Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

OR

For the transition period from ____________ to _________________

Commission file number 1-13163

YUM! BRANDS, INC.

(Exact name of registrant as specified in its charter)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ×   No    

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   ×      No       

     The number of shares outstanding of the Registrant’s Common Stock as of October 7, 2004 was 292,931,021 shares.

YUM! BRANDS, INC.

INDEX

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)

See accompanying Notes to Condensed Consolidated Financial Statements.

4

CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)

See accompanying Notes to Condensed Consolidated Financial Statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)

We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 27, 2003 (“2003 Form 10-K”). Except as disclosed herein, there has been no material change in the information disclosed in the notes to our Consolidated Financial Statements included in the 2003 Form 10-K.

Our Financial Statements include YUM! Brands, Inc. and its wholly-owned subsidiaries (collectively referred to as “YUM” or the “Company”). The Financial Statements include 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”). References to YUM throughout these notes to our Financial Statements are made using the first person notations of “we,” “us” or “our.”

Our preparation of the accompanying 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 the estimates.

We participate in various advertising cooperatives with our franchisees and licensees. In certain of these cooperatives we possess majority voting rights, and thus control the cooperatives. We have previously reported the related assets and liabilities of those advertising cooperatives we control in accounts and notes receivable, prepaid expenses and other current assets and accounts payable and other current liabilities, as appropriate. We have now summed all assets and liabilities of these advertising cooperatives and reported the amounts as advertising cooperative assets, restricted and advertising cooperative liabilities in the Condensed Consolidated Balance Sheet as of September 4, 2004. We have reclassified those amounts in the Condensed Consolidated Balance Sheet as of December 27, 2003 for comparative purposes. As the contributions to these cooperatives are designated and segregated for advertising, we act as an agent for the franchisees and licensees with regard to these contributions. Thus, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 45, “Accounting for Franchise Fee Revenue,” we do not reflect, and have not reflected in the past, franchisee and licensee contributions to these cooperatives in our Condensed Consolidated Statements of Income.

In our opinion, the accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2003 Form 10-K, our financial position as of September 4, 2004, and the results of our operations for the quarters and years to date ended September 4, 2004 and September 6, 2003 and cash flows for the years to date ended September 4, 2004 and September 6, 2003. Our results of operations for these interim periods are not necessarily indicative of the results to be expected for the full year.

6

We have reclassified certain items in the accompanying Financial Statements and Notes to the Financial Statements in order to be comparable with the current classifications. These reclassifications had no effect on previously reported net income.

The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation.

We have adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”). FIN 46 addresses the consolidation of an entity whose equity holders either (a) have not provided sufficient equity at risk to allow the entity to finance its own activities or (b) do not possess certain characteristics of a controlling financial interest. FIN 46 requires the consolidation of such an entity, known as a variable interest entity (“VIE”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that is obligated to absorb a majority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both. FIN 46 excludes from its scope businesses (as defined by FIN 46) unless certain conditions exist.

The principal entities in which we possess a variable interest include franchise entities, including our Unconsolidated Affiliates, which operate our restaurants. We do not possess any ownership interests in franchise entities except for our investments in various Unconsolidated Affiliates accounted for under the equity method. Additionally, we generally do not provide financial support to franchise entities in a typical franchise relationship.

7

We also possess variable interests in certain purchasing cooperatives we have formed along with representatives of the franchisee groups of each of our Concepts. These purchasing cooperatives were formed for the purpose of purchasing certain restaurant products and equipment in the U.S. Our equity ownership in each cooperative is generally proportional to our percentage ownership of the U.S. system units for the Concept.

As a result of the adoption of FIN 46 we have not consolidated any franchise entities, purchasing cooperatives or other entities.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”), which introduces a Medicare prescription drug benefit, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit, was enacted. On May 19, 2004, the FASB issued Financial Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”) to discuss certain accounting and disclosure issues raised by the Act. FSP 106-2 addresses accounting for the federal subsidy for the sponsors of single employer defined benefit postretirement healthcare plans and disclosure requirements for plans for which the employer has not yet been able to determine actuarial equivalency. Except for certain nonpublic entities, FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004 (the quarter ending December 25, 2004 for the Company).

The reported net periodic benefit cost of our postretirement plan in the accompanying Financial Statements and Notes to the Financial Statements does not reflect the effects of the Act. We do not believe at this time that the effects of the Act will materially affect our postretirement benefit obligation or our postretirement benefit expense reported in future periods.

8

Unexercised employee stock options to purchase approximately 0.7 million and 0.5 million shares of our Common Stock for the quarter and year to date ended September 4, 2004, respectively, were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of our Common Stock during the quarter and year to date ended September 4, 2004.

Unexercised employee stock options to purchase approximately 1 million and 5 million shares of our Common Stock for the quarter and year to date ended September 6, 2003, respectively, were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of our Common Stock during the quarter and year to date ended September 6, 2003.

During the year to date ended September 4, 2004, we granted employee stock options to purchase approximately 5 million shares of our Common Stock at an exercise price equal to the average market price on the date of grant. The weighted-average exercise price of these options was approximately $35.

Comprehensive income was as follows:

Facility actions

Facility actions consists of the following components:

• Refranchising net (gains) losses;
  
• Store closure costs; and
  
• Impairment of long-lived assets for stores we intend to close and stores we intend to continue to use in the business.

9

The following table summarizes the carrying values of the major classes of assets held for sale at September 4, 2004 and December 27, 2003. U.S. amounts primarily represent land on which we previously operated restaurants and are net of impairment charges of $5 million and $2 million at September 4, 2004 and December 27, 2003, respectively. International amounts relate primarily to our Puerto Rico business, which we have written down by approximately $22 million since it was designated held for sale in the quarter ended December 28, 2002. The carrying values of liabilities of the Puerto Rico business that we anticipate would be assumed by a buyer were not significant at September 4, 2004 or at December 27, 2003. Subsequent to the quarter ended September 4, 2004, we sold the Puerto Rico business at an amount that approximates its carrying value.

10

The following table summarizes Company sales and restaurant profit related to stores held for sale at September 4, 2004, or disposed of through refranchising or closure during 2004 and 2003. The operations of such stores classified as held for sale as of September 4, 2004 or September 6, 2003 or disposed of in the quarters and years to date ended September 4, 2004 or September 6, 2003, which meet the conditions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), for reporting as discontinued operations were not material. Restaurant profit represents Company sales less the cost of food and paper, payroll and employee benefits and occupancy and other operating expenses.

Wrench Litigation

An insignificant amount of expense was recorded as Wrench litigation for the quarter and year to date ended September 4, 2004. Expense of $7 million and $42 million was recorded as Wrench litigation for the quarter and year to date ended September 6, 2003, reflecting the amounts awarded to the plaintiff and estimated pre-judgment interest. See Note 13 for a discussion of Wrench litigation.

AmeriServe and Other Charges (Credits)

AmeriServe Food Distribution Inc. (“AmeriServe”) was the primary distributor of food and paper supplies to our U.S. stores when it filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 31, 2000. A plan of reorganization for AmeriServe (the “POR”) was approved on November 28, 2000, which resulted in, among other things, the assumption of our distribution agreement, subject to certain amendments, by McLane Company, Inc. During the AmeriServe bankruptcy reorganization process, we took a number of actions to ensure continued supply to our system. Those actions resulted in significant expense for the Company, primarily recorded in 2000. Under the POR we are entitled to proceeds from certain residual assets, preference claims and other legal recoveries of the estate.

