Executive officers are elected by and serve at the discretion of the Board of Directors.

 

 

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PART II

Item 5.

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s Common Stock trades under the symbol YUM and is listed on the New York Stock Exchange (“NYSE”).  The following sets forth the high and low NYSE composite closing sale prices by quarter for the Company’s Common Stock and dividends per common share.  All per share and share amounts herein have been adjusted for the two-for-one stock split on June 26, 2007.

	2007
Quarter	High			Low					Dividends Declared					Dividends Paid
First	$	31.03		$	27.69				$	—				$	0.075
Second		34.37			28.85					0.15					0.15
Third		34.80			29.62					—					0.15
Fourth		40.27			31.45					0.30					0.15

	2006
Quarter	High			Low					Dividends Declared					Dividends Paid
First	$	25.59		$	23.38				$	0.0575				$	0.0575
Second		26.84			23.83					0.075					0.0575
Third		25.96			22.47					—					0.075
Fourth		31.74			25.59					0.30					0.075

In 2006, the Company declared one cash dividend of $0.0575 per share of Common Stock, three cash dividends of $0.075 per share of Common Stock and one cash dividend of $0.15 per share of Common Stock.  In 2007, the Company declared three cash dividends of $0.15 per share of Common Stock, one of which had a distribution date of February 1, 2008.  The Company is targeting an annual dividend payout ratio of 35% to 40% of net income.

As of February 18, 2008, there were approximately 85,000 registered holders of record of the Company’s Common Stock.

The Company had no sales of unregistered securities during 2007, 2006 or 2005.

 

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Issuer Purchases of Equity Securities

The following table provides information as of December 29, 2007 with respect to shares of Common Stock repurchased by the Company during the quarter then ended:

Fiscal Periods		Total number of shares purchased			Average price paid per share				Total number of shares purchased as part of publicly announced plans or programs			Approximate dollar value of shares that may yet be purchased under the plans or programs
Period 10
9/9/07 – 10/6/07		4,140,000			$	33.56			4,140,000			$	26,137,093
Period 11
10/7/07 – 11/3/07		5,706,777			$	38.37			5,706,777			$	1,057,158,754
Period 12
11/4/07 – 12/1/07		3,958,428			$	37.87			3,958,428			$	907,256,535
Period 13
12/2/07 – 12/29/07		2,468,063			$	38.24			2,468,063			$	812,876,870
Total		16,273,268			$	37.01			16,273,268			$	812,876,870

In March 2007, our Board of Directors authorized additional share repurchases, through March 2008, of up to an additional $500 million (excluding applicable transaction fees) of our outstanding Common Stock.  For the quarter ended December 29, 2007, approximately 4.9 million shares were repurchased under this authorization.  This authorization was completed during the quarter.

In October 2007, our Board of Directors authorized additional share repurchases, through October 2008, of up to an additional $1.25 billion (excluding applicable transaction fees) of our outstanding Common Stock.  For the quarter ended December 29, 2007, approximately 11.4 million shares were repurchased under this authorization.

In January 2008, our Board of Directors authorized additional share repurchases, through January 2009, of up to an additional $1.25 billion (excluding applicable transaction fees) of our outstanding Common Stock.

 

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Stock Performance Graph

This graph compares the cumulative total return of our Common Stock to the cumulative total return of the S&P 500 Stock Index and the S&P 500 Consumer Discretionary Sector, a peer group that includes YUM, for the period from December 27, 2002 to December 28, 2007, the last trading day of our 2007 fiscal year.  The graph assumes that the value of the investment in our Common Stock and each index was $100 at December 27, 2002 and that all dividends were reinvested.

 

 

		12/27/02		12/26/03		12/23/04		12/30/05		12/29/06		12/28/07
YUM!		$      100		$    140		$    193		$    197		$    250		$    333
S&P 500		$      100		$    125		$    138		$    143		$    162		$    169
S&P Consumer Discretionary		$      100		$    137		$    153		$    144		$    169		$    145

 

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Item 6.

Selected Financial Data.

Selected Financial Data

YUM! Brands, Inc. and Subsidiaries

(in millions, except per share and unit amounts)

	Fiscal Year
	2007			2006			2005			2004			2003
Summary of Operations
Revenues
Company sales	$	9,100		$	8,365		$	8,225		$	7,992		$	7,441
Franchise and license fees		1,316			1,196			1,124			1,019			939
Total		10,416			9,561			9,349			9,011			8,380
Closures and impairment expenses(a)		(35	)		(59	)		(62	)		(38	)		(40	)
Refranchising gain (loss)(a)		11			24			43			12			4
Operating profit(b)		1,357			1,262			1,153			1,155			1,059
Interest expense, net		166			154			127			129			173
Income before income taxes and cumulative effect of accounting change		1,191			1,108			1,026			1,026			886
Income before cumulative effect of accounting change		909			824			762			740			618
Cumulative effect of accounting change, net of tax(c)		—			—			—			—			(1	)
Net income		909			824			762			740			617
Basic earnings per common share		1.74			1.51			1.33			1.27			1.05
Diluted earnings per common share		1.68			1.46			1.28			1.21			1.01
Cash Flow Data
Provided by operating activities	$	1,567		$	1,299		$	1,233		$	1,186		$	1,099
Capital spending, excluding acquisitions		742			614			609			645			663
Proceeds from refranchising of restaurants		117			257			145			140			92
Repurchase shares of Common Stock		1,410			983			1,056			569			278
Dividends paid on common shares		273			144			123			58			—
Balance Sheet
Total assets	$	7,242		$	6,368		$	5,797		$	5,696		$	5,620
Long-term debt		2,924			2,045			1,649			1,731			2,056
Total debt		3,212			2,272			1,860			1,742			2,066
Other Data
Number of stores at year end
Company		7,625			7,736			7,587			7,743			7,854
Unconsolidated Affiliates		1,314			1,206			1,648			1,662			1,512
Franchisees		24,297			23,516			22,666			21,858			21,471
Licensees		2,109			2,137			2,376			2,345			2,362
System		35,345			34,595			34,277			33,608			33,199
U.S. Company same store sales growth(d)		(3)%			—			4%			3%			—
International Division system sales growth(e)
Reported		15%			7%			9%			14%			13%
Local currency(f)		10%			7%			6%			6%			5%
China Division system sales growth(e)
Reported		31%			26%			13%			23%			23%
Local currency(f)		24%			23%			11%			23%			23%
Shares outstanding at year end(g)		499			530			556			581			583
Cash dividends declared per common share(g)	$	0.45		$	0.4325		$	0.2225		$	0.15		$	—
Market price per share at year end (g)	$	38.54		$	29.40		$	23.44		$	23.14		$	16.82

 

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Fiscal years 2007, 2006, 2004 and 2003 include 52 weeks and fiscal year 2005 includes 53 weeks.

Fiscal years 2007, 2006 and 2005 include the impact of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R (Revised 2004), “Share Based Payment,” (“SFAS 123R”).  This resulted in a $37 million, $39 million and $38 million decrease in net income, for 2007, 2006 and 2005, respectively.  This translates to a decrease of $0.07 to both basic and diluted earnings per share for 2007 and 2006, and a decrease of $0.07 and $0.06 to basic and diluted earnings per share, respectively, for 2005.  If SFAS 123R had been effective for prior years presented, both reported basic and diluted earnings per share would have decreased $0.06 for 2004 and 2003 consistent with previously disclosed pro-forma information.

The selected financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto.

(a)	See Note 5 to the Consolidated Financial Statements for a description of Closures and Impairment Expenses and Refranchising Gain (Loss) in 2007, 2006 and 2005.
(b)	Fiscal years 2007, 2006, 2005, 2004 and 2003 included $11 million income, $1 million income, $4 million income, $30 million income and $16 million expense, respectively, related to Wrench litigation and AmeriServe.  The Wrench litigation relates to a lawsuit against Taco Bell Corporation, which was settled in 2004, including financial recoveries from settlements with insurance carriers.  Amounts related to AmeriServe are the result of cash recoveries related to the AmeriServe bankruptcy reorganization process for which we incurred significant expense in years prior to those presented here (primarily 2000).  AmeriServe was formerly our primary distributor of food and paper supplies to our U.S. stores.
(c)	Fiscal year 2003 includes the impact of the adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses the financial accounting and reporting for legal obligations associated with the retirement of long-lived assets and the associated asset retirement costs.
(d)	U.S. Company same-store sales growth only includes the results of Company owned KFC, Pizza Hut and Taco Bell restaurants that have been open one year or more.  U.S. same store sales for Long John Silver’s and A&W restaurants are not included given the relative insignificance of the Company stores for these brands and the limited impact they currently have and will have in the future, on our U.S. same store sales, as well as our overall U.S. performance.
(e)	International Division and China Division system sales growth includes the results of all restaurants regardless of ownership, including Company owned, franchise, unconsolidated affiliate and license restaurants.  Sales of franchise, unconsolidated affiliate and license restaurants generate franchise and license fees for the Company (typically at a rate of 4% to 6% of sales).  Franchise, unconsolidated affiliate and license restaurant sales are not included in Company sales we present on the Consolidated Statements of Income; however, the fees are included in the Company’s revenues.  We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all our revenue drivers, Company and franchise same store sales as well as net unit development.  Additionally, we began reporting information for our international business in two separate operating segments (the International Division and the China Division) in 2005 as a result of changes in our management structure.  Segment information for periods prior to 2005 has been restated to reflect this reporting.
(f)	Local currency represents the percentage change excluding the impact of foreign currency translation.  These amounts are derived by translating current year results at prior year average exchange rates.  We believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
(g)	Adjusted for the two for one stock split on June 26, 2007.  See Note 3 to the Consolidated Financial Statements.

 

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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52

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Consolidated Statements of Cash Flows

YUM! Brands, Inc. and Subsidiaries

Fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005

(in millions)

		2007					2006					2005
Cash Flows – Operating Activities
Net income		$	909				$	824				$	762
Depreciation and amortization			542					479					469
Closures and impairment expenses			35					59					62
Refranchising (gain) loss			(11	)				(24	)				(43	)
Contributions to defined benefit pension plans			(1	)				(43	)				(74	)
Deferred income taxes			(95	)				(30	)				(101	)
Equity income from investments in unconsolidated affiliates			(51	)				(51	)				(51	)
Distributions of income received from unconsolidated affiliates			40					32					44
Excess tax benefits from share-based compensation			(74	)				(65	)				(92	)
Share-based compensation expense			61					65					62
Changes in accounts and notes receivable			(4	)				24					(1	)
Changes in inventories			(31	)				(3	)				(4	)
Changes in prepaid expenses and other current assets			(6	)				(33	)				78
Changes in accounts payable and other current liabilities			118					(30	)				(10	)
Changes in income taxes payable			70					10					54
Other non-cash charges and credits, net			65					85					78
Net Cash Provided by Operating Activities			1,567					1,299					1,233
Cash Flows – Investing Activities
Capital spending			(742	)				(614	)				(609	)
Proceeds from refranchising of restaurants			117					257					145
Acquisition of remaining interest in unconsolidated affiliate, net of cash assumed			—					(178	)				—
Proceeds from the sale of interest in Japan unconsolidated affiliate			128					—					—
Acquisition of restaurants from franchisees			(4	)				(7	)				(2	)
Short-term investments			6					39					12
Sales of property, plant and equipment			56					57					81
Other, net			7					(30	)				28
Net Cash Used in Investing Activities			(432	)				(476	)				(345	)
Cash Flows – Financing Activities
Proceeds from issuance of long-term debt			1,195					300					—
Repayments of long-term debt			(24	)				(211	)				(14	)
Revolving credit facilities, three months or less, net			(149	)				(23	)				160
Short-term borrowings by original maturity
More than three months – proceeds			1					236					—
More than three months – payments			(184	)				(54	)				—
Three months or less, net			(8	)				4					(34	)
Repurchase shares of Common Stock			(1,410	)				(983	)				(1,056	)
Excess tax benefit from share-based compensation			74					65					92
Employee stock option proceeds			112					142					148
Dividends paid on Common Stock			(273	)				(144	)				(123	)
Other, net			(12	)				(2	)				—
Net Cash Used in Financing Activities			(678	)				(670	)				(827	)
Effect of Exchange Rate on Cash and Cash Equivalents			13					8					1
Net Increase in Cash and Cash Equivalents			470					161					62
Net Increase in Cash and Cash Equivalents of Mainland China for December 2004			—					—					34
Cash and Cash Equivalents – Beginning of Year			319					158					62
Cash and Cash Equivalents – End of Year		$	789				$	319				$	158

 

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See accompanying Notes to Consolidated Financial Statements.

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Consolidated Balance Sheets

YUM! Brands, Inc. and Subsidiaries

December 29, 2007 and December 30, 2006

(in millions) 

		2007					2006
ASSETS
Current Assets
Cash and cash equivalents		$	789				$	319
Accounts and notes receivable, less allowance: $21 in 2007 and $18 in 2006			225					220
Inventories			128					93
Prepaid expenses and other current assets			142					138
Deferred income taxes			125					57
Advertising cooperative assets, restricted			72					74
Total Current Assets			1,481					901
Property, plant and equipment, net			3,849					3,631
Goodwill			672					662
Intangible assets, net			333					347
Investments in unconsolidated affiliates			153					138
Other assets			464					369
Deferred income taxes			290					320
Total Assets		$	7,242				$	6,368
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and other current liabilities		$	1,650				$	1,386
Income taxes payable			52					37
Short-term borrowings			288					227
Advertising cooperative liabilities			72					74
Total Current Liabilities			2,062					1,724
Long-term debt			2,924					2,045
Other liabilities and deferred credits			1,117					1,147
Total Liabilities			6,103					4,916
Shareholders’ Equity
Preferred stock, no par value, zero shares and 250 shares authorized in 2007 and 2006, respectively; no shares issued			—					—
Common Stock, no par value, 750 shares authorized; 499 shares and 530 shares issued in 2007 and 2006, respectively			—					—
Retained earnings			1,119					1,608
Accumulated other comprehensive income (loss)			20					(156	)
Total Shareholders’ Equity			1,139					1,452
Total Liabilities and Shareholders’ Equity		$	7,242				$	6,368

 

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Consolidated Statements of Shareholders’ Equity and Comprehensive Income

YUM! Brands, Inc. and Subsidiaries

Fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005

(in millions, except per share data)

		Issued Common Stock								Retained				Accumulated Other Comprehensive
		Shares				Amount				Earnings				Income (Loss)				Total
Balance at December 25, 2004			581			$	659			$	1,074			$	(131	)		$	1,602
Net income											762								762
Foreign currency translation adjustment arising during the period															(31	)			(31	)
Foreign currency translation adjustment included in net income															6				6
Minimum pension liability adjustment (net of tax impact of $8 million)															(15	)			(15	)
Net unrealized gain on derivative instruments (net of tax impact of $1 million)															1				1
Comprehensive Income																			723
Dividends declared on Common Stock ($0.2225 per common share)											(129	)							(129	)
China December 2004 net income											6								6
Repurchase of shares of Common Stock			(43	)			(974	)			(82	)							(1,056	)
Employee stock option exercises (includes tax impact of $94 million)			17				242												242
Compensation-related events (includes tax impact of $5 million)			1				73												73
Balance at December 31, 2005			556			$	—			$	1,631			$	(170	)		$	1,461
Adjustment to initially apply SAB No. 108											100								100
Net income											824								824
Foreign currency translation adjustment arising during the period (includes tax impact of $13 million)															59				59
Minimum pension liability adjustment (net of tax impact of $11 million)															17				17
Net unrealized gain on derivative instruments (net of tax impact of $3 million)															5				5
Comprehensive Income																			905
Adjustment to initially apply SFAS No. 158 (net of tax impact of $37 million)															(67	)			(67	)
Dividends declared on Common Stock ($0.4325 per common share)											(234	)							(234	)
Repurchase of shares of Common Stock			(40	)			(287	)			(713	)							(1,000	)
Employee stock option and SARs exercises (includes tax impact of $68 million)			13				210												210
Compensation-related events (includes tax impact of $3 million)			1				77												77
Balance at December 30, 2006			530			$	—			$	1,608			$	(156	)		$	1,452
Net income											909								909
Foreign currency translation adjustment arising during the period															93				93
Foreign currency translation adjustment included in net income															1				1
Pension and post-retirement benefit plans (net of tax impact of $55 million)															96				96
Net unrealized loss on derivative instruments (net of tax impact of $8 million)															(14	)			(14	)
Comprehensive Income																			1,085
Adjustment to initially apply FIN 48											(13	)							(13	)
Dividends declared on Common Stock ($0.45 per common share)											(231	)							(231	)
Repurchase of shares of Common Stock			(42	)			(252	)			(1,154	)							(1,406	)
Employee stock option and SARs exercises (includes tax impact of $69 million)			10				181												181
Compensation-related events (includes tax impact of $5 million)			1				71												71
Balance at December 29, 2007			499			$	—			$	1,119			$	20			$	1,139

 

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See accompanying Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

(Tabular amounts in millions, except share data)

Note 1 – Description of Business

YUM! Brands, Inc. and Subsidiaries (collectively referred to as “YUM” or the “Company”) comprises the worldwide operations of KFC, Pizza Hut, Taco Bell, Long John Silver’s (“LJS”) and A&W All-American Food Restaurants (“A&W”) (collectively the “Concepts”).  YUM is the world’s largest quick service restaurant company based on the number of system units, with more than 35,000 units of which approximately 44% 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., of our Common Stock (the “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 attractive 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 malls, airports, gasoline service stations, convenience stores, stadiums, amusement parks and colleges, where a full-scale traditional outlet would not be practical or efficient.  We also operate multibrand units, where two or more of our Concepts are operated in a single unit.  In addition, we continue to pursue the multibrand combination of Pizza Hut and WingStreet, a flavored chicken wings concept we have developed.

