Pizza Hut 2003 Annual Report Download - page 75

Yum! Brands Inc. 73.
damages trial for the remaining 938 claimants began on
July 7, 2003. Before the trial concluded, the parties reached
an agreement to settle this matter in full. The court granted
final approval of the settlement on December 23, 2003 and
final judgment of dismissal was entered on December 26,
2003. Payments to class counsel and eligible claimants
were made in the first quarter of 2004. We have previously
provided for the costs of this settlement as AmeriServe and
other charges (credits).
On January 16, 1998, a lawsuit against Taco Bell Corp.,
entitled Wrench LLC, Joseph Shields and Thomas Rinks v.
Taco Bell Corp. was filed in the United States District Court
for the Western District of Michigan. The lawsuit alleged
that Taco Bell Corp. misappropriated certain ideas and
concepts used in its advertising featuring a Chihuahua.
The plaintiffs sought to recover monetary damages under
several theories, including breach of implied-in-fact contract,
idea misappropriation, conversion and unfair competition.
On June 10, 1999, the District Court granted summary
judgment in favor of Taco Bell Corp. Plaintiffs filed an
appeal with the U.S. Court of Appeals for the Sixth Circuit
(the “Court of Appeals”), and oral arguments were held on
September 20, 2000. On July 6, 2001, the Court of Appeals
reversed the District Court’s judgment in favor of Taco Bell
Corp. and remanded the case to the District Court. Taco Bell
Corp. unsuccessfully petitioned the Court of Appeals for
rehearing en banc, and its petition for writ of certiorari to the
United States Supreme Court was denied on January 21,
2002. The case was returned to District Court for trial
which began on May 14, 2003 and on June 4, 2003 the
jury awarded $30 million to the plaintiffs. Subsequently,
the plaintiffs’ moved to amend the judgment to include pre-
judgment interest and post-judgment interest and Taco Bell
filed its post-trial motion for judgment as a matter of law
or a new trial. On September 9, 2003, the District Court
denied Taco Bell’s motion and granted the plaintiff’s motion
to amend the judgment.
In view of the jury verdict and subsequent District
Court ruling, we recorded a charge of $42 million in 2003.
We continue to believe that the Wrench plaintiffs’ claims
are without merit and have appealed the verdict to the
Sixth Circuit Court of Appeals. Post-judgment interest will
continue to accrue during the appeal process.
On July 9, 2003 we filed suit against Taco Bell’s former
advertising agency in the United States District Court for
the Central District of California seeking reimbursement
for any final award that may be ultimately affirmed by the
appeals courts and costs that we have incurred in defending
this matter. We are also seeking reimbursement from our
insurance carriers.
Obligations to PepsiCo, Inc. After Spin-off
In connection with the Spin-off, we entered into sepa-
ration and other related agreements (the “Separation
Agreements”) governing the Spin-off and our subsequent
relationship with PepsiCo. These agreements provide
certain indemnities to PepsiCo.
Under terms of the agreement, 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 27, 2003, PepsiCo remains liable
for approximately $82 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.
Included in the indemnities described above are contin-
gent liabilities on lease agreements of certain non-core
businesses of PepsiCo which were sold prior to the Spinoff.
Two of these businesses, Chevys Mexican Restaurant and
Hot ’n Now filed for bankruptcy protection in October 2003
and January 2004, respectively. While we can not presently
determine our liability under these indemnities, if any, we
do not expect the amount to have a material impact on our
Consolidated Financial Statements. Any related expenses
will be recorded as AmeriServe and other charges (credits)
in our Consolidated Income Statement.
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 settle 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 27, 2003,
there have not been any determinations made by PepsiCo
where we would have reached a different determination.