We classify expenses and recoveries related to AmeriServe, as well as certain other items, as AmeriServe and other charges (credits). An insignificant amount was recorded as AmeriServe and other charges (credits) for the quarter ended September 4, 2004. Income of $14 million was recorded as AmeriServe and other charges (credits) for the year to date ended September 4, 2004. The amount primarily resulted from cash recoveries related to the AmeriServe bankruptcy reorganization process. Income of $3 million was recorded as

11

AmeriServe and other charges (credits) for the quarter ended September 6, 2003 and primarily includes the reversal of reserves associated with the settlement of certain wage and hour litigation. Income of $1 million was recorded as AmeriServe and other charges (credits) for the year to date ended September 6, 2003 and primarily includes recoveries related to the AmeriServe bankruptcy reorganization process and the reversal of reserves associated with the settlement of certain wage and hour litigation, partially offset by costs to defend certain wage and hour litigation and integration costs related to our acquisition of Yorkshire Global Restaurants, Inc.

At September 4, 2004, our primary bank credit agreement comprises a $1.0 billion senior unsecured Revolving Credit Facility (the “Existing Facility”) with a maturity date of June 25, 2005. At September 4, 2004, our unused Existing Facility totaled $734 million, net of outstanding letters of credit of $266 million. There were no borrowings outstanding under the Existing Facility at September 4, 2004.

On September 7, 2004, the Company executed an amended and restated five-year Revolving Credit Facility (the “New Facility”) totaling $1.0 billion which replaced the Existing Facility. Under the terms of the New Facility, the Company may borrow up to the maximum borrowing limit less outstanding letters of credit. The interest rate for borrowings under the New Facility ranges from 0.35% to 1.625% over the London Interbank Offered Rate (“LIBOR”) or 0.00% to 0.20% over an Alternate Base Rate, which is the greater of the Prime Rate or the Federal Funds Effective Rate plus 0.50%. The exact spread over LIBOR or the Alternate Base Rate, as applicable, will depend upon our performance under specified financial criteria. Interest on any outstanding borrowings under the New Facility is payable at least quarterly.

The New Facility is unconditionally guaranteed by our principal domestic subsidiaries and contains financial covenants relating to maintenance of leverage and fixed charge coverage ratios. The New Facility also contains affirmative and negative covenants including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, level of cash dividends, aggregate non-U.S. investment and certain other transactions as defined in the agreement. These covenants are substantially similar to those contained in the Existing Facility.

Included in short-term borrowings at September 4, 2004 are $350 million of Senior Unsecured Notes with a May 2005 maturity date (“the May 2005 Notes”). The May 2005 Notes were included in long-term debt at December 27, 2003. Additionally, short-term borrowings at September 4, 2004 now includes a derivative adjustment of $13 million related to the pay-variable interest rate swaps designated as a hedge of the May 2005 Notes. The derivative adjustment related to these swaps was included in long-term debt, along with the May 2005 Notes, at December 27, 2003.

During the quarter ended June 12, 2004, we entered into additional pay-variable interest rate swaps with notional amounts of $850 million. The swaps were entered into with financial institutions and have reset dates and critical terms that match those of $75 million, $375 million and $400 million in long-term debt under our 2008, 2011 and 2012 fixed-rate Senior Unsecured Notes, respectively. Accordingly, the swaps are accounted for as hedges of these portions of our debt. Considering the impact of these swaps, at September 4, 2004 approximately 50% of our long-term debt is at variable interest rates.

Interest expense on short-term borrowings and long-term debt was $32 million and $43 million for the quarters ended September 4, 2004 and September 6, 2003, respectively, and $106 million and $131 million for the years to date ended September 4, 2004 and September 6, 2003, respectively.

12

13

Pension Benefits

We sponsor noncontributory defined benefit pension plans covering substantially all full-time U.S. salaried employees, certain hourly employees and certain international employees. The most significant of these plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from the other plan are paid by the Company as incurred. 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 the Plan. Benefits are based on years of service and earnings or stated amounts for each year of service.

Postretirement Medical Benefits

Our postretirement plan provides health care benefits, principally to U.S. salaried retirees and their dependents. This plan 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.

Components of Net Periodic Benefit Cost

Contributions

As disclosed in our 2003 Form 10-K, we are not required to make contributions to the Plan in 2004. No contributions have been made to the Plan during the quarter or year to date ended September 4, 2004. However, subsequent to September 4, 2004

14

we elected to make a discretionary contribution to the Plan in the amount of $50 million. No further contributions to the Plan are expected in 2004.

In May 2004, our Board of Directors authorized a share repurchase program. This program authorizes us to repurchase, through November 2005, up to $300 million (excluding applicable transaction fees) of our outstanding Common Stock. As of September 4, 2004, no shares have been repurchased under this program and $300 million remained available for repurchases. Based on market conditions and other factors, repurchases may be made from time to time in the open market or through privately negotiated transactions at the discretion of the Company.

In November 2003, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase, through May 2005, up to $300 million (excluding applicable transaction fees) of our outstanding Common Stock. As of September 4, 2004, this share program was substantially completed. During the year to date ended September 4, 2004, we repurchased approximately 8.1 million shares for approximately $294 million at an average price per share of approximately $36 under this program.

In November 2002, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase up to $300 million (excluding applicable transaction fees) of our outstanding Common Stock. This share repurchase program was completed in 2003. During the year to date ended September 6, 2003, we repurchased approximately 4.7 million shares for approximately $121 million at an average price per share of approximately $26 under this program.

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 contingently liable on certain lease agreements. These leases have varying terms, the latest of which expires in 2030. As of September 4, 2004 and December 27, 2003, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was $367 million and $393 million, respectively. The present value of these potential payments discounted at our pre-tax cost of debt at September 4, 2004 was $299 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 under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make

15

payments under these leases. Accordingly, the liability recorded for our exposure under such leases at September 4, 2004 and December 27, 2003 was not material.

Included in the potential payments described above are contingent liabilities related to our guarantees of lease agreements of certain former non-core businesses of PepsiCo, Inc. (“PepsiCo”) which were sold prior to our October 6, 1997 spin-off from PepsiCo (the “Spin-off”). Two of these businesses, Chevys Mexican Restaurant and Hot 'n Now filed for bankruptcy protection in October 2003 and January 2004, respectively. We believe that we have appropriately provided for our estimated probable exposure under these guarantees and we do not expect any necessary, future adjustments to recorded reserves to have a material impact on our Financial Statements. Any related expenses have been recorded as AmeriServe and other charges (credits) in our Consolidated Income Statement.

Guarantees Supporting Financial Arrangements of Franchisees, Unconsolidated Affiliates and Other Third Parties

We had provided approximately $16 million and $32 million of partial guarantees of two franchisee loan pools related primarily to the Company’s historical refranchising programs and, to a lesser extent, franchisee development of new restaurants at September 4, 2004 and December 27, 2003, respectively. In support of these guarantees, we had posted $4 million and $32 million of letters of credit at September 4, 2004 and December 27, 2003, respectively. We also had provided a standby letter of credit of $18 million and $23 million at September 4, 2004 and December 27, 2003, respectively, under which we could potentially be required to fund a portion of one of the franchisee loan pools. The total loans outstanding under these loan pools were approximately $105 million at September 4, 2004. On July 12, 2004, approximately $26 million of loans were sold from one of the loan pools to the other resulting in a reduction of our related guarantees and letters of credit by $16 million. Additionally, on August 2, 2004, a $12 million letter of credit related to our guarantee of one of the loan pools was eliminated based on our improved credit rating and, on August 6, 2004, a third party assumed a portion of the risk associated with one of the loan pools resulting in a $5 million reduction of our standby letter of credit. These changes resulted in a $21 million decrease in our maximum exposure related to the franchisee loan pools.

Any funding under the guarantees or letters of credit would be secured by the franchisee loans and any related collateral. We believe that we have appropriately provided for our estimated probable exposures under these contingent liabilities. These provisions were primarily charged to net refranchising loss (gain). New loans are not currently being added to either loan pool.