Beginning in 2005, we changed the China Division, which includes mainland China (“China”), Thailand and KFC Taiwan, 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.  To maintain comparability of our consolidated results of operations, amounts related to our China business for December 2004 were not reflected in our Consolidated Statements of Income and net income for the China business for the one month period ended December 31, 2004 was recognized as an adjustment directly to consolidated retained earnings in the year ended December 31, 2005.

For the month of December 2004 the China business had revenues of $79 million and net income of $6 million.  As mentioned previously, neither of these amounts is included in our Consolidated Statement of Income for the year ended December 31, 2005 and the net income figure was credited directly to retained earnings in the first quarter of 2005.  Net income for the month of December 2004 was negatively impacted by costs incurred in preparation of opening a significant number of new stores in early 2005 as well as increased advertising expense, all of which was recorded in December’s results of operations.  Additionally, the net increase in cash for the China business in December 2004 has been presented as a single line item on our Consolidated Statement of Cash Flows for the year ended December 31, 2005.  The $34 million net increase in cash was primarily attributable to short-term borrowings for working capital purposes, a majority of which were repaid prior to the end of the China business’ first quarter of 2005.

Note 2 - Summary of Significant Accounting Policies

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 reporting period.  Actual results could differ from these estimates.

 

 

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Principles of Consolidation and Basis of Preparation.  Intercompany accounts and transactions have been eliminated. Certain investments in businesses that operate our Concepts are accounted for by the equity method.  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 established to collect and administer funds contributed for use in advertising and promotional programs designed to increase sales and enhance the reputation of the Company and its franchise owners. Contributions to the advertising cooperatives are required for both company operated and franchise restaurants and are generally based on a percent of restaurant sales.  In certain of these cooperatives we possess majority voting rights, and thus control and consolidate the cooperatives. We report all assets and liabilities of these advertising cooperatives that we consolidate as advertising cooperative assets, restricted and advertising cooperative liabilities in the Consolidated Balance Sheet.  The advertising cooperatives assets, consisting primarily of cash received from the Company and franchisees and accounts receivable from franchisees, can only be used for selected purposes and are considered restricted.  The advertising cooperative liabilities represent the corresponding obligation arising from the receipt of the contributions to purchase advertising and promotional programs.  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 franchisee and licensee contributions to these cooperatives in our Consolidated Statements of Income or Consolidated Statements of Cash Flows.

Fiscal Year.  Our fiscal year ends on the last Saturday in December and, as a result, a 53rd week is added every five or six years. Fiscal year 2005 included 53 weeks.  The first three quarters of each fiscal year consist of 12 weeks and the fourth quarter consists of 16 weeks in fiscal years with 52 weeks and 17 weeks in fiscal years with 53 weeks.  In fiscal year 2005, the 53rd week added $96 million to total revenues and $23 million to total operating profit in our Consolidated Statement of Income.  Our subsidiaries operate on similar fiscal calendars with period or month end dates suited to their businesses. The subsidiaries’ period end dates are within one week of YUM’s period end date with the exception of all of our international businesses except China.  The international businesses except China close one period or one month earlier to facilitate consolidated reporting.

Reclassifications.  We have reclassified certain items in the accompanying Consolidated Financial Statements and Notes thereto for prior periods to be comparable with the classification for the fiscal year ended December 29, 2007.  These reclassifications had no effect on previously reported net income.

Specifically, we reclassified $15 million for the cumulative impact of excess tax benefits from prior year exercises of share-based compensation that were inappropriately recognized as Deferred income taxes in 2006 to Common Stock.  This correction also resulted in Net Cash Provided by Operating Activities decreasing by $3 million and $5 million versus previously reported amounts for the years ended 2006 and 2005, respectively, with an offsetting impact to Net Cash Used in Financing Activities.

Additionally, we have netted amounts previously presented as Wrench litigation (income) expense and AmeriServe and other charges (credits) in our Consolidated Statements of Income for 2006 and 2005 and included those amounts in Other (income) expense in the current year presentation.  These two items resulted in a $1 million and $4 million increase in Other (income) expense in 2006 and 2005, respectively.

Franchise and License Operations.  We execute franchise or license agreements for each unit which set out the terms of our arrangement with the franchisee or licensee.  Our franchise and license agreements typically require the franchisee or licensee to pay an initial, non-refundable fee and continuing fees based upon a percentage of sales. Subject to our approval and their payment of a renewal fee, a franchisee may generally renew the franchise agreement upon its expiration.

 

 

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We incur expenses that benefit both our franchise and license communities and their representative organizations and our Company operated restaurants.  These expenses, along with other costs of servicing of franchise and license agreements are charged to general and administrative (“G&A”) expenses as incurred.  Certain direct costs of our franchise and license operations are charged to franchise and license expenses.  These costs include provisions for estimated uncollectible fees, franchise and license marketing funding, amortization expense for franchise related intangible assets and certain other direct incremental franchise and license support costs.

We monitor the financial condition of our franchisees and licensees and record provisions for estimated losses on receivables when we believe that our franchisees or licensees are unable to make their required payments.  While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control.  Net provisions for uncollectible franchise and license receivables of $2 million, $2 million and $3 million were included in Franchise and license expenses in 2007, 2006 and 2005, respectively.

Revenue Recognition.  Our revenues consist of sales by Company operated restaurants and fees from our franchisees and licensees. Revenues from Company operated restaurants are recognized when payment is tendered at the time of sale. The Company presents sales net of sales tax and other sales related taxes.  We recognize initial fees received from a franchisee or licensee as revenue when we have performed substantially all initial services required by the franchise or license agreement, which is generally upon the opening of a store.  We recognize continuing fees based upon a percentage of franchisee and licensee sales as earned.  We recognize renewal fees when a renewal agreement with a franchisee or licensee becomes effective.  We include initial fees collected upon the sale of a restaurant to a franchisee in refranchising (gain) loss.

Direct Marketing Costs.  We charge direct marketing costs to expense ratably in relation to revenues over the year in which incurred and, in the case of advertising production costs, in the year the advertisement is first shown.  Deferred direct marketing costs, which are classified as prepaid expenses, consist of media and related advertising production costs which will generally be used for the first time in the next fiscal year and have historically not been significant.  To the extent we participate in advertising cooperatives, we expense our contributions as incurred.  Our advertising expenses were $556 million, $521 million and $519 million in 2007, 2006 and 2005, respectively.  We report substantially all of our direct marketing costs in occupancy and other operating expenses.

Research and Development Expenses.  Research and development expenses, which we expense as incurred, are reported in G&A expenses. Research and development expenses were $39 million, $33 million and $33 million in 2007, 2006 and 2005, respectively.

Share-Based Employee Compensation.  We account for share-based employee compensation in accordance with SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”).  SFAS 123R requires all share-based payments to employees, including grants of employee stock options and stock appreciation rights (“SARs”), to be recognized in the financial statements as compensation cost over the service period based on their fair value on the date of grant.  Compensation cost is recognized over the service period on a straight-line basis for the fair value of awards that actually vest.

Impairment or Disposal of Long-Lived Assets.  In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we review our long-lived assets related to each restaurant that we are currently operating and have not offered to refranchise, including any allocated intangible assets subject to amortization, semi-annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable.  We evaluate restaurants using a “two-year history of operating losses” as our primary indicator of potential impairment.  Based on the best information available, we write down an impaired restaurant to its estimated fair market value, which becomes its new cost basis.  We generally measure estimated fair market value by discounting estimated future cash flows. In addition, when we decide to close a restaurant it is reviewed for impairment and depreciable lives are adjusted based on the expected disposal date.  The impairment evaluation is based on the estimated cash flows from continuing use through the expected disposal date plus the expected terminal value.

 

 

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We account for exit or disposal activities, including store closures, in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).  Store closure costs include costs of disposing of the assets as well as other facility-related expenses from previously closed stores.  These store closure costs are generally expensed as incurred.  Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, if any.  Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in store closure costs as well.  To the extent we sell assets, primarily land, associated with a closed store, any gain or loss upon that sale is also recorded in store closure (income) costs.

Refranchising (gain) loss includes the gains or losses from the sales of our restaurants to new and existing franchisees and the related initial franchise fees, reduced by transaction costs.  In executing our refranchising initiatives, we most often offer groups of restaurants.  We classify restaurants as held for sale and suspend depreciation and amortization when (a) we make a decision to refranchise; (b) the stores can be immediately removed from operations; (c) we have begun an active program to locate a buyer; (d) significant changes to the plan of sale are not likely; and (e) the sale is probable within one year.  We recognize estimated losses on refranchisings when the restaurants are classified as held for sale.  When we have offered to refranchise stores or groups of stores for a price less than their carrying value, but do not believe the store(s) have met the criteria to be classified as held for sale, we recognize impairment at the offer date for any excess of carrying value over the expected sales proceeds plus holding period cash flows, if any.  Such impairment is classified as refranchising loss.  We recognize gains on restaurant refranchisings when the sale transaction closes, the franchisee has a minimum amount of the purchase price in at-risk equity, and we are satisfied that the franchisee can meet its financial obligations.  If the criteria for gain recognition are not met, we defer the gain to the extent we have a remaining financial exposure in connection with the sales transaction.  Deferred gains are recognized when the gain recognition criteria are met or as our financial exposure is reduced.  When we make a decision to retain a store, or group of stores, previously held for sale, we revalue the store at the lower of its (a) net book value at our original sale decision date less normal depreciation and amortization that would have been recorded during the period held for sale or (b) its current fair market value.  This value becomes the store’s new cost basis.  We record any resulting difference between the store’s carrying amount and its new cost basis to refranchising (gain) loss.

Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, sublease income and refranchising proceeds.  Accordingly, actual results could vary significantly from our estimates.

Impairment of Investments in Unconsolidated Affiliates.  We record impairment charges related to an investment in an unconsolidated affiliate whenever events or circumstances indicate that a decrease in the fair value of an investment has occurred which is other than temporary.  In addition, we evaluate our investments in unconsolidated affiliates for impairment when they have experienced two consecutive years of operating losses.  We recorded no impairment associated with our investments in unconsolidated affiliates during the years ended December 29, 2007, December 30, 2006 and December 31, 2005.

Considerable management judgment is necessary to estimate future cash flows.  Accordingly, actual results could vary significantly from our estimates.

Guarantees.  We account for certain guarantees in accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34” (“FIN 45”).  FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued.  FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of certain obligations undertaken.

We have also issued guarantees as a result of assigning our interest in obligations under operating leases as a condition to the refranchising of certain Company restaurants.  Such guarantees are subject to the requirements of SFAS No. 145,

 

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“Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). We recognize a liability for the fair value of such lease guarantees under SFAS 145 upon refranchising and upon any subsequent renewals of such leases when we remain contingently liable.  The related expense in both instances is included in refranchising (gain) loss.

Income Taxes.  We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).  Under SFAS 109, we record deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  In addition, a valuation allowance is recorded to reduce the carrying amount of deferred tax assets if it is more likely than not all or a portion of the asset will not be realized.

Effective December 31, 2006, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS 109.  FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities.  A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.  FIN 48 also requires that changes in judgment that result in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the interim period in which the change occurs.  Prior to adopting FIN 48, we provided reserves for potential exposures when we considered it probable that a taxing authority may take a sustainable position on a matter contrary to our position and recorded any changes in judgment thereon as a component of our annual effective rate.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as components of its income tax provision.

See Note 20 for a further discussion of our income taxes.

Cash and Cash Equivalents.  Cash equivalents represent funds we have temporarily invested (with original maturities not exceeding three months) as part of managing our day-to-day operating cash receipts and disbursements.  Included in cash equivalents are short-term, highly liquid debt securities of $481 million and $92 million classified as held-to-maturity at December 29, 2007 and December 30, 2006, respectively.

Inventories.  We value our inventories at the lower of cost (computed on the first-in, first-out method) or net realizable value.

Property, Plant and Equipment.  We state property, plant and equipment at cost less accumulated depreciation and amortization.  We calculate depreciation and amortization on a straight-line basis over the estimated useful lives of the assets as follows:  5 to 25 years for buildings and improvements, 3 to 20 years for machinery and equipment and 3 to 7 years for capitalized software costs.  As discussed above, we suspend depreciation and amortization on assets related to restaurants that are held for sale.

Leases and Leasehold Improvements.  We account for our leases in accordance with SFAS No. 13, “Accounting for Leases” (“SFAS 13”) and other related authoritative guidance.  When determining the lease term, we often include option periods for which failure to renew the lease imposes a penalty on the Company in such an amount that a renewal appears, at the inception of the lease, to be reasonably assured.  The primary penalty to which we are subject is the economic detriment associated with the existence of leasehold improvements which might be impaired if we choose not to continue the use of the leased property.

 

 

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We record rent expense for leases that contain scheduled rent increases on a straight-line basis over the lease term, including any option periods considered in the determination of that lease term.  Contingent rentals are generally based on sales levels in excess of stipulated amounts, and thus are not considered minimum lease payments and are included in rent expense as they accrue.  We generally do not receive leasehold improvement incentives upon opening a store that is subject to a lease.

Prior to fiscal year 2006, we capitalized rent while we were constructing a restaurant even if such construction period was subject to a rent holiday.  Such capitalized rent was then expensed on a straight-line basis over the remaining term of the lease upon opening of the restaurant.  Effective January 1, 2006 as required by FASB Staff Position (“FSP”) No. 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (“FSP 13-1”), we began expensing rent associated with leased land or buildings for construction periods whether rent was paid or we were subject to a rent holiday.  The adoption of FSP 13-1 did not significantly impact our results of operations in 2007 or 2006 and we do not anticipate significant future impact.

Internal Development Costs and Abandoned Site Costs.  We capitalize direct costs associated with the site acquisition and construction of a Company unit on that site, including direct internal payroll and payroll-related costs.  Only those site-specific costs incurred subsequent to the time that the site acquisition is considered probable are capitalized.  If we subsequently make a determination that a site for which internal development costs have been capitalized will not be acquired or developed, any previously capitalized internal development costs are expensed and included in G&A expenses.

Goodwill and Intangible Assets.  The Company accounts for acquisitions of restaurants from franchisees and other acquisitions of businesses that may occur from time to time in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”).  Goodwill in such acquisitions represents the excess of the cost of a business acquired over the net of the amounts assigned to assets acquired, including identifiable intangible assets, and liabilities assumed.  SFAS 141 specifies criteria to be used in determining whether intangible assets acquired in a business combination must be recognized and reported separately from goodwill.  We base amounts assigned to goodwill and other identifiable intangible assets on independent appraisals or internal estimates.  If a Company restaurant is sold within two years of acquisition, the goodwill associated with the acquisition is written off in its entirety.  If the restaurant is refranchised beyond two years, the amount of goodwill written off is based on the relative fair value of the restaurant to the fair value of the reporting unit, as described below.

The Company accounts for recorded goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  In accordance with SFAS 142, we do not amortize goodwill and indefinite-lived intangible assets.  We evaluate the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events and circumstances continue to support an indefinite useful life.  If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, we amortize the intangible asset prospectively over its estimated remaining useful life.  Amortizable intangible assets are amortized on a straight-line basis.

In accordance with the requirements of SFAS 142, goodwill has been assigned to reporting units for purposes of impairment testing.  Our reporting units are our operating segments in the U.S. (see Note 21) and our business management units internationally (typically individual countries).  We evaluate goodwill and indefinite lived assets for impairment on an annual basis or more often if an event occurs or circumstances change that indicate impairments might exist.  Goodwill impairment tests consist of a comparison of each reporting unit’s fair value with its carrying value.  Fair value is the price a willing buyer would pay for a reporting unit, and is generally estimated using either discounted expected future cash flows from operations or the present value of the estimated future franchise royalty stream plus any estimated sales proceeds from refranchising.  Any estimated sales proceeds are based on relevant historical sales multiples.  If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value.  We have selected the beginning of our fourth quarter as the date on which to perform our ongoing annual

 

 

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impairment test for goodwill.  For 2007, 2006 and 2005, there was no impairment of goodwill identified during our annual impairment testing.

For indefinite-lived intangible assets, our impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount.  Fair value is an estimate of the price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future cash flows associated with the intangible asset.  We also perform our annual test for impairment of our indefinite-lived intangible assets at the beginning of our fourth quarter.  No impairment of indefinite-lived intangible assets was recorded in 2007, 2006 and 2005.

Our amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.  An intangible asset that is deemed impaired is written down to its estimated fair value, which is based on discounted cash flows.  For purposes of our impairment analysis, we update the cash flows that were initially used to value the amortizable intangible asset to reflect our current estimates and assumptions over the asset’s future remaining life.

Derivative Financial Instruments.  Historically we have engaged in transactions involving various derivative instruments to hedge interest rates and foreign currency denominated purchases, assets and liabilities.  These derivative contracts are entered into with financial institutions. We do not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use.

