Pizza Hut 2004 Annual Report Download - page 72

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GUARANTEES,฀COMMITMENTS฀AND฀CONTINGENCIES฀
NOTE฀24
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฀ unconsoli-
dated฀affiliates;฀and฀(c)฀guaranteeing฀certain฀other฀leases,฀we฀
are฀frequently฀contingently฀liable฀on฀lease฀agreements.฀These฀
leases฀have฀varying฀terms,฀the฀latest฀of฀which฀expires฀in฀2031.฀
As฀of฀December฀25,฀2004฀and฀December฀27,฀2003,฀the฀poten-
tial฀amount฀of฀undiscounted฀payments฀we฀could฀be฀required฀
to฀make฀in฀the฀event฀of฀non-payment฀by฀the฀primary฀lessee฀
was฀$365฀million฀and฀$393฀million,฀respectively.฀The฀present฀
values฀of฀these฀potential฀payments฀discounted฀at฀our฀pre-tax฀
cost฀of฀debt฀at฀December฀25,฀2004฀and฀December฀27,฀2003฀
were฀$306฀million฀and฀$312฀million,฀respectively.฀Our฀franchi-
sees฀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฀payments฀under฀these฀
leases.฀ Accordingly,฀ the฀ liability฀ recorded฀ for฀ our฀ exposure฀
under฀such฀leases฀at฀December฀25,฀2004฀and฀December฀27,฀
2003฀was฀not฀material.
Included฀in฀the฀potential฀payments฀described฀above฀are฀
contingent฀liabilities฀related฀to฀our฀guarantees฀of฀lease฀agree-
ments฀ of฀ certain฀ former฀ non-core฀ businesses฀ of฀ PepsiCo฀
which฀were฀sold฀prior฀to฀Spin-off.฀Two฀of฀these฀businesses,฀
Chevys฀Mexican฀Restaurant฀and฀Hot฀‘n฀Now฀filed฀for฀bank-
ruptcy฀ 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฀
December฀25,฀2004฀and฀December฀27,฀2003,฀respectively.฀
In฀support฀of฀these฀guarantees,฀we฀posted฀letters฀of฀credit฀
of฀ $4฀million฀ and฀ $32฀million฀ at฀ December฀25,฀ 2004฀ and฀
December฀27,฀2003,฀respectively.฀We฀also฀provided฀a฀standby฀
letter฀of฀credit฀of฀$18฀million฀and฀$23฀million฀at฀December฀25,฀
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฀$90฀million฀at฀December฀25,฀
2004.฀ In฀ 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,฀in฀2004฀a฀$12฀million฀letter฀of฀credit฀
related฀to฀our฀guarantee฀of฀one฀of฀the฀loan฀pools฀was฀elimi-
nated฀based฀on฀our฀improved฀credit฀rating฀and฀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฀$34฀million฀and฀$28฀million฀
at฀ December฀25,฀ 2004฀ and฀ December฀27,฀ 2003,฀ respec-
tively.฀Our฀unconsolidated฀affiliates฀had฀total฀ revenues฀of฀
over฀ $1.7฀billion฀ for฀ the฀ year฀ ended฀ December฀25,฀ 2004฀
and฀ assets฀ and฀ debt฀ of฀ approximately฀ $884฀million฀ and฀
$49฀million,฀respectively,฀at฀December฀25,฀2004.
We฀have฀also฀guaranteed฀certain฀lines฀of฀credit,฀loans฀and฀
letters฀of฀credit฀of฀third฀parties฀totaling฀$9฀million฀and฀$8฀million฀
at฀December฀25,฀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฀$26฀million฀as฀of฀December฀25,฀2004฀
and฀$25฀million฀as฀of฀December฀27,฀2003.
We฀have฀varying฀levels฀of฀recourse฀provisions฀and฀collat-
eral฀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฀December฀25,฀2004฀and฀December฀27,฀2003฀is฀not฀
significant.
Insurance฀Programs฀ We฀are฀self-insured฀for฀a฀substantial฀
portion฀ of฀ our฀ current฀and฀prior฀ years’฀ coverage฀including฀
workers’฀ compensation,฀ employment฀ practices฀ liability,฀
general฀ liability,฀ automobile฀ liability฀ and฀ property฀ losses฀
(collectively,฀ “property฀ and฀ casualty฀ losses”).฀ To฀ mitigate฀
the฀cost฀of฀our฀exposures฀for฀certain฀property฀and฀casualty฀
losses,฀we฀make฀annual฀decisions฀to฀self-insure฀the฀risks฀of฀
loss฀up฀to฀defined฀maximum฀per฀occurrence฀retentions฀on฀a฀
line฀by฀line฀basis฀or฀to฀combine฀certain฀lines฀of฀coverage฀into฀
one฀loss฀pool฀with฀a฀single฀self-insured฀aggregate฀retention.฀
The฀Company฀then฀purchases฀insurance฀coverage,฀up฀to฀a฀
certain฀limit,฀for฀losses฀that฀exceed฀the฀self-insurance฀per฀
occurrence฀or฀aggregate฀retention.฀The฀insurers’฀maximum฀
aggregate฀loss฀limits฀are฀significantly฀above฀our฀actuarially฀
determined฀probable฀losses;฀therefore,฀we฀believe฀the฀likeli-
hood฀of฀losses฀exceeding฀the฀insurers’฀maximum฀aggregate฀
loss฀limits฀is฀remote.
In฀the฀U.S.฀and฀in฀certain฀other฀countries,฀we฀are฀also฀
self-insured฀for฀healthcare฀claims฀for฀eligible฀participating฀
employees฀subject฀to฀certain฀deductibles฀and฀limitations.฀We฀
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