Pizza Hut 2005 Annual Report Download - page 73

cost฀of฀debt฀at฀December฀31,฀2005฀was฀$316฀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฀payments฀
under฀these฀leases.฀Accordingly,฀the฀liability฀recorded฀for฀our฀
probable฀exposure฀under฀such฀leases฀at฀December฀31,฀2005฀
and฀December฀25,฀2004฀was฀not฀material.
Franchise฀Loan฀Pool฀Guarantees฀ We฀had฀provided฀approxi-
mately฀$16฀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฀31,฀ 2005฀
and฀December฀25,฀2004.฀In฀support฀of฀these฀guarantees,฀
we฀posted฀letters฀of฀credit฀of฀$4฀million.฀We฀also฀provide฀
a฀ standby฀ letter฀ of฀ credit฀ of฀ $18฀million฀ 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฀$77฀and฀$90฀million฀at฀
December฀31,฀2005฀and฀December฀25,฀2004,฀respectively.
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฀added฀to฀the฀loan฀pools฀
in฀2005฀were฀not฀significant.
Unconsolidated฀ Affiliates฀ Guarantees฀ We฀ have฀ guaran-
teed฀ certain฀ lines฀ of฀ credit฀ and฀ loans฀ of฀ unconsolidated฀
affiliates฀ totaling฀ zero฀ and฀ $34฀million฀ at฀ December฀31,฀
2005฀and฀December฀25,฀2004,฀respectively.฀Our฀unconsoli-
dated฀affiliates฀had฀total฀revenues฀of฀over฀$1.8฀billion฀for฀
the฀year฀ended฀December฀31,฀2005฀and฀assets฀and฀debt฀of฀
approximately฀$775฀million฀and฀$32฀million,฀respectively,฀at฀
December฀31,฀2005.
Other฀Third฀Parties฀Guarantees฀ We฀have฀also฀guaranteed฀
certain฀lines฀of฀ credit,฀loans฀and฀letters฀of฀credit฀of฀third฀
parties฀totaling฀$1฀million฀and฀$9฀million฀at฀December฀31,฀
2005฀and฀December฀25,฀2004,฀respectively.฀If฀all฀such฀lines฀
of฀credit฀and฀letters฀of฀credit฀were฀fully฀drawn฀the฀maximum฀
contingent฀ liability฀ under฀ these฀ arrangements฀ would฀ be฀
approximately฀ $2฀million฀ as฀ of฀ December฀31,฀ 2005฀ and฀
$26฀million฀as฀of฀December฀25,฀2004.
We฀ have฀ varying฀ levels฀ of฀ recourse฀ provisions฀ and฀
collateral฀that฀mitigate฀the฀risk฀of฀loss฀related฀to฀our฀guar-
antees฀of฀these฀financial฀arrangements฀of฀unconsolidated฀
affiliates฀and฀other฀third฀parties.฀Accordingly,฀our฀recorded฀
liability฀as฀of฀December฀31,฀2005฀and฀December฀25,฀2004฀
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฀and฀long-term฀disability฀for฀
eligible฀participating฀employees฀subject฀to฀certain฀deduct-
ibles฀and฀limitations.฀We฀have฀accounted฀for฀our฀retained฀
liabilities฀for฀property฀and฀casualty฀losses,฀healthcare฀and฀
long-term฀disability฀claims,฀including฀reported฀and฀incurred฀
but฀not฀reported฀claims,฀based฀on฀information฀provided฀by฀
independent฀actuaries.
Due฀to฀the฀inherent฀volatility฀of฀actuarially฀determined฀
property฀ and฀ casualty฀ loss฀ estimates,฀ it฀ is฀ reasonably฀
possible฀ that฀ we฀ could฀ experience฀ changes฀ in฀ estimated฀
losses฀which฀could฀be฀material฀to฀our฀growth฀in฀quarterly฀
and฀annual฀net฀income.฀We฀believe฀that฀we฀have฀recorded฀
reserves฀for฀property฀and฀casualty฀losses฀at฀a฀level฀which฀
has฀substantially฀mitigated฀the฀potential฀negative฀impact฀of฀
adverse฀developments฀and/or฀volatility.
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,฀at฀the฀ higher฀ of฀target฀ or฀actual฀ for฀the฀
preceding฀year,฀a฀proportionate฀bonus฀at฀the฀higher฀of฀target฀
or฀actual฀performance฀earned฀through฀the฀date฀of฀termina-
tion,฀outplacement฀services฀and฀a฀tax฀gross-up฀for฀any฀excise฀
taxes.฀These฀Agreements฀have฀a฀three-year฀term฀and฀auto-
matically฀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฀December฀31,฀
2005,฀payments฀of฀approximately฀$39฀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฀ contin-
gencies฀related฀to฀lawsuits,฀taxes,฀environmental฀and฀other฀
matters฀arising฀out฀of฀the฀normal฀course฀of฀business.฀We฀
provide฀reserves฀for฀such฀claims฀and฀contingencies฀when฀
payment฀ is฀ probable฀ and฀ estimable฀ in฀ accordance฀ with฀
SFAS฀No.฀5฀“Accounting฀for฀Contingencies.”
On฀ 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.฀
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 77.