We have guaranteed certain lines of credit and loans of unconsolidated affiliates totaling $30 million and $28 million at September 4, 2004 and December 27, 2003, respectively. Our unconsolidated affiliates had total revenues of approximately $430 million and $1.2 billion, respectively, for the quarter and year to date ended September 4, 2004, and assets of $856 million and debt of $54 million at September 4, 2004.

We have also guaranteed certain lines of credit, loans and letters of credit of third parties totaling $7 million and $8 million at September 4, 2004 and December 27, 2003, respectively. If all such lines of credit and letters of credit were fully drawn, the maximum contingent liability under these arrangements would be approximately $24 million and $25 million as of September 4, 2004 and December 27, 2003, respectively.

We have varying levels of recourse provisions and collateral that mitigate the risk of loss related to our guarantees of these financial arrangements of unconsolidated affiliates and other third parties. Accordingly, our recorded liability as of September 4, 2004 and December 27, 2003 is not significant.

16

Insurance Programs

We are self-insured for a substantial portion of our current and prior coverage including workers’ compensation, employment practices liability, general liability and automobile liability as well as 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.

We are also self-insured for healthcare claims for eligible participating employees subject to certain deductibles and limitations. We have accounted for our retained liabilities for property and casualty losses and healthcare 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.

Change of Control Severance Agreements

The Company has severance agreements with certain key executives (the “Agreements”) that are renewable on an annual basis. These Agreements are triggered by a termination, under certain conditions, of the executive’s employment following a change in control of the Company, as defined in the Agreements. If triggered, the affected executives would generally receive twice the amount of both their annual base salary and their annual incentive in a lump sum, a proportionate bonus at the higher of target or actual performance, outplacement services and a tax gross-up for any excise taxes. These Agreements have a three-year term and automatically renew each January 1 for another three-year term unless the Company elects not to renew the Agreements. If these Agreements had been triggered as of September 4, 2004, payments of approximately $30 million would have been made. In the event of a change of control, rabbi trusts would be established and used to provide payouts under existing deferred and incentive compensation plans.

Litigation

We are subject to various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business.

On August 13, 2003, a class action lawsuit against Pizza Hut, Inc., entitled Coldiron v. Pizza Hut, Inc., was filed in the United States District Court, Central District of California. Plaintiff alleges that she and other current and former Pizza Hut Restaurant General Managers (“RGM's”) were improperly classified as exempt employees under the U.S. Fair Labor Standards Act (“FLSA”). There is also a pendent state law claim, alleging that current and former RGM's in California were misclassified under that state's law. Plaintiff seeks unpaid overtime wages and penalties. On May 5, 2004, the District Court granted conditional certification of a nationwide class of RGM's under the FLSA claim, providing notice to prospective class members and an opportunity to join the class. Less than 10 percent of the eligible class members have joined the litigation. Once class certification discovery is completed, Pizza Hut intends to challenge the propriety of conditional class

17

certification. On July 20, 2004, the District Court granted summary judgment on Ms. Coldiron's individual FLSA claim. Pizza Hut believes that the District Court's summary judgment ruling in favor of Ms. Coldiron is clearly erroneous under well-established legal precedent, and is currently considering whether to seek a writ of mandamus review by the U.S. Court of Appeals for the Ninth Circuit, requesting that the Court of Appeals vacate the District Court's decision granting Ms. Coldiron's motion for summary judgment. As of September 28, 2004, Ms. Coldiron has also filed motions to certify an additional class of current and former California RGM's under California state law, and a motion requesting that the District Court enter summary judgment on the damages that FLSA class members would be due upon successful prosecution of the class-wide litigation. Pizza Hut is opposing both motions.

We continue to believe that Pizza Hut has properly classified its RGM's as exempt under the FLSA and California law and accordingly intend 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 entitled 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 (including parking spaces, ramps, counters, restroom facilities, and seating) 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. For themselves, the four named plaintiffs have claimed aggregate minimum statutory damages of no less than $16,000, but are expected to claim greater amounts based on the number of Taco Bell outlets they visited at which they claim to have suffered discrimination.

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 intends to file a motion to partially decertify the class to exclude from the Rule 23(b)(2) class claims for monetary damages. Plaintiffs have stated their intent to oppose Taco Bell's motion and to file their own motion for summary judgment as to liability relating to a subset of the California Restaurants.

Taco Bell has denied liability and intends to vigorously defend against all claims in this lawsuit. This lawsuit is at an early stage in the proceedings. Accordingly, at this time, it is not possible to reasonably estimate any

18

potential costs to bring any non-compliant California Restaurants into compliance with applicable state or federal disability access laws. Nor is it possible at this time to reasonably estimate the probability or amount of liability for monetary damages on a class-wide basis to Taco Bell.

On January 16, 1998, a lawsuit against Taco Bell Corp., entitled Wrench LLC, Joseph Shields and Thomas Rinks v. Taco Bell Corp. (“Wrench”) was filed in the United States District Court for the Western District of Michigan. The lawsuit alleged that Taco Bell Corp. misappropriated certain ideas and concepts used in its advertising featuring a Chihuahua. The plaintiffs sought to recover monetary damages under several theories, including breach of implied-in-fact contract, idea misappropriation, conversion and unfair competition. On June 10, 1999, the District Court granted summary judgment in favor of Taco Bell Corp. Plaintiffs filed an appeal with the U.S. Court of Appeals for the Sixth Circuit, and oral arguments were held on September 20, 2000. On July 6, 2001, the Court of Appeals reversed the District Court's judgment in favor of Taco Bell Corp. and remanded the case to the District Court. Taco Bell Corp. unsuccessfully petitioned the Court of Appeals for rehearing en banc, and its petition for writ of certiorari to the United States Supreme Court was denied on January 21, 2002. The case was returned to District Court for trial which began on May 14, 2003 and on June 4, 2003 the jury awarded $30 million to the plaintiffs. Subsequently, the plaintiffs' moved to amend the judgment to include pre-judgment interest and post-judgment interest and Taco Bell filed its post-trial motion for judgment as a matter of law or a new trial. On September 9, 2003, the District Court denied Taco Bell's motion and granted the plaintiff's motion to amend the judgment.

In view of the jury verdict and subsequent District Court ruling, we recorded a charge of $42 million in 2003. We continue to believe that the Wrench plaintiffs' claims are without merit and have appealed the verdict to the Sixth Circuit Court of Appeals. Post-judgment interest will continue to accrue during the appeal process. We have included the liability related to the Wrench judgment and related interest as accounts payable and other current liabilities in our Condensed Consolidated Balance Sheets.

On July 9, 2003, we filed suit against Taco Bell's former advertising agency in the United States District Court for the Central District of California seeking reimbursement for any final award that may be ultimately affirmed by the appeals courts and costs that we have incurred in defending this matter. We are also seeking reimbursement from our insurance carriers.

Obligations to PepsiCo, Inc. After Spin-off

In connection with the Spin-off, we entered into separation and other related agreements (the “Separation Agreements”) governing the Spin-off and our subsequent relationship with PepsiCo. These agreements provide certain indemnities to PepsiCo.

Under the terms of these agreements, we have indemnified PepsiCo for any costs or losses it incurs with respect to all letters of credit, guarantees and contingent liabilities relating to our businesses under which PepsiCo remains liable. As of September 4, 2004, PepsiCo remains liable for approximately $43 million on a nominal basis related to these contingencies. This obligation ends at the time PepsiCo is released, terminated or replaced by a qualified letter of credit. We have not been required to make any payments under this indemnity.