We account for these derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”).  SFAS 133 requires that all derivative instruments be recorded on the Consolidated Balance Sheet at fair value.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument is dependent upon whether the derivative has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.  For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in the results of operations.  For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the gain or loss on the derivative instrument is reported in the foreign currency translation component of other comprehensive income (loss).  Any ineffective portion of the gain or loss on the derivative instrument for a cash flow hedge or net investment hedge is recorded in the results of operations immediately.  For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the results of operations immediately.  See Note 15 for a discussion of our use of derivative instruments, management of credit risk inherent in derivative instruments and fair value information.

Common Stock Share Repurchases.  From time to time, we repurchase shares of our Common Stock under share repurchase programs authorized by our Board of Directors.  Shares repurchased constitute authorized, but unissued shares under the North Carolina laws under which we are incorporated.  Additionally, our Common Stock has no par or stated value.  Accordingly, we record the full value of share repurchases, upon the trade date, against Common Stock except when to do so would result in a negative balance in our Common Stock account.  In such instances, on a period basis, we record the cost of any further share repurchases as a reduction in retained earnings.  Due to the large number of share repurchases and the increase in our Common Stock market value over the past several years, our Common Stock balance is frequently zero at the end of any period.  Accordingly, $1,154 million and $713 million in share repurchases were recorded as a reduction in retained earnings in 2007 and 2006, respectively.  We have no legal restrictions on the payment of dividends.  See Note 19 for additional information.

Pension and Post-Retirement Medical Benefits.  In the fourth quarter of 2006, we adopted the recognition and disclosure provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement

 

 

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Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”).  SFAS 158 amends SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS 87”), SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits” (“SFAS 88”), SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”) and SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.”

SFAS 158 required the Company to recognize the funded status of its pension and post-retirement plans in the December 30, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax.  Gains or losses and prior service costs or credits that arise in future years will be recognized as a component of other comprehensive income to the extent they have not been recognized as a component of net periodic benefit cost pursuant to SFAS 87 or SFAS 106.

The incremental effects of adopting the provisions of SFAS 158 on the Company’s Consolidated Balance Sheet at December 30, 2006 are presented as follows.  The adoption of SFAS 158 had no impact on the Consolidated Statement of Income.

		Before Application of SFAS 158					Adjustments					After Application  of SFAS 158
Intangible assets, net		$	350				$	(3	)			$	347
Deferred income taxes			283					37					320
Total assets			6,334					34					6,368
Accounts payable and other current liabilities			1,384					2					1,386
Other liabilities and deferred credits			1,048					99					1,147
Total liabilities			4,815					101					4,916
Accumulated other comprehensive loss			(89	)				(67	)				(156	)
Total shareholders’ equity			1,519					(67	)				1,452

Quantification of Misstatements.  In September 2006, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).  SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement for the purpose of a materiality assessment.  SAB 108 requires that registrants quantify a current year misstatement using an approach that considers both the impact of prior year misstatements that remain on the balance sheet and those that were recorded in the current year income statement (the “Dual Method”).  Historically, we quantified misstatements and assessed materiality based on a current year income statement approach.  We were required to adopt SAB 108 in the fourth quarter of 2006.

The transition provisions of SAB 108 permit uncorrected prior year misstatements that were not material to any prior periods under our historical income statement approach but that would have been material under the dual method of SAB 108 to be corrected in the carrying amounts of assets and liabilities at the beginning of 2006 with the offsetting adjustment to retained earnings for the cumulative effect of misstatements.  We have adjusted certain balances in the accompanying Consolidated Financial Statements at the beginning of 2006 to correct the misstatements discussed below which we considered to be immaterial in prior periods under our historical approach.  The impact of the January 1, 2006 cumulative effect adjustment, net of any income tax effect, was an increase to retained earnings as follows:

Deferred Tax Liabilities Adjustments		$	79
Reversal of Unallocated Reserve			6
Non-GAAP Conventions			15
Net Increase to January 1, 2006 Retained Earnings		$	100

 

 

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Deferred Taxes  Our opening Consolidated Balance Sheet at Spin-off included significant deferred tax assets and liabilities.  Over time we have determined that deferred tax liability amounts were recorded in excess of those necessary to reflect our temporary differences.

Unallocated Reserves  A reserve was established in 1999 equal to certain out of year corrections recorded during that year such that there was no misstatement under our historical approach.  No adjustments have been recorded to this reserve since its establishment and we do not believe the reserve is required.

Non-GAAP Accounting Conventions  Prior to 2006, we used certain non-GAAP conventions to account for capitalized interest on restaurant construction projects, the leases of our Pizza Hut United Kingdom (“U.K.”) unconsolidated affiliate and certain state tax benefits.  The net income statement impact on any given year from the use of these non-GAAP conventions was immaterial both individually and in the aggregate under our historical approach.  Below is a summary of the accounting policies we adopted effective the beginning of 2006 and the impact of the cumulative effect adjustment under SAB 108, net of any income tax effect.  The impact of these accounting policy changes was not significant to our results of operations in 2006 or 2007.

Interest Capitalization  SFAS No. 34, “Capitalization of Interest Cost” requires that interest be capitalized as part of an asset’s acquisition cost.  We traditionally have not capitalized interest on individual restaurant construction projects.  We increased our 2006 beginning retained earnings balance by approximately $12 million for the estimated capitalized interest on existing restaurants, net of accumulated depreciation.

Lease Accounting by our Pizza Hut United Kingdom Unconsolidated Affiliate  Prior to our fourth quarter 2006 acquisition of the remaining fifty percent interest in our Pizza Hut U.K. unconsolidated affiliate, we accounted for our ownership under the equity method.  The unconsolidated affiliate historically accounted for all of its leases as operating and we made no adjustments in recording equity income.  We decreased our 2006 beginning retained earnings balance by approximately $4 million to reflect our fifty percent share of the cumulative equity income impact of properly recording certain leases as capital.

Recognition of Certain State Tax Benefits  We historically recognized certain state tax benefits on a cash basis as they were recognized on the respective state tax returns instead of in the year the benefit originated.  We increased our 2006 beginning retained earnings by approximately $7 million to recognize these state tax benefits as deferred tax assets.

New Accounting Pronouncements Not Yet Adopted.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value.  SFAS 157, as issued, was effective for fiscal years beginning after November 15, 2007, the year beginning December 30, 2007 for the Company.  In February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157” which permits a one-year deferral for the implementation of SFAS 157 with regard to non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  We intend to defer adoption of SFAS 157 for such items.  We currently anticipate that neither the partial adoption of SFAS 157 in 2008 nor the full adoption in 2009 will materially impact the Company’s results of operations or financial condition.

In the fourth quarter of 2006, we adopted the recognition and disclosure provisions of SFAS 158 as described previously.  Additionally, SFAS 158 requires measurement of the funded status of pension and postretirement plans as of the date of a company’s fiscal year that ends after December 15, 2008 (the year ended December 27, 2008 for the Company).  Certain of our plans currently have measurement dates that do not coincide with our fiscal year end and thus we will be required to change their measurement dates in 2008.  As permitted by SFAS 158, we will use the measurements performed in 2007

 

 

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to estimate the effects of our changes to fiscal year end measurement dates. The impact of transitioning to fiscal year end measurement dates, including the net periodic benefit cost computed for the period between our previous measurement dates and our fiscal year ends, as well as changes in the fair value of plan assets and benefit obligations during the same periods, will be recorded directly to Shareholders’ Equity.  We do not currently anticipate any such amount will materially impact our financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007, the year beginning December 30, 2007 for the Company.  We did not elect to begin reporting any financial assets or liabilities at fair value upon adoption of SFAS 159 nor do we currently anticipate that the adoption of SFAS 159 will materially impact the Company going forward.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).  SFAS 141R, which is broader in scope than SFAS 141, applies to all transactions or other events in which an entity obtains control of one or more businesses, and requires that the acquisition method be used for such transactions or events.  SFAS 141R, with limited exceptions, will require an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date.  This will result in acquisition related costs and anticipated restructuring costs related to the acquisition being recognized separately from the business combination.  This statement is effective as the beginning of an entity’s first fiscal year beginning after December 15, 2008, the year beginning December 28, 2008 for the Company.  The impact of SFAS 141R on the Company will be dependent upon the extent to which we have transactions or events occur that are within its scope.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”).  SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and will change the accounting and reporting for noncontrolling interests, which are the portion of equity in a subsidiary not attributable, directly or indirectly to a parent.  SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, the year beginning December 28, 2008 for the Company and requires retroactive adoption of its presentation and disclosure requirements.  We do not anticipate that the adoption of SFAS 160 will materially impact the Company.

Note 3 - Two-for-One Common Stock Split

On May 17, 2007, the Company announced that its Board of Directors approved a two-for-one split of the Company’s outstanding shares of Common Stock.  The stock split was effected in the form of a stock dividend and entitled each shareholder of record at the close of business on June 1, 2007 to receive one additional share for every outstanding share of Common Stock held.  The stock dividend was distributed on June 26, 2007, with approximately 261 million shares of Common Stock distributed.  All per share and share amounts in the accompanying Financial Statements and Notes to the Financial Statements have been adjusted to reflect the stock split.

 

 

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Note 4 – Earnings Per Common Share (“EPS”)

	2007					2006					2005
Net income	$	909				$	824				$	762
Weighted-average common shares outstanding (for basic calculation)		522					546					572
Effect of dilutive share-based employee compensation		19					18					25
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)		541					564					597
Basic EPS	$	1.74				$	1.51				$	1.33
Diluted EPS	$	1.68				$	1.46				$	1.28
Unexercised employee stock options and stock appreciation rights (in millions) excluded from the diluted EPS compensation (a)		5.7					13.3					7.5

(a)	These unexercised employee stock options and stock appreciation rights were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.

Note 5 – Items Affecting Comparability of Net Income and Cash Flows

Sale of an Investment in Unconsolidated Affiliate - Japan

In December 2007, we sold our interest in our unconsolidated affiliate in Japan for $128 million in cash (includes the impact of related foreign currency contracts that were settled in December 2007).  Our international subsidiary that owned this interest operates on a fiscal calendar with a period end that is approximately one month earlier than our consolidated period close.  Thus, consistent with our historical treatment of events occurring during the lag period, the pre-tax gain on the sale of this investment of approximately $87 million will be recorded in the first quarter of 2008.  However, the cash proceeds from this transaction were transferred from our international subsidiary to the U.S. in December 2007 and are thus reported on our Consolidated Statement of Cash Flows for the year ended December 29, 2007.  The offset to this cash on our Consolidated Balance Sheet at December 29, 2007 is in accounts payable and other current liabilities.

While we will no longer have an ownership interest in this entity that operates both KFCs and Pizza Huts in Japan, it will continue to be a franchisee as it was when it operated as an unconsolidated affiliate.  This sale of our interest will result in lower Other income as we will no longer record our share of the entity’s earnings under the equity method of accounting.  Had this sale occurred at the beginning of 2007, our International Division’s Other income would have decreased $4 million.

 

 

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Facility Actions

Refranchising (gain) loss, store closure (income) costs and store impairment charges by reportable segment are as follows:

		2007					2006					2005
U.S.
Refranchising net (gain) loss(a)		$	(12	)			$	(20	)			$	(40	)
Store closure (income) costs(b)			(9	)				(1	)				2
Store impairment charges			23					38					44
Closure and impairment expenses		$	14				$	37				$	46
International Division
Refranchising net (gain) loss(a)		$	3				$	(4	)			$	(3	)
Store closure (income) costs(b)			1					1					(1	)
Store impairment charges			13					15					10
Closure and impairment expenses		$	14				$	16				$	9

China Division
Refranchising net (gain) loss(a)		$	(2	)			$	—				$	—
Store closure (income) costs(b)			—					(1	)				(1	)
Store impairment charges			7					7					8
Closure and impairment expenses		$	7				$	6				$	7
Worldwide
Refranchising net (gain) loss(a)		$	(11	)			$	(24	)			$	(43	)
Store closure (income) costs(b)			(8	)				(1	)				—
Store impairment charges			43					60					62
Closure and impairment expenses		$	35				$	59				$	62

(a)	Refranchising (gain) loss is not allocated to segments for performance reporting purposes.
(b)	Store closure (income) costs include the net gain or loss on sales of real estate on which we formerly operated a Company restaurant that was closed, lease reserves established when we cease using a property under an operating lease and subsequent adjustments to those reserves, and other facility-related expenses from previously closed stores.

 

 

 

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The following table summarizes the 2007 and 2006 activity related to reserves for remaining lease obligations for closed stores.

 

				Beginning Balance					Amounts Used				New Decisions				Estimate/Decision Changes				CTA/ Other				Ending Balance
2007 Activity				$	36				(12	)			8				1				1				$	34
2006 Activity				$	44				(17	)			8				1				—				$	36

Assets held for sale at December 29, 2007 and December 30, 2006 total $9 million and $13 million, respectively, of U.S. property, plant and equipment, primarily land, on which we previously operated restaurants and are included in prepaid expenses and other current assets on our Consolidated Balance Sheets.

Note 6 – Supplemental Cash Flow Data

		2007					2006					2005
Cash Paid For:
Interest		$	177				$	185				$	132
Income taxes			264					304					232
Significant Non-Cash Investing and Financing Activities:
Capital lease obligations incurred to acquire assets		$	59	(a)			$	9				$	7
Net investment in direct financing leases			33					—					—

(a)	Includes the capital lease of an airplane (see Note 14).

During 2006 we assumed the full liability associated with capital leases of $97 million and short-term borrowings of $23 million when we acquired the remaining fifty percent ownership interest of our Pizza Hut U.K. unconsolidated affiliate (See Note 7).  Previously, our fifty percent share of these liabilities were reflected in our Investment in unconsolidated affiliate balance under the equity method of accounting and were not presented as liabilities on our Consolidated Balance Sheet.

Note 7 - Pizza Hut United Kingdom Acquisition

On September 12, 2006, we completed the acquisition of the remaining fifty percent ownership interest of our Pizza Hut U.K. unconsolidated affiliate for $187 million in cash, including transaction costs and prior to $9 million of cash assumed.  This unconsolidated affiliate owned more than 500 restaurants in the U.K.  The acquisition was driven by growth opportunities we see in the market and the desire of our former partner in the unconsolidated affiliate to refocus its business to other industry sectors.  Prior to this acquisition, we accounted for our ownership interest under the equity method of accounting.  Our Investment in unconsolidated affiliate balance for the Pizza Hut U.K. unconsolidated affiliate was $51 million at the date of this acquisition.

Subsequent to the acquisition we consolidated all of the assets and liabilities of Pizza Hut U.K.  These assets and liabilities were valued at fifty percent of their historical carrying value and fifty percent of their fair value upon acquisition.  During 2007 we finalized our purchase price allocation such that assets and liabilities recorded for Pizza Hut U.K. due to the acquisition were as follows:

 

 

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Current assets, including cash of $9		$	27
Property, plant and equipment			338
Intangible assets			18
Goodwill			125
Total assets acquired			508
Current liabilities, other than capital lease obligations and short-term borrowings			107
Capital lease obligation, including current portion			97
Short-term borrowings			23
Other long-term liabilities			43
Total liabilities assumed			270
Net assets acquired (cash paid and investment allocated)		$	238

All of the $18 million in intangible assets (primarily reacquired franchise rights) are subject to amortization with a weighted average life of approximately 18 years.  The $125 million in goodwill is not expected to be deductible for income tax purposes and will be allocated to the International Division in its entirety.

Under the equity method of accounting, we reported our fifty percent share of the net income of the unconsolidated affiliate (after interest expense and income taxes) as Other (income) expense in the Consolidated Statements of Income.  We also recorded a franchise fee for the royalty received from the stores owned by the unconsolidated affiliate.  Since the date of acquisition, we have reported Company sales and the associated restaurant costs, G&A expense, interest expense and income taxes associated with the restaurants previously owned by the unconsolidated affiliate in the appropriate line items of our Consolidated Statements of Income.  We no longer record franchise fee income for the restaurants previously owned by the unconsolidated affiliate nor do we report other income under the equity method of accounting.  As a result of this acquisition, Company sales and restaurant profit increased $576 million and $59 million, respectively, franchise fees decreased $19 million and G&A expenses increased $33 million in 2007 compared to 2006.  As a result of this acquisition, Company sales and restaurant profit increased $164 million and $16 million, respectively, franchise fees decreased $7 million and G&A expenses increased $8 million in 2006 compared to 2005.  The impact of the acquisition on operating profit and net income was not significant in either year.

If the acquisition had been completed as of the beginning of the years ended December 30, 2006 and December 31, 2005, pro forma Company sales and franchise and license fees would have been as follows:

						2006				2005
Company sales						$	8,886			$	8,944
Franchise and license fees						$	1,176			$	1,095

The pro forma impact of the acquisition on net income and diluted earnings per share would not have been significant in 2006 and 2005.  The pro forma information is not necessarily indicative of the results of operations had the acquisition actually occurred at the beginning of each of these periods nor is it necessarily indicative of future results.

