ of฀ the฀ first฀
interim฀or฀annual฀period฀beginning฀after฀June฀15,฀2005฀(the฀
quarter฀ending฀December฀31,฀2005฀for฀the฀ Company)฀and฀
early฀adoption฀is฀encouraged.฀We฀are฀in฀the฀process฀of฀evalu-
ating฀the฀use฀of฀certain฀option-pricing฀models฀as฀well฀as฀the฀
assumptions฀to฀be฀used฀in฀such฀models.฀When฀such฀evalua-
tion฀is฀complete,฀we฀will฀determine฀the฀transition฀method฀to฀
use฀and฀the฀timing฀of฀adoption.฀We฀currently฀do฀not฀anticipate฀
that฀the฀ impact฀ on฀ net฀income฀on฀a฀ full฀ year฀ basis฀of฀the฀
adoption฀of฀SFAS฀123R฀will฀be฀significantly฀different฀from฀the฀
historical฀pro฀forma฀impacts฀as฀previously฀disclosed.
See฀Note฀2.
Sale฀of฀Puerto฀Rico฀Business฀ As฀a฀result฀of฀the฀sale฀of฀our฀
Puerto฀Rico฀business฀on฀October฀4,฀2004,฀Company฀sales,฀
restaurant฀profit฀and฀general฀and฀administrative฀expenses฀
will฀decrease฀ by฀$159฀million,฀$29฀million฀and฀$8฀million,฀
respectively,฀and฀we฀estimate฀franchise฀fees฀will฀increase฀by฀
$10฀million฀for฀the฀year฀ended฀December฀31,฀2005฀compared฀
to฀the฀year฀ended฀December฀25,฀2004.
Extra฀Week฀in฀2005฀ Our฀fiscal฀calendar฀results฀in฀a฀fifty-
third฀week฀every฀five฀or฀six฀years.฀Fiscal฀year฀2005฀will฀include฀
a฀fifty-third฀week฀in฀the฀fourth฀quarter฀for฀the฀majority฀of฀our฀
U.S.฀businesses฀as฀well฀as฀our฀international฀businesses฀that฀
report฀on฀a฀period,฀as฀opposed฀to฀a฀monthly,฀basis.฀In฀the฀U.S.,฀
we฀anticipate฀permanently฀accelerating฀the฀timing฀of฀the฀KFC฀
business฀closing฀by฀one฀week฀in฀December฀2005,฀and฀thus,฀
there฀will฀be฀no฀fifty-third฀week฀benefit฀for฀this฀business฀in฀
2005.฀We฀estimate฀the฀fifty-third฀week฀will฀increase฀revenues฀
and฀operating฀profit฀in฀2005฀by฀approximately฀$80฀million฀and฀
$15฀million,฀respectively.฀While฀the฀impact฀of฀the฀fifty-third฀
week฀adds฀a฀potential฀incremental฀benefit฀of฀$0.04฀to฀diluted฀
earnings฀per฀share,฀we฀believe฀this฀benefit฀will฀be฀offset฀by฀
expense฀associated฀with฀strategic฀asset฀actions฀and฀refran-
chising฀KFC฀restaurants฀in฀the฀U.S.
International฀ Reporting฀ Changes฀ In฀ the฀ first฀ quarter฀ of฀
2005฀we฀will฀begin฀reporting฀information฀for฀our฀international฀
businesses฀in฀two฀separate฀operating฀segments฀as฀a฀result฀
of฀ changes฀ to฀ our฀ management฀ reporting฀ structure.฀ The฀
China฀Division฀will฀include฀Mainland฀China฀(“China”),฀Thailand฀
and฀KFC฀Taiwan,฀and฀the฀International฀Division฀will฀include฀
the฀remainder฀of฀our฀international฀operations.฀This฀reporting฀
change฀will฀not฀impact฀our฀consolidated฀results.
In฀ the฀ first฀ quarter฀ of฀ 2005฀ we฀ will฀ also฀ change฀ the฀
China฀business฀reporting฀calendar฀to฀more฀closely฀align฀the฀
timing฀of฀the฀reporting฀of฀its฀results฀of฀operations฀with฀our฀
U.S.฀business.฀Previously฀our฀China฀business,฀like฀the฀rest฀
of฀our฀international฀businesses,฀closed฀one฀month฀(or฀one฀
period฀for฀certain฀of฀our฀international฀businesses)฀earlier฀than฀
YUM’s฀period฀end฀date฀to฀facilitate฀consolidated฀reporting.฀
As฀a฀result,฀the฀operations฀of฀the฀China฀business฀for฀the฀one฀
month฀period฀ending฀December฀31,฀2004฀will฀be฀recognized฀
as฀an฀adjustment฀to฀consolidated฀retained฀earnings฀in฀the฀
first฀quarter฀of฀2005,฀as฀opposed฀to฀being฀recorded฀in฀our฀
Consolidated฀Statement฀of฀Income,฀to฀maintain฀comparability฀
of฀our฀consolidated฀results฀of฀operations.฀Our฀consolidated฀
results฀of฀operations฀for฀the฀first฀quarter฀of฀2005฀will฀thus฀
include฀the฀results฀of฀operations฀of฀the฀China฀business฀for฀
the฀months฀of฀January฀and฀February฀and฀the฀months฀included฀
in฀each฀quarterly฀reporting฀period฀thereafter฀will฀begin฀one฀
month฀later฀in฀2005฀than฀in฀previous฀years.
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