Pizza Hut 2004 Annual Report Download - page 53

DESCRIPTION฀OF฀BUSINESS฀
NOTE฀1
YUM!฀Brands,฀Inc.฀and฀Subsidiaries฀(collectively฀referred฀to฀
as฀“YUM”฀or฀the฀“Company”)฀comprises฀the฀worldwide฀opera-
tions฀of฀KFC,฀Pizza฀Hut,฀Taco฀Bell฀and฀since฀May฀7,฀2002,฀Long฀
John฀Silver’s฀(“LJS”)฀and฀A&W฀All-American฀Food฀Restaurants฀
(“A&W”)฀ (collectively฀ the฀ “Concepts”),฀ which฀ were฀ added฀
when฀we฀acquired฀Yorkshire฀Global฀Restaurants,฀Inc.฀(“YGR”).฀
YUM฀is฀the฀world’s฀largest฀quick฀service฀restaurant฀company฀
based฀on฀the฀number฀of฀system฀units,฀with฀over฀33,000฀units฀
of฀which฀approximately฀39%฀are฀located฀outside฀the฀U.S.฀in฀
more฀than฀100฀countries฀and฀territories.฀YUM฀was฀created฀as฀
an฀independent,฀publicly-owned฀company฀on฀October฀6,฀1997฀
(the฀“Spin-off฀Date”)฀via฀a฀tax-free฀distribution฀by฀our฀former฀
parent,฀PepsiCo,฀Inc.฀(“PepsiCo”),฀of฀our฀Common฀Stock฀(the฀
“Distribution”฀or฀“Spin-off”)฀to฀its฀shareholders.฀References฀to฀
YUM฀throughout฀these฀Consolidated฀Financial฀Statements฀are฀
made฀using฀the฀first฀person฀notations฀of฀“we,”฀“us฀“฀or฀“our.”
Through฀our฀ widely-recognized฀ Concepts,฀we฀ develop,฀
operate,฀franchise฀and฀license฀a฀system฀of฀both฀traditional฀
and฀non-traditional฀quick฀service฀restaurants.฀Each฀Concept฀
has฀proprietary฀menu฀items฀and฀emphasizes฀the฀preparation฀
of฀food฀with฀high฀quality฀ingredients฀as฀well฀as฀unique฀recipes฀
and฀special฀seasonings฀to฀provide฀appealing,฀tasty฀and฀attrac-
tive฀food฀at฀competitive฀prices.฀Our฀traditional฀restaurants฀
feature฀dine-in,฀carryout฀and,฀in฀some฀instances,฀drive-thru฀or฀
delivery฀service.฀Non-traditional฀units,฀which฀are฀principally฀
licensed฀outlets,฀include฀express฀units฀and฀kiosks฀which฀have฀
a฀more฀limited฀menu฀and฀operate฀in฀non-traditional฀locations฀
like฀airports,฀gasoline฀service฀stations,฀convenience฀stores,฀
stadiums,฀amusement฀parks฀and฀colleges,฀where฀a฀full-scale฀
traditional฀outlet฀would฀not฀be฀practical฀or฀efficient.฀We฀are฀
actively฀pursuing฀the฀strategy฀of฀multibranding,฀where฀two฀
or฀more฀ of฀ our฀Concepts฀are฀operated฀ in฀a฀single฀unit.฀In฀
addition,฀we฀are฀pursuing฀the฀multibrand฀combination฀of฀Pizza฀
Hut฀and฀ WingStreet,฀a฀flavored฀chicken฀wings฀concept฀we฀
have฀developed.฀We฀are฀also฀testing฀multibranding฀options฀
involving฀one฀of฀our฀Concepts฀and฀either฀a฀concept฀in฀devel-
opment,฀such฀as฀Pasta฀ Bravo,฀or฀a฀ concept฀not฀ owned฀or฀
affiliated฀with฀YUM.
SUMMARY฀OF฀SIGNIFICANT฀ACCOUNTING฀POLICIES฀
NOTE฀2
Our฀preparation฀of฀the฀accompanying฀Consolidated฀Financial฀
Statements฀in฀conformity฀with฀accounting฀principles฀generally฀
accepted฀in฀the฀United฀States฀of฀America฀requires฀us฀to฀make฀
estimates฀and฀assumptions฀that฀affect฀reported฀amounts฀of฀
assets฀and฀liabilities,฀disclosure฀ of฀contingent฀assets฀and฀
liabilities฀ at฀ the฀date฀of฀the฀ financial฀ statements,฀and฀the฀
reported฀amounts฀of฀revenues฀and฀expenses฀during฀the฀report-
ing฀period.฀Actual฀results฀could฀differ฀from฀these฀estimates.
Principles฀ of฀ Consolidation฀ and฀ Basis฀ of฀ Preparation฀
Intercompany฀accounts฀and฀transactions฀have฀ been฀ elimi-
nated.฀Certain฀investments฀in฀businesses฀that฀operate฀our฀
Concepts฀are฀accounted฀for฀by฀the฀equity฀method.฀Generally,฀
we฀possess฀50%฀ownership฀of฀and฀50%฀voting฀rights฀over฀
these฀affiliates.฀Our฀lack฀of฀majority฀voting฀rights฀precludes฀
us฀ from฀ controlling฀ these฀ affiliates,฀ and฀ thus฀ we฀ do฀ not฀
consolidate฀these฀affiliates.฀Our฀share฀of฀the฀net฀income฀or฀
loss฀of฀those฀unconsolidated฀affiliates฀is฀included฀in฀other฀
(income)฀expense.