 

 

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Note 8 – Franchise and License Fees

		2007				2006				2005
Initial fees, including renewal fees		$	49			$	57			$	51
Initial franchise fees included in refranchising gains			(10	)			(17	)			(10	)
			39				40				41
Continuing fees			1,277				1,156				1,083
		$	1,316			$	1,196			$	1,124

Note 9 – Other (Income) Expense

		2007				2006				2005
Equity income from investments in unconsolidated affiliates		$	(51	)		$	(51	)		$	(51	)
Gain upon sale of investment in unconsolidated affiliate(a)			(6	)			(2	)			(11	)
Recovery from supplier(b)			—				—				(20	)
Contract termination charge(c)			—				8				—
Wrench litigation income (d)			(11	)			—				(2	)
Foreign exchange net (gain) loss and other			(3	)			(7	)			—
Other (income) expense		$	(71	)		$	(52	)		$	(84	)

(a)	Fiscal years 2007 and 2006 reflect recognition of income associated with receipt of payments for a note receivable arising from the 2005 sale of our fifty percent interest in the entity that operated almost all KFCs and Pizza Huts in Poland and the Czech Republic to our then partner in the entity.  Fiscal year 2005 reflects the gain recognized at the date of this sale.
(b)	Relates to a financial recovery from a supplier ingredient issue in mainland China totaling $24 million, $4 million of which was recognized through equity income from investments in unconsolidated affiliates.  Our KFC business in mainland China was negatively impacted by the interruption of product offerings and negative publicity associated with a supplier ingredient issue experienced in late March 2005.  During 2005, we entered into agreements with the supplier for a partial recovery of our losses.
(c)	Reflects an $8 million charge associated with the termination of a beverage agreement in the U.S. segment.
(d)	Fiscal years 2007 and 2005 reflect financial recoveries from settlements with insurance carriers related to a lawsuit settled by Taco Bell Corporation in 2004.

 

 

 

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Note 10 - Property, Plant and Equipment, net

		2007					2006
Land		$	548				$	541
Buildings and improvements			3,649					3,449
Capital leases, primarily buildings			284					221
Machinery and equipment			2,651					2,566
			7,132					6,777
Accumulated depreciation and amortization			(3,283	)				(3,146	)
		$	3,849				$	3,631

Depreciation and amortization expense related to property, plant and equipment was $514 million, $466 million and $459 million in 2007, 2006 and 2005, respectively.

Note 11 – Goodwill and Intangible Assets

The changes in the carrying amount of goodwill are as follows:

		U.S.					International Division					China Division					Worldwide
Balance as of December 31, 2005		$	384				$	96				$	58				$	538
Acquisitions			—					123					—					123
Disposals and other, net(a)			(17	)				18					—					1
Balance as of December 30, 2006		$	367				$	237				$	58				$	662
Acquisitions			—					—					—					—
Disposals and other, net(b)			(9	)				17					2					10
Balance as of December 29, 2007		$	358				$	254				$	60				$	672

(a)	Disposals and other, net for the International Division primarily reflects the impact of foreign currency translation on existing balances.  Disposals and other, net for the U.S. Division, primarily reflects goodwill write-offs associated with refranchising.
(b)	Disposals and other, net for the International Division primarily reflects adjustments to the Pizza Hut U.K. goodwill allocation and the impact of foreign currency translation on existing balances.  Disposals and other, net for the U.S. Division, primarily reflects goodwill write-offs associated with refranchising.

 

 

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Intangible assets, net for the years ended 2007 and 2006 are as follows:

 

		2007										2006
		Gross Carrying Amount					Accumulated Amortization					Gross Carrying Amount					Accumulated Amortization
Amortized intangible assets
Franchise contract rights		$	157				$	(73	)			$	153				$	(66	)
Trademarks/brands			221					(26	)				220					(18	)
Favorable/unfavorable operating leases			15					(12	)				15					(10	)
Reacquired franchise rights			17					(1	)				18					—
Other			6					(2	)				5					(1	)
		$	416				$	(114	)			$	411				$	(95	)
Unamortized intangible assets
Trademarks/brands		$	31									$	31

We have recorded intangible assets through past acquisitions representing the value of our KFC, LJS and A&W trademarks/brands.  The value of a trademark/brand is determined based upon the value derived from the royalty we avoid, in the case of Company stores, or receive, in the case of franchise and licensee stores, for the use of the trademark/brand.  We have determined that our KFC trademark/brand intangible asset has an indefinite life and therefore is not amortized.  We have determined that our LJS and A&W trademarks/brands are subject to amortization and are being amortized over their expected useful lives which are currently thirty years.

Amortization expense for all definite-lived intangible assets was $19 million in 2007, $15 million in 2006 and $13 million in 2005.  Amortization expense for definite-lived intangible assets will approximate $18 million annually in 2008 through 2012.

Note 12 – Accounts Payable and Other Current Liabilities

				2007					2006
Accounts payable				$	639				$	554
Accrued compensation and benefits					372					302
Dividends payable					75					119
Proceeds from sale of interest in Japan unconsolidated affiliate (See Note 5)					128					—
Other current liabilities					436					411
				$	1,650				$	1,386

 

 

 

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Note 13 – Short-term Borrowings and Long-term Debt

 

		2007					2006
Short-term Borrowings
Unsecured Term Loans, expire January 2007		$	—				$	183
Current maturities of long-term debt			268					16
Other			20					28
		$	288				$	227

Long-term Debt
Unsecured International Revolving Credit Facility, expires November 2012		$	28				$	174
Unsecured Revolving Credit Facility, expires November 2012			—					—
Senior, Unsecured Notes, due May 2008			250					251
Senior, Unsecured Notes, due April 2011			648					646
Senior, Unsecured Notes, due July 2012			399					399
Senior, Unsecured Notes, due April 2016			300					300
Senior, Unsecured Notes, due March 2018			598					—
Senior, Unsecured Notes, due November 2037			597					—
Capital lease obligations (See Note 14)			282					228
Other, due through 2019 (11%)			73					76
			3,175					2,074
Less current maturities of long-term debt			(268	)				(16	)
Long-term debt excluding SFAS 133 adjustment			2,907					2,058
Derivative instrument adjustment under SFAS 133 (See Note 15)			17					(13	)
Long-term debt including SFAS 133 adjustment		$	2,924				$	2,045

On November 29, 2007, the Company executed an amended and restated five-year senior unsecured Revolving Credit Facility (the “Credit Facility”) totaling $1.15 billion which replaced a five-year facility in the amount of $1.0 billion that was set to expire on September 7, 2009.  The Credit Facility is unconditionally guaranteed by our principal domestic subsidiaries and contains financial covenants relating to maintenance of leverage and fixed charge coverage ratios.  The Credit Facility also contains affirmative and negative covenants including, among other things, limitations on certain additional indebtedness and liens and certain other transactions specified in the agreement.  We were in compliance with all debt covenants at December 29, 2007.

Under the terms of the Credit Facility, we may borrow up to the maximum borrowing limit less outstanding letters of credit or banker’s acceptances, where applicable.  At December 29, 2007, our unused Credit Facility totaled $971 million, net of outstanding letters of credit of $179 million.  There were no borrowings under the Credit Facility at December 29, 2007.  The interest rate for borrowings under the Credit Facility ranges from 0.25% to 1.25% over the London Interbank Offered Rate (“LIBOR”) or is determined by an Alternate Base Rate, which is the greater of the Prime Rate or the Federal Funds Rate plus 0.50%.  The exact spread over LIBOR or the Alternate Base Rate, as applicable, depends on our performance under specified financial criteria.  Interest on any outstanding borrowings under the Credit Facility is payable at least quarterly.

 

 

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On November 29, 2007, the Company executed an amended and restated five-year revolving credit facility (the “International Credit Facility” or “ICF”) totaling $350 million, which replaced a five-year facility also in the amount of $350 million that was set to expire on November 8, 2010. The ICF is unconditionally guaranteed by YUM and by YUM’s principal domestic subsidiaries and contains covenants substantially identical to those of the Credit Facility. We were in compliance with all debt covenants at the end of 2007.

There were borrowings of $28 million and available credit of $322 million outstanding under the ICF at the end of 2007.  The interest rate for borrowings under the ICF ranges from 0.31% to 1.50% over LIBOR or is determined by a Canadian Alternate Base Rate, which is the greater of the Citibank, N.A., Canadian Branch’s publicly announced reference rate or the “Canadian Dollar Offered Rate” plus 0.50%.  The exact spread over LIBOR or the Canadian Alternate Base Rate, as applicable, depends upon YUM’s performance under specified financial criteria. Interest on any outstanding borrowings under the ICF is payable at least quarterly.

In 2006, we executed two short-term borrowing arrangements (the "Term Loans") on behalf of the International Division.  There were borrowings of $183 million outstanding at the end of 2006 under the Term Loans, both of which expired and were repaid in the first quarter of 2007.

The majority of our remaining long-term debt primarily comprises Senior Unsecured Notes.  The Senior Unsecured Notes represent senior, unsecured obligations and rank equally in right of payment with all of our existing and future unsecured unsubordinated indebtedness.  Amounts outstanding under Senior Unsecured Notes were $2.8 billion at December 29, 2007.  This amount includes $600 million aggregate principal amount of 6.25% Senior Unsecured Notes that were issued in October 2007 and are due on March 15, 2018 and $600 million aggregate principal amount of 6.875% Senior Unsecured Notes that were issued in October 2007 and are due November 15, 2037 (together the “2007 Notes”).  We are using the proceeds from the 2007 Notes to repay outstanding borrowings on our Credit Facility, for additional share repurchases and for general corporate purposes.

In anticipation of issuing the 2007 Notes, we entered into treasury locks and forward starting interest rate swaps with aggregate notional amounts of $100 million and $400 million, respectively, to hedge the interest rate risk attributable to changes in the United States Treasury Rates and the LIBOR, respectively, prior to issuance of the 2007 Notes.  As these treasury locks and forward starting interest rate swaps were designated and highly effective in offsetting this variability in cash flows associated with the future interest payments, a resulting $1 million treasury lock gain and $22 million forward starting interest rate swap loss from settlement of these instruments is being amortized over ten and thirty years, respectively, as a decrease and increase in interest expense, respectively.  

 

The following table summarizes all Senior Unsecured Notes issued that remain outstanding at December 29, 2007:

						Interest Rate
Issuance Date(a)		Maturity Date		Principal Amount (in millions)		Stated		Effective(b)
May 1998		May 2008		250		7.65%		7.81%
April 2001		April 2011		650		8.88%		9.20%
June 2002		July 2012		400		7.70%		8.04%
April 2006		April 2016		300		6.25%		6.03%
October 2007		March 2018		600		6.25%		6.38%
October 2007		November 2037		600		6.88%		7.29%

 

 

 

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(a)	Interest payments commenced six months after issuance date and are payable semi-annually thereafter.
(b)	Includes the effects of the amortization of any (1) premium or discount; (2) debt issuance costs; and (3) gain or loss upon settlement of related treasury locks and forward starting interest rate swaps utilized to hedge the interest rate risk prior to the debt issuance.  Excludes the effect of any swaps that remain outstanding as described in Note 15.

The annual maturities of short-term borrowings and long-term debt as of December 29, 2007, excluding capital lease obligations of $282 million and derivative instrument adjustments of $17 million, are as follows:

 

Year ended:
2008			$	273
2009				3
2010				3
2011				654
2012				433
Thereafter				1,555
Total			$	2,921

Interest expense on short-term borrowings and long-term debt was $199 million, $172 million and $147 million in 2007, 2006 and 2005, respectively.

Note 14 – Leases

At December 29, 2007 we operated more than 7,600 restaurants, leasing the underlying land and/or building in more than 6,000 of those restaurants with the vast majority of our commitments expiring within 15 to 20 years from the inception of the lease.  Our longest lease expires in 2151.  We also lease office space for headquarters and support functions, as well as certain office and restaurant equipment.  We do not consider any of these individual leases material to our operations.  Most leases require us to pay related executory costs, which include property taxes, maintenance and insurance.

In 2007, we entered into an agreement to lease a corporate aircraft to enhance our international travel capabilities.  This lease provides for an upfront payment of $10 million and monthly payments for three years.  At the end of the three-year period we have the option to purchase the aircraft.  In accordance with SFAS No. 13, this lease has been classified as capital and we had a related capital lease obligation recorded of $41 million at December 29, 2007.  Our lease is with CVS Corporation (“CVS”).  One of the Company’s directors is the Chairman, Chief Executive Officer and President of CVS.  Multiple independent appraisals were obtained during the negotiation process to insure that the lease was reflective of an arms-length transaction.

 

 

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Future minimum commitments and amounts to be received as lessor or sublessor under non-cancelable leases are set forth below:

		Commitments										Lease Receivables
		Capital					Operating					Direct Financing					Operating
2008		$	24				$	462				$	7				$	41
2009			24					417					8					37
2010			62					381					8					35
2011			20					340					8					29
2012			20					300					8					24
Thereafter			240					1,986					58					124
		$	390				$	3,886				$	97				$	290

At December 29, 2007 and December 30, 2006, the present value of minimum payments under capital leases was $282 million and $228 million, respectively.  At December 29, 2007 and December 30, 2006, unearned income associated with direct financing lease receivables was $46 million and $24 million, respectively.

The details of rental expense and income are set forth below:

		2007				2006				2005
Rental expense
Minimum		$	474			$	412			$	380
Contingent			81				62				51
		$	555			$	474			$	431
Minimum rental income		$	23			$	21			$	24

Note 15 - Financial Instruments

Interest Rate Derivative Instruments.  We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk and lowering interest expense for a portion of our debt. Under the contracts, we agree with other parties to exchange, at specified intervals, the difference between variable rate and fixed rate amounts calculated on a notional principal amount.  At both December 29, 2007 and December 30, 2006, interest rate derivative instruments outstanding had notional amounts of $850 million.  These swaps have reset dates and floating rate indices which match those of our underlying fixed-rate debt and have been designated as fair value hedges of a portion of that debt. As the swaps qualify for the short-cut method under SFAS 133, no ineffectiveness has been recorded.  The fair value of these swaps as of December 29, 2007 was a net asset of approximately $15 million, of which $16 million and $1 million were included in Other assets and Other liabilities and deferred credits, respectively.  The fair value of these swaps as of December 30, 2006 was a liability of approximately $15 million, which were included in Other liabilities and deferred credits.  The portion of this fair value which has not yet been recognized as an addition to interest expense at December 29, 2007 and December 30, 2006 has been included as an addition of $17 million and a reduction of $13 million, respectively, to long-term debt.

Foreign Exchange Derivative Instruments.  We enter into foreign currency forward contracts with the objective of reducing our exposure to cash flow volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany short-term receivables and payables.  The notional amount, maturity date, and currency of these contracts match those of the underlying receivables or payables.  For those foreign currency exchange forward contracts that we have designated as cash flow hedges, we measure ineffectiveness by comparing the cumulative

 

 

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change in the forward contract with the cumulative change in the hedged item.  No material ineffectiveness was recognized in 2007, 2006 or 2005 for those foreign currency forward contracts designated as cash flow hedges.

Deferred Amounts in Accumulated Other Comprehensive Income (Loss).  As of December 29, 2007, we had a net deferred loss associated with cash flow hedges of approximately $10 million, net of tax, due to treasury locks, forward starting interest rate swaps and foreign currency forward contracts.  The vast majority of this loss arose from the settlement of forward starting interest rate swaps entered into prior to the issuance of our Senior Unsecured Notes due in 2037, and is being reclassified into earnings through 2037 to interest expense.  See Note 13 for further discussion of these forward starting interest rate swaps.

Credit Risks.  Credit risk from interest rate swaps and foreign currency forward contracts is dependent both on movement in interest and currency rates and the possibility of non-payment by counterparties.  We mitigate credit risk by entering into these agreements with high-quality counterparties, and settle both interest rate swaps and foreign currency forward contracts for the net of our payable and receivable with the counterparty under the agreement.

Accounts receivable consists primarily of amounts due from franchisees and licensees for initial and continuing fees.  In addition, we have notes and lease receivables from certain of our franchisees.  The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our Concepts.  This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each Concept and the short-term nature of the franchise and license fee receivables.

Fair Value.  At December 29, 2007 and December 30, 2006, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.  The fair value of notes receivable approximates the carrying value after consideration of recorded allowances.

The carrying amounts and fair values of our other financial instruments subject to fair value disclosures are as follows:

 

		2007										2006
		Carrying  Amount					Fair Value					Carrying Amount					Fair Value
Debt
Short-term borrowings and long-term debt, excluding capital leases and the derivative instrument adjustments		$	2,913				$	3,081				$	2,057				$	2,230
Debt-related derivative instruments:
Open contracts in a net asset (liability) position			15					15					(15	)				(15	)
Foreign currency-related derivative instruments:
Open contracts in a net asset (liability) position			—					—					(7	)				(7	)
Lease guarantees			22					26					19					28
Guarantees supporting financial arrangements of certain franchisees and other third parties			8					8					7					7
Letters of credit			—					1					—					1

We estimated the fair value of debt, debt-related derivative instruments, foreign currency-related derivative instruments, guarantees and letters of credit using market quotes and calculations based on market rates.

 

 

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Note 16 – Pension and Postretirement Medical Benefits

The following disclosures reflect our 2006 adoption of the recognition and disclosure provisions of SFAS 158 as discussed in Note 2.