Under the Separation Agreements, PepsiCo maintains full control and absolute discretion with regard to any combined or consolidated tax filings for periods through October 6, 1997. PepsiCo also maintains full control and absolute discretion regarding any common tax audit issues. Although PepsiCo has contractually agreed to, in good faith, use its best efforts to settle all joint interests in any common tax audit issue on a basis consistent with prior practice, there can be no assurance that determinations made by PepsiCo would be the same as we would reach, acting on our own behalf. Through September 4, 2004, there have not been any determinations made by PepsiCo where we would have reached a different determination.

19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

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”) and is the world’s largest quick service restaurant (“QSR”) company based on the number of system units. LJS and A&W were added when YUM acquired Yorkshire Global Restaurants, Inc. (“YGR”) on May 7, 2002. With 12,657 international units, YUM is the second largest QSR company outside the U.S.

Through its Concepts, YUM develops, operates, franchises and licenses a system of both traditional and non-traditional QSR restaurants. Traditional units feature dine-in, carryout and, in some instances, drive-thru or delivery services. Non-traditional units, which are typically 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.

The retail food industry, in which the Company competes, is made up of supermarkets, supercenters, warehouse stores, convenience stores, coffee shops, snack bars, delicatessens and restaurants (including the QSR segment), and is intensely competitive with respect to food quality, price, service, convenience, location and concept. The industry is often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power. Each of the Concepts compete with international, national and regional restaurant chains as well as locally-owned restaurants, not only for customers, but also for management and hourly personnel, suitable real estate sites and qualified franchisees.

The Company is focused on five long-term measures identified as essential to our growth and progress. These five measures and related key performance indicators are as follows:

• International expansion
       International system-sales growth (local currency)
       Number of new international restaurant openings
       Net international unit growth

• Multibrand innovation and expansion
       Number of multibrand restaurant locations
       Number of multibrand units added
       Number of franchise multibrand units added

• Portfolio of category-leading U.S. brands
       U.S. blended same-store sales growth
       U.S. system-sales growth

• Global franchise fees
       New restaurant openings by franchisees
       Franchise fee growth

20

• Strong cash generation and returns
       Cash generated from all sources
       Cash generated from all sources after capital spending
       Restaurant margins

Our progress against these measures is discussed throughout the Management’s Discussion and Analysis (“MD&A”).

The following MD&A should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Cautionary Statements and our annual report on Form 10-K for the fiscal year ended December 27, 2003 (“2003 Form 10-K”).

All Note references herein refer to the accompanying Notes to the Financial Statements. Tabular amounts are displayed in millions except per share and unit count amounts, or as otherwise specifically identified.

Significant Known Events, Trends or Uncertainties Expected to Impact 2004 Comparisons with 2003

The following factors impacted comparability of operating performance for the quarter and year to date ended September 4, 2004 or could impact comparisons for the remainder of 2004. Certain of these factors were previously discussed in our 2003 Form 10-K.

New Accounting Pronouncements Not Yet Adopted

See Note 4.

Canada Unconsolidated Affiliate Dissolution

As previously disclosed in our 2003 Form 10-K, on November 10, 2003 we dissolved our unconsolidated affiliate that previously operated 733 restaurants in Canada. We owned 50% of this unconsolidated affiliate prior to its dissolution and accounted for our interest under the equity method. Of the restaurants previously operated by the unconsolidated affiliate, we now operate the vast majority of Pizza Huts and Taco Bells, while almost all KFCs are operated by franchisees. As a result of operating certain restaurants that were previously operated by the unconsolidated affiliate, our Company sales, restaurant profit and general and administrative expenses will increase and our franchise fees will decrease. Additionally, on a full year basis other income will increase as we recorded a loss from our investment in the Canadian unconsolidated affiliate in 2003. The overall impact on net income is not expected to be material.

As a result of our dissolution of our Canada Unconsolidated Affiliate, Company sales increased $37 million, franchise fees decreased $2 million, restaurant profit increased $2 million and general and administrative expenses increased $3 million for the quarter ended September 4, 2004 compared to the quarter ended September 6, 2003. The impacts on other income and net income were not significant for the quarter.

As a result of the dissolution of our Canada Unconsolidated Affiliate, Company sales increased $108 million, franchise fees decreased $6 million, restaurant profit increased $5 million, general and administrative expenses increased $8 million and other income increased $6 million for the year to date ended September 4, 2004 compared to the year to date ended September 6, 2003. The impact on net income was not significant for the year to date.

21

Amendment of Sale-Leaseback Agreements

On August 15, 2003, we amended two sale-leaseback agreements assumed in our 2002 acquisition of YGR such that the amended agreements qualified for sale-leaseback accounting. Restaurant profit decreased by $1 million and $5 million in the quarter and year to date ended September 4, 2004, respectively, compared to the same periods in 2003 as a result of the two amended agreements being accounted for as operating leases subsequent to the amendment. Interest expense decreased by $1 million and $6 million in the quarter and year to date ended September 4, 2004, respectively.

Puerto Rico Business Held for Sale

Our Puerto Rico business has been held for sale since the fourth quarter of 2002. Subsequent to the quarter ended September 4, 2004, we sold our Puerto Rico business for an amount approximating carrying value. Accordingly, Company sales and restaurant profit will decrease $27 million and $4 million, respectively, and we estimate franchise fees will increase $2 million and general and administrative expenses will decrease $2 million for the quarter and year to date ended December 25, 2004, as compared to the quarter and year to date ended December 27, 2003. The impact on net income is not expected to be significant.

Commodity Inflation

The increased cost of certain commodities negatively impacted our U.S. margins for the quarter and year to date ended September 4, 2004. Higher commodity costs, particularly in cheese and meat prices, negatively impacted U.S. restaurant margins by approximately 190 and 160 basis points for the quarter and year to date ended September 4, 2004, respectively. We currently estimate that higher commodity costs (particularly in meats and cheese) will negatively impact U.S. restaurant margins by approximately 150 basis points for the quarter ending December 25, 2004. We have incorporated this potential unfavorable impact into our operating plans and outlook.

AmeriServe and Other Charges (Credits)

An insignificant amount was recorded as AmeriServe and other charges (credits) for the quarter ended September 4, 2004. Income of $14 million was recorded as AmeriServe and other charges (credits) for the year to date ended September 4, 2004. The amount primarily resulted from cash recoveries related to the AmeriServe bankruptcy reorganization process. Income of $3 million was recorded as AmeriServe and other charges (credits) for the quarter ended September 6, 2003 and primarily includes the reversal of reserves associated with the settlement of certain wage and hour litigation. Income of $1 million was recorded as AmeriServe and other charges (credits) for the year to date ended September 6, 2003 and primarily includes recoveries related to the AmeriServe bankruptcy reorganization process and the reversal of reserves associated with the settlement of certain wage and hour litigation, partially offset by costs to defend certain wage and hour litigation and integration costs related to our acquisition of YGR. See Note 7 for a discussion of AmeriServe and other charges (credits).

Wrench Litigation

An insignificant amount of expense was recorded for the quarter and year to date ended September 4, 2004 reflecting interest related to the Wrench litigation. Expense of $7 million and $42 million was recorded as Wrench litigation for the quarter and year to date ended September 6, 2003 reflecting the amounts awarded to the plaintiff and estimated pre-judgment interest. See Note 13 for a discussion of Wrench litigation.

22

Pension Plan Funded Status

Certain of our employees are covered under noncontributory defined benefit pension plans. The most significant of these plans was amended in 2001 such that salaried employees hired or rehired after September 30, 2001 are not eligible to participate. As disclosed in our 2003 Form 10-K, as of our September 30, 2003 measurement date these plans had a projected benefit obligation (“PBO”) of $629 million and a fair value of plan assets of $438 million. We currently estimate that continued benefits earned by covered employees and interest on benefits previously earned, both of which result in an increase in our PBO, will be substantially offset by increases to plan assets as a result of stock market gains since September 30, 2003 as well as a $50 million pension plan contribution we made subsequent to September 4, 2004 but prior to our September 30, 2004 measurement date.

