Taco Bell 2004 Annual Report Download - page 72
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Please find page 72 of the 2004 Taco Bell annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.GUARANTEES,COMMITMENTSANDCONTINGENCIES
NOTE24
LeaseGuaranteesand Contingencies As a result of (a)
assigningourinterestinobligationsunderrealestateleasesas
aconditiontotherefranchisingofcertainCompanyrestaurants;
(b) contributing certain Company restaurants to unconsoli-
datedaffiliates;and(c)guaranteeingcertainotherleases,we
arefrequentlycontingentlyliableonleaseagreements.These
leaseshavevaryingterms,thelatestofwhichexpiresin2031.
AsofDecember25,2004andDecember27,2003,thepoten-
tialamountofundiscountedpaymentswecouldberequired
tomakeintheeventofnon-paymentbytheprimarylessee
was$365millionand$393million,respectively.Thepresent
valuesofthesepotentialpaymentsdiscountedatourpre-tax
costofdebtatDecember25,2004andDecember27,2003
were$306millionand$312million,respectively.Ourfranchi-
seesaretheprimarylesseesunderthevastmajorityofthese
leases.Wegenerallyhavecross-defaultprovisionswiththese
franchiseesthatwouldputthemindefaultoftheirfranchise
agreementintheeventofnon-paymentunderthelease.We
believethesecross-defaultprovisionssignificantlyreducethe
riskthatwewillberequiredtomakepaymentsunderthese
leases. Accordingly, the liability recorded for our exposure
undersuchleasesatDecember25,2004andDecember27,
2003wasnotmaterial.
Includedinthepotentialpaymentsdescribedaboveare
contingentliabilitiesrelatedtoourguaranteesofleaseagree-
ments of certain former non-core businesses of PepsiCo
whichweresoldpriortoSpin-off.Twoofthesebusinesses,
ChevysMexicanRestaurantandHot‘nNowfiledforbank-
ruptcy protection in October 2003 and January2004,
respectively.Webelievethatwehaveappropriatelyprovided
forourestimatedprobableexposureundertheseguarantees
andwedonotexpectanynecessary,futureadjustmentsto
recordedreservestohaveamaterialimpactonourFinancial
Statements.Anyrelated expenseshavebeen recordedas
AmeriServeandothercharges(credits)inourConsolidated
IncomeStatement.
GuaranteesSupportingFinancialArrangementsofFranchisees,
UnconsolidatedAffiliatesandOtherThirdParties Wehad
providedapproximately$16millionand$32millionofpartial
guaranteesoftwofranchiseeloanpoolsrelatedprimarilyto
theCompany’shistoricalrefranchisingprograms and,to a
lesserextent,franchiseedevelopmentofnewrestaurants,at
December25,2004andDecember27,2003,respectively.
Insupportoftheseguarantees,wepostedlettersofcredit
of $4million and $32million at December25, 2004 and
December27,2003,respectively.Wealsoprovidedastandby
letterofcreditof$18millionand$23millionatDecember25,
2004andDecember27,2003,respectively,underwhichwe
couldpotentiallyberequiredtofundaportionofoneofthe
franchiseeloanpools.Thetotalloansoutstandingunderthese
loanpoolswereapproximately$90millionatDecember25,
2004. In 2004, approximately $26million of loans were
soldfromoneoftheloanpoolstotheotherresultingina
reductionofourrelatedguaranteesandlettersofcreditby
$16million.Additionally,in2004a$12millionletterofcredit
relatedtoourguaranteeofoneoftheloanpoolswaselimi-
natedbasedonourimprovedcreditratingandathirdparty
assumedaportionoftheriskassociatedwithoneoftheloan
poolsresultingina$5millionreductionofourstandbyletter
ofcredit.Thesechangesresultedina$21milliondecreasein
ourmaximumexposurerelatedtothefranchiseeloanpools.
Any funding under the guarantees or letters of credit
wouldbesecuredbythefranchiseeloansandanyrelated
collateral.Webelievethatwehaveappropriatelyprovidedfor
ourestimatedprobableexposuresunderthesecontingent
liabilities.Theseprovisionswereprimarilycharged to net
refranchisingloss(gain).Newloansarenotcurrentlybeing
addedtoeitherloanpool.
Wehaveguaranteedcertainlinesofcreditandloansof
unconsolidatedaffiliatestotaling$34millionand$28million
at December25, 2004 and December27, 2003, respec-
tively.Ourunconsolidatedaffiliateshadtotal revenuesof
over $1.7billion for the year ended December25, 2004
and assets and debt of approximately $884million and
$49million,respectively,atDecember25,2004.
Wehavealsoguaranteedcertainlinesofcredit,loansand
lettersofcreditofthirdpartiestotaling$9millionand$8million
atDecember25,2004andDecember27,2003,respectively.
Ifallsuchlinesofcreditandlettersofcreditwerefullydrawn
themaximumcontingentliabilityunderthesearrangements
wouldbeapproximately$26millionasofDecember25,2004
and$25millionasofDecember27,2003.
Wehavevaryinglevelsofrecourseprovisionsandcollat-
eralthatmitigatetheriskoflossrelatedtoourguarantees
ofthesefinancialarrangementsofunconsolidatedaffiliates
andotherthird parties.Accordingly, ourrecorded liability
asofDecember25,2004andDecember27,2003isnot
significant.
InsurancePrograms Weareself-insuredforasubstantial
portion of our currentandprior years’ coverageincluding
workers’ compensation, employment practices liability,
general liability, automobile liability and property losses
(collectively, “property and casualty losses”). To mitigate
thecostofourexposuresforcertainpropertyandcasualty
losses,wemakeannualdecisionstoself-insuretherisksof
lossuptodefinedmaximumperoccurrenceretentionsona
linebylinebasisortocombinecertainlinesofcoverageinto
onelosspoolwithasingleself-insuredaggregateretention.
TheCompanythenpurchasesinsurancecoverage,uptoa
certainlimit,forlossesthatexceedtheself-insuranceper
occurrenceoraggregateretention.Theinsurers’maximum
aggregatelosslimitsaresignificantlyaboveouractuarially
determinedprobablelosses;therefore,webelievethelikeli-
hoodoflossesexceedingtheinsurers’maximumaggregate
losslimitsisremote.
IntheU.S.andincertainothercountries,wearealso
self-insuredforhealthcareclaimsforeligibleparticipating
employeessubjecttocertaindeductiblesandlimitations.We
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