Pension Benefits.  We sponsor noncontributory defined benefit pension plans covering certain full-time salaried and hourly U.S. employees.  The most significant of these plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from the other U.S. plans are paid by the Company as incurred.  During 2001, the plans covering our U.S. salaried employees were amended such that any salaried employee hired or rehired by YUM after September 30, 2001 is not eligible to participate in those plans.  Benefits are based on years of service and earnings or stated amounts for each year of service.  We also sponsor various defined benefit pension plans covering certain of our non-U.S. employees, the most significant of which are in the U.K. (including a plan for Pizza Hut U.K. employees that was sponsored by our unconsolidated affiliate prior to our acquisition of the remaining fifty percent interest in the unconsolidated affiliate in 2006).  Our plans in the U.K. have previously been amended such that new employees are not eligible to participate in these plans.

Obligation and Funded Status at Measurement Date:

The following chart summarizes the balance sheet impact, as well as benefit obligations, assets, and funded status associated with our U.S. pension plans and significant International pension plans based on actuarial valuations prepared as of a measurement date of September 30, 2007 and 2006, with the exception of the Pizza Hut U.K. pension plan where such information is presented as of a measurement date of November 30, 2007 and 2006.

 

 

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		U.S. Pension Plans										International Pension Plans
		2007					2006					2007					2006
Change in benefit obligation
Benefit obligation at beginning of year		$	864				$	815				$	152				$	57
Service cost			33					34					9					5
Interest cost			50					46					8					4
Participant contributions			—					—					2					1
Plan amendments			4					(3	)				—					—
Acquisitions(a)			—					—					4					71
Curtailment gain			(4	)				(1	)				—					—
Exchange rate changes			—					—					8					14
Benefits and expenses paid			(34	)				(29	)				(2	)				(1	)
Actuarial (gain) loss			(71	)				2					(20	)				1
Benefit obligation at end of year		$	842				$	864				$	1611				$	152
Change in plan assets
Fair value of plan assets at beginning of year		$	673				$	610				$	117				$	39
Actual return on plan assets			93					60					11					6
Employer contributions			2					35					6					19
Participant contributions			—					—					2					1
Acquisitions(a)			—					—					—					40
Benefits paid			(33	)				(29	)				(2	)				(1	)
Exchange rate changes			—					—					5					13
Administrative expenses			(3	)				(3	)				—					—
Fair value of plan assets at end of year		$	732				$	673				$	139				$	117
Funded status at end of year		$	(110	)			$	(191	)			$	(22	)			$	(35	)

(a)	Relates to the acquisition of the remaining fifty percent interest in our Pizza Hut U.K. unconsolidated affiliate.

Amounts recognized in the Consolidated Balance Sheet:
		U.S. Pension Plans										International Pension Plans
		2007					2006					2007					2006
Accrued benefit asset – non-current		$	—				$	—				$	5				$	—
Accrued benefit liability – current			(6	)				(2	)				—					—
Accrued benefit liability – non-current			(104	)				(189	)				(27	)				(35	)
		$	(110	)			$	(191	)			$	(22	)			$	(35	)

 

 

 

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Amounts recognized as a loss in Accumulated Other Comprehensive Income:
		U.S. Pension Plans										International Pension Plans
		2007					2006					2007					2006
Actuarial net loss		$	77				$	216				$	13				$	31
Prior service cost			3					—					—					—
		$	80				$	216				$	13				$	31

The accumulated benefit obligation for the U.S. and International pension plans was $900 million and $916 million at December 29, 2007 and December 30, 2006, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets:
		U.S. Pension Plans										International Pension Plans
		2007					2006					2007					2006
Projected benefit obligation		$	73				$	864				$	80				$	79
Accumulated benefit obligation			64					786					74					75
Fair value of plan assets			—					673					53					44

Information for pension plans with a projected benefit obligation in excess of plan assets:
		U.S. Pension Plans										International Pension Plans
		2007					2006					2007					2006
Projected benefit obligation		$	842				$	864				$	80				$	79
Accumulated benefit obligation			770					786					74					75
Fair value of plan assets			732					673					53					44

Based on current funding rules, we do not anticipate being required to make contributions to the Plan in 2008, but we may make discretionary contributions during the year based on our estimate of the Plan’s expected December 27, 2008 funded status.  The funding rules for our pension plans outside the U.S. vary from country to country and depend on many factors including discount rates, performance of plan assets, local laws and tax regulations.  Since our plan assets currently approximate our projected benefit obligation for our KFC U.K. pension plan, we did not make a significant contribution in 2007 and we do not anticipate any significant near term funding.  The projected benefit obligation of our Pizza Hut U.K. pension plan exceeds plan assets by approximately $27 million.  We anticipate taking steps to reduce this deficit in the near term, which could include a decision to partially or completely fund the deficit in 2008.

We do not anticipate any plan assets being returned to the Company during 2008 for any plans.

 

 

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Components of net periodic benefit cost:

		U.S. Pension Plans																International Pension Plans(d)
Net periodic benefit cost		2007					2006					2005						2007					2006					2005
Service cost		$	33				$	34				$	33					$	9				$	5				$	3
Interest cost			50					46					43						8					4					2
Amortization of prior service cost(a)			1					3					3						—					—					—
Expected return on plan assets			(51	)				(47	)				(45	)					(9	)				(4	)				(2	)
Amortization of net loss			23					30					22						1					1					—
Net periodic benefit cost		$	56				$	66				$	56					$	9				$	6				$	3
Additional loss recognized due to: Curtailment(b)		$	—				$	—				$	1					$	—				$	—				$	—
Settlement(c)		$	—				$	—				$	3					$	—				$	—				$	—
Pension losses in accumulated other comprehensive income (loss):
		U.S. Pension Plans																International Pension Plans
		2007																2007
Beginning of year		$	216															$	31
Net actuarial gain			(116	)															(17	)
Amortization of net loss			(23	)															(1	)
Prior service cost			4																—
Amortization of prior service cost			(1	)															—
End of year		$	80															$	13

(a)	Prior service costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.
(b)	Curtailment losses have been recognized as refranchising losses as they have resulted primarily from refranchising activities.
(c)	Settlement loss results from benefit payments from a non-funded plan exceeding the sum of the service cost and interest cost for that plan during the year.
(d)	Excludes pension expense for the Pizza Hut U.K. pension plan of $4 million in both 2006 and 2005 related to periods prior to our acquisition of the remaining fifty percent interest in the unconsolidated affiliate.

The estimated net loss for the U.S. and International pension plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost in 2008 is $6 million and $1 million, respectively.  The estimated prior service cost for the U.S. pension plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost in 2008 is $1 million.

 

 

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Weighted-average assumptions used to determine benefit obligations at the measurement dates:
		U.S. Pension Plans										International Pension Plans
		2007					2006					2007					2006
Discount rate			6.50%					5.95%					5.60%					5.00%
Rate of compensation increase			3.75%					3.75%					4.30%					3.77%

Weighted-average assumptions used to determine the net periodic benefit cost for fiscal years:
		U.S. Pension Plans															International Pension Plans
		2007					2006					2005					2007					2006					2005
Discount rate			5.95%					5.75%					6.15%					5.00%					5.00%					5.50%
Long-term rate of return on plan assets			8.00%					8.00%					8.50%					7.07%					6.70%					7.00%
Rate of compensation increase			3.75%					3.75%					3.75%					3.78%					3.85%					4.00%

Our estimated long-term rate of return on plan assets represents the weighted-average of expected future returns on the asset categories included in our target investment allocation based primarily on the historical returns for each asset category, adjusted for an assessment of current market conditions.

Plan Assets

Our pension plan weighted-average asset allocations at the measurement dates, by asset category are set forth below:

		U.S. Pension Plans										International Pension Plans
Asset Category		2007					2006					2007					2006
Equity securities			71	%				70	%				80	%				80	%
Debt securities			29					30					20					20
Total			100	%				100	%				100	%				100	%

Our primary objectives regarding the Plan’s assets, which make up 84% of total pension plan assets at the 2007 measurement dates, are to optimize return on assets subject to acceptable risk and to maintain liquidity, meet minimum funding requirements and minimize plan expenses.  To achieve these objectives, we have adopted a passive investment strategy in which the asset performance is driven primarily by the investment allocation.  Our target investment allocation is 70% equity securities and 30% debt securities, consisting primarily of low cost index mutual funds that track several sub-categories of equity and debt security performance.  The investment strategy is primarily driven by our Plan’s participants’ ages and reflects a long-term investment horizon favoring a higher equity component in the investment allocation.

A mutual fund held as an investment by the Plan includes YUM stock in the amount of $0.4 million at September 30, 2007 and 2006 (less than 1% of total plan assets in each instance).

 

 

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Benefit Payments

The benefits expected to be paid in each of the next five years and in the aggregate for the five years thereafter are set forth below:

Year ended:				U.S. Pension Plans					International Pension Plans
2008				$	43				$	2
2009					34					2
2010					36					2
2011					39					2
2012					42					2
2013 - 2017					263					12

Expected benefits are estimated based on the same assumptions used to measure our benefit obligation on the measurement date and include benefits attributable to estimated further employee service.

Postretirement Medical Benefits

Our postretirement plan provides health care benefits, principally to U.S. salaried retirees and their dependents, and includes retiree cost sharing provisions.  During 2001, the plan was amended such that any salaried employee hired or rehired by YUM after September 30, 2001 is not eligible to participate in this plan.  Employees hired prior to September 30, 2001 are eligible for benefits if they meet age and service requirements and qualify for retirement benefits.  We fund our postretirement plan as benefits are paid.

At the end of 2007 and 2006, the accumulated postretirement benefit obligation is $73 million and $68 million, respectively.  The unrecognized actuarial loss recognized in Accumulated other comprehensive loss is $9 million at the end of 2007 and $4 million at the end of 2006. The net periodic benefit cost recorded in 2007, 2006 and 2005 was $5 million, $6 million and $8 million, respectively, the majority of which is interest cost on the accumulated postretirement benefit obligation.  The weighted-average assumptions used to determine benefit obligations and net periodic benefit cost for the postretirement medical plan are identical to those as shown for the U.S. pension plans.  Our assumed heath care cost trend rates for the following year as of 2007 and 2006 are 8.0% and 9.0%, respectively, both with an expected ultimate trend rate of 5.5% reached in 2012.

There is a cap on our medical liability for certain retirees.  The cap for Medicare eligible retirees was reached in 2000 and the cap for non-Medicare eligible retirees is expected to be reached in 2011; once the cap is reached, our annual cost per retiree will not increase.  A one-percentage-point increase or decrease in assumed health care cost trend rates would have less than a $1 million impact on total service and interest cost and on the post retirement benefit obligation.  The benefits expected to be paid in each of the next five years are approximately $6 million and in aggregate for the five years thereafter are $33 million.

Note 17 –Stock Options and Stock Appreciation Rights

At year end 2007, we had four stock award plans in effect: the YUM! Brands, Inc. Long-Term Incentive Plan (“1999 LTIP”), the 1997 Long-Term Incentive Plan (“1997 LTIP”), the YUM! Brands, Inc. Restaurant General Manager Stock Option Plan (“RGM Plan”) and the YUM! Brands, Inc. SharePower Plan (“SharePower”).  Under all our plans, the exercise price of stock options and stock appreciation rights (“SARs”) granted must be equal to or greater than the average market price or the ending market price of the Company’s stock on the date of grant.

 

 

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We may grant awards of up to 59.6 million shares and 90.0 million shares of stock under the 1999 LTIP, as amended, and 1997 LTIP, respectively.  Potential awards to employees and non-employee directors under the 1999 LTIP include stock options, incentive stock options, SARs, restricted stock, stock units, restricted stock units, performance shares and performance units.  Potential awards to employees and non-employee directors under the 1997 LTIP include restricted stock and performance restricted stock units.  Prior to January 1, 2002, we also could grant stock options, incentive stock options and SARs under the 1997 LTIP.  Through December 29, 2007, we have issued only stock options and performance restricted stock units under the 1997 LTIP and have issued only stock options and SARs under the 1999 LTIP.  While awards under the 1999 LTIP can have varying vesting provisions and exercise periods, previously granted awards under the 1997 LTIP and 1999 LTIP vest in periods ranging from immediate to 10 years and expire ten to fifteen years after grant.

We may grant awards to purchase up to 30.0 million shares of stock under the RGM Plan.  Potential awards to employees under the RGM Plan include stock options and SARs.  RGM Plan awards granted have a four year cliff vesting period and expire ten years after grant.  Certain RGM Plan awards are granted upon attainment of performance conditions in the previous year.  Expense for such awards is recognized over a period that includes the performance condition period.

We may grant awards to purchase up to 28.0 million shares of stock under SharePower.  Potential awards to employees under SharePower include stock options, SARs, restricted stock and restricted stock units.  SharePower awards granted subsequent to the Spin-off Date consist only of stock options and SARs to date, which vest over a period ranging from one to four years and expire no longer than ten years after grant.  Previously granted SharePower awards have expirations through 2017.

We estimated the fair value of each award made during 2007, 2006 and 2005 as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

		2007				2006				2005
Risk-free interest rate		4.7	%			4.5	%			3.8	%
Expected term (years)		6.0				6.0				6.0
Expected volatility		28.8	%			31.0	%			36.6	%
Expected dividend yield		2.0	%			1.0	%			0.9	%

We believe it is appropriate to group our awards into two homogeneous groups when estimating expected term.  These groups consist of grants made primarily to restaurant-level employees under the RGM Plan, which cliff vest after four years and expire ten years after grant, and grants made to executives under our other stock award plans, which typically have a graded vesting schedule of 25% per year over four years and expire ten years after grant.  We use a single-weighted average expected term for our awards that have a graded vesting schedule as permitted by SFAS 123R.  Based on analysis of our historical exercise and post-vesting termination behavior we have determined that six years is an appropriate term for both awards to our restaurant-level employees and awards to our executives.

When determining expected volatility, we consider both historical volatility of our stock as well as implied volatility associated with our traded options.

 

 

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A summary of award activity as of December 29, 2007, and changes during the year then ended is presented below.

		Shares				Weighted-Average Exercise Price					Weighted- Average Remaining Contractual Term			Aggregate Intrinsic Value (in millions)
Outstanding at the beginning of the year		54,603				$	14.93
Granted		7,302					29.77
Exercised		(10,564	)				11.16
Forfeited or expired		(2,204	)				23.35
Outstanding at the end of the year		49,137				$	17.57				5.67			$	1,030
Exercisable at the end of the year		30,516				$	12.80				4.23			$	786

The weighted-average grant-date fair value of awards granted during 2007, 2006 and 2005 was $8.85, $8.52 and $8.89, respectively.  The total intrinsic value of stock options and SARs exercised during the years ended December 29, 2007, December 30, 2006 and December 31, 2005, was $238 million, $215 million and $271 million, respectively.

As of December 29, 2007, there was $103 million of unrecognized compensation cost, which will be reduced by any forfeitures that occur, related to unvested awards that is expected to be recognized over a weighted-average period of 2.7 years.  The total fair value at grant date of awards vested during 2007, 2006 and 2005 was $58 million, $57 million and $57 million, respectively.

The total compensation expense for stock options and SARs recognized was $56 million, $60 million and $58 million in 2007, 2006 and 2005, respectively.  The related tax benefit recognized from this expense was $19 million, $21 million and $20 million in 2007, 2006 and 2005, respectively.

Cash received from stock options exercises for 2007, 2006 and 2005, was $112 million, $142 million and $148 million, respectively.  Tax benefits realized on our tax returns from tax deductions associated with stock options and SARs exercised for 2007, 2006 and 2005 totaled $76 million, $68 million and $94 million, respectively.

The Company has a policy of repurchasing shares on the open market to satisfy award exercises and expects to repurchase approximately 10 million shares during 2008 based on estimates of stock option and SARs exercises for that period.

Note 18 – Other Compensation and Benefit Programs

Executive Income Deferral Program (the “EID Plan”)

The EID Plan allows participants to defer receipt of a portion of their annual salary and all or a portion of their incentive compensation.  As defined by the EID Plan, we credit the amounts deferred with earnings based on the investment options selected by the participants.  These investment options are limited to cash, phantom shares of our Common Stock, phantom shares of a Stock Index Fund and phantom shares of a Bond Index Fund. Additionally, the EID Plan allows participants to defer incentive compensation to purchase phantom shares of our Common Stock at a 25% discount from the average market price at the date of deferral (the “Discount Stock Account”).  Deferrals to the Discount Stock Account are similar to a restricted stock unit award in that participants will generally forfeit both the discount and incentive compensation amounts deferred to the Discount Stock Account if they voluntarily separate from employment during a vesting period that is two years.  We expense the intrinsic value of the discount and, beginning in 2006, the incentive compensation over the requisite service period which includes the vesting period.  Investments in cash, the Stock Index fund and the Bond Index fund will be distributed in cash at a date as elected by the employee and therefore are classified as a liability on our Consolidated Balance Sheets.  We recognize compensation expense for the appreciation or

 

 

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depreciation of these investments.  As investments in the phantom shares of our Common Stock can only be settled in shares of our Common Stock, we do not recognize compensation expense for the appreciation or the depreciation, if any, of these investments.  Deferrals into the phantom shares of our Common Stock are credited to the Common Stock Account.

