Pizza Hut 2001 Annual Report Download - page 62

60 TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
See Note 5 for additional operating segment disclosures related
to impairment and the carrying amount of assets held for disposal.
COMMITMENTS AND CONTINGENCIES
AmeriServe Bankruptcy Reorganization Process
We and our franchisees and licensees are dependent on fre-
quent replenishment of the food ingredients and paper supplies
required by our restaurants. We and a large number of our fran-
chisees and licensees operated under multi-year contracts, which
were assumed by McLane Company, Inc. (“McLane”), that had
required the use of AmeriServe to purchase and make deliver-
ies of most of these supplies. AmeriServe 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 by the U.S. Bankruptcy Court on November 28, 2000.
During the AmeriServe bankruptcy reorganization process,
we took a number of actions to ensure continued supply to our
system. These actions resulted in a total expense of $170 mil-
lion which was recorded as unusual items in 2000. These costs
included the net funding of $70 million under a debtor-in pos-
session revolving credit facility, $59 million of net charges related
to the global settlement with holders of allowed secured and
administrative priority claims in the bankruptcy and other costs
of $41 million. The other costs included allowances for esti-
mated uncollectible receivables arising from supply sales to our
franchisees and licensees under a temporary program. The costs
also included incremental interest expenses arising from the
additional debt required to finance inventory purchases and the
receivables arising from these supply sales. In 2001, we recorded
unusual items income of $21 million related to net recoveries of
residual assets and certain preference claims under the POR. We
will record additional recoveries, if any, as unusual items as they
are realized.
Other Commitments and Contingencies
Contingent Liabilities
We were directly or indirectly contingently liable in the amounts
of $353 million and $401 million at year-end 2001 and 2000,
respectively, for certain lease assignments and guarantees. At
December 29, 2001, $293 million represented contingent lia-
bilities to lessors as a result of assigning our interest in and
obligations under real estate leases as a condition to the refran-
chising of certain Company restaurants, the contribution of
22
NOTE
certain Company restaurants to unconsolidated affiliates and
guarantees of certain other leases. The $293 million represented
the present value of the minimum payments of the assigned
leases, excluding any renewal option periods, discounted at our
pre-tax cost of debt. On a nominal basis, the contingent liabil-
ity resulting from the assigned leases is $435 million.
The contingent liabilities also include guarantees of approx-
imately $32.4 million to support financial arrangements of
certain franchisees, including partial guarantees of franchisee
loan pools originated primarily in connection with the
Company’s refranchising programs. The total loans outstanding
under these loan pools were approximately $180 million at
December 29, 2001. In support of these guarantees, we have
posted $32.4 million of letters of credit. Also, TRICON provides
a standby letter of credit under which TRICON could potentially
be required to fund a portion (up to $25 million) of one of the
franchisee loan pools. Any such funding under the standby let-
ter of credit would be secured by franchisee loan collateral. We
believe that we have appropriately provided for our estimated
probable exposures under these contingent liabilities. These pro-
visions were primarily charged to refranchising (gains) losses.
The remaining contingent liabilities of $28 million primarily
related to our guarantees of financial arrangements of certain
unconsolidated affiliates and third parties. These financial
arrangements primarily include lines of credit, loans and letters
of credit. If all lines of credit and letters of credit were fully
drawn down, the maximum contingent liability under these
arrangements would be approximately $56 million as of
December 29, 2001.
Insurance Programs
We are currently self-insured for a portion of our current and
prior years’ losses related to workers’ compensation, general lia-
bility and automobile liability insurance programs (collectively,
“casualty loss[es]”) as well as property losses and certain other
insurable risks. To mitigate the cost of our exposures for certain
property and casualty losses, we make annual decisions to either
retain the risks of loss up to certain maximum per occurrence or
aggregate loss limits negotiated with our insurance carriers or
to fully insure those risks. Since the Spin-off, we have elected to
retain the risks subject to certain insured limitations. Effective
August 16, 1999, we made changes to our U.S. and portions of
our International property and casualty insurance programs. For
fiscal years 2001, 2000 and the period from August 16, 1999
through the end of fiscal year 1999, we have bundled our risks