E-Z-GO 2006 Annual Report Download - page 47

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Performance Guarantee
In 2004, through our Bell Helicopter business, we formed AgustaWestlandBell LLC (“AWB LLC”) with AgustaWestland North America Inc.
(“AWNA”). This venture was created for the joint design, development, manufacture, sale, customer training and product support of the VH-71
helicopter, and certain variations and derivatives thereof, to be offered and sold to departments or agencies of the U.S. Government. In March
2005, AWB LLC received a $1.2 billion cost reimbursement-type subcontract from Lockheed Martin for the System Development and Demonstra-
tion phase of the U.S. Marine Corps Helicopter Squadron Program. We guaranteed to Lockheed Martin the due and prompt performance by AWB
LLC of all its obligations under this subcontract, provided that our liability under the guaranty shall not exceed 49% of AWB LLC’s aggregate lia-
bility to Lockheed Martin under the subcontract. AgustaWestland N.V., AWNA’s parent company, has guaranteed the remaining 51% to Lockheed
Martin. We have entered into cross-indemnification agreements with AgustaWestland N.V. in which each party indemnifies the other related to any
payments required under these agreements that result from the indemnifying party’s workshare under any subcontracts received.
For 2006, AWB LLC’s maximum obligation was 40% of the total contract value, which equates to $464 million based on the current contract value
of $1.2 billion. In 2007 and thereafter, AWB LLC’s maximum obligation increases to 50%, or $580 million. Accordingly, the maximum amount of
our liability under the guarantee was $227 million at December 30, 2006 and will be $284 million thereafter through completion.
Guaranteed Minimum Resale Contracts
We have a number of guaranteed minimum resale value contracts associated with certain past aircraft sales. If the fair value of an aircraft falls
below a minimum guaranteed amount, we may be required to make a future payment to the customer or provide a minimum trade-in value toward
a new aircraft. These agreements generally include operating restrictions such as maximum usage over the contract period or minimum mainte-
nance requirements. We also have guaranteed the minimum resale value of certain customer-owned aircraft anticipated to be traded in upon com-
pletion of a model currently under development. These contracts expire as follows: $2 million in 2008, $3 million in 2009, $3 million in 2010, $3
million in 2011 and $19 million in 2012.
Guarantees Related to Dispositions
We have guaranteed payment on certain credit facilities and bank-issued letters of credit and guarantees of the Fastening Systems business,
where the total guarantee is capped at approximately $9 million, for which the buyer has provided a letter of credit of approximately $4 million as
collateral. We also have guaranteed payment and performance on certain other credit facilities and leases of the Fastening Systems business
totaling approximately $14 million, where we also are liable for unpaid interest, fees and other costs associated with claims that may arise from
these guarantees. While potential interest and fees are not capped, we have monitoring provisions that mitigate the exposure to these additional
costs. The buyer has provided a letter of credit of approximately $9 million as collateral on these guarantees.
We also have indemnified the purchaser of the Fastening Systems business for remediation costs related to pre-existing environmental condi-
tions to the extent they exist at the sold locations. We have estimated the fair value of these indemnifications at approximately $12 million. Poten-
tial payments under these obligations are not capped, and as a result the maximum potential obligation cannot be determined.
In connection with the disposition of Trim to subsidiaries of C&A, certain equipment and operating leases were transferred and assigned to sub-
sidiaries of C&A. We guaranteed C&A’s payments under these leases and for an environmental matter.
We also have obligations arising from sales of certain other businesses, including representations and warranties and related indemnities for
environmental, health and safety, and tax and employment matters. The maximum potential payment related to these obligations is not a specified
amount as a number of the obligations do not contain financial caps.
Loss-Sharing Agreements
In connection with the sale of a note receivable in 2005, our Finance group has indemnified the purchaser against potential losses in limited cir-
cumstances. The maximum potential exposure of the indemnity is estimated to be $29 million, but due to the extremely low probability of occur-
rence and several other mitigating factors, including a specific indemnification from the original note issuer, no significant fair value has been
attributed to the indemnity.
In connection with the sale of the Small Business Direct financing business in 2003, our Finance group entered into a loss-sharing agreement.
This agreement required us to reimburse the purchaser for 50% of losses incurred on the portfolio above a 4% annual level. A liability of $14 mil-
lion was originally recorded representing the estimated fair value of the guarantee. During the fourth quarter of 2006, we entered into a settlement
agreement with the purchaser, which terminated our obligation to reimburse the purchaser for future losses. The settlement resulted in a $1 mil-
lion loss, net of tax, from discontinued operations in 2006.
At December 31, 2005, our Finance group had a contingent liability related to the sale of equipment lease streams with a maximum liability of $42
million. These lease streams were sold in 2006, and we had no remaining liability at the end of 2006.