As of December 29, 2007, total deferrals to phantom shares of our Common Stock within the EID Plan totaled approximately 6.1 million shares.  We recognized compensation expense of $9 million, $8 million and $4 million, including discount amortization of $5 million, $5 million and $4 million, in 2007, 2006 and 2005, respectively, for the EID Plan.  These expense amounts do not include the salary or bonus actually deferred into Common Stock of $15 million, $17 million and $13 million in 2007, 2006 and 2005, respectively.

Contributory 401(k) Plan

We sponsor a contributory plan to provide retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for eligible U.S. salaried and hourly employees.  Participants are able to elect to contribute up to 25% of eligible compensation on a pre-tax basis.  Participants may allocate their contributions to one or any combination of 10 investment options within the 401(k) Plan.  We match 100% of the participant’s contribution to the 401(k) Plan up to 3% of eligible compensation and 50% of the participant’s contribution on the next 2% of eligible compensation.  We recognized as compensation expense our total matching contribution of $13 million in 2007 and $12 million in 2006 and 2005.

Note 19 – Shareholders’ Equity

Under the authority of our Board of Directors, we repurchased shares of our Common Stock during 2007, 2006 and 2005.  All amounts exclude applicable transaction fees.

			Shares Repurchased (thousands)						Dollar Value of Shares Repurchased
Authorization Date			2007		2006		2005		2007				2006				2005
October 2007			11,431		—		—		$	437			$	—			$	—
March 2007			15,092		—		—			500				—				—
September 2006			15,274		1,056		—			469				31				—
March 2006			—		20,145		—			—				500				—
November 2005			—		19,128		1,289			—				469				31
May 2005			—		—		20,279			—				—				500
January 2005			—		—		19,926			—				—				500
May 2004			—		—		1,068			—				—				25
Total			41,797		40,329		42,562		$	1,406	(a)		$	1,000	(b)		$	1,056

(a)	Amounts excludes the effects of $17 million in share repurchases (0.6 million shares) with trade dates prior to the 2006 fiscal year end but cash settlement dates subsequent to the 2006 fiscal year end and includes the effect of $13 million in share repurchases (0.4 million shares) with trade dates prior to the 2007 fiscal year end but cash settlement dates subsequent to the 2007 fiscal year.
(b)	Amount includes effects of $17 million in share repurchases (0.6 million shares) with trade dates prior to the 2006 fiscal year end but cash settlement dates subsequent to the 2006 fiscal year end.

 

 

 

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As of December 29, 2007, we have $813 million available for future repurchases (includes the impact of shares repurchased but not yet cash settled above) under our October 2007 share repurchase authorization.  Additionally, in January 2008 our Board of Directors authorized additional share repurchases, through January 2009, of up to an additional $1.25 billion (excluding applicable transaction fees) of our outstanding Common Stock.  Based on market conditions and other factors, additional repurchases may be made from time to time in the open market or through privately negotiated transactions at the discretion of the Company.

Accumulated Other Comprehensive Income (Loss) – Comprehensive income is net income plus certain other items that are recorded directly to shareholders’ equity.  Amounts included in other accumulated comprehensive loss for the Company’s derivative instruments and unrecognized actuarial losses are recorded net of the related income tax effects.  Refer to Note 16 for additional information about our pension accounting and Note 15 for additional information about our derivative instruments.  The following table gives further detail regarding the composition of other accumulated comprehensive income (loss) at December 29, 2007 and December 30, 2006.

		2007					2006
Foreign currency translation adjustment		$	94				$	—
Pension and post retirement losses, net of tax			(64	)				(160	)
Net unrealized losses on derivative instruments, net of tax			(10	)				4
Total accumulated other comprehensive income (loss)		$	20				$	(156	)

Note 20 – Income Taxes

The details of our income tax provision (benefit) are set forth below:

	2007					2006					2005
Current:    Federal	$	229				$	181				$	241
Foreign		151					131					113
State		(3	)				2					11
		377					314					365
Deferred:  Federal		(125	)				(33	)				(66	)
Foreign		27					(13	)				(20	)
State		3					16					(15	)
		(95	)				(30	)				(101	)
	$	282				$	284				$	264

Included in the federal tax provision above for 2005 is approximately $20 million current tax provided on $500 million of earnings in our foreign investments which we repatriated to the U.S. in 2005.  We made the determination to repatriate such earnings as the result of The American Jobs Creation Act of 2004 which became law on October 22, 2004 (the “Act”).  The Act allowed a dividend received deduction of 85% of repatriated qualified foreign earnings in fiscal year 2005. The federal and state tax provision for 2006 includes $4 million current tax benefit as a result of the reconciliation of tax on repatriated earnings as recorded in our Consolidated Statements of Income to the amounts on our tax returns.

The deferred tax provision includes $120 million and $39 million of benefit in 2007 and 2005, respectively, and $4 million of expense in 2006 for changes in valuation allowances due to changes in determinations regarding the likelihood of the use of certain deferred tax assets that existed at the beginning of the year.  The deferred tax provisions also include $16 million, $72 million and $26 million in 2007, 2006 and 2005, respectively, for increases in valuation allowances recorded against deferred tax assets generated during the year.  Additionally, foreign currency translation and other

 

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adjustments contributed to the fluctuations.  Total changes in valuation allowances were decreases of $37 million and $36 million in 2007 and 2005, respectively, and an increase of $112 million in 2006.  See additional discussion of federal valuation allowances adjustments in the effective tax rate discussion below.

The deferred foreign tax provision includes $17 million and $2 million of expense in 2007 and 2006, respectively, for the impact of changes in statutory tax rates in various countries. The $17 million of expense for 2007 includes $20 million for the Mexico tax law change enacted during the fourth quarter of 2007.  The 2007 deferred state tax provision includes $4 million ($3 million, net of federal tax) of benefit for the impact of state law changes.  The 2006 deferred state tax provision includes $12 million ($8 million, net of federal tax) of expense for the impact of state law changes.  The 2005 deferred state tax provision includes $8 million ($5 million, net of federal tax) of expense for the impact of state law changes.

U.S. and foreign income before income taxes are set forth below:

	2007					2006					2005
U.S.	$	527				$	626				$	690
Foreign		664					482					336
	$	1,191				$	1,108				$	1,026

The above U.S. income includes all income taxed in the U.S. even if the income is earned outside the U.S.

The reconciliation of income taxes calculated at the U.S. federal tax statutory rate to our effective tax rate is set forth below:

			2007				2006				2005
U.S. federal statutory rate			35.0	%			35.0	%			35.0	%
State income tax, net of federal tax benefit			1.0				2.0				1.6
Foreign and U.S. tax effects attributable to foreign operations			(5.7	)			(7.8	)			(8.4	)
Adjustments to reserves and prior years			2.6				(3.5	)			(1.1	)
Repatriation of foreign earnings			—				(0.4	)			2.0
Non-recurring foreign tax credit adjustments			—				(6.2	)			(1.7	)
Valuation allowance additions (reversals)			(9.0	)			6.8				(1.1	)
Other, net			(0.2	)			(0.3	)			(0.5	)
Effective income tax rate			23.7	%			25.6	%			25.8	%

Our 2007 effective income tax rate was positively impacted by valuation allowance reversals.  In December 2007, the Company finalized various tax planning strategies based on completing a review of our international operations, distributed a $275 million intercompany dividend and sold our interest in our Japan unconsolidated affiliate.  As a result, in the fourth quarter of 2007, we reversed approximately $82 million of valuation allowances associated with foreign tax credit carryovers that we now believe are more likely than not to be claimed on future tax returns.  In 2007, benefits associated with our foreign and U.S. tax effects attributable to foreign operations were negatively impacted by $36 million of expense associated with the $275 million intercompany dividend and approximately $20 million of expense for adjustments to our deferred tax balances as a result of the Mexico tax law change enacted during the fourth quarter of 2007.  These negative impacts were partially offset by a higher percentage of our income being earned outside the U.S.  Additionally, the effective tax rate was negatively impacted by the year-over-year change in adjustments to reserves and prior years.

 

 

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Our 2006 effective income tax rate was positively impacted by the reversal of tax reserves in connection with our regular U.S. audit cycle as well as certain out-of-year adjustments to reserves and accruals that lowered our effective income tax rate by 2.2 percentage points.  The reversal of tax reserves was partially offset by valuation allowance additions on foreign tax credits of approximately $36 million for which, as a result of the tax reserve reversals, we believed were not likely to be utilized before they expired.  We also recognized deferred tax assets for the foreign tax credit impact of non-recurring decisions to repatriate certain foreign earnings in 2007.  However, we provided full valuation allowances on such assets as we did not believe it was more likely than not that they would be realized at that time.  The 2005 tax rate was favorably impacted by the reversal of valuation allowances and the recognition of certain non-recurring foreign tax credits that we were able to substantiate during 2005.

Adjustments to reserves and prior years include the effects of the reconciliation of income tax amounts recorded in our Consolidated Statements of Income to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets.  Adjustments to reserves and prior years also includes changes in tax reserves, including interest thereon, established for potential exposure we may incur if a taxing authority takes a position on a matter contrary to our position.  We evaluate these reserves, including interest thereon, on a quarterly basis to insure that they have been appropriately adjusted for events, including audit settlements, that we believe may impact our exposure.

The details of 2007 and 2006 deferred tax assets (liabilities) are set forth below:

 

	2007					2006
Net operating loss and tax credit carryforwards	$	363				$	337
Employee benefits, including share-based compensation		209					189
Self-insured casualty claims		73					85
Lease related liabilities		115					95
Various liabilities		124					92
Deferred income and other		36					66
Gross deferred tax assets		920					864
Deferred tax asset valuation allowances		(308	)				(345	)
Net deferred tax assets	$	612				$	519
Intangible assets and property, plant and equipment	$	(156	)			$	(149	)
Lease related assets		(41	)				(23	)
Other		(58	)				(55	)
Gross deferred tax liabilities		(255	)				(227	)
Net deferred tax assets (liabilities)	$	357				$	292

Reported in Consolidated Balance Sheets as:
Deferred income taxes – current	$	125				$	57
Deferred income taxes – long-term		290					320
Accounts payable and other current liabilities		(8	)				(8	)
Other liabilities and deferred credits		(50	)				(77	)
	$	357				$	292

We have not provided deferred tax on certain undistributed earnings from our foreign subsidiaries as we believe they are indefinitely reinvested.  This amount may become taxable upon an actual or deemed repatriation of assets from the subsidiaries or a sale or liquidation of the subsidiaries.  We estimate that our total net undistributed earnings upon which

 

 

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we have not provided deferred tax total approximately $810 million at December 29, 2007.  A determination of the deferred tax liability on such earnings is not practicable. Foreign operating and capital loss carryforwards totaling $705 million and state operating loss carryforwards totaling $1.1 billion at year end 2007 are being carried forward in jurisdictions where we are permitted to use tax losses from prior periods to reduce future taxable income.  These losses will expire as follows:  $27 million in 2008, $113 million between 2009 and 2012, $1.1 billion between 2013 and 2027 and $601 million may be carried forward indefinitely.  In addition, tax credits totaling $99 million are available to reduce certain federal and state liabilities, of which $26 million will expire between 2009 and 2012, $66 million will expire between 2013 and 2027 and $7 million may be carried forward indefinitely.

Effective December 31, 2006, we adopted FIN 48 which requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities.  A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.  Upon adoption, we recognized an additional $13 million for unrecognized tax benefits, which we accounted for as a reduction to our opening balance of retained earnings.

The Company had $376 million of unrecognized tax benefits at December 29, 2007, $194 million of which, if recognized, would affect the effective income tax rate.  A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:

	2007
Balance upon adoption at December 31, 2006	$	318
Additions on tax positions related to the current year		105
Additions for tax positions of prior years		17
Reductions for tax positions of prior years		(49	)
Reductions for settlements		(6	)
Reductions due to statute expiration		(11	)
Foreign currency translation adjustment		2
Balance at December 29, 2007	$	376

The balance of unrecognized tax benefits previously disclosed upon adoption as of December 31, 2006 increased from $283 million to $318 million as a result of additional uncertain temporary tax positions identified in 2007.  These unrecognized tax benefits were properly recorded on our Consolidated Balance Sheet at December 31, 2006, but were not identified as uncertain tax positions for disclosure purposes.  As these items were temporary in nature, there was no change to the disclosed amount of $185 million of unrecognized tax benefits which, if recognized, would affect the effective income tax rate.

The major jurisdictions in which the Company files income tax returns include the U.S. federal jurisdiction, China, the United Kingdom, Mexico and Australia.  As of December 29, 2007, the earliest years that the Company was subject to examination in these jurisdictions were 1999 in the U.S., 2004 in China, 2000 in the United Kingdom, 2001 in Mexico and 2003 in Australia.  In addition, the Company is subject to various U.S. state income tax examinations, for which, in the aggregate, we had significant unrecognized tax benefits at December 29, 2007.  The Company believes that it is reasonably possible that its unrecognized tax benefits may decrease by approximately $110 million in the next 12 months.  Of this amount, approximately $95 million relates to items temporary in nature which will have no impact on the 2008 effective tax rate.  The remaining $15 million decrease in unrecognized tax benefits relate to various positions, each of which are individually insignificant, which if recognized upon audit settlement or statute expiration, will affect the effective income tax rate by approximately $12 million.

At December 29, 2007, total liabilities of $319 million, including $58 million for the payment of accrued interest and penalties, are included in Other liabilities and deferred credits as reported on the Consolidated Balance Sheet. Total

 

 

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accrued interest and penalties recorded at December 29, 2007 were $58 million.  During 2007, accrued interest decreased by $16 million, of which $11 million affected the 2007 effective tax rate.  The Company recognizes accrued interest and penalties related to unrecognized tax benefits as components of its income tax provision.

See Note 22 for further discussion of certain proposed Internal Revenue Service adjustments.

Note 21 – Reportable Operating Segments

We are principally engaged in developing, operating, franchising and licensing the worldwide KFC, Pizza Hut, Taco Bell, LJS and A&W concepts. KFC, Pizza Hut, Taco Bell, LJS and A&W operate throughout the U.S. and in 104, 96, 14, 6 and 10 countries and territories outside the U.S., respectively.  Our five largest international markets based on operating profit in 2007 are China, United Kingdom, Asia Franchise, Australia and Mexico.  At the end of fiscal year 2007, we had investments in 6 unconsolidated affiliates outside the U.S. which operate principally KFC and/or Pizza Hut restaurants.  These unconsolidated affiliates operate in China and Japan. Subsequent to the fiscal year ended 2007 the Company sold its interest in its unconsolidated affiliate in Japan (See Note 5 for further discussion).

We identify our operating segments based on management responsibility.  The China Division includes mainland China, Thailand, KFC Taiwan, and the International Division includes the remainder of our international operations.  For purposes of applying SFAS No. 131, “Disclosure About Segments of An Enterprise and Related Information” (“SFAS 131”) in the U.S., we consider LJS and A&W to be a single operating segment.  We consider our KFC, Pizza Hut, Taco Bell and LJS/A&W operating segments in the U.S. to be similar and therefore have aggregated them into a single reportable operating segment.

				Revenues
				2007					2006					2005
United States				$	5,197				$	5,603				$	5,929
International Division(a)					3,075					2,320					2,124
China Division(a)					2,144					1,638					1,296
				$	10,416				$	9,561				$	9,349

 

 

 

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				Operating Profit; Interest Expense, Net; and Income Before Income Taxes
				2007					2006					2005
United States				$	739				$	763				$	760
International Division(b)					480					407					372
China Division(b)					375					290					211
Unallocated and corporate expenses					(257	)				(229	)				(246	)
Unallocated other income (expense)(c)					9					7					13
Unallocated refranchising gain (loss)(d)					11					24					43
Total operating profit					1,357					1,262					1,153
Interest expense, net					(166	)				(154	)				(127	)
Income before income taxes				$	1,191				$	1,108				$	1,026

				Depreciation and Amortization
				2007					2006					2005
United States				$	247				$	259				$	266
International Division					161					115					107
China Division					117					95					82
Corporate					17					10					14
				$	542				$	479				$	469

				Capital Spending
				2007					2006					2005
United States				$	304				$	329				$	333
International Division					189					118					96
China Division					246					165					159
Corporate					3					2					21
				$	742				$	614				$	609

				Identifiable Assets
				2007					2006					2005
United States				$	2,884				$	2,909				$	3,118
International Division(e)					2,254					2,100					1,536
China Division(e)					1,116					869					746
Corporate(f)					988					490					397
				$	7,242				$	6,368				$	5,797

 

 

 

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				Long-Lived Assets(g)
				2007					2006					2005
United States				$	2,595				$	2,604				$	2,800
International Division(h)					1,429					1,357					804
China Division(h)					757					595					517
Corporate					73					84					103
				$	4,854				$	4,640				$	4,224

(a)	Includes revenues of $1.3 billion, $673 million and $483 million for entities in the United Kingdom for 2007, 2006 and 2005, respectively. Includes revenues of $1.9 billion, $1.4 billion and $1.0 billion in mainland China for 2007, 2006 and 2005, respectively.
(b)	Includes equity income of unconsolidated affiliates of $4 million, $10 million and $21 million in 2007, 2006 and 2005, respectively, for the International Division.  Includes equity income of unconsolidated affiliates of $47 million, $41 million, and $30 million in 2007, 2006 and 2005, respectively, for the China Division.
(c)	Includes net gains of approximately $6 million, $2 million and $11 million in 2007, 2006 and 2005, respectively, associated with the sale of our Poland/Czech Republic business.  See Note 9.
(d)	Refranchising gain (loss) is not allocated to the U.S., International Division or China Division segments for performance reporting purposes.
(e)	Includes investment in unconsolidated affiliates of $63 million, $64 million and $117 million for 2007, 2006 and 2005, respectively, for the International Division.  Includes investment in unconsolidated affiliates of $90 million, $74 million and $56 million for 2007, 2006 and 2005, respectively, for the China Division.
(f)	Primarily includes deferred tax assets, property, plant and equipment, net, related to our office facilities and cash.
(g)	Includes property, plant and equipment, net, goodwill, and intangible assets, net.