We฀participate฀in฀various฀advertising฀cooperatives฀with฀
our฀franchisees฀and฀licensees.฀In฀certain฀of฀these฀coopera-
tives฀ we฀ possess฀ majority฀ voting฀ rights,฀ and฀ thus฀ control฀
the฀cooperatives.฀At฀December฀27,฀2003,฀we฀reported฀the฀
related฀assets฀and฀liabilities฀of฀those฀advertising฀coopera-
tives฀we฀control฀in฀accounts฀and฀notes฀receivable,฀prepaid฀
expenses฀and฀other฀ current฀assets฀and฀accounts฀ payable฀
and฀ other฀ current฀ liabilities,฀as฀appropriate.฀ We฀have฀ now฀
summed฀all฀assets฀and฀liabilities฀of฀these฀advertising฀coop-
eratives฀and฀reported฀the฀amounts฀as฀advertising฀cooperative฀
assets,฀restricted฀and฀advertising฀cooperative฀liabilities฀in฀the฀
Consolidated฀Balance฀Sheet฀as฀of฀December฀25,฀2004.฀We฀
have฀reclassified฀those฀amounts฀in฀the฀Consolidated฀Balance฀
Sheet฀as฀of฀December฀27,฀2003฀for฀comparative฀purposes.฀
As฀the฀contributions฀to฀these฀cooperatives฀are฀designated฀
and฀segregated฀for฀advertising,฀we฀act฀as฀an฀agent฀for฀the฀
franchisees฀and฀licensees฀with฀regard฀to฀these฀contributions.฀
Thus,฀in฀accordance฀with฀Statement฀of฀Financial฀Accounting฀
Standards฀(“SFAS”)฀No.฀45,฀“Accounting฀for฀Franchise฀ Fee฀
Revenue,”฀we฀do฀not฀reflect,฀and฀have฀not฀reflected฀in฀the฀
past,฀franchisee฀and฀licensee฀contributions฀to฀these฀coopera-
tives฀in฀our฀Consolidated฀Statements฀of฀Income.
In฀ 2004,฀ we฀ adopted฀ Financial฀ Accounting฀ Standards฀
Board฀(“FASB”)฀Interpretation฀No.฀46฀(revised฀December฀2003),฀
“Consolidation฀of฀Variable฀Interest฀Entities,฀an฀interpretation฀
of฀ARB฀No.฀51”฀(“FIN฀46R”).฀FIN฀46R฀addresses฀the฀consoli-
dation฀of฀an฀entity฀whose฀equity฀holders฀either฀(a)฀have฀not฀
provided฀sufficient฀equity฀at฀risk฀to฀allow฀the฀entity฀to฀finance฀
its฀own฀activities฀or฀(b)฀do฀not฀possess฀certain฀characteristics฀
of฀a฀controlling฀financial฀interest.฀FIN฀46R฀requires฀the฀consol-
idation฀of฀such฀an฀entity,฀known฀as฀a฀variable฀interest฀entity฀
(“VIE”),฀by฀the฀primary฀beneficiary฀of฀the฀entity.฀The฀primary฀
beneficiary฀is฀the฀entity,฀if฀any,฀that฀is฀obligated฀to฀absorb฀a฀
majority฀of฀the฀risk฀of฀loss฀from฀the฀VIE’s฀activities,฀entitled฀
to฀receive฀a฀majority฀of฀the฀VIE’s฀residual฀returns,฀or฀both.฀
FIN฀46R฀excludes฀from฀its฀scope฀businesses฀(as฀defined฀by฀
FIN฀46R)฀unless฀certain฀conditions฀exist.
The฀ principal฀ entities฀in฀ which฀we฀ possess฀ a฀ variable฀
interest฀include฀franchise฀entities,฀including฀our฀unconsoli-
dated฀ affiliates฀ described฀ above.฀ We฀ do฀ not฀ possess฀ any฀
ownership฀interests฀in฀franchise฀entities฀except฀for฀our฀invest-
ments฀ in฀ various฀ unconsolidated฀ affiliates฀ accounted฀ for฀
under฀the฀equity฀method.฀Additionally,฀we฀generally฀do฀not฀
provide฀financial฀support฀to฀franchise฀entities฀in฀a฀typical฀fran-
chise฀relationship.
We฀also฀possess฀variable฀interests฀in฀certain฀purchas-
ing฀cooperatives฀we฀have฀formed฀along฀with฀representatives฀
of฀ the฀ franchisee฀groups฀of฀ each฀ of฀our฀Concepts.฀These฀
purchasing฀cooperatives฀were฀formed฀for฀the฀purpose฀of฀pur-
chasing฀certain฀restaurant฀products฀and฀equipment฀in฀the฀
Notes฀to฀Consolidated฀Financial฀Statements
(Tabular฀amounts฀in฀millions,฀except฀share฀data)
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Yum!฀Brands,฀Inc.