Thus, any change in our pension plan funded status at September 30, 2004 versus September 30, 2003 will be primarily the result of any change in the discount rate we use to measure our PBO. Due to the relatively long time frame over which benefits are expected to be paid, our PBO is highly sensitive to changes in discount rates. A 10 basis point increase/decrease in the discount rate from the 6.25% used at September 30, 2003 would decrease/increase our PBO at September 30, 2004, holding all other variables and assumptions constant, by approximately $12 million. While we have not yet determined the discount rate we will use to measure our PBO as of our September 30, 2004 measurement date, we do not anticipate that any resulting change in our PBO will be significant.

We do not believe the remaining underfunded status of the pension plan will materially affect our results of operations, financial position or cash flows and have incorporated the estimated future impact into our financial projections and plans. We estimate that pension expense will increase in the range of $5 million to $10 million in 2005 from the $54 million that is being expensed in 2004.

Store Portfolio Strategy

From time to time we sell Company restaurants to existing and new franchisees where geographic synergies can be obtained or where their expertise can generally be leveraged to improve our overall operating performance, while retaining Company ownership of key U.S. and International markets. Such refranchisings reduce our reported revenues and restaurant profits and increase the importance of system sales growth as a key performance measure.

The following table summarizes our refranchising activities:

23

In addition to our refranchising program, from time to time we close restaurants that are poor performing, we relocate restaurants to a new site within the same trade area or we consolidate two or more of our existing units into a single unit (collectively, “store closures”).

The following table summarizes Company store closure activities:

For the years to date ended September 4, 2004 and September 6, 2003, income in store closure costs results primarily from gains from the sale of properties on which we formerly operated restaurants or adjustments to previously recorded lease reserves as a result of changes in settlement and/or sublease estimates.

The impact on operating profit arising from refranchising and Company store closures is the net of (a) the estimated reduction in restaurant profit, which reflects the decrease in Company sales, and general and administrative expenses (“G&A”) and (b) the estimated increase in franchise fees from the stores refranchised. The amounts presented below reflect the estimated impact from stores that were operated by us for all or some portion of the comparable period in 2003 and are no longer operated by us as of September 4, 2004. The amounts do not include results from new restaurants that we opened in connection with a relocation of an existing unit or any incremental impact upon consolidation of two or more of our existing units into a single unit.

The following table summarizes the estimated impact on revenue of refranchising and Company store closures:

24

The following table summarizes the estimated impact on operating profit of refranchising and Company store closures:

Worldwide Results of Operations

Impact of Foreign Currency Translation on Reported Results

Throughout the MD&A, the Company provides the percentage impact of foreign currency translation. These amounts are derived by translating current year results at prior year average exchange rates. We believe the presentation of the foreign currency translation impact allows for better year-to-year comparability without the distortion of foreign currency fluctuations.

25

Worldwide Restaurant Unit Activity

The franchise multibrand unit counts include both franchisee and unconsolidated affiliate multibrand units. Multibrand conversions increase the sales and points of distribution for the second brand added to a restaurant but do not result in an additional unit count. Similarly, a new multibrand restaurant, while increasing sales and points of distribution for two brands, results in just one additional unit count.

For the year to date ended September 4, 2004, Company and franchise multibrand unit gross additions were 281 and 107, respectively.

Worldwide System Sales Growth

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 restaurants sales are not included in Company sales 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 of our revenue drivers, Company and franchise same store sales as well as net unit development.

Worldwide system sales growth was 9% for the quarter and 8% year to date, including a 2% favorable impact from foreign currency translation in both periods. Excluding the favorable impact of foreign currency translation, the increases were driven by new unit development and same store sales growth, partially offset by store closures.

Worldwide Revenues

Company sales increased $170 million or 10% in the quarter, including a 1% favorable impact from foreign currency translation. Excluding the favorable impact of foreign currency translation, the increase was driven by new unit development, same store sales growth, and acquisitions of franchisee restaurants (primarily units in Canada which we now operate), partially offset by store closures and refranchising.

26

Company sales increased $443 million or 9% year to date, after a 2% favorable impact from foreign currency translation. Excluding the favorable impact of foreign currency translation, the increase was driven by new unit development, acquisitions of franchisee restaurants (primarily units in Canada which we now operate) and same store sales growth, partially offset by refranchising and store closures.

Franchise and license fees increased $20 million or 9% for the quarter, including a 2% favorable impact from foreign currency translation. Franchise and license fees increased $56 million or 9% year to date, including a 3% favorable impact from foreign currency translation. Excluding the impact of foreign currency translation, the increases were driven by new unit development and same store sales growth, partially offset by store closures and our acquisitions of franchisee restaurants (primarily units in Canada which we now operate).

Worldwide Company Restaurant Margin

Restaurant margin as a percentage of sales increased approximately 10 basis points in the quarter. U.S. restaurant margin decreased approximately 70 basis points and International restaurant margin increased 110 basis points, respectively.

Restaurant margin as a percentage of sales increased approximately 10 basis points year to date. U.S. restaurant margin decreased approximately 20 basis points and International restaurant margin increased approximately 70 basis points.

The changes in U.S. and International restaurant margin are discussed in the respective sections.

Worldwide General and Administrative Expenses

Worldwide G&A expenses increased $38 million or 18% in the quarter, including a 1% unfavorable impact from foreign currency translation. The increase was driven by higher compensation related costs, including amounts associated with investments in strategic initiatives in China and other international growth markets, incentive compensation and pension costs. Also contributing to the increase were increased reserves related to potential development sites and surplus facilities and costs associated with a biennial International leadership conference held in 2004. The increase was also partially attributable to expenses of $3 million associated with operating the restaurants we now own in Canada that were previously operated by our unconsolidated affiliate.

Worldwide G&A expenses increased $98 million or 16% year to date, including a 2% unfavorable impact from foreign currency translation. The increase was driven by higher compensation related costs, including incentive compensation, amounts associated with investments in strategic initiatives in China and other international growth markets and pension costs. Also contributing to the increase were increased reserves related to potential development sites and surplus facilities, expenses associated with the implementation of new financial and human resource systems, and the unfavorable impact of lapping the recovery of $3 million of legal fees during

27

2003. The increase was also partially attributable to expenses of $8 million associated with operating the restaurants we now own in Canada that were previously operated by our unconsolidated affiliate.

Worldwide Franchise and License Expenses

Worldwide franchise and license expenses increased $1 million or 19% in the quarter and decreased $4 million or 18% year to date. The year to date decrease was primarily driven by the favorable impact of lapping the biennial International franchise convention held in 2003.

Worldwide Other (Income) Expense

Worldwide other income increased $3 million or 40% in the quarter, including a 5% favorable impact from foreign currency translation, and $11 million or 48% year to date, including an 8% favorable impact from foreign currency translation. The increases in other income in the quarter and year to date ended September 4, 2004 were primarily driven by an increase in equity income from our unconsolidated affiliates, principally in China. The increase in other income for the year to date was also partially driven by the dissolution of our unconsolidated affiliate in Canada which recorded a loss in the year to date ended September 6, 2003.

Worldwide Facility Actions

We recorded a net loss of $3 million and $9 million from facility actions for the quarters ended September 4, 2004 and September 6, 2003, respectively. We recorded a net loss of $22 million and $24 million from facility actions for the years to date ended September 4, 2004 and September 6, 2003, respectively. See the Store Portfolio Strategy section for more detail of our refranchising and closure activities and Note 7 for a summary of components of facility actions by reportable operating segment.

Worldwide Operating Profit

28

U.S. and International operating profit are discussed in the respective sections.

Unallocated facility actions comprise refranchising gains (losses) which are not allocated to U.S. or International segments for performance reporting purposes. See Note 7 for further discussion.