(h)	Includes long-lived assets of $843 million, $813 million and $271 million for entities in the United Kingdom for 2007, 2006 and 2005, respectively.  Includes long-lived assets of $651 million, $495 million and $430 million in mainland China for 2007, 2006 and 2005, respectively.

See Note 5 for additional operating segment disclosures related to impairment, store closure (income) costs and the carrying amount of assets held for sale.

Note 22 – Guarantees, Commitments and Contingencies

Lease Guarantees and Contingencies

As a result of (a) assigning our interest in obligations under real estate leases as a condition to the refranchising of certain Company restaurants; (b) contributing certain Company restaurants to unconsolidated affiliates; and (c) guaranteeing certain other leases, we are frequently contingently liable on lease agreements.  These leases have varying terms, the latest of which expires in 2026.  As of December 29, 2007, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $400 million.  The present value of these potential payments discounted at our pre-tax cost of debt at December 29, 2007 was approximately $325 million.  Our franchisees are the primary lessees under the vast majority of these leases.  We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment

 

 

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under the lease.  We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases.  Accordingly, the liability recorded for our probable exposure under such leases at December 29, 2007 and December 30, 2006 was not material.

Franchise Loan Pool Guarantees

We have provided a partial guarantee of approximately $12 million of a franchisee loan pool related primarily to the Company’s historical refranchising programs and, to a lesser extent, franchisee development of new restaurants, at December 29, 2007.  In support of this guarantee, we have provided a standby letter of credit of $18 million under which we could potentially be required to fund a portion of the franchisee loan pool.  The total loans outstanding under the loan pool were approximately $62 million at December 29, 2007.

The loan pool is funded by the issuance of commercial paper by a conduit established for that purpose.  A disruption in the commercial paper markets may result in the Company and the participating financial institutions having to fund commercial paper issuances that have matured.  Any funding under the guarantee or letter 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 (gain) loss.  New loans added to the loan pool in 2007 were not significant.

All outstanding loans in another franchisee loan pool we previously partially guaranteed were paid in full during 2007.  No further loans will be made from this loan pool.

Unconsolidated Affiliates Guarantees

From time to time we have guaranteed certain lines of credit and loans of unconsolidated affiliates.  At December 29, 2007 there are no guarantees outstanding for unconsolidated affiliates.  Our unconsolidated affiliates had total revenues of $1.4 billion for the year ended December 29, 2007 and assets and debt of approximately $665 million and $22 million, respectively, at December 29, 2007.

Insurance Programs

We are self-insured for a substantial portion of our current and prior years’ coverage including workers’ compensation, employment practices liability, general liability, automobile liability and property losses (collectively, “property and casualty losses”).  To mitigate the cost of our exposures for certain property and casualty losses, we make annual decisions to self-insure the risks of loss up to defined maximum per occurrence retentions on a line by line basis or to combine certain lines of coverage into one loss pool with a single self-insured aggregate retention.  The Company then purchases insurance coverage, up to a certain limit, for losses that exceed the self-insurance per occurrence or aggregate retention.  The insurers’ maximum aggregate loss limits are significantly above our actuarially determined probable losses; therefore, we believe the likelihood of losses exceeding the insurers’ maximum aggregate loss limits is remote.

In the U.S. and in certain other countries, we are also self-insured for healthcare claims and long-term disability for eligible participating employees subject to certain deductibles and limitations.  We have accounted for our retained liabilities for property and casualty losses, healthcare and long-term disability claims, including reported and incurred but not reported claims, based on information provided by independent actuaries.

Due to the inherent volatility of actuarially determined property and casualty loss estimates, it is reasonably possible that we could experience changes in estimated losses which could be material to our growth in quarterly and annual net income.  We believe that we have recorded reserves for property and casualty losses at a level which has substantially mitigated the potential negative impact of adverse developments and/or volatility.

 

 

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Legal Proceedings

We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business.  We provide reserves for such claims and contingencies when payment is probable and estimable in accordance with SFAS No. 5, “Accounting for Contingencies.”

On November 26, 2001, a lawsuit against Long John Silver’s, Inc. (“LJS”) styled Kevin Johnson, on behalf of himself and all others similarly situated v. Long John Silver’s, Inc. (“Johnson”) was filed in the United States District Court for the Middle District of Tennessee, Nashville Division.  Johnson’s suit alleged that LJS’s former “Security/Restitution for Losses” policy (the “Policy”) provided for deductions from Restaurant General Managers’ (“RGMs”) and Assistant Restaurant General Managers’ (“ARGMs”) salaries that violate the salary basis test for exempt personnel under regulations issued pursuant to the U.S. Fair Labor Standards Act (“FLSA”).  Johnson alleged that all RGMs and ARGMs who were employed by LJS for the three year period prior to the lawsuit – i.e., since November 26, 1998 – should be treated as the equivalent of hourly employees and thus were eligible under the FLSA for overtime for any hours worked over 40 during all weeks in the recovery period.  In addition, Johnson claimed that the potential members of the class are entitled to certain liquidated damages and attorneys’ fees under the FLSA.

LJS believed that Johnson’s claims, as well as the claims of all other similarly situated parties, should be resolved in individual arbitrations pursuant to LJS’s Dispute Resolution Program (“DRP”), and that a collective action to resolve these claims in court was clearly inappropriate under the current state of the law.  Accordingly, LJS moved to compel arbitration in the Johnson case.  The Court determined on June 7, 2004 that Johnson’s individual claims should be referred to arbitration.  Johnson appealed, and the decision of the District Court was affirmed in all respects by the United States Court of Appeals for the Sixth Circuit on July 5, 2005.

On December 19, 2003, counsel for plaintiff in the above referenced Johnson lawsuit, filed a separate demand for arbitration with the American Arbitration Association (“AAA”) on behalf of former LJS managers Erin Cole and Nick Kaufman (the “Cole Arbitration”).  Claimants in the Cole Arbitration demand a class arbitration on behalf of the same putative class - and the same underlying FLSA claims - as were alleged in the Johnson lawsuit.  The complaint in the Cole Arbitration subsequently was amended to allege a practice of deductions (distinct from the allegations as to the Policy) in violation of the FLSA salary basis test.  LJS has denied the claims and the putative class alleged in the Cole Arbitration.

Arbitrations under LJS’s DRP, including the Cole Arbitration, are governed by the rules of the AAA.  In October 2003, the AAA adopted its Supplementary Rules for Class Arbitrations (“AAA Class Rules”).  The AAA appointed an arbitrator for the Cole Arbitration.  On June 15, 2004, the arbitrator issued a clause construction award, ruling that the DRP does not preclude class arbitration.  LJS moved to vacate the clause construction award in the United States District Court for the District of South Carolina.  On September 15, 2005, the federal court in South Carolina ruled that it did not have jurisdiction to hear LJS’s motion to vacate.  LJS appealed the U.S. District Court’s ruling to the United States Court of Appeals for the Fourth Circuit.

On January 5, 2007, LJS moved to dismiss the clause construction award appeal and that motion was granted by the Fourth Circuit on January 10, 2007.  While judicial review of the clause construction award was pending in the U.S. District Court, the arbitrator permitted claimants to move for a class determination award, which was opposed by LJS.  On September 19, 2005, the arbitrator issued a class determination award, certifying a class of LJS’s RGMs and ARGMs employed between December 17, 1998, and August 22, 2004, on FLSA claims, to proceed on an opt-out basis under the AAA Class Rules.  That class determination award was upheld on appeal by the United States District Court for the District of South Carolina on January 20, 2006, and the arbitrator declined to reconsider the award.  LJS appealed the ruling of the United States District Court to the United States Court of Appeals for the Fourth Circuit.  On January 28, 2008, the Fourth Circuit issued its ruling, affirming the decision of the District Court, and thereby affirming the class determination award of the arbitrator.  LJS is currently considering the merits of an appeal to the United States Supreme Court.

 

 

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In light of the decision of the Fourth Circuit, LJS now believes that it is probable the Cole Arbitration will proceed on a class basis, governed by the opt-out collective action provisions of the AAA Class Rules.  LJS also believes, however, that each individual should not be able to recover for more than two years (and a maximum three years) prior to the date they file a consent to join the arbitration.  We have provided for the estimated costs of the Cole Arbitration, based on our current projection of eligible claims, the amount of each eligible claim, the estimable claim recovery rates for class actions of this type, the estimated legal fees incurred by the claimants and the results of settlement negotiations in this and other wage and hour litigation matters.  But in view of the novelties of proceeding under the AAA Class Rules and the inherent uncertainties of litigation, there can be no assurance that the outcome of the arbitration will not result in losses in excess of those currently provided for in our Consolidated Financial Statements.

On September 2, 2005, a collective action lawsuit against the Company and KFC Corporation, originally styled Parler v. Yum Brands, Inc., d/b/a KFC, and KFC Corporation, was filed in the United States District Court for the District of Minnesota.  Plaintiffs allege that they and other current and former KFC Assistant Unit Managers (“AUMs”) were improperly classified as exempt employees under the FLSA.  Plaintiffs seek overtime wages and liquidated damages.  On January 17, 2006, the District Court dismissed the claims against the Company with prejudice, leaving KFC Corporation as the sole defendant.  Plaintiffs amended the complaint on September 8, 2006, to add related state law claims on behalf of a putative class of KFC AUMs employed in Illinois, Minnesota, Nevada, New Jersey, New York, Ohio, and Pennsylvania. On October 24, 2006, plaintiffs moved to decertify the conditionally certified FLSA action, and KFC Corporation did not oppose the motion.  On June 4, 2007, the District Court decertified the collective action and dismissed all opt-in plaintiffs without prejudice.  Subsequently, plaintiffs filed twenty-seven new cases around the country, most of which allege a statewide putative collective/class action.  Plaintiffs also filed 324 individual arbitrations with the American Arbitration Association (“AAA”). KFC filed a motion with the Judicial Panel on Multidistrict Litigation (“JPML”) to transfer all twenty-eight pending cases to a single district court for coordinated pretrial proceedings pursuant to the Multidistrict Litigation (“MDL”) statute, 28 U.S.C. § 1407.  KFC also filed a motion with the Minnesota District Court to enjoin the 324 AAA arbitrations on the ground that Plaintiffs waived the right to arbitrate by their participation in the Minnesota (Parler) litigation.  Finally, KFC filed a motion in the new Minnesota action to deny certification of a collective or class action on the ground that Plaintiffs are judicially and equitably estopped from proceeding collectively on behalf of a class in light of positions they took in the Parler case.  The Court denied KFC’s motion without prejudice.  On January 3, 2008, the JPML granted KFC’s motion to transfer all of the pending court cases to the Minnesota District Court for discovery and pre-trial proceedings.  On January 4, 2008, KFC’s motion to enjoin the 324 arbitrations on the ground that plaintiffs have waived their right to arbitrate was granted.

We believe that KFC has properly classified its AUMs as exempt under the FLSA and applicable state law, and accordingly intend to vigorously defend against all claims in these lawsuits.  However, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time.  Likewise, the amount of any potential loss cannot be reasonably estimated.

On August 4, 2006, a putative class action lawsuit against Taco Bell Corp. styled Rajeev Chhibber vs. Taco Bell Corp. was filed in Orange County Superior Court. On August 7, 2006, another putative class action lawsuit styled Marina Puchalski v. Taco Bell Corp. was filed in San Diego County Superior Court. Both lawsuits were filed by a Taco Bell RGM purporting to represent all current and former RGMs who worked at corporate-owned restaurants in California from August 2002 to the present.  The lawsuits allege violations of California’s wage and hour laws involving unpaid overtime and meal and rest period violations and seek unspecified amounts in damages and penalties.  As of September 7, 2006, the Orange County case was voluntarily dismissed by the plaintiff and both cases have been consolidated in San Diego County.  Discovery is underway, with pre-certification discovery cutoff set for June 2, 2008 and a July 1, 2008 deadline for plaintiffs to file their motion for class certification.

Taco Bell denies liability and intends to vigorously defend against all claims in this lawsuit.  However, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time.  Likewise, the amount of any potential loss cannot be reasonably estimated.

On September 10, 2007, a putative class action against Taco Bell Corp., the Company and other related entities styled Sandrika Medlock v. Taco Bell Corp., was filed in United States District Court, Eastern District, Fresno, California. The case was filed on behalf of all hourly employees who have worked for the defendants within the last four years and alleges numerous violations of California labor laws including unpaid overtime, failure to pay wages on termination, denial of meal and rest breaks, improper wage statements, unpaid business expenses and unfair or unlawful business practices in violation of California Business & Professions Code §17200.  The Company was dismissed from the case without prejudice on January 10, 2008, and discovery is underway.

Taco Bell denies liability and intends to vigorously defend against all claims in this lawsuit.  However, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time.  Likewise, the amount of any potential loss cannot be reasonably estimated.

 

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On December 21, 2007, a putative class action lawsuit against KFC U.S. Properties, Inc. styled Baskall v. KFC U.S. Properties, Inc., was filed in San Diego County Superior Court on behalf of all current and former RGMs, AUMs and Shift Supervisors who worked at KFC's California restaurants since December 18, 2003.  The lawsuit alleges violations of California’s wage and hour and unfair competition laws, including denial of sufficient meal and rest periods, improperly itemized pay stubs, and delays in issuing final paychecks, and seeks unspecified amounts in damages, injunctive relief, and attorneys' fees and costs.  KFC has not yet been served with the complaint.

KFC denies liability and intends to vigorously defend against all claims in this lawsuit.  However, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time.  Likewise, the amount of any potential loss cannot be reasonably estimated.

On December 17, 2002, Taco Bell was named as the defendant in a class action lawsuit filed in the United States District Court for the Northern District of California styled Moeller, et al. v. Taco Bell Corp.  On August 4, 2003, plaintiffs filed an amended complaint that alleges, among other things, that Taco Bell has discriminated against the class of people who use wheelchairs or scooters for mobility by failing to make its approximately 220 company-owned restaurants in California (the “California Restaurants”) accessible to the class.  Plaintiffs contend that queue rails and other architectural and structural elements of the Taco Bell restaurants relating to the path of travel and use of the facilities by persons with mobility-related disabilities do not comply with the U.S. Americans with Disabilities Act (the “ADA”), the Unruh Civil Rights Act (the “Unruh Act”), and the California Disabled Persons Act (the “CDPA”).  Plaintiffs have requested:  (a) an injunction from the District Court ordering Taco Bell to comply with the ADA and its implementing regulations; (b) that the District Court declare Taco Bell in violation of the ADA, the Unruh Act, and the CDPA; and (c) monetary relief under the Unruh Act or CDPA.  Plaintiffs, on behalf of the class, are seeking the minimum statutory damages per offense of either $4,000 under the Unruh Act or $1,000 under the CDPA for each aggrieved member of the class.  Plaintiffs contend that there may be in excess of 100,000 individuals in the class.

On February 23, 2004, the District Court granted Plaintiffs' motion for class certification.  The District Court certified a Rule 23(b)(2) mandatory injunctive relief class of all individuals with disabilities who use wheelchairs or electric scooters for mobility who, at any time on or after December 17, 2001, were denied, or are currently being denied, on the basis of disability, the full and equal enjoyment of the California Restaurants.  The class includes claims for injunctive relief and minimum statutory damages.

Pursuant to the parties’ agreement, on or about August 31, 2004, the District Court ordered that the trial of this action be bifurcated so that stage one will resolve Plaintiffs’ claims for equitable relief and stage two will resolve Plaintiffs’ claims for damages.  The parties are currently proceeding with the equitable relief stage of this action.  During this stage, Taco Bell filed a motion to partially decertify the class to exclude from the Rule 23(b)(2) class claims for monetary damages.  The District Court denied the motion.  Plaintiffs filed their own motion for partial summary judgment as to liability relating to a subset of the California Restaurants.  The District Court denied that motion as well.

 

 

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On May 17, 2007, a hearing was held on Plaintiffs’ Motion for Partial Summary Judgment seeking judicial declaration that Taco Bell was in violation of accessibility laws as to three specific issues:  indoor seating, queue rails and door opening force.  On August 8, 2007, the court granted Plaintiffs’ motion in part with regard to dining room seating.  In addition, the court granted Plaintiffs’ motion in part with regard to door opening force at some restaurants (but not all) and denied the motion with regard to queue lines.

At a status conference on September 27, 2007, the court set a trial date of November 10, 2008 with respect to not more than 20 restaurants to determine the issue of liability and common issues.  Discovery related to the subject of the mini-trial is underway.  The parties are in discussions intended to get to mediation.

