Pizza Hut 2001 Annual Report Download - page 65

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pizza topping. C&F’s trade secret claims against Pizza Hut were
originally dismissed by the trial court on statute of limitations
grounds. That ruling was later overturned by the U.S. Court of
Appeals for the Federal Circuit in August 2000 and the case was
remanded to the trial court for further proceedings. On remand,
Pizza Hut moved for summary judgment on its statute of limi-
tations defense. That motion was denied in January 2001. This
lawsuit was scheduled for trial in late January 2002. Prior to trial,
the parties entered into a written settlement agreement pur-
suant to which C&F agreed to dismiss the case in exchange for
a lump sum payment from Pizza Hut. This payment has been
made and the case was dismissed with prejudice effective
February 6, 2002. We have provided for the costs of this settle-
ment as unusual items in 2001.
Obligations to PepsiCo, Inc. After Spin-off
In connection with the Spin-off, we entered into separation
and other related agreements (the “Separation Agreements”),
governing the Spin-off transaction and our subsequent rela-
tionship with PepsiCo. These agreements provide certain
indemnities to PepsiCo.
The Separation Agreements provided for, among other
things, our assumption of all liabilities relating to the restaurant
businesses, including California Pizza Kitchen, Chevys Mexican
Restaurant, D’Angelo’s Sandwich Shops, East Side Mario’s and
Hot ‘n Now (collectively the “Non-core Businesses”), and our
indemnification of PepsiCo with respect to these liabilities. We
have included our best estimates of these liabilities in the accom-
panying Consolidated Financial Statements.
In addition, we have indemnified PepsiCo for any costs or
losses it incurs with respect to all letters of credit, guarantees
and contingent liabilities relating to our businesses under which
PepsiCo remains liable. As of December 29, 2001, PepsiCo
remains liable for approximately $94 million on a nominal basis
related to these contingencies. This obligation ends at the time
PepsiCo is released, terminated or replaced by a qualified letter
of credit. We have not been required to make any payments
under this indemnity.
Under the Separation Agreements, PepsiCo maintains full
control and absolute discretion with regard to any combined or
consolidated tax filings for periods through October 6, 1997.
PepsiCo also maintains full control and absolute discretion
regarding any common tax audit issues. Although PepsiCo has
contractually agreed to, in good faith, use its best efforts to set-
tle all joint interests in any common audit issue on a basis
consistent with prior practice, there can be no assurance that
determinations made by PepsiCo would be the same as we
would reach, acting on our own behalf. Through December 29,
2001, there have not been any determinations made by PepsiCo
where we would have reached a different determination.
We also agreed to certain restrictions on our actions to help
ensure that the Spin-off maintained its tax-free status. These
restrictions, which were generally applicable to the two-year
period following October 6, 1997, included among other things,
limitations on any liquidation, merger or consolidation with
another company, certain issuances and redemptions of our
Common Stock, our granting of stock options and our sale,
refranchising, distribution or other disposition of assets. If we
failed to abide by these restrictions or to obtain waivers from
PepsiCo and, as a result, the Spin-off fails to qualify as a tax-free
reorganization, we may be obligated to indemnify PepsiCo for
any resulting tax liability, which could be substantial. No payments
under these indemnities have been required or are expected to
be required. Additionally, PepsiCo is entitled to the federal
income tax benefits related to the exercise after the Spin-off of
vested PepsiCo options held by our employees. We expense the
payroll taxes related to the exercise of these options as incurred.