Worldwide Interest Expense, Net

Interest expense decreased $11 million or 27% for the quarter and $25 million or 20% year to date. The decrease for the quarter was driven by a decrease in our average interest rates, primarily attributable to pay-variable interest rate swaps entered into during the quarter ended June 12, 2004. The year to date decrease was driven by a reduction in our average debt outstanding, partially as a result of the amended YGR sale-leaseback agreement, and a decrease in our average interest rates, primarily attributable to the pay-variable interest rate swaps entered into during the quarter ended June 12, 2004.

Worldwide Income Taxes

The increase in our effective tax rate for the quarter ended September 4, 2004 was driven by the impact of lapping the benefit in 2003 of amending certain prior U.S. income tax returns to claim credit for foreign taxes paid in prior years as well as lapping the favorable impact of certain International tax planning strategies. The increase was partially offset by a number of factors, including the reversal of reserves in the current year associated with audits that were settled.

The decrease in our effective tax rate for the year to date ended September 4, 2004 was driven by a number of factors, including the reversal of reserves in the current year associated with audits that were settled. The decrease was partially offset by the impact of lapping the benefit in 2003 of amending certain prior U.S. income tax returns to claim credit for foreign taxes paid in prior years.

While we continue to claim credit for foreign taxes paid in the current year, the amended return benefit recognized in 2003 was non-recurring.

29

U.S. Results of Operations

U.S. Restaurant Unit Activity

For the year to date ended September 4, 2004, Company and franchise multibrand unit gross additions were 281 and 102, respectively.

U.S. System Sales Growth

U.S. system sales growth was 4% for both the quarter and year to date. The increases were driven by same store sales growth and new unit development, partially offset by store closures.

U.S. Revenues

Company sales increased $26 million or 2% in the quarter and $81 million or 2% year to date. The increases were driven by new unit development and same store sales growth, partially offset by refranchising and store closures.

Franchise and license fees increased $6 million or 5% in the quarter and $17 million or 4% year to date. The increases were driven by same store sales growth and new unit development, partially offset by store closures.

30

U.S. Same Store Sales

U.S. same store sales includes only Company restaurants that have been open one year or more. U.S. blended same store sales include KFC, Pizza Hut, and Taco Bell Company owned restaurants only. U.S. same store sales for Long John Silver’s and A&W restaurants are not included. Following are the same store sales growth results by brand for the quarter and year to date ended September 4, 2004:

U.S. blended same store sales increased 4% and 3% for the quarter and year to date, respectively, due to increases in average guest checks and transactions.

U.S. Company Restaurant Margin

Restaurant margin as a percentage of sales decreased approximately 70 basis points and 20 basis points for the quarter and year to date, respectively. The decreases were driven by higher food and paper costs, partially offset by the impact of same store sales increases on restaurant margin. Higher food and paper costs were primarily driven by increased commodity costs (principally cheese and meats).

U.S. Operating Profit

Operating profit decreased $8 million or 5% for the quarter and $4 million or 1% year to date. The decreases were driven by the impact of higher commodity costs (primarily cheese and meat) on restaurant profit and higher G&A expenses, partially offset by the impact of same store sales increases on restaurant profit and franchise and license fees.

31

International Results of Operations

International Restaurant Unit Activity

For the year to date ended September 4, 2004, there were no Company multibrand unit gross additions and 5 franchise multibrand unit gross additions.

International System Sales Growth

International system sales growth increased 16% in the quarter and year to date, including 4% and 7% favorable impacts from foreign currency translation for the quarter and year to date, respectively. Excluding the favorable impact of foreign currency translation, the increases were driven by new unit development and same store sales growth, partially offset by store closures.

International Revenues

Company sales increased $144 million or 25% in the quarter, including a 2% favorable impact from foreign currency translation. Excluding the favorable impact of foreign currency translation, the increase was driven by new unit development, acquisitions of franchisee restaurants (primarily units in Canada which we now operate) and same store sales growth, partially offset by store closures and refranchising.

32

Company sales increased $362 million or 23% year to date, including a 5% favorable impact from foreign currency translation. Excluding the favorable impact of foreign currency translation, the increase was driven by new unit development and acquisitions of franchisee restaurants (primarily units in Canada which we now operate) and same store sales growth, partially offset by refranchising and store closures.

Franchise and license fees increased $14 million or 16% in the quarter and $39 million or 16% year to date, including a 5% and an 8% favorable impact from foreign currency translation for the quarter and year to date, respectively. Excluding the favorable impact of foreign currency translation, the increases were driven by new unit development, same store sales growth, and royalty rate increases, partially offset by acquisitions of franchisee restaurants (primarily units in Canada which we now operate) and store closures.

International Company Restaurant Margin

Restaurant margin as a percentage of sales increased approximately 110 basis points in the quarter. The increase was driven by the impact of same store sales increases on restaurant margin and lower food and paper costs (principally due to supply chain savings initiatives). The increase was partially offset by an increase in labor costs and a 60 basis point unfavorable impact of operating the restaurants in Canada, which is a market with below average margins, that were previously operated by our unconsolidated affiliate.

Restaurant margin as a percentage of sales increased approximately 70 basis points year to date including a 10 basis points unfavorable impact from foreign currency translation. The increase was driven by the impact of same store sales increases on restaurant margin and lower food and paper costs (principally due to supply chain savings initiatives). The increase was partially offset by a 50 basis point unfavorable impact of operating the restaurants in Canada, which is a market with below average margins, that were previously operated by our unconsolidated affiliate.

The impact from foreign currency translation on margin as a percentage of sales is a result of the portfolio of markets effect. International margin percentages in total are impacted unfavorably when currencies strengthen in markets with below average margins. Those markets contributing to the unfavorable impact of foreign currency translation on margin year to date have below average margins largely due to their higher labor costs.

International Operating Profit

Operating profit increased $29 million or 25% in the quarter, including a 4% favorable impact from foreign currency translation. The remaining increase was driven by the impact of same store sales increases on restaurant profit and franchise and license fees and new unit development, partially offset by higher G&A costs.

Operating profit increased $85 million or 28% year to date, including a 6% favorable impact from foreign currency translation. The remaining increase was driven by new unit development, the impact of same store sales

33

increases on restaurant profit and franchise and license fees and higher income from our investments in unconsolidated affiliates, partially offset by higher G&A costs.

Consolidated Cash Flows

Net cash provided by operating activities was $791 million compared to $769 million in 2003. The increase was driven by higher net income and the timing of payment of accounts payable and other current liabilities compared to 2003. The increase was partially offset by higher income tax payments in 2004.

Net cash used in investing activities was $391 million compared to $336 million in 2003. The change was primarily due to the timing of purchases of short-term investments and increased capital spending.

Net cash used in financing activities was $205 million compared to $269 million in 2003. The change was due to lower credit facility and long-term debt repayments and higher proceeds from stock option exercises, partially offset by higher share repurchases.

Consolidated Financial Condition

Assets increased $364 million or 6% to $6.0 billion in 2004. The increase was primarily driven by higher cash and short term investment balances due to the timing of our discretionary spending. The decrease in the allowance for doubtful accounts was the result of the completion of financial restructurings by certain Pizza Hut U.S. franchisees which resulted in the reversal of previously established reserves and the transfer for certain amounts, along with related receivables, to long-term notes receivable.

Liabilities decreased $30 million or 1% to $4.5 billion in 2004. The decrease was primarily driven by lower income taxes payable due to the excess of current year tax payments made over the current year provision. The decrease was partially offset by increases in other liabilities, primarily driven by an increase in the pension liability, and accounts payable and other current liabilities due to the timing of payments.