Taco Bell has denied liability and intends to vigorously defend against all claims in this lawsuit.  Taco Bell has taken certain steps to address potential architectural and structural compliance issues at the restaurants in accordance with applicable state and federal disability access laws.  The costs associated with addressing these issues have not, and are not expected to significantly impact our results of operations.  It is not possible at this time to reasonably estimate the probability or amount of liability for monetary damages on a class wide basis to Taco Bell.

According to the Centers for Disease Control (“CDC”), there was an outbreak of illness associated with a particular strain of E. coli 0157:H7 in the northeast United States during November and December 2006.  Also according to the CDC, the outbreak from this particular strain was associated with eating at Taco Bell restaurants in Pennsylvania, New Jersey, New York, and Delaware.  The CDC concluded that the outbreak ended on or about December 6, 2006.  The CDC has stated that it received reports of 71 persons who became ill in association with the outbreak in the above-mentioned area during the above time frame, and that no deaths have been reported.

On December 6, 2006, a lawsuit styled Tyler Vormittag, et. al. v. Taco Bell Corp, Taco Bell of America, Inc. and Yum! Brands, Inc. was filed in the Supreme Court of the State of New York, County of Suffolk.  Mr. Vormittag, a minor, alleges he became ill after consuming food purchased from a Taco Bell restaurant in Riverhead, New York, which was allegedly contaminated with E. coli 0157:H7.  Subsequently, twenty-six other cases have been filed naming the Company, Taco Bell Corp., Taco Bell of America, K.F.C. Company (alleged owner/operator of the Taco Bell restaurant claimed to be at issue in one case), and/or Yum! Restaurant Services Group, Inc. and alleging similar facts on behalf of other customers.

According to the allegations common to all the Complaints, each Taco Bell customer became ill after ingesting contaminated food in late November or early December 2006 from Taco Bell restaurants located in the northeast states implicated in the outbreak.  Discovery is in the preliminary stages.  However, the Company believes, based on the allegations, that the stores identified in fourteen of the Complaints are in fact not owned by the Company or any of its subsidiaries. As such, the Company believes that at a minimum it is not liable for any losses at these stores.  Three of these Complaints have been dismissed without prejudice pending settlement discussions with plaintiffs’ counsel.  A fourth was dismissed with prejudice as against the Company on the ground that neither the Company nor any of its subsidiaries owned or operated the store at issue.

Additionally, the Company has received a number of claims from customers who have alleged injuries relating to the E.coli outbreak, but have not filed lawsuits.  Several of these claims have been settled.

We have provided for the estimated costs of these claims and litigation, based on a projection of potential claims and their amounts as well as the results of settlement negotiations in similar matters.  But in view of the inherent uncertainties of litigation, there can be no assurance that the outcome of the litigation will not result in losses in excess of those currently provided for in our Consolidated Financial Statements.

On March 14, 2007, a lawsuit styled Boskovich Farms, Inc. v. Taco Bell Corp. and Does 1 through 100 was filed in the Superior Court of the State of California, Orange County.  Boskovich Farms, a supplier of produce to Taco Bell, alleges in

 

 

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its Complaint, among other things, that it suffered damage to its reputation and business as a result of publications and/or statements it claims were made by Taco Bell in connection with Taco Bell’s reporting of results of certain tests conducted during investigations on green onions used at Taco Bell restaurants.  The Company believes that the Complaint should properly be heard in an alternative dispute resolution forum according to the contractual terms governing the relationship of the parties.  The Company filed a motion to compel ADR and stay the litigation on May 1, 2007.  The Court entered an order granting this motion on June 14, 2007.  Boskovich filed a writ petition to set aside the trial court’s ruling compelling ADR; the writ petition was denied in October 2007.  The parties are currently in the process of selecting a mediator.  The Company denies liability and intends to vigorously defend against all claims in any arbitration and the lawsuit.  However, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time.  Likewise, the amount of any potential loss cannot be reasonably estimated.

Proposed Internal Revenue Service Adjustments

In early 2007, the Internal Revenue Service (the “IRS”) informed the Company of its intent to propose certain adjustments based on its position that the Company did not file Gain Recognition Agreements (“GRAs”) in connection with certain transfers of foreign subsidiaries among its affiliated group.  In the fourth quarter of 2007, prior to any adjustments being proposed, the Company and the IRS settled this matter for an amount that was not significant to the Company’s financial results or condition.

 

 

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Note 23 - Selected Quarterly Financial Data (Unaudited)

		2007
		First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Revenues:
Company sales		$	1,942		$	2,073		$	2,243		$	2,842		$	9,100
Franchise and license fees			281			294			321			420			1,316
Total revenues			2,223			2,367			2,564			3,262			10,416
Restaurant profit(a)			288			310			353			376			1,327
Operating profit			316			310			401			330			1,357
Net income			194			214			270			231			909
Diluted earnings per common share			0.35			0.39			0.50			0.44			1.68
Dividends declared per common share			—			0.15			—			0.30			0.45

		2006
		First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Revenues:
Company sales		$	1,819		$	1,912		$	1,989		$	2,645		$	8,365
Franchise and license fees			266			270			289			371			1,196
Total revenues			2,085			2,182			2,278			3,016			9,561
Restaurant profit(a)			284			301			321			365			1,271
Operating profit			282			307			344			329			1,262
Net income			170			192			230			232			824
Diluted earnings per common share			0.30			0.34			0.41			0.41			1.46
Dividends declared per common share			0.0575			0.075			—			0.30			0.4325

(a)	Restaurant profit is defined as Company sales less expenses incurred directly by Company restaurants in generating Company sales.  These expenses are presented as subtotals on our Consolidated Statements of Income.

 

 

 

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Management’s Responsibility for Financial Statements

To Our Shareholders:

We are responsible for the preparation, integrity and fair presentation of the Consolidated Financial Statements, related notes and other information included in this annual report.  The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include certain amounts based upon our estimates and assumptions, as required.  Other financial information presented in the annual report is derived from the financial statements.

We maintain a system of internal control over financial reporting, designed to provide reasonable assurance as to the reliability of the financial statements, as well as to safeguard assets from unauthorized use or disposition.  The system is supported by formal policies and procedures, including an active Code of Conduct program intended to ensure employees adhere to the highest standards of personal and professional integrity.  We have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation, we concluded that our internal control over financial reporting was effective as of December 29, 2007.  Our internal audit function monitors and reports on the adequacy of and compliance with the internal control system, and appropriate actions are taken to address significant control deficiencies and other opportunities for improving the system as they are identified.

The Consolidated Financial Statements have been audited and reported on by our independent auditors, KPMG LLP, who were given free access to all financial records and related data, including minutes of the meetings of the Board of Directors and Committees of the Board.  We believe that management representations made to the independent auditors were valid and appropriate.  Additionally, the effectiveness of our internal control over financial reporting has been audited and reported on by KPMG LLP.

The Audit Committee of the Board of Directors, which is composed solely of outside directors, provides oversight to our financial reporting process and our controls to safeguard assets through periodic meetings with our independent auditors, internal auditors and management.  Both our independent auditors and internal auditors have free access to the Audit Committee.

Although no cost-effective internal control system will preclude all errors and irregularities, we believe our controls as of December 29, 2007 provide reasonable assurance that our assets are reasonably safeguarded.

Richard T. Carucci                                           

Chief Financial Officer

 

 

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Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 29, 2007.

Changes in Internal Control

There were no changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended December 29, 2007.

Item 9B.

Other Information.

None.

 

 

 

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PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Information regarding Section 16(a) compliance, the Audit Committee and the Audit Committee financial expert, the Company’s code of ethics and background of the directors appearing under the captions “Stock Ownership Information,” “Governance of the Company,” “Executive Compensation” and “Election of Directors” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 29, 2007.

Information regarding executive officers of the Company is included in Part I.

Item 11.

Executive Compensation

Information regarding executive and director compensation and the Compensation Committee appearing under the captions “Governance of the Company” and “Executive Compensation” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 29, 2007.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information regarding equity compensation plans and security ownership of certain beneficial owners and management appearing under the captions “Executive Compensation” and “Stock Ownership Information” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 29, 2007.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Information regarding certain relationships and related transactions and information regarding director independence appearing under the caption “Governance of the Company” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 29, 2007.

Item 14.

Principal Accountant Fees and Services.

Information regarding principal accountant fees and services and audit committee pre-approval policies and procedures appearing under the caption “Item 2:  Ratification of Independent Auditors” is incorporated by reference from the Company’s definitive proxy statement which will be filed with the Securities and Exchange Commission no later than 120 days after December 29, 2007.

 

 

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PART IV

Item 15.

Exhibits and Financial Statement Schedules.

(a)	(1)	Financial Statements:  Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.
	(2)	Financial Statement Schedules:  No schedules are required because either the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the related notes thereto filed as a part of this Form 10-K.
	(3)	Exhibits:  The exhibits listed in the accompanying Index to Exhibits are filed as part of this Form 10-K. The Index to Exhibits specifically identifies each management contract or compensatory plan required to be filed as an exhibit to this Form 10-K.

 

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:                      February 22, 2008

YUM! BRANDS, INC.

By:	/s/ David C. Novak

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ David C. Novak David C. Novak		Chairman of the Board, Chief Executive Officer and President (principal executive officer)		February 22, 2008
/s/ Richard T. Carucci Richard T. Carucci		Chief Financial Officer (principal financial officer)		February 22, 2008
/s/ Ted F. Knopf Ted F. Knopf		Senior Vice President Finance and Corporate Controller (principal accounting officer)		February 22, 2008
/s/ David W. Dorman David W. Dorman		Director		February 22, 2008
/s/ Massimo Ferragamo Massimo Ferragamo		Director		February 22, 2008
/s/ J. David Grissom J. David Grissom		Director		February 22, 2008

 

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/s/ Bonnie G. Hill  Bonnie G. Hill		Director		February 22, 2008
/s/ Robert Holland, Jr. Robert Holland, Jr.		Director		February 22, 2008
/s/ Kenneth G. Langone Kenneth G. Langone		Director		February 22, 2008
/s/ Jonathan S. Linen Jonathan S. Linen		Director		February 22, 2008
/s/ Thomas C. Nelson Thomas C. Nelson		Director		February 22, 2008
/s/ Thomas M. Ryan Thomas M. Ryan		Director		February 22, 2008
/s/ Jackie Trujillo Jackie Trujillo		Director		February 22, 2008

 

 

 

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YUM! Brands, Inc.

Exhibit Index

(Item 15)

Exhibit Number		Description of Exhibits
3.1		Restated Articles of Incorporation of YUM, which are incorporated herein by reference from Exhibit 3.1 to YUM’s Quarterly Report on Form 10-Q for the quarter ended September 3, 2005.
3.2		Amended and restated Bylaws of YUM, which are incorporated herein by reference from Exhibit 3.2 on Form 8-K filed on May 17, 2002.
4.1*		Indenture, dated as of May 1, 1998, between YUM and J.P. Morgan Chase Bank, National Association, successor in interest to The First National Bank of Chicago, pertaining to 7.65% Senior Notes due May 15, 2008, 8.5% Senior Notes and 8.875% Senior Notes due April 15, 2006 and April 15, 2011, respectively, and 7.70% Senior Notes due July 1, 2012, which is incorporated herein by reference from Exhibit 4.1 to YUM’s Report on Form 8-K filed on May 13, 1998.   (i)        6.25% Senior Notes due April 15, 2016 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.2 to YUM’s Report on Form 8-K filed on April 17, 2006.   (ii)        6.25% Senior Notes due March 15, 2018 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.2 to YUM’s Report on Form 8-K filed on October 22, 2007.   (iii)       6.875% Senior Notes due November 15, 2037 issued under the foregoing May 1, 1998 indenture, which notes are incorporated by reference from Exhibit 4.3 to YUM’s Report on Form 8-K filed on October 22, 2007.
10.1		Separation Agreement between PepsiCo, Inc. and YUM effective as of August 26, 1997, and the First Amendment thereto dated as of October 6, 1997, which is incorporated herein by reference from Exhibit 10.1 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
10.2		Tax Separation Agreement between PepsiCo, Inc. and YUM effective as of August 26, 1997, which is incorporated herein by reference from Exhibit 10.2 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
10.5		Amended and Restated Sales and Distribution Agreement between AmeriServe Food Distribution, Inc., YUM, Pizza Hut, Taco Bell and KFC, effective as of November 1, 1998, which is incorporated herein by reference from Exhibit 10 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 26, 1998, as amended by the First Amendment thereto, which is incorporated herein by reference from Exhibit 10.5 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000.
10.6		Amended and Restated Credit Agreement, dated November 29, 2007 among YUM, the lenders party thereto, JP Morgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as Lead Arrangers and Bookrunners and Citibank N.A., as Syndication Agent (as filed herewith).

 

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10.7†		YUM Director Deferred Compensation Plan, as effective October 7, 1997, which is incorporated herein by reference from Exhibit 10.7 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
10.8†		YUM 1997 Long Term Incentive Plan, as effective October 7, 1997, which is incorporated herein by reference from Exhibit 10.8 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
10.9†		YUM Executive Incentive Compensation Plan, which is incorporated herein by reference from Exhibit A of YUM’s Definitive Proxy Statement on Form DEF 14A for the Annual Meeting of Shareholders held on May 20, 2004.
10.10†		YUM Executive Income Deferral Program, as effective October 7, 1997, and as amended through May 16, 2002, which is incorporated herein by reference from Exhibit 10.10 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
10.13†		YUM Pension Equalization Plan, as effective October 7, 1997, which is incorporated herein by reference from Exhibit 10.14 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
10.16		Form of Directors’ Indemnification Agreement, which is incorporated herein by reference from Exhibit 10.17 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
10.17†		Amended and restated form of Severance Agreement (in the event of a change in control), which is incorporated herein by reference from Exhibit 10.17 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000.
10.18†		YUM Long Term Incentive Plan, as Amended through the First Amendment, as effective May 20, 1999, which is incorporated herein by reference from Exhibit B to YUM’s Definitive Proxy Statement on Form DEF 14A for the Annual Meeting of Shareholders held on May 15, 2003.
10.19†		Employment Agreement between YUM and Christian L. Campbell, dated as of September 3, 1997, which is incorporated herein by reference from Exhibit 10.19 to YUM’s Annual Report on Form 10-K for fiscal year ended December 26, 1998.
10.20		Amended and Restated YUM Purchasing Co-op Agreement, dated as of August 26, 2002, between YUM and the Unified FoodService Purchasing Co-op, LLC, which is incorporated herein by reference from Exhibit 10.20 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002.
10.22†		YUM Restaurant General Manager Stock Option Plan, as effective April 1, 1999, and as amended through June 23, 2003, which is incorporated herein by reference from Exhibit 10.22 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

10.23†		YUM SharePower Plan, as effective October 7, 1997, and as amended through June 23, 2003, which is incorporated herein by reference from Exhibit 10.23 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
10.24†		Employment agreement between YUM and David C. Novak, dated September 24, 2004, which is incorporated herein by reference from Exhibit 10.24 on Form 8-K filed on September 24, 2004.

 

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10.25†		Form of YUM Director Stock Option Award Agreement, which is incorporated herein by reference from Exhibit 10.25 to YUM’s Quarterly Report on Form 10-Q for the quarter ended September 4, 2004.
10.26†		Form of YUM 1999 Long Term Incentive Plan Award Agreement, which is incorporated herein by reference from Exhibit 10.26 to YUM’s Quarterly Report on Form 10-Q for the quarter ended September 4, 2004.
10.27†		YUM! Brands, Inc. International Retirement Plan, as in effect January 1, 2005, which is incorporated herein by reference from Exhibit 10.27 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 25, 2004.
10.28†		Letter of Understanding, dated July 13, 2004, by and between the Company and Samuel Su, which is incorporated herein by reference from Exhibit 10.28 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 25, 2004.
10.29†		Form of 1999 Long Term Incentive Plan Award Agreement (Stock Appreciation Rights) which is incorporated by reference from Exhibit 99.1 to YUM’s Report on Form 8-K as filed on January 30, 2006.
10.30		Amended and Restated Credit Agreement, dated November 29, 2007, among YUM, the lenders party thereto, Citigroup Global Markets Ltd. and J.P. Morgan Securities Inc., as Lead Arrangers and Bookrunners, and Citigroup International Plc and Citibank, N.A., Canadian Branch, as Facility Agents (as filed herewith).
10.31†		Severance Agreement (in the event of change in control) for Emil Brolick, dated as of February 15, 2001, which is incorporated herein by reference from Exhibit 10.31 to YUM’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006.
10.32†		YUM! Brands Leadership Retirement Plan, as in effect January 1, 2005, which is incorporated herein by reference from Exhibit 10.32 to YUM’s Quarterly Report on Form 10-Q for the quarter ended March 24, 2007.
10.33†		1999 Long Term Incentive Plan Award (Restricted Stock Unit Agreement) by and between the Company and David Novak, dated as of January 24, 2008 (as filed herewith).
12.1		Computation of ratio of earnings to fixed charges.
21.1		Active Subsidiaries of YUM.
23.1		Consent of KPMG LLP.
31.1		Certification of the Chairman, Chief Executive Officer and President pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chairman, Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

Neither YUM nor any of its subsidiaries is party to any other long-term debt instrument under which securities authorized exceed 10 percent of the total assets of YUM and its subsidiaries on a consolidated basis.  Copies of instruments with respect to long-term debt of lesser amounts will be furnished to the Commission upon request.

†           Indicates a management contract or compensatory plan.

 

 

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