Liquidity and Capital Resources

Operating in the QSR industry allows us to generate substantial cash flows from the operations of our Company stores and from our franchise operations, which require a limited YUM investment. In each of the last two fiscal years, net cash provided by operating activities has exceeded $1 billion. These cash flows have allowed us to fund our discretionary spending, while at the same time reducing our long-term debt balances. We expect these levels of net cash provided by operating activities to continue in the foreseeable future. Our discretionary spending includes capital spending for new restaurants, acquisitions of restaurants from franchisees, repurchases of shares of our common stock and dividends paid to our shareholders. Though a decline in revenues could adversely impact our cash flows from operations, we believe our operating cash flows, our ability to reduce discretionary spending, and our borrowing capacity will allow us to meet our cash requirements in 2004 and beyond.

During the quarter ended September 4, 2004, we paid our first-ever quarterly cash dividend totaling $29 million. Additionally, on September 24, 2004 our Board of Directors approved our second cash dividend of $0.10 per share of common stock to be distributed on November 5, 2004 to shareholders of record at the close of business on October 15, 2004. On an annual basis, the Company is targeting a payout ratio of 15% to 20% of net income.

34

At September 4, 2004 our primary bank credit agreement comprises a $1.0 billion senior unsecured Revolving Credit Facility (the “Existing Facility”) with a maturity date of June 25, 2005. At September 4, 2004, our unused Existing Facility totaled $734 million, net of outstanding letters of credit of $266 million. There were no borrowings outstanding under the Existing Facility at September 4, 2004.

On September 7, 2004, the Company executed an amended and restated five-year Revolving Credit Facility (the “New Facility”) totaling $1.0 billion which replaced the Existing Facility. Under the terms of the New Facility, the Company may borrow up to the maximum borrowing limit less outstanding letters of credit. The interest rate for borrowings under the New Facility ranges from 0.35% to 1.625% over the London Interbank Offered Rate (“LIBOR”) or 0.00% to 0.20% over an Alternate Base Rate, which is the greater of the Prime Rate or the Federal Funds Effective Rate plus 0.50%. The exact spread over LIBOR or the Alternate Base Rate, as applicable, will depend upon our performance under specified financial criteria. Interest on any outstanding borrowings under the New Facility is payable at least quarterly.

The New Facility is unconditionally guaranteed by our principal domestic subsidiaries and contains financial covenants relating to maintenance of leverage and fixed charge coverage ratios. The New Facility also contains affirmative and negative covenants including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, level of cash dividends, aggregate non-U.S. investment and certain other transactions as defined in the agreement. These covenants are substantially similar to those contained in the Existing Facility.

The remainder of our long-term debt primarily comprises Senior Unsecured Notes. Amounts outstanding under Senior Unsecured Notes were $1.87 billion at September 4, 2004. At September 4, 2004, $350 million of these Senior Unsecured Notes are included in short-term borrowings due to their May 2005 maturity date. The remaining Senior Unsecured Notes are included in long-term debt based on their maturities. We currently anticipate that our cash flows provided by operating activities will permit us to make a significant portion of the $350 million payment for the May 2005 Senior Unsecured Notes without borrowing additional amounts.

As previously reported, we estimate that capital spending will be approximately $770 million and refranchising proceeds will be approximately $100 million in 2004. Additionally, subsequent to September 4, 2004 we made a discretionary $50 million contribution to our most significant pension plan. At September 4, 2004, we had remaining capacity to repurchase, through November 21, 2005, up to $300 million of our outstanding Common Stock (excluding applicable transaction fees) under the share repurchase program authorized in May 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates and commodity prices. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which include the use of derivative financial and commodity instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for trading purposes, and we have procedures in place to monitor and control their use.

Interest Rate Risk

We have a market risk exposure to changes in interest rates, principally in the United States. We attempt to minimize this risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps. These swaps are entered into with financial institutions and have reset dates and critical terms that match those of the underlying debt. Accordingly, any change in market value associated with interest rate swaps is offset by the opposite market impact on the related debt.

35

During the quarter ended June 12, 2004, we entered into additional pay-variable interest rate swaps with notional amounts of $850 million. The swaps were entered into with financial institutions and have reset dates and critical terms that match those of $75 million, $375 million and $400 million in long-term debt under our 2008, 2011 and 2012 fixed-rate Senior Unsecured Notes, respectively. Accordingly, the swaps are accounted for as hedges of these portions of our debt. Considering the impact of these swaps, at September 4, 2004 approximately 50% of our long-term debt is at variable interest rates.

At September 4, 2004 and December 27, 2003, a hypothetical 100 basis point increase in short-term interest rates would result in a reduction of $9 million and $3 million, respectively, in annual income before taxes. The estimated reductions are based upon the level of variable rate debt and assume no changes in the volume or composition of debt. In addition, the fair value of our derivative financial instruments at September 4, 2004 and December 27, 2003 would decrease approximately $54 million and $5 million, respectively. The fair value of our Senior Unsecured Notes at September 4, 2004 and December 27, 2003 would increase approximately $81 million and $87 million, respectively. Fair value was determined by discounting the projected cash flows.

Foreign Currency Exchange Rate Risk

International operating profit constitutes approximately 40% of our year to date 2004 operating profit, excluding unallocated and corporate expenses. In addition, the Company’s net asset exposure (defined as foreign currency assets less foreign currency liabilities) totaled approximately $1.4 billion as of September 4, 2004. Operating in international markets exposes the Company to movements in foreign currency exchange rates. The Company’s primary exposures result from our operations in Asia-Pacific, the Americas and Europe. Changes in foreign currency exchange rates would impact the translation of our investments in foreign operations, the fair value of our foreign currency denominated financial instruments and our reported foreign currency denominated earnings and cash flows. For the year to date ended September 4, 2004, operating profit would have decreased approximately $40 million if all foreign currencies had uniformly weakened 10% relative to the U.S. dollar. The estimated reduction assumes no changes in sales volumes or local currency sales or input prices.

We attempt to minimize the exposure related to our investments in foreign operations by financing those investments with local currency debt when practical and holding cash in local currencies when possible. In addition, we attempt to minimize the exposure related to foreign currency denominated financial instruments by purchasing goods and services from third parties in local currencies when practical. Consequently, foreign currency denominated financial instruments consist primarily of intercompany short-term receivables and payables. At times, we utilize forward contracts to reduce our exposure related to these foreign currency denominated financial instruments. The notional amount and maturity dates of these contracts match those of the underlying receivables or payables such that our foreign currency exchange risk related to these instruments is eliminated.

Commodity Price Risk

We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements as well as, on a limited basis, commodity future and option contracts. Commodity future and option contracts entered into by the Company that were outstanding at September 4, 2004 and December 27, 2003, were not significant to the Financial Statements.

36

Item 4. 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 and Chief Executive Officer (the “CEO”) and 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.

During the quarter ended September 4, 2004, we implemented certain modules of an enterprise resource planning software that impact our domestic reporting systems. This implementation resulted in certain changes to our internal controls associated with those systems. We have reviewed the controls associated with each domestic system affected by the implementation of the software and made appropriate changes to those controls. We believe that the controls as modified are designed and operating effectively. There were no other significant changes with respect to the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting during the quarter ended September 4, 2004.

Cautionary Statements

From time to time, in both written reports and oral statements, we present “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements include those identified by such words as “may,” “will,” “expect,” “project,” “anticipate,” “believe,” “plan” and other similar terminology. These “forward-looking statements” reflect our current expectations regarding future events and operating and financial performance and are based upon data available at the time of the statements. Actual results involve risks and uncertainties, including both those specific to the Company and those specific to the industry, and could differ materially from expectations.

Company risks and uncertainties include, but are not limited to, potentially substantial tax contingencies related to the Spin-off, which, if they occur, require us to indemnify PepsiCo, Inc.; changes in effective tax rates; our debt leverage and the attendant potential restriction on our ability to borrow in the future; potential unfavorable variances between estimated and actual liabilities; our ability to secure distribution of products and equipment to our restaurants on favorable economic terms and our ability to ensure adequate supply of restaurant products and equipment in our stores; effects and outcomes of legal claims involving the Company; the effectiveness of operating initiatives and advertising and promotional efforts; the ongoing financial viability of our franchisees and licensees; the success of our refranchising strategy; volatility of actuarially determined losses and loss estimates; and adoption of new or changes in accounting policies and practices including pronouncements promulgated by standard setting bodies.

Industry risks and uncertainties include, but are not limited to, economic and political conditions in the countries and territories where we operate, including effects of war and terrorist activities; changes in legislation and governmental regulation; new product and concept development by us and/or our food industry competitors; changes in commodity, labor, and other operating costs; changes in competition in the food industry; publicity which may impact our business and/or industry; severe weather conditions; volatility of commodity costs; increases in minimum wage and other operating costs; availability and cost of land and construction; consumer preferences, spending patterns and demographic trends; political or economic instability in local markets and changes in currency exchange and interest rates; and the impact that any widespread illness or general health concern may have on our business and/or the economy of the countries in which we operate.

37

Independent Accountants’ Review Report

The Board of Directors
YUM! Brands, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of YUM! Brands, Inc. and Subsidiaries (“YUM”) as of September 4, 2004, the related condensed consolidated statements of income for the twelve and thirty-six weeks ended September 4, 2004 and September 6, 2003, and the related condensed consolidated statements of cash flows for the thirty-six weeks ended September 4, 2004 and September 6, 2003. These condensed consolidated financial statements are the responsibility of YUM’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of YUM as of December 27, 2003, and the related consolidated statements of income, cash flows, and shareholders’ equity (deficit) and comprehensive income for the year then ended not presented herein; and in our report dated February 10, 2004, we expressed an unqualified opinion on those consolidated financial statements. Our report refers to the adoption of the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” in 2002. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 27, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP
Louisville, Kentucky
October 4, 2004

38

PART II - Other Information and Signatures

Item 1. Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 13 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table provides information as of September 4, 2004 with respect to shares of Common Stock repurchased by the Company during the quarter then ended:

In November 2003, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase, through May 21, 2005, up to $300 million of our outstanding Common Stock (excluding applicable transaction fees). For the year to date ended September 4, 2004, all repurchases of shares have occurred under this program. As of September 4, 2004, this share repurchase program was substantially completed.

In May 2004, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase through November 21, 2005, up to $300 million of our outstanding Common Stock (excluding applicable transaction fees). As of September 4, 2004, no shares have been repurchased under this program.

Item 6. Exhibits and Reports on Form 8-K

39

40

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized officer of the registrant.

41

AMENDED AND RESTATED CREDIT AGREEMENT

dated as of

September 7, 2004

among

YUM! BRANDS, INC.,

The Lenders Party Hereto

and

JPMORGAN CHASE BANK,
as Administrative Agent

CITIBANK, N.A.,
as Syndication Agent

J.P. MORGAN SECURITIES INC. and CITIGROUP GLOBAL MARKETS INC.,
as Lead Arrangers and Joint Bookrunners

HSBC BANK USA, N.A., COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. “RABOBANK INTERNATIONAL”, NEW YORK
BRANCH, and
SUNTRUST BANK
as Documentation Agents

TABLE OF CONTENTS

Page

ARTICLE I

Definitions

ARTICLE II

The Credits

ARTICLE III

Representations and Warranties

ARTICLE IV

Conditions

ARTICLE V

Affirmative Covenants

ARTICLE VI

Negative Covenants

ARTICLE VII

Events of Default

ARTICLE VIII

The Administrative Agent

ARTICLE IX

Miscellaneous

SCHEDULES:

Schedule A - Initial Guarantors
Schedule 2.01 -- Commitments
Schedule 2.06 -- Existing Letters of Credit
Schedule 3.06 -- Disclosed Matters
Schedule 3.11 -- Disclosure
Schedule 6.01 -- Existing Indebtedness
Schedule 6.02 -- Existing Liens

EXHIBITS:

Exhibit A -- Form of Assignment and Assumption
Exhibit B -- Form of Guarantee Agreement
Exhibit C-1 -- Form of Opinion of Mayer, Brown, Rowe & Maw LLP
Exhibit C-2 -- Form of Opinion of Matthew Preston, Esq.

AMENDED AND RESTATED CREDIT AGREEMENT dated as of September 7, 2004, among YUM! BRANDS, INC., the LENDERS party hereto, JPMORGAN CHASE BANK, as Administrative Agent, CITIBANK, N.A., as Syndication Agent, J.P. MORGAN SECURITIES INC. and CITIGROUP GLOBAL MARKETS INC., as Lead Arrangers and Joint Bookrunners, and HSBC BANK USA, N.A., COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. “RABOBANK INTERNATIONAL”, NEW YORK BRANCH and SUNTRUST BANK, as Documentation Agents.

      WHEREAS, the Borrower has requested, and the Lenders and the Administrative Agent have agreed, upon the terms and subject to the conditions set forth herein, that the Existing Credit Agreement be amended and restated in its entirety as provided herein effective upon satisfaction of the conditions set forth in Section 4.01 below;

      NOW, THEREFORE, the Borrower, each of the Lenders and the Administrative Agent hereby agree as follows:

ARTICLE I

Definitions

     SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

     “ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

     “Acquired Business” means any Person, property, business or asset acquired (or, as applicable, proposed to be acquired) by the Borrower or a Subsidiary pursuant to a Permitted Acquisition.

     “Adjusted EBITDA” means, for any period, the Consolidated EBITDA of the Borrower for such period, adjusted (a) to include (to the extent not otherwise included) the Consolidated EBITDA of any Acquired Business acquired during such period (and, solely for purposes of determining whether a proposed acquisition is a Permitted Acquisition pursuant to clause (d) of the definition of the term Permitted Acquisition, any Acquired Business that, at the time of calculation of Adjusted EBITDA for such purpose, has been acquired subsequent to the end of such period and prior to such time as well as that proposed to be acquired) pursuant to a Permitted Acquisition and not subsequently sold, transferred or otherwise disposed of during such period (or, solely for purposes of determining whether a proposed acquisition is a Permitted Acquisition, subsequent to the end of such period and prior to such time), based on the actual Consolidated EBITDA of such Acquired Business for such period (including the

2

portion thereof attributable to such period prior to the date of acquisition of such Acquired Business) and (b) to exclude the Consolidated EBITDA of any Sold Business sold, transferred or otherwise disposed of during such period (and, solely for purposes of determining whether a proposed acquisition is a Permitted Acquisition pursuant to clause (d) of the definition of the term Permitted Acquisition, any Sold Business that, at the time of calculation of Adjusted EBITDA for such purpose, has been sold, transferred or otherwise disposed of subsequent to the end of such period and prior to such time), based on the actual Consolidated EBITDA of such Sold Business for such period (including the portion thereof attributable to such period prior to the date of sale, transfer or disposition of such Sold Business). For purposes of calculating Adjusted EBITDA for any period, the portion of the Consolidated EBITDA of any Acquired Business that is to be included in Adjusted EBITDA for such period that is attributable to the period prior to the date of acquisition of such Acquired Business shall be determined as though all net income of such Acquired Business for such period was distributed to the holders of the Equity Interests of such Acquired Business ratably.

     “Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

     “Administrative Agent” means JPMorgan Chase Bank, in its capacity as administrative agent for the Lenders hereunder.

     “Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.

     “Affiliate”means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

     “Alternate Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

     “Alternative Currency” means any currency other than dollars which is freely transferable and convertible into dollars.

     “Applicable Percentage” means, with respect to any Lender, the percentage of the total